================================================================================

                       Securities And Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-K/A

                                 Amendment No. 1

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For The Fiscal Year Ended December 31, 2005

                                VECTOR GROUP LTD.
             (Exact name of registrant as specified in its charter)




                                                                       
           Delaware                                 1-5759                               65-0949535
(State or other jurisdiction of             Commission File Number          (I.R.S. Employer Identification No.)
         incorporation
incorporation or organization)

 100 S.E. Second Street, Miami, Florida                                                      33131
(Address of principal executive offices)                                                  (Zip Code)



                                 (305) 579-8000
              (Registrant's telephone number, including area code)

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

                                                      Name of each exchange on
           Title of each class                            which registered
 --------------------------------------               ------------------------
 Common Stock, par value $.10 per share               New York Stock Exchange

        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 Securities Act. [X] Yes [ ] No

         Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
[ ] Yes [X]  No

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statement 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. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. [ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer

         Indicate by check mark whether the Registrant is a shell company as
defined in Rule 12b-2 of the Exchange Act. [ ] Yes [X] No

         The aggregate market value of the common stock held by non-affiliates
of Vector Group Ltd. as of June 30, 2005 was approximately $550 million.

         At March 15, 2006, Vector Group Ltd. had 49,914,537 shares of common
stock outstanding.

                      Documents Incorporated by Reference:

         Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy
Statement for the 2006 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
Registrant's fiscal year covered by this report.

================================================================================




                                EXPLANATORY NOTE


         This Annual Report on Form 10-K/A for the year ended December 31, 2005
is being filed to include in Part IV, Item 15, financial statements with respect
to Douglas Elliman Realty, LLC and Koa Investors, LLC. In accordance with Rule
3-09 of Regulation S-X, the separate financial statements of these entities (50%
or less owned persons) are being filed with the SEC no later than 90 days after
the end of our fiscal year covered by this report.

         This Amendment No. 1 does not update any other disclosure to reflect
developments since the original date of filing.

         The following item of the original filing is amended by this Amendment
No. 1:

Item 15.  Exhibits and Financial Statement Schedules.

         Unaffected items have not been repeated in this Amendment No. 1.

         (a)(2) List of Financial Statement Schedules

         The following is filed as part of this report pursuant to Item 15(c) of
Form 10-K:

                                                                  Page
                                                                  ----
         Douglas Elliman Realty, LLC financial statements          4
         as of December 31, 2005 and 2004 and for the three
         years ended December 31, 2005.

         Koa Investors, LLC financial statements as
         of December 31, 2005 and 2004 and for the three years
         ended December 31, 2005.                                 57

    -------------------------------
    * Incorporated by reference.

         (a)(3) Exhibits

              EXHIBIT
                NO.                       DESCRIPTION
              -------    -------------------------------------------------------

                23.1     Consent of Independent Registered Public Accounting
                         Firm

                23.2     Consent of Independent Registered Public Accounting
                         Firm

                31.1     Certification of Chief Executive Officer, Pursuant to
                         Exchange Act Rule 13a-14(a), as Adopted Pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.


                                       2


                31.2     Certification of Chief Financial Officer, Pursuant to
                         Exchange Act Rule 13a-14(a), as Adopted Pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.

                32.1     Certification of Chief Executive Officer, Pursuant to
                         18 U.S.C. Section 1350, as Adopted Pursuant to Section
                         906 of the Sarbanes-Oxley Act of 2002.

                32.2     Certification of Chief Financial Officer, Pursuant to
                         18 U.S.C. Section 1350, as Adopted Pursuant to Section
                         906 of the Sarbanes-Oxley Act of 2002.


         (c) Financial Statement Schedules

         The financial statements with regard to Douglas Elliman Realty, LLC and
Koa Investors, LLC are being filed in this report pursuant to Rule 3-09 of
Regulation S-X.



                                       3






































DOUGLAS ELLIMAN REALTY,
LLC AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 2005




















                                       4


DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
INDEX
(UNAUDITED)
DECEMBER 31, 2005



                                                                         PAGE(S)
                                                                         -------
                                                                      
FINANCIAL STATEMENTS
Consolidated Statement of Financial Position..........................      6
Consolidated Statement of Operations..................................      7
Consolidated Statement of Changes in Members' Equity..................      8
Consolidated Statement of Cash Flows..................................      9
Notes to Consolidated Financial Statements............................    10-20













                                       5


DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)



                                                                          2005
                                                                        --------
                                                                     
ASSETS
Current assets
   Cash and cash equivalents                                            $ 15,384
   Commission receivables                                                  1,696
   Other receivables                                                       3,518
   Other current assets                                                      763
                                                                        --------
      Total current assets                                                21,361
                                                                        --------
   Property and equipment, net                                            17,973
   Goodwill                                                               37,924
   Trademarks                                                             21,663
   Other intangible assets, net                                            2,072
   Deferred financing charges                                                308
   Security deposits and other non current assets                          1,271
                                                                        --------
      Total assets                                                      $102,572
                                                                        ========

LIABILITIES AND MEMBERS' EQUITY
Current liabilities
   Current portion of notes payable and other obligations               $  2,437
   Current portion of notes payable to related parties                     2,333
   Accounts payable and accrued expenses                                   7,989
   Accrued compensation                                                    5,196
   Commissions payable                                                     3,292
   Other current liabilities                                                 500
                                                                        --------
      Total current liabilities                                           21,747
                                                                        --------
Notes payable and other obligations, less current portion                    765
Notes payable to related parties, less current portion                    53,657
Other long-term liabilities                                                3,047
Accrued royalties                                                          1,894
                                                                        --------
      Total liabilities                                                   81,110
                                                                        --------
Commitments and contingencies (Note 10)
Members' equity                                                           21,462
                                                                        --------
      Total liabilities and members' equity                             $102,572
                                                                        ========


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                        6




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)



                                                                         2005
                                                                       --------
                                                                    
REVENUES
   Commission revenues                                                 $303,291
   Property management fees                                              22,486
   Other revenues                                                         4,298
                                                                       --------
      Total                                                             330,075

COSTS AND EXPENSES
   Commissions and royalties                                            195,056
   Sales administration                                                  13,290
   General and administration                                            53,858
   Rent                                                                  14,681
   Advertising and promotions                                            20,588
   Depreciation                                                           4,896
   Amortization of intangible assets                                        899
                                                                       --------
      Total costs and expenses                                          303,268
Operating income                                                         26,807
Other income (expenses)
   Interest income                                                          299
   Interest expense                                                      (6,273)
                                                                       --------
      Net income before taxes                                            20,833
      Income tax expense                                                    782
                                                                       --------
      Net income                                                       $ 20,051
                                                                       ========


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                        7




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)



                                                                          2005
                                                                        -------
                                                                     
BALANCE, JANUARY 1,2005                                                 $10,723
Net income                                                               20,051
Distributions to members                                                 (9,312)
                                                                        -------
BALANCE, DECEMBER 31, 2005                                              $21,462
                                                                        =======


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                        8



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)



                                                                         2005
                                                                       --------
                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                             $ 20,051
Adjustments to reconcile net income to net cash provided by
   operating activities
   Depreciation                                                           4,896
   Amortization                                                             899
   Interest paid in kind                                                    389
   Changes in operating assets and liabilities, net of
      effects of acquisitions
      Commission receivable                                                 119
      Prepaid expenses and other assets                                  (1,895)
      Accounts payable and accrued expenses                               1,739
      Commissions payable                                                (2,228)
      Other liabilities                                                   1,016
                                                                       --------
         Net cash provided by operating activities                       24,986
                                                                       --------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                                     (7,347)
Business acquisitions                                                      (680)
                                                                       --------
         Net cash used in investing activities                           (8,027)
                                                                       --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable to related parties                            (11,452)
Payments on notes payable and other obligations                          (2,186)
Distribution to members                                                  (9,312)
                                                                       --------
         Net cash used in financing activities                          (22,950)
                                                                       --------
Net decrease in cash and cash equivalents                                (5,991)

CASH AND CASH EQUIVALENTS
Beginning of period                                                      21,375
                                                                       --------
End of period                                                          $ 15,384
                                                                       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                          $  6,273
Income taxes paid                                                      $    384


Non-cash investing and financing activities - see Note 3.

              The accompanying notes are an interal part of these
                       consolidated financial statements.


                                       9




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

1.   BASIS OF PRESENTATION

     Principles of Consolidation

     The consolidated financial statements include the accounts of Douglas
     Elliman Realty, LLC, formerly Montauk Battery Realty, LLC, a New York
     limited liability company, and its wholly-owned subsidiaries (the
     "Company"). All significant intercompany balances and transactions have
     been eliminated in consolidation.

     Nature of Operations

     The Company is primarily engaged in the real estate brokerage business
     through its principal subsidiaries, Douglas Elliman, LLC ("Douglas
     Elliman"), a residential real estate brokerage company based in New York,
     New York and its Long Island based operations, B&H Associates of New York,
     LLC and B&H of the Hamptons, LLC, both of which conduct business as
     Prudential Douglas Elliman Real Estate ("Prudential Douglas Elliman"). The
     Company is also engaged in property management through its subsidiary,
     Residential Management Group, LLC, which conducts business as Douglas
     Elliman Property Management ("DEPM").

     Organization

     On October 15, 2002, Montauk Battery Realty, LLC was formed to consolidate
     the ownership of the then Company's operating entities, B&H Associates of
     New York, LLC and B&H of the Hamptons, LLC, under one company, which was
     completed on December 19, 2002. On March 14, 2003, the Company acquired
     Douglas Elliman and DEPM and, on May 19, 2003, Montauk Battery Realty, LLC
     changed its name to Douglas Elliman Realty, LLC.

     In October 2004, upon receipt of required regulatory approvals, the Company
     purchased all of the interest in Burr Enterprises Ltd., which conducts
     business as Preferred Empire Mortgage Company ("Preferred"). Preferred is a
     mortgage broker.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Estimates. The preparation of financial statements in conformity with
     accounting principles generally accepted in the United States of America
     requires management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amounts of revenues and expenses during the reporting period.
     Actual results could differ from those estimates.

     Cash and Cash Equivalents. The Company considers all highly liquid
     financial instruments with an original maturity of less than three months
     to be cash equivalents.


                                       10




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

     Property and Equipment. Property, equipment and leasehold improvements are
     stated at cost. Maintenance and repairs are charged to expense as incurred;
     costs of major additions and betterments are capitalized. When property and
     equipment are sold or otherwise disposed of, the cost and related
     accumulated depreciation are eliminated from the accounts and any resulting
     gain or loss is reflected in other revenues.

     Depreciation is provided on the straight line method over the estimated
     useful lives of the related assets. The cost of leasehold improvements is
     amortized over the lesser of the length of the related leases or the
     estimated useful lives of the improvements.

     Goodwill and Trademarks. In accordance with Statement of Financial
     Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
     No. 142"), the Company does not amortize goodwill and trademarks, which are
     deemed to have an indefinite useful life. The Company assesses goodwill and
     trademarks for impairment using fair value measurement techniques on an
     annual basis. Based on such annual review, no impairment adjustment is
     required.

     Other intangible assets. Other intangible assets consist primarily of
     management contracts. Amortization of management contracts is being
     provided over fifteen years.

     Deferred Financing Charges. Deferred financing charges consist primarily of
     professional fees related to the acquisition of new financing and the
     restructuring of the Company's debt obligations in March 2003. These are
     being amortized on a straight-line basis over the life of the related debt
     obligations which approximates amortization expense under the effective
     interest method.

     Revenue Recognition. Real estate commissions earned by the Company's real
     estate brokerage business are recorded as revenue on a gross basis upon the
     closing of a real estate transaction (i.e., the purchase or sale of a
     home). Property management fees earned by DEPM are recorded as revenue when
     the related services are performed.

     Advertising Costs. Advertising costs are expensed as incurred and are
     included in operating expenses.

     Income Taxes. The Company is a limited liability company. The members of a
     limited liability company are taxed on their proportionate share of the
     Company's taxable income. Accordingly, no provision or liability for
     federal income taxes is included in the financial statements, except for
     Preferred Empire Mortgage which is taxed as a C Corporation. Taxes for New
     York City operations are included in the financial statements as New York
     City does not follow federal tax regulations for limited liability
     companies.


                                       11




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

3.   ACQUISITIONS IN 2005

     The Company acquired the interest of several real estate offices in four
     transactions for an aggregate purchase price of $1,415. The results of
     their operations are included in the consolidated financial statements from
     the dates of acquisition. The Company's acquisition objective was to
     leverage its position in the real estate brokerage business in the New York
     metropolitan area.

     The acquisitions have been accounted for in accordance with SFAS No. 141,
     "Business Combinations". The cost of the acquisitions was allocated to the
     assets acquired and liabilities assumed based on estimates of their
     respective fair values at the date of acquisition, which approximated their
     book values. The costs of the acquisitions were allocated to goodwill for
     $1,248, to fixed assets for $2, and to listings for $165. The purchases
     were primarily funded from the Company's operations, and the Company issued
     a note for $733 for one of the real estate transactions. Goodwill acquired
     is amortizable over 15 years for U.S. income tax purposes. Pro forma
     information has not been presented because the net impact of the
     acquisitions would not have been significant to the Company's Consolidated
     Financial Statements.

4.   PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 2005 consist of the following:



                                                                          2005
                                                                       --------
                                                                    
Furniture, fixtures and office equipment                               $ 14,742
Computer software                                                         5,416
Leasehold improvements                                                   11,928
Automobiles                                                                  80
Construction in progress                                                    430
                                                                       --------
   Total                                                                 32,596
                                                                       --------
Less, accumulated depreciation and amortization                         (14,623)
                                                                       --------
   Total                                                               $ 17,973
                                                                       ========


     The estimated useful life of furniture, fixtures and office equipment at
     December 31, 2005 ranges from five to ten years. Computer software has an
     estimated useful life of three to five years, and automobiles have a life
     of six years. Leasehold improvements are depreciated based on the lesser of
     the remaining life of the lease or the useful life of the leasehold
     improvement. Depreciation expense for the year ended December 31, 2005 was
     $4,896. Computer software had a net book value of $2,915 at December 31,
     2005, and the related amortization expense included in the above was $967
     for the year then ended.


                                        12



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

5.   INTANGIBLE ASSETS

     Intangible assets at December 31, 2005 consist of the following:



                                                                          2005
                                                                        -------
                                                                     
Goodwill                                                                $37,924
Trademarks                                                               21,663
Deferred financing charges                                                  506
Other intangible assets                                                   3,926
                                                                        -------
   Total                                                                 64,019
Less, accumulated amortization                                           (2,052)
                                                                        -------
   Total                                                                $61,967
                                                                        =======


     In accordance with SFAS No. 142, the Company does not amortize goodwill and
     trademarks, which have indefinite lives. Amortization expense for the year
     ended December 31, 2005 was $899, which includes $165 of amortization of
     customer-based intangible assets acquired and fully amortized during the
     year. Amortization expense is estimated to be $405, $344, $293, $253, and
     $218 for the five years ended December 31, 2006 through 2010, respectively.
     Accumulated amortization on deferred financing costs is $198, and on other
     intangible assets is $1,854 at December 31, 2005.

     The changes in the carrying amount of goodwill for the year ended December
     31, 2005 was as follows:



                                              REAL ESTATE    PROPERTY
                                               BROKERAGE    MANAGEMENT    TOTAL
                                              -----------   ----------   -------
                                                                
Balance as of December 31, 2004                 $36,673         $ 3      $36,676
Acquisitions                                      1,248          --        1,248
                                                -------         ---      -------
Balance as of December 31, 2005                 $37,921         $ 3      $37,924
                                                =======         ===      =======



                                        13




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

6.   NOTES PAYABLE AND OTHER OBLIGATIONS

     Notes payable, capital leases and other obligations at December 31, 2005
     consist of:



                                                                          2005
                                                                        --------
                                                                     
Notes payable and other obligations
   Payment obligation - former owner                                    $   406
   Term note payable - bank                                               1,430
   Notes payable issued in connection with acquisitions                   1,322
   Capital leases payable                                                    44
                                                                        -------
      Total notes payable, capital leases and other obligations           3,202
Less, current maturities                                                 (2,437)
                                                                        -------
Amount due after one year                                               $   765
                                                                        =======


     Payment Obligation - Former Owner:

     In connection with the acquisition of Douglas Elliman, the Company assumed
     an obligation to make a payment to a former owner of Douglas Elliman in an
     amount up to $4,000, due in 2003 and 2004. The obligation is subject to
     certain claims and offsets the Company has against this former owner. The
     2003 payment of $2,000 was made. A payment of $1,594 was paid during 2005,
     and the Company assumed a liability for the remaining balance.

     Term Note Payable - Bank:

     In December 2002, Prudential Douglas Elliman borrowed $1,940 from a bank,
     bearing interest at 7% per annum, due in January 2006. Principal is
     amortized in the amount of $15 per month during the term of the loan. The
     loan is collateralized by the assets of Prudential Douglas Elliman to the
     extent of the unpaid principal and interest.

     Notes payable issued in connection with acquisitions and capital leases
     payable:

     Prudential Douglas Elliman has various other notes issued in connection
     with acquisitions of real estate brokerage companies and capital leases
     payable bearing interest at various rates up to 14.5%, which mature through
     2009. Assets under capital lease are primarily office equipment and
     furniture, and have a net book value of $110 at December 31, 2005.


                                        14




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

     Scheduled Maturities:

     Scheduled maturities of notes payable, capital leases and other obligations
     are as follows:



Year ending December 31                                                    2005
-----------------------                                                   ------
                                                                       
2006                                                                      $2,437
2007                                                                         564
2008                                                                         103
2009                                                                          98
                                                                          ------
   Total                                                                  $3,202
                                                                          ======


7.   NOTES PAYABLE TO RELATED PARTIES

     Notes payable to related parties at December 31, 2005 consist of:



                                                                          2005
                                                                        -------
                                                                     
Notes payable to related parties
Acquisition term note payable - PREFSA                                  $35,058
Acquisition subordinated notes payable - PREFSA                           8,570
Acquisition subordinated notes payable - New Valley                       8,570
Franchise term notes payable - PREA                                       3,583
Note payable - officer                                                      209
                                                                        -------
   Total notes payable to related parties                                55,990
Less, current maturities                                                 (2,333)
                                                                        -------
Amount due after one year                                               $53,657
                                                                        =======


     Acquisition Term Note Payable - PREFSA:

     In connection with the acquisition of Douglas Elliman and DEPM, Prudential
     Real Estate Financial Services of America, Inc. ( PREFSA ) lent the Company
     $52,500 of Senior Secured Debt, maturing in 2011 (the "Term Note"). The
     Term Note bears interest at prime rate (7.25% at December 31, 2005) plus 2%
     and is collateralized by substantially all the assets of the Company. The
     Term Note provides for monthly payments of 3% of gross revenues of Douglas
     Elliman and Prudential Douglas Elliman prior to March 15, 2005 and 4.5%
     thereafter so long as the Term Note is outstanding. The payments based on
     gross revenues are applied first to interest and then to outstanding
     principal. Additional principal payments are due on June 1 of each year in
     the amount equal to 60% of the Company's Excess Cash Flow, which is defined
     in the Term Note loan agreement as the prior year's net income plus cash
     proceeds received from asset sales and depreciation and amortization
     expense, less cash capital expenditures, principal payments on notes
     payable and capital leases (excluding the revolving note facility discussed
     below), and tax distributions made to the Company's members. The Term Note
     includes covenants that, among other things, require the Company to meet
     certain financial ratios, limit the Company's ability to incur debt, and
     limit capital expenditures.


                                       15





DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

     Subordinated Notes Payable - PREFSA and New Valley:

     In connection with the acquisition of Douglas Elliman and DEPM, PREFSA and
     New Valley each lent the Company $9,500 of subordinated debt, due 2013 (the
     "Subordinated Debt"). The Subordinated Debt is subordinate to the Term Note
     and bears interest at 12% per annum, of which 10% is payable in cash and 2%
     accrues and is added to the principal amount. Interest added to the
     principal balance in 2005 was $389. In connection with the issuance of the
     Subordinated Debt, PREFSA and New Valley each acquired additional
     membership interests representing a 15% fully-diluted interest in the
     Company. Based on an appraisal conducted by an third party, the Company
     valued those membership interests at $2,500 and recorded this amount as a
     reduction to the principal amount of the Subordinated Debt. The Company is
     amortizing the value of these membership interests over the term of the
     Subordinated Debt. The amount amortized to interest expense for the year
     ended December 31, 2005 was $172. Principal payments are due on June 1 of
     each year in an amount equal to 20% of the Company's Excess Cash Flow
     computed in the same manner as defined in the Term Note loan agreement.

     Franchise term notes payable:

     In December 2002, The Prudential Real Estate Affiliates, Inc. ("PREA" or
     the "Franchiser"), an affiliate of PREFSA, lent Prudential Douglas Elliman
     $3,300 bearing interest at 9% per annum and due in annual installments of
     principal and interest of $514 through 2012.

     In March 2003, PREA lent Douglas Elliman $1,250 bearing interest at 8% per
     annum and due in annual installments of principal and interest of $186
     through 2013.

     Revolving Loan Facility:

     In March 2003, the Company and PREFSA entered into a revolving loan
     facility for $5,000, available until March 2006. Borrowings under the
     facility bear interest at prime rate plus 1.5% and are collateralized by
     substantially all the assets of the Company. As of December 31, 2005,
     $5,000 was available under the facility.

     Note payable - Officer:

     As of December 31, 2005, the Company was indebted to a member and executive
     officer of Douglas Elliman Realty, in the amount of $209 with interest at
     prime rate plus 1.5%. The principal amount is due on June 1 of each year in
     the amount equal to approximately 8.29% of the Company's Excess Cash Flow,
     which is computed in the same manner as defined in the Term Loan
     agreements, provided New Valley receives an equal payment and PREFSA
     receives a proportionate payment, each as a return of capital.


                                       16





DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

     Scheduled Maturities:

     Scheduled maturities of debt to related parties are presented below. The
     table does not include the Company's obligations to make principal payments
     under the Term Note, the Subordinated Notes, or the note payable to such
     officer based on percentages of future Gross Revenues or future Excess Cash
     Flow.



Year ending December 31                                                    2005
-----------------------                                                  -------
                                                                      
2006                                                                     $ 2,333
2007                                                                         415
2008                                                                         451
2009                                                                         491
2010                                                                         534
Thereafter                                                                51,766
                                                                         -------
   Total                                                                 $55,990
                                                                         =======


8.   FRANCHISE AGREEMENT AND ROYALTY FEES

     Douglas Elliman is party to a franchise agreement with PREA entered into in
     March 2003. The agreement provides for Douglas Elliman to make monthly
     payments of royalty fees to PREA based on the level of gross revenue, with
     a royalty rate ranging from 1.8% to 6.0% of gross revenues earned. Pursuant
     to the franchise agreement, Douglas Elliman was granted a 25% deferral of
     applicable royalty fees for 2005, which is payable in monthly installments
     beginning in the first month of the fourth year. A balance of $2,135 was
     accrued at December 31, 2005 of which $241 included in accrued expenses.
     The royalty percentage was 1.90% for the year ended December 31, 2005. The
     agreement also provides for Douglas Elliman to remit advertising and annual
     franchise fees to PREA, which are based on gross revenues and the number of
     offices occupied.

     Prudential Douglas Elliman is party to a franchise agreement with PREA
     entered into in December 2002. The Agreement provides for Prudential
     Douglas Elliman to make monthly payments of royalty fees to PREA based on
     2.24% of gross revenues earned for the first five years and on a scale
     ranging from 1.8% to 6.0% of gross revenues earned thereafter. The
     agreement also provides for Prudential Douglas Elliman to remit advertising
     and annual franchise fees, which are based on gross revenues and the number
     of offices occupied.

     For the year ended December 31, 2005, total royalty fees incurred under the
     franchise agreements amounted to approximately $4,798.


                                       17



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

     The Franchiser has significant rights over the use of the franchised
     service marks and the conduct of the brokerage companies' business. The
     franchise agreements require the companies to coordinate with the
     Franchiser on significant matters relating to their operations, including
     the opening and closing of offices, make substantial royalty payments to
     the Franchiser and contribute significant amounts to national advertising
     funds maintained by the Franchiser, indemnify the Franchiser against losses
     arising out of the operations of their business under the franchise
     agreements and maintain standards and comply with guidelines relating to
     their operations which are applicable to all franchisees of the
     Franchiser's real estate franchise system.

     The Franchiser has the right to terminate Douglas Elliman's and Prudential
     Douglas Elliman's franchises, upon the occurrence of certain events,
     including a bankruptcy or insolvency event, a change in control, a transfer
     of rights under the franchise agreement and a failure to promptly pay
     amounts due under the franchise agreements. A termination of Douglas
     Elliman's or Prudential Douglas Elliman's franchise agreement could have a
     material adverse affect on the Company.

     The franchise agreements grant Douglas Elliman and Prudential Douglas
     Elliman exclusive franchises in New York for the counties of Nassau and
     Suffolk on Long Island and for Brooklyn, Queens and Manhattan, subject to
     various exceptions and to meeting certain annual revenue thresholds. If
     Douglas Elliman or Prudential Douglas Elliman fails to achieve these levels
     of revenues for two consecutive years or otherwise materially breaches the
     franchise agreements, the Franchiser would have the right to terminate the
     applicable brokerage company's exclusivity rights. A loss of these rights
     could have a material adverse affect on the Company.

9.   DEFINED CONTRIBUTION PLANS

     Douglas Elliman, Prudential Douglas Elliman and DEPM sponsor individual
     401(k) plans which allow eligible employees to make pre-tax contributions.
     Employees who have completed one year of service, as defined, are eligible
     to participate in the plans. The plans provide for matching employer
     contributions of 10% of employee contributions up to a maximum annual
     contribution of $12 per employee. Participants are immediately vested in
     their contributions made. Matching contributions for the year ended
     December 31, 2005 amounted to $305.


                                       18





DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

10.  COMMITMENTS AND CONTINGENCIES

     Lawsuits

     The Company is involved in litigation through the normal course of
     business. Certain claims arising before the date of acquisition of Douglas
     Elliman and DEPM are subject to indemnification agreements with the prior
     owners. The majority of these claims have been referred to the insurance
     carrier and related counsel. The Company believes that the resolution of
     these matters will not have a material adverse effect on the financial
     position, results of operations or cash flows of the Company.

     Leases

     The Company and its subsidiaries are obligated under various operating
     lease agreements for office facilities. Certain leases are non-cancelable
     and expire on various dates through September 2013.

     Future minimum rental payments under the operating leases at December 31,
     2005 are as follows:



Year ending December 31     2005
-----------------------   -------
                       
2006                      $13,538
2007                       12,490
2008                       11,031
2009                        7,101
2010                        5,577
Thereafter                 34,494
                          -------
   Total                  $84,231
                          =======


11.  CONCENTRATION OF CREDIT RISK

     The Company and its subsidiaries may, from time to time, maintain demand
     deposits in excess of federally insured limits in the normal course of
     business. At December 31, 2005, cash balances in excess of insured limits
     were approximately $13,200.


                                       19





DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

(in thousands of dollars)

12.  BUSINESS SEGMENT INFORMATION

     The Company reports using separate business segments, defined by the
     different services offered. The following table presents certain financial
     information of the Company's continuing operations as of and for the year
     ended December 31, 2005. Corporate loss consists solely of the Company's
     net interest expense.



                                REAL ESTATE    PROPERTY   MORTGAGE                  2005
                                 BROKERAGE    MANAGEMENT  BROKERAGE   CORPORATE     TOTAL
                                -----------   ----------  ---------   ---------   --------
                                                                      
Revenues                          $295,098     $22,486    $12,491     $    --     $330,075
Net income (loss)                   26,929      (1,017)       525      (6,386)      20,051
Identifiable assets                 94,735       5,261      2,576          --      102,572
Depreciation and amortization        4,153       1,484        158          --        5,795
Capital expenditures                 6,958         293         96          --        7,347



                                       20



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004




                                       21




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
INDEX
DECEMBER 31, 2004
-----------------------------------------------------------------------------


                                                                      PAGE(S)



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................23

FINANCIAL STATEMENTS

Consolidated Statement of Financial Position.............................24

Consolidated Statement of Operations.....................................25

Consolidated Statement of Changes in Members' Equity.....................26

Consolidated Statement of Cash Flows.....................................27

Notes to Consolidated Financial Statements............................28-39








                                       22

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Managers and the Members
of Douglas Elliman Realty, LLC:

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Douglas Elliman Realty, LLC and Subsidiaries (the "Company") at December 31,
2004 and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP


Melville, New York
February 18, 2005


                                       23



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


ASSETS
Current assets
    Cash and cash equivalents                                           $ 21,375
    Commission receivables                                                 1,814
    Prepaid expenses and other current assets                              2,912
                                                                        --------
             Total current assets                                         26,101
                                                                        --------
    Property and equipment, net                                           15,520
    Goodwill                                                              36,676
    Trademarks                                                            21,663
    Other intangible assets, net                                           2,748
    Deferred financing charges                                               370
    Security deposits                                                        650
    Other assets                                                              92
                                                                        --------
             Total assets                                               $103,820
                                                                        ========

LIABILITIES AND MEMBERS' EQUITY
Current liabilities
    Current portion of notes payable and other obligations              $  2,491
    Current portion of notes payable to related parties                    2,507
    Accounts payable and accrued expenses                                  7,436
    Accrued compensation                                                   4,808
    Commissions payable                                                    5,520
    Other current liabilities                                                500
                                                                        --------
             Total current liabilities                                    23,262
                                                                        --------
Notes payable and other obligations, less current portion                  2,063
Notes payable to related parties, less current portion                    64,647
Other long-term liabilities                                                1,838
Accrued royalties                                                          1,287
                                                                        --------
             Total liabilities                                            93,097
                                                                        --------
Commitments and contingencies
Members' equity                                                           10,723
                                                                        --------
             Total liabilities and members' equity                      $103,820
                                                                        ========







        The accompanying notes are an integral part of these consolidated
                             financial statements.



                                       24



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------


REVENUES
    Commission revenues                                               $ 258,388
    Property management fees                                             22,939
    Other revenues                                                        5,489
                                                                      ---------
             Total                                                      286,816

COSTS AND EXPENSES
    Commissions and royalties                                           168,164
    Sales administration                                                 13,170
    General and administration                                           45,191
    Rent                                                                 12,137
    Advertising and promotions                                           15,200
    Depreciation                                                          4,533
    Amortization of intangible assets                                       968
                                                                      ---------
             Total costs and expenses                                   259,363
Operating income                                                         27,453
Other income (expenses)
    Interest income                                                          71
    Interest expense                                                     (6,279)
                                                                      ---------
             Net income before taxes                                     21,245
                                                                      ---------
             Income tax expense                                             645
                                                                      ---------
             Net income                                               $  20,600
                                                                      =========



        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       25





DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------------


BALANCE, JANUARY 1, 2004                                               $   (288)
Net income                                                               20,600
Distributions to members                                                 (9,589)
                                                                       --------
BALANCE, DECEMBER 31, 2004                                             $ 10,723
                                                                       ========




        The accompanying notes are an integral part of these consolidated
                             financial statements.



                                       26



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------



                                                                                  
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                           $ 20,600
Adjustments to reconcile net income to net cash provided by
 operating activities
    Depreciation                                                                        4,533
    Amortization                                                                          968
    Interest paid in kind                                                                 392
    Changes in operating assets and liabilities, net of effects of acquisitions
      Accounts receivable                                                                (182)
      Prepaid expenses and other assets                                                 1,003
      Accounts payable and accrued expenses                                             4,579
      Commissions payable                                                               2,995
      Other liabilities                                                                 3,125
                                                                                     --------
             Net cash provided by operating activities                                 38,013
                                                                                     --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                                                   (8,413)
Business acquisitions                                                                  (3,293)
                                                                                     --------
             Net cash used in investing activities                                    (11,706)
                                                                                     --------

CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable to related parties                                           (5,594)
Payments on notes payable and other obligations                                          (396)
Payments on notes receivable                                                            1,585
Distribution to members                                                                (9,589)
                                                                                     --------
             Net cash used in financing activities                                    (13,994)
                                                                                     --------
Net increase in cash and cash equivalents                                              12,313

CASH AND CASH EQUIVALENTS
Beginning of period                                                                     9,062
                                                                                     --------
End of period                                                                        $ 21,375
                                                                                     ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                        $  6,279
Income taxes paid                                                                    $     77




Non-cash investing and financing activities -- see Note 4.


        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       27




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


1.       BASIS OF PRESENTATION

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of Douglas
         Elliman Realty, LLC, formerly Montauk Battery Realty, LLC, a New York
         limited liability company, and its wholly-owned subsidiaries (the
         "Company"). All significant intercompany balances and transactions have
         been eliminated in consolidation.

         NATURE OF OPERATIONS

         The Company is primarily engaged in the real estate brokerage business
         through its principal subsidiaries, Douglas Elliman, LLC ("Douglas
         Elliman"), a residential real estate brokerage company based in New
         York, New York and its Long Island based operations, B&H Associates of
         New York, LLC and B&H of the Hamptons, LLC, both of which conduct
         business as Prudential Douglas Elliman Real Estate ("Prudential Douglas
         Elliman"). The Company is also engaged in property management through
         its subsidiary, Residential Management Group, LLC, which conducts
         business as Douglas Elliman Property Management ("DEPM").

         ORGANIZATION

         On October 15, 2002, Montauk Battery Realty, LLC was formed to
         consolidate the ownership of the then Company's operating entities, B&H
         Associates of New York, LLC and B&H of the Hamptons, LLC, under one
         company, which was completed on December 19, 2002. On March 14, 2003,
         the Company acquired Douglas Elliman and DEPM and, on May 19, 2003,
         Montauk Battery Realty, LLC changed its name to Douglas Elliman Realty,
         LLC.

         In October 2004, upon receipt of required regulatory approvals, the
         Company purchased all of the interest in Burr Enterprises Ltd., which
         conducts business as Preferred Empire Mortgage Company ("Preferred").
         Preferred is a mortgage broker, and the seller is a former officer of
         the Company. See Notes 3 and 4.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         ESTIMATES. The preparation of financial statements in conformity with
         generally accepted accounting principles requires management to make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities and disclosure of contingent assets and liabilities at
         the date of the financial statements and the reported amounts of
         revenues and expenses during the reporting period. Actual results could
         differ from those estimates.

         CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
         financial instruments with an original maturity of less than three
         months to be cash equivalents.




                                       28



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         PROPERTY AND EQUIPMENT. Property, equipment and leasehold improvements
         are stated at cost. Maintenance and repairs are charged to expense as
         incurred; costs of major additions and betterments are capitalized.
         When property and equipment are sold or otherwise disposed of, the cost
         and related accumulated depreciation are eliminated from the accounts
         and any resulting gain or loss is reflected in other income.

         Depreciation is provided on the straight line method over the estimated
         useful lives of the related assets. The cost of leasehold improvements
         is amortized over the lesser of the length of the related leases or the
         estimated useful lives of the improvements.

         GOODWILL AND TRADEMARKS.  In accordance with Statement of Financial
         Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
         ("SFAS No. 142"), the Company does not amortize goodwill and
         trademarks, which are deemed to have an indefinite useful life.  The
         Company assesses goodwill and trademarks for impairment using fair
         value measurement techniques on an annual basis.

         OTHER INTANGIBLE ASSETS. Other intangible assets consist primarily of
         non-compete agreements and management contracts. Amortization of
         non-compete agreements is being provided over the contractual term,
         generally three years or less. Amortization of management contracts is
         being provided over fifteen years.

         DEFERRED FINANCING CHARGES. Deferred financing charges consist
         primarily of professional fees related to the acquisition of new
         financing and the restructuring of the Company's debt obligations in
         March 2003. These are being amortized over the life of the related debt
         obligations.

         REVENUE RECOGNITION. Real estate commissions earned by the Company's
         real estate brokerage business are recorded as revenue on a gross basis
         upon the closing of a real estate transaction (i.e., the purchase or
         sale of a home). Property management fees earned by DEPM are recorded
         as revenue when the related services are performed.

         ADVERTISING COSTS.   Advertising costs are expensed as incurred
         and are included in operating expenses.

         INCOME TAXES. The Company is a limited liability company. The members
         of a limited liability company are taxed on their proportionate share
         of the Company's taxable income. Accordingly, no provision or liability
         for federal income taxes is included in the financial statements. Taxes
         for New York City operations are included in the financial statements
         as New York City does not follow federal tax regulations for limited
         liability companies.



                                       29



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


3.       ACQUISITION OF DOUGLAS ELLIMAN AND DEPM

         On March 14, 2003, the Company acquired from Insignia Financial Group,
         Inc. ("Insignia") the operations of Douglas Elliman and DEPM and
         related trademarks for $67,250 cash, $175 in closing costs and the
         assumption of up to $4,000 of liabilities. The results of their
         operations are included in the consolidated financial statements from
         the date of acquisition. The Company's acquisition objective was to
         leverage and expand its position in the real estate brokerage business
         in the New York metropolitan area.

         Douglas Elliman was founded in 1911 and is one of Manhattan's leading
         residential real estate brokers, specializing in the high-end of the
         sales and rental marketplaces. Douglas Elliman has twelve New York City
         offices with more than 1,100 real estate brokers. DEPM is a leading
         manager of rental, co-op and condominium housing in the New York
         metropolitan area. DEPM provides full service third-party fee
         management for approximately 250 properties, representing approximately
         50,000 units in New York City, Nassau County, Northern New Jersey and
         Westchester County.

         To fund the acquisition, the Company borrowed $71,500 from two of its
         members, Prudential Real Estate Financial Services of America, Inc.
         ("PREFSA") and New Valley Corporation ("New Valley"). PREFSA lent the
         Company $52,500 of senior secured debt and PREFSA and New Valley each
         lent the Company $9,500 of subordinated debt. In connection with the
         issuance of the subordinated debt, PREFSA and New Valley each acquired
         additional membership interests representing a 15% fully diluted
         interest in the Company. Based on an appraisal conducted by an
         independent third party, the Company valued these additional membership
         interests at $2,500 and recorded this amount as a reduction to the
         principal amount of the subordinated debt. The Company is amortizing
         the value of these membership interests over the term of the
         subordinated debt.

         The acquisition of Douglas Elliman and DEPM has been accounted for in
         accordance with SFAS No. 141, "Business Combinations". The cost of
         acquisition was allocated to the assets acquired and liabilities
         assumed based on estimates of their respective fair values at the date
         of acquisition. Fair values were determined by an independent
         third-party appraisal.






                                       30



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         The following table summarizes the final purchase price allocation of
         Douglas Elliman's and DEPM's assets acquired and liabilities assumed at
         the date of acquisition.

         ASSETS
              Cash                                                  $   650
              Receivables                                             2,860
              Other assets                                              462
              Property and equipment                                 10,864
              Customer-based intangible assets                        4,057
              Management contract intangible assets                   2,734
              Trademarks                                             21,663
              Goodwill                                               33,617
                                                                    -------
                                       Total                        $76,907
                                                                    -------
         LIABILITIES
              Accounts payable and accrued expenses                 $ 6,407
              Other obligations                                       4,000
              Acquisition financing from related parties             66,500
                                                                    -------
                                       Total                        $76,907
                                                                    -------


         The Company assesses intangible assets for impairment using fair value
         measurement techniques on an annual basis. In accordance with SFAS No.
         142, the Company does not amortize goodwill and trademarks, which are
         deemed to have an indefinite useful live. Douglas Elliman amortized the
         entire amount of the acquired customer-based intangible assets of
         $4,057 in the year ended December 31, 2003. DEPM is amortizing
         management contracts over 15 years. This represents the expected period
         of benefit from such assets. For U.S. income tax purposes, the Company
         and Insignia elected to treat the acquisition of Douglas Elliman, DEPM
         and the related trademarks as an asset acquisition. As a result, the
         entire amount of intangible assets is amortizable over 15 years for
         U.S. income tax purposes.

4.       ACQUISITIONS IN 2004

         The Company acquired the interest of Preferred for a purchase price of
         $2,363, and the interest of several real estate offices in four
         transactions for an aggregate purchase price of $1,230. The results of
         their operations are included in the consolidated financial statements
         from the dates of acquisition. The Company's acquisition objective was
         to leverage its position in the real estate brokerage business in the
         New York metropolitan area.

         The acquisitions have been accounted for in accordance with SFAS No.
         141, "Business Combinations". The cost of the acquisitions was
         allocated to the assets acquired and liabilities assumed based on
         estimates of their respective fair values at the date of acquisition,
         which approximated their book values. The costs of the acquisitions
         were allocated to goodwill for $2,357, to fixed assets for $330, and to
         other assets for $906. The purchases were primarily funded from the
         Company's operations, and the Company issued a note for $300 for one of
         the real estate transactions. Goodwill acquired is amortizable over 15
         years for U.S. income tax purposes.





                                       31


DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


5.       PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 2004 consist of the following:

         Furniture, fixtures and office equipment             $ 12,803
         Internally developed software                           6,030
         Leasehold improvements                                  8,319
         Automobiles                                                80
         Construction in progress                                  415
                                                              --------
                      Total                                     27,647
                                                              --------
         Less, accumulated depreciation and amortization       (12,127)
                                                              --------
                      Total                                   $ 15,520
                                                              ========

         The estimated useful life of furniture, fixtures and office equipment
         at December 31, 2004 ranges from five to ten years. Internally
         developed software has an estimated useful life of three to five years,
         and automobiles have a life of six years. Leasehold improvements are
         depreciated based on the lesser of the remaining life of the lease or
         the useful life of the leasehold improvement. Depreciation expense for
         the year ended December 31, 2004 was $4,533. Computer software had a
         net book value of $3,818 at December 31, 2004, and the related
         amortization expense included in depreciation expense was $1,091 for
         the year then ended.

6.       INTANGIBLE ASSETS

         Intangible assets at December 31, 2004 consist of the following:

         Goodwill                                        $ 36,676
         Trademarks                                        21,663
         Deferred financing charges                           506
         Other intangible assets                            3,764
                                                         --------
                      Total                                62,609
         Less, accumulated amortization                    (1,153)
                                                         --------
                      Total                              $ 61,456
                                                         ========


         In accordance with SFAS No. 142, the Company does not amortize goodwill
         and trademarks, which have indefinite lives. Amortization expense for
         the year ended December 31, 2004 was $968, which includes $78 of
         amortization of customer-based intangible assets acquired and fully
         amortized during the year. Amortization expense is estimated to be
         $729, $405, $344, $293, and $251 for the five years ended December 31,
         2005 through 2009, respectively.





                                       32



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         The changes in the carrying amount of goodwill for the year ended
         December 31, 2004 were as follows:

                                             REAL ESTATE   PROPERTY
                                              BROKERAGE   MANAGEMENT     TOTAL
                                              -------     ----------    -------

         Balance as of December 31, 2003      $34,316      $     3      $34,319
         Acquisitions                           2,357           --        2,357
                                              -------      -------      -------
         Balance as of December 31, 2004      $36,673      $     3      $36,676
                                              =======      =======      =======

7.       DUE FROM RELATED PARTIES

         A former officer of the Company used the proceeds he received from the
         sale of Preferred to repay $1,585 due from that officer.

8.       NOTES PAYABLE AND OTHER OBLIGATIONS

         Notes payable, capital leases and other obligations at December 31,
         2004 consist of:

                                                                        2004
                                                                      -------

         Notes payable and other obligations
             Payment obligation - former owner                        $ 2,000
             Term note payable - bank                                   1,605
             Notes payable issued in connection with acquisitions         830
             Capital leases payable                                       119
                                                                      -------
                      Total notes payable, capital leases and
                        other obligations                               4,554
         Less, current maturities                                      (2,491)
                                                                      -------
         Amount due after one year                                    $ 2,063
                                                                      =======

         In connection with the acquisition of Douglas Elliman, the Company
         assumed an obligation to make a payment to a former owner of Douglas
         Elliman in an amount up to $4,000, due in 2003 and 2004. The obligation
         is subject to certain claims and offsets the Company has against this
         former owner. The 2003 payment of $2,000 was made. The remaining
         balance of $2,000 was due in August 2004, but is the subject to final
         negotiation.

         TERM NOTE PAYABLE - BANK:

         In December 2002, Prudential Douglas Elliman borrowed $1,940 from a
         bank, bearing interest at 7% per annum, due in January 2006. Principal
         is amortized in the amount of $15 per month during the term of the
         loan. The loan is collateralized by the assets of Prudential Douglas
         Elliman to the extent of the unpaid principal and interest.






                                       33


DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         NOTES PAYABLE ISSUED IN CONNECTION WITH ACQUISITIONS AND CAPITAL LEASES
         PAYABLE:

         Prudential Douglas Elliman has various other notes issued in connection
         with acquisitions of real estate brokerage companies and capital leases
         payable bearing interest at various rates up to 14.5%, which mature
         through 2009. Assets under capital lease are primarily office equipment
         and furniture, and have a net book value of $167 at December 31, 2004.

         SCHEDULED MATURITIES:

         Scheduled maturities of notes payable, capital leases and other
         obligations are as follows:

         Year ending December 31                              2004
                                                         -----------
         2005                                             $   2,491
         2006                                                 1,658
         2007                                                   203
         2008                                                   103
         2009                                                    99
                                                         -----------
                      Total                               $   4,554
                                                         ===========



9.       NOTES PAYABLE TO RELATED PARTIES

         Notes payable to related parties at December 31, 2004 consist of:


                                                                    2004
                                                                  --------
         Notes payable to related parties
         Acquisition term note payable - PREFSA                   $ 45,530
         Acquisition subordinated notes payable - PREFSA             8,621
         Acquisition subordinated notes payable - New Valley         8,621
         Franchise term notes payable - PREA                         3,939
         Note payable - officer                                        443
                                                                  --------
                      Total notes payable to related parties        67,154
         Less, current maturities                                   (2,507)
                                                                  --------
         Amount due after one year                                $ 64,647
                                                                  ========




                                       34




DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         ACQUISITION TERM NOTE PAYABLE - PREFSA:

         In connection with the acquisition of Douglas Elliman and DEPM, PREFSA
         lent the Company $52,500 of Senior Secured Debt, maturing in 2011 (the
         "Term Note"). The Term Note bears interest at prime rate plus 2% and is
         collateralized by substantially all the assets of the Company. The Term
         Note provides for monthly payments of 3% of gross revenues of Douglas
         Elliman and Prudential Douglas Elliman prior to March 15, 2005 and 4.5%
         thereafter so long as the Term Note is outstanding. The payments based
         on gross revenues are applied first to interest and then to outstanding
         principal. Additional principal payments are due on June 1 of each year
         in the amount equal to 60% of the Company's Excess Cash Flow, which is
         defined in the Term Note loan agreement as the prior year's net income
         plus cash proceeds received from asset sales and depreciation and
         amortization expense, less cash capital expenditures, principal
         payments on notes payable and capital leases (excluding the revolving
         note facility discussed below), and tax distributions made to the
         Company's members. The Term Note includes covenants that, among other
         things, require the Company to meet certain financial ratios, limit the
         Company's ability to incur debt, and limit capital expenditures.

         SUBORDINATED NOTES PAYABLE - PREFSA AND NEW VALLEY:

         In connection with the acquisition of Douglas Elliman and DEPM, PREFSA
         and New Valley each lent the Company $9,500 of subordinated debt, due
         2013 (the "Subordinated Debt"). The Subordinated Debt is subordinate to
         the Term Note and bears interest at 12% per annum, of which 10% is
         payable in cash and 2% accrues and is added to the principal amount.
         Interest added to the principal balance in 2004 was $392. In connection
         with the issuance of the Subordinated Debt, PREFSA and New Valley each
         acquired additional membership interests representing a 15%
         fully-diluted interest in the Company. Based on an appraisal conducted
         by an independent third party, the Company valued those membership
         interests at $2,500 and recorded this amount as a reduction to the
         principal amount of the Subordinated Debt. The Company is amortizing
         the value of these membership interests over the term of the
         Subordinated Debt. The amount amortized to interest expense for the
         year ended December 31, 2004 was $172. Principal payments are due on
         June 1 of each year in an amount equal to 20% of the Company's Excess
         Cash Flow computed in the same manner as defined in the Term Note loan
         agreement.

         FRANCHISE TERM NOTES PAYABLE:

         In December 2002, The Prudential Real Estate Affiliates, Inc. ("PREA"
         or the "Franchiser"), an affiliate of PREFSA, lent Prudential Douglas
         Elliman $3,300 bearing interest at 9% per annum and due in annual
         installments of principal and interest of $514 through 2012.

         In March 2003, PREA lent Douglas Elliman $1,250 bearing interest at 8%
         per annum and due in annual installments of principal and interest of
         $186 through 2013.






                                       35



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         REVOLVING LOAN FACILITY:

         In March 2003, the Company and PREFSA entered into a revolving loan
         facility for $5,000, available until March 2006. Borrowings under the
         facility bear interest at prime rate plus 1.5% and are collateralized
         by substantially all the assets of the Company. As of December 31,
         2004, $5,000 was available under the facility.

         NOTE PAYABLE - OFFICER:

         As of December 31, 2004, the Company was indebted to a member and
         executive officer of Realty, in the amount of $443 with interest at
         prime rate plus 1.5%. The principal amount is due on June 1 of each
         year in the amount equal to approximately 8.29% of the Company's Excess
         Cash Flow, which is computed in the same manner as defined in the Term
         Loan agreements, provided New Valley receives an equal payment and
         PREFSA receives a proportionate payment, each as a return of capital.

         SCHEDULED MATURITIES:

         Scheduled maturities of debt to related parties are presented below.
         The table does not include the Company's obligations to make principal
         payments under the Term Note, the Subordinated Notes, or the note
         payable to such officer based on percentages of future Gross Revenues
         or future Excess Cash Flow.


          Year ending December 31                                2004
                                                               ----------
          2005                                                 $   2,507
          2006                                                       574
          2007                                                       424
          2008                                                       461
          2009                                                       501
          Thereafter                                              62,687
                                                               ----------
                       Total                                   $  67,154
                                                               ==========




 10.     FRANCHISE AGREEMENT AND ROYALTY FEES

         Douglas Elliman is party to a franchise agreement with PREA entered
         into in March 2003. The agreement provides for Douglas Elliman to make
         monthly payments of royalty fees to PREA based on the level of gross
         revenue, with a royalty rate ranging from 1.8% to 6.0% of gross
         revenues earned. Pursuant to the franchise agreement, Douglas Elliman
         was granted a 50% deferral of applicable royalty fees for 2004, which
         is payable in monthly installments beginning in the first month of the
         fourth year. A balance of $1,394 was accrued at December 31, 2004. The
         royalty percentage was 2.07% for the year ended December 31, 2004. The
         agreement also provides for Douglas Elliman to remit advertising and
         annual franchise fees to PREA, which are based on gross revenues and
         the number of offices occupied.




                                       36


DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


         Prudential Douglas Elliman is party to a franchise agreement with PREA
         entered into in December 2002. The Agreement provides for Prudential
         Douglas Elliman to make monthly payments of royalty fees to PREA based
         on 2.24% of gross revenues earned for the first five years and on a
         scale ranging from 1.8% to 6.0% of gross revenues earned thereafter.
         The agreement also provides for Prudential Douglas Elliman to remit
         advertising and annual franchise fees, which are based on gross
         revenues and the number of offices occupied.

         For the year ended December 31, 2004, total fees incurred under the
         franchise agreements amounted to approximately $4,515.

         The Franchiser has significant rights over the use of the franchised
         service marks and the conduct of the brokerage companies' business. The
         franchise agreements require the companies to coordinate with the
         Franchiser on significant matters relating to their operations,
         including the opening and closing of offices, make substantial royalty
         payments to the Franchiser and contribute significant amounts to
         national advertising funds maintained by the Franchiser, indemnify the
         Franchiser against losses arising out of the operations of their
         business under the franchise agreements and maintain standards and
         comply with guidelines relating to their operations which are
         applicable to all franchisees of the Franchiser's real estate franchise
         system.

         The Franchiser has the right to terminate Douglas Elliman's and
         Prudential Douglas Elliman's franchises, upon the occurrence of certain
         events, including a bankruptcy or insolvency event, a change in
         control, a transfer of rights under the franchise agreement and a
         failure to promptly pay amounts due under the franchise agreements. A
         termination of Douglas Elliman's or Prudential Douglas Elliman's
         franchise agreement could have a material adverse affect on the
         Company.

         The franchise agreements grant Douglas Elliman and Prudential Douglas
         Elliman exclusive franchises in New York for the counties of Nassau and
         Suffolk on Long Island and for Brooklyn, Queens and Manhattan, subject
         to various exceptions and to meeting certain annual revenue thresholds.
         If Douglas Elliman or Prudential Douglas Elliman fails to achieve these
         levels of revenues for two consecutive years or otherwise materially
         breaches the franchise agreements, the Franchiser would have the right
         to terminate the applicable brokerage company's exclusivity rights. A
         loss of these rights could have a material adverse affect on the
         Company.

11.      DEFINED CONTRIBUTION PLANS

         Douglas Elliman, Prudential Douglas Elliman and DEPM sponsor individual
         401(k) plans which allow eligible employees to make pre-tax
         contributions. Employees who have completed one year of service, as
         defined, are eligible to participate in the plans. The plans provide
         for matching employer contributions of 10% of employee contributions up
         to a maximum annual contribution of $12 per employee. Participants are
         immediately vested in their contributions made. Matching contributions
         for the years ended December 31, 2004 amounted to $252.





                                       37



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


 12.     COMMITMENTS AND CONTINGENCIES

         LAWSUITS

         The Company is involved in litigation through the normal course of
         business. Certain claims arising before the date of acquisition of
         Douglas Elliman and DEPM are subject to indemnification agreements with
         the prior owners. The majority of these claims have been referred to
         the insurance carrier and related counsel. The Company believes that
         the resolution of these matters will not have a material adverse effect
         on the financial position, results of operations or cash flows of the
         Company.

         LEASES

         The Company and its subsidiaries are obligated under various operating
         lease agreements for office facilities. Certain leases are
         non-cancelable and expire on various dates through September 2013.

         Future minimum rental payments under the operating leases at December
         31, 2004 are as follows:

         Year ending December 31                                  2004
                                                                ----------
         2005                                                   $  10,465
         2006                                                       9,775
         2007                                                       8,752
         2008                                                       7,670
         2009                                                       4,190
         Thereafter                                                31,408
                                                                ----------
                      Total                                     $  72,260
                                                                ==========



13.      CONCENTRATION OF CREDIT RISK

         The Company and its subsidiaries may, from time to time, maintain
         demand deposits in excess of federally insured limits in the normal
         course of business. At December 31, 2004, cash balances in excess of
         insured limits were approximately $24,384.





                                       38



DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------


14.      BUSINESS SEGMENT INFORMATION

         The Company reports using separate business segments, defined by the
         different services offered. The following table presents certain
         financial information of the Company's continuing operations as of and
         for the year ended December 31, 2004. Corporate loss consists solely of
         the Company's net interest expense.




                                           REAL ESTATE   PROPERTY
                                            BROKERAGE    MANAGEMENT     CORPORATE         TOTAL
                                          ------------    --------      ----------      --------

                                                                            
         Revenues                           $263,877      $ 22,939       $     --       $286,816
         Net income (loss)                    27,126          (244)        (6,282)        20,600
         Identifiable assets                  96,960         6,860             --        103,820
         Depreciation and amortization         3,992         1,509             --          5,501
         Capital expenditures                  7,909           504             --          8,413



                                       39

DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(Unaudited)







                                       40








                                                                          Page
                                                                          ----
Consolidated Balance Sheet.................................................42
Consolidated Statement of Operations.......................................43
Consolidated Statement of Changes in Members' Deficiency...................44
Consolidated Statement of Cash Flows.......................................45
Notes to Consolidated Financial Statements................................46-56










                                       41





                  DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2003
                             (DOLLARS IN THOUSANDS)
                                 (Unaudited)

                              ASSETS
Current assets:
  Cash and cash equivalents ...............................            $  9,062
  Commission receivables ..................................               1,217
  Escrow deposits .........................................                 312
  Due from affiliate ......................................                 415
  Due from officer ........................................               1,485
  Prepaid expenses and other current assets ...............               2,956
                                                                       --------
    Total current assets ..................................              15,447
                                                                       --------

  Property and equipment, net .............................              11,310
  Goodwill ................................................              34,319
  Trademarks ..............................................              21,663
  Other intangible assets, net ............................               3,821
  Deferred financing charges ..............................                 156
  Security deposits .......................................                 634
  Other assets ............................................                  58
                                                                       --------

    Total assets ..........................................            $ 87,408

               LIABILITIES AND MEMBERS' DEFICIENCY

Current liabilities:
  Current portion of notes payable and other obligations ..            $  2,400
  Current portion of notes payable to related parties .....               1,658
  Accounts payable and accrued expenses ...................               7,353
  Commissions payable .....................................               2,525
  Escrow deposits payable .................................                 312
  Other current liabilities ...............................                 500
                                                                       --------
    Total current liabilities .............................              14,748
                                                                       --------

  Notes payable and other obligations, less current portion               2,250
  Notes payable to related parties, less current portion ..              70,698

  Commitments and contingencies ...........................                  --

Members' deficiency .......................................                (288)
                                                                       --------

    Total liabilities and members' deficiency .............            $ 87,408
                                                                       ========



                 The accompanying notes are an integral part of
                    these consolidated financial statements.




                                       42



                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF OPERATIONS
                    FOR THE YEAR ENDED DECEMBER 31, 2003
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)

Revenues:
     Commission revenues .....................................      $ 157,958
     Property management fees ................................         19,807
     Other revenues ..........................................          2,088
                                                                    ---------
         Total ...............................................        179,853
                                                                    ---------

Costs and expenses:
     Commissions and royalties ..............................         100,461
     Sales administration ...................................          15,099
     Administration .........................................          28,480
     Rent ...................................................           8,677
     Advertising and promotions .............................          11,643
     Depreciation ...........................................           3,640
     Amortization of intangible assets.......................           5,037
     Other costs and expenses ...............................           1,917
                                                                    ---------
         Total ..............................................         174,954
                                                                    ---------

     Operating income .......................................           4,899
                                                                    ---------

Other:
     Other income ...........................................              67
     Interest income ........................................              15
     Interest expense .......................................          (4,782)
                                                                    ---------
         Total ..............................................          (4,700)
                                                                    ---------

Net income ..................................................       $     199
                                                                    =========





                 The accompanying notes are an integral part of
                    these consolidated financial statements.



                                       43



                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
          CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' DEFICIENCY
                    FOR THE YEAR ENDED DECEMBER 31, 2003
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)

Balance, January 1, 2003..........................................   $ (2,541)
     Net income...................................................        199
     Issuance of membership interests.............................      2,500
     Distributions................................................       (446)
                                                                     --------

Balance, December 31, 2003........................................   $   (288)
                                                                     ========






                 The accompanying notes are an integral part of
                    these consolidated financial statements.




                                       44

                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF CASH FLOWS
                    FOR THE YEAR ENDED DECEMBER 31, 2003
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)


                                                                                     
Cash flows from operating activities
     Net income ................................................................        $   199
                                                                                        -------
     Adjustments to reconcile net income to net cash
       provided by operating activities:
         Depreciation ..........................................................          3,640
         Amortization ..........................................................          5,037
         Interest paid-in-kind .................................................            308
          Changes in operating assets and liabilities, net of acquisitions
             Accounts receivable ...............................................            655
             Prepaid expenses and other assets .................................         (3,686)
             Accounts payable and accrued expenses .............................         (1,420)
             Commissions payable ...............................................          1,555
             Escrow deposits payable and other liabilities .....................            711
                                                                                        -------
         Cash provided by operating activities .................................          6,999
                                                                                        -------

Cash flows used in investing activities
     Capital expenditures ......................................................         (2,321)
     Cash acquired in acquisition ..............................................            650
     Investment in affiliate ...................................................           (325)
                                                                                        -------
         Cash used in investing activities .....................................         (1,996)
                                                                                        -------

Cash flows used in financing activities
     Proceeds from notes payable to related parties ............................          3,322
     Repayments of notes payable to related parties ............................         (2,127)
     Proceeds from notes payable and other obligations .........................            657
     Repayments of notes payable and other obligations .........................         (2,344)
     Deferred financing charges ................................................           (475)
     Distributions to members ..................................................           (446)
                                                                                        -------
          Cash used in financing activities ....................................         (1,413)
                                                                                        -------

Net increase in cash and cash equivalents ......................................          3,590

Cash and cash equivalents, beginning of year ...................................          5,472
                                                                                        -------

Cash and cash equivalents, end of year .........................................        $ 9,062
                                                                                        =======

Interest paid ..................................................................        $ 4,237
Income taxes paid ..............................................................              4

Non cash investing and financing activities:
See Note 3 for the acquisition of Douglas Elliman and RMG.
Fixed assets acquired through incurrence of debt ...............................        $    95
The Company recorded an increase of $2,500 to members' equity in connection with
the issuance of the subordinated debt. See Note 8





                 The accompanying notes are an integral part of
                    these consolidated financial statements.




                                       45


                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)

1.       BASIS OF PRESENTATION

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of Douglas
Elliman Realty, LLC (formerly Montauk Battery Realty, LLC), a New York limited
liability company, and its wholly-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.

         NATURE OF OPERATIONS

         The Company is primarily engaged in the real estate brokerage business
through its principal subsidiaries, Douglas Elliman, LLC ("Douglas Elliman"), a
residential real estate brokerage company based in New York, New York and its
Long Island based operations, B&H Associates of New York, LLC and B&H of the
Hamptons, LLC, both of which conduct business as Prudential Douglas Elliman Real
Estate ("Prudential Douglas Elliman"). The Company is also engaged in property
management through its subsidiary, Residential Management Group, LLC ("RMG").

         ORGANIZATION

         On October 15, 2002 Montauk Battery Realty, LLC was formed to
consolidate the ownership of the then Company's operating entities, B&H
Associates of New York, LLC and B&H of the Hamptons, LLC, under one company,
which was completed on December 19, 2002. On March 14, 2003, the Company
acquired Douglas Elliman and RMG and, on May 19, 2003, Montauk Battery Realty,
LLC changed its name to Douglas Elliman Realty, LLC. See Note 3.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
financial instruments with an original maturity of less than three months to be
cash equivalents.

         PROPERTY AND EQUIPMENT. Property, equipment and leasehold improvements
are stated at cost. Maintenance and repairs are charged to expense as incurred;
costs of major additions and betterments are capitalized. When property and
equipment are sold or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in other income.




                                       46


                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)

         Depreciation is provided on the straight line method over the estimated
useful lives of the related assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the estimated
useful lives of the improvements.

         GOODWILL AND TRADEMARKS. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), the Company does not amortize goodwill and other intangible assets,
primarily trademarks, deemed to have an indefinite useful life. The Company
assesses goodwill and certain intangible assets deemed to have an indefinite
useful life for impairment using fair value measurement techniques on an annual
basis.

         OTHER INTANGIBLE ASSETS. Other intangible assets consist primarily of
non-compete agreements and management contracts. Amortization of non-compete
agreements is being provided on a straight line basis over the contractual term,
generally three years or less. Amortization of management contracts is being
provided on a straight line basis over fifteen years.

         DEFERRED FINANCING CHARGES. Deferred financing charges consist
primarily of professional fees related to the acquisition of new financing and
the restructuring of the Company's debt obligations in March 2003. These are
being amortized over the life of the related debt obligations.

         REVENUE RECOGNITION. Real estate commissions earned by the Company's
real estate brokerage business are recorded as revenue on a gross basis upon the
closing of a real estate transaction (i.e., the purchase or sale of a home).
Property management fees earned by RMG are recorded as revenue when the related
services are performed.

         ADVERTISING  COSTS.  Advertising  costs are  expensed  as  incurred
and are included in operating expenses.

         INCOME TAXES. The Company is a limited liability company. The members
of a limited liability company are taxed on their proportionate share of the
Company's taxable income. Accordingly, no provision or liability for federal or
state income taxes is included in the financial statements.

         NEW ACCOUNTING PRONOUNCEMENTS. In December 2003, Financial Accounting
Standards Board Interpretation ("FIN") No. 46(R), "Consolidation of Variable
Interest Entities (revised December 2003)" was issued. The interpretation
revises FIN No. 46, "Consolidation of Variable Interest Entities" to exempt
certain entities from the requirements of FIN No. 46. The interpretation
requires a company to consolidate a variable interest entity ("VIE"), as
defined, when the company will absorb a majority of the VIE's expected losses,
receive a majority of the VIE's expected residual returns, or both. FIN No.
46(R) also requires consolidation of existing, non-controlled affiliates if the
VIE is unable to finance its operations without investor support, or where the
other investors do not have exposure to the significant risks and rewards of
ownership. The interpretation applies immediately to a VIE created or acquired
after January 31, 2003. For a VIE acquired before February 1, 2003, FIN No.
46(R) applies in the first interim period ending after March 15, 2004. The
Company has not completed its assessment of the impact of this interpretation,
but does not anticipate a material impact on its consolidated financial
statements.

         In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.



                                       47


                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)


SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of this statement did not have an impact on the Company's consolidated financial
statements.

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

3.       ACQUISITION OF DOUGLAS ELLIMAN AND RMG

         On March 14, 2003, the Company acquired from Insignia Financial Group,
Inc. ("Insignia") the operations of Douglas Elliman and RMG and related
trademarks for $67,250 cash, $175 in closing costs and the assumption of up to
$4,000 of liabilities. The results of their operations are included in the
consolidated financial statements from the date of acquisition. The Company's
acquisition objective was to leverage and expand its position in the real estate
brokerage business in the New York metropolitan area.

         Douglas Elliman was founded in 1911 and is one of Manhattan's leading
residential real estate brokers, specializing in the high-end of the sales and
rental marketplaces. Douglas Elliman has nine New York City offices with more
than 900 real estate brokers. RMG is a leading manager of rental, co-op and
condominium housing in the New York metropolitan area. RMG provides full service
third-party fee management for approximately 250 properties, representing
approximately 50,000 units in New York City, Nassau County, Northern New Jersey
and Westchester County.

         To fund the acquisition, the Company borrowed $71,500 from two of its
members, Prudential Real Estate Financial Services of America, Inc. ("PREFSA")
and New Valley Corporation ("New Valley"). PREFSA lent the Company $52,500 of
senior secured debt and PREFSA and New Valley each lent the Company $9,500 of
subordinated debt. In connection with the issuance of the subordinated debt,
PREFSA and New Valley each acquired additional membership interests representing
a 15% fully diluted interest in the Company. Based on an appraisal conducted by
an independent third party, the Company valued these additional membership
interests at $2,500 and recorded this amount as a reduction to the principal
amount of the subordinated debt. The Company is amortizing the value of these
membership interests over the term of the subordinated debt.

         The acquisition of Douglas Elliman and RMG has been accounted for in
accordance with SFAS No. 141, "Business Combinations". The cost of acquisition
was allocated to the assets acquired and liabilities assumed based on estimates
of their respective fair values at the date of acquisition. Fair values were
determined by an independent third-party appraisal.


                                       48

                DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)




         The following table summarizes the final purchase price allocation of
Douglas Elliman's and RMG's assets acquired and liabilities assumed at the date
of acquisition.

               ASSETS:
                 Cash                                           $      650
                 Receivables                                         2,860
                 Other assets                                          462
                 Property and equipment                             10,864
                 Customer-based intangible assets                    4,057
                 Management contract intangible assets               2,734
                 Trademarks                                         21,663
                 Goodwill                                           33,617
                                                                  --------
                     Total                                        $ 76,907
                                                                  ========

               LIABILITIES:
                 Accounts payable and accrued expenses            $  6,407
                 Other obligations                                   4,000
                 Acquisition financing from related parties         66,500
                                                                  --------

                   Total                                          $ 76,907
                                                                  ========

         The Company assesses intangible assets for impairment using fair value
measurement techniques on an annual basis. In accordance with SFAS No. 142, the
Company does not amortize goodwill and trademarks, which are deemed to have an
indefinite useful live. Douglas Elliman amortized the entire amount of the
acquired customer-based intangible assets of $4,057 in the year ended December
31, 2003. RMG is amortizing management contracts using the straight line method
over 15 years. This represents the expected period of benefit from such assets
and will result in future annual amortization expense of $181. For U.S. income
tax purposes, the Company and Insignia elected to treat the acquisition of
Douglas Elliman, RMG and the related trademarks as an asset acquisition. As a
result, the entire amount of intangible assets is amortizable over 15 years for
U.S. income tax purposes.

4.     PROPERTY AND EQUIPMENT

       Property and equipment at December 31, 2003 consist of the following:



           Furniture, fixtures and office equipment.................   $  9,773
           Internally developed software............................      4,362
           Leasehold improvements...................................      4,394
           Automobiles..............................................         49
                                                                       --------
                Total...............................................     18,578
           Less:  Accumulated depreciation and amortization.........     (7,268)
                                                                       --------
                Total...............................................   $ 11,310
                                                                       ========


       The estimated useful life of the property and equipment, excluding
leasehold improvements, at December 31, 2003 ranges from one to seven years.
Leasehold improvements are depreciated based on the lesser of the



                                       49

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)

remaining life of the lease or the useful life of the leasehold improvement.
Depreciation expense for the year ended December 31, 2003 was $3,640.

5.     INTANGIBLE ASSETS

       Intangible assets at December 31, 2003 consist of the following:

           Goodwill.............................................   $ 34,329
           Trademarks...........................................     21,663
           Deferred financing charges...........................        505
           Other intangible assets..............................      4,084
                                                                   --------
                Total...........................................     60,581
           Less:  Accumulated amortization......................       (622)
                                                                   --------
                Total...........................................   $ 59,959
                                                                   ========

       In accordance with SFAS No. 142, the Company does not amortize goodwill
and trademarks, which have indefinite lives. Amortization expense for the year
ended December 31, 2003 was $5,037, which includes $4,057 of amortization of
customer-based intangible assets acquired and fully amortized during the year.


       The changes in the carrying amount of goodwill for the year ended
       December 31, 2003 were as follows:



                                                               Real Estate          Property
                                                                Brokerage          Management           Total
                                                               -----------         ----------         ---------
                                                                                                   
     Balance as of December 31, 2002                            $     387          $      --          $     387
     Acquisition of Douglas Elliman (Note 3)                       33,614                 --             33,614
     Acquisition of RMG (Note 3)                                       --                  3                  3
     Other acquisitions                                               325                 --                325
                                                                ---------          ---------          ---------
     Balance as of December 31, 2003                            $  34,326          $       3          $  34,329
                                                                =========          =========          =========



6.     DUE FROM RELATED PARTIES

       As of December 31, 2003, the Company had a receivable of $415 due from
Burr Enterprises, Ltd., doing business as Preferred Empire Mortgage Company
("Preferred Empire Mortgage"), for advances made during 2002, and for allocation
of expenses in 2003. The balances are payable on demand and bear interest at the
prime rate (4.00% at December 31, 2003) plus 1.5% per annum compounded monthly.

        In December 2002, the Company advanced $300 to an officer in connection
with the purchase by the Company of the officer's stock ownership interest in
Preferred Empire Mortgage. In January 2003, the Company lent $1,150 to the
officer to finance the officer's purchase of additional stock in Preferred
Empire Mortgage. The loan bears interest at prime plus 1.5%, and is due in
January 2005. Upon receipt of the required regulatory approvals, the Company has
agreed to purchase this officer's shares at a price of $1,150.




                                       50

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)



7.       NOTES PAYABLE AND OTHER OBLIGATIONS

         Notes payable, capital leases and other obligations at December 31,
2003 consist of:


Payment obligation - former owner..................................    $2,000
Term note payable - bank...........................................     1,780
Notes payable issued in connection with acquisitions...............       667
Capital leases payable.............................................       203
                                                                      -------

Total notes payable, capital leases and
      other obligations............................................     4,650
Less:
      Current maturities...........................................    (2,400)
                                                                      -------
Amount due after one year..........................................   $ 2,250
                                                                       ======

PAYMENT OBLIGATION - FORMER OWNER:

         In connection with the acquisition of Douglas Elliman, the Company
assumed an obligation to make a payment to a former owner of Douglas Elliman in
an amount up to $4,000. The obligation is subject to certain claims and offsets
the Company has against this former owner. During 2003, $2,000 of this
obligation was paid by the Company. The remaining balance is due in August 2004.

TERM NOTE PAYABLE - BANK:

         In December 2002, Prudential Douglas Elliman borrowed $1,940, bearing
interest at 7% per annum and due in January 2006, from North Fork Bank.
Principal is amortized in the amount of $15 per month during the term of the
loan. The loan is collateralized by the assets of Prudential Douglas Elliman to
the extent of the unpaid principal and interest.

NOTES PAYABLE ISSUED IN CONNECTION WITH ACQUISITIONS AND CAPITAL LEASES PAYABLE:

         Prudential Douglas Elliman has various other notes issued in connection
with acquisitions of real estate brokerage companies and capital leases payable
bearing interest at rates between 0% and 14.5% outstanding at December 31, 2003,
which mature through 2009. Assets under capital lease have a net book value of
$207 at December 31, 2003.



                                       51

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)



 SCHEDULED MATURITIES:

         Scheduled maturities of notes payable, capital leases and other
obligations are as follows:

                 Year ending December 31:
                 2004............................         $ 2,400
                 2005............................             387
                 2006............................           1,558
                 2007............................             103
                 2008............................             102
                 Thereafter......................             100
                                                           ------
                          Total..................          $4,650
                                                           ======

8.       NOTES PAYABLE TO RELATED PARTIES

         Notes payable to related parties at December 31, 2003 consist of:


Acquisition term note payable - PREFSA....................          $50,790
Acquisition subordinated notes payable - PREFSA...........            8,459
Acquisition subordinated notes payable - New Valley.......            8,459
Franchise term notes payable - PREA.......................            4,121
Note payable - Dorothy Herman.............................              527
                                                                    -------

      Total notes payable to related parties..............           72,356
Less:
      Current maturities..................................           (1,658)
                                                                    -------
Amount due after one year.................................          $70,698
                                                                    =======


ACQUISITION TERM NOTE PAYABLE - PREFSA:

         In connection with the acquisition of Douglas Elliman and RMG, PREFSA
lent the Company $52,500 of Senior Secured Debt, maturing in 2011 (the "Term
Note"). The Term Note bears interest at prime rate plus 2% and is collateralized
by substantially all the assets of the Company. The Term Note provides for
monthly payments of 3% of gross revenues of Douglas Elliman and Prudential
Douglas Elliman prior to March 15, 2005 and 4.5% thereafter so long as the Term
Note is outstanding. The payments based on gross revenues are applied first to
interest and then to outstanding principal. Additional principal payments are
due on June 1 of each year in the amount equal to 60% of the Company's Excess
Cash Flow, which is defined in the Term Note loan agreement as the prior year's
net income plus cash proceeds received from asset sales and depreciation and
amortization expense, less cash capital expenditures, principal payments on
notes payable and capital leases (excluding the revolving note facility
discussed below), and tax distributions made to the Company's members. The Term
Note includes covenants that, among other things, require the Company to meet
certain financial ratios, limit the Company's ability to incur debt, and limit
capital expenditures.




                                       52

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)




SUBORDINATED NOTES PAYABLE - PREFSA AND NEW VALLEY:

         In connection with the acquisition of Douglas Elliman and RMG, PREFSA
and New Valley each lent the Company $9,500 of subordinated debt, due 2013 (the
"Subordinated Debt"). The Subordinated Debt is subordinate to the Term Note and
bears interest at 12% per annum, of which 10% is payable in cash and 2% accrues
and is added to the principal amount. Interest added to the principal balance in
2003 was $418. In connection with the issuance of the Subordinated Debt, PREFSA
and New Valley each acquired additional membership interests representing a 15%
fully-diluted interest in the Company. Based on an appraisal conducted by an
independent third party, the Company valued those membership interests at $2,500
and recorded this amount as a reduction to the principal amount of the
Subordinated Debt. The Company is amortizing the value of these membership
interests over the term of the Subordinated Debt. The amount amortized to
interest expense for the year ended December 31, 2003 was $110. Principal
payments are due on June 1 of each year in an amount equal to 20% of the
Company's Excess Cash Flow computed in the same manner as defined in the Term
Note loan agreement.

FRANCHISE TERM NOTES PAYABLE:

         In December 2002, The Prudential Real Estate Affiliates, Inc. ("PREA"
or the "Franchiser"), an affiliate of PREFSA, lent Prudential Douglas Elliman
$3,300 bearing interest at 9% per annum and due in annual installments of
principal and interest of $514 through 2012. A portion of the royalties received
by PREA are applied to the annual principal payments due under the note.

         In March 2003, PREA lent Douglas Elliman $1,250 bearing interest at 8%
per annum and due in annual installments of principal and interest of $186
through 2013. A portion of the royalties received by PREA are applied to the
annual principal payments due under the note.

REVOLVING LOAN FACILITY:

         In March 2003, the Company and PREFSA entered into a revolving loan
facility for $5,000, available until March 2006. Borrowings under the facility
bear interest at prime rate plus 1.5% and are collateralized by substantially
all the assets of the Company. As of December 31, 2003, $5,000 was available
under the facility.

NOTE PAYABLE - DOROTHY HERMAN:

         As of December 31, 2003, the Company was indebted to Dorothy Herman, a
member and executive officer of Realty, in the amount of $527 with interest at
prime rate plus 1.5%. The principal amount is due on June 1 of each year in the
amount equal to approximately 8.29% of the Company's Excess Cash Flow, which is
computed in the same manner as defined in the Term Loan agreements, provided New
Valley receives an equal payment and PREFSA receives a proportionate payment,
each as a return of capital.




                                       53

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)



SCHEDULED MATURITIES:

         Scheduled maturities of debt to related parties are presented below.
The table does not include the Company's obligations to make principal payments
under the Term Note, the Subordinated Notes, or the note payable to Dorothy
Herman based on percentages of future Gross Revenues or future Excess Cash Flow.

               Year ending December 31:
               2004...........................        $  1,658
               2005...........................             455
               2006...........................             455
               2007...........................             455
               2008...........................             455
               Thereafter.....................          68,878
                                                       -------
                       Total..................         $72,356
                                                       =======

9.      FRANCHISE AGREEMENT AND ROYALTY FEES

        Douglas Elliman is party to a franchise agreement with PREA entered into
in March 2003. The agreement provides for Douglas Elliman to make monthly
payments of royalty fees to PREA based on the level of gross revenue, with a
royalty rate ranging from 1.8% to 6.0% of gross revenues earned. Pursuant to the
franchise agreement, Douglas Elliman was granted a 50% reduction in royalty fees
for the first year and a 50% deferral of applicable royalty fees for the second
year, which is payable in monthly installments beginning in the first month of
the fourth year. The percentage was 0.90% for the period ended December 31,
2003. The agreement also provides for Douglas Elliman to remit advertising and
annual franchise fees to PREA, which are based on gross revenues and the number
of offices occupied.

        Prudential Douglas Elliman is party to a franchise agreement with PREA
entered into in December 2002. The agreement provides for Prudential Douglas
Elliman to make monthly payments of royalty fees to PREA based on 2.24% of gross
revenues earned for the first five years and on a scale ranging from 1.8% to
6.0% of gross revenues earned thereafter. The agreement also provides for
Prudential Douglas Elliman to remit advertising and annual franchise fees, which
are based on gross revenues and the number of offices occupied. Prudential
Douglas Elliman operates each of its offices under its franchiser's brand name,
but generally does not own any of the brand names under which it operates.

        For the year ended December 31, 2003, total fees incurred under the
franchise agreements amounted to approximately $2,162.

        The Franchiser has significant rights over the use of the franchised
service marks and the conduct of the brokerage companies' business. The
franchise agreements require the companies to coordinate with the Franchiser on
significant matters relating to their operations, including the opening and
closing of offices, make substantial royalty payments to the Franchiser and
contribute significant amounts to national advertising funds maintained by the
Franchiser, indemnify the Franchiser against losses arising out of the
operations of their business under the franchise agreements and maintain
standards and comply with guidelines relating to their operations which are
applicable to all franchisees of the Franchiser's real estate franchise system.




                                       54

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)



        The Franchiser has the right to terminate Douglas Elliman's and
Prudential Douglas Elliman's franchises, upon the occurrence of certain events,
including a bankruptcy or insolvency event, a change in control, a transfer of
rights under the franchise agreement and a failure to promptly pay amounts due
under the franchise agreements. A termination of Douglas Elliman's or Prudential
Douglas Elliman's franchise agreement could have a material adverse affect on
the Company.

        The franchise agreements grant Douglas Elliman and Prudential Douglas
Elliman exclusive franchises in New York for the counties of Nassau and Suffolk
on Long Island and for Manhattan, subject to various exceptions and to meeting
certain annual revenue thresholds. If Douglas Elliman or Prudential Douglas
Elliman fails to achieve these levels of revenues for two consecutive years or
otherwise materially breaches the franchise agreements, the Franchiser would
have the right to terminate the applicable brokerage company's exclusivity
rights. A loss of these rights could have a material adverse affect on the
Company.

10.     DEFINED CONTRIBUTION PLANS

        Douglas Elliman, Prudential Douglas Elliman and RMG sponsor individual
401(k) plans which allow eligible employees to make pre-tax contributions.
Employees who have completed one year of service, as defined, are eligible to
participate in the plans. The plans provide for matching employer contributions
of 10% of employee contributions up to a maximum annual contribution of $12 per
employee. Participants are immediately vested in their contributions made.
Matching contributions for the years ended December 31, 2003 amounted to $106.

11.     COMMITMENTS AND CONTINGENCIES

        LAWSUITS

        The Company is involved in litigation through the normal course of
business. Certain claims arising before the date of acquisition of Douglas
Elliman and RMG are subject to indemnification agreements with the prior owners.
The majority of these claims have been referred to the insurance carrier and
related counsel. The Company believes that the resolution of these matters will
not have a material adverse effect on the financial position of the Company.

        LEASES

        The Company and its subsidiaries are obligated under various operating
lease agreements for office facilities. Certain leases are non-cancelable and
expire on various dates through September 2013. Rent expense during the year
ended December 31, 2003 was approximately $6,602.




                                       55

                 DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                           (DOLLARS IN THOUSANDS)
                                 (Unaudited)




         Future minimum rental payments under the operating leases at December
31, 2003 are as follows:

                Year ending December 31:
                2004...........................         $ 7,452
                2005...........................           7,970
                2006...........................           6,953
                2007...........................           6,121
                2008...........................           5,194
                Thereafter.....................          24,700
                                                        -------
                        Total..................         $58,390
                                                        =======

12.      CONCENTRATION OF CREDIT RISK

         The Company and its subsidiaries may, from time to time, maintain
demand deposits in excess of federally insured limits in the normal course of
business. At December 31, 2003, cash balances in excess of insured limits were
approximately $10,008.

13.      BUSINESS SEGMENT INFORMATION

         The following table presents certain financial information of the
Company's continuing operations as of and for the year ended December 31, 2003.
Corporate loss consists solely of the Company's net interest expense.




                                     Real
                                    Estate          Property
                                  Brokerage        Management          Corporate           Total
                                  ---------        ----------          ---------           -----
                                                                            
Revenues....................     $  160,046      $  19,807              $     --        $  179,853
Net income (loss)...........          4,171            795                (4,767)              199
Identifiable assets.........         77,934          9,474                    --            87,408
Depreciation and
   amortization.............          7,672          1,005                    --             8,677
Capital expenditures........          2,169            152                    --             2,321




                                       56













                               KOA INVESTORS, LLC
                         (A Limited Liability Company)

                              FINANCIAL STATEMENTS

                               DECEMBER 31, 2005








                                       57


                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                              FINANCIAL STATEMENTS





                                C O N T E N T S



                                                                                     Page
                                                                                  



Balance Sheet                                                                        59

Statement of Operations                                                              60

Statement of Changes in Members' Deficit                                             61

Statement of Cash Flows                                                              62

Notes to Financial Statements                                                       63 - 67






                                       58


                               KOA INVESTORS, LLC
                                  BALANCE SHEET
                                DECEMBER 31, 2005
                                  (UNAUDITED)




                                                   2005
                                               -----------
                                            
                   ASSETS

CURRENT ASSETS
   Cash and cash equivalents                   $ 1,375,477
   Accounts receivable, net of allowance
      of $41,183                                 1,234,460
   Inventories                                      89,641
   Prepaid and other current assets                219,058
                                               -----------
      TOTAL CURRENT ASSETS                       2,918,636
                                               -----------
LEASEHOLD INTEREST, IMPROVEMENTS
   AND PERSONAL PROPERTY
   Leasehold interest and improvements          61,284,564
   Furnishings and equipment                    17,528,917
                                               -----------
                                                78,813,481
Less accumulated depreciation                    5,977,097
                                               -----------
                                                72,836,384
                                               -----------
DEFERRED FINANCING COSTS, NET OF ACCUMULATED
   AMORTIZATION OF $301,053 IN 2005              2,017,622
RESTRICTED CASH                                  3,135,209
                                               -----------
                                               $80,907,851
                                               ===========

      LIABILITIES AND MEMBERS' DEFICIT

LIABILITIES
   Accounts payable and accrued expenses       $ 3,962,891
   Due to affiliates                                66,950
                                               -----------
      TOTAL CURRENT LIABILITIES                  4,029,841
MORTGAGE NOTE PAYABLE                           82,000,000
DEFERRED GROUND RENT PAYABLE                     4,509,393
                                               -----------
                                                90,539,234
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT                                (9,631,383)
                                               -----------
                                               $80,907,851
                                               ===========


The accompanying notes are an integral part of these financial statements.



                                       59




                               KOA INVESTORS, LLC
                             STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 2005
                                  (UNAUDITED)



                                                    2005
                                                ------------
                                             
REVENUES
   Rooms                                        $ 15,920,758
   Food and beverage                               6,677,341
   Other operating revenue                         1,653,424
                                                ------------
                                                  24,251,523
                                                ------------
COSTS AND EXPENSES
   Cost of sales                                  13,907,174
   Other operating expenses                        5,092,453
   Selling, general and administrative             4,927,758
   Management fees                                   604,980
   Ground rent                                     1,062,747
   Interest expense                                6,724,527
   Depreciation and amortization                   7,401,288
                                                ------------
                                                  39,720,927
                                                ------------
Interest income                                       38,130
                                                ------------
NET LOSS                                        $(15,431,274)
                                                ============


The accompanying notes are an integral part of these financial statements.




                                       60



                               KOA INVESTORS, LLC
               STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
                          YEARS ENDED DECEMBER 31, 2005

BALANCE, JANUARY 1, 2005                                     $ 14,799,913
Contributions                                                   2,000,000
Distributions                                                 (11,000,022)
Net loss                                                      (15,431,274)
                                                             ------------
BALANCE, DECEMBER 31, 2005                                   $ (9,631,383)
                                                             ============

The accompanying notes are an integral part of these financial statements.



                                       61




                               KOA INVESTORS, LLC
                             STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2005
                                  (UNAUDITED)



                                                        2005
                                                    ------------
                                                 
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss                                            $(15,431,274)
ADJUSTMENTS TO RECONCILE NET LOSS
   TO NET CASH USED IN OPERATING ACTIVITIES:
   Depreciation and amortization                       7,401,288
   Bad debts                                              41,183
   Accounts receivable                                  (768,632)
   Inventories                                           (11,691)
   Prepaid and other current assets                      183,604
   Accounts payable and accrued expenses               3,962,891
   Deferred ground rent                                1,050,248
                                                    ------------
      NET CASH USED IN OPERATING ACTIVITIES           (3,572,383)
                                                    ------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
   Additions to leasehold interest, improvements
      and personal property                           (4,304,935)
   Restricted cash                                    (3,135,209)
                                                    ------------
      NET CASH USED IN INVESTING ACTIVITIES           (7,440,144)
                                                    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from mortgage notes                       82,000,000
   Payments on mortgages and loans                   (57,000,000)
   Deferred financing costs                           (2,318,675)
   Repayment of capital obligations                   (3,355,616)
   Members' contributions                              2,000,000
   Distributions to members                          (11,000,022)
                                                    ------------
      NET CASH PROVIDED BY FINANCING ACTIVITIES       10,325,687
                                                    ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                 (686,840)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR         2,062,317
                                                    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR            $  1,375,477
                                                    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the year ended for:
      Interest                                      $  5,994,885
                                                    ============


The accompanying notes are an integral part of these financial statements.


                                       62



                               KOA INVESTORS, LLC
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                                  (UNAUDITED)

1.   PURPOSE AND ORGANIZATION

     A.   FORMATION

          Koa Investors, LLC (the "Company") was formed as a Delaware limited
          liability company on November 17, 1999. The Company was formed to
          acquire a mortgage note and foreclose on the note for the purpose of
          owning, developing and operating a hotel resort in Keauhou, Hawaii
          (the "Hotel").

          The Hotel contains 521 guest rooms, cabana style dining services, and
          a multi-level pool with a poolside grill and bar. The Hotel renovation
          was completed in January 2005. The Company has engaged Starwood Hotels
          & Resorts Worldwide, Inc. ("Starwood") as its exclusive managing agent
          to operate the Hotel.

          Pursuant to the operating agreement, the Company will continue in
          existence until the earlier of December 31, 2051 or upon the decision
          of the Decision Members, as defined, to terminate the Company.

     B.   CONTRIBUTIONS

          The operating agreement (the "Agreement") provides for contributions
          generally based upon each member's ownership interest.

     C.   DISTRIBUTIONS

          Cash available for distribution, as defined in the Agreement, is
          distributed in accordance with the contributions made until the
          members have received a 12% return on their contributions and have
          been returned all contributions; thereafter incentive distributions
          may be earned by some of the members subject to achievement of certain
          returns, as defined, in the Agreement. As of December 31, 2005 unpaid
          returns were approximately $1,289,553.

     D.   INCOME AND LOSSES

          Generally, income and losses are allocated in such a manner as to
          cause each member's capital account to equal the cash distribution
          each would receive based upon a hypothetical liquidation at the
          Company's book basis.



                                       63


                               KOA INVESTORS, LLC
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                                  (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A.   CASH AND CASH EQUIVALENTS

          Cash and cash equivalents include cash in banks and overnight
          investments that at various times during the year exceed Federally
          insured limits. The Company believes it mitigates this risk by banking
          with high credit institutions.

     B.   ACCOUNTS RECEIVABLE

          Accounts receivable consists of the receivables for guest rooms and
          other services. Accounts receivable does not bear interest and is
          evaluated periodically by collectibility. The Company establishes an
          allowance for doubtful accounts, based on a percentage of the aged
          accounts receivable throughout the year.

     C.   INVENTORIES

          Inventories, comprised primarily of food, beverage and hotel operating
          supplies, are stated at the lower cost or market. Cost is determined
          by the first-in, first-out method.

     D.   RESTRICTED ASSETS

          Restricted assets at December 31, 2005 consisted  primarily of amounts
          held in escrow related to interest, insurance and property taxes.

     E.   REAL ESTATE UNDER DEVELOPMENT

          All costs incurred in connection with the acquisition, development and
          construction of the Hotel were capitalized. The Hotel was completed in
          January 2005.

     F.   LEASEHOLD INTEREST, IMPROVEMENTS AND PERSONAL PROPERTY

          Leasehold interest, improvements and personal property are stated at
          cost. Buildings, improvements and furnishings and equipment are
          depreciated using the straight-line method over their estimated useful
          lives. Significant improvements and betterments are capitalized.
          Maintenance and repairs are charged to expense as incurred.

          The estimated useful lives are as follows:


                          
Buildings and improvements   39 years
Land improvements            15 years
Furnishings and equipment     5 years


          On a periodic basis, management assesses whether there are any
          indicators that the value of the real estate and personal property may
          be impaired. The value is impaired only if management's estimate of
          the aggregate future cash flows (undiscounted and without interest
          charges) generated by the Hotel is less than the carrying value of the
          assets. Any impairment losses would be measured primarily by comparing
          management's analysis of estimated future cash flows generated by the
          Hotel discounted at an appropriate rate, to the carrying value of the
          asset. Management does not believe that the value of any of its real
          estate and personal property is impaired.



                                       64



                               KOA INVESTORS, LLC
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                                  (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     G.   DEFERRED FINANCING COSTS

          Costs incurred in obtaining financing or interest cap agreements are
          amortized over the term of the related debt.

     H.   DEFERRED GROUND RENT

          Base rental expense on the Company's ground lease is recognized
          ratably over its non-cancelable term. The difference between the
          ground rent recognized using the straight-line method and the ground
          rent in accordance with the lease is reflected as deferred ground rent
          payable on the balance sheets.

     I.   REVENUE RECOGNITION

          Revenues are recognized when services are rendered. The Company
          receives deposits for events and rooms. Such deposits, which were
          $474,802 at December 31, 2005, are deferred and included in accounts
          payable and accrued expenses in the accompanying balance sheet. The
          amounts are charged to income when the specific event takes place.

     J.   INCOME TAXES

          No provision or benefit for income taxes has been included in the
          financial statements because as a limited liability company, the
          Company is generally not subject to Federal or state income taxes. The
          effects of the Company's activities accrue directly to the members.

     K.   ADVERTISING

          Advertising and marketing costs, which were $578,586 for the year
          ended December 31, 2005, are expensed as incurred.

     L.   USE OF ESTIMATES

          The preparation of financial statements, in conformity with accounting
          principles generally accepted in the United States of America
          ("GAAP"), requires management to make estimates and assumptions that
          affect the reported amounts of assets and liabilities and disclosure
          of contingent assets and liabilities at the date of the financial
          statements and the reported amounts of revenues and expenses during
          the period. Actual results could differ from those estimates.

3.   LEASEHOLD INTEREST, IMPROVEMENTS AND PERSONAL PROPERTY AND MORTGAGE NOTE
     PAYABLE

     The components of the Company's Leasehold Interest, Improvements and
Personal Property and the related mortgage note payable at December 31, 2005 are
as follows:


      Leasehold interest and improvements ............    $ 61,284,564
      Furnishings and equipment ......................      17,528,917
                                                          ------------
       Total .........................................      78,813,481
      Less accumulated depreciation ..................      (5,977,097)
                                                          ------------
       Net investment in real estate .................    $ 72,836,384
                                                          ============

      Mortgage note payable ..........................    $ 82,000,000
      Current portion of mortgage
       note payable ..................................              --
                                                          ------------
      Mortgage note payable -
       long-term portion .............................    $ 82,000,000
                                                          ============

     MORTGAGE NOTES

     The Company entered into a loan agreement with Lehman Brothers Bank, FSB,
     pursuant to an $82,000,000 mortgage note payable (the "Note") dated August
     1, 2005. The Note bears interest at the LIBOR rate plus 2.65% (LIBOR was
     4.12% at December 31, 2005). The note matures on August 8, 2008 and has two
     1-year extension options under terms defined in the loan agreement. The
     note is secured by the Company's property.



                                       65


                               KOA INVESTORS, LLC
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                                  (UNAUDITED)

     The loan agreement required the Company to purchase an interest cap
     agreement on the entire outstanding principal to mitigate its interest
     risk. The agreement caps the LIBOR rate at 5.5% per annum. The cap
     agreement was deemed to have a nominal value at December 31, 2005.

     The Company entered into a cash management agreement that specifies the
     priority of application of cash receipts. In addition, the Company was
     required to fund certain escrows for the ground lease, insurance, property
     taxes and a reserve for replacements.

     The loan agreement also provides for the maintenance of minimum debt
     service coverage ratios beginning in March 2007. The note provides for
     prepayment penalties ranging from 2% of the outstanding principal if the
     note is prepaid before February 9, 2006 and decreasing to 1.5% if prepaid
     before February 9, 2007 and to 1% if prepaid before February 9, 2008;
     thereafter there is no fee.

     Prior to the refinancing in 2005, the Company was obligated pursuant to a
     $57,000,000 mortgage note payable dated April 15, 2004. The note required
     payments of interest only at 10% per annum. In connection with the early
     repayment of the note, the Company incurred prepayment penalties of
     approximately $852,000 which is included in interest expense.

4.   CAPITAL LEASE OBLIGATIONS

     In June 2004, the Company entered into a capital lease agreement to acquire
     up to $5,000,000 of furniture and equipment through GMAC Commercial
     Mortgage Corporation ("GMAC"). Monthly payments commenced in May 2005. In
     connection with the refinancing in August, 2005, the capital lease was
     repaid.

5.   GROUND LEASE

     In connection with the acquisition of the property, the Company assumed two
     ground leases. On December 20, 2002, the Company entered into a Lease
     Escrow Agreement, which modified and combined the provisions of the ground
     lease.

     As of December 31, 2005, the minimum amounts payable under the terms of the
     ground lease for the next five years and in the aggregate thereafter, are
     as follows:

               
                         
               2006         $    12,000
               2007              12,000
               2008              12,000
               2009              12,000
               2010              12,000
               Thereafter    76,745,110
                            -----------
                            $76,805,110
                            ===========
               

     Subsequent to December 31, 2037, minimum payments are to be agreed upon at
     a later date in accordance with the Lease Escrow Agreement, but in no event
     will be less than $1,537,000. The ground lease expires on April 30, 2069.

     The Company is also obligated to pay to the ground lessor percentage rent,
     as stipulated in the original ground lease agreement, once the Hotel begins
     operations. As of December 31, 2005, no percentage rent has been paid or
     accrued.


                                       66




                               KOA INVESTORS, LLC
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                                  (UNAUDITED)

5.   GROUND LEASE (CONTINUED)

     The Company incurred ground rent expense of approximately $1,141,000 for
     2005.

6.   RELATED PARTY TRANSACTIONS

     DUE TO AFFILIATES

     Due to affiliates represents advances from affiliates of the Company
     through common control to finance short-term cash flow requirements of the
     Company. The advance is non-interest bearing and due on demand.

     ASSET MANAGEMENT FEES

     In accordance with the terms of the operating agreement, the managing
     member provides asset management services to the Company for an annual fee
     equal to the greater of $500,000 or 2% of the gross asset value, at cost,
     of the assets owned by the Company and prior to depreciation. Upon
     completion of the renovation of the Hotel, the asset management fee was
     reduced, by amendment, to $120,000 per annum.

     For the year ended December 31, 2005 the Company incurred asset management
     fees in the amount of $120,000.

7.   COMMITMENTS AND CONTINGENCIES

     MANAGEMENT FEES

     On December 20, 2002, the Company entered into a management agreement (the
     "Management Agreement") with Sheraton Operating Corporation ("Starwood"),
     which requires Starwood to provide managerial and promotional services for
     the Project. The Management Agreement has an operating term of two (2)
     periods of five (5) years each, as more fully described in the Management
     Agreement.

     Starwood has the option to renew the Management Agreement for two
     successive terms of five years each. The Management Agreement consists of a
     base management fee equal to 2% of the Gross Operating Revenue of the
     Project, as defined for the first 12 months after the Hotel opens, 2.5% for
     the subsequent 12 months and 3% thereafter. In addition, the Management
     Agreement provides for an incentive fee equal to 15% of operating income in
     excess of a threshold, as defined. Management fees in the amount of
     $484,980 were incurred in 2005.

     In accordance with the terms of the Management Agreement, the Company also
     reimburses Starwood for services including payroll and benefits, insurance,
     marketing, advertising, promotion, sales, reservation services and other
     charges.


                                       67















                               KOA INVESTORS, LLC
                         (A Limited Liability Company)

                              FINANCIAL STATEMENTS

                               DECEMBER 31, 2004





                                       68




                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                              FINANCIAL STATEMENTS





                                C O N T E N T S



                                                                                     Page
                                                                                  


Report of Independent Registered Public Accounting Firm                              70

Balance Sheet                                                                        71

Statement of Operations                                                              72

Statement of Changes in Members' Equity                                              73

Statement of Cash Flows                                                              74

Notes to Financial Statements                                                       75 - 79









                                       69


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Members
of KOA Investors, LLC
(A Limited Liability Company)

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of KOA
Investors, LLC (a Delaware limited liability company) at December 31, 2004 and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.


/s/ Weiser LLP


New York, New York
February 7, 2005


                                       70





                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                                 BALANCE SHEET
                               DECEMBER 31, 2004





ASSETS
                                                                                                      
Real estate under development                                                                            $32,625,132
Fixed assets, at cost, net of accumulated depreciation of $634,141                                        44,714,014
Cash and cash equivalents                                                                                  2,062,317
Cash - restricted                                                                                          5,538,372
Accounts receivable                                                                                          507,011
Prepaid expenses and other assets                                                                            480,612
Deferred financing costs, net of accumulated amortization of $847,854                                      1,723,952
                                                                                                         -----------
                                                                                                         $87,651,410
                                                                                                         ===========
LIABILITIES AND MEMBERS' EQUITY

Mortgage note payable                                                                                    $57,000,000
Capital lease obligation                                                                                   3,355,616
Construction costs and accounts payable                                                                    7,537,786
Due to affiliates                                                                                             66,950
Deferred ground rent payable                                                                               3,459,145
                                                                                                         -----------
                                                                                                          71,419,497
                                                                                                         ===========
Commitments, contingencies, and other matters

Members' equity                                                                                           16,231,913
                                                                                                         -----------
                                                                                                         $87,651,410
                                                                                                         ===========


See notes to financial statements.


                                       71



                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                            STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED DECEMBER 31, 2004




                                                                                                  
Revenue                                                                                             $ 2,806,376
Costs and expenses                                                                                    2,286,061
                                                                                                    -----------
Gross Profit                                                                                            520,315
                                                                                                    -----------
Operating expenses:
  General and administrative                                                                            574,317
  Repairs and maintenance                                                                               233,862
  Marketing                                                                                             810,493
  Utilities                                                                                             380,995
  Ground rent                                                                                           140,226
  Management fees                                                                                        60,201
  Real estate taxes                                                                                      27,470
  Insurance                                                                                              73,423
  Depreciation                                                                                          634,141
  Amortization                                                                                          104,488
                                                                                                    -----------
      Total operating expenses                                                                        3,039,616
                                                                                                    -----------

Operating loss                                                                                       (2,519,301)
                                                                                                    -----------
Other expenses:

Interest expense                                                                                        709,480
                                                                                                    -----------
      Total other expenses                                                                              709,480
                                                                                                    -----------

Net loss                                                                                            $(3,228,781)
                                                                                                    ===========


See notes to financial statements.


                                       72





                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                    STATEMENT OF CHANGES IN MEMBERS' EQUITY
                     FOR THE YEAR ENDED DECEMBER 31, 2004


Balance - January 1, 2004                                         $ 12,459,794

Contributions                                                        7,000,900

Net loss                                                            (3,228,781)
                                                                  ------------
Balance - December 31, 2004                                       $ 16,231,913
                                                                  ============

See notes to financial statements.


                                       73





                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                            STATEMENT OF CASH FLOWS
                     FOR THE YEAR ENDED DECEMBER 31, 2004





Cash flows from operating activities:
                                                                                                
          Net loss                                                                                    $(3,228,781)
          Adjustment to reconcile net loss to net cash used
             in operating activities:
               Depreciation                                                                               634,141
               Amortization                                                                               104,488
               Ground rent                                                                                138,782
               Changes in assets:
                 Increase in accounts receivable                                                         (507,011)
                 Increase in prepaid expenses and other assets                                           (338,672)
                                                                                                      -----------
                    Net cash used in operating activities                                              (3,197,053)
                                                                                                      -----------
Cash flows from investing activities:
               Real estate under development                                                          (50,037,743)
                                                                                                      -----------
                    Net cash used in investing activities                                             (50,037,743)
                                                                                                      -----------
Cash flows from financing activities:
             Proceeds from mortgage note payable                                                       58,500,000
             Loan payoff                                                                               (6,500,000)
             Restricted cash deposits                                                                  (5,538,372)
             Capital lease obligation                                                                   3,355,616
             Members' contributions                                                                     7,000,900
             Deferred financing costs                                                                  (2,200,095)
                                                                                                      -----------
                    Net cash provided by financing activities                                          54,618,049
                                                                                                      -----------
Net increase in cash and cash equivalents                                                               1,383,253

Cash and cash equivalents - beginning of year                                                             679,064
                                                                                                      -----------
Cash and cash equivalents - end of year                                                               $ 2,062,317
                                                                                                      ===========
Supplemental disclosure of cash flow information:
    Cash paid during the year for interest, net of amounts capitalized                                $   506,401
                                                                                                      ===========
Supplemental disclosure of non-cash financing activities:
    Deferred ground rent payable                                                                      $ 1,013,376
                                                                                                      ===========


See notes to financial statements.


                                       74





                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2004


Note   1 - Organization

           KOA Investors, LLC (the "Company"), was formed as a limited
           liability company under the laws of the State of Delaware in
           November 1999. The Company was formed to acquire a mortgage note
           (see Note 3) and foreclose on the note for the purpose of owning,
           developing and operating a hotel resort in Keauhou, Hawaii (the
           "Project").

           The Project contains 521 guest rooms, cabana style dining services,
           and a multilevel pool with a poolside grill and bar. Management
           projects the renovation of the hotel will be completed by the
           beginning of 2005. The Company has engaged Starwood Hotels & Resorts
           Worldwide, Inc. ("Starwood") as its exclusive managing agent to
           operate the Project.

           Pursuant to the operating agreement, the Company will continue in
           existence until the earlier of December 31, 2051 or upon the
           decision of the Decision Members, as defined, to terminate the
           Company.


Note   2 - Summary of Significant Accounting Policies

           a) Basis of Accounting

              The accompanying financial statements have been prepared in
              accordance with accounting principles generally accepted in the
              United States of America.

           b) Real Estate Under Development

              Costs for the acquisition, development and construction of the
              Project are charged to real estate under development. Capitalized
              costs include deferred ground rent and interest expenditures
              incurred during the acquisition, development and construction of
              the Project.


           c) Cash and Cash Equivalents

              Cash and cash equivalents include cash in banks and overnight
              investments that at various times during the year have exceeded
              the Federally insured limits. The Company believes it mitigates
              its risk by banking with major financial institutions.

           d) Accounts Receivable

              Accounts receivable consists of the receivables from guests for
              guest room revenue. Accounts receivable does not bear interest
              and is periodically evaluated for collectibility. At December 31,
              2004, the Company considers accounts receivable to be fully
              collectible; accordingly, no allowance for doubtful accounts is
              required. The Company generally does not require collateral for
              accounts receivable.


                                       75





                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2004


Note   2 - Summary of Significant Accounting Policies (continued)

           e) Inventories

              Inventories are comprised primarily of hotel operating supplies
              and are valued at the lower of cost or market. Cost is determined
              by the first-in, first-out method.

           f) Revenue Recognition

              Revenues are primarily derived from hotel and resort revenues at
              the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii and
              the Company recognizes revenues when services are rendered.


           g) Deferred Financing Costs

              Costs incurred in obtaining financing are amortized over the term
              of the related financing instrument. Amortization of such costs
              from inception through completion of construction is capitalized
              as a cost of the Project and is amortized on a straight-line basis
              over the life of the related debt, which approximates amortization
              expense under the effective interest method.


           h) Property and Equipment Under Capital Lease

              Property and equipment under capital lease represents property
              and equipment, which have been leased and have been capitalized
              by the Company. The property and equipment are recorded at cost
              and are depreciated on the straight-line basis over the term of
              the lease.

           i) Leasehold Improvements and Equipment

              Leasehold improvements and furniture, fixtures and equipment are
              carried at cost and depreciated on the straight-line basis over
              their estimated useful lives.

              Expenditures for maintenance and repairs are charged to
              operations as incurred. Significant renovations or betterments,
              which extend the useful life of the assets, are capitalized.

           j) Deferred Ground Rent Payable

              Base rental expense on the ground lease is recognized ratably
              over its non-cancelable term. The difference between the ground
              rent expense recognized using the straight-line method and the
              ground rent in accordance with the lease is shown as deferred
              ground rent payable on the balance sheet.

           k) Income Taxes

              No provision or benefit for income taxes has been included in the
              financial statements because such taxable income or loss passes
              through to, and is reportable by, the members.


                                       76




                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2004


Note   2 - Summary of Significant Accounting Policies (continued)

           1) Use of Estimates

              The preparation of financial statements requires management to
              make estimates and assumptions that affect the reported amounts
              of assets and liabilities and disclosure of contingent assets and
              liabilities at the date of the financial statements and the
              reported amounts of revenue and expenses during the reporting
              period. Actual results could differ from those estimates.

Note   3 - Fixed Assets and Real Estate Under Development

           FIXED ASSETS

           As of December 31, 2004, fixed assets consists of the following:

           Building  and leasehold interest                      $ 32,287,529
           Land improvements                                        2,937,572
           Furniture and equipment                                 10,123,055
                                                                 ------------
                                                                   45,338,156
           Less: accumulated depreciation                             634,141
                                                                 ------------
           Total                                                 $ 44,714,014
                                                                 ============

           Depreciation expense for the year ended December 31, 2004 amounted to
           $634,141.

           REAL ESTATE UNDER DEVELOPMENT

           The Company purchased a non-performing note, collateralized by a
           leasehold interest in a hotel resort in Hawaii, for approximately
           $7,300,000. The Company foreclosed on the note and took possession of
           the leasehold for renovation and operation of the hotel. During 2004,
           the Company began to phase-in operations at the Project. At December
           31, 2004, real estate under development of $32,625,132 represents the
           portion of the Project that has yet to be placed in service,
           including approximately $1,399,000 of capitalized deferred ground
           rent and $936,632 of capitalized interest.

Note   4 - Mortgage Note Payable

           On August 18, 2002, the Company entered into a pre-development loan
           agreement (the "Loan") with Far East National Bank in an amount up
           to $5,000,000. The Loan bore interest at the Prime Rate (as defined
           in the Loan) plus 2.00% per annum. Interest only payments were
           required on the first day of every month in arrears. All principal
           and all accrued and unpaid interest were due and payable at the
           Loan's maturity date, February 28, 2004. Far East National Bank
           funded additional loan proceeds in the amount of $1,500,000 to the
           Company in January 2004, at which time the Loan's maturity date was
           extended to May 31, 2004. The Loan was collateralized by the
           Company's real estate under development. Interest expense relating
           to the Loan amounted to approximately $269,000, all of which was
           capitalized as a cost of the Project.

           The Company entered into a loan agreement ("New Loan Agreement")
           with Canpartners Realty Holding Company IV, LLC (the "Lender") in
           the amount of $57,000,000 (the "New Loan") on April 15th 2004.
           Proceeds of the New Loan included amounts to payoff the principal
           and interest of the Loan, $6,500,000 and $22,750, respectively.

           The New Loan bears interest at 10% per annum and calculated on
           360-day year. Principal and interest payments are due on the first
           day of the month beginning May 1, 2004 through January 31, 2007, the
           maturity date. For the year ending December 31, 2004 the Company
           incurred interest pf $2,935,043, of which $2,223,563 was capitalized
           as a costs of the Project and $709,480 was expensed.


                                       77




                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2004


Note   5 - Cash - Restricted

           Cash - restricted represents unused funds from the proceeds of the
           New Loan. Cash - restricted is disbursed upon requisition of project
           expenditures in agreement with the funding schedule and approved
           budget in accordance with the New Loan Agreement. Unused funds
           available from the New Loan as of December 31, 2004 amounted to
           $5,538,372.


Note   6 - Deferred Ground Rent Payable

           In conjunction with the purchase of the hotel mortgage note the
           Company assumed two ground leases for the leasehold. On December 20,
           2002, the Company entered into a Lease Escrow Agreement, which
           modified the provisions of the two ground leases.

           As of December 31, 2004, the minimum amounts payable under the terms
           of the ground lease for the next five years and in the aggregate
           thereafter are approximately as follows:


                   Year Ending
                   December 31,                           Amount
                   ------------                           ------

                       2005                           $      12,000
                       2006                                   12,000
                       2007                                   12,000
                       2008                                   12,000
                       2009                                   12,000
                       Thereafter                         76,729,110
                                                      --------------
                                                      $   76,789,110
                                                      ==============

           Subsequent to December 31, 2037 minimum payments are to be agreed
           upon at a later date in accordance with the Lease Escrow Agreement,
           but in no event will be less than $1,537,000. The ground lease
           expires on December 31, 2067.

           The Company is also obligated to pay to the ground lessor percentage
           rent, as stipulated in the original ground lease agreement, once the
           hotel begins operations.

           For the year ended December 31, 2004 the Company incurred ground
           rent expense of approximately $1,165,000, of which approximately
           $1,025,000 capitalized as a cost of the Project.


                                       78





                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2004


Note   7 - Capital Lease Obligations

           The Company has entered into a lease agreement with GMAC Commercial
           Mortgage Corporation ("GMAC") on November 11, 2004, whereby the
           Company may receive advances in the amount of $5,000,000 for
           furniture, fixtures and equipment for the Project. Monthly payments
           will be determined upon commencement of the lease in May 2005. The
           lease terminates on May 5, 2012 at which time the Company has the
           option to purchase the leased equipment for $1, unless terminated
           earlier in accordance with the lease agreement. Accordingly, the
           Company's leasehold interest has been recorded as an asset and the
           capital lease is recorded as a liability in the accompanying balance
           sheet as capital lease obligation at the lower of the present value
           of the minimum lease payments or the fair market value of the asset.
           At December 31, 2004 the Company has drawn $3,355,516 of advances
           from GMAC.

Note   8 - Related Party Transactions

           Due to Affiliates

           Due to affiliates represents advances from affiliates of the Company
           through common control to finance short-term cash flow requirements
           of the Company. The advance is non-interest bearing and due on
           demand.

           Management Fees

           In accordance with the terms of the operating agreement, the
           managing member shall provide asset management services to the
           Company for an annual fee equal to the greater of $500,000 or 2% of
           the gross asset value, at cost, of the assets owned by the Company
           and the project entities, prior to depreciation. For the year ended
           December 31, 2004 the Company incurred management fees in the amount
           of $500,000, of which $439,803 have been capitalized as costs of the
           Project.

Note   9 - Commitments, Contingencies and Other Matters

a)       Management Agreement - Starwood

                On December 20 of 2002, the Company entered into a management
                agreement (the "Management Agreement") with Sheraton Operating
                Corporation ("Starwood"), which requires Starwood to provide
                managerial and promotional services for the Project. The
                Management Agreement has an operating term of two (2) periods
                of five (5) years each, as more fully described in the
                Management Agreement.

                Starwood has the option to renew the Management Agreement for
                two successive terms of five years each. The Management
                Agreement provides for a base management fee equal to 2% of the
                Gross Operating Revenue of the Project, as defined in the
                Management Agreement. Management fees in the amount of $56,200
                were incurred for the year ending December 31, 2004.

           b) A Leasehold Mortgage and Security Agreement secure the New Loan.
              Individuals that are affiliates of the Company are the guarantors
              of the New Loan.


                                       79







                               KOA INVESTORS, LLC
                         (A Limited Liability Company)

                                 BALANCE SHEET

                               DECEMBER 31, 2003






                                       80




                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                              FINANCIAL STATEMENTS
                                  (Unaudited)

                                C O N T E N T S




                                                                                    Page
                                                                                 



Balance Sheet                                                                       82

Statement of Changes in Members' Equity                                             83

Statement of Cash Flows                                                             84

Notes to Financial Statements                                                      85 - 88






                                       81



                              KOA INVESTORS, LLC
                         (A Limited Liability Company)
                                 BALANCE SHEET
                               DECEMBER 31, 2003
                                  (Unaudited)


ASSETS
                                                                                                      
Real estate under development                                                                            $19,850,414
Cash and cash equivalents                                                                                    679,064
Deferred financing costs, net of accumulated amortization of $233,139                                        138,572
Prepaid expenses and other assets                                                                            141,940
                                                                                                         -----------
                                                                                                         $20,809,990
                                                                                                         ===========
LIABILITIES AND MEMBERS' EQUITY

Mortgage note payable                                                                                     $5,000,000
Construction costs and accounts payable                                                                      976,259
Due to affiliates                                                                                             66,950
Deferred ground rent payable                                                                               2,306,987
                                                                                                         -----------
                                                                                                           8,350,196
Commitments, contingencies and other matters

Members' equity                                                                                           12,459,794
                                                                                                         -----------

                                                                                                         $20,809,990
                                                                                                         ===========


See notes to financial statements.


                                       82




                               KOA INVESTORS, LLC
                          (A Limited Liability Company)
                     STATEMENT OF CHANGES IN MEMBERS' EQUITY
                      FOR THE YEAR ENDED DECEMBER 31, 2003
                                   (Unaudited)



Balance - January 1, 2003...................................      $ 9,400,694

Contributions...............................................        3,059,100
                                                                  -----------

Balance - December 31, 2003.................................      $12,459,794
                                                                  ===========





                                       83



                               KOA INVESTORS, LLC
                          (A Limited Liability Company)
                             STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2003
                                   (Unaudited)



Cash flows from operating activities:

    Net income ...........................................          $        --
    Changes in asset and liabilities:
        Increase in accounts receivable ..................              139,927
        Increase in prepaid expenses and other assets ....               11,750
                                                                    -----------
           Net cash provided from operating activities ...              151,677
                                                                    -----------

Cash flows from investing activities:
        Real estate under development ....................           (5,388,567)
                                                                    -----------
           Net cash used in investing activities .........           (5,388,567)
                                                                    -----------

Cash flows from financing activities:
        Proceeds from mortgage note payable ..............            5,000,000
        Payment of mortgage note payable .................           (2,384,544)
        Members' contributions ...........................            3,059,100
                                                                    -----------
           Net cash provided by financing activities .....            5,674,556
                                                                    -----------

Net increase in cash and cash equivalents ................              437,666

Cash and cash equivalents - beginning of year ............              241,398
                                                                    -----------

Cash and cash equivalents - end of year ..................          $   679,064
                                                                    ===========

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest, net
      of amounts capitalized .............................          $        --
                                                                    ===========

Supplemental disclosure on non-cash financing activities:
    Deferred ground rent payable .........................          $ 1,152,158
                                                                    ===========

    Amortization of deferred finance costs ...............          $    70,564
                                                                    ===========


                                       84



                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                             NOTES TO BALANCE SHEET
                               DECEMBER 31, 2003
                                  (Unaudited)

Note   1 - Organization

           KOA Investors, LLC (the "Company"), was formed as a limited
           liability company under the laws of the State of Delaware in
           November 1999. The Company was formed to acquire a mortgage note
           (see Note 3) and foreclose on the note for the purpose of owning,
           developing and operating a hotel resort in Keauhou, Hawaii (the
           "Project").

           Pursuant to the operating agreement, the Company will continue in
           existence until the earlier of December 31, 2051 or upon the
           decision of the Decision Members, as defined, to terminate the
           Company.


Note   2 - Summary of Significant Accounting Policies

           a) Basis of Accounting

              The accompanying financial statements have been prepared in
              accordance with accounting principles generally accepted in the
              United States of America.

           b) Real Estate Under Development

              Costs for the acquisition, development and construction of the
              Project are charged to real estate under development. Capitalized
              costs include deferred ground rent and interest expenditures
              incurred during the acquisition, development and construction of
              the Project.

           c) Cash and Cash Equivalents

              Cash and cash equivalents include cash in banks and overnight
              investments that at various times during the year have exceeded
              the Federally insured limits. The Company believes it mitigates
              its risk by banking with major financial institutions.

           d) Deferred Financing Costs

              Costs incurred in obtaining financing are amortized over the term
              of the related financing instrument. Amortization of such costs
              from inception through completion of construction is capitalized
              as a cost of the Project and is amortized on a straight-line basis
              over the life of the related debt, which approximates amortization
              expense under the effective interest method.


           e) Deferred Ground Rent Payable

              Base rental expense on the ground lease is recognized ratably
              over its non-cancelable term. The difference between the ground
              rent expense recognized using the straight-line method and the
              ground rent in accordance with the lease is shown as deferred
              ground rent payable on the balance sheet.


                                       85





                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                             NOTES TO BALANCE SHEET
                               DECEMBER 31, 2003
                                  (Unaudited)

Note   2 - Summary of Significant Accounting Policies (continued)

           f) Income Taxes

              The Company is treated as the equivalent of a partnership for
              income tax purposes. Accordingly, all components of income and
              expense are reported in the income tax returns of the Company's
              members.

           g) Use of Estimates

              The preparation of financial statements requires management to
              make estimates and assumptions that affect the reported amounts
              of assets and liabilities and disclosure of contingent assets and
              liabilities at the date of the balance sheet. Actual results
              could differ from those estimates.


Note   3 - Real Estate Under Development

           The Company purchased a non-performing note, collateralized by a
           leasehold interest in a hotel resort in Hawaii, for approximately
           $7,300,000. The Company foreclosed on the note and took possession
           of the leasehold for renovation and operation of the hotel. At
           December 31, 2003, the Company's real estate under development
           includes approximately $5,700,000 of predevelopment costs.


Note   4 - Mortgage Note Payable

           On August 18, 2002, the Company entered into a pre-development loan
           agreement (the "Loan") with Far East National Bank in an amount up
           to $5,000,000. The Loan bears interest at the Prime Rate (as defined
           in the Loan) plus 2.00% per annum. Interest only payments are
           required on the first day of every month in arrears. All principal
           and all accrued and unpaid interest are due and payable at the
           Loan's maturity date, February 28, 2004. The Loan is secured by the
           Company's real estate under development. Interest expense relating
           to the Loan amounted to approximately $269,000 all of which was
           capitalized and is included in real estate under development. The
           Company is currently in negotiations for new construction financing.


                                       86






                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                             NOTES TO BALANCE SHEET
                               DECEMBER 31, 2003
                                  (Unaudited)

Note   5 - Deferred Ground Rent Payable

           In conjunction with the purchase of the hotel mortgage note the
           Company assumed two ground leases for the leasehold. On December 20,
           2002, the Company entered into a Lease Escrow Agreement, which
           modified the provisions of the two ground leases.

           As of December 31, 2003, the amounts payable under the terms of the
           ground lease for the next five years and in the aggregate thereafter
           are approximately as follows:


                   Year Ending
                   December 31,                            Amount
                   ------------                            ------

                       2004                           $      12,000
                       2005                                   12,000
                       2006                                   12,000
                       2007                                   12,000
                       2008                                   12,000
                       Thereafter                         76,741,110
                                                      --------------
                                                      $   76,801,110
                                                      ==============

           Subsequent to December 31, 2037 minimum payments are to be agreed
           upon at a later date in accordance with the Lease Escrow Agreement,
           but in no event will be less $1,537,000. The ground lease expires on
           December 31, 2067.

           The Company is also obligated to pay to the ground lessor percentage
           rent, as stipulated in the original ground lease agreement, once the
           hotel begins operations.

           For the year ended December 31, 2003 the Company incurred ground
           rent expense of approximately $1,165,000 all of which was
           capitalized and included in real estate under development.


Note   6 - Related Party Transactions

           Due to Affiliates

           Due to affiliates of the members presents costs paid on behalf of
           the Company. The amounts due are non-interest bearing and due upon
           demand.


                                       87





                               KOA INVESTORS, LLC
                         (A Limited Liability Company)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2003
                                  (Unaudited)


Note   6 - Related Party Transactions (continued)

           Management Fees

           In accordance with the terms of the operating agreement, the
           managing member shall provide asset management services to the
           Company for an annual fee of the greater of $500,000 or 2% of the
           gross asset value, at cost, of the assets owned by the Company and
           the project entities, prior to depreciation. For the year ended
           December 31, 2003 management fees in the amount of $500,000 have
           been capitalized and are included in real estate under development.




                                       88






                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.



                                VECTOR GROUP LTD.
                                (Registrant)


                             By: /s/ Joselynn D. Van Siclen
                             -------------------------------------------
                             Joselynn D. Van Siclen
                             Vice President, Chief Financial Officer and
                                  Treasurer


Date: March 21, 2006


                                       89