NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.             Organization

Vornado Realty Trust (“Vornado”) is a fully-integrated real estate investment trust.  Vornado conducts its business through Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”).  Vornado is the sole general partner of, and owned approximately 81% of the common limited partnership interest in, the Operating Partnership at September 30, 2003.  All references to the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.

2.             Basis of Presentation

The accompanying consolidated financial statements are unaudited.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Vornado’s annual report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission.  The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the operating results for the full year.

The accompanying consolidated financial statements include the accounts of Vornado and its majority-owned subsidiary, Vornado Realty L.P., as well as entities in which the Company owns more than 50%, unless a partner has shared board and management representation and authority and substantive participation rights on all significant business decisions.  All significant intercompany amounts have been eliminated.  Equity interests in partially-owned corporate entities are accounted for under the equity method of accounting when the Company’s ownership interest is more than 20%, but less than 50%.  When partially-owned investments are in partnership form, the 20% threshold for equity method accounting may be reduced.  Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company’s share of the net income or loss and cash contributions and distributions to or from these entities.  For all other investments, the Company uses the cost method.

Management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144 — Accounting for the Impairment or Disposal of Long-Lived Assets, for all periods presented the Company reclassified its consolidated statements of income to reflect income and expenses for properties which are held for sale or sold during 2003 as discontinued operations, and reclassified assets and liabilities related to such properties as assets related to discontinued operations and liabilities related to discontinued operations on its consolidated balance sheets.

6

3.             Recently Issued Accounting Standards

Financial Accounting Standards Board (“FASB”) Interpretation No. 46 – Consolidation of Variable Interest Entities (“FIN 46”)

In January 2003, the FASB issued FIN 46 – Consolidation of Variable Interest Entities, which requires the consolidation of an entity by an enterprise (i) if that enterprise, known as a “primary beneficiary,” will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both and (ii) if the entity is a variable interest entity, as defined.  An entity qualifies as a variable interest entity if (i) the total equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the equity investors do not have the characteristics of a controlling financial interest in the entity.  The initial determination of whether an entity qualifies as a variable interest entity shall be made as of the date at which a primary beneficiary becomes involved with the entity and reconsidered as of the date of a triggering event, as defined.  On October 9, 2003, the FASB issued FIN 46-6, deferring the effective date until the first interim or annual period ending after December 15, 2003 for (i) interests held by public companies in variable interest entities created before February 1, 2003 and (ii) non registered investment companies.  The Company does not anticipate that the adoption of FIN 46 will have a material effect on the consolidated financial statements.

SFAS No. 149 – Amendment of SFAS 133 on Derivative Instruments and Hedging Activities

In April 2003, the FASB issued SFAS No. 149 – Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133 – Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  The adoption of SFAS No. 149 on July 1, 2003, had no impact on the Company’s consolidated financial statements.

SFAS No. 150 - Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

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 classifying and measuring as liabilities, certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity.  On October 29, 2003, the FASB deferred, indefinitely, the application of paragraphs 9 and 10 of SFAS No. 150 as it relates to mandatorily redeemable non-controlling interests in consolidated subsidiaries that would not be recorded as liabilities under SFAS No. 150 by such subsidiaries.  The adoption of the remainder of SFAS No. 150 on July 1, 2003, had no impact on the Company’s consolidated financial statements.

4.             Acquisitions, Dispositions and Financings

Acquisitions

Upon acquisition of real estate, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships.  The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values.  The Company uses third party appraisers or methods similar to those used by third party appraisers such as estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information.

The fair value of the tangible assets (land, building and improvements) of an acquired property considers the value of the property as if it were vacant.  The fair value of the identified intangible assets and liabilities for above and below market in-place leases is based on the present value of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of the market lease rates measured over a period equal to the remaining non-cancelable term of the lease.  The capitalized above market (deferred charge) or below market (deferred credit) intangible is amortized to rental income over the non-cancelable term of the respective leases. The aggregate value of the other acquired identified intangible assets, consisting of in-place leases and tenant relationships, considers the difference between the estimated fair value of the property as if vacant and the estimated value of property as if occupied at the level it was on the date of acquisition, adjusted to market rental rates.

7

Management considers current market conditions and costs to execute similar leases in arriving at an estimate of carrying costs during the expected lease-up period in determining the value of in-place leases.  In estimating carrying costs management includes real estate taxes, insurance, other operating expenses and estimates of lost revenue during the expected lease-up periods and costs to execute similar leases including commissions and other related costs.  In estimating the value of tenant relationships management considers, among other factors, the nature and extent of the existing tenant relationship and the expectation of lease renewals, growth prospects and tenant credit quality.  The value of the tenant relationship is amortized over the anticipated life of the relationship while the value of the in-place leases is amortized over the non-cancelable term of the acquired in-place leases.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

Building Maintenance Service Company (“BMS”)

On January 1, 2003, the Company acquired for $13,000,000 in cash BMS, which provides cleaning, security and engineering services to office properties, including the Company’s Manhattan office properties.  This company was previously owned by the estate of Bernard Mendik and certain other individuals including Mr. David R. Greenbaum, one of the Company’s executive officers.  This acquisition was recorded as a business combination under the purchase method of accounting.  Accordingly, the operations of BMS are consolidated into the accounts of the Company beginning January 1, 2003.

For the three and nine months ended September 30, 2003, BMS revenues of $7,087,000 and $21,762,000 are included in fee and other income and BMS expenses of $4,647,000 and $15,171,000 are included in operating expenses in the Company’s consolidated statements of income.

Kaempfer Company (“Kaempfer”)

On April 9, 2003, the Company acquired Kaempfer, which owns partial interests in six Class “A” office properties in Washington D.C., manages and leases these properties and four others for which it receives customary fees and has options to acquire certain other real estate interests, including 50% of Kaempfer’s 5% interest in the planned redevelopment of Waterfront, located at 401 M Street, a mixed-use project in Southwest Washington D.C. (the “Waterfront interest”).  Kaempfer’s equity interest in the properties approximates 5.0%.  The aggregate purchase price for the equity interests and the management and leasing business was $33,400,000 (consisting of $29,800,000 in cash and approximately 99,300 Vornado Realty L.P. partnership units valued at $3,600,000) and may be increased by up to $9,000,000 based on the performance of the management company.  This acquisition was recorded as a business combination under the purchase method of accounting.  Accordingly, the operations of Kaempfer are consolidated into the accounts of the Company beginning April 9, 2003.

The six Class “A” office buildings contain 1.8 million square feet and are as follows: the Warner Building located at 1299 Pennsylvania Avenue containing 600,000 square feet, the Investment Building located at 1501 K Street containing 380,000 square feet, the Commonwealth Tower located at 1300 Wilson Boulevard in Rosslyn, VA, containing 343,000 square feet, the Bowen Building (under development) located at 875 15th Street containing 220,000 square feet, 1925 K Street containing 150,000 square feet, and the Executive Tower located at 1399 New York Avenue, containing 123,000 square feet.  Kaempfer, which was founded in 1977 and has 65 employees, was combined with the Company’s Charles E. Smith Commercial Realty division (“CESCR”).  Mitchell N. Schear, the President of Kaempfer, has become President of CESCR.

On October 7, 2003, the Company acquired the Waterfront interest described above for $2,000,000, of which the Company paid $1,545,000 in cash and issued 12,500 Vornado Realty L.P. partnership units valued at $455,000.  The partnership units were issued to Mitchell N. Schear, one of the partners in the Waterfront interest, and the President of the Company’s CESCR division.

20 Broad Street

On May 2, 2003, the Company acquired the remaining 40% of a 78-year leasehold interest in 20 Broad Street it did not already own.  The purchase price was approximately $30,000,000 in cash.  20 Broad Street contains 466,000 square feet of office space, of which 348,000 square feet is leased to the New York Stock Exchange.  Prior to the acquisition of the remaining 40%, the Company consolidated the operations of this property and reflected the 40% interest that it did not own as a component of minority interest.  Subsequent to this acquisition, the Company will no longer reflect the 40% minority interest.

8

2101 L Street

On August 4, 2003, the Company completed the acquisition of 2101 L Street, a 370,000 square foot office building located in Washington D.C.  The consideration for the acquisition consisted of approximately 1.1 million newly issued Vornado Realty L.P. partnership units (valued at approximately $49,517,000) and the assumption of existing mortgage debt and transaction costs totaling approximately $32,000,000.  Mr. Robert H. Smith and Mr. Robert P. Kogod, trustees of Vornado, together with family members owned approximately 24 percent of the limited partnership that sold the building and Mr. Smith was a general partner.  On August 5, 2003, the Company repaid the mortgage of $29,056,000.

Dispositions

On January 9, 2003, the Company sold its Baltimore, Maryland shopping center for $4,752,000, which resulted in a net gain of $2,644,000.

The Company recognized gains on sale of residential condominiums in Chicago, Illinois of $188,000 during the first quarter of 2003 and $282,000 and $2,156,000 during the three and nine months ended September 30, 2002.  Such gains are included in the income statement caption “net gains on disposition of wholly-owned and partially-owned assets.”

On June 13, 2003, the Company received its $5,000,000 share of a settlement with affiliates of Primestone Investment Partners of the amounts due under the guarantees of the Primestone loans.  In connection therewith, the Company recognized a $1,388,000 loss on settlement of the guarantees which is included in the income statement caption “net gains on disposition of wholly-owned and partially-owned assets” for the nine months ended September 30, 2003.

On June 27, 2003, the Park Laurel joint venture completed the sale of the remaining condominium unit in the project resulting in a net gain to the Company of $94,000, which is included in the income statement caption “net gains on disposition of wholly-owned and partially-owned assets” for the nine months ended September 30, 2003.

On August 18, 2003, the Company recognized a $767,000 deferred gain on the sale of its 50% interest in 570 Lexington Avenue which was sold on May 17, 2001, which is included in the income statement caption “net gains on disposition of wholly-owned and partially-owned assets” for the three and nine months ended September 30, 2003.

On October 10, 2003, the Company sold Two Park Avenue, a 965,000 square foot office building, for $292,000,000 to SEB Immobilien-Investment GMBH, a German capital investment company.   The Company’s net gain on the sale after closing costs is approximately $157,000,000 and will be recognized in the fourth quarter of 2003.

On November 3, 2003, the Company sold its Hagerstown retail property located in Maryland for $3,100,000.  The Company’s gain on sale after closing costs is approximately $2,000,000, and will be recognized in the fourth quarter of 2003.

Financings

On October 10, 2003, the Company called for the redemption of all of its 8.5% Series D-1 Cumulative Redeemable Preferred Units issued in 1998.  The Preferred Units will be redeemed on November 12, 2003 at a redemption price equal to $25.00 per unit or an aggregate of $87,500,000 plus accrued distributions of $849,000.  In conjunction with the redemption, the Company will write-off $2,100,000 of issuance costs in the fourth quarter of 2003.

For details of the Company’s financing activities see Note 7 - Notes and Mortgages Payable.

9

5.             Investments and Advances to Partially-Owned Entities

The Company’s investments and advances to partially-owned entities and equity in income of such investments are as follows:

(1)     Alexander’s capitalizes the fees and interest charged by the Company.  Because the Company owns 33.1% of Alexander’s, the Company recognizes 66.9% of such amounts as income and the remainder is reflected as a reduction of the Company’s carrying amount of the investment in Alexander’s.

(2)     The three months ended September 30, 2003 and 2002, includes the Company’s share of net losses on sale of real estate of $400 and $1,200 respectively.  The nine months ended September 30, 2003 includes net gains of $9,500 from the sale of properties and the early extinguishment of debt.  The nine months ended September 30, 2002, includes $1,200 for the Company’s share of losses on sale of real estate.

(3)     Includes $4,413 for the Company’s share of Prime Group’s lease termination fee income.

10

Below is a summary of the debt of partially-owned entities as of September 30, 2003 and December 31, 2002, none of which is guaranteed by the Company.

(1)                                   The Company converted its investment in Prime Group Realty L.P. into common shares of Prime Group Realty Trust on May 23, 2003.  Accordingly, the investment is accounted for as a marketable security from that date forward.

Based on the Company’s ownership interest in the partially-owned entities above, the Company’s share of the debt of these partially-owned entities was $937,512,000 and $1,048,108,000 as of September 30, 2003 and December 31, 2002.

11

Temperature Controlled Logistics

Based on the joint venture’s policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $8,416,000 and $19,518,000 of rent it was due for the three and nine months ended September 30, 2003 and $6,808,000 and $12,361,000 of rent it was due for the three and nine months ended September 30, 2002, which together with previously deferred rent is $43,868,000.

On March 7, 2003, AmeriCold Logistics and the Landlord extended the deferred rent period to December 31, 2004 from December 31, 2003.

On March 28, 2003, a joint venture in which the Company has a 44% interest acquired $6,640,000 of trade receivables from AmeriCold Logistics for $6,500,000 in cash (a 2% discount).  These receivables were collected in full during the second quarter of 2003.

Alexander’s

Alexander’s is managed by, and its properties are leased by, the Company pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable.  As of September 30, 2003, the Company has a receivable from Alexander’s of $18,821,000 under the management and development agreement.

At September 30, 2003, the Company had loans receivable from Alexander’s of $124,000,000, including $29,000,000 drawn under a $50,000,000 line of credit.  The maturity date of the loan and the line of credit is the earlier of January 3, 2006, or the date the Alexander’s Lexington Avenue construction loan is repaid.  The Company accrues interest at 12.48% on the loan and line of credit, which resets quarterly using the same spread to treasuries as previously existed with a 3% floor for treasuries.  The Company believes that although Alexander’s has disclosed that it does not currently have positive cash flow sufficient to repay the loans receivable to the Company (although interest is currently being paid on the Company’s loans), Alexander’s will be able to repay the loans upon the successful development and permanent financing of its Lexington Avenue development project or through asset sales.

Equity in income from Alexander’s reflects Alexander’s stock appreciation rights compensation expense of which the Company’s share was $6,192,000 and $9,477,000 for the three and nine months ended September 30, 2003, based on a closing Alexander’s stock price of $105.50 on September 30, 2003.  In the three months ended September 30, 2002, Alexander’s reversed stock appreciation rights compensation expense recognized in the second quarter of 2002, of which the Company’s share was $1,402,000.  The closing stock price of Alexander’s was $61.00 on September 30, 2002.  In addition, in the nine months ended September 30, 2002, equity in income from Alexander’s includes $3,431,000 representing the Company’s share of Alexander’s gain on sale of its Third Avenue property.

12

Prime Group Realty L.P.

On June 11, 2003, the Company exercised its right to exchange the 3,972,447 units it owned in Prime Group Realty L.P. for 3,972,447 common shares in Prime Group Realty Trust (NYSE: PGE).  Prior to the exchange, the Company accounted for its investment in the partnership on the equity method.

Subsequent to the exchange, the Company is accounting for its investment in PGE as a marketable equity security – available for sale, as the Company’s shares represent less than a 20% ownership interest in PGE (which is not a partnership), the Company does not have significant influence and the common shares have a readily determinable fair value.  Accordingly, the carrying amount previously included in Investments and Advances to Partially-Owned Entities has been reclassified to Marketable Securities on the Company’s consolidated balance sheet as of September 30, 2003.  The Company is also required to mark-to-market these securities based on the closing price of the PGE shares on the NYSE at the end of each reporting period.  For the period from June 11, 2003 through September 30, 2003, the Company recorded a $6,623,000 unrealized gain, which is not included in the Company’s net income, but is reflected as a component of Accumulated Other Comprehensive Loss in the Shareholders’ Equity section of the consolidated balance sheet.  From the date of exchange, income recognition is limited to dividends received on the PGE shares.

On June 13, 2003, the Company received its $5,000,000 share of a settlement with affiliates of Primestone Investment Partners of the amounts due under the guarantees of the Primestone loans.  In connection therewith, the Company recognized a $1,388,000 loss on settlement of the guarantees, which has been reflected as a component of “net gains on disposition of wholly-owned and partially-owned assets” in the Company’s consolidated statement of income for the nine months ended September 30, 2003.

6.             Notes and Mortgage Loans Receivable

On September 11, 2003, the Company made a loan of $7,300,000 to a non-affiliated holder of the Company’s Series C-1 convertible preferred and Class A operating partnership units.  The loan is secured by the borrower’s units (valued at approximately $17,000,000 at September 30, 2003), bears interest at 3.0% per annum and matures on November 10, 2003.

On October 17, 2003, the Company made a $200,000,000 mezzanine loan secured by partnership interests in the General Motors Building.  The Company’s loan is subordinate to $900,000,000 of other debt.  The loan is based on a rate of LIBOR plus 8.69% (with a LIBOR floor of 1.5%).  The loan matures in October 2005, with three one-year extensions.  Further, on October 30, 2003, the Company made an additional $25,000,000 loan, as part of a $50,000,000 loan, the balance of which was funded by an affiliate of Soros Fund Management LLC.  This loan, which is junior to the $1,100,000,000 of loans noted above, is based on a rate of LIBOR plus 12.81% (with a LIBOR floor of 1.5%).  The loan will mature in October 2005, with three one-year extensions.

13

7.             Notes and Mortgages Payable

Following is a summary of the Company’s debt:

14

(1)           On June 9, 2003, the Company completed a $170,000 mortgage financing of its 770 Broadway property.  The loan bears interest at LIBOR plus 1.05%, is prepayable after one year without penalty and matures in June 2006 with two-one year extension options.  The proceeds of the new loan were used primarily to repay (i) a $18,926 mortgage loan on 33 North Dearborn, (ii) a $69,507 mortgage loan on Tysons Dulles Plaza, and (iii) $40,000 of borrowings under the Company’s unsecured revolving credit facility.  In connection with the closing of the 770 Broadway loan, the Company purchased an interest rate cap, and simultaneously sold an interest rate cap with the same terms. Since these instruments do not reduce the Company’s net interest rate risk exposure, they do not qualify as hedges and changes in their respective values are charged to earnings. As the significant terms of these arrangements are the same, the effects of a revaluation of these instruments is expected to substantially offset one another.  Simultaneously with the completion of the 770 Broadway loan, the Company used cash from its mortgage escrow account to repay $133,659 of the $153,659 of debt previously cross-collateralized by its 770 Broadway and 595 Madison Avenue properties.

(2)           On August 4, 2003, the Company completed a refinancing of its 909 Third Avenue mortgage loan.  The new $125,000 mortgage loan is for a term of three years and bears interest at LIBOR plus .70% and has two one-year extension options.  Simultaneously with the completion of the 909 Third Avenue loan, the Company used cash from its mortgage escrow account to repay the balance of $20,000 of debt previously cross-collateralized by its 770 Broadway and 595 Madison Avenue properties.  In connection with the closing of the 909 Third Avenue loan, the Company purchased an interest rate cap, and simultaneously sold an interest rate cap with the same terms. Since these instruments do not reduce the Company’s net interest rate risk exposure, they do not qualify as hedges and changes in their respective values are charged to earnings. As the significant terms of these arrangements are the same, the effects of a revaluation of these instruments is expected to substantially offset one another.

(3)           On July 31, 2003, the Company replaced the mortgage on the Commerce Executive property with (i) a new $43,000 non-recourse mortgage loan at LIBOR plus 1.50% with a two-year term and a one-year extension option and (ii) a $10,000 unsecured loan for three years at LIBOR plus .65% with a one-year extension option.

(4)           On July 3, 2003, the Company entered into a new $600 million unsecured revolving credit facility which has replaced its $1 billion unsecured revolving credit facility which was to mature in July, 2003.  The new facility has a three-year term, a one-year extension option and bears interest at LIBOR plus .65%.  The Company also has the ability under the new facility to seek up to $800 million of commitments during the facility’s term.  The new facility contains financial covenants similar to the prior facility.

15

8.             Fee And Other Income

The following table sets forth the details of fee and other income: