Vornado Realty Trust (VNO) 8-K Other Events

EXHIBIT 99.1

ITEM 6. SELECTED FINANCIAL DATA

	Year Ended December 31,
	2008			2007			2006			2005			2004
(in thousands, except per share amounts)
Operating Data:
Revenues:
Property rentals	$	2,211,311		$	1,977,023		$	1,544,741		$	1,358,521		$	1,310,945
Tenant expense reimbursements		358,437			323,544			260,772			206,386			188,211
Fee and other income		127,303			109,949			103,587			94,603			83,897
Total revenues		2,697,051			2,410,516			1,909,100			1,659,510			1,583,053
Expenses:
Operating		1,070,118			951,582			737,452			627,980			599,313
Depreciation and amortization		537,427			441,209			319,066			252,086			228,983
General and administrative		194,027			189,041			180,167			139,470			139,486
Impairment losses on development projects and costs of acquisitions not consummated		81,447			10,375			—			—			1,475
Total expenses		1,883,019			1,592,207			1,236,685			1,019,536			969,257
Operating income		814,032			818,309			672,415			639,974			613,796
Income (loss) applicable to Alexander’s		36,671			50,589			(14,530	)		59,022			8,580
Income (loss) applicable to Toys ‘R’ Us		2,380			(14,337	)		(47,520	)		(40,496	)		—
(Loss) income from partially owned entities		(195,878	)		31,891			60,355			34,917			37,740
Interest and other investment (loss) income, net		(2,682	)		226,425			255,391			164,941			203,775
Interest and debt expense		(625,904	)		(599,804	)		(400,540	)		(284,876	)		(233,750	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		7,757			39,493			76,073			39,042			19,775
Income before income taxes		36,376			552,566			601,644			612,524			649,916
Income tax benefit (expense)		204,537			(9,179	)		(491	)		(2,315	)		(1,258	)
Income from continuing operations		240,913			543,387			601,153			610,209			648,658
Income from discontinued operations		170,532			64,446			32,203			59,805			101,409
Net income		411,445			607,833			633,356			670,014			750,067
Net income attributable to noncontrolling interests, including unit distributions		(52,148	)		(66,294	)		(78,574	)		(133,134	)		(157,150	)
Net income attributable to Vornado		359,297			541,539			554,782			536,880			592,917
Preferred share dividends		(57,091	)		(57,177	)		(57,511	)		(46,501	)		(21,920	)
Net income attributable to common shareholders	$	302,206		$	484,362		$	497,271		$	490,379		$	570,997
Income from continuing operations - basic	$	0.92		$	2.70		$	3.14		$	3.09		$	3.59
Income from continuing operations - diluted		0.90			2.59			2.98			2.94			3.44
Income per share – basic		1.89			3.07			3.36			3.52			4.36
Income per share – diluted		1.84			2.95			3.19			3.35			4.17
Dividends per common share		3.65			3.45			3.79			3.90			3.05
Balance Sheet Data:
Total assets	$	21,418,048		$	22,478,717		$	17,954,384		$	13,637,102		$	11,580,517
Real estate, at cost		17,879,374			17,038,511			11,617,126			9,594,370			7,948,137
Accumulated depreciation		2,168,997			1,810,151			1,448,540			1,208,328			1,021,782
Debt		12,511,670			11,718,977			8,422,377			5,489,694			4,193,619
Total equity		6,214,652			6,011,240			5,006,596			4,659,359			4,014,242

1

	Year Ended December 31,
(Amounts in thousands)	2008			2007			2006			2005			2004
Other Data:
Funds From Operations (“FFO”) (1):
Net income attributable to Vornado	$	359,297		$	541,539		$	554,782		$	536,880		$	592,917
Depreciation and amortization of real property		509,367			451,313			337,730			276,921			228,298
Net gains on sale of real estate		(57,523	)		(60,811	)		(33,769	)		(31,614	)		(75,755	)
Proportionate share of adjustments to equity in net income of Toys to arrive at FFO:
Depreciation and amortization of real property		66,435			85,244			60,445			12,192			—
Net gains on sale of real estate		(719	)		(3,012	)		(2,178	)		—			—
Income tax effect of Toys adjustments included above		(23,223	)		(28,781	)		(21,038	)		(4,613	)		—
Proportionate share of adjustments to equity in net income of partially owned entities to arrive at FFO:
Depreciation and amortization of real property		49,513			48,770			45,184			29,860			49,440
Net gains on sale of real estate		(8,759	)		(12,451	)		(10,988	)		(2,918	)		(3,048	)
Noncontrolling interests’ share of above adjustments		(49,683	)		(46,664	)		(39,809	)		(31,990	)		(27,991	)
FFO		844,705			975,147			890,359			784,718			763,861
Preferred share dividends		(57,091	)		(57,177	)		(57,511	)		(46,501	)		(21,920	)
FFO attributable to common shareholders		787,614			917,970			832,848			738,217			741,941
Interest on 3.875% exchangeable senior debentures		25,261			24,958			24,671			18,029			—
Series A convertible preferred dividends		189			277			631			943			1,068
Convertible preferred unit distributions		—			—			—			—			7,034
FFO attributable to common shareholders plus assumed conversions (1)	$	813,064		$	943,205		$	858,150		$	757,189		$	750,043

________________________________

(1) FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income or loss determined in accordance with Generally Accepted Accounting Principles (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO is used by management, investors and industry analysts as a supplemental measure of operating performance of equity REITs. FFO should be evaluated along with GAAP net income (the most directly comparable GAAP measure), as well as cash flow from operating activities, investing activities and financing activities, in evaluating the operating performance of equity REITs. Management believes that FFO is helpful to investors as a supplemental performance measure because this measure excludes the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs which implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, this non-GAAP measure can facilitate comparisons of operating performance between periods and among other equity REITs. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as disclosed in our Statements of Cash Flows. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity.

2

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

	Page
Overview	4
Overview – Leasing Activity	10
Critical Accounting Policies	12
Results of Operations:
Years Ended December 31, 2008 and 2007	23
Years Ended December 31, 2007 and 2006	29
Supplemental Information:
Summary of Net Income and EBITDA for the Three Months Ended December 31, 2008 and 2007	37
Changes in EBITDA by segment for the Three Months Ended December 31, 2008 as compared to December 31, 2007	40
Changes in EBITDA by segment for the Three Months Ended December 31, 2008 as compared to September 30, 2008	40
Related Party Transactions	41
Liquidity and Capital Resources	42
Certain Future Cash Requirements	44
Financing Activities and Contractual Obligations	45
Cash Flows for the Year Ended December 31, 2008	49
Cash Flows for the Year Ended December 31, 2007	51
Cash Flows for the Year Ended December 31, 2006	53
Funds From Operations for the Years Ended December 31, 2008 and 2007	55

3

Overview

We own and operate office, retail and showroom properties (our “core” operations) with large concentrations of office and retail properties in the New York City metropolitan area and in the Washington, DC / Northern Virginia areas. In addition, we have a 32.7% interest in Toys “R” Us, Inc. (“Toys”) which has a significant real estate component, a 32.5% interest in Alexander’s, Inc., which has seven properties in the greater New York metropolitan area, as well as interests in other real estate and related investments.

Our ultimate business objective is to maximize shareholder value, which we measure by the total return provided to our shareholders. The table below compares our performance to the Morgan Stanley REIT Index (“RMS”) and the SNL REIT Index (“SNL”) for the following periods ending December 31, 2008 (past performance is not necessarily indicative of future performance):

	Total Returns
	Vornado	RMS	SNL
One-year	(28.4%)	(38.0%)	(36.6%)
Three-years	(19.3%)	(29.9%)	(27.8%)
Five-years	36.1%	3.4%	7.1%
Ten-years	202.8%	100.2%	107.3%

We intend to achieve our ultimate business objective by continuing to pursue our investment philosophy and executing our operating strategies through:

• Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;

• Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is high likelihood of capital appreciation;

• Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;

• Investing in retail properties in select under-stored locations such as the New York City metropolitan area;

• Investing in fully-integrated operating companies that have a significant real estate component; and

• Developing and redeveloping existing properties to increase returns and maximize value.

We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets.

We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends. See “Risk Factors” in Item 1A for additional information regarding these factors.

In the second half of 2007 the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining home values and increasing inventory nationwide. In 2008, the “credit crisis” spread to the broader commercial credit and financial markets resulting in illiquidity and volatility in the bond and equity markets. We are currently in an economic recession which has negatively affected all businesses, including ours. During the past year, real estate transactions have diminished significantly and capitalization rates have risen. Our real estate portfolio may be affected by declining demand for office and retail space and tenant bankruptcies, which may result in lower average occupancy rates and effective rents, and a corresponding decrease in net income, funds from operations and cash flow. In addition, the value of our assets, including investments in joint ventures, marketable securities, and mezzanine loans may also decline, and may result in impairment charges and/or valuation allowances and a corresponding decrease in net income and funds from operations.

4

Overview - continued

Year Ended December 31, 2008 Financial Results Summary

Net income attributable to common shareholders for the year ended December 31, 2008 was $302,206,000, or $1.84 per diluted share, versus $484,362,000, or $2.95 per diluted share, for the year ended December 31, 2007. Net income for the years ended December 31, 2008 and 2007 include $67,001,000 and $76,274,000, respectively, for our share of net gains on sale of real estate. In addition, net income for the years ended December 31, 2008 and 2007 include certain items that affect comparability which are listed in the table below. The aggregate of net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the years ended December 31, 2008 and 2007 by $17,621,000 and $131,023,000, or $0.11 and $0.80 per diluted share, respectively.

Funds from operations attributable to common shareholders plus assumed conversions (“FFO”) for the year ended December 31, 2008 was $813,064,000, or $4.80 per diluted share, compared to $943,205,000, or $5.55 per diluted share, for the prior year. FFO for the years ended December 31, 2008 and 2007 includes certain items that affect comparability which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the year ended December 31, 2008 by $36,216,000, or $0.21 per diluted share and increased FFO for the year ended December 31, 2007 by $91,975,000, $0.54 per diluted share.

(Amounts in thousands)	For the Year Ended December 31,
Items that affect comparability (income) expense:	2008			2007
Reversal of deferred income taxes initially recorded in connection with the H Street acquisition	$	(222,174	)	$	—
Net gain on sale of our 47.6% interest in Americold		(112,690	)		—
Non-cash asset write-downs:
Investment in Lexington Realty Trust		107,882			—
Marketable equity securities		76,352			—
Real estate development projects:
Partially owned entities		96,037			—
Wholly owned entities		81,447			10,375
MPH mezzanine loan loss (reversal) accrual		(10,300	)		57,000
Derivative positions in marketable equity securities		33,740			(136,593	)
Purchase price accounting adjustments:
Toys		14,900			—
Beverly Connection		(4,100	)		—
Net gain on extinguishment of debt and write-off of unamortized financing costs		(9,820	)		7,562
Alexander’s – reversal of stock appreciation rights compensation expense		(6,583	)		(14,280	)
After-tax net gain on sale of residential condominiums		(5,361	)		—
Net gain on disposition of our 13.8% interest in GMH		(2,038	)		—
Other, net		8,575			5,387
		45,867			(70,549	)
47.6% share of Americold’s FFO (Net losses of $1,076 and $4,342, respectively) – sold in March 2008		(6,098	)		(24,693	)
13.8% share of GMH’s FFO (Equity in net income of $6,463 in 2007) – sold in June 2008		—			(5,754	)
		39,769			(100,996	)
Noncontrolling interests’ share of above adjustments		(3,553	)		9,021
Total items that affect comparability	$	36,216		$	(91,975	)

5

Overview– continued

During the year ended December 31, 2008, we did not recognize income on certain assets with an aggregate carrying amount of approximately $1.6 billion at December 31, 2008, because they were out of service for redevelopment, although we capitalized approximately $63,000,000 of interest costs in connection with the development of these assets. Assets under development include all or portions of: the Bergen Town Center, the Manhattan Mall, 220 20^th Street, 1229-1231 25^th Street (“West End 25”), 1999 K Street, and certain investments in partially owned entities.

The percentage increase (decrease) in the same-store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the year ended December 31, 2008 over the year ended December 31, 2007 is summarized below.

Year Ended:	New York Office	Washington, DC Office	Retail	Merchandise Mart
December 31, 2008 vs. December 31, 2007	6.2%	4.5%	4.8%	(0.2%)

Calculations of same-store EBITDA, reconciliations of net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.

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Overview - continued

Quarter Ended December 31, 2008 Financial Results Summary

Net loss attributable to common shareholders for the quarter ended December 31, 2008 was $226,951,000, or $1.42 per diluted share, versus net income of $82,709,000, or $0.50 per diluted share, for the quarter ended December 31, 2007. Net loss for the quarter ended December 31, 2008 and net income for the quarter ended December 31, 2007 include $1,083,000 and $43,859,000, respectively, of net gains on sale of real estate. In addition, net loss for the quarter ended December 31, 2008 and net income for the quarter ended December 31, 2007 include certain other items that affect comparability which are listed in the table below. The aggregate of net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, increased net loss attributable to common shareholders for the quarter ended December 31, 2008 by $251,841,000, or $1.57 per diluted share and increased net income attributable to common shareholders for the quarter ended December 31, 2007 by $20,414,000, or $0.12 per diluted share.

FFO for the quarter ended December 31, 2008 was a negative $88,154,000, or $0.55 per diluted share, compared to a positive $186,210,000, or $1.10 per diluted share, for the prior year’s quarter. FFO for the quarters ended December 31, 2008 and 2007 includes certain items that affect comparability which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased negative FFO for the quarter ended December 31, 2008 by $253,506,000, or $1.58 per diluted share and decreased FFO for the quarter ended December 31, 2007 by $11,146,000, or $0.07 per diluted share.

(Amounts in thousands)	For the Three Months Ended December 31,
Items that affect comparability (income) expense:	2008			2007
Non-cash asset write-downs:
Investment in Lexington Realty Trust	$	100,707		$	—
Marketable equity securities		55,471			—
Real estate development projects:
Partially owned entities		61,837			—
Wholly owned entities		73,438			1,568
MPH mezzanine loan loss accrual		—			57,000
Alexander’s – reversal of stock appreciation rights compensation expense		(14,188	)		(5,289	)
Net gain on extinguishment of debt		(9,820	)		—
Derivative positions in marketable equity securities		7,928			(36,533	)
Other, net		8,426			3,418
		283,799			20,164
47.6% share of Americold’s FFO (Net loss of $1,494 in the three months ended December 31, 2007) – sold in March 2008		—			(6,869	)
13.8% share of GMH’s FFO (Equity in net income of $1,036 in the three months ended December 31, 2007) – sold in June 2008		—			(1,036	)
		283,799			12,259
Noncontrolling interests’ share of above adjustments		(30,293	)		(1,113	)
Total items that affect comparability	$	253,506		$	11,146

The percentage increase (decrease) in the same-store EBITDA of our operating segments for the quarter ended December 31, 2008 over the quarter ended December 31, 2007 and the trailing quarter ended September 30, 2008 are summarized below.

Quarter Ended:	New York Office	Washington, DC Office	Retail	Merchandise Mart
December 31, 2008 vs. December 31, 2007	6.1%	5.8%	4.0%	(5.1%)
December 31, 2008 vs. September 30, 2008	5.8%	6.2%	0.6%	15.8%

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Overview - continued

Significant Activity during 2008

Reversal of Deferred Tax Liabilities

In connection with the purchase accounting for H Street, in July 2005 and April 2007 we recorded an aggregate of $222,174,000 of deferred tax liabilities representing the differences between the tax basis and the book basis of the acquired assets and liabilities multiplied by the effective tax rate. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.

Lexington Realty Trust (“Lexington”) (NYSE: LXP)

Prior to October 28, 2008, we owned 8,149,592 limited partnership units of the Lexington Master Limited Partnership (“Lexington MLP”) which were exchangeable on a one-for-one basis into Lexington common shares, or a 7.7% limited partnership interest. On October 28, 2008, we acquired 8,000,000 common shares of Lexington for $5.60 per share, or $44,800,000. The purchase price consisted of $22,400,000 in cash and a $22,400,000 margin loan recourse only to the 8,000,000 shares acquired. In addition, we exchanged our existing limited partnership units in Lexington MLP for 8,149,592 Lexington common shares. As of December 31, 2008, we own 16,149,592 Lexington common shares, or approximately 17.2% of Lexington’s common equity. We account for our investment in Lexington on the equity method and record our pro rata share of Lexington’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.

Based on Lexington’s December 31, 2008 closing share price of $5.00, the market value (“fair value” pursuant to SFAS 157) of our investment in Lexington was $80,748,000, or $100,707,000 below the carrying amount on our consolidated balance sheet. We have concluded that our investment in Lexington is “other-than-temporarily” impaired and recorded a $100,707,000 non-cash impairment loss in the fourth quarter of 2008. Together with the impairment charge recorded in the nine months ended September 30, 2008, we recognized an aggregate of $107,882,000 of non-cash charges on our investment in Lexington during 2008. Our conclusions were based on the recent deterioration in the capital and financial markets and our inability to forecast a recovery in the near-term. These charges are included as a component of “(loss) income from partially owned entities,” on our consolidated statement of income.

Marketable Securities

At December 31, 2008, we concluded that certain of our investments in marketable equity securities were “other-than-temporarily” impaired, based on the severity and duration of the declines in the market value (“fair value” pursuant to SFAS 157) of these securities and recognized non-cash impairment charges aggregating $55,471,000, based on December 31, 2008 closing share prices. Together with impairment charges recorded in the nine months ended September 30, 2008, we recognized an aggregate of $76,352,000 of non-cash impairment charges on these investments during 2008. Our conclusions were based on the recent deterioration in the capital and financial markets and our inability to forecast a recovery in the near-term. These charges are included as a component of “interest and other investment (loss) income, net,” on our consolidated statement of income.

Real Estate Development Projects

During 2008, we recognized non-cash charges aggregating $96,037,000, for the write-off of our share of certain partially owned entities’ development costs, as these projects were either deferred or abandoned. These charges include $37,000,000 in the fourth quarter of 2008, for our 50% share of costs in connection with the redevelopment of the Filene’s property in Boston, Massachusetts and $23,000,000 in the first quarter of 2008, for our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project. These charges are included as a component of “(loss) income from partially owned entities,” on our consolidated statement of income.

During 2008, we also recognized non-cash charges aggregating $81,447,000, of which $73,438,000 was recognized in the fourth quarter of 2008, primarily related to residential condominium projects under development.

8

Overview – continued

MPH Mezzanine Loan

On June 5, 2007, we acquired a 42% interest in two MPH mezzanine loans totaling $158,700,000, for $66,000,000 in cash. The loans, which were due on February 8, 2008 and have not been repaid, are subordinate to $2.9 billion of mortgage and other debt and secured by the equity interests in four New York City properties: Worldwide Plaza, 1540 Broadway office condominium, 527 Madison Avenue and Tower 56. At December 31, 2007, we reduced the net carrying amount of the loans to $9,000,000 by recognizing a $57,000,000 non-cash charge in our consolidated statement of income. On April 2, 2008, we sold a sub-participation interest in the loans for $19,300,000, which resulted in the reduction of our valuation allowance from $57,000,000 to $46,700,000 and the recognition of $10,300,000 of non-cash income in our consolidated statement of income.

Dispositions

On March 31, 2008, we sold our 47.6% interest in Americold, our Temperature Controlled Logistics segment, for $220,000,000, in cash, which resulted in a net gain of $112,690,000, which is included as a component of “income from discontinued operations” on our consolidated statement of income.

On June 6, 2008, we sold our Tysons Dulles Plaza office building complex located in Tysons Corner, Virginia for approximately $152,800,000, in cash, which resulted in a net gain of $56,831,000, which is included as a component of “income from discontinued operations” on our consolidated statement of income.

Pursuant to the sale of GMH Communities L.P. (“GMH”) military housing division and the merger of its student housing division with American Campus Communities, Inc (“ACC”) (NYSE: ACC), in June 2008 we received an aggregate of $105,180,000, consisting of $82,142,000 in cash and 753,126 shares of ACC common stock valued at $23,038,000 based on ACC’s then closing share price of $30.59, in exchange for our entire interest in GMH. We subsequently sold all of the ACC common shares. The above transactions resulted in a net gain of $2,038,000, which was recognized in the second quarter of 2008, and is included as a component of “net gains on disposition of wholly owned and partially owned assets other than depreciable real estate” on our consolidated statement of income. The aggregate net income realized from inception of this investment in 2004 through its disposition was $77,000,000.

Financings

During 2008 we completed approximately $1.3 billion of property level financings and repaid approximately $241,000,000 of existing debt with a portion of the proceeds. In addition, we purchased $81,540,000 (aggregate face amount) of our 4.50% senior unsecured notes due August 15, 2009, for $80,408,000 in cash, resulting in a net gain on extinguishment of debt of $783,000. We also purchased $10,200,000 and $17,300,000 (aggregate face amounts) of our 3.63% and 2.85% convertible senior debentures, respectively, for an aggregate of $18,080,000 in cash, resulting in a net gain on extinguishment of debt of $9,037,000. These gains are included as a reduction of “interest and debt expense” on our consolidated statement of income.

The net proceeds we received from the above dispositions and financings were used primarily for general corporate purposes. We may seek to obtain additional capital through equity offerings, debt financings or asset sales, although there is no express policy with respect to these capital markets transactions. We may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire our shares or any other securities in the future.

9

Overview – continued

Leasing Activity

The following table sets forth certain information for the properties we own directly or indirectly, including leasing activity. The leasing activity presented below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue recognition in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Tenant improvements and leasing commissions are presented below based on square feet leased during the period, on a per square foot and per square foot per annum basis based on weighted average lease terms and as a percentage of initial rent per square foot.

(Square feet in thousands)	New York			Washington, DC						Merchandise Mart
As of December 31, 2008:	Office				Office		Retail			Office			Showroom
Square feet (in service)		16,108				17,666		21,861			2,424		6,332
Number of properties		28				84		176			8		8
Occupancy rate		96.7%				95.0%		92.1%			96.5%		92.2%
Leasing Activity:
Year ended December 31, 2008:
Square feet		1,246	(2)			2,152		1,022			493		862
Initial rent (1)	$	71.69			$	38.52	$	38.34		$	27.50	$	28.07
Weighted average lease term (years)		9.1				7.3		9.0			9.7		5.1
Rent per square foot – relet space:
Square feet		1,141				1,320		559			427		839
Initial Rent – cash basis (1)	$	73.50			$	36.04	$	42.59		$	28.02	$	27.87
Prior escalated rent – cash basis	$	48.69			$	30.89	$	28.46		$	32.13	$	28.33
Percentage increase (decrease):
Cash basis		51.0%	(3)			16.7%		49.6%	(3)		(12.8%)		(1.6%)
GAAP basis		48.4%	(3)			17.7%		18.1%	(3)		4.3%		10.2%
Rent per square foot – vacant space:
Square feet		105				832		463			66		23
Initial rent (1)	$	52.10			$	42.46	$	33.19		$	24.17	$	36.51
Tenant improvements and leasing commissions:
Per square foot	$	48.72			$	15.75	$	18.31		$	37.23	$	6.85
Per square foot per annum	$	5.35			$	2.16	$	2.03		$	3.84	$	1.33
Percentage of initial rent		7.5%				5.6%		5.3%			14.0%		4.7%
Quarter ended December 31, 2008:
Square feet		232				296		221			270		206
Initial rent (1)	$	70.39			$	39.13	$	61.77		$	30.09	$	27.06
Weighted average lease terms (years)		8.6				5.8		13.8			10.1		4.7
Rent per square foot – relet space:
Square feet		200				231		93			270		206
Initial Rent – cash basis (1)	$	72.26			$	38.92	$	97.73		$	30.09	$	27.06
Prior escalated rent – cash basis	$	48.67			$	35.13	$	34.87		$	35.20	$	27.67
Percentage increase (decrease):
Cash basis		48.5%	(3)			10.8%		180.3%	(3)		(14.5%)		(2.2%)
GAAP basis		18.4%	(3)			10.5%		10.5%	(3)		3.7%		8.2%
Rent per square foot – vacant space:
Square feet		33				65		128			—		—
Initial rent (1)	$	58.90			$	39.88	$	35.31		$	—	$	—
Tenant improvements and leasing commissions:
Per square foot	$	57.05			$	12.52	$	58.73		$	24.99	$	5.64
Per square foot per annum	$	6.60			$	2.16	$	4.26		$	2.48	$	1.19
Percentage of initial rent		9.4%				5.5%		6.9%			8.2%		4.4%

____________________

See notes on following page

10

Overview – continued

(Square feet in thousands)	New York			Washington, DC							Merchandise Mart
As of December 31, 2007:	Office				Office			Retail			Office				Showroom
Square feet (in service)		15,994				17,483			21,710			2,358			6,139
Number of properties		28				81			175			8			8
Occupancy rate		97.6	%			93.3	%		94.2	%		96.7	%		93.7	%
Leasing Activity:
Year ended December 31, 2007:
Square feet		1,445				2,512			857			329			1,510
Initial rent (1)	$	73.74			$	38.97		$	39.38		$	26.70		$	26.70
Weighted average lease term (years)		9.5				6.6			8.9			10.3			5.6
Rent per square foot – relet space:
Square feet		1,347				1,764			361			327			1,381
Initial Rent (1)	$	75.05			$	33.89		$	41.50		$	26.75		$	26.73
Prior escalated rent	$	43.66			$	31.90		$	28.60		$	28.25		$	26.85
Percentage increase (decrease):
Cash basis		71.9	%(3)			6.2	%		45.1	%(3)		(5.3	%)		(0.4	%)
GAAP basis		67.5	%(3)			7.1	%		38.1	%(3)		13.2	%		9.9	%
Rent per square foot – vacant space:
Square feet		98				748			496			2			129
Initial rent (1)	$	55.73			$	50.96		$	37.74		$	19.50		$	26.38
Tenant improvements and leasing commissions:
Per square foot	$	48.90			$	11.34		$	9.86		$	52.39		$	13.33
Per square foot per annum	$	5.17			$	1.72		$	1.11		$	5.09		$	2.38
Percentage of initial rent		7.0	%			4.4	%		2.8	%		19.1	%		8.9	%

_______________________

(1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

(2) In addition, the New York Office segment leased 13,468 square feet of retail space during the year ended December 31, 2008 at an initial rent of $205.39, a 268% increase over the prior escalated rent per square foot.

(3) Pursuant to SFAS 141, acquired below-market leases are marked-to-market at the time of their acquisition. Accordingly, when the space is subsequently re-leased, the cash basis rent increase is greater than the GAAP basis rent increase.

11

Critical Accounting Policies

In preparing the consolidated financial statements we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Set forth below is a summary of the accounting policies that we believe are critical to the preparation of the consolidated financial statements. The summary should be read in conjunction with the more complete discussion of our accounting policies included in Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.

Real Estate

Real estate is carried at cost, net of accumulated depreciation and amortization. As of December 31, 2008 and 2007, the carrying amounts of real estate, net of accumulated depreciation, were $15.710 billion and $15.228 billion, respectively. Maintenance and repairs are charged to operations as incurred. Depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated.

Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, identified intangibles such as acquired above and below market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, and we allocate purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions.

Our properties, including any related intangible assets, are individually reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over our anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, our anticipated holding period for properties, or the estimated fair value of properties change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.

Identified Intangible Assets

Upon an acquisition of a business we record intangible assets acquired at their estimated fair value separate and apart from goodwill. We amortize identified intangible assets that are determined to have finite lives which are based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the business acquired. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset, including the related real estate when appropriate, is not recoverable and the carrying amount exceeds the estimated fair value.

As of December 31, 2008 and 2007, the carrying amounts of identified intangible assets, a component of “other assets” on our consolidated balance sheets, were $525,950,000 and $563,359,000, respectively. In addition, the carrying amounts of identified intangible liabilities, a component of “deferred credit” on our consolidated balance sheets, were $719,822,000 and $814,098,000, respectively. If the intangible assets are deemed to be impaired, or the estimated useful lives of finite-life intangibles assets or liabilities change, the impact to our consolidated financial statements could be material.

12

Critical Accounting Policies – continued

Mezzanine Loans Receivable

We invest in mezzanine loans to entities which have significant real estate assets. These investments, which are subordinate to the mortgage loans secured by the real property, are generally secured by pledges of the equity interests of the entities owning the underlying real estate. We record investments in mezzanine loans at the stated principal amount net of any unamortized discount or premium. As of December 31, 2008 and 2007, the carrying amounts of “mezzanine loans receivable” were $472,539,000 and $492,339,000, respectively. We accrete or amortize any discounts or premiums over the life of the related receivable utilizing the effective interest method, or straight-line method if the result is not materially different. We evaluate the collectibility of both interest and principal of each of our loans, if circumstances warrant, in determining whether they are impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to the estimated fair value of the loan or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. If our estimates of the collectibility of both interest and principal or the fair value of our loans change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements.

Partially Owned Entities

As of December 31, 2008 and 2007, the carrying amounts of investments and advances to partially owned entities, including Alexander’s and Toys “R” Us, were $1.083 billion and $1.505 billion, respectively. In determining whether we have a controlling interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity in which we will absorb the majority of the entity’s expected losses, if they occur, or receive the majority of the expected residual returns, if they occur, or both. We account for investments on the equity method when the requirements for consolidation are not met, and we have significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently adjusted for our share of net income or loss and cash contributions and distributions. Investments that do not qualify for consolidation or equity method accounting are accounted for on the cost method.

Our investments in partially owned entities are reviewed for impairment if events or circumstances change indicating that the carrying amount of our investments may not be recoverable. The ultimate realization of our investments in partially owned entities is dependent on a number of factors, including the performance of each investment and market conditions. We will record an impairment charge if we determine that a decline in the value of an investment is other than temporary. If our estimates of the projected future cash flows, the nature of development activities for properties for which such activities are planned, and the estimated fair value of the investment change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.

Allowance For Doubtful Accounts

We periodically evaluate the collectibility of amounts due from tenants and maintain an allowance for doubtful accounts ($32,834,000 and $19,151,000 as of December 31, 2008 and 2007) for estimated losses resulting from the inability of tenants to make required payments under their lease agreements. We also maintain an allowance for receivables arising from the straight-lining of rents ($5,773,000 and $3,076,000 as of December 31, 2008 and 2007). This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.

13

Critical Accounting Policies – continued

Revenue Recognition

We have the following revenue sources and revenue recognition policies:

• Base Rent — income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease.

• Percentage Rent — income arising from retail tenant leases that is contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accordance with Staff Accounting Bulletin No. 104: Revenue Recognition, which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved).

• Hotel Revenue — income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is recognized when rooms are occupied. Food and beverage and banquet revenue are recognized when the services have been rendered.

• Trade Shows Revenue — income arising from the operation of trade shows, including rentals of booths. This revenue is recognized when the trade shows have occurred.

• Expense Reimbursements — revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is accrued in the same periods as the expenses are incurred.

• Management, Leasing and Other Fees — income arising from contractual agreements with third parties or with partially owned entities. This revenue is recognized as the related services are performed under the respective agreements.

Before we recognize revenue, we assess, among other things, its collectibility. If our assessment of the collectibility of revenue changes, the impact on our consolidated financial statements could be material.

Income Taxes

We operate in a manner intended to enable us to continue to qualify as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We distribute to our shareholders 100% of our taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our shareholders, or fail to meet other REIT requirements, we may fail to qualify as a REIT which may result in substantial adverse tax consequences.

14

Recently Issued Accounting Literature

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”).SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. SFAS 157 was effective for our financial assets and liabilities on January 1, 2008.  The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain non-financial assets and liabilities until January 1, 2009. This standard did not materially affect how we determine fair value, but resulted in certain additional disclosures. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Financial assets and liabilities measured at fair value in our consolidated financial statements primarily consist of (i) marketable securities, (ii) the assets of our deferred compensation plan (primarily marketable securities and equity investments in limited partnerships), for which there is a corresponding liability on our consolidated balance sheets and (iii) Class A units of the Operating Partnership, held by third-parties. Financial assets and liabilities measured at fair value as of December 31, 2008 are presented in the table below based on their level in the fair value hierarchy.

				Fair Value Hierarchy(1)
(Amounts in thousands)		Total		Level 1	Level 2		Level 3
Marketable securities	$	118,438	$	118,438	$	—	$	—
Deferred compensation plan assets (included in other assets)		69,945		35,769		—		34,176
Interest rate caps (included in other assets)		25		—		25		—
Total Assets	$	188,408	$	154,207	$	25	$	34,176
Class A units (included in redeemable noncontrolling interests)	$	882,740	$	—	$	882,740	$	—
Deferred compensation plan liabilities	$	69,945	$	35,769	$	—	$	34,176

___________________

(1) We chose not to elect the fair value option prescribed by Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), for our financial assets and liabilities that had not been previously measured at fair value. These financial assets and liabilities include our outstanding debt, accounts receivable, accounts payable and investments in partially owned entities.

The fair value of Level 3 “deferred compensation plan assets” represents equity investments in certain limited partnerships, for which there is a corresponding Level 3 liability to the plan’s participants. The following is a summary of changes in Level 3 deferred compensation plan assets and liabilities, for the year ended December 31, 2008.

(Amounts in thousands)		Beginning Balance		Total Realized/ Unrealized Losses		Purchases, Sales, Other Settlements and Issuances, net			Ending Balance
For the year ended December 31, 2008	$	50,578	$	(15,407	)	$	(995	)	$	34,176

15

Recently Issued Accounting Literature - continued

In February 2007, the FASB issued SFAS 159, which permits companies to measure many financial instruments and certain other items at fair value.  SFAS 159 was effective on January 1, 2008. We did not elect the fair value option for any of our existing financial instruments on the effective date and have not determined whether we will elect this option for any eligible financial instruments we acquire in the future.

In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R also broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and acquisition related costs will generally be expensed rather than included as part of the basis of the acquisition. SFAS 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for all transactions entered into on or after January 1, 2009. The adoption of this standard on January 1, 2009 could materially impact our future financial results to the extent that we acquire significant amounts of real estate, in part because acquisition costs will be expensed as incurred compared to our current practice of capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. As of December 31, 2008, as part of our preparation for the adoption of SFAS 160, which is effective for us on January 1, 2009, we have retroactively adopted the measurement provisions of EITF Topic D-98, Classification and Measurement of Redeemable Securities. Upon adoption, we adjusted the carrying amounts of the Class A units held by third parties, a component of “redeemable noncontrolling interests” on our consolidated balance sheets, by recognizing a $639,447,000 increase to the January 1, 2006 balance of “redeemable noncontrolling interests” and a corresponding decrease in “earnings in excess of (less than) distributions,” which was accounted for as a cumulative effect adjustment on January 1, 2006. Subsequent adjustments to the carrying amounts of the Class A units, to reflect the change in their redemption value at the end of each reporting period, were recorded to “additional capital.” The effects of retrospectively applying SFAS 160, resulted in (i) the reclassification of minority interests in consolidated subsidiaries to noncontrolling interests in consolidated subsidiaries, a component of permanent equity on our consolidated balance sheets, (ii) the reclassification of minority interest expense to net income attributable to noncontrolling interests, on our consolidated statements of income, and (iii) additional disclosures, including a consolidated statement of changes in equity in quarterly reporting periods.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures related to derivative instruments and hedging activities, including disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.

16

Recently Issued Accounting Literature - continued

On January 1, 2009, we adopted FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP 14-1”), which was required to be applied retrospectively. The adoption of FSP 14-1 affected the accounting for our convertible and exchangeable senior debentures by requiring the initial proceeds from their sale to be allocated between a debt component and an equity component in a manner that results in interest expense on the debt component at our nonconvertible debt borrowing rate on the date of issue. The initial debt components of our $1.4 billion Convertible Senior Debentures, $1 billion Convertible Senior Debentures and $500 million Exchangeable Senior Debentures were $1,241,286,000, $926,361,000 and $457,699,000, respectively, based on the fair value of similar nonconvertible instruments issued at that time. The aggregate initial debt discount of $216,655,000 after original issuance costs allocated to the equity component was recorded in “additional capital” in our consolidated statement of changes in equity. We are amortizing the discount using the effective interest method over the period the debt is expected to remain outstanding (i.e., the earliest date the holders may require us to repurchase the debentures), as additional interest expense. Accordingly, interest expense for the years ended December 31, 2008, 2007 and 2006 has been adjusted to include $39,546,000, 30,418,000 and $5,969,000 of amortization in the aggregate, or $35,746,000, $27,367,000 and $5,358,000, net of amounts attributable to noncontrolling interests. Amortization for periods prior to December 31, 2005 (not presented herein) aggregating $2,724,000 have been reflected as a cumulative effect of change in accounting principle in “earnings in excess (less than) distributions” on our consolidated statement of changes in equity. Below is a summary of the financial statement effects of implementing FSP 14-1 and related disclosures.

		$1.4 Billion Convertible Senior Debentures				$1 Billion Convertible Senior Debentures				$500 Million Exchangeable Senior Debentures
(Amounts in thousands, except per share amounts)		December 31,				December 31,				December 31,
Balance Sheet:		2008		2007		2008		2007		2008		2007
Principal amount of debt component	$	1,382,700	$	1,400,000	$	989,800	$	1,000,000	$	499,982	$	499,982
Unamortized discount		(106,415	)	(137,295	)	(44,342	)	(58,867	)	(21,726	)	(27,612	)
Carrying amount of debt component	$	1,276,285	$	1,262,705	$	945,458	$	941,133	$	478,256	$	472,370
Carrying amount of equity component	$	130,714	$	130,714	$	53,640	$	53,640	$	32,301	$	32,301
Effective interest rate		5.45	%	5.45	%	5.32	%	5.32	%	5.32	%	5.32	%
Maturity date (period through which discount is being amortized)		4/1/12				11/15/11				4/15/12
Conversion price per share, as adjusted	$	162.46			$	153.45			$	89.94
Number of shares on which the aggregate consideration to be delivered upon conversion is determined		—	(1)			—	(1)			5,570

__________________

(1) In accordance with FSP 14-1, we are required to disclose the conversion price and the number of shares on which the aggregate consideration to be delivered upon conversion is determined (principal plus excess value.) Our convertible senior debentures require the entire principal amount to be settled in cash, and at our option, any excess value above the principal amount may be settled in cash or common shares. Based on the December 31, 2008 closing share price of our common shares and the conversion prices in the table above, there was no excess value; accordingly, no common shares would be issued if these securities were settled on this date. The number of common shares on which the aggregate consideration to be delivered upon conversion is 8,511 and 6,450 common shares, respectively.

17

Recently Issued Accounting Literature - continued

(Amounts in thousands)		Year Ended December 31,
Income Statement:		2008		2007		2006
$1.4 Billion Convertible Senior Debentures:
Coupon interest	$	39,853	$	30,368	$	—
Discount amortization – original issue		5,352		3,963		—
Discount amortization – FSP 14-1 implementation		24,099		17,456		—
	$	69,304	$	51,787	$	—
$1 Billion Convertible Senior Debentures:
Coupon interest	$	36,216	$	36,049	$	4,229
Discount amortization – original issue		3,860		3,711		404
Discount amortization – FSP 14-1 implementation		10,155		9,819		838
	$	50,231	$	49,579	$	5,471
$500 Million Exchangeable Senior Debentures:
Coupon interest	$	19,374	$	19,379	$	19,375
Discount amortization – original issue		1,399		1,341		1,286
Discount amortization – FSP 14-1 implementation		4,488		4,238		4,010
	$	25,261	$	24,958	$	24,671

In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance Contracts (“SFAS 163”). SFAS 163 was issued to decrease inconsistencies within Statement No. 60, Accounting and Reporting by Insurance Enterprises, and clarify how it applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition of premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.

In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 is effective on January 1, 2009. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Investments Granted in Share-Based Payment Transactions are Participating Securities (“FSP 03-6-1”). FSP 03-6-1 requires companies to treat unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents as “participating securities” and include such securities in the computation of earnings per share pursuant to the two-class method as described in SFAS 128. FSP 03-6-1 became effective on January 1, 2009 and required all prior period earnings per share data presented, to be adjusted retroactively. The adoption of FSP 03-6-1 on January 1, 2009 did not have a material effect on our computation of income per share.

18

Net income and EBITDA ⁽¹⁾ by Segment for the Years Ended December 31, 2008, 2007 and 2006.

(Amounts in thousands)	For the Year Ended December 31, 2008
	Total			New York Office			Washington, DC Office (2)			Retail			Merchandise Mart (2)			Toys			Other (4)
Property rentals	$	2,024,075		$	722,445		$	509,377		$	349,763		$	245,400		$	—		$	197,090
Straight-line rents:
Contractual rent increases		58,159			28,023			6,764			16,622			5,954			—			796
Amortization of free rent		32,901			14,743			10,778			4,156			2,703			—			521
Amortization of acquired below- market leases, net		96,176			60,355			4,423			26,765			161			—			4,472
Total rentals		2,211,311			825,566			531,342			397,306			254,218			—			202,879
Tenant expense reimbursements		358,437			135,788			61,523			128,496			18,567			—			14,063
Fee and other income:
Tenant cleaning fees		56,416			71,833			—			—			—			—			(15,417	)
Management and leasing fees		13,397			6,411			8,940			1,673			349			—			(3,976	)
Lease termination fees		8,634			3,088			2,635			2,281			630			—			—
Other		48,856			15,699			22,360			2,603			7,059			—			1,135
Total revenues		2,697,051			1,058,385			626,800			532,359			280,823			—			198,684
Operating expenses		1,070,118			439,012			220,139			201,397			137,971			—			71,599
Depreciation and amortization		537,427			190,925			137,255			92,353			51,833			—			65,061
General and administrative		194,027			20,217			26,548			29,866			29,254			—			88,142
Impairment losses on development projects and costs of acquisitions not consummated		81,447			—			—			595			—			—			80,852
Total expenses		1,883,019			650,154			383,942			324,211			219,058			—			305,654
Operating income (loss)		814,032			408,231			242,858			208,148			61,765			—			(106,970	)
Income applicable to Alexander’s		36,671			763			—			650			—			—			35,258
Income applicable to Toys		2,380			—			—			—			—			2,380			—
(Loss) income from partially owned entities		(195,878	)		5,319			6,173			9,721			1,106			—			(218,197	)
Interest and other investment (loss) income, net		(2,682	)		2,288			2,116			494			356			—			(7,936	)
Interest and debt expense		(625,904	)		(139,146	)		(126,508	)		(86,787	)		(52,148	)		—			(221,315	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		7,757			—			—			—			—			—			7,757
Income (loss) before income taxes		36,376			277,455			124,639			132,226			11,079			2,380			(511,403	)
Income tax benefit (expense)		204,537			—			220,973			(82	)		(1,206	)		—			(15,148	)
Income (loss) from continuing operations		240,913			277,455			345,612			132,144			9,873			2,380			(526,551	)
Income (loss) from discontinued operations		170,532			—			59,068			(448	)		—			—			111,912
Net income (loss)		411,445			277,455			404,680			131,696			9,873			2,380			(414,639	)
Net (income) loss attributable to noncontrolling interests, including unit distributions		(52,148	)		(4,762	)		—			157			(125	)		—			(47,418	)
Net income (loss) attributable to Vornado		359,297			272,693			404,680			131,853			9,748			2,380			(462,057	)
Interest and debt expense (3)		821,940			132,406			130,310			102,600			53,072			147,812			255,740
Depreciation and amortization (3)		710,526			181,699			143,989			98,238			52,357			136,634			97,609
Income tax (benefit) expense (3)		(142,415	)		—			(220,965	)		82			1,260			59,652			17,556
EBITDA(1)	$	1,749,348		$	586,798		$	458,014		$	332,773		$	116,437		$	346,478		$	(91,152	)
Percentage of EBITDA by segment		100.0	%		33.5	%		26.2	%		19.0	%		6.7	%		19.8	%		(5.2	)%

Excluding items that affect comparability, which are described in the “Overview,” the percentages of EBITDA by segment are 30.5% for New York Office, 20.6% for Washington, DC Office, 17.3% for Retail, 6.0% for Merchandise Mart, 18.0% for Toys and 7.6% for Other.

_____________________

See notes on page 22.

19

Net income and EBITDA ⁽¹⁾ by Segment for the Years Ended December 31, 2008, 2007 and 2006 – continued

(Amounts in thousands)	For the Year Ended December 31, 2007
	Total			New York Office			Washington, DC Office (2)			Retail			Merchandise Mart (2)			Toys			Other (4)
Property rentals	$	1,816,698		$	640,739		$	455,416		$	328,911		$	237,199		$	—		$	154,433
Straight-line rents:
Contractual rent increases		42,431			13,281			11,856			12,257			4,193			—			844
Amortization of free rent		34,602			15,935			14,115			1,138			1,836			—			1,578
Amortization of acquired below- market leases, net		83,292			47,861			4,615			25,960			193			—			4,663
Total rentals		1,977,023			717,816			486,002			368,266			243,421			—			161,518
Tenant expense reimbursements		323,544			125,940			45,138			120,756			19,570			—			12,140
Fee and other income:
Tenant cleaning fees		46,238			58,837			—			—			—			—			(12,599	)
Management and leasing fees		15,713			4,928			12,539			1,770			7			—			(3,531	)
Lease termination fees		7,453			3,500			453			2,823			677			—			—
Other		40,545			16,239			16,299			2,257			6,997			—			(1,247	)
Total revenues		2,410,516			927,260			560,431			495,872			270,672			—			156,281
Operating expenses		951,582			395,357			183,776			172,557			131,332			—			68,560
Depreciation and amortization		441,209			150,268			117,496			78,286			47,105			—			48,054
General and administrative		189,041			17,252			27,629			27,476			28,168			—			88,516
Costs of acquisitions not consummated		10,375			—			—			—			—			—			10,375
Total expenses		1,592,207			562,877			328,901			278,319			206,605			—			215,505
Operating income (loss)		818,309			364,383			231,530			217,553			64,067			—			(59,224	)
Income applicable to Alexander’s		50,589			757			—			812			—			—			49,020
Loss applicable to Toys “R” Us		(14,337	)		—			—			—			—			(14,337	)		—
Income from partially owned entities		31,891			4,799			8,728			9,041			1,053			—			8,270
Interest and other investment income, net		226,425			2,888			5,982			534			390			—			216,631
Interest and debt expense		(599,804	)		(133,804	)		(126,163	)		(78,234	)		(52,237	)		—			(209,366	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		39,493			—			—			—			—			—			39,493
Income (loss) before income taxes		552,566			239,023			120,077			149,706			13,273			(14,337	)		44,824
Income tax expense		(9,179	)		—			(2,909	)		(185	)		(969	)		—			(5,116	)
Income (loss) from continuing operations		543,387			239,023			117,168			149,521			12,304			(14,337	)		39,708
Income (loss) from discontinued operations		64,446			—			62,481			6,397			—			—			(4,432	)
Net income (loss)		607,833			239,023			179,649			155,918			12,304			(14,337	)		35,276
Net (income) loss attributable to noncontrolling interests, including unit distributions		(66,294	)		(3,583	)		—			96			—			—			(62,807	)
Net income (loss) attributable to Vornado		541,539			235,440			179,649			156,014			12,304			(14,337	)		(27,531	)
Interest and debt expense (3)		853,448			131,418			131,013			89,537			53,098			174,401			273,981
Depreciation and amortization (3)		676,660			147,340			132,302			82,002			47,711			155,800			111,505
Income tax expense (benefit) (3)		4,234			—			6,738			185			969			(10,898	)		7,240
EBITDA(1)	$	2,075,881		$	514,198		$	449,702		$	327,738		$	114,082		$	304,966		$	365,195
Percentage of EBITDA by segment		100.0	%		24.8	%		21.7	%		15.8	%		5.5	%		14.7	%		17.5	%

Excluding items that affect comparability, which are described in the “Overview,” the percentages of EBITDA by segment are 27.8% for New York Office, 20.8% for Washington, DC Office, 17.5% for Retail, 6.2% for Merchandise Mart, 16.3% for Toys and 11.4% for Other.

___________________

See notes on page 22.

20

Net income and EBITDA ⁽¹⁾ by Segment for the Years Ended December 31, 2008, 2007 and 2006 – continued

(Amounts in thousands)	For the Year Ended December 31, 2006
	Total			New York Office			Washington, DC Office (2)			Retail			Merchandise Mart (2)			Toys			Other (4)
Property rentals	$	1,458,201		$	487,421		$	394,997		$	264,727		$	224,341		$	—		$	86,715
Straight-line rents:
Contractual rent increases		31,947			4,431			13,632			7,908			6,142			—			(166	)
Amortization of free rent		31,103			7,245			16,155			5,080			2,623			—			—
Amortization of acquired below- market leases, net		23,490			976			4,178			15,513			43			—			2,780
Total rentals		1,544,741			500,073			428,962			293,228			233,149			—			89,329
Tenant expense reimbursements		260,772			102,488			34,618			101,737			17,810			—			4,119
Fee and other income:
Tenant cleaning fees		33,779			42,317			—			—			—			—			(8,538	)
Management and leasing fees		10,256			1,111			7,643			1,463			39			—			—
Lease termination fees		29,362			25,188			2,798			371			1,005			—			—
Other		30,190			12,307			11,247			1,588			4,963			—			85
Total revenues		1,909,100			683,484			485,268			398,387			256,966			—			84,995
Operating expenses		737,452			301,583			152,121			130,520			103,644			—			49,584
Depreciation and amortization		319,066			98,474			106,592			50,806			42,132			—			21,062
General and administrative		180,167			16,942			34,074			21,683			26,572			—			80,896
Total expenses		1,236,685			416,999			292,787			203,009			172,348			—			151,542
Operating income (loss)		672,415			266,485			192,481			195,378			84,618			—			(66,547	)
(Loss) income applicable to Alexander’s		(14,530	)		772			—			716			—			—			(16,018	)
Loss applicable to Toys “R” Us		(47,520	)		—			—			—			—			(47,520	)		—
Income from partially owned entities		60,355			3,844			13,302			5,950			1,076			—			36,183
Interest and other investment income, net		255,391			913			1,782			812			275			—			251,609
Interest and debt expense		(400,540	)		(84,134	)		(97,972	)		(79,202	)		(28,672	)		—			(110,560	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		76,073			—			—			—			—			—			76,073
Income (loss) before income taxes		601,644			187,880			109,593			123,654			57,297			(47,520	)		170,740
Income tax (expense) benefit		(491	)		—			(1,066	)		—			575			—			—
Income (loss) from continuing operations		601,153			187,880			108,527			123,654			57,872			(47,520	)		170,740
Income (loss) from discontinued operations		32,203			—			25,714			9,206			5,682			—			(8,399	)
Net income (loss)		633,356			187,880			134,241			132,860			63,554			(47,520	)		162,341
Net (income) loss attributable to noncontrolling interests, including unit distributions		(78,574	)		—			—			84			5			—			(78,663	)
Net income (loss) attributable to Vornado		554,782			187,880			134,241			132,944			63,559			(47,520	)		83,678
Interest and debt expense (3)		698,465			86,861			107,477			89,748			29,551			196,259			188,569
Depreciation and amortization (3)		542,515			101,976			125,674			56,168			42,717			137,176			78,804
Income tax (benefit) expense (3)		(11,848	)		—			8,976			—			(575	)		(22,628	)		2,379
EBITDA(1)	$	1,783,914		$	376,717		$	376,368		$	278,860		$	135,252		$	263,287		$	353,430
Percentage of EBITDA by segment		100.0	%		21.1	%		21.1	%		15.6	%		7.6	%		14.8	%		19.8	%

Excluding items that affect comparability, the percentages of EBITDA by segment are 25.2% for New York Office, 23.5% for Washington, DC Office, 18.0% for Retail, 8.7% for Merchandise Mart, 17.5% for Toys and 7.1% for Other.

_________________________

See notes on the following page.

21

Net income and EBITDA ⁽¹⁾ by Segment for the Years Ended December 31, 2008, 2007 and 2006 – continued

Notes to the preceding tabular information:

(1) EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.” Management considers EBITDA a supplemental measure for making decisions and assessing the un-levered performance of its segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, management utilizes this measure to make investment decisions as well as to compare the performance of its assets to that of its peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.

(2) As of January 1, 2008, we transferred the operations and financial results related to 409 3^rd Street, NW (Washington Office Center) from the Merchandise Mart segment to the Washington, DC Office segment for both the current and prior periods presented.

(3) Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of net income to EBITDA include our share of these items from partially owned entities.

(4) Other EBITDA is comprised of:

(Amounts in thousands)	For the Year Ended December 31,
	2008			2007			2006
Alexander’s	$	64,683		$	78,375		$	14,130
555 California Street (acquired 70% interest in May 2007)		48,316			34,073			—
Hotel Pennsylvania		42,269			37,941			27,495
Lexington		35,150			24,539			51,737
GMH (sold in June 2008)		—			22,604			10,737
Industrial warehouses		5,264			4,881			5,582
Other investments		6,321			7,322			13,253
		202,003			209,735			122,934
Non-cash asset write-downs:
Investment in Lexington		(107,882	)		—			—
Marketable equity securities		(76,352	)		—			—
Real estate development projects:
Partially owned entities		(96,037	)		—			—
Wholly owned entities (including costs of acquisitions not consummated)		(80,852	)		(10,375	)		—
MPH mezzanine loan loss reversal (accrual)		10,300			(57,000	)		—
Derivative positions in marketable equity securities		(33,740	)		113,503			111,107
Corporate general and administrative expenses		(77,763	)		(76,799	)		(76,071	)
Investment income and other, net		87,322			181,277			207,832
Net income attributable to noncontrolling interests, including unit distributions		(47,418	)		(62,807	)		(78,663	)
Discontinued operations of Americold (including a $112,690 net gain on sale in 2008)		129,267			67,661			66,291
	$	(91,152	)	$	365,195		$	353,430

22

Results of Operations - Year Ended December 31, 2008 Compared to December 31, 2007

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below–market leases, net of above market leases, and fee income, were $2,697,051,000 for the year ended December 31, 2008, compared to $2,410,516,000 in the prior year, an increase of $286,535,000. Below are the details of the increase by segment:

(Amounts in thousands)
Property rentals:	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart			Other
Increase (decrease) due to:
Acquisitions:
1290 Avenue of the Americas	$	46,780		$	46,780		$	—		$	—		$	—		$	—
555 California Street		37,301			—			—			—			—			37,301
H Street (effect of consolidating from May 1, 2007, vs. equity method prior)		19,330			—			19,330			—			—			—
Other		25,788			—			780			16,838			8,170			—
Development/Redevelopment		(8,065	)		—			(2,703	)		(4,688	)		—			(674	)
Amortization of acquired below- market leases, net		12,884			12,494			(192	)		805			(32	)		(191	)
Leasing activity (see page 10)		91,016			48,476			28,125			16,085			549			(2,219	)
Hotel Pennsylvania		7,144			—			—			—			—			7,144
Trade shows		2,110			—			—			—			2,110			—
Total increase in property rentals		234,288			107,750			45,340			29,040			10,797			41,361
Tenant expense reimbursements:
Increase (decrease) due to:
Acquisitions/development		12,613			6,041			2,558			2,165			—			1,849
Operations		22,280			3,807	(1)		13,827			5,575			(1,003	)(2)		74
Total increase (decrease) in tenant expense reimbursements		34,893			9,848			16,385			7,740			(1,003	)		1,923
Fee and other income:
Increase (decrease) in:
Lease cancellation fee income		1,181			(412	)		2,182			(542	)		(47	)		—
Management and leasing fees		(2,316	)		1,483			(3,599	)(3)		(97	)		342			(445	)
BMS Cleaning fees		10,178			12,996			—			—			—			(2,818	)(4)
Other		8,311			(540	)		6,061			346			62			2,382
Total increase (decrease) in fee and other income		17,354			13,527			4,644			(293	)		357			(881	)
Total increase in revenues	$	286,535		$	131,125		$	66,369		$	36,487		$	10,151		$	42,403

____________________________

(1) Primarily due to a decrease in real estate tax reimbursements resulting from lower tax assessments and new tenant base years.

(2) Primarily from lower real estate tax reimbursements resulting from a reassessment of 2006 real estate taxes in 2007.

(3) Primarily from leasing fees recognized in the prior year in connection with the management of a development project.

(4) Results from the elimination of inter-company fees from operating segments upon consolidation. See note 4 on page 24.

23

Results of Operations - Year Ended December 31, 2008 Compared to December 31, 2007 – continued

Expenses

Our expenses, which consist of operating, depreciation and amortization, general and administrative expenses and costs of acquisitions and developments not consummated were $1,883,019,000 for the year ended December 31, 2008, compared to $1,592,207,000 in the prior year, an increase of $290,812,000. Below are the details of the increase (decrease) by segment:

(Amounts in thousands)
Operating:	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart			Other
Increase (decrease) due to:
Acquisitions:
1290 Avenue of the Americas	$	19,148		$	19,148		$	—		$	—		$	—		$	—
555 California Street		17,442			—			—			—			—			17,442
H Street (effect of consolidating from May 1, 2007, vs. equity method prior)		8,300			—			8,300			—			—			—
Other		14,455			—			1,410			6,190			6,855			—
Development/Redevelopment		145			—			(731	)		2,186			—			(1,310	)
Operations		59,624			24,507	(1)		27,384			20,464	(2)		2,744	(3)		(15,475	) (4)
Hotel Pennsylvania		2,382			—			—			—			—			2,382
Trade shows activity		(2,960	)		—			—			—			(2,960	)		—
Total increase in operating expenses		118,536			43,655			36,363			28,840			6,639			3,039
Depreciation and amortization:
Increase due to:
Acquisitions/Development		46,620			23,618			7,006			4,248			—			11,748
Operations (due to additions to buildings and improvements)		49,598			17,039			12,753			9,819			4,728			5,259
Total increase in depreciation and amortization		96,218			40,657			19,759			14,067			4,728			17,007
General and administrative:
Increase (decrease) due to:
Acquisitions/Development and Other		7,349			—			(17	)		1,948			—			5,418
Operations		(2,363	)		2,965			(1,064	)		442			1,086			(5,792	)(5)
Total increase (decrease) in general and administrative		4,986			2,965			(1,081	)		2,390			1,086			(374	)
Impairment losses on development projects and cost of acquisitions not consummated		71,072			—			—			595			—			70,477
Total increase in expenses	$	290,812		$	87,277		$	55,041		$	45,892		$	12,453		$	90,149

_________________________

(1) Results from an $11,715 increase in BMS operating expenses and a $12,792 increase in property level operating expenses.

(2) Includes $6,990 of write-offs for receivables arising from the straight-lining of rents and $2,492 of bad debt expense, all relating to tenants that filed for bankruptcy. Of these amounts, $3,931 and $1,203, respectively, relate to Circuit City.

(3) Primarily due to higher bad debt expense, partially offset by lower real estate taxes.

(4) Results primarily from an increase in the elimination of inter-company fees of our operating segments upon consolidation.

(5) Primarily due to a $15,344 reduction from the mark-to-market of investments in our deferred compensation plan (for which there is a corresponding reduction in “interest and other investment (loss) income, net”), partially offset by a $4,600 pension termination cost, higher compensation expense and professional fees.

24

Results of Operations - Year Ended December 31, 2008 Compared to December 31, 2007 – continued

Income Applicable to Alexander’s

Our 32.5% share of income applicable to Alexander’s (comprised of our share of Alexander’s net income, management, leasing and development fees) was $36,671,000 for the year ended December 31, 2008, compared to $50,589,000 for the prior year, a decrease of $13,918,000. The decrease was primarily due to $6,583,000 of income for our share of the reversal of accrued stock appreciation rights compensation expense, compared to $14,280,000 in the prior year.

Income (loss) Applicable to Toys

Our 32.7% share of Toys’ financial results (comprised of our share of Toys’ net income, interest income on loans receivable, and management fees) for the years ended December 31, 2008 and December 31, 2007 are for Toys fiscal periods from November 4, 2007 to November 1, 2008 and October 29, 2006 to November 3, 2007, respectively. In the year ended December 31, 2008, our income applicable to Toys was $2,380,000, or $62,032,000 before our share of Toys’ income tax expense, compared to a loss of $14,337,000 or $25,235,000 before our share of Toys’ income tax benefit in the prior year.

(Loss) Income from Partially Owned Entities

Summarized below are the components of (loss) income from partially owned entities for the years ended December 31, 2008 and 2007.

(Amounts in thousands)	For The Year Ended December 31,
Equity in Net (Loss) Income:	2008			2007
Lexington	$	(105,630	)(1)	$	2,211
Beverly Connection (2):
50% share of equity in net loss		(8,706	)(3)		(7,031	)
Interest and fee income		14,450			12,141
		5,744			5,110
India real estate ventures – 4% to 50% share of equity in net loss		(3,336	)		—
GMH Communities L.P. – 13.8% share of equity in net income		—	(4)		6,463
H Street partially owned entities – 50% share of equity in net income		—	(5)		5,923	(5)
Other		(92,656	)(6)		12,184
	$	(195,878	)	$	31,891

________________________

(1) Includes $107,882 of non-cash impairment charges. See “Overview” on page 4 for details.

(2) As of November 13, 2008, our joint venture partner’s failure to contribute its pro rata share of required capital resulted in our ability under the joint venture agreement to assert unilateral control over major business decisions and accordingly, we began to consolidate our investment pursuant to Accounting Research Bulletin 51, Consolidated Financial Statements.

(3) Includes $4,100 for the reversal of a non-cash charge recorded by the joint venture in prior periods which, pursuant to paragraph 19(n) of Accounting Principles Board Opinion 18, The Equity Method of Accounting For Investments In Common Stock, should have been eliminated in the determination of our share of the earnings of the venture. In addition, in accordance with EITF 99-10, during the quarter ended September 30, 2008 our partner’s capital account was reduced to zero and, accordingly, we recognized $1,528 of additional net loss for the portion that related to our partner’s pro rata share of the venture’s net loss.

(4) In June 2008, we sold our interest in GMH Communities L.P.

(5) As of April 30, 2007, our H Street subsidiary, acquired the remaining 50% interest in these entities and began to consolidate this investment into our consolidated financial statements and no longer account for it under the equity method.

(6) Includes non-cash asset write-downs aggregating $96,037,000. See “Overview” on page 4 for details.

25

Results of Operations - Year Ended December 31, 2008 Compared to December 31, 2007 – continued

Interest and Other Investment (Loss) Income, net

Interest and other investment (loss) income, net (comprised of mark-to-market of derivative positions, interest income on mezzanine loans receivable, other interest and dividend income and impairment charges on marketable securities) was ($2,682,000) for the year ended December 31, 2008, compared to $226,425,000 for the year ended December 31, 2007, a decrease of $229,107,000. This decrease resulted primarily from:

(Amounts in thousands)
Derivative positions in marketable equity securities – net loss of $33,740 in 2008 compared to a net gain of $113,503 in 2007	$	(147,243	)
Marketable equity securities - impairment losses		(76,352	)
MPH mezzanine loan – income of $10,300 from the reversal of a portion of the 2007 loan loss accrual in 2008, compared to a $57,000 loan loss accrual in 2007		67,300
Decrease in interest income as a result of lower average yields on investments (2.3% in the current year compared to 5.0% in the prior year)		(28,250	)
Decrease in interest income on mezzanine loans as a result of lower average investments ($480,558 in the current year compared to $611,943 in the prior year)		(20,522	)
Decrease in income on investments in our deferred compensation plan		(15,344	)
Other, net		(8,696	)
	$	(229,107	)

Interest and Debt Expense

Interest and debt expense was $625,904,000 for the year ended December 31, 2008, compared to $599,804,000 in the year ended December 31, 2007, an increase of $26,100,000. This increase was primarily due to an $812 million increase in average outstanding debt from property financings and refinancings, partially offset by a $9,820,000 net gain on early extinguishment of debt.

Net Gains on Disposition of Wholly Owned and Partially Owned Assets other than Depreciable Real Estate

Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate was $7,757,000 in the year ended December 31, 2008, compared to $39,493,000 in the year ended December 31, 2007. The year ended December 31, 2008 includes a $3,691,000 pre-tax gain on sale of residential condominiums, a $2,038,000 net gain on disposition of our 13.8% interest in GMH and $2,028,000 for net gains on sale of marketable securities. The $39,493,000 net gain in the year ended December 31, 2007 represents net gains on sale of marketable securities, including $23,090,000 from the sale of McDonald’s common shares.

26

Results of Operations - Year Ended December 31, 2008 Compared to December 31, 2007 – continued

Income Tax Expense

In the year ended December 31, 2008, we had an income tax benefit of $204,537,000, compared to an expense of $9,179,000 in the prior year, a decrease of $213,716,000. The decrease results primarily from a $222,174,000 reversal of deferred taxes recorded in connection with the acquisition of H Street. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.

Discontinued Operations

The combined results of discontinued operations for the years ended December 31, 2008 and 2007 include the operating results of Americold, which was sold on March 31, 2008; Tysons Dulles Plaza, which was sold on June 10, 2008; 19.6 acres of land we acquired as part of our acquisition of H Street, of which 11 acres were sold in September 2007; Vineland, New Jersey, which was sold on July 16, 2007; Crystal Mall Two, which was sold on August 9, 2007; Arlington Plaza, which was sold on October 17, 2007.

(Amounts in thousands)	For the Year Ended December 31,
	2008		2007
Total revenues	$	222,361	$	865,584
Total expenses		222,042		866,119
Net income (loss)		319		(535	)
Net gain on sale of Americold		112,690		—
Net gain on sale of Tysons Dulles Plaza		56,831		—
Net gain on sale of Arlington Plaza		—		33,890
Net gain on sale of Crystal Mall Two		—		19,893
Net gains on sale of other real estate		692		11,198
Income from discontinued operations	$	170,532	$	64,446

Net Income Attributable to Noncontrolling Interests, Including Unit Distributions

Net income attributable to noncontrolling interests for the years ended December 31, 2008 and 2007 is comprised of (i) allocations of income to redeemable noncontrolling interests of $33,327,000 and $50,514,000, respectively, (ii) net loss attributable to noncontrolling interests in consolidated subsidiaries of $3,263,000 and $3,494,000, respectively and (iii) preferred unit distributions of the Operating Partnership of $22,084,000 and $19,274,000, respectively. The decrease of $17,187,000 in allocations of income to redeemable noncontrolling interests resulted primarily from lower net income subject to allocation to the unitholders. The increase of $2,810,000 in preferred unit distributions of the Operating Partnership was due to the amortization of unit issuance costs in connection with our adoption of the measurement provisions of EITF Topic D-98.

Preferred Share Dividends

Preferred share dividends were $57,091,000 for the year ended December 31, 2008, compared to $57,177,000 for the prior year.

27

Results of Operations - Year Ended December 31, 2008 Compared to December 31, 2007 – continued

EBITDA

Below are the details of the changes in EBITDA by segment.

(Amounts in thousands)	Total		New York Office			Washington, DC Office			Retail			Merchandise Mart			Toys		Other
Year ended December 31, 2007	$	2,075,881	$	514,198		$	449,702		$	327,738		$	114,082		$	304,966	$	365,195
2008 Operations: Same store operations(1)				32,652			17,287			14,158			(268	)
Acquisitions, dispositions and non-same store income and expenses				39,948			(8,975	)		(9,123	)		2,623
Year ended December 31, 2008	$	1,749,348	$	586,798		$	458,014		$	332,773		$	116,437		$	346,478	$	(91,152)
% increase (decrease) in same store operations				6.2	%		4.5	%		4.8	%		(0.2	)%

__________________________

(1) Represents the increase (decrease) in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses. We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers. Same store operations may not be comparable to similarly titled measures employed by other companies.

28

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below market leases net of above market leases pursuant to SFAS No. 141 and 142, and fee income, were $2,410,516,000 for the year ended December 31, 2007, compared to $1,909,100,000 in the prior year, an increase of $501,416,000. Below are the details of the increase by segment:

(Amounts in thousands)
Property rentals:	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart			Other
Increase (decrease) due to:
Acquisitions:
1290 Avenue of the Americas	$	60,438		$	60,438		$	—		$	—		$	—		$	—
555 California Street		55,764			—			—			—			—			55,764
Manhattan Mall		51,492			34,716			—			16,776			—			—
H Street (effect of consolidating from May 1, 2007, vs. equity method prior)		40,965			—			40,965			—			—			—
350 Park Avenue		30,382			30,382			—			—			—			—
Former Toys “R” Us stores		15,872			—			—			15,872			—			—
Bruckner Plaza		7,487			—			—			7,487			—			—
1540 Broadway		3,619			407			—			3,212			—			—
Other		27,482			—			2,554			14,184			10,744			—
Development/Redevelopment:
2101 L Street – out of service		(3,336	)		—			(3,336	)		—			—			—
Bergen Town Ctr – portion out of service		(190	)		—			—			(190	)		—			—
Springfield Mall – portion out of service		(301	)		—			—			(301	)		—			—
Other		(4,208	)		—			—			(619	)		—			(3,589	)
Amortization of acquired below market leases, net		59,802			46,885			437			10,447			150			1,883
Leasing activity (see page 10)		72,439			44,915			16,420			8,170			(1,159	)		4,093
Hotel Pennsylvania		14,038			—			—			—			—			14,038
Trade shows		537			—			—			—			537			—
Total increase in property rentals		432,282			217,743			57,040			75,038			10,272			72,189
Tenant expense reimbursements:
Increase due to:
Acquisitions/development		44,406			22,745			3,314			10,626			—			7,721
Operations		18,366			707			7,206			8,393			1,760			300
Total increase in tenant expense reimbursements		62,772			23,452			10,520			19,019			1,760			8,021
Fee and other income:
(Decrease) increase in:
Lease cancellation fee income		(21,909	)		(21,688	)(1)		(2,345	)		2,452			(328	)		—
Management and leasing fees		5,457			3,817			4,896			307			(32	)		(3,531	) (2)
BMS Cleaning fees		12,459			16,520			—			—			—			(4,061	) (2)
Other		10,355			3,932			5,052			669			2,034			(1,332	) (2)
Total increase (decrease) in fee and other income		6,362			2,581			7,603			3,428			1,674			(8,924	)
Total increase in revenues	$	501,416		$	243,776		$	75,163		$	97,485		$	13,706		$	71,286

____________________________

(1) Primarily due to lease termination fee income received from MONY Life Insurance Company in 2006 in connection with the termination of their 289,000 square foot lease at 1740 Broadway.

(2) Results from the elimination of inter-company fees from operating segments upon consolidation. See note 3 on page 31.

29

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

Expenses

Our expenses, which consist of operating, depreciation and amortization and general and administrative expenses, were $1,592,207,000 for the year ended December 31, 2007, compared to $1,236,685,000 in the prior year, an increase of $355,522,000. Below are the details of the increase (decrease) by segment:

(Amounts in thousands)
Operating:	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart			Other
Increase (decrease) due to:
Acquisitions:
1290 Avenue of the Americas	$	32,059		$	32,059		$	—		$	—		$	—		$	—
555 California Street		24,946			—			—			—			—			24,946
Manhattan Mall		23,279			13,108			—			10,171			—			—
H Street (effect of consolidating from May 1, 2007, vs. equity method prior)		18,119			—			18,119			—						—
350 Park Avenue		15,618			15,618			—			—			—			—
Former Toys “R” Us stores		12,241			—			—			12,241			—			—
Bruckner Plaza		3,066			—			—			3,066			—			—
1540 Broadway		2,228			667			—			1,561			—			—
Other		21,980			—			1,635			7,429			12,916			—
Development/Redevelopment:
2101 L Street – out of service		(2,177	)		—			(2,177	)		—			—			—
Bergen Town Ctr – portion out of service		(917	)		—			—			(917	)		—			—
Springfield Mall – portion out of service		(782	)		—			—			(782	)		—			—
Other		(1,332	)		—			—			234			—			(1,566	)
Operations		60,163			32,322	(1)		14,078			9,034			12,990	(2)		(8,261	)(3)
Hotel Pennsylvania		3,857			—			—			—			—			3,857
Trade shows activity		1,782			—			—			—			1,782			—
Total increase in operating expenses		214,130			93,774			31,655			42,037			27,688			18,976
Depreciation and amortization:
Increase due to:
Acquisitions/Development		103,366			50,483			8,032			22,629			—			22,222
Operations (due to additions to buildings and improvements)		18,777			1,311			2,872			4,851			4,973			4,770
Total increase in depreciation and amortization		122,143			51,794			10,904			27,480			4,973			26,992
General and administrative:
Increase (decrease) due to:
Acquisitions/Development and Other		6,309			1,208			(7,757	) (4)		4,512			—			8,346	(5)
Operations		2,565			(898	)		1,312			1,281			1,596			(726	)(6)
Total increase (decrease) in general and administrative		8,874			310			(6,445	)		5,793			1,596			7,620
Cost of acquisitions not consummated		10,375			—			—			—			—			10,375
Total increase in expenses	$	355,522		$	145,878		$	36,114		$	75,310		$	34,257		$	63,963

_________________________

See notes on the following page.

30

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

Notes to preceding tabular information:

($ in thousands)

(1) Primarily from a (i) $13,885 increase in operating expenses of Building Maintenance Services, Inc. (“BMS”), a wholly owned subsidiary, which provides cleaning, security and engineering services to New York Office properties (the corresponding increase in BMS revenues is included in “other income”), (ii) $8,992 increase in property level costs and (iii) $7,553 write-off of straight line rent receivable in connection with lease terminations.

(2) Primarily from (i) a $6,940 increase in property level operating costs, (ii) $2,000 due to a reassessment of 2006 real estate taxes in 2007 and (iii) a $4,050 reversal of a reserve for bad debts in 2006.

(3) Represents the elimination of inter-company fees from operating segments upon consolidation. See note 2 on page 29.

(4) H Street litigation costs in 2006.

(5) Primarily from (i) $4,835 of administrative and organization expenses of the India Property Fund, in which we were a 50.6% partner as of December 31, 2007 (because we consolidated the India Property Fund during 2007, the minority share of these expenses is included in net income attributable to noncontrolling interests, including unit distributions on our consolidated statement of income), and (ii) $1,880 of general and administrative expenses of 555 California Street from the date of acquisition.

(6) Primarily from a (i) $5,465 decrease in franchise taxes and donations, (ii) $4,420 decrease in Medicare taxes resulting from stock option exercises and the termination of a rabbi trust, partially offset by, (iii) an $8,245 increase in stock-based compensation.

31

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

Income Applicable to Alexander’s

Income applicable to Alexander’s (loan interest income, management, leasing, development and commitment fees, and equity in income) was $50,589,000 for the year ended December 31, 2007, compared to a loss of $14,530,000 for the prior year, an increase of $65,119,000. The increase was primarily due to (i) our $14,280,000 share of income in 2007 for the reversal of accrued stock appreciation rights compensation expense as compared to $49,043,000 for our share of expense in the prior year, (ii) an increase of $3,504,000 in our equity in earnings of Alexander’s before stock appreciation rights and net gains on sales of condominiums, (iii) an increase of $3,758,000 in development fees in 2007, partially offset by (iv) our $4,580,000 share of Alexander’s net gain on sale of 731 Lexington Avenue condominiums in the prior year and (v) a $1,305,000 decrease in leasing fee income.

Loss Applicable to Toys

Our 32.7% share of Toys’ financial results (comprised of our share of Toys’ net loss, interest income on loans receivable, and management fees) for the years ended December 31, 2007 and December 31, 2006 are for Toys fiscal periods from October 29, 2006 to November 3, 2007 and October 30, 2005 to October 28, 2006, respectively. In the year ended December 31, 2007, our loss applicable to Toys was $14,337,000, or $25,235,000 before our share of Toys’ income tax benefit, as compared to $47,520,000 or $70,147,000 before our share of Toys’ income tax benefit in the prior year. The decrease in our loss applicable to Toys before income tax benefit of $44,912,000 results primarily from (i) an increase in Toys’ net sales due to improvements in comparable store sales across all divisions and benefits in foreign currency translation, (ii) a net gain related to a lease termination, (iii) decreased interest expense primarily due to reduced borrowings and reduced amortization of deferred financing costs, partially offset by, (iv) an increase in selling, general and administrative expenses, which as a percentage of net sales were 27.7% and 26.4% for the twelve month periods ended November 3, 2007 and October 28, 2006, respectively, as a result of higher payroll, store occupancy, corporate and advertising expenses.

32

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

Income from Partially Owned Entities

Summarized below are the components of income from partially owned entities for the years ended December 31, 2007 and 2006.

Equity in Net Income (Loss): (Amounts in thousands)	For The Year Ended December 31,
	2007			2006
H Street non-consolidated subsidiaries:
50% share of equity in income (1)	$	5,923		$	11,074
Beverly Connection:
50% share of equity in net loss		(7,031	)		(8,567	)
Interest and fee income		12,141			10,837
		5,110			2,270
GMH Communities L.P: (2)
13.8% share in 2007 and 13.5% in 2006 of equity in net income (loss)		6,463			(1,013	)
Lexington MLP: (3)
7.5% in 2007 and 15.8% in 2006 share of equity in net income		2,211			34,459
Other (4)		12,184			13,565
	$	31,891		$	60,355

__________________________

(1) On April 30, 2007, we acquired the corporations that own the remaining 50% interest in these assets and began to consolidate the accounts of these entities into our consolidated financial statements and no longer account for them under the equity method. Prior to the quarter ended June 30, 2006 these corporations were contesting our acquisition of H Street and impeded our access to their financial information. Accordingly, we were unable to record our pro rata share of their earnings. 2006 includes $3,890 for our 50% share of their earnings for the period from July 20, 2005 (date of acquisition) to December 31, 2005.

(2) We recorded our pro rata share of GMH’s net income or loss on a one-quarter lag basis because we filed our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT filed its financial statements. On July 31, 2006 GCT filed its annual report on Form 10-K for the year ended December 31, 2005, which restated the quarterly financial results of each of the first three quarters of 2005. On September 15, 2006 GCT filed its quarterly reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. Accordingly, “equity in net income or loss from partially owned entities” for the year ended December 31, 2006 includes a net loss of $1,013, which consists of (i) a $94 net loss representing our share of GMH’s 2005 fourth quarter results, including adjustments to restate its first three quarters of 2005 and (ii) a net loss of $919 for our share of GMH’s earnings through September 30, 2006.

(3) On January 1, 2007, we began recording our pro rata share of Lexington MLP’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements. Prior to January 1, 2007, we recorded our pro rata share of Newkirk MLP’s (Lexington MLP’s predecessor) quarterly earnings current in our same quarter. Accordingly, our “equity in net income or loss from partially owned entities” for the year ended December 31, 2007 includes our share of Lexington MLP’s net income or loss for the nine month period from January 1, 2007 through September 30, 2007.

The decrease in our share of earnings from the prior year is primarily due to (i) 2007 including our share of Lexington MLP’s first, second and third quarter results (lag basis) compared to 2006 including our share of Newkirk MLP’s full year results, (ii) higher depreciation expense and amortization of above market lease intangibles in the current year as a result of Lexington’s purchase price accounting adjustments in connection with the merger of Newkirk MLP on December 31, 2006, (iii) $10,842 for our share of net gains on sale of real estate in 2006 and (iv) a $10,362 net gain recognized in 2006 as a result of the acquisition of Newkirk by Lexington.

(4) Includes our equity in net earnings of partially owned entities, including partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Dune Capital LP, Verde Group LLC, and others.

33

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

Interest and Other Investment Income

Interest and other investment income (interest income on mezzanine loans receivable, other interest income and dividend income) was $226,425,000 for the year ended December 31, 2007, compared to $255,391,000 in the year ended December 31, 2006, a decrease of $28,966,000. This decrease resulted primarily from the following:

(Amounts in thousands)
Decrease (increase) due to:
Mezzanine loan loss accrual in 2007	$	57,000
Higher average cash balances and marketable securities ($1,210,000 in 2007 compared to $526,000 in 2006)		(51,939	)
McDonalds derivative – net gain of $108,866 in 2007 compared to $138,815 in 2006		29,949
Sears Holding derivative – net gain of $18,611 in 2006		18,611
GMH warrants derivative – net loss of $16,370 in 2006		(16,370	)
Higher average mezzanine loans receivable ($612,000 in 2007 compared to $488,500 in 2006)		(8,747	)
Other derivatives – net gain of $4,682 in 2007 compared to $12,153 in 2006		7,471
Other, net		(7,009	)
Total decrease in interest and other investment income	$	28,966

Interest and Debt Expense

Interest and debt expense was $599,804,000 for the year ended December 31, 2007, compared to $400,540,000 in the year ended December 31, 2006, an increase of $199,264,000. This increase was primarily due to (i) $80,255,000 from approximately $1.713 billion of mortgage financings and refinancings on our existing property portfolio during 2007 and 2006, (ii) $67,780,000 from a $1.754 billion of mortgage debt resulting from property acquisitions, (iii) $94,881,000 from senior unsecured financings, including $1.0 billion issued in November 2006 and $1.4 billion issued in March 2007, partially offset by, (iv) an increase of $28,240,000 in the amount of capitalized interest relating to a larger amount of assets under development in 2007, (v) $19,344,000 less interest in 2007 from the redemption of $500,000,000 of senior unsecured notes in May 2007, and (vi) $3,582,000 of expense in 2006 from early extinguishments of debt.

Net Gains on Disposition of Wholly Owned and Partially Owned Assets other than Depreciable Real Estate

Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate was $39,493,000 and $76,073,000 for the years ended December 31, 2007 and 2006, respectively, and consists primarily of net gains from sales of marketable equity securities, including $23,090,000 from the sale of McDonalds common shares in 2007 and $55,438,000 from the sale of Sears Canada common shares in 2006.

34

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

Income Tax Expense

Income tax expense was $9,179,000 for the year ended December 31, 2007, compared to $491,000 for the prior year, an increase of $8,688,000. This increase results primarily from (i) the consolidation of two H Street corporations beginning on April 30, 2007, the date we acquired the remaining 50% of these corporations we did not previously own (we previously accounted for our 50% investment on the equity method) and (ii) $4,622,000 of Federal withholding tax on dividends paid to foreign corporations in connection with 1290 Avenue of the Americas and 555 California Street, which we acquired in May 2007.

Discontinued Operations

The combined results of discontinued operations for the years ended December 31, 2007 and 2006 include the operating results of Americold; Tysons Dulles Plaza; 19.6 acres of land we acquired as part of our acquisition of H Street, of which 11 acres were sold in September 2007; Vineland, New Jersey, which was sold on July 16, 2007; Crystal Mall Two, which was sold on August 9, 2007; Arlington Plaza, which was sold on October 17, 2007; 33 North Dearborn Street in Chicago, Illinois, which was sold on March 14, 2006; 424 Sixth Avenue in New York City, which was sold on March 13, 2006 and 1919 South Eads Street in Arlington, Virginia, which was sold on June 22, 2006.

(Amounts in thousands)	December 31,
	2007			2006
Total revenues	$	865,584		$	813,665
Total expenses		866,119			815,231
Net loss		(535	)		(1,566	)
Net gain on sale of Arlington Plaza		33,890			—
Net gain on sale of Crystal Mall Two		19,893			—
Net gain on sale of 1919 South Eads Street		—			17,609
Net gains on sale of other real estate		11,198			16,160
Income from discontinued operations	$	64,446		$	32,203

Net Income Attributable to Noncontrolling Interests, Including Unit Distributions

Net income attributable to noncontrolling interests for the years ended December 31, 2007 and 2006 is comprised of (i) allocations of income to redeemable noncontrolling interests of $50,514,000 and $58,089,000, respectively, (ii) net loss attributable to noncontrolling interests in consolidated subsidiaries of $3,494,000 and $1,363,000, respectively and (iii) preferred unit distributions of the Operating Partnership of $19,274,000 and $21,848,000, respectively. The decrease of $7,576,000 in allocations of income to redeemable noncontrolling interests resulted primarily from a decrease in the noncontrolling interests’ ownership due to the conversion of Class A Operating Partnership units into our common shares during 2007 and 2006. The decrease of $2,574,000 in preferred unit distributions of the Operating Partnership was due to the redemption of $45,000,000 Series D-9 preferred units and the write-off of $1,125,000 of Series D-9 issuance costs in October 2006.

35

Results of Operations - Year Ended December 31, 2007 Compared to December 31, 2006 – continued

EBITDA

Below are the details of the changes in EBITDA by segment.

(Amounts in thousands)	Total		New York Office			Washington, DC Office			Retail			Merchandise Mart			Toys		Other
Year ended December 31, 2006	$	1,783,914	$	376,717		$	376,368		$	278,860		$	135,252		$	263,287	$	353,430
2007 Operations: Same store operations(1)				35,279			14,092			8,583			(3,956	)
Acquisitions, dispositions and non-same store income and expenses				102,202			59,242			40,295			(17,214	)
Year ended December 31, 2007	$	2,075,881	$	514,198		$	449,702		$	327,738		$	114,082		$	304,966	$	365,195
% increase (decrease) in same store operations				9.6	%		4.2	%		3.4	%		(2.5	)%

__________________________

(1) Represents the increase (decrease) in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses. We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers. Same store operations may not be comparable to similarly titled measures employed by other companies.

36

Supplemental Information

Net Income and EBITDA by Segment for the Three Months Ended December 31, 2008 and December 31, 2007

(Amounts in thousands)	For the Three Months Ended December 31, 2008
	Total			New York Office			Washington, DC Office(2)			Retail			Merchandise Mart(2)			Toys			Other (3)
Property rentals	$	520,150		$	183,191		$	131,510		$	89,484		$	65,794		$	—		$	50,171
Straight-line rents:
Contractual rent increases		12,435			7,163			(97	)		3,755			1,423			—			191
Amortization of free rent		15,441			6,637			5,019			3,837			41			—			(93	)
Amortization of acquired below- market leases, net		22,521			14,807			1,118			6,749			77			—			(230	)
Total rentals		570,547			211,798			137,550			103,825			67,335			—			50,039
Tenant expense reimbursements		88,467			32,558			16,874			30,245			3,852			—			4,938
Fee and other income:
Tenant cleaning fees		14,985			18,418			—			—			—			—			(3,433	)
Management and leasing fees		3,071			1,376			1,957			699			43			—			(1,004	)
Lease termination fees		4,165			1,038			1,598			1,254			275			—			—
Other		15,024			3,823			7,558			587			1,310			—			1,746
Total revenues		696,259			269,011			165,537			136,610			72,815			—			52,286
Operating expenses		276,207			105,167			58,919			56,749			35,224			—			20,148
Depreciation and amortization		139,164			47,376			32,356			28,757			13,509			—			17,166
General and administrative		44,862			5,311			7,724			6,761			7,333			—			17,733
Impairment losses on development projects and costs of acquisitions not consummated		73,438			—			—			595			—			—			72,843
Total expenses		533,671			157,854			98,999			92,862			56,066			—			127,890
Operating income (loss)		162,588			111,157			66,538			43,748			16,749			—			(75,604	)
Income applicable to Alexander’s		20,267			195			—			121			—			—			19,951
Loss applicable to Toys “R” Us		(39,130	)		—			—			—			—			(39,130	)		—
(Loss) income from partially owned entities		(166,711	)		1,476			1,625			(168	)		128			—			(169,772	)
Interest and other investment (loss) income, net		(50,217	)		323			379			72			135			—			(51,126	)
Interest and debt expense		(151,042	)		(35,114	)		(32,423	)		(22,806	)		(12,958	)		—			(47,741	)
Net loss on disposition of wholly owned and partially owned assets other than depreciable real estate		(789	)		—			—			—			—			—			(789	)
(Loss) income before income taxes		(225,034	)		78,037			36,119			20,967			4,054			(39,130	)		(325,081	)
Income tax (expense) benefit		(2,633	)		—			57			(75	)		(1	)		—			(2,614	)
Net (loss) income		(227,667	)		78,037			36,176			20,892			4,053			(39,130	)		(327,695	)
Net loss (income) attributable to noncontrolling interests, including unit distributions		14,987			(1,396	)		—			53			(125	)		—			16,455
Net (loss) income attributable to Vornado		(212,680	)		76,641			36,176			20,945			3,928			(39,130	)		(311,240	)
Interest and debt expense (1)		200,573			33,596			33,352			26,108			13,249			38,842			55,426
Depreciation and amortization (1)		179,274			44,961			33,655			30,782			13,646			33,343			22,887
Income tax (benefit) expense (1)		(20,571	)		—			(54	)		75			55			(23,126	)		2,479
EBITDA	$	146,596		$	155,198		$	103,129		$	77,910		$	30,878		$	9,929		$	(230,448	)

EBITDA above includes certain items that affect comparability, which are described in the “Overview.”

___________________

See notes on page 39.

37

Supplemental Information – continued

Net Income and EBITDA by Segment for the Three Months Ended December 31, 2008 and December 31, 2007 – continued

(Amounts in thousands)	For the Three Months Ended December 31, 2007
	Total			New York Office			Washington, DC Office(2)			Retail			Merchandise Mart(2)			Toys			Other (3)
Property rentals	$	500,836		$	177,061		$	119,112		$	87,936		$	64,768		$	—		$	51,959
Straight-line rents:
Contractual rent increases		13,860			2,278			5,782			3,463			1,876			—			461
Amortization of free rent		5,358			1,188			2,176			583			792			—			619
Amortization of acquired below- market leases, net		24,450			14,966			1,405			6,841			63			—			1,175
Total rentals		544,504			195,493			128,475			98,823			67,499			—			54,214
Tenant expense reimbursements		84,561			31,889			12,479			32,834			3,231			—			4,128
Fee and other income:
Tenant cleaning fees		12,840			18,017			—			—			—			—			(5,177	)
Management and leasing fees		2,819			1,605			1,828			536			(4	)		—			(1,146	)
Lease termination fees		1,158			276			243			365			274			—			—
Other		11,284			4,158			4,731			1,087			1,794			—			(486	)
Total revenues		657,166			251,438			147,756			133,645			72,794			—			51,533
Operating expenses		253,621			107,202			49,727			46,696			34,164			—			15,832
Depreciation and amortization		123,294			42,373			33,695			19,260			13,148			—			14,818
General and administrative		50,950			2,474			6,921			7,406			6,362			—			27,787
Costs of acquisitions not consummated		1,568			—			—			—			—			—			1,568
Total expenses		429,433			152,049			90,343			73,362			53,674			—			60,005
Operating income (loss)		227,733			99,389			57,413			60,283			19,120			—			(8,472	)
Income applicable to Alexander’s		15,475			190			—			252			—			—			15,033
Loss applicable to Toys “R” Us		(32,680	)		—			—			—			—			(32,680	)		—
Income (loss) from partially owned entities		1,440			1,111			550			1,681			316			—			(2,218	)
Interest and other investment (loss) income, net		(3,349	)		1,078			1,373			147			98			—			(6,045	)
Interest and debt expense		(157,790	)		(36,037	)		(29,832	)		(19,028	)		(13,168	)		—			(59,725	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		21,794			—			—			—			—			—			21,794
Income (loss) before income taxes		72,623			65,731			29,504			43,335			6,366			(32,680	)		(39,633	)
Income tax (expense) benefit		(3,776	)		—			1,083			—			(304	)		—			(4,555	)
Income (loss) from continuing operations		68,847			65,731			30,587			43,335			6,062			(32,680	)		(44,188	)
Income (loss) from discontinued operations		36,544			—			34,641			3,397			—			—			(1,494	)
Net income (loss)		105,391			65,731			65,228			46,732			6,062			(32,680	)		(45,682	)
Net income attributable to noncontrolling interests, including unit distributions		(8,391	)		(1,401	)		—			(16	)		—			—			(6,974	)
Net income (loss)		97,000			64,330			65,228			46,716			6,062			(32,680	)		(52,656	)
Interest and debt expense (1)		222,599			34,596			31,011			22,315			13,382			45,908			75,387
Depreciation and amortization (1)		176,413			40,455			36,518			20,187			13,324			32,606			33,323
Income tax (benefit) expense (1)		(30,185	)		(2,052	)		(1,078	)		—			304			(31,148	)		3,789
EBITDA	$	465,827		$	137,329		$	131,679		$	89,218		$	33,072		$	14,686		$	59,843

EBITDA above includes certain items that affect comparability, which are described in the “Overview.”

__________________________

See notes on the following page.

38

Supplemental Information – continued

Net Income and EBITDA by Segment for the Three Months Ended December 31, 2008 and December 31, 2007 – continued

Notes to preceding tabular information:

(1) Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of net income to EBITDA include our share of these items from partially owned entities.

(2) As of January 1, 2008, we transferred the operations and financial results related to 409 3^rd Street, NW (Washington Office Center) from Merchandise Mart segment to the Washington, DC Office segment for both the current and prior periods presented.

(3) Other EBITDA is comprised of:

	For the Three Months Ended December 31,
(Amounts in thousands)	2008			2007
Alexander’s	$	27,503		$	21,864
555 California Street (70% interest acquired in May 2007)		12,762			15,560
Hotel Pennsylvania		12,497			13,187
Lexington		5,879			9,533
GMH (sold in June 2008)		—			4,732
Industrial warehouses		1,239			1,286
Other investments		110			(1,849	)
		59,990			64,313
Non-cash assets write-downs:
Investment in Lexington		(100,707	)		—
Marketable equity securities		(55,471	)		—
Real estate development projects:
Partially owned entities		(61,837	)		—
Wholly owned entities		(72,843	)		(1,568	)
MPH mezzanine loan loss accrual		—			(57,000	)
Derivative positions in marketable equity securities		(7,928	)		36,533
Corporate general and administrative expenses		(15,662	)		(22,917	)
Investment income and other, net		7,555			29,606
Net loss (income) attributable to noncontrolling interests, including unit distributions		16,455			(6,974	)
Discontinued operations of Americold (sold in March 2008)		—			17,850
	$	(230,448	)	$	59,843

39

Supplemental Information – continued

Below are the details of the changes by segment in EBITDA for the three months ended December 31, 2008 compared to the three months ended December 31, 2007.

(Amounts in thousands)	Total		New York Office			Washington, DC Office			Retail			Merchandise Mart			Toys		Other
For the three months ended December 31, 2007	$	465,827	$	137,329		$	131,679		$	89,218		$	33,072		$	14,686	$	59,843
2008 Operations: Same store operations(1)				8,998			5,926			3,227			(1,934	)
Acquisitions, dispositions and non-same store income and expenses				8,871			(34,476	)		(14,535	)		(260	)
For the three months ended December 31, 2008	$	146,596	$	155,198		$	103,129		$	77,910		$	30,878		$	9,929	$	(230,448	)
% increase (decrease) in same store operations				6.1	%		5.8	%		4.0	%		(5.1	)%

____________________________

(1)  Represents the increase (decrease) in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses. We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers. Same store operations may not be comparable to similarly titled measures employed by other companies.

Our revenues and expenses are subject to seasonality during the year which impacts quarter-by-quarter net earnings, cash flows and funds from operations. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income, which we recorded on a one-quarter lag basis in our first quarter, accounts for more than 80% of its fiscal year net income. The Office and Merchandise Mart segments have historically experienced higher utility costs in the first and third quarters of the year. The Merchandise Mart segment also has experienced higher earnings in the second and fourth quarters of the year due to major trade shows occurring in those quarters. The Retail segment revenue in the fourth quarter is typically higher due to the recognition of percentage rental income.

Below are the details of the changes in EBITDA by segment for the three months ended December 31, 2008 compared to the three months ended September 30, 2008.

(Amounts in thousands)	Total		New York Office			Washington, DC Office			Retail			Merchandise Mart			Toys		Other
For the three months ended September 30, 2008	$	413,964	$	142,905		$	97,340		$	85,133		$	24,388		$	49,639	$	14,559
2008 Operations: Same store operations				8,726			6,395			498			5,021
Acquisitions, dispositions and non-same store income and expenses				3,567			(606	)		(7,721	)		1,469
For the three months ended December 31, 2008	$	146,596	$	155,198		$	103,129		$	77,910		$	30,878		$	9,929	$	(230,448	)
% increase in same store operations				5.8	%		6.2	%		0.6	%		15.8	%

Below is a reconciliation of net income to EBITDA for the three months ended September 30, 2008.

(Amounts in thousands)	Total			New York Office		Washington, DC Office		Retail		Merchandise Mart			Toys			Other
Net income (loss) for the three months ended September 30, 2008	$	37,007		$	63,813	$	27,173	$	34,907	$	(2,671	)	$	(8,141	)	$	(78,074	)
Interest and debt expense		202,446			32,979		32,244		26,733		13,360			33,569			63,561
Depreciation and amortization		179,574			46,113		37,222		23,488		12,885			35,155			24,711
Income tax (benefit) expense		(5,063	)		—		701		5		814			(10,944	)		4,361
EBITDA for the three months ended September 30, 2008	$	413,964		$	142,905	$	97,340	$	85,133	$	24,388		$	49,639		$	14,559

40

Related Party Transactions

Loans and Compensation Agreements

On March 26, 2007, Joseph Macnow, Executive Vice President – Finance and Administration and Chief Financial Officer, repaid to the Company his $2,000,000 outstanding loan which was scheduled to mature June 2007.

Effective as of April 19, 2007, we entered into a new employment agreement with Mitchell Schear, the President of our Washington, DC Office segment. This agreement, which replaced his prior agreement, was approved by the Compensation Committee of our Board of Trustees and provides for a term of five years and is automatically renewable for one-year terms thereafter. The agreement also provides for a minimum salary of $1,000,000 per year and bonuses and other customary benefits. Pursuant to the terms of the agreement, on April 19, 2007, the Compensation Committee granted options to Mr. Schear to acquire 200,000 of our common shares at an exercise price of $119.94 per share. These options vest ratably over three years beginning in 2010 and accelerate on a change of control or if we terminate his employment without cause or by him for breach by us. The agreement also provides that if we terminate Mr. Schear’s employment without cause or by him for breach by us, he will receive a lump-sum payment equal to one year’s salary and bonus, up to a maximum of $2,000,000.

Transactions with Affiliates and Officers and Trustees

Alexander’s

We own 32.5% of Alexander’s. Steven Roth, the Chairman of our Board and Chief Executive Officer, and Michael D. Fascitelli, our President, are officers and directors of Alexander’s. We provide various services to Alexander’s in accordance with management, development and leasing agreements. These agreements are described in Note 6 - Investments in Partially Owned Entities to our consolidated financial statements in this Annual Report on Form 10-K.

On September 9, 2008, Alexander’s Board of Directors declared a special dividend of $7.00 per share, payable on October 30, 2008, to shareholders of record on October 14, 2008. The dividend was attributable to the liquidation of the wholly owned 731 Lexington Avenue taxable REIT subsidiary into Alexander’s. Accordingly, on October 30, we received $11,578,000, which was accounted for as a reduction of our investment in Alexander’s.

On September 15, 2008 and October 14, 2008, Steven Roth, the Chairman of our Board of Directors and Chief Executive Officer, who holds the same positions in Alexander’s, exercised an aggregate of 200,000 of his SARs, which were scheduled to expire on March 4, 2009, and received gross proceeds of $62,809,000.

On March 13, 2007, Michael Fascitelli, our President, who also holds the same position in Alexander’s, exercised 350,000 of his SARs, which were scheduled to expire on March 14, 2007, and he received gross proceeds of $50,465,000.

Interstate Properties (“Interstate”)

Interstate is a general partnership in which Steven Roth, the Chairman of our Board and Chief Executive Officer, is the managing general partner. David Mandelbaum and Russell B. Wight, Jr., Trustees of Vornado and Directors of Alexander’s, are Interstate’s two other partners. As of December 31, 2008, Interstate and its partners beneficially owned approximately 8.8% of the common shares of beneficial interest of Vornado and 27.0% of Alexander’s common stock.

We manage and lease the real estate assets of Interstate pursuant to a management agreement for which we receive an annual fee equal to 4% of annual base rent and percentage rent. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on sixty days’ notice at the end of the term. We believe based upon comparable fees charged by other real estate companies that the management agreement terms are fair to us. We earned $803,000, $800,000 and $798,000 of management fees under the agreement for the years ended December 31, 2008, 2007 and 2006.

41

Liquidity and Capital Resources

We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures. Capital requirements for significant acquisitions and development expenditures may require funding from borrowings and/or equity offerings.

Acquisitions and Investments

There were no material real estate acquisitions or investments in partially owned entities and mezzanine loans during 2008. During 2007, we completed approximately $4,045,400,000 of real estate acquisitions and $217,081,000 mezzanine loans. These acquisitions and investments were consummated through our subsidiaries and were financed with available cash, mortgage indebtedness, and/or the issuance of operating partnership equity. The related assets, liabilities and results of operations are included in our consolidated financial statements from their respective dates of acquisition. Excluding our acquisition of a 70% interest in 1290 Avenue of the Americas and 555 California Street in May 2007, none of the acquisitions, individually or in the aggregate, were material to our historical consolidated financial statements. Details of our 2007 acquisitions and investments are summarized below.

100 West 33^rd Street, New York City (the “Manhattan Mall”)

On January 10, 2007, we acquired the Manhattan Mall for approximately $689,000,000 in cash. This mixed-use property is located on the entire Sixth Avenue block-front between 32^nd and 33^rd Streets in Manhattan and contains approximately 1,000,000 square feet, including 845,000 square feet of office space and 164,000 square feet of retail space. Included as part of the acquisition were 250,000 square feet of additional air rights. The property is adjacent to our Hotel Pennsylvania.

Bruckner Plaza, Bronx, New York

On January 11, 2007, we acquired the Bruckner Plaza shopping center, containing 386,000 square feet, for approximately $165,000,000 in cash. Also included as part of the acquisition was an adjacent parcel which is ground leased to a third party. The property is located on Bruckner Boulevard in the Bronx, New York.

Filene’s, Boston, Massachusetts

On January 26, 2007, a joint venture in which we have a 50% interest, acquired the Filene’s property located in the Downtown Crossing district of Boston, Massachusetts for approximately $100,000,000 in cash, of which our share was $50,000,000.

H Street Building Corporation (“H Street”)

In July 2005, we acquired H Street, which owns a 50% interest in real estate assets located in Pentagon City, Virginia and Washington, DC. On April 30, 2007, we acquired the corporations that own the remaining 50% interest in these assets for approximately $383,000,000, consisting of $322,000,000 in cash and $61,000,000 of existing mortgages. These assets include twin office buildings located in Washington, DC, containing 577,000 square feet, and assets located in Pentagon City, Virginia, comprised of 34 acres of land leased to three residential and retail operators, a 1,680 unit high-rise apartment complex and 10 acres of vacant land.

Further, we agreed to sell approximately 19.6 of the 34 acres of land to one of the existing ground lessees in two closings over a two-year period for approximately $220,000,000. On May 11, 2007, we closed on the sale of 11 of the 19.6 acres for $104,000,000 and received $5,000,000 in cash and a $99,000,000 short-term note. On September 28, 2007, the buyer pre-paid the note in cash and we recognized a net gain of $4,803,000.

Our total purchase price for 100% of the assets we will own, after the anticipated proceeds from the land sales, is $409,000,000, consisting of $286,000,000 in cash and $123,000,000 of existing mortgages.

42

Liquidity and Capital Resources – continued

1290 Avenue of the Americas and 555 California Street

On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas, a 2,000,000 square foot Manhattan office building located on the block-front between 51^st and 52^nd Street on Avenue of the Americas, and the three- building 555 California Street complex (“555 California Street”) containing 1,800,000 square feet, known as the Bank of America Center, located at California and Montgomery Streets in San Francisco’s financial district. The purchase price for our 70% interest in the real estate was approximately $1.8 billion, consisting of $1.0 billion of cash and $797,000,000 of existing debt. Our share of the debt was comprised of $308,000,000 secured by 1290 Avenue of the Americas and $489,000,000 secured by 555 California Street. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump.

Shopping Center Portfolio Acquisition

On June 26, 2007, we entered into an agreement to acquire a portfolio of 15 shopping centers aggregating approximately 1.9 million square feet for an aggregate purchase price of $351,000,000. The properties are located primarily in Northern New Jersey and Long Island, New York. We have completed the acquisition of nine of these properties for an aggregate purchase price of $250,478,000, consisting of $109,279,000 in cash, $49,599,000 in Vornado Realty L.P. preferred units, $12,460,000 of Vornado Realty L.P. common units and $79,140,000 of existing mortgage debt. We determined not to complete the acquisition of the remaining six properties and expensed $2,700,000 for costs of acquisitions not consummated on our consolidated statement of income for the year ended December 31, 2007.

BNA Complex

On August 9, 2007, we acquired a three building complex from The Bureau of National Affairs, Inc. (“BNA”) for $111,000,000 in cash. The complex contains approximately 300,000 square feet and is located in Washington’s West End between Georgetown and the Central Business District. We plan to convert two of these buildings to rental apartments. Simultaneously with the acquisition, we sold Crystal Mall Two, a 277,000 square foot office building located at 1801 South Bell Street in Crystal City, to BNA for $103,600,000 in cash, which resulted in a net gain of $19,893,000.

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Liquidity and Capital Resources – continued

Certain Future Cash Requirements

Development and Redevelopment Expenditures

We are currently engaged in various development and redevelopment projects for which we have budgeted approximately $1.2 billion, of which $804.9 million has been expended as of December 31, 2008 and substantially all of the remainder is anticipated to be expended in 2009. Details of our development and redevelopment activities are summarized in Item 1. Business, in the Annual Report on Form 10-K.

Other Capital Expenditures

The following table summarizes other anticipated 2009 capital expenditures.

	Total		New York Office		Washington, DC Office		Retail		Merchandise Mart			Other (1)
Expenditures to maintain assets	$	78.0	$	31.0	$	31.0	$	2.0	$	5.0		$	9.0
Tenant improvements		72.0		24.0		24.0		7.0		16.0			1.0
Leasing commissions		39.0		12.0		9.0		11.0		7.0			—
Total Tenant Improvements and Leasing Commissions		111.0		36.0		33.0		18.0		23.0			1.0
Per square foot			$	49.00	$	15.00	$	29.00	$	15.00	(2)	$	42.00
Per square foot per annum			$	5.00	$	3.00	$	4.00	$	2.00	(2)	$	6.00
Total Capital Expenditures and Leasing Commissions	$	189.0	$	67.0	$	64.0	$	20.0	$	28.0		$	10.0
Square feet budgeted to be leased (in thousands)				740		2,200		630		1,500
Weighted average lease term				9.6		4.3		7.7		7.7

____________________________

(1) Hotel Pennsylvania, Warehouses, 555 California Street and Wasserman.

(2) Tenant improvements and leasing commissions per square foot budgeted for 2009 leasing activity are $38.74 ($2.58 per annum) and $6.72 ($1.34 per annum) for Merchandise Mart office and showroom space, respectively.

The table above excludes anticipated capital expenditures of non-consolidated entities, including Alexander’s and Toys, as these entities will fund their own capital expenditures without additional equity contributions from us.

Dividends and Distributions

On January 14, 2009, we declared a regular quarterly dividend of $0.95 per common share, payable on March 12, 2009 in a combination of cash, not to exceed 40% in the aggregate, and Vornado common shares. This dividend policy, continued for all of 2009, will require approximately $260,000,000 of cash for common share dividends during 2009, assuming shareholder elections to receive cash meet or exceed the aggregate cash limitations. In addition, we expect to pay cash dividends on outstanding preferred shares during 2009 aggregating approximately $57,000,000.

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Liquidity and Capital Resources – continued

Financing Activities and Contractual Obligations

Below is a schedule of our contractual obligations and commitments at December 31, 2008.

(Amounts in thousands) Contractual Cash Obligations (principal and interest(1)):	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		Thereafter
Mortgages and Notes Payable	$	11,035,540	$	823,834	$	3,943,042	$	2,432,379	$	3,836,285
Convertible Senior Debentures due 2027		1,520,624		39,407		1,481,217		—		—
Convertible Senior Debentures due 2026		1,097,441		35,880		1,061,561		—		—
Exchangeable Senior Debentures due 2025		567,811		19,375		548,436		—		—
Revolving Credit Facilities		333,218		6,650		326,568		—		—
Senior Unsecured Notes due 2011		285,000		14,000		271,000		—		—
Purchase obligations, primarily construction commitments		237,830		237,830		—		—		—
Senior Unsecured Notes due 2010		219,000		9,500		209,500		—		—
Operating leases		1,131,176		26,346		49,723		49,737		1,005,370
Senior Unsecured Notes due 2009		176,041		176,041		—		—		—
Capital lease obligations		21,666		706		1,413		1,413		18,134
Total Contractual Cash Obligations	$	16,625,347	$	1,389,569	$	7,892,460	$	2,483,529	$	4,859,789
Commitments:
Capital commitments to partially owned entities	$	213,352	$	213,352	$	—	$	—	$	—
Standby letters of credit		98		92		6		—		—
Total Commitments	$	213,450	$	213,444	$	6	$	—	$	—

________________________

(1) Interest on variable rate debt is computed using rates in effect at December 31, 2008.

We may from time to time purchase or retire outstanding debt securities though cash purchases and/or exchanges for our equity securities, in open market purchases, privately negotiated transactions or otherwise. Such purchases and/or exchanges, if any, will depend on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.

We believe that we have complied with the financial covenants required by our revolving credit facilities and our senior unsecured notes, and that as of December 31, 2008 we have the ability to incur a substantial amount of additional indebtedness. We have an effective shelf registration for the offering of our equity securities and debt securities that is not limited in amount due to our status as a “well-known seasoned issuer.”

Our credit facilities contain financial covenants, that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provides for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also contain customary conditions precedent to borrowing, including representations and warranties and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

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Liquidity and Capital Resources – continued

Financing Activities and Contractual Obligations – continued

During 2008, we purchased an aggregate of $109,040,000 of our senior unsecured notes and convertible senior debentures, for $98,488,000 in cash. In addition, we completed approximately $1.3 billion of property level mortgage financings and repaid $241,000,000 of existing debt. During 2007, we completed approximately $1.4 billion of senior unsecured financings and $1.111 billion of property level mortgage financings and repaid $912,674,000 of existing debt. The net proceeds we received from 2008 and 2007 financings were used primarily for general corporate purposes and to fund acquisitions and investments unless otherwise noted. Details of our 2008 financing activities are summarized in the Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Details of our 2007 financing activities are summarized below.

2.85% Convertible Senior Debentures due 2027

On March 21, 2007, we sold $1.4 billion aggregate face amount of 2.85% convertible senior debentures due 2027, pursuant to an effective registration statement. The aggregate net proceeds from this offering, after underwriters’ discounts and expenses, were approximately $1.37 billion. The debentures are redeemable at our option beginning in 2012 for the principal amount plus accrued and unpaid interest. Holders of the debentures have the right to require us to repurchase their debentures in 2012, 2017, and 2022 and in certain other limited circumstances. The debentures are convertible, under certain circumstances, for cash and Vornado common shares at an initial conversion rate of 6.1553 common shares per $1,000 of principal amount of debentures. The initial conversion price was $162.46, which represented a premium of 30% over the March 21, 2007 closing price for our common shares. The principal amount of debentures will be settled for cash and the amount in excess of the principal defined as the conversion value will be settled in cash or, at our election, Vornado common shares.

The net proceeds of the offering were contributed to the Operating Partnership in the form of an inter-company loan and the Operating Partnership guaranteed the payment of the debentures.

Revolving Credit Facility

On September 28, 2007, the Operating Partnership entered into a new $1.510 billion unsecured revolving credit facility, which was increased by $85,000,000 on October 12, 2007 and can be increased to up to $2.0 billion during the initial term. The new facility has a three-year term with two one-year extension options, bears interest at LIBOR plus 55 basis points, based on our current credit ratings and requires the payment of an annual facility fee of 15 basis points. Together with the existing $0.965 billion credit facility, the Operating Partnership has an aggregate of $2.56 billion of unsecured revolving credit. Vornado is the guarantor of the Operating Partnership’s obligations under both revolving credit agreements. The existing $0.965 billion credit facility’s financial covenants were modified to conform to the financial covenants under the new agreement. Significant modifications included (i) changing the definition of Capitalization Value to exclude corporate unallocated general and administrative expenses and to reducing the capitalization rate to 6.5% from 7.5%, and (ii) changing the definition of Total Outstanding Indebtedness to exclude indebtedness of unconsolidated joint ventures. Under the new agreement, “Equity Value” may not be less than Three Billion Dollars; “Total Outstanding Indebtedness” may not exceed sixty percent (60%) of “Capitalization Value;” the ratio of “Combined EBITDA” to “Fixed Charges,” each measured as of the most recently ended calendar quarter, may not be less than 1.40 to 1.00; the ratio of “Unencumbered Combined EBITDA” to “Unsecured Interest Expense,” each measured as of the most recently ended calendar quarter, may not be less than 1.50 to 1.00; at any time, “Unsecured Indebtedness” may not exceed sixty percent (60%) of “Capitalization Value of Unencumbered Assets;” and the ratio of “Secured Indebtedness” to “Capitalization Value,” each measured as of the most recently ended calendar quarter, may not exceed fifty percent (50%). The new agreement also contains standard representations and warranties and other covenants. The terms in quotations in this paragraph are all defined in the new agreement, which was filed as an exhibit to our Current Report on Form 8-K dated September 28, 2007, filed on October 4, 2007.

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Liquidity and Capital Resources – continued

Financing Activities and Contractual Obligations – continued

Insurance

We carry commercial liability and all risk property insurance ((i) fire, (ii) flood, (iii) extended coverage, (iv) “acts of terrorism” as defined in the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) , which expires in December 2014, and (v) rental loss insurance) with respect to our assets. Our New York Office, Washington, DC Office, Retail and Merchandise Mart divisions have $2.0 billion of per occurrence all risk property insurance coverage, including terrorism coverage in effect through September 15, 2009. Our California properties have earthquake insurance with coverage of $150,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, and a $150,000,000 annual aggregate.

In June 2007 we formed Penn Plaza Insurance Company, LLC (“PPIC”), a wholly owned consolidated subsidiary, to act as a re-insurer with respect to a portion of our earthquake insurance coverage and as a direct insurer for coverage for “certified” acts of terrorism and for nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by TRIPRA. Coverage for “certified” acts of terrorism is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. Prior to the formation of PPIC, we were uninsured for NBCR losses. Subsequently, we have $2.0 billion of NBCR coverage under TRIPRA, for which PPIC is responsible for 15% of each NBCR loss and the insurance company deductible of $1,000,000. We are ultimately responsible for any loss borne by PPIC.

We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.

Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), senior unsecured notes, exchangeable senior debentures, convertible senior debentures and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.

Other Commitments and Contingencies

Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.

We are committed to fund additional capital to certain of our partially owned entities aggregating approximately $213,352,000. Of this amount, $80,923,000 is committed to IPF and is pledged as collateral to IPF’s lender.

From time to time, we have disposed of substantial amounts of real estate to third parties for which, as to certain properties, we remain contingently liable for rent payments or mortgage indebtedness that we cannot quantify.

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Liquidity and Capital Resources – continued

Litigation

We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters, including the matters referred to below, are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) claiming that we had no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty, because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, froze our right to re-allocate which effectively terminated our right to collect the additional rent from Stop & Shop. On March 3, 2003, after we moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint. On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint. We removed the action to the United States District Court for the Southern District of New York. In January 2005 that court remanded the action to the New York Supreme Court. On February 14, 2005, we served an answer in which we asserted a counterclaim seeking a judgment for all the unpaid additional rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the additional rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. On May 17, 2005, we filed a motion for summary judgment. On July 15, 2005, Stop & Shop opposed our motion and filed a cross-motion for summary judgment. On December 13, 2005, the Court issued its decision denying the motions for summary judgment. Both parties appealed the Court’s decision and on December 14, 2006, the Appellate Court division issued a decision affirming the Court’s decision. On January 16, 2007, we filed a motion for the reconsideration of one aspect of the Appellate Court’s decision which was denied on March 13, 2007. We are currently engaged in discovery and anticipate that a trial date will be set for some time in 2009. We intend to vigorously pursue our claims against Stop & Shop. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.

On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas and the 555 California Street complex. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump. In August 2005, Mr. Trump brought a lawsuit in the New York State Supreme Court against, among others, the general partners of the partnerships referred to above.   Mr. Trump’s claims arose out of a dispute over the sale price of and use of proceeds from, the sale of properties located on the former Penn Central rail yards between West 59th and 72nd Streets in Manhattan which were formerly owned by the partnerships. In decisions dated September 14, 2005 and July 24, 2006, the Court denied several of Mr. Trump’s motions and ultimately dismissed all of Mr. Trump’s claims, except for his claim seeking access to books and records. In a decision dated October 1, 2007, the Court determined that Mr. Trump had already received access to the books and records to which he was entitled, with the exception of certain documents which were subsequently delivered to Mr. Trump. Mr. Trump sought re-argument and renewal on, and filed a notice of appeal in connection with, his dismissed claims.  In a decision dated January 6, 2009, the Court denied all of Mr. Trump’s motions. Mr. Trump has filed a notice appealing the 2007 and 2009 decisions. In connection with the acquisition, we agreed to indemnify the sellers for liabilities and expenses arising out of Mr. Trump’s claim that the general partners of the partnerships we acquired did not sell the rail yards at a fair price or could have sold the rail yards for a greater price and any other claims asserted in the legal action; provided however, that if Mr. Trump prevails on certain claims involving partnership matters, other than claims relating to sale price, the sellers will be required to reimburse us for certain costs related to those claims. We believe that the claims relating to the sale price are without merit. All other allegations are not asserted as a basis for damages and regardless of merit, in our opinion, after consultation with legal counsel, will not have a material effect on our financial condition, results of operation or cash flows.

In July 2005, we acquired H Street Building Corporation (“H Street”) which has a subsidiary that owns, among other things, a 50% tenancy in common interest in land located in Arlington County, Virginia, known as "Pentagon Row," leased to two tenants. In April 2007, H Street acquired the remaining 50% interest in that fee. In April 2007, we received letters from those tenants, Street Retail, Inc. and Post Apartment Homes, L.P., claiming they had a right of first offer triggered by each of those transactions. On September 25, 2008, both tenants filed suit against us and the former owners. The claim alleges the right to purchase the fee interest, damages in excess of $75,000,000 and punitive damages. We believe this claim is without merit and in our opinion, after consultation with legal counsel, will not have a material effect on our financial condition, results of operation or cash flow.

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Liquidity and Capital Resources – continued

Cash Flow for the Year Ended December 31, 2008

Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties. Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, and our revolving credit facilities; proceeds from the issuance of common and preferred equity; and asset sales. Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, distributions to common and preferred shareholders, as well as acquisition and development costs. Our cash and cash equivalents were $1,526,853,000 at December 31, 2008, a $372,258,000 increase over the balance at December 31, 2007. This increase resulted from $817,812,000 of net cash provided by operating activities and $7,677,000 of net cash provided by financing activities, partially offset by $453,231,000 of net cash used in investing activities. Property rental income represents our primary source of net cash provided by operating activities.

Our consolidated outstanding debt was $12,511,670,000 at December 31, 2008, a $792,693,000 increase over the balance at December 31, 2007. This increase resulted primarily from debt associated with property refinancings. As of December 31, 2008 and December 31, 2007, $358,468,000 and $405,656,000, respectively, was outstanding under our revolving credit facilities. During 2009 and 2010, $453,530,000 and $1,096,941,000 of our outstanding debt matures, respectively. We may refinance such debt or choose to repay all or a portion, using existing cash balances or our revolving credit facilities.

Our share of debt of unconsolidated subsidiaries was $3,196,585,000 at December 31, 2008, a $93,288,000 decrease from the balance at December 31, 2007.

Cash flows provided by operating activities of $817,812,000 was comprised of (i) net income of $411,445,000, (ii) $401,571,000 of non-cash adjustments, including depreciation and amortization expense, non-cash impairment losses, the effect of straight-lining of rental income, equity in net income of partially owned entities, and (iii) distributions of income from partially owned entities of $44,690,000, partially offset by (iv) the net change in operating assets and liabilities of $39,894,000.

Net cash used in investing activities of $453,231,000 was primarily comprised of (i) development and redevelopment expenditures of $598,688,000, (ii) additions to real estate of $207,885,000, (iii) investments in partially owned entities of $156,227,000, (iv) purchases of marketable equity securities of $164,886,000, partially offset by, (v) proceeds from the sale of real estate (primarily Americold and Tysons Dulles Plaza) of $390,468,000, (vi) distributions of capital from partially owned entities of $218,367,000, (vii) proceeds received from repayments on mezzanine loans receivable of $52,470,000 and (viii) proceeds from the sale of marketable securities of $51,185,000.

Net cash provided by financing activities of $7,677,000 was primarily comprised of (i) proceeds from borrowings of $1,721,974,000 and (ii) proceeds received from exercises of employee stock options of $29,377,000, partially offset by, (iii) repayments of borrowings of $993,665,000, (iv) dividends paid on common shares of $561,981,000, (v) distributions to noncontrolling interests of $85,419,000 and (vi) dividends paid on preferred shares of $57,112,000.

Capital Expenditures

Our capital expenditures consist of expenditures to maintain assets, tenant improvements and leasing commissions. Recurring capital improvements include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases. Non-recurring capital improvements include expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property. Our development and redevelopment expenditures include all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions and capitalized interest and operating costs until the property is substantially complete and ready for its intended use.

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Liquidity and Capital Resources – continued

Cash Flow for the Year Ended December 31, 2008 – continued

Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the year ended December 31, 2008.

(Amounts in thousands)	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart				Other
Capital Expenditures (Accrual basis):
Expenditures to maintain the assets:
Recurring	$	50,137		$	23,380		$	10,341		$	4,024		$	10,730		$	1,662
Non-recurring		22,623			6,504			10,590			—			—			5,529
Total		72,760			29,884			20,931			4,024			10,730			7,191
Tenant improvements:
Recurring		57,573			23,433			17,223			7,881			9,036			—
Non-recurring		34,149			12,224			10,298			2,468			8,925			234
Total		91,722			35,657			27,521			10,349			17,961			234
Leasing Commissions:
Recurring		29,642			16,037			6,385			3,145			4,075			—
Non-recurring		14,088			10,045			—			1,641			2,221			181
Total		43,730			26,082			6,385			4,786			6,296			181
Tenant improvements and leasing commissions:
Per square foot per annum	$	3.03		$	5.35		$	2.16		$	2.03		$	2.63		$	—
Percentage of initial rent		7.0%			7.5%			5.6%			5.3%			9.4%			—
Total Capital Expenditures and Leasing Commissions (accrual basis)	$	208,212		$	91,623		$	54,837		$	19,159		$	34,987		$	7,606
Adjustments to reconcile accrual basis to cash basis:
Expenditures in the current year applicable to prior periods		114,778			57,001			15,539			9,590			28,576			4,072
Expenditures to be made in future periods for the current period		(78,614	)		(33,571	)		(22,076	)		(15,135	)		(7,729	)		(103	)
Total Capital Expenditures and Leasing Commissions (Cash basis)	$	244,376		$	115,053		$	48,300		$	13,614		$	55,834		$	11,575
Development and Redevelopment Expenditures:
Bergen Town Center	$	126,673		$	—		$	—		$	126,673		$	—		$	—
Wasserman Venture		61,867			—			—			—			—			61,867
Manhattan Mall		51,474			—			—			51,474			—			—
1999 K Street		45,742			—			45,742			—			—			—
40 East 66th Street		41,827			—			—			—			—			41,827
220 20th Street		36,014			—			36,014			—			—			—
220 Central Park South		30,533			—			—			—			—			30,533
West End 25		24,002			—			24,002			—			—			—
478-486 Broadway		17,182			—			—			17,182			—			—
Hotel Pennsylvania		15,591			—			—			—			—			15,591
2101 L Street		14,992			—			14,992			—			—			—
Springfield Mall		12,948			—			—			12,948			—			—
Garfield		12,775			—			—			12,775			—			—
North Bergen, New Jersey		10,749			—			—			10,749			—			—
South Hills Mall		10,404			—			—			10,404			—			—
Green Acres Mall		3,914			—			—			3,914			—			—
Other		82,001			25,959			27,106			20,226			8,710			—
	$	598,688		$	25,959		$	147,856		$	266,345		$	8,710		$	149,818

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Liquidity and Capital Resources – continued

Cash Flow for the Year Ended December 31, 2007

Cash and cash equivalents was $1,154,595,000 at December 31, 2007, a $1,078,722,000 decrease from the balance at December 31, 2006. This decrease resulted from $3,067,704,000 of net cash used in investing activities, primarily for real estate acquisitions, partially offset by $1,291,657,000 of net provided by financing activities and $697,325,000 of net cash provided by operating activities.

Consolidated outstanding debt was $11,718,977,000 at December 31, 2007, a $3,296,600,000 increase over the balance at December 31, 2006. This increase resulted primarily from debt associated with asset acquisitions, property financings and refinancings and from the issuance of $1.0 billion of senior unsecured convertible debentures during 2007. As of December 31, 2007 and 2006, $405,656,000 and $0, respectively, was outstanding under our revolving credit facilities.

Our share of debt of unconsolidated subsidiaries was $3,289,873,000 at December 31, 2007, a $33,134,000 decrease from the balance at December 31, 2006.

Cash flows provided by operating activities of $697,325,000 was comprised of (i) net income of $607,833,000, (ii) adjustments for non-cash items of $211,074,000, and (iii) distributions of income from partially owned entities of $24,044,000 partially offset by, (iv) a net change in operating assets and liabilities of $145,626,000. The adjustments for non-cash items were primarily comprised of (i) depreciation and amortization of $545,885,000, (ii) a non-cash mezzanine loan loss accrual of $57,000,000, (iii) net loss on early extinguishment of debt and write-off of unamortized financing costs of $7,670,000, partially offset by (iv) net gains on derivatives of $113,503,000 (primarily McDonald’s), (v) equity in net income of partially owned entities, including Alexander’s and Toys, of $69,656,000, (vi) the effect of straight-lining of rental income of $77,699,000, (vii)  net gains on sale of real estate of $64,981,000, (viii) net gains on dispositions of wholly-owned and partially owned assets other than real estate of $39,493,000 and (ix) amortization of below market leases, net of above market leases of $83,250,000.

Net cash used in investing activities of $3,067,704,000 was primarily comprised of (i) acquisitions of real estate and other of $2,811,285,000, (ii) development and redevelopment expenditures of $358,748,000, (iii) investments in partially owned entities of $271,423,000, (iv) investments in mezzanine loans receivable of $217,081,000, (v) purchases of marketable securities of $152,683,000, (vi) capital expenditures of $166,319,000, partially offset by, (vii) proceeds from settlement of derivative positions of $260,764,000, (viii) repayments received on mezzanine loans receivable of $241,289,000, (ix) proceeds from the sale of real estate of $297,234,000, (x) proceeds from the sale of marketable securities of $112,779,000 and (xi) distributions of capital from partially owned entities of $22,541,000.

Net cash provided by financing activities of $1,291,657,000 was primarily comprised of (i) proceeds from borrowings of $2,954,497,000, partially offset by, (ii) repayments of borrowings of $868,055,000, (iii) dividends paid on common shares of $524,719,000, (iv) purchases of marketable securities in connection with the legal defeasance or mortgage notes payable of $109,092,000, (v) distributions to noncontrolling interests of $81,065,000 and (vi) dividends paid on preferred shares of $57,236,000. 

51

Liquidity and Capital Resources – continued

Cash Flow for the Year Ended December 31, 2007 – continued

Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the year ended December 31, 2007.

(Amounts in thousands)	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart			Other
Capital Expenditures (Accrual basis):
Expenditures to maintain the assets:
Recurring	$	46,549		$	15,162		$	15,725		$	2,626		$	10,625		$	2,411
Non-recurring		8,325			—			6,717			—			—			1,608
Total		54,874			15,162			22,442			2,626			10,625			4,019
Tenant improvements:
Recurring		100,939			43,677			20,890			3,176			33,196			—
Non-recurring		1,794			—			—			741			—			1,053
Total		102,733			43,677			20,890			3,917			33,196			1,053
Leasing Commissions:
Recurring		43,163			28,626			7,591			2,773			4,173			—
Non-recurring		855			—			—			539			—			316
Total		44,018			28,626			7,591			3,312			4,173			316
Tenant improvements and leasing commissions:
Per square foot per annum	$	2.91		$	5.17		$	1.72		$	1.11		$	3.15		$	—
Percentage of initial rent		6.7	%		7.0	%		4.4	%		2.8	%		11.8	%		—
Total Capital Expenditures and Leasing Commissions (accrual basis)	$	201,625		$	87,465		$	50,923		$	9,855		$	47,994		$	5,388
Adjustments to reconcile accrual basis to cash basis:
Expenditures in the current year applicable to prior periods		76,117			17,416			40,019			8,263			8,982			1,437
Expenditures to be made in future periods for the current period		(88,496	)		(46,845	)		(13,763	)		(5,542	)		(21,203	)		(1,143	)
Total Capital Expenditures and Leasing Commissions (Cash basis)	$	189,246		$	58,036		$	77,179		$	12,576		$	35,773		$	5,682
Development and Redevelopment Expenditures:
Bergen Town Center	$	52,664		$	—		$	—		$	52,664		$	—		$	—
2101 L Street		46,664			—			46,664			—			—			—
Wasserman Venture		43,260			—			—			—			—			43,260
Green Acres Mall		32,594			—			—			32,594			—			—
Crystal Mall Two		29,552			—			29,552			—			—			—
North Bergen, New Jersey		19,925			—			—			19,925			—			—
40 East 66th Street		13,544			—			—			—			—			13,544
1999 K Street		11,245			—			11,245			—			—			—
Springfield Mall		6,055			—			—			6,055			—			—
Other		103,245			11,728			30,515			27,124			693			33,185
	$	358,748		$	11,728		$	117,976		$	138,362		$	693		$	89,989

52

Liquidity and Capital Resources – continued

Cash Flow for the Year Ended December 31, 2006

Cash and cash equivalents was $2,233,317,000 at December 31, 2006, a $1,938,813,000 increase over the balance at December 31, 2005. This increase resulted from $824,668,000 of net cash provided by operating activities, $3,030,655,000 of net cash provided by financing activities, partially offset by $1,916,510,000 of net cash used in investing activities.

Consolidated outstanding debt was $8,422,377,000 at December 31, 2006, a $2,932,683,000 increase over the balance at December 31, 2005. This increase resulted primarily from debt associated with asset acquisitions, property financings and refinancings and from the issuance of $1.0 billion of senior unsecured convertible debentures during 2006. As of December 31, 2006 and 2005, our revolving credit facility had a zero outstanding balance. Our share of debt of unconsolidated subsidiaries was $3,323,007,000 at December 31, 2006, a $311,355,000 increase over the balance at December 31, 2005. This increase resulted primarily from our $89,630,000 share of an increase in Toys “R” Us outstanding debt and from debt associated with asset acquisitions and refinancings.

Cash flows provided by operating activities of $824,668,000 was comprised of (i) net income of $633,356,000, (ii) adjustments for non-cash items of $86,642,000, (iii) distributions of income from partially owned entities of $35,911,000 and (iv) a net change in operating assets and liabilities of $68,759,000. The adjustments for non-cash items were primarily comprised of (i) depreciation and amortization of $413,162,000, (ii) net loss on early extinguishment of debt and write-off of unamortized financing costs of $33,488,000, partially offset by (iii) net gains on mark-to-market of derivatives of $153,208,000 (Sears, McDonald’s and GMH warrants), (iv) equity in net income of partially owned entities, including Alexander’s and Toys, of $273,000, (v) the effect of straight-lining of rental income of $62,655,000, (vi) net gains on sale of real estate of $33,769,000, (vii) net gains on dispositions of wholly-owned and partially owned assets other than real estate of $76,073,000 and (viii) amortization of below market leases, net of above market leases of $23,814,000.

Net cash used in investing activities of $1,916,510,000 was primarily comprised of (i) acquisitions of real estate and other of $1,399,326,000, (ii) investments in partially owned entities of $233,651,000, (iii) investment in mezzanine loans receivable of $363,374,000, (iv) purchases of marketable securities of $153,914,000, (v) development and redevelopment expenditures of $233,492,000, (vi) capital expenditures of $198,215,000, (vii) deposits in connection with real estate acquisitions and pre-acquisition costs aggregating $82,753,000, partially offset by (viii) repayments received on mezzanine loans receivable of $172,445,000, (ix) distributions of capital from partially owned entities of $114,041,000, (x) proceeds from the sale of marketable securities of $173,027,000, (xi) proceeds from the sale of real estate of $110,388,000 and (xii) proceeds from settlement of derivative positions of $135,028,000.

Net cash provided by financing activities of $3,030,655,000 was primarily comprised of (i) proceeds from borrowings of $5,151,952,000, (ii) proceeds from the issuance of common shares of $1,004,394,000, (iii) proceeds from the issuance of preferred shares and units of $43,819,000, (iv) proceeds from the exercise of employee share options of $77,873,000, partially offset by, (v) repayments of borrowings of $1,544,076,000, (vi) purchases of marketable securities in connection with the legal defeasance or mortgage notes payable of $636,293,000, (vii) dividends paid on common shares of $537,298,000, (viii) repurchase of shares related to stock compensation arrangements and associated employee tax withholdings of $201,866,000, (ix) distributions to noncontrolling interests of $188,052,000, (x) dividends paid on preferred shares of $57,606,000, (xi) redemption of perpetual preferred shares and units of $45,000,000 and (xii) debt issuance costs of $37,192,000. 

53

Liquidity and Capital Resources – continued

Cash Flow for the Year Ended December 31, 2006 – continued

Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the year ended December 31, 2006.

(Amounts in thousands)	Total			New York Office			Washington, DC Office			Retail			Merchandise Mart			Other
Capital Expenditures (Accrual basis):
Expenditures to maintain the assets:
Recurring	$	44,156		$	12,446		$	16,355		$	1,269		$	10,174			$	3,912
Non-recurring		2,708			—			2,259			449			—				—
Total		46,864			12,446			18,614			1,718			10,174				3,912
Tenant improvements:
Recurring		88,064			44,251			27,961			3,219			12,633				—
Non-recurring		1,824			—			89			1,735			—				—
Total		89,888			44,251			28,050			4,954			12,633				—
Leasing Commissions:
Recurring		32,181			22,178			6,744			2,024			1,235				—
Non-recurring		290			—			32			258			—				—
Total		32,471			22,178			6,776			2,282			1,235				—
Tenant improvements and leasing commissions:
Per square foot per annum	$	2.44		$	4.10		$	2.54		$	0.64		$	1.74	$			—
Percentage of initial rent		7.2%			7.9%			8.0%			2.8%			7.1%				—
Total Capital Expenditures and Leasing Commissions (accrual basis)	$	169,223		$	78,875		$	53,440		$	8,954		$	24,042			$	3,912
Adjustments to reconcile accrual basis to cash basis:
Expenditures in the current year applicable to prior periods		51,830			22,377			20,949			3,638			4,866				—
Expenditures to be made in future periods for the current period		(55,964	)		(33,195	)		(17,480	)		(4,916	)		(373	)			—
Total Capital Expenditures and Leasing Commissions (Cash basis)	$	165,089		$	68,057		$	56,909		$	7,676		$	28,535			$	3,912
Development and Redevelopment Expenditures:
Green Acres Mall	$	37,927		$	—		$	—		$	37,927		$	—			$	—
Wasserman Venture		32,572			—			—			—			—				32,572
North Bergen, New Jersey (Ground-up development)		28,564			—			—			28,564			—				—
Crystal Park (PTO)		27,294			—			27,294			—			—				—
Bergen Town Center		22,179			—			—			22,179			—				—
Crystal Plazas (PTO)		12,229			—			12,229			—			—				—
220 Central Park South		12,055			—			—			—			—				12,055
1740 Broadway		9,921			9,921			—			—			—				—
7 W. 34th Street		9,436			—			—			—			9,436				—
2101 L Street		10,447			—			10,447			—			—				—
Crystal Mall Two		6,497			—			6,497			—			—				—
640 Fifth Avenue		1,937			1,937			—			—			—				—
Other		22,434			1,330			4,217			12,126			—				4,761
	$	233,492		$	13,188		$	60,684		$	100,796		$	9,436			$	49,388

54

Funds From Operations (“FFO”)

FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income or loss determined in accordance with Generally Accepted Accounting Principles (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO and FFO per diluted share are used by management, investors and industry analysts as supplemental measures of operating performance of equity REITs. FFO and FFO per diluted share should be evaluated along with GAAP net income and income per diluted share (the most directly comparable GAAP measures), as well as cash flow from operating activities, investing activities and financing activities, in evaluating the operating performance of equity REITs. Management believes that FFO and FFO per diluted share are helpful to investors as supplemental performance measures because these measures exclude the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs which implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, these non-GAAP measures can facilitate comparisons of operating performance between periods and among other equity REITs. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as disclosed in Our Statements of Cash Flows. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity. The calculations of both the numerator and denominator used in the computation of income per share are disclosed in Note 18. Income per Share, in our notes to consolidated financial statements on page 114 of this Annual Report on Form 10-K.

FFO attributable to common shareholders plus assumed conversions was $813,064,000, or $4.80 per diluted share for the year ended December 31, 2008, compared to $943,205,000 or $5.55 per diluted share for the year ended December 31, 2007. FFO attributable to common shareholders plus assumed conversions was a negative $88,154,000 or $0.55 per diluted share for the three months ended December 31, 2008 compared to $186,210,000, or $1.10 per diluted share for the three months ended December 31, 2007.

(Amounts in thousands except per share amounts)	For The Year Ended December 31,						For The Three Months Ended December 31,
Reconciliation of our net income (loss) to FFO:	2008			2007			2008			2007
Net income (loss) attributable to Vornado	$	359,297		$	541,539		$	(212,680	)	$	97,000
Depreciation and amortization of real property		509,367			451,313			129,305			125,989
Net gains on sale of real estate		(57,523	)		(60,811	)		—			(37,869	)
Proportionate share of adjustments to equity in net income of Toys to arrive at FFO:
Depreciation and amortization of real property		66,435			85,244			15,533			16,260
Net gains on sale of real estate		(719	)		(3,012	)		(555	)		(2,519	)
Income tax effect of above adjustments		(23,223	)		(28,781	)		(5,242	)		(4,809	)
Proportionate share of adjustments to equity in net income of partially owned entities, excluding Toys, to arrive at FFO:
Depreciation and amortization of real property		49,513			48,770			13,735			12,679
Net gains on sale of real estate		(8,759	)		(12,451	)		(528	)		(3,471	)
Noncontrolling interests’ share of above adjustments		(49,683	)		(46,664	)		(13,451	)		(9,094	)
FFO		844,705			975,147			(73,883	)		194,166
Preferred share dividends		(57,091	)		(57,177	)		(14,271	)		(14,291	)
FFO attributable to common shareholders		787,614			917,970			(88,154	)		179,875
Interest on 3.875% exchangeable senior debentures		25,261			24,958			—			6,268
Series A convertible preferred dividends		189			277			—			67
FFO attributable to common shareholders plus assumed conversions	$	813,064		$	943,205		$	(88,154	)	$	186,210
Reconciliation of Weighted Average Shares:
Weighted average common shares outstanding		159,637			157,686			160,327			158,310
Effect of dilutive securities:
Employee stock options and restricted share awards		4,219			6,491			—			5,728
3.875% exchangeable senior debentures		5,559			5,559			—			5,559
Series A convertible preferred shares		85			122			—			118
Denominator for FFO per diluted share		169,500			169,858			160,327			169,715
FFO attributable to common shareholders plus assumed conversions per diluted share	$	4.80		$	5.55		$	(0.55	)	$	1.10

55

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

We have exposure to fluctuations in market interest rates. Market interest rates are highly sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:

(Amounts in thousands, except per share amounts)	2008						2007
	December 31, Balance		Weighted Average Interest Rate	Effect of 1% Change In Base Rates			December 31, Balance		Weighted Average Interest Rate
Consolidated debt:
Variable rate	$	2,076,128	2.70%	$	20,761		$	1,113,181	5.86%
Fixed rate		10,435,542	5.76%		—			10,605,796	5.78%
	$	12,511,670	5.25%		20,761		$	11,718,977	5.79%
Pro-rata share of debt of non- consolidated entities (non-recourse):
Variable rate – excluding Toys	$	282,752	3.63%		2,828		$	193,655	6.74%
Variable rate – Toys		819,512	3.68%		8,195			1,072,431	7.14%
Fixed rate (including $1,175,310 and $1,028,918 of Toys’ debt in 2008 and 2007)		2,094,321	6.51%		—			2,023,787	6.88%
	$	3,196,585	5.53%		11,023		$	3,289,873	6.96%
Redeemable noncontrolling interest’ share of above					(3,862	)
Total change in annual net income				$	27,922
Per share-diluted				$	0.18

We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of December 31, 2008, variable rate debt with an aggregate principal amount of $462,000,000 and a weighted average interest rate of 2.75% was subject to LIBOR caps. These caps are based on a notional amount of $462,000,000 and cap LIBOR at a weighted average rate of 5.93%.

As of December 31, 2008, we have investments in mezzanine loans with an aggregate carrying amount of $99,011,000 that are based on variable interest rates which partially mitigate our exposure to a change in interest rates on our variable rate debt.

Fair Value of Our Debt

The estimated fair value of our debt at December 31, 2008 was less than its aggregate carrying amount by approximately $1,040,386,000 based on current market prices and discounted cash flows at the current rate at which we believe similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt.

Derivative Instruments

We have, and may in the future enter into, derivative positions that do not qualify for hedge accounting treatment. Because these derivatives do not qualify for hedge accounting treatment, the gains or losses resulting from their mark-to-market at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statements of income. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative positions and a specified spread over LIBOR. Because the market value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our investment income or expense. In 2008, we recognized a net loss of $33,740,000 and in 2007 and 2006 we recognized net gains aggregating approximately $113,503,000 and $153,208,000, respectively, from these positions.

56

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	58
Consolidated Balance Sheets at December 31, 2008 and 2007	59
Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006	60
Consolidated Statements of Changes in Equity for the years ended December 31, 2008, 2007, and 2006	61
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006	64
Notes to Consolidated Financial Statements	66
Consolidated Financial Statements of Lexington Realty Trust, Report of Independent Registered Public Accounting Firm thereon and Notes to Such Consolidated Financial Statements and Consolidated Financial Statements of Lex-Win Concord LLC (incorporated herein by reference to Exhibits 99.1 and 99.2, respectively, to Item 9.01(d) of Lexington Realty Trust’s Current Report on Form 8-K (file no. 001-12386), dated and filed with the Securities and Exchange Commission on September 1, 2009)	N/A

57

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Trustees

Vornado Realty Trust

New York, New York

We have audited the accompanying consolidated balance sheets of Vornado Realty Trust (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, statement of changes in equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty Trust at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As disclosed in Note 16 to the consolidated financial statements, effective December 31, 2008, the Company retrospectively adopted the measurements provisions of Emerging Issues Task Force Topic D-98, Classification and Measurement of Redeemable Securities.

As disclosed in Note 2 to the consolidated financial statements, on January 1, 2009, the Company adopted FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments that May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”), Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS No. 160”), and FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”) and retrospectively adjusted all periods presented in the consolidated financial statements for the changes required by these statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey

February 24, 2009

(October 13, 2009, as to the effects of the retrospective application of FSP APB 14-1, SFAS No. 160 and FSP EITF 03-6-1 as disclosed in Note 2)

58

VORNADO REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts) ASSETS	December 31, 2008			December 31, 2007
Real estate, at cost:
Land	$	4,517,558		$	4,577,896
Buildings and improvements		12,154,857			11,532,564
Development costs and construction in progress		1,088,356			821,991
Leasehold improvements and equipment		118,603			106,060
Total		17,879,374			17,038,511
Less accumulated depreciation and amortization		(2,168,997	)		(1,810,151	)
Real estate, net		15,710,377			15,228,360
Cash and cash equivalents		1,526,853			1,154,595
Restricted cash		375,888			378,732
Marketable securities		334,322			322,992
Accounts receivable, net of allowance for doubtful accounts of $32,834 and $19,151		201,566			168,183
Investments in partially owned entities, including Alexander’s of $137,305 and $122,797		790,154			1,206,742
Investment in Toys “R” Us		293,096			298,089
Mezzanine loans receivable, net allowance of $46,700 and $57,000		472,539			492,339
Receivable arising from the straight-lining of rents, net of allowance of $5,773 and $3,076		592,903			513,345
Deferred leasing and financing costs, net of accumulated amortization of $168,714 and $123,624		306,847			274,078
Assets related to discontinued operations		108,292			1,630,082
Due from officers		13,185			13,228
Other assets		692,026			797,952
	$	21,418,048		$	22,478,717
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Notes and mortgages payable	$	8,835,387		$	7,938,457
Convertible senior debentures		2,221,743			2,203,838
Senior unsecured notes		617,816			698,656
Exchangeable senior debentures		478,256			472,370
Revolving credit facility debt		358,468			405,656
Accounts payable and accrued expenses		515,607			480,123
Deferred credit		764,774			848,852
Deferred compensation plan		69,945			67,714
Deferred tax liabilities		19,895			241,895
Liabilities related to discontinued operations		750			1,332,630
Other liabilities		142,777			118,983
Total liabilities		14,025,418			14,809,174
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units – 14,627,005 and 15,530,125 units outstanding		882,740			1,365,874
Series D cumulative redeemable preferred units – 11,200,000 units outstanding		280,000			277,191
Series B convertible preferred units – 444,559 units outstanding		15,238			15,238
Total redeemable noncontrolling interests		1,177,978			1,658,303
Shareholders’ equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000 shares; issued and outstanding 33,954,124 and 33,980,362 shares		823,807			825,095
Common shares of beneficial interest: $.04 par value per share; authorized, 250,000,000 shares; issued and outstanding 155,285,903 and 153,076,606 shares		6,195			6,140
Additional capital		6,025,976			5,491,112
Earnings less than distributions		(1,047,340	)		(757,177	)
Accumulated other comprehensive loss		(6,899	)		29,772
Total Vornado shareholders’ equity		5,801,739			5,594,942
Noncontrolling interests in consolidated subsidiaries		412,913			416,298
Total equity		6,214,652			6,011,240
	$	21,418,048		$	22,478,717

See notes to consolidated financial statements.

59

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
(Amounts in thousands, except per share amounts)	2008			2007			2006
REVENUES:
Property rentals	$	2,211,311		$	1,977,023		$	1,544,741
Tenant expense reimbursements		358,437			323,544			260,772
Fee and other income		127,303			109,949			103,587
Total revenues		2,697,051			2,410,516			1,909,100
EXPENSES:
Operating		1,070,118			951,582			737,452
Depreciation and amortization		537,427			441,209			319,066
General and administrative		194,027			189,041			180,167
Impairment losses on development projects and cost of acquisitions not consummated		81,447			10,375			—
Total expenses		1,883,019			1,592,207			1,236,685
Operating income		814,032			818,309			672,415
Income (loss) applicable to Alexander’s		36,671			50,589			(14,530	)
Income (loss) applicable to Toys “R” Us		2,380			(14,337	)		(47,520	)
(Loss) income from partially owned entities		(195,878	)		31,891			60,355
Interest and other investment (loss) income, net		(2,682	)		226,425			255,391
Interest and debt expense (including amortization of deferred financing costs of $17,507, $15,182 and $11,718)		(625,904	)		(599,804	)		(400,540	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		7,757			39,493			76,073
Income before income taxes		36,376			552,566			601,644
Income tax benefit (expense)		204,537			(9,179	)		(491	)
Income from continuing operations		240,913			543,387			601,153
Income from discontinued operations		170,532			64,446			32,203
Net income		411,445			607,833			633,356
Net income attributable to noncontrolling interests, including unit distributions		(52,148	)		(66,294	)		(78,574	)
Net income attributable to Vornado		359,297			541,539			554,782
Preferred share dividends		(57,091	)		(57,177	)		(57,511	)
NET INCOME attributable to common shareholders	$	302,206		$	484,362		$	497,271
INCOME PER COMMON SHARE – BASIC:
Income from continuing operations	$	0.92		$	2.70		$	3.14
Income from discontinued operations		0.97			0.37			0.22
Net income per common share	$	1.89		$	3.07		$	3.36
INCOME PER COMMON SHARE – DILUTED:
Income from continuing operations	$	0.90		$	2.59		$	2.98
Income from discontinued operations		0.94			0.36			0.21
Net income per common share	$	1.84		$	2.95		$	3.19

See notes to consolidated financial statements.

60

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Preferred Shares			Common Shares			Additional Capital			Earnings in Excess of (Less Than) Distributions			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Equity
(Amounts in thousands, except per share amounts)
Balance, December 31, 2005	$	834,527		$	5,675		$	4,236,841		$	103,061		$	83,406		$	6,112		$	5,269,622
Cumulative effect of change in accounting principle		—			—			31,908			(642,171	)		—			—			(610,263	)
Balance, January 1, 2006		834,527			5,675			4,268,749			(539,110	)		83,406			6,112			4,659,359
Net income (loss)		—			—			—			554,782			—			(1,363	)		553,419
Dividends paid on common shares ($3.79 per share, including $.54 in special cash dividends)		—			—			—			(537,298	)		—			—			(537,298	)
Dividends paid on preferred shares:
Series A preferred shares ($3.25 per share)		—			—			—			(604	)		—			—			(604	)
Series D-10 preferred shares ($1.75 per share)		—			—			—			(2,800	)		—			—			(2,800	)
Series E preferred shares ($1.75 per share)		—			—			—			(5,250	)		—			—			(5,250	)
Series F preferred shares ($1.6875 per share)		—			—			—			(10,125	)		—			—			(10,125	)
Series G preferred shares ($1.65625 per share)		—			—			—			(13,250	)		—			—			(13,250	)
Series H preferred shares ($1.6875 per share)		—			—			—			(7,594	)		—			—			(7,594	)
Series I preferred shares ($1.65625 per share)		—			—			—			(17,888	)		—			—			(17,888	)
Proceeds from the issuance of common shares		—			324			1,004,481			—			—			—			1,004,805
Conversion of Series A preferred shares to common shares		(5,897	)		7			5,890			—			—			—			—
Deferred compensation shares and options		—			(57	)		(59,209	)		(137,580	)		—			—			(196,846	)
Common shares issued:
Under employees’ share option plan		—			110			75,555			—			—			—			75,665
Upon redemption of Class A Operating Partnership units, at redemption value		—			23			56,490			—			—			—			56,513
In connection with dividend reinvestment plan		—			1			2,207			—			—			—			2,208
Change in unrealized net gain on securities available for sale		—			—			—			—			70,416			—			70,416
Sale of securities available for sale		—			—			—			—			(69,863	)		—			(69,863	)
Common share offering costs		—			—			(411	)		—			—						(411	)
Change in pension plans		—			—			—			—			2,269			—			2,269
Adjustments to reflect Class A Operating Partnership units at redemption value		—			—			(631,343	)		—			—			—			(631,343	)
Equity component of $1 billion convertible senior debentures		—			—			53,640			—			—			—			53,640
Acquisition of noncontrolling interests		—			—			—			—			—			5,054			5,054
Contributions from noncontrolling interests		—			—			—			—			—			5,741			5,741
Other		30			—			466			1			6,735			3,547			10,779
Balance, December 31, 2006	$	828,660		$	6,083		$	4,776,515		$	(716,716	)	$	92,963		$	19,091		$	5,006,596

See notes to consolidated financial statements.
61

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED

	Preferred Shares			Common Shares			Additional Capital			Earnings in Excess of (Less Than) Distributions			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Equity
(Amounts in thousands, except per share amounts)
Balance, December 31, 2006	$	828,660		$	6,083		$	4,776,515		$	(716,716	)	$	92,963		$	19,091		$	5,006,596
Net Income		—			—			—			541,539			—			(3,494	)		538,045
Dividends paid on common shares ($3.79 per share, including $.54 in special cash dividends)		—			—			—			(524,719	)		—			—			(524,719	)
Dividends paid on preferred shares:
Series A preferred shares ($3.25 per share)		—			—			—			(270	)		—			—			(270	)
Series D-10 preferred shares ($1.75 per share)		—			—			—			(2,800	)		—			—			(2,800	)
Series E preferred shares ($1.75 per share)		—			—			—			(5,250	)		—			—			(5,250	)
Series F preferred shares ($1.6875 per share)		—			—			—			(10,125	)		—			—			(10,125	)
Series G preferred shares ($1.65625 per share)		—			—			—			(13,250	)		—			—			(13,250	)
Series H preferred shares ($1.6875 per share)		—			—			—			(7,594	)		—			—			(7,594	)
Series I preferred shares ($1.65625 per share)		—			—			—			(17,888	)		—			—			(17,888	)
Conversion of Series A preferred shares to common shares		(3,565	)		4			3,561			—			—			—			—
Deferred compensation shares and options		—			(17	)		(36,422	)		—			—			—			(36,439	)
Common shares issued:
Under employees’ share option plan		—			30			34,617			—			—			—			34,647
Upon redemption of Class A Operating Partnership units, at redemption value		—			39			116,046			—			—			—			116,085
In connection with dividend reinvestment plan		—			1			2,030			—			—			—			2,031
Change in unrealized net gain on securities available for sale		—			—			—			—			(38,842	)		—			(38,842	)
Sale of securities available for sale		—			—			—			—			(36,563	)		—			(36,563	)
Change in pension plans		—			—			—			—			895			—			895
Adjustments to reflect Class A Operating Partnership units at redemption value		—			—			464,114			—			—			—			464,114
Equity component of $1.4 billion convertible senior debentures		—			—			130,714			—			—			—			130,714
Acquisition of noncontrolling interests		—			—			—			—			—			398,386			398,386
Other		—			—			(63	)		(104	)		11,319			2,315			13,467
Balance, December 31, 2007	$	825,095		$	6,140		$	5,491,112		$	(757,177	)	$	29,772		$	416,298		$	6,011,240

See notes to consolidated financial statements.

62

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED

	Preferred Shares			Common Shares		Additional Capital			Earnings in Excess of (Less Than) Distributions			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Equity
(Amounts in thousands, except per share amounts)
Balance, December 31, 2007	$	825,095		$	6,140	$	5,491,112		$	(757,177	)	$	29,772		$	416,298		$	6,011,240
Net Income		—			—		—			359,297			—			3,263			362,560
Dividends paid on common shares ($3.79 per share, including $.54 in special cash dividends)		—			—		—			(561,981	)		—			—			(561,981	)
Dividends paid on preferred shares:
Series A preferred shares ($3.25 per share)		—			—		—			(184	)		—			—			(184	)
Series D-10 preferred shares ($1.75 per share)		—			—		—			(2,800	)		—			—			(2,800	)
Series E preferred shares ($1.75 per share)		—			—		—			(5,250	)		—			—			(5,250	)
Series F preferred shares ($1.6875 per share)		—			—		—			(10,125	)		—			—			(10,125	)
Series G preferred shares ($1.65625 per share)		—			—		—			(13,250	)		—			—			(13,250	)
Series H preferred shares ($1.6875 per share)		—			—		—			(7,594	)		—			—			(7,594	)
Series I preferred shares ($1.65625 per share)		—			—		—			(17,888	)		—			—			(17,888	)
Conversion of Series A preferred shares to common shares		(1,312	)		2		1,310			—			—			—			—
Deferred compensation shares and options		—			1		11,410			—			—			—			11,411
Common shares issued:
Under employees’ share option plan		—			7		26,897			(30,345	)		—			—			(3,441	)
Upon redemption of Class A Operating Partnership units, at redemption value		—			40		82,290			—			—			—			82,330
In connection with dividend reinvestment plan		—			1		2,373			—			—			—			2,374
Change in unrealized net gain on securities available for sale		—			—		—			—			(20,150	)		—			(20,150	)
Sale of securities available for sale		—			—		—			—			6,128			—			6,128
Change in pension plans		—			—		—			—			3,251			—			3,251
Adjustments to reflect Class A Operating Partnership units at redemption value		—			—		400,647			—			—			—			400,647
Conversion of Series F-1 preferred units		—			4		9,996			—			—			—			10,000
Other		24			—		(59	)		(43	)		(25,900	)		(6,648	)		(32,626	)
Balance, December 31, 2008	$	823,807		$	6,195	$	6,025,976		$	(1,047,340	)	$	(6,899	)	$	412,913		$	6,214,652

See notes to consolidated financial statements.

63

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)	Year Ended December 31,
	2008			2007			2006
Cash Flows from Operating Activities:
Net income	$	411,445		$	607,833		$	633,356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including amortization of debt issuance costs		577,338			545,885			413,162
Reversal of H Street deferred tax liability		(222,174	)		—			—
Net gain on sale of Americold Realty Trust		(112,690	)		—			—
Impairment loss – Lexington Realty Trust		107,882			—			—
Amortization of below-market leases, net		(96,176	)		(83,250	)		(23,814	)
Write-off of real estate joint ventures’ development costs		96,037			—			—
Straight-lining of rental income		(91,060	)		(77,699	)		(62,655	)
Impairment loss – marketable equity securities		76,352			—			—
Net gains on sale of real estate		(57,523	)		(64,981	)		(33,769	)
Equity in income of partially owned entities, including Alexander’s and Toys		(47,460	)		(69,656	)		273
Distributions of income from partially owned entities		44,690			24,044			35,911
Net loss (gain) from derivative positions, including McDonalds, Sears Holdings and GMH		33,740			(113,503	)		(153,208	)
Impairment losses on development projects and costs of acquisitions not consummated		81,447			10,375			—
Mezzanine loan loss (reversal) accrual		(10,300	)		57,000			—
(Gain) loss on early extinguishment of debt and write-off of unamortized financing costs		(9,820	)		7,670			33,488
Net gains on dispositions of wholly owned and partially owned assets other than depreciable real estate		(7,757	)		(39,493	)		(76,073	)
Other non-cash adjustments, including amortization of stock-based compensation		83,735			38,726			(10,762	)
Changes in operating assets and liabilities:
Accounts receivable, net		(1,646	)		(25,877	)		24,373
Accounts payable and accrued expenses		(5,207	)		(89,961	)		60,348
Other assets		(39,831	)		(52,478	)		(62,224	)
Other liabilities		6,790			22,690			46,262
Net cash provided by operating activities		817,812			697,325			824,668
Cash Flows from Investing Activities:
Development costs and construction in progress		(598,688	)		(358,748	)		(233,492	)
Proceeds from sales of real estate		390,468			297,234			110,388
Distributions of capital from partially owned entities		218,367			22,541			114,041
Additions to real estate		(207,885	)		(166,319	)		(198,215	)
Purchases of marketable securities		(164,886	)		(152,683	)		(153,914	)
Investments in partially owned entities		(156,227	)		(271,423	)		(233,651	)
Proceeds received from repayment of mezzanine loans receivable		52,470			241,289			172,445
Proceeds from sales of, and return of investment in, marketable securities		51,185			112,779			173,027
Acquisitions of real estate and other		(26,318	)		(2,811,285	)		(1,399,326	)
Cash restricted, including mortgage escrows		12,004			11,652			52,268
Deposits in connection with real estate acquisitions, including pre-acquisition costs		(11,719	)		(27,702	)		(82,753	)
Investments in mezzanine loans receivable		(7,397	)		(217,081	)		(363,374	)
Acquisition of trade shows		(6,003	)		(10,722	)		(17,582	)
Cash received upon consolidation of investments in partially owned entities		1,398			—			—
Proceeds received on settlement of derivatives		—			260,764			135,028
Repayment of officers’ loans		—			2,000			8,600
Net cash used in investing activities		(453,231	)		(3,067,704	)		(1,916,510	)

See notes to consolidated financial statements.

64

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

	Year Ended December 31,
(Amounts in thousands)	2008			2007			2006
Cash Flows from Financing Activities:
Proceeds from borrowings		1,721,974			2,954,497			5,151,952
Repayments of borrowings		(993,665	)		(868,055	)		(1,544,076	)
Dividends paid on common shares		(561,981	)		(524,719	)		(537,298	)
Distributions to noncontrolling interests		(85,419	)		(81,065	)		(188,052	)
Dividends paid on preferred shares		(57,112	)		(57,236	)		(57,606	)
Repurchase of shares related to stock compensation arrangements and associated employee tax withholdings		(31,198	)		(43,396	)		(201,866	)
Proceeds received from exercise of employee share options		29,377			35,083			77,873
Debt issuance costs		(14,299	)		(14,360	)		(37,192	)
Purchase of marketable securities in connection with the legal defeasance of mortgage notes payable		—			(109,092	)		(636,293	)
Proceeds from issuance of common shares		—			—			1,004,394
Redemption of redeemable noncontrolling interests		—			—			(45,000	)
Proceeds from issuance of preferred shares and units		—			—			43,819
Net cash provided by financing activities		7,677			1,291,657			3,030,655
Net increase (decrease) in cash and cash equivalents		372,258			(1,078,722	)		1,938,813
Cash and cash equivalents at beginning of year		1,154,595			2,233,317			294,504
Cash and cash equivalents at end of year	$	1,526,853		$	1,154,595		$	2,233,317
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest (including capitalized interest of $63,063, $53,648, and $26,195)	$	658,376		$	653,811		$	454,391
Cash payments for taxes	$	22,005		$	36,489		$	8,766
Non-Cash Transactions:
Adjustments to reflect redeemable Class A operating partnership units at redemption value	$	400,647		$	464,114		$	(631,343	)
Conversion of Class A operating partnership units to common shares, at redemption value		82,230			116,085			56,513
Unrealized (loss) gain on securities available for sale		(20,150	)		38,842			70,416
Financing assumed in acquisitions		—			1,405,654			303,703
Marketable securities transferred in connection with the legal defeasance of mortgage notes payable		—			109,092			636,293
Mortgage notes payable legally defeased		—			104,571			612,270
Operating Partnership units issued in connection with acquisitions		—			62,059			—
Increase in assets and liabilities resulting from the consolidation of investments previously accounted for on the equity method (Beverly Connection in November 2008 and H Street in April 2007) :
Real estate, net		197,600			342,764			—
Restricted cash		2,287			369			—
Other assets		3,393			11,648			—
Notes and mortgages payable		100,000			55,272			—
Accounts payable and accrued expenses		2,069			3,101			—
Deferred credit		—			2,407			—
Deferred tax liabilities		—			112,797			—
Other liabilities		—			71			—

See notes to consolidated financial statements.

65

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Business

Vornado Realty Trust (“Vornado”) is a fully-integrated real estate investment trust (“REIT”) and 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 90.6% of the common limited partnership interest in, the Operating Partnership at December 31, 2008. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.

As of December 31, 2008, we own directly or indirectly:

Office Properties:

(i)       all or portions of 28 office properties aggregating approximately 16.1 million square feet in the New York City metropolitan area (primarily Manhattan);

(ii)      all or portions of 84 office properties aggregating 17.7 million square feet in the Washington, DC / Northern Virginia areas;

(iii)     a 70% controlling interest in 555 California Street, a three-building complex aggregating 1.8 million square feet in San Francisco’s financial district;

Retail Properties:

(iv)     176 retail properties in 21 states, Washington, DC and Puerto Rico aggregating approximately 21.9 million square feet, including 3.7 million square feet owned by tenants on land leased from us;

Merchandise Mart Properties:

(v)      8 properties in 5 states and Washington, DC aggregating approximately 8.9 million square feet of showroom and office space, including the 3.5 million square foot Merchandise Mart in Chicago;

Toys “R” Us, Inc.:

(vi)     a 32.7% interest in Toys “R” Us, Inc. which owns and/or operates 1,561 stores worldwide, including 847 stores in the United States and 714 toy stores internationally;

Other Real Estate Investments:

(vii)    32.5% of the common stock of Alexander’s, Inc. (NYSE: ALX), which has seven properties in the greater New York metropolitan area;

(viii)   the Hotel Pennsylvania in New York City, consisting of a hotel portion containing 1.0 million square feet with 1,700 rooms and a commercial portion containing 400,000 square feet of retail and office space;

(ix)    mezzanine loans to entities that have significant real estate assets; and

(x)      interests in other real estate, including interests in office, industrial and retail properties net leased to major corporations; 6 warehouse/industrial properties in New Jersey containing approximately 1.2 million square feet; and other investments and marketable securities.

66

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Vornado Realty Trust and its majority-owned subsidiary, Vornado Realty L.P. All significant inter-company amounts have been eliminated. We account for unconsolidated partially owned entities on the equity method of accounting. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires us 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 periods. Actual results could differ materially from those estimates.

Impact of Retrospective Application of New Accounting Pronouncements

On January 1, 2009, we adopted (i) FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP 14-1”), (ii) Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (“SFAS 160”), and (iii) FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities (“EITF 03-6-1”). These pronouncements were required to be applied retrospectively; accordingly, the accompanying consolidated financial statements include the effects of the retrospective application of these pronouncements. The tables below summarize the impact of the adoption of these pronouncements on our previously issued consolidated balance sheets and statements of income and adjusts retroactively to the earliest period presented, the income per share amounts for additional common shares outstanding as a result of the stock portion of our common dividends during 2009.

	As of December 31, 2008
($ in thousands)	As Reported			FSP 14-1			SFAS 160			As Adjusted
Balance Sheet:
Assets:
Other assets		692,188			(162	)		—			692,026
Total assets		21,418,210			(162	)		—			21,418,048
Liabilities:
Convertible senior debentures		2,342,914			(121,171	)		—			2,221,743
Exchangeable senior debentures		494,501			(16,245	)		—			478,256
Total liabilities		14,162,834			(137,416	)		—			14,025,418
Redeemable noncontrolling interests		1,590,891			—			(412,913	)		1,177,978
Equity:
Additional capital		5,817,380			208,596			—			6,025,976
Earnings less than distributions		(975,998	)		(71,342	)		—			(1,047,340	)
Noncontrolling interests in consolidated subsidiaries		—			—			412,913			412,913
Total equity		5,664,485			137,254			412,913			6,214,652
Total liabilities, redeemable noncontrolling interests and equity		21,418,210			(162	)		—			21,418,048

	As of December 31, 2007
($ in thousands)	As Reported			FSP 14-1			SFAS 160			As Adjusted
Balance Sheet:
Assets:
Other assets		798,170			(218	)		—			797,952
Total assets		22,478,935			(218	)		—			22,478,717
Liabilities:
Convertible senior debentures		2,360,412			(156,574	)		—			2,203,838
Exchangeable senior debentures		492,857			(20,487	)		—			472,370
Total liabilities		14,986,235			(177,061	)		—			14,809,174
Redeemable noncontrolling interests		2,074,601			—			(416,298	)		1,658,303
Equity:
Additional capital		5,278,717			212,395			—			5,491,112
Earnings less than distributions		(721,625	)		(35,552	)		—			(757,177	)
Noncontrolling interests in consolidated subsidiaries		—			—			416,298			416,298
Total equity		5,418,099			176,843			416,298			6,011,240
Total liabilities, redeemable noncontrolling interests and equity		22,478,935			(218	)		—			22,478,717

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2. Basis of Presentation and Significant Accounting Policies - continued

	For the Year Ended December 31, 2008
($ in thousands)	As Reported		FSP 14-1			SFAS 160		EITF 03-6-1		As Adjusted
Statement of Income:
Interest and debt expense		586,358		39,546			—			625,904
Income from discontinued operations		154,442		—			16,090			170,532
Net income		434,901		(39,546	)		16,090			411,445
Net income attributable to Vornado		395,043		(35,746	)		—			359,297
Net income attributable to common shareholders		337,952		(35,746	)		—			302,206
Income per common share – basic:
Income from continuing operations		1.14		(0.22	)		—		—	0.92
Net income		2.11		(0.22	)		—		—	1.89
Income per common share – diluted:
Income from continuing operations		1.12		(0.22	)		—		—	0.90
Net income		2.06		(0.22	)		—		—	1.84

	For the Year Ended December 31, 2007
($ in thousands)	As Reported		FSP 14-1			SFAS 160		EITF 03-6-1		As Adjusted
Statement of Income:
Interest and debt expense		569,386		30,418			—			599,804
Income from discontinued operations		58,389		—			6,057			64,446
Net income		632,194		(30,418	)		6,057			607,833
Net income attributable to Vornado		568,906		(27,367	)		—			541,539
Net income attributable to common shareholders		511,729		(27,367	)		—			484,362
Income per common share – basic:
Income from continuing operations		2.87		(0.17	)		—		—	2.70
Net income		3.24		(0.17	)		—		—	3.07
Income per common share – diluted:
Income from continuing operations		2.76		(0.17	)		—		—	2.59
Net income		3.12		(0.17	)		—		—	2.95

	For the Year Ended December 31, 2006
($ in thousands)	As Reported		FSP 14-1			SFAS 160			EITF 03-6-1		As Adjusted
Statement of Income:
Interest and debt expense		394,571		5,969			—				400,540
Income from discontinued operations		32,215		—			(12	)			32,203
Net income		639,337		(5,969	)		(12	)			633,356
Net income attributable to Vornado		560,140		(5,358	)		—				554,782
Net income attributable to common shareholders		502,629		(5,358	)		—				497,271
Income per common share – basic:
Income from continuing operations		3.18		(0.04	)		—			—	3.14
Net income		3.40		(0.04	)		—			—	3.36
Income per common share – diluted:
Income from continuing operations		3.01		(0.03	)		—			—	2.98
Net income		3.22		(0.03	)		—			—	3.19

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2. Basis of Presentation and Significant Accounting Policies - continued

Significant Accounting Policies

Real Estate: Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. For redevelopment of existing operating properties, the net book value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete. If the cost of the redeveloped property, including the undepreciated net book value of the property carried forward, exceeds the estimated fair value of redeveloped property, the excess is charged to expense. Depreciation is provided on a straight-line basis over the assets’ estimated useful lives which range from 7 to 40 years. Tenant allowances are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets. Additions to real estate include interest expense capitalized during construction of $63,063,000 and $53,648,000, for the years ended December 31, 2008 and 2007, respectively.

Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below-market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets, and we allocate purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

Our properties, including any related intangible assets, are individually reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over our anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Our impairment analysis is based on our plans for the asset and the market information available to our management at the time the analysis is prepared. If our estimates of the projected future cash flows, our anticipated holding period for properties, or the estimated fair value of properties change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. In the year ended December 31, 2008, we recognized an aggregate of $78,069,000 of non-cash impairment charges on our wholly owned real estate assets related to certain development projects. No impairment charges were recognized in the years ended December 31, 2007 and 2006.

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2. Basis of Presentation and Significant Accounting Policies – continued

Partially Owned Entities:In determining whether we have a controlling interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity in which we will absorb the majority of the entity’s expected losses, if they occur, or receive the majority of the expected residual returns, if they occur, or both. We have concluded that we do not control a partially owned entity, despite an ownership interest of 50% or greater, if the entity is not considered a variable interest entity and the approval of all of the partners/members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of real property, the hiring of a chief executive officer, the commencement, compromise or settlement of any lawsuit, legal proceeding or arbitration or the placement of new or additional financing secured by assets of the venture. This is the case with respect to our 50% interests in Monmouth Mall, MartParc Wells, MartParc Orleans, 478-486 Broadway, 968 Third Avenue, West 57^th Street properties and 825 Seventh Avenue. We account for investments on the equity method when the requirements for consolidation are not met, and we have significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently adjusted for our share of investees’ net income or loss and cash contributions and distributions made during the year. Investments that do not qualify for consolidation or equity method accounting are accounted for on the cost method.

Our investments in partially owned entities are reviewed for impairment, if events or circumstances change indicating that the carrying amount of our investments may not be recoverable. The ultimate realization of our investments in partially owned entities is dependent on a number of factors, including the performance of each investment and market conditions. We will record an impairment charge if we determine that a decline in the value of an investment is other than temporary. In the year ended December 31, 2008, we recognized $203,919,000 of non-cash impairment charges related to investments in partially owned entities, of which $107,882,000 represents our investment in Lexington Realty Trust and the remainder represents our share of certain ventures’ development costs. No impairment charges were recognized in the years ended December 31, 2007 and 2006.

Identified Intangibles: We record acquired intangible assets (including above-market leases, customer relationships and in-place leases) and acquired intangible liabilities (including below–market leases) at their estimated fair value separate and apart from goodwill. We amortize identified intangible assets and liabilities that are determined to have finite lives over the period the assets and liabilities are expected to contribute directly or indirectly to the future cash flows of the property or business acquired. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its estimated fair value.

As of December 31, 2008 and 2007, the carrying amounts of identified intangible assets, a component of “other assets” on our consolidated balance sheets, were $525,950,000 and $563,359,000, respectively. In addition, the carrying amounts of identified intangible liabilities, a component of “deferred credit” on our consolidated balance sheets, were $719,822,000 and $814,098,000, respectively.

Mezzanine Loans Receivable: We invest in mezzanine loans to entities which have significant real estate assets. These investments, which are subordinate to the mortgage loans secured by the real property, are generally secured by pledges of the equity interests of the entities owning the underlying real estate. We record these investments at the stated principal amount net of any unamortized discount or premium. We accrete or amortize any discounts or premiums over the life of the related loan receivable utilizing the effective interest method, or straight-line method if the result is not materially different. We evaluate the collectibility of both interest and principal of each of our loans, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to the estimated fair value of the loan or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. In the year ended December 31, 2007, we recognized a $57,000,000 non-cash impairment charge on one of our mezzanine loans. Upon sale of a sub-participation in that loan during 2008, we reversed $10,300,000 of the charge recognized in 2007.

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2. Basis of Presentation and Significant Accounting Policies – continued

Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Cash and cash equivalents do not include cash escrowed under loan agreements and cash restricted in connection with an officer’s deferred compensation payable. The majority of our cash and cash equivalents are held at major commercial banks which may at times exceed the Federal Deposit Insurance Corporation limit. We have not experienced any losses to date on our invested cash.

Allowance for Doubtful Accounts: We periodically evaluate the collectibility of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. We also maintain an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. As of December 31, 2008 and 2007, we had $32,834,000 and $19,151,000, respectively, in allowances for doubtful accounts. In addition, as of December 31, 2008 and 2007, we had $5,773,000 and $3,076,000, respectively, in allowances for receivables arising from the straight-lining of rents.

Marketable Securities: We classify debt and equity securities which we intend to hold for an indefinite period of time as securities available-for-sale; equity securities we intend to buy and sell on a short term basis as trading securities; and mandatorily redeemable preferred stock investments which we intend to hold to maturity as securities held–to–maturity. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses on securities available-for-sale are included as a component of shareholders’ equity and other comprehensive income. Realized gains or losses on the sale of securities are recorded based on the weighted average cost of such securities.

We evaluate our portfolio of marketable securities for impairment as of each reporting period. For each of the securities in our portfolio with unrealized losses, we review the underlying cause of the decline in value and the estimated recovery period, as well as the severity and duration of the decline. In our evaluation, we consider our ability and intent to hold these investments for a reasonable period of time sufficient for us to recover our cost basis. We also evaluate the near-term prospects for each of these investments in relation to the severity and duration of the decline. In the year ended December 31, 2008, we recognized an aggregate of $76,352,000 of non-cash impairment charges related to investments in marketable securities, which is included as a component of “interest and other investment (loss) income, net” on our consolidated statement of income. Our conclusions were based on the severity and duration of the decline in the market value (“fair value” pursuant to SFAS 157) of these securities and our inability to forecast a recovery in the near term. No impairment charges were recognized in the years ended December 31, 2007 and 2006.

At December 31, 2008 and 2007, our marketable equity securities had an aggregate carrying amount of $120,499,000 and $215,134,000, and an aggregate fair value of $118,438,000 and $226,682,000, respectively. Accordingly, net unrealized (losses) gains were ($2,061,000) and $11,548,000 as of December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, our held-to-maturity securities had an aggregate carrying amount of $215,884,000 and $96,310,000, and an aggregate fair value of $164,728,000 and $96,310,000, respectively.

Deferred Charges: Direct financing costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to successful leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis, which approximates the effective interest rate method, in accordance with the terms of the agreements to which they relate.

Fair Value of Financial Instruments: We have estimated the fair value of all financial instruments reflected in the accompanying consolidated balance sheets at amounts which are based upon an interpretation of available market information and valuation methodologies (including discounted cash flow analyses with regard to mezzanine loans and debt). While we chose not to elect the fair value option prescribed by Statement No.159, The Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), for our financial assets and liabilities that had not been previously measured at fair value, the aggregate fair value of our mezzanine loans receivable was less than its aggregate carrying amount by approximately $55,452,000 as of December 31, 2008 and approximated its carrying amount at December 31, 2007. As of December 31, 2008, the estimated fair value of our consolidated debt was less than its carrying amount by approximately $1,040,386,000. As of December 31, 2007, the fair value of our consolidated debt exceeded its carrying amount by approximately $226,833,000. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of our financial instruments.

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2. Basis of Presentation and Significant Accounting Policies – continued

Revenue Recognition: We have the following revenue sources and revenue recognition policies:

• Base Rent — income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances in which we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease.

• Percentage Rent — income arising from retail tenant leases that is contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accordance with Staff Accounting Bulletin No. 104: Revenue Recognition, which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved).

• Hotel Revenue — income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is recognized when rooms are occupied. Food and beverage and banquet revenue is recognized when the services have been rendered.

• Trade Shows Revenue — income arising from the operation of trade shows, including rentals of booths. This revenue is recognized when the trade shows have occurred.

• Expense Reimbursements — revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is accrued in the same periods as the expenses are incurred.

• Management, Leasing and Other Fees – income arising from contractual agreements with third parties or with partially owned entities. This revenue is recognized as the related services are performed under the respective agreements.

Derivative Instruments and Hedging Activities: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Basis of Presentation and Significant Accounting Policies – continued

Income Taxes: We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We distribute to shareholders 100% of taxable income and therefore, no provision for Federal income taxes is required. Dividend distributions for the year ended December 31, 2008 were characterized, for Federal income tax purposes, as 70.81% ordinary income and 29.19% return of capital. Dividend distributions for the year ended December 31, 2007 were characterized, for Federal income tax purposes, as 61.6% ordinary income and 38.4% long-term capital gain income. Dividend distributions for the year ended December 31, 2006 were characterized, for Federal income tax purposes, as 29.0% ordinary income, 14.8% long-term capital gain income and 56.2% return of capital.

We have elected to treat certain consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries pursuant to an amendment to the Internal Revenue Code that became effective January 1, 2001. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to Federal and State income tax at regular corporate tax rates. Our taxable REIT subsidiaries had a combined current income tax liability of approximately $21,357,000 and $15,361,000 for the years ended December 31, 2008 and 2007, respectively, and have immaterial differences between the financial reporting and tax basis of assets and liabilities.

In connection with purchase accounting for H Street, in July 2005 and April 2007 we recorded an aggregate of $222,174,000 of deferred tax liabilities representing the differences between the tax basis and the book basis of the acquired assets and liabilities multiplied by the effective tax rate. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.

The following table reconciles net income attributable to common shareholders to estimated taxable income for the years ended December 31, 2008, 2007 and 2006.

(Amounts in thousands)	2008			2007			2006
Net income attributable to common shareholders	$	302,206		$	484,362		$	497,271
Book to tax differences (unaudited):
Depreciation and amortization		233,426			145,131			118,364
Reversal of deferred tax liability		(202,267	)		—			—
Straight-line rent adjustments		(82,901	)		(70,450	)		(56,690	)
Stock options expense		(71,995	)		(88,752	)		(220,043	)
Derivatives		43,218			131,711			(25,726	)
Earnings of partially owned entities		(50,855	)		12,093			72,534
Net gains on sale of real estate		3,687			(57,386	)		(22,699	)
Compensation deduction for units held in Rabbi Trust		—			—			(171,356	)
Sears Canada dividend		—			—			(72,706	)
Other, net		119,870			64,938			(15,690	)
Estimated taxable income	$	294,389		$	621,647		$	103,259

The net basis of our assets and liabilities for tax reporting purposes is approximately $3.4 billion lower than the amount reported in our consolidated financial statements.

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2. Basis of Presentation and Significant Accounting Policies – continued

Income Per Share: Basic income per share is computed based on weighted average shares outstanding. Diluted income per share considers the effect of all potentially dilutive share equivalents, including outstanding employee stock options, restricted shares, warrants and convertible or redeemable securities.

Stock-Based Compensation: Stock-based compensation consists of awards to certain employees and officers and consists of stock options, restricted stock, restricted Operating Partnership units and out-performance plan awards. The terms of each of these awards are described in Note 11. Stock-Based Compensation. We account for all stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment (“SFAS 123R”).

Stock optionawards

We determine the value of stock option awards, using a binomial valuation model and appropriate market assumptions adjusted to include an estimated forfeiture factor which is based on our past history. Compensation expense for stock option awards is recognized on a straight-line basis over the vesting period, which is generally five years.

Restricted stock and Operating Partnership unitawards

Restricted stock awards are valued using the average of the high and low market price of our common shares on the NYSE on the date of grant, adjusted to include an estimated forfeiture factor which is based on our past history. Compensation expense is recognized on a straight-line basis over the vesting period, which is generally three to five years. Dividends paid on unvested shares are charged to retained earnings. Dividends on shares that are cancelled or terminated prior to vesting are charged to compensation expense in the period they are cancelled or terminated.

Restricted Operating Partnership unit awards are also valued using the average of the high and low market price of our common shares on the NYSE on the date of grant, adjusted to include an estimated forfeiture factor which is based on history. Compensation expense is recognized over the five year vesting period using a graded vesting attribution model as these awards are subject to the satisfaction of a performance condition. Dividends paid on unvested units are charged to “net income attributable to noncontrolling interests” expense on our consolidated statements of operations. Dividends on units that are cancelled or terminated prior to the satisfaction of the performance condition and vesting are charged to compensation expense in the period they are cancelled or terminated.

Out-performance planawards

Out-performance plan awards are valued using a risk-free valuation model and appropriate market assumptions as of the date of grant, adjusted to include an estimated forfeiture factor which is based on our past history. Compensation expense is recognized over five years using a graded vesting attribution model as these awards are subject to the satisfaction of certain market and performance conditions, in addition to vesting.

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2. Basis of Presentation and Significant Accounting Policies – continued

Recently Issued Accounting Literature

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”).SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. SFAS 157 was effective for our financial assets and liabilities on January 1, 2008.  The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain non-financial assets and liabilities until January 1, 2009. This standard did not materially affect how we determine fair value, but resulted in certain additional disclosures. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Financial assets and liabilities measured at fair value in our consolidated financial statements primarily consist of (i) marketable securities, (ii) the assets of our deferred compensation plan (primarily marketable securities and equity investments in limited partnerships), for which there is a corresponding liability on our consolidated balance sheets and (iii) Class A units of the Operating Partnership, held by third-parties. Financial assets and liabilities measured at fair value as of December 31, 2008 are presented in the table below based on their level in the fair value hierarchy.

				Fair Value Hierarchy(1)
(Amounts in thousands)		Total		Level 1	Level 2		Level 3
Marketable securities	$	118,438	$	118,438	$	—	$	—
Deferred compensation plan assets (included in other assets)		69,945		35,769		—		34,176
Interest rate caps (included in other assets)		25		—		25		—
Total Assets	$	188,408	$	154,207	$	25	$	34,176
Class A units (included in redeemable noncontrolling interests)	$	882,740	$	—	$	882,740	$	—
Deferred compensation plan liabilities	$	69,945	$	35,769	$	—	$	34,176

___________________

(1) We chose not to elect the fair value option prescribed by SFAS 159, for our financial assets and liabilities that had not been previously measured at fair value. These financial assets and liabilities include our outstanding debt, accounts receivable, accounts payable and investments in partially owned entities.

The fair value of Level 3 “deferred compensation plan assets” represents equity investments in certain limited partnerships, for which there is a corresponding Level 3 liability to the plan’s participants. The following is a summary of changes in Level 3 deferred compensation plan assets and liabilities, for the year ended December 31, 2008.

(Amounts in thousands)		Beginning Balance		Total Realized/ Unrealized Losses		Purchases, Sales, Other Settlements and Issuances, net			Ending Balance
For the year ended December 31, 2008	$	50,578	$	(15,407	)	$	(995	)	$	34,176

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2. Basis of Presentation and Significant Accounting Policies – continued

In February 2007, the FASB issued SFAS 159, which permits companies to measure many financial instruments and certain other items at fair value.  SFAS 159 was effective on January 1, 2008. We did not elect the fair value option for any of our existing financial instruments on the effective date and have not determined whether we will elect this option for any eligible financial instruments we acquire in the future.

In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R also broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and acquisition related costs will generally be expensed rather than included as part of the basis of the acquisition. SFAS 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for all transactions entered into on or after January 1, 2009. The adoption of this standard on January 1, 2009 could materially impact future financial results to the extent that we acquire significant amounts of real estate, in part because acquisition costs will be expensed as incurred compared to our current practice of capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. As of December 31, 2008, as part of our preparation for the adoption of SFAS 160, which is effective for us on January 1, 2009, we have retroactively adopted the measurement provisions of EITF Topic D-98, Classification and Measurement of Redeemable Securities. Upon adoption, we adjusted the carrying amounts of the Class A units held by third parties, a component of “redeemable noncontrolling interests” on our consolidated balance sheets, by recognizing a $639,447,000 increase to the January 1, 2006 balance of “redeemable noncontrolling interests” and a corresponding decrease in “earnings in excess of (less than) distributions,” which was accounted for as a cumulative effect adjustment on January 1, 2006. Subsequent adjustments to the carrying amounts of the Class A units, to reflect the change in their redemption value at the end of each reporting period, were recorded to “additional capital.” The effects of retrospectively applying SFAS 160, resulted in (i) the reclassification of minority interests in consolidated subsidiaries to noncontrolling interests in consolidated subsidiaries, a component of permanent equity on our consolidated balance sheets, (ii) the reclassification of minority interest expense to net income attributable to noncontrolling interests, on our consolidated statements of income, and (iii) additional disclosures, including a consolidated statement of changes in equity in quarterly reporting periods.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures related to derivative instruments and hedging activities, including disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.

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2. Basis of Presentation and Significant Accounting Policies – continued

On January 1, 2009, we adopted FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP 14-1”), which was required to be applied retrospectively. The adoption of FSP 14-1 affected the accounting for our convertible and exchangeable senior debentures by requiring the initial proceeds from their sale to be allocated between a debt component and an equity component in a manner that results in interest expense on the debt component at our nonconvertible debt borrowing rate on the date of issue. The initial debt components of our $1.4 billion Convertible Senior Debentures, $1 billion Convertible Senior Debentures and $500 million Exchangeable Senior Debentures were $1,241,286,000, $926,361,000 and $457,699,000, respectively, based on the fair value of similar nonconvertible instruments issued at that time. The aggregate initial debt discount of $216,655,000 after original issuance costs allocated to the equity component was recorded in “additional capital” in our consolidated statements of changes in equity. We are amortizing the discount using the effective interest method over the period the debt is expected to remain outstanding (i.e., the earliest date the holders may require us to repurchase the debentures), as additional interest expense. Accordingly, interest expense for the years ended December 31, 2008, 2007 and 2006 has been adjusted to include $39,546,000, 30,418,000 and $5,969,000 of amortization in the aggregate, or $35,746,000, $27,367,000 and $5,358,000, net of amounts attributable to noncontrolling interests. Amortization for periods prior to December 31, 2005 (not presented herein) aggregating $2,724,000 have been reflected as a cumulative effect of change in accounting principle in “earnings in excess (less than) distributions” on our consolidated statements of changes in equity. Below is a summary of the financial statement effects of implementing FSP 14-1 and related disclosures.

		$1.4 Billion Convertible Senior Debentures				$1 Billion Convertible Senior Debentures				$500 Million Exchangeable Senior Debentures
(Amounts in thousands, except per share amounts)		December 31,				December 31,				December 31,
Balance Sheet:		2008		2007		2008		2007		2008		2007
Principal amount of debt component	$	1,382,700	$	1,400,000	$	989,800	$	1,000,000	$	499,982	$	499,982
Unamortized discount		(106,415	)	(137,295	)	(44,342	)	(58,867	)	(21,726	)	(27,612	)
Carrying amount of debt component	$	1,276,285	$	1,262,705	$	945,458	$	941,133	$	478,256	$	472,370
Carrying amount of equity component	$	130,714	$	130,714	$	53,640	$	53,640	$	32,301	$	32,301
Effective interest rate		5.45	%	5.45	%	5.32	%	5.32	%	5.32	%	5.32	%
Maturity date (period through which discount is being amortized)		4/1/12				11/15/11				4/15/12
Conversion price per share, as adjusted	$	162.46			$	153.45			$	89.94
Number of shares on which the aggregate consideration to be delivered upon conversion is determined		—	(1)			—	(1)			5,570

__________________

(1) In accordance with FSP 14-1, we are required to disclose the conversion price and the number of shares on which the aggregate consideration to be delivered upon conversion is determined (principal plus excess value.) Our convertible senior debentures require the entire principal amount to be settled in cash, and at our option, any excess value above the principal amount may be settled in cash or common shares. Based on the December 31, 2008 closing share price of our common shares and the conversion prices in the table above, there was no excess value; accordingly, no common shares would be issued if these securities were settled on this date. The number of common shares on which the aggregate consideration to be delivered upon conversion is 8,511 and 6,450 common shares, respectively.

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(UNAUDITED)

2. Basis of Presentation and Significant Accounting Policies – continued

(Amounts in thousands)		Year Ended December 31,
Income Statement:		2008		2007		2006
$1.4 Billion Convertible Senior Debentures:
Coupon interest	$	39,853	$	30,368	$	—
Discount amortization – original issue		5,352		3,963		—
Discount amortization – FSP 14-1 implementation		24,099		17,456		—
	$	69,304	$	51,787	$	—
$1 Billion Convertible Senior Debentures:
Coupon interest	$	36,216	$	36,049	$	4,229
Discount amortization – original issue		3,860		3,711		404
Discount amortization – FSP 14-1 implementation		10,155		9,819		838
	$	50,231	$	49,579	$	5,471
$500 Million Exchangeable Senior Debentures:
Coupon interest	$	19,374	$	19,379	$	19,375
Discount amortization – original issue		1,399		1,341		1,286
Discount amortization – FSP 14-1 implementation		4,488		4,238		4,010
	$	25,261	$	24,958	$	24,671

In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance Contracts (“SFAS 163”). SFAS 163 was issued to decrease inconsistencies within Statement No. 60, Accounting and Reporting by Insurance Enterprises, and clarify how it applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition of premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.

In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 is effective on January 1, 2009. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Investments Granted in Share-Based Payment Transactions are Participating Securities (“FSP 03-6-1”). FSP 03-6-1 requires companies to treat unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents as “participating securities” and include such securities in the computation of earnings per share pursuant to the two-class method as described in SFAS 128. FSP 03-6-1 became effective on January 1, 2009 and required all prior period earnings per share data presented, to be adjusted retroactively. The adoption of FSP 03-6-1 on January 1, 2009 did not have a material effect on our computation of income per share.

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3. Acquisitions and Investments

There were no material real estate acquisitions or investments during 2008. We completed approximately $4,045,400,000 of real estate acquisitions and investments in 2007. We record the assets (primarily land, building, in-place and above market leases) and liabilities (primarily mortgage debt and below market leases) acquired in real estate acquisitions at their estimated fair values. Below are the details of our 2007 acquisitions.

New York Office:

100 West 33^rd Street, New York City / Manhattan Mall

On January 10, 2007, we acquired the 100 West 33^rd Street, New York City / Manhattan Mall for approximately $689,000,000 in cash. This mixed-use property is located on the entire Sixth Avenue block-front between 32^nd and 33^rd Streets in Manhattan and contains approximately 1,000,000 square feet, including 845,000 square feet of office space and 164,000 square feet of retail space. Included as part of the acquisition were 250,000 square feet of additional air rights. The property is adjacent to our Hotel Pennsylvania. At closing, we completed a $232,000,000 financing secured by the property, which bears interest at LIBOR plus 0.55% and matures in two years with three one-year extension options. The operations of the office component of the property are included in the New York Office segment and the operations of the retail component are included in the Retail segment. We consolidate the accounts of this property into our consolidated financial statements from the date of acquisition.

1290 Avenue of the Americas and 555 California Street

On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas, a 2,000,000 square foot Manhattan office building located on the block-front between 51^st and 52^nd Street on Avenue of the Americas, and the three-building 555 California Street complex (“555 California Street”) containing 1,800,000 square feet, known as the Bank of America Center, located at California and Montgomery Streets in San Francisco’s financial district. The purchase price for our 70% interest in the real estate was approximately $1.8 billion, consisting of $1.0 billion of cash and $797,000,000 of existing debt. Our share of the debt was comprised of $308,000,000 secured by 1290 Avenue of the Americas and $489,000,000 secured by 555 California Street. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump. The operations of 1290 Avenue of the Americas are included in the New York Office segment and the operations of 555 California Street are included in the Other segment. We consolidate the accounts of these properties into our consolidated financial statements from the date of acquisition.

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3. Acquisitions and Investments - continued

Washington, DC Office:

H Street Building Corporation (“H Street”)

In July 2005, we acquired H Street, which owns a 50% interest in real estate assets located in Pentagon City, Virginia and Washington, DC. On April 30, 2007, we acquired the corporations that own the remaining 50% interest in these assets for approximately $383,000,000, consisting of $322,000,000 in cash and $61,000,000 of existing mortgages. These assets include twin office buildings located in Washington, DC, containing 577,000 square feet, and assets located in Pentagon City, Virginia, comprising 34 acres of land leased to three residential and retail operators, a 1,680 unit high-rise apartment complex and 10 acres of vacant land. Beginning on April 30, 2007, we consolidated the accounts of these entities into our consolidated financial statements and no longer account for them on the equity method.

Further, we agreed to sell approximately 19.6 of the 34 acres of land to one of the existing ground lessees in two closings over a two-year period for approximately $220,000,000. On May 11, 2007, we closed on the sale of 11 of the 19.6 acres for $104,000,000 and received $5,000,000 in cash and a $99,000,000 short-term note. On September 28, 2007, the buyer pre-paid the note in cash and we recognized a net gain on sale of $4,803,000.

BNA Complex

On August 9, 2007, we acquired a three building complex from The Bureau of National Affairs, Inc. (“BNA”) for $111,000,000 in cash. The complex contains approximately 300,000 square feet and is located in Washington’s West End between Georgetown and the Central Business District. We plan to convert two of these buildings into rental apartments. We consolidate the accounts of these properties into our consolidated financial statements from the date of acquisition.

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3. Acquisitions and Investments – continued

Retail:

Bruckner Plaza, Bronx, New York

On January 11, 2007, we acquired the Bruckner Plaza shopping center, containing 386,000 square feet, for $165,000,000 in cash. Also included as part of the acquisition was an adjacent parcel which is ground leased to a third party. The property is located on Bruckner Boulevard in the Bronx, New York. We consolidated the accounts of this property into our consolidated financial statements from the date of acquisition.

Shopping Center Portfolio Acquisition

On June 26, 2007, we entered into an agreement to acquire a portfolio of 15 shopping centers aggregating approximately 1.9 million square feet for an aggregate purchase price of $351,000,000. The properties are located primarily in Northern New Jersey and Long Island, New York. We have completed the acquisition of nine of these properties for an aggregate purchase price of $250,478,000, consisting of $109,279,000 in cash, $49,599,000 in Vornado Realty L.P. Series G-1 through G-4 convertible preferred units, $12,460,000 of Vornado Realty L.P. Class A units and $79,140,000 of existing mortgage debt. In December 2007, we determined not to complete the acquisition of the remaining six properties and expensed $2,700,000 which is included as a component of “impairment losses on development projects and costs of acquisitions not consummated” on our consolidated statement of income for the year ended December 31, 2007.

Other:

India Real Estate Ventures

In August 2008, we entered into a joint venture with Reliance Industries Limited (“Reliance”) (BSE: RIL), under which each partner has an equal ownership interest, to acquire, develop, and operate retail shopping centers across key cities in India. We are also a partner in four other joint ventures established to develop real estate in India’s major cities. During the year ended December 31, 2008, we funded an aggregate of $50,387,000 in cash to our India ventures, including $7,500,000 to the Reliance venture and $34,077,000 to the India Property Fund L.P. (“IPF”). As of December 31, 2008, our aggregate investment in all of these ventures was $89,295,000 and our remaining capital commitment is approximately $192,000,000. At December 31, 2008 and 2007, our ownership interest in IPF was 36.5% and 50.6%, respectively. Based on the reduction of our ownership interest in 2008, we no longer consolidate the accounts of IPF into our consolidated financial statements and beginning on January 1, 2008 we account for IPF under the equity method.

Filene’s, Boston, Massachusetts

On January 26, 2007, a joint venture in which we have a 50% interest, acquired the Filene’s property located in the Downtown Crossing district of Boston, Massachusetts for approximately $100,000,000 in cash, of which our share was $50,000,000. We account for our investment in the joint venture on the equity method. In the fourth quarter of 2008, the venture deferred the development of this project and accordingly, we wrote-off $37,000,000 for our 50% share of development costs, which is included as a component of “(loss) income from partially owned entities” on our consolidated statement of income.

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4. Discontinued Operations

In accordance with the provisions of SFAS 144, Accounting for the Impairment and Disposal of Long-Lived Assets, we have reclassified the revenues and expenses of properties and businesses sold or to be sold to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all periods presented in the accompanying consolidated financial statements.

The net gains resulting from the disposition of the properties below are included in “income from discontinued operations” on our consolidated statements of income.

424 Sixth Avenue

On March 13, 2006, we sold 424 Sixth Avenue, a 10,000 square foot retail property located in New York City, for $22,000,000, which resulted in a net gain of $9,218,000.

33 North Dearborn Street

On March 14, 2006, we sold 33 North Dearborn Street, a 336,000 square foot office building located in Chicago, Illinois, for $46,000,000, which resulted in a net gain of $4,835,000. All of the proceeds from the sale have been reinvested in tax-free “like-kind” exchange investments in accordance with Section 1031.

1919 South Eads Street

On June 22, 2006, we sold 1919 South Eads Street, a 96,000 square foot office building located in Arlington, Virginia, for $38,400,000, which resulted in a net gain of $17,609,000. All of the proceeds from the sale have been reinvested in tax-free “like-kind” exchange investments in accordance with Section 1031.

Vineland, New Jersey Shopping Center Property

On July 16, 2007, we sold our Vineland, New Jersey shopping center property for $2,774,000 in cash, which resulted in a net gain of $1,708,000.

Crystal Mall Two

On August 9, 2007, we sold Crystal Mall Two, a 277,000 square foot office building located at 1801 South Bell Street in Crystal City for $103,600,000, which resulted in a net gain of $19,893,000. All of the proceeds from the sale have been reinvested in tax-free “like-kind” exchange investments in accordance with Section 1031.

Arlington Plaza

On October 17, 2007, we sold Arlington Plaza, a 188,000 square foot office building located in Arlington, Virginia for $71,500,000, resulting in a net gain of $33,900,000.

Americold Realty Trust (“Americold”)

On March 31, 2008, we sold our 47.6% interest in Americold, our Temperature Controlled Logistics segment for $220,000,000 in cash, which resulted in a net gain of $112,690,000.

Tysons Dulles Plaza

On June 6, 2008, we sold our Tysons Dulles Plaza office building complex for $152,800,000 in cash, which resulted in a net gain of $56,831,000.

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4. Discontinued Operations – continued

During the first quarter of 2009, we reclassified two retail properties out of “assests related to discontinued operations” as they no longer met such criteria.

The following table sets forth the assets (primarily the net book value of real estate) related to discontinued operations.

(Amounts in thousands)	December 31,
	2008		2007
H Street – 8.6 acres of land subject to ground leases (see page 80)	$	108,292	$	108,470
Americold		—		1,424,770
Tysons Dulles Plaza		—		95,048
Retail Properties		—		1,794
	$	108,292	$	1,630,082

The following table sets forth the liabilities (primarily mortgage debt) related to discontinued operations as of December 31, 2008 and 2007.

(Amounts in thousands)	December 31,
	2008		2007
Americold	$	750	$	1,332,627
Tysons Dulles Plaza		—		3
	$	750	$	1,332,630

The following table sets forth the combined results of discontinued operations for the years ended December 31, 2008, 2007 and 2006.

(Amounts in thousands)	For the Year Ended December 31,
	2008		2007			2006
Total revenues	$	222,361	$	865,584		$	813,665
Total expenses		222,042		866,119			815,231
Net income (loss)		319		(535	)		(1,566	)
Net gains on sale of real estate		170,213		64,981			33,769
Income from discontinued operations	$	170,532	$	64,446		$	32,203

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5. Derivative Instruments and Related Marketable Securities

Investment in McDonald’s Corporation (“McDonalds”) (NYSE: MCD)

We owned an economic interest in 14,565,500 McDonalds’ common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on McDonalds’ common shares. These call and put options had an initial weighted-average strike price of $32.66 per share, or an aggregate of $475,692,000 and provided for net cash settlement. Under these agreements, the strike price for each pair of options increased at an annual rate of LIBOR plus 45 basis points and was decreased for dividends received. The options provided us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate purchase price at an annual rate of LIBOR plus 45 basis points. Because these options were derivatives and did not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period were recognized as “interest and other investment income, net” on our consolidated statements of income. During 2006, we sold 2,119,500 of these shares at a weighted average price of $35.49 per share, and acquired an additional 1,250,000 option shares at a weighted average price of $33.08 per share. During 2007, we settled the 13,695,500 remaining option shares and received an aggregate of $260,719,000 in cash. We recognized net gains of $108,821,000 and $138,815,000 in the years ended December 31, 2007 and 2006, respectively, representing income from the mark-to-market of these shares during the period of our ownership through their settlement, net of related LIBOR charges.

In addition to the above, in October 2007, we sold 858,000 McDonald’s common shares for aggregate proceeds of $48,434,000, or $56.45 per share, and recognized a net gain of $23,090,000, representing accumulated appreciation during the period of our ownership. The shares were acquired in 2005 at a weighted average price of $29.54 per share, and were classified as “available-for-sale” marketable equity securities on our consolidated balance sheet.

The aggregate net gain from inception of our investments in McDonalds in 2005 through final settlement in October 2007 was $289,414,000.

Investment in Sears, Roebuck and Co. (“Sears”)

We owned an economic interest in 7,916,900 Sears’ common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on Sears’ common shares. These call and put options had an initial weighted-average strike price of $39.82 per share, or an aggregate of $315,250,000. Under these agreements, the strike price for each pair of options increased at an annual rate of LIBOR plus 45 basis points and was decreased for dividends received. The options provided us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate strike price at an annual rate of LIBOR plus 45 basis points. Because these options were derivatives and did not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period were recognized as “interest and other investment income, net” on our consolidated statements of income. On March 30, 2005, as a result of the merger between Sears and Kmart and pursuant to the terms of the contract, our derivative position representing 7,916,900 Sears common shares became a derivative position representing 2,491,819 common shares of Sears Holdings, Inc. (“Sears Holdings”) (Nasdaq: SHLD) valued at $323,936,000 based on the then closing share price of $130.00 and $146,663,000 of cash. During 2005 we sold 402,660 of the option shares at a weighted average price of $124.44 per share. During 2006, we settled the remaining 2,089,159 option shares at a weighted average price of $125.43 per share, resulting in a net gain of $18,611,000. The aggregate net gain realized from inception of this investment in 2004 through settlement was $142,877,000.

Investment in Sears Canada, Inc. (“Sears Canada”)

On April 3, 2006, we tendered the 7,500,000 Sears Canada shares we owned to Sears Holdings at the increased tender price of Cdn. $18.00 per share (the equivalent at that time of US $15.68 per share), which resulted in a net gain of $55,438,000, the difference between the tender price, and our carrying amount of $8.29 per share. Together with income recognized in the fourth quarter of 2005 that resulted from a Sears Canada special dividend, the aggregate net gain from inception in 2005 on our $143,737,000 investment was $78,323,000.

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5. Derivative Instruments and Related Marketable Securities - continued

GMH Communities L.P. Stock Purchase Warrants

We owned warrants to acquire GMH Communities L.P. (“GMH”) common equity. The warrants entitled us to acquire (i) 6,666,667 GMH limited partnership units at an exercise price of $7.50 per unit and (ii) 5,496,724 GMH limited partnership units at an exercise price of $8.22 per unit. The warrants were accounted for as derivative instruments that did not qualify for hedge accounting treatment. Accordingly, the gains or losses resulting form the mark-to-market of the warrants at the end of each reporting period were recognized as “interest and other investment income, net” on our consolidated statements of income.

On November 3, 2004, we exercised our first tranche of warrants to acquire 6,666,667 limited partnership units at a price of $7.50 per unit, or an aggregate of $50,000,000. On May 2, 2006, the date our remaining GMH warrants were to expire, we received 1,817,247 GMH Communities Trust (NYSE: GCT) (“GCT”) common shares through an automatic cashless exercise, which resulted in the recognition of a net loss of $16,370,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price of $15.51 on December 31,2005.

6. Investments in Partially Owned Entities

Toys “R” Us (“Toys”)

As of December 31, 2008, we own 32.7% of Toys. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income. Because Toys’ fiscal year ends on the Saturday nearest January 31, we record our 32.7% share of Toys’ net income or loss on a one-quarter lag basis.

In July 2008, in connection with an audit of Toys’ purchase accounting basis financial statements for its fiscal years 2006 and 2007, it was determined that the purchase accounting basis income tax expense was understated. Our share of this non-cash charge was $14,900,000, which we recognized as part of our equity in Toys’ net loss in the second quarter of 2008. This non-cash charge had no effect on cash actually paid for income taxes or Toys’ previously issued Recap basis consolidated financial statements.

In 2006, Toys closed 87 Toys “R” Us stores in the United States as a result of its store-closing program. Toys incurred restructuring and other charges aggregating approximately $127,000,000 before tax, which includes $44,000,000 for the cost of liquidating the inventory. Our share of the $127,000,000 charge was $42,000,000, of which $27,300,000 had no income statement effect as a result of purchase accounting and the remaining portion relating to the cost of liquidating inventory of approximately $9,100,000 after-tax, was recognized as an expense as part of our equity in Toys’ net income in 2006.

Below is a summary of Toys’ latest available financial information presented on a purchase accounting basis:

(Amounts in millions)
Balance Sheet:	As of November 1, 2008		As of November 3, 2007
Total Assets	$	12,410	$	12,636
Total Liabilities		11,481		11,645
Total Equity		929		991

	For the Twelve Months Ended
Income Statement:	November 1, 2008			November 3, 2007			October 28, 2006
Total Revenue	$	14,090		$	13,646		$	12,205
Net Loss		(13	)		(65	)		(143	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. Investments in Partially Owned Entities - continued

Alexander’s, Inc. (NYSE: ALX) (“Alexander’s”)

We owned 32.5% and 32.8% of the outstanding common shares of Alexander’s at December 31, 2008 and 2007, respectively. We manage, lease and develop Alexander’s properties pursuant to the agreements described below which expire in March of each year and are automatically renewable. At December 31, 2008 the fair value of our investment in Alexander’s, based on Alexander’s December 31, 2008 closing share price of $254.90, was $421,622,000.

Management and Development Agreements

We receive an annual fee for managing Alexander’s and all of its properties equal to the sum of (i) $3,000,000, (ii) 3% of the gross income from the Kings Plaza Regional Shopping Center, (iii) $0.50 per square foot of the tenant-occupied office and retail space at 731 Lexington Avenue and (iv) $234,000, escalating at 3% per annum, for managing the common area of 731 Lexington Avenue.

In addition, we are entitled to a development fee of 6% of development costs, as defined, with minimum guaranteed payments of $750,000 per annum. During the years ended December 31, 2008, 2007 and 2006, we recognized $4,101,000, $4,482,000 and $725,000, respectively, of development fee income.

Leasing Agreements

We provide Alexander’s with leasing services for a fee of 3% of rent for the first ten years of a lease term, 2% of rent for the eleventh through twentieth year of a lease term and 1% of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by Alexander’s tenants. In the event third-party real estate brokers are used, our fee increases by 1% and we are responsible for the fees to the third-parties. We are also entitled to a commission upon the sale of any of Alexander’s assets equal to 3% of gross proceeds, as defined, for asset sales less than $50,000,000, or 1% of gross proceeds, as defined, for asset sales of $50,000,000 or more. The total of these amounts is payable to us in annual installments in an amount not to exceed $4,000,000 with interest on the unpaid balance at one-year LIBOR plus 1.0% (5.19% at December 31, 2008).

Other Agreements

Building Maintenance Services (“BMS”), our wholly-owned subsidiary, supervises the cleaning, engineering and security services at Alexander’s 731 Lexington Avenue and Kings Plaza properties for an annual fee of the costs for such services plus 6%. During the years ended December 31, 2008, 2007 and 2006, we recognized $2,083,000, $3,016,000 and $2,828,000, respectively, of income under these agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. Investments in Partially Owned Entities - continued

Lexington Realty Trust (“Lexington”) (NYSE: LXP)

On December 31, 2006, Newkirk Realty Trust (NYSE: NKT) was acquired in a merger by Lexington, a real estate investment trust that invests in, owns and manages commercial properties net leased to major corporations throughout the United States. We owned 10,186,991 Newkirk Master Limited Partnership (“Newkirk MLP”) units (representing a 15.8% ownership interest), which was also acquired by Lexington as a subsidiary and was renamed Lexington Master Limited Partnership (“Lexington MLP”). The units in Newkirk MLP, which we accounted for on the equity method, were converted on a 0.80 for 1 basis into limited partnership units of Lexington MLP, which we also account for on the equity method. In addition, upon the merger, Newkirk terminated its advisory agreement with NKT Advisors, in which we had a 20.0% interest, for an aggregate payment of $12,500,000, of which our share was $2,300,000. On December 31, 2006, we recognized a net gain of $10,362,000, as a result of the merger transactions, which is included on a component of “(loss) income from partially owned entities” on our consolidated statement of income.

In connection with the above transactions, we owned 8,149,592 limited partnership units of Lexington MLP which were exchangeable on a one-for-one basis into Lexington common shares, or a 7.7% limited partnership interest. On October 28, 2008, we acquired 8,000,000 Lexington common shares for $5.60 per share, or $44,800,000. The purchase price consisted of $22,400,000 in cash and a $22,400,000 margin loan recourse only to the 8,000,000 shares acquired. In addition, we exchanged our existing limited partnership units in Lexington MLP for 8,149,592 Lexington common shares. As of December 31, 2008, we own 16,149,592 Lexington common shares, or approximately 17.2% of Lexington’s common equity. We account for our investment in Lexington on the equity method and record our pro rata share of Lexington’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.

Based on Lexington’s December 31, 2008 closing share price of $5.00, the market value (“fair value” pursuant to SFAS 157) of our investment in Lexington was $80,748,000, or $100,707,000 below the carrying amount on our consolidated balance sheet. We have concluded that our investment in Lexington is “other-than-temporarily” impaired and recorded a $100,707,000 non-cash impairment loss in the fourth quarter of 2008. Together with impairment changes recorded in the nine months ended September 30, 2008, we recognized an aggregate of $107,882,000 of non-cash charges on our investment in Lexington. Our conclusions were based on the recent deterioration in the capital and financial markets and our inability to forecast a recovery in the near-term. These charges are included as a component of “(loss) income from partially owned entities,” on our consolidated statement of income.

GMH

In June 2008, pursuant to the sale of GMH’s military housing division and the merger of its student housing division with American Campus Communities, Inc. (“ACC”) (NYSE: ACC), we received an aggregate of $105,180,000, consisting of $82,142,000 in cash and 753,126 shares of ACC common stock valued at $23,038,000 based on ACC’s then closing share price of $30.59, in exchange for our entire interest in GMH. We subsequently sold all of the ACC common shares. The above transactions resulted in a net gain of $2,038,000 which is included as a component of “net gains on disposition of wholly owned and partially owned assets other than depreciable real estate” in our consolidated statement of income. The aggregate net income realized from inception of this investment in 2004 through its disposition was $77,000,000.

Real Estate Joint Ventures’ Development Costs

During 2008, we recognized non-cash charges aggregating $96,037,000, for the write-off of our share of certain partially owned entities’ development costs, as these projects were either deferred or abandoned. These charges include $37,000,000 in the fourth quarter of 2008, for our 50% share of costs in connection with the redevelopment of the Filene’s property in Boston, Massachusetts and $23,000,000 in the first quarter of 2008, for our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project. Such charges are included as a component of “(loss) income from partially owned entities,” on our consolidated statement of income.

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6. Investments in Partially Owned Entities – continued

Investments in partially owned entities as of December 31, 2008 and 2007 and income recognized from such investments for the years ended December 31, 2008, 2007 and 2006 are as follows:

Investments:

	Percentage
(Amounts in thousands)	Ownership as of	As of December 31,
	December 31, 2008	2008		2007
Toys	32.7%	$	293,096	$	298,089
Partially owned office buildings (1)	(1)	$	157,468	$	161,411
Lexington (see page 87)	17.2%		80,748		160,868
India real estate ventures	4%-50%		88,858		123,997
Alexander’s	32.5%		137,305		122,797
GMH (sold in June 2008)	—		—		103,260
Beverly Connection (2)	50%		—		91,302
Other equity method investments (3)	(3)		325,775		443,107
		$	790,154	$	1,206,742

____________________________

(1) Includes interests in 330 Madison Avenue (25%), 825 Seventh Avenue (50%), Fairfax Square (20%), Kaempfer equity interests in three office buildings (2.5% to 5.0%), Rosslyn Plaza (46%) and West 57^th Street properties (50%).

(2) As of November 13, 2008, our joint venture partner’s failure to contribute its pro rata share of required capital resulted in our ability under the joint venture agreement to assert unilateral control over major business decisions and accordingly, we began to consolidate our investment pursuant to Accounting Research Bulletin (“ARB”) 51, Consolidated Financial Statements.

(3) Includes interests in Monmouth Mall and redevelopment ventures including Boston Filene’s, Harlem Park and Farley Project.

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6. Investments in Partially Owned Entities – continued

Our Share of Net Income (Loss):	For the Years Ended December 31,
(Amounts in thousands)	2008			2007			2006
Toys:
32.7% share in 2008 and 2007 and 32.9% in 2006: Equity in net loss	$	(5,785	)	$	(20,957	)	$	(56,218	)
Interest and other income		8,165			6,620			8,698
	$	2,380		$	(14,337	)	$	(47,520	)
Alexander’s:
32.5% share in 2008, 32.8% in 2007 and 2006 of:
Equity in net income before reversal (accrual) of stock appreciation rights compensation expense and net gain on sale of condominiums	$	17,484		$	22,624		$	19,120
Reversal (accrual) of stock appreciation rights compensation expense		6,583			14,280			(49,043	)
Net gain on sale of condominiums		—			420			4,580
Equity in net income (loss)		24,067			37,324			(25,343	)
Management and leasing fees		8,503			8,783			10,088
Development fees		4,101			4,482			725
	$	36,671		$	50,589		$	(14,530	)
Lexington (see page 87)	$	(105,630	)(1)	$	2,211		$	34,459	(2)
Beverly Connection (3):
50% share of equity in net loss		(8,706	)(4)		(7,031	)		(8,567	)
Interest and other income		14,450			12,141			10,837
		5,744			5,110			2,270
India Real Estate Ventures:
4% to 50% share of equity in net losses		(3,336	)		—			—
GMH:
13.8% share in 2007 and 13.5% in 2006: Equity in net income (loss)		—			6,463			(1,013	)
H Street non-consolidated entities:
50% share of equity in net income		—			5,923	(5)		11,074	(6)
Other (7)		(92,656	)(8)		12,184			13,565
	$	(195,878	)	$	31,891		$	60,355

_________________________

See notes on the following page.

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6. Investments in Partially Owned Entities – continued

Notes to preceding tabular information (in thousands):

(1) Includes $107,882 for non-cash impairment charges.

(2) Includes (i) a $10,362 net gain recognized as a result of the acquisition of Newkirk by Lexington and (ii) $10,842 for our share of Newkirk MLP’s net gains on sale of real estate.

(3) As of November 13, 2008, our joint venture partner’s failure to contribute its pro rata share of required capital resulted in our ability under the joint venture agreement to assert unilateral control over major business decisions and accordingly, we began to consolidate our investment pursuant to ARB 51.

(4) Includes $4,100 for the reversal of a non-cash charge recorded by the joint venture in prior periods which, pursuant to paragraph 19(n) of Accounting Principles Board Opinion 18, The Equity Method of Accounting For Investments In Common Stock, should have been eliminated in the determination of our share of the earnings of the venture. In addition, in accordance with EITF 99-10, during the quarter ended September 30, 2008 our partner’s capital account was reduced to zero and, accordingly, we recognized $1,528 of additional net loss for the portion that related to our partner’s pro rata share of the venture’s net loss.

(5) Represents our 50% share of equity in net income from January 1, 2007 through April 29, 2007. On April 30, 2007, we acquired the remaining 50% interest of these entities and began to consolidate the accounts into our consolidated financial statements and no longer account for this investment under the equity method.

(6) Prior to the quarter ended June 30, 2006, two 50% owned entities that were contesting our acquisition of H Street impeded our access to their financial information and accordingly, we were unable to record our pro rata share of their earnings. 2006 includes $3,890 for our 50% share of their earnings for the period from July 20, 2005 (date of acquisition) to December 31, 2005.

(7) Includes our equity in net earnings of partially owned entities, including partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Dune Capital LP, Verde Group LLC and other equity method investments.

(8) Includes $96,037 for non-cash charges for the write-off of our share of certain partially owned entities’ development costs.

Condensed Combined Financial Information of Partially Owned Entities

  The following is a summary of combined financial information for all of our partially owned entities, including Toys, Alexander’s, and Lexington, as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006.

(Amounts in millions)	December 31,
Balance Sheet:	2008		2007
Total Assets	$	23,705	$	24,832
Total Liabilities		19,526		20,611
Total Equity		4,179		4,221

	For the Years Ended December 31,
Income Statement:	2008			2007			2006
Total Revenue	$	15,313		$	14,821		$	13,036
Net Loss		(43	)		(144	)		(19	)

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6. Investments in Partially Owned Entities - continued

Below is a summary of the debt of partially owned entities as of December 31, 2008 and 2007, none of which is recourse to us.

	100% of Partially Owned Entities Debt at
(Amounts in thousands)	December 31, 2008		December 31, 2007
Toys (32.7% interest) (as of November 1, 2008 and November 3, 2007, respectively):
$1.3 billion senior credit facility, due 2010, (6.14% at December 31, 2008)	$	1,300,000	$	1,300,000
$2.0 billion credit facility, due 2010, LIBOR plus 1.00% - 3.75% (3.57% at December 31, 2008) ($110,000 reserved for outstanding letters of credit)		367,000		489,000
Mortgage loan, due 2010, LIBOR plus 1.30% (2.50% at December 31, 2008)		800,000		800,000
$804 million secured term loan facility, due 2012, LIBOR plus 4.25% (4.83% at December 31, 2008)		797,000		797,000
Senior U.K. real estate facility, due 2013, with interest at 5.02%		568,000		741,000
7.625% bonds, due 2011 (Face value – $500,000)		486,000		481,000
7.875% senior notes, due 2013 (Face value – $400,000)		377,000		373,000
7.375% senior notes, due 2018 (Face value – $400,000)		335,000		331,000
Japan borrowings, due 2009-2011 (weighted average rate of 1.29% at December 31, 2008)		289,000		243,000
4.51% Spanish real estate facility, due 2013		167,000		193,000
$181 million unsecured term loan facility, due 2013, LIBOR plus 5.00% (5.96% at December 31, 2008)		180,000		180,000
Japan bank loans, due 2011-2014, 1.20%-2.80%		158,000		161,000
6.84% Junior U.K. real estate facility, due 2013		101,000		132,000
4.51% French real estate facility, due 2013		81,000		93,000
8.750% debentures, due 2021 (Face value – $22,000)		21,000		21,000
Multi-currency revolving credit facility, due 2010, LIBOR plus 1.50%-2.00%		—		28,000
Other		73,000		60,000
		6,100,000		6,423,000
Alexander’s (32.5% interest):
731 Lexington Avenue mortgage note payable collateralized by the office space, due in March 2014, with interest at 5.33% (prepayable without penalty after December 2013)		373,637		383,670
731 Lexington Avenue mortgage note payable, collateralized by the retail space, due in July 2015, with interest at 4.93% (prepayable without penalty after March 2015)		320,000		320,000
Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011, with interest at 7.46% (prepayable without penalty after March 2011)		199,537		203,456
Rego Park construction loan payable, due in December 2010, with a one-year extension, LIBOR plus 1.20% (3.08% at December 31, 2008)		181,695		55,786
Rego Park mortgage note payable, due in June 2009, with interest at 7.25% (prepayable without penalty after March 2009)		78,386		79,285
Paramus mortgage note payable, due in October 2011, with interest at 5.92% (prepayable without penalty)		68,000		68,000
		1,221,255		1,110,197
Lexington (7.7% interest) (as of September 30, 2008 and September 30, 2007, respectively): Mortgage loans collateralized by the partnership’s real estate, due from 2008 to 2037, with a weighted average interest rate of 5.65% at September 30, 2008 (various prepayment terms)		2,486,370		3,320,261
GMH – 13.8% interest in mortgage notes payable		—		995,818

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. Investments in Partially Owned Entities – continued

(Amounts in thousands)	100% of Partially Owned Entities Debt at
Partially owned office buildings:	December 31, 2008		December 31, 2007
Kaempfer Properties (2.5% and 5.0% interests in two partnerships) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2011 to 2031, with a weighted average interest rate of 5.69% at December 31, 2008 (various prepayment terms)	$	143,000	$	144,340
100 Van Ness, San Francisco office complex (9% interest) up to $132 million construction loan payable, due in July 2013, LIBOR plus 2.75% with an interest rate floor of 6.50% and interest rate cap of 7.00%		85,249		—
330 Madison Avenue (25% interest) up to $150,000 mortgage note payable, due in June 2015, LIBOR plus 1.50% with interest at 3.38%		70,000		60,000
Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%		62,815		64,035
Rosslyn Plaza (46% interest) mortgage note payable, due in December 2011, LIBOR plus 1.0% (1.43% at December 31, 2008)		56,680		56,680
West 57th Street (50% interest) mortgage note payable, due in October 2009, with interest at 4.94% (prepayable without penalty after July 2009)		29,000		29,000
825 Seventh Avenue (50% interest) mortgage note payable, due in October 2014, with interest at 8.07% (prepayable without penalty after April 2014)		21,426		21,808
India Real Estate Ventures:
TCG Urban Infrastructure Holdings (25% interest) mortgage notes payable, collateralized by the entity’s real estate, due from 2009 to 2022, with a weighted average interest rate of 13.38% at December 31, 2008 (various prepayment terms)		148,792		136,431
India Property Fund L.P. (36.5% interest) $120 million secured revolving credit facility, due in December 2009, LIBOR plus 2.75% (4.60% at December 31, 2008)		90,500		—
Waterfront associates, LLC (2.5% interest) construction and land loan up to $250 million payable, due in September 2011 with a six month extension option, LIBOR plus 2.00%-3.00% (3.19% at December 31, 2008)		57,600		—
Verde Realty Master Limited Partnership (8.5% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2009 to 2037, with a weighted average interest rate of 6.03% at December 31, 2008 (various prepayment terms)		559,840		487,122
Green Courte Real Estate Partners, LLC (8.3% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2009 to 2015, with a weighted average interest rate of 4.96% at December 31, 2008 (various prepayment terms)		307,098		225,704
Monmouth Mall (50% interest) mortgage note payable, due in September 2015, with interest at 5.44% (prepayable without penalty after July 2015)		165,000		165,000
San Jose, California Ground-up Development (45% interest) construction loan, due in March 2009, with a one-year extension option; $114 million fixed at 4.62%, balance at LIBOR plus 1.75% (4.49% at December 31, 2008)		132,128		101,045
Wells/Kinzie Garage (50% interest) mortgage note payable, due in December 2013, with interest at 6.87%		14,800		14,422
Orleans Hubbard Garage (50% interest) mortgage note payable, due in December 2013, with interest at 6.87%		10,200		9,045
Other		468,559		452,320

Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $3,196,585,000 and $3,289,873,000 as of December 31, 2008 and 2007, respectively.

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7. Mezzanine Loans Receivable

The following is a summary of our investments in mezzanine loans as of December 31, 2008 and 2007.

(Amounts in thousands)		Interest Rate as of	Carrying Amount as of
Mezzanine Loans Receivable:	Maturity	December 31, 2008	December 31, 2008		December 31, 2007
Equinox (1)	02/13	14.00%	$	85,796	$	73,162
Tharaldson Lodging Companies (2)	04/11	4.68%		76,341		76,219
Riley HoldCo Corp. (3)	02/15	10.00%		74,381		74,268
280 Park Avenue (4)	06/16	10.25%		73,750		73,750
MPH, net of valuation allowance of $46,700 and $57,000, respectively (5)	—	—		19,300		9,000
Other	04/09-07/17	4.75 – 12.0%		142,971		185,940
			$	472,539	$	492,339

_____________________

(1) On February 10, 2006, we acquired a 50% interest in a $115,000 note issued by Related Equinox Holdings II, LLC (the “Note”), for $57,500 in cash. The Note is secured by a pledge of the stock of Related Equinox Holdings II. Related Equinox Holdings II owns Equinox Holdings Inc., which in turn owns all of the assets and obligations, including the fitness clubs, operated under the Equinox brand. The Note is junior to a $50,000 revolving loan and $280,000 of senior unsecured obligations. The Note is senior to $125,000 of equity contributed by third parties for their acquisition of the Equinox fitness club business. The Note matures on February 15, 2013 and bears paid-in-kind interest at 14% through February 15, 2011, increasing by 3% per annum through maturity. The Note is prepayable at any time after February 15, 2009.

(2) On June 16, 2006, we acquired an 81.5% interest in a $95,968 mezzanine loan to Tharaldson Lodging Companies for $78,166 in cash. The loan is secured by a 107 hotel property portfolio with brands including Fairfield Inn, Residence Inn, Comfort Inn and Courtyard by Marriott. The loan is subordinate to $671,778 of debt and is senior to approximately $192,000 of other debt and equity. The loan matures in April 2009, with two one-year extensions, provides for a 0.75% placement fee and bears interest at LIBOR plus 4.25% (4.68% at December 31, 2008).

(3) In 2005, we made a $135,000 loan to Riley HoldCo Corp., consisting of a $60,000 mezzanine loan and a $75,000 fixed rate unsecured loan. During 2006, we were repaid the $60,000 balance of the mezzanine loan with a pre-payment premium of $972, which was recognized as “interest and other investment income” for the year ended December 31, 2006.

(4) On June 30, 2006, we made a $73,750 mezzanine loan secured by the equity interests in 280 Park Avenue, a 1.2 million square foot office building, located between 48th and 49th Streets in Manhattan. The loan bears interest at 10.25% and matures in June 2016. The loan is subordinate to $1.036 billion of other debt and is senior to approximately $260,000 of equity and interest reserves.

(5) On June 5, 2007, we acquired a 42% interest in two MPH mezzanine loans totaling $158,700 for $66,000 in cash. The loans, which were due on February 8, 2008 and have not been repaid, are subordinate to $2.9 billion of mortgage and other debt and secured by the equity interests in four New York City properties: Worldwide Plaza, 1540 Broadway office condominium, 527 Madison Avenue and Tower 56. At December 31, 2007, we reduced the net carrying amount of the loans to $9,000 by recognizing a $57,000 non-cash charge in our consolidated statement of income. On April 2, 2008, we sold a sub-participation interest in the loans for $19,300 which resulted in the reduction of our valuation allowance from $57,000 to $46,700 and the recognition of $10,300 of non-cash income in our consolidated statement of income.

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8. Identified Intangible Assets

The following summarizes our identified intangible assets (primarily acquired above-market leases) and intangible liabilities (primarily acquired below-market leases) as of December 31, 2008 and December 31, 2007.

(Amounts in thousands)	December 31, 2008			December 31, 2007
Identified intangible assets (included in other assets):
Gross amount	$	784,192		$	726,204
Accumulated amortization		(258,242	)		(162,845	)
Net	$	525,950		$	563,359
Identified intangible liabilities (included in deferred credit):
Gross amount	$	998,179		$	977,455
Accumulated amortization		(278,357	)		(163,357	)
Net	$	719,822		$	814,098

Amortization of acquired below-market leases, net of acquired above-market leases resulted in an increase to rental income of $96,176,000, $83,292,000 and $23,490,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The estimated annual amortization of acquired below-market leases net of acquired above-market leases for each of the five succeeding years is as follows:

(Amounts in thousands)
2009	$	69,110
2010		62,152
2011		59,187
2012		55,470
2013		47,504

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $86,498,000, $45,764,000 and $21,156,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The estimated annual amortization of all other identified intangible assets, including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years is as follows:

(Amounts in thousands)
2009	$	58,973
2010		56,286
2011		53,879
2012		49,296
2013		42,068

We are a tenant under ground leases for certain properties. Amortization of these acquired below-market leases resulted in an increase to rent expense of $2,654,000, $1,565,000 and $320,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The estimated annual amortization of these below market leases for each of the five succeeding years is as follows:

(Amounts in thousands)
2009	$	2,133
2010		2,133
2011		2,133
2012		2,133
2013		2,133

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          9.   Debt

The following is a summary of our debt:

(Amounts in thousands)		Interest Rate at	Balance at
Notes and Mortgages Payable:	Maturity (1)	December 31, 2008	December 31, 2008		December 31, 2007
Fixed Interest:
New York Office:
1290 Avenue of the Americas	01/13	5.97%	$	444,667	$	454,166
350 Park Avenue	01/12	5.48%		430,000		430,000
770 Broadway	03/16	5.65%		353,000		353,000
888 Seventh Avenue	01/16	5.71%		318,554		318,554
Two Penn Plaza	02/11	4.97%		287,386		292,000
909 Third Avenue	04/15	5.64%		214,074		217,266
Eleven Penn Plaza	12/11	5.20%		206,877		210,338
Washington, DC Office:
Skyline Place	02/17	5.74%		678,000		678,000
Warner Building	05/16	6.26%		292,700		292,700
River House Apartment Complex (2)	04/15	5.43%		195,546		46,339
1215 Clark Street, 200 12th Street & 251 18th Street	01/25	7.09%		115,440		117,464
Bowen Building	06/16	6.14%		115,022		115,022
Reston Executive I, II and III	01/13	5.57%		93,000		93,000
1101 17th , 1140 Connecticut, 1730 M and 1150 17th Street	08/10	6.74%		87,721		89,514
1550, 1750 Crystal Drive	11/14	7.08%		83,912		86,026
Universal Buildings	04/14	4.88%		59,728		62,613
2345 Crystal Drive	09/08	6.66%		—		58,656
1235 Clark Street	07/12	6.75%		54,128		54,936
2231 Crystal Drive	08/13	7.08%		50,394		52,293
241 18th Street	10/10	6.82%		46,532		47,445
1750 Pennsylvania Avenue	06/12	7.26%		46,570		47,204
2011 Crystal Drive	10/09	6.88%		38,338		39,135
1225 Clark Street	08/13	7.08%		30,145		31,279
1800, 1851, 1901 South Bell Street	12/11	6.91%		27,801		35,558
Retail:
Cross collateralized mortgages on 42 shopping centers	03/10	7.93%		448,115		455,907
Springfield Mall (including present value of purchase option)	10/12-04/13	5.45%		252,803		256,796
Green Acres Mall (3)	(3)	(3)		—		137,331
Montehiedra Town Center	07/16	6.04%		120,000		120,000
Broadway Mall	07/13	5.40%		94,879		97,050
828-850 Madison Avenue Condominium	06/18	5.29%		80,000		80,000
Las Catalinas Mall	11/13	6.97%		60,766		62,130
Other	05/09-11/34	4.00%-7.33%		159,597		165,299
Merchandise Mart:
Merchandise Mart	12/16	5.57%		550,000		550,000
High Point Complex	08/16	6.34%		220,361		221,258
Boston Design Center	09/15	5.02%		70,740		71,750
Washington Design Center	11/11	6.95%		44,992		45,679
Other:
555 California Street	05/10-09/11	5.97%		720,671		719,568
Industrial Warehouses	10/11	6.95%		25,268		25,656
Total Fixed Interest Notes and Mortgages Payable		5.96%		7,117,727		7,230,932

________________________    
 See notes on page 97.

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9. Debt - continued

(Amounts in thousands)			Interest Rate at	Balance at
Notes and Mortgages Payable:	Maturity (1)	Spread over LIBOR	December 31, 2008	December 31, 2008		December 31, 2007
Variable Interest:
New York Office:
Manhattan Mall	02/12	L+55	1.75%	$	232,000	$	232,000
866 UN Plaza	05/11	L+40	1.84%		44,978		44,978
Washington, DC Office:
2101 L Street (4)	02/13	L+120	1.68%		150,000		—
Courthouse Plaza One and Two	01/15	L+75	2.58%		70,774		74,200
River House Apartments (2)	04/18	(2)	1.78%		64,000		—
Commerce Executive III, IV and V	07/09	L+55	1.98%		50,223		50,223
1999 K Street (5)	12/10	L+130	2.73%		73,747		—
220 20th Street (6)	01/11	L+115	2.03%		40,701		—
West End 25 (7)	02/11	L+130	3.19%		24,620		—
Retail:
Green Acres Mall (3)	02/13	L+140	3.28%		335,000		—
Bergen Town Center (8)	03/13	L+150	3.41%		228,731		—
Beverly Connection (9)	07/09	L+245	3.70%		100,000		—
Other:
220 Central Park South	11/10	L+235 – L+245	3.82%		130,000		128,998
India Property Fund L.P. (10)	(10)	(10)	—		—		82,500
Other	07/09 – 11/11	Various	3.79%		172,886		94,626
Total Variable Interest Notes and Mortgages Payable			2.85%		1,717,660		707,525
Total Notes and Mortgages Payable			5.36%	$	8,835,387	$	7,938,457
Convertible Senior Debentures:
Due 2027 (11)	04/12		2.85%	$	1,276,285	$	1,262,705
Due 2026 (12)	11/11		3.63%		945,458		941,133
Total Convertible Senior Debentures			3.18%	$	2,221,743	$	2,203,838
Senior Unsecured Notes:
Senior unsecured notes due 2009 (13)	08/09		4.50%	$	168,289	$	249,365
Senior unsecured notes due 2010	12/10		4.75%		199,625		199,436
Senior unsecured notes due 2011	02/11		5.60%		249,902		249,855
Total Senior Unsecured Notes			5.03%	$	617,816	$	698,656
Exchangeable Senior Debentures due 2025	04/12		3.88%	$	478,256	$	472,370
Unsecured Revolving Credit Facilities:
$1.595 billion unsecured revolving credit facility	09/12	L+55(15)	1.97%	$	300,000	$	300,000
$.965 billion unsecured revolving credit facility (14) ($44,565 reserved for outstanding letters of credit)	06/11	L+55(15)	2.18%		58,468		105,656
Total Unsecured Revolving Credit Facilities			2.00%	$	358,468	$	405,656

____________________________

See notes on the following page.

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9. Debt - continued

Notes to preceding tabular information:

(Amounts in thousands)

(1) Represents the extended maturity for certain loans in which we have the unilateral right, ability and intent to extend. In the case of our convertible and exchangeable debt, represents the earliest date holders may require us to repurchase the debentures.

(2) On March 12, 2008, we completed a $260,000 refinancing of the River House Apartment Complex. The financing is comprised of a $196,000 interest-only seven-year 5.43% fixed rate mortgage and a $64,000 interest-only ten-year floating rate mortgage at the Freddie Mac Reference Note Rate plus 1.53% (1.78% at December 31, 2008). We retained net proceeds of $205,000 after repaying the existing loan.

(3) On February 11, 2008, we completed a $335,000 refinancing of the Green Acres regional mall. This interest-only loan has a rate of LIBOR plus 1.40% (3.28% at December 31, 2008) and matures in February 2011, with two one-year extension options. We retained net proceeds of $193,000 after repaying the existing loan.

(4) On February 26, 2008, we completed a $150,000 financing of 2101 L Street. The loan bears interest at LIBOR plus 1.20% (1.68% at December 31, 2008) and matures in February 2011 with two one-year extension options. We retained net proceeds of $148,000.

(5) On March 27, 2008, we closed a construction loan providing up to $124,000 to finance the redevelopment of 1999 K Street. The interest-only loan has a rate of LIBOR plus 1.30% (2.73% at December 31, 2008) and matures in December 2010 with two six-month extension options.

(6) On January 18, 2008, we closed a construction loan providing up to $87,000 to finance the residential redevelopment project at 220 20th Street (formally Crystal Plaza Two). The construction loan bears interest at LIBOR plus 1.15% (2.03% at December 31, 2008) and matures in January 2011 with two six-month extension options.

(7) On February 20, 2008, we closed a construction loan providing up to $104,000 to finance the residential redevelopment project at 1229-1231 25th Street NW (“West End 25”). The construction loan bears interest at LIBOR plus 1.30% (3.19% at December 31, 2008) and matures in February 2011 with two six-month extension options.

(8) On March 24, 2008, we closed a construction loan providing up to $290,000 to finance the redevelopment of a portion of the Bergen Town Center. The interest-only loan has a rate of LIBOR plus 1.50% (3.41% at December 31, 2008) and matures in March 2011 with two one-year extension options.

(9) Beginning in November 2008, we consolidate our investment in Beverly Connection and no longer account for it under the equity method.

(10) Beginning in the first quarter of 2008, we account for our investment in the India Property Fund on the equity method and no longer consolidate its accounts into our consolidated financial statements, based on the reduction in our ownership interest from 50.6% as of December 31, 2007 to 36.5%.

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9. Debt - continued

Notes to preceding tabular information:

(Amounts in thousands)

(11) On March 21, 2007, Vornado Realty Trust sold $1.4 billion aggregate principal amount of 2.85% convertible senior debentures due 2027, pursuant to an effective registration statement. The aggregate net proceeds from this offering, after underwriters’ discounts and expenses, were approximately $1.37 billion. The debentures are redeemable at our option beginning in 2012 for the principal amount plus accrued and unpaid interest. Holders of the debentures have the right to require us to repurchase their debentures in 2012, 2017, and 2022 and in certain other limited circumstances. The debentures are convertible, under certain circumstances, for cash and Vornado common shares at an initial conversion rate of 6.1553 common shares per one-thousand dollars of principal amount of debentures. The initial conversion price of $162.46 represented a premium of 30% over the March 21, 2007 closing price for our common shares. The principal amount of debentures will be settled for cash and the amount in excess of the principal defined as the conversion value will be settled in cash or, at our election, Vornado common shares. The net proceeds of the offering were contributed to the Operating Partnership in the form of an inter-company loan and the Operating Partnership fully and unconditionally guaranteed the payment of the debentures. There are no restrictions which limit the Operating Partnership from making distributions to Vornado and Vornado has no independent assets or operations outside of the Operating Partnership.

We are amortizing the underwriters’ discount on a straight-line basis (which approximates the effective interest method) over the period from the date of issuance to the date of earliest redemption of April 1, 2012. Because the conversion option associated with the debentures, when analyzed as a freestanding instrument, meets the criteria to be classified as equity specified by paragraphs 12 to 32 of EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s own Common Stock,” separate accounting for the conversion option under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” is not appropriate.

In November 2008, we purchased $17,300 (aggregate face amounts) of our convertible senior debentures due 2027 for $11,094 in cash.

(12) On November 20, 2006, we sold $1,000,000 aggregate principal amount of 3.625% convertible senior debentures due 2026, pursuant to an effective registration statement. The aggregate net proceeds from this offering, after underwriters’ discounts and expenses, were approximately $980,000. The debentures are convertible, under certain circumstances, for Vornado common shares at a current conversion rate of 6.5168 common shares per $1 of principal amount of debentures. The initial conversion price of $153.45 represented a premium of 30% over the November 14, 2006 closing price for our common shares. The debentures are redeemable at our option beginning in 2011 for the principal amount plus accrued and unpaid interest. Holders of the debentures have the right to require us to repurchase their debentures in 2011, 2016, and 2021 and in the event of a change in control. The net proceeds of the offering were contributed to the Operating Partnership in the form of an inter-company loan and the Operating Partnership fully and unconditionally guaranteed the payment of the debentures. There are no restrictions which limit the Operating Partnership from making distributions to Vornado and Vornado has no independent assets or operations outside of the Operating Partnership.

We are amortizing the underwriters’ discount on a straight-line basis (which approximates the effective interest method) over the period from the date of issuance to the date of earliest redemption of December 1, 2011. Because the conversion option associated with the debentures, when analyzed as a freestanding instrument, meets the criteria to be classified as equity specified by paragraphs 12 to 32 of EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s own Common Stock,” separate accounting for the conversion option under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” is not appropriate.

In November 2008, we purchased $10,200 (aggregate face amounts) of our convertible senior debentures due 2026 for $6,987 in cash.

(13) During 2008, we purchased $81,540 (aggregate face amounts) of our senior unsecured notes due August 15, 2009 for $80,408.

(14) Lehman Brothers is part of the syndicate of banks under this unsecured revolving credit facility with a total commitment of $35 million. On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. All of the banks in the syndicate, except for Lehman Brothers, have funded their pro rata share of a draw we made subsequent to Lehman’s bankruptcy filing.

(15) Requires the payment of an annual facility fee of 15 basis points.

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9. Debt - continued

Our revolving credit facility and senior unsecured notes contain financial covenants which require us to maintain minimum interest coverage ratios and limit our debt to market capitalization ratios. We believe that we have complied with all of our financial covenants as of December 31, 2008.

On May 9, 2006, we executed supplemental indentures with respect to our senior unsecured notes due 2007, 2009 and 2010 (collectively, the “Notes”), pursuant to our consent solicitation statement dated April 18, 2006, as amended. Holders of approximately 96.7% of the aggregate face amount of the Notes consented to the solicitation. The supplemental indentures contain modifications of certain covenants and related defined terms governing the terms of the Notes to make them consistent with corresponding provisions of the covenants and defined terms included in the senior unsecured notes due 2011 issued on February 16, 2006. The supplemental indentures also include a new covenant that provides for an increase in the interest rate of the Notes upon certain decreases in the ratings assigned by rating agencies to the Notes. In connection with the consent solicitation we paid an aggregate fee of $2,241,000 to the consenting note holders, which will be amortized into expense over the remaining term of the Notes. In addition, we incurred advisory and professional fees aggregating $1,415,000, which were expensed in 2006.

The net carrying amount of properties collateralizing the notes and mortgages payable amounted to $11.631 billion at December 31, 2008. As of December 31, 2008, the principal repayments required for the next five years and thereafter are as follows:

(Amounts in thousands)
Year Ending December 31,	Mortgages Payable			Senior Unsecured Debt
2009	$	349,249	$	168,460
2010		977,185		200,000
2011		1,978,996		1,298,268
2012		911,606		2,182,699
2013		1,109,516		—
Thereafter		3,464,965		—

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10. Shareholders’ Equity

Preferred Shares

The following table sets forth the details of our preferred shares of beneficial interest outstanding as of December 31, 2008 and 2007.

(Amounts in thousands, except share and per share amounts)	December 31,
	2008		2007
6.5% Series A: liquidation preference $50.00 per share; authorized 5,750,000 shares; issued and outstanding 54,124 and 80,362 shares	$	2,762	$	4,050
7.0% Series D-10: liquidation preference $25.00 per share; authorized 4,800,000 shares; issued and outstanding 1,600,000 shares		39,982		39,982
7.0% Series E: liquidation preference $25.00 per share; authorized 3,450,000 shares; issued and outstanding 3,000,000 shares		72,248		72,248
6.75% Series F: liquidation preference $25.00 per share; authorized 6,000,000 shares; issued and outstanding 6,000,000 shares		144,720		144,720
6.625% Series G: liquidation preference $25.00 per share; authorized 9,200,000 shares; issued and outstanding 8,000,000 shares		193,135		193,135
6.75% Series H: liquidation preference $25.00 per share; authorized 4,600,000 shares; issued and outstanding 4,500,000 shares		108,559		108,559
6.625% Series I: liquidation preference $25.00 per share; authorized 12,050,000 shares; issued and outstanding 10,800,000 shares		262,401		262,401
	$	823,807	$	825,095

Series A Convertible Preferred Shares of Beneficial Interest

Holders of Series A Preferred Shares of beneficial interest are entitled to receive dividends in an amount equivalent to $3.25 per annum per share. These dividends are cumulative and payable quarterly in arrears. The Series A Preferred Shares are convertible at any time at the option of their respective holders at a conversion rate of 1.38504 common shares per Series A Preferred Share, subject to adjustment in certain circumstances. In addition, upon the satisfaction of certain conditions we, at our option, may redeem the $3.25 Series A Preferred Shares at a current conversion rate of 1.38504 common shares per Series A Preferred Share, subject to adjustment in certain circumstances. At no time will the Series A Preferred Shares be redeemable for cash.

Series D-10 Cumulative Redeemable Preferred Shares of Beneficial Interest

Holders of Series D-10 Preferred Shares of beneficial interest are entitled to receive dividends at an annual rate of 7.0% of the liquidation preference of $25.00 per share, or $1.75 per Series D-10 Preferred Share per annum. These dividends are cumulative and payable quarterly in arrears. The Series D-10 Preferred Shares are not convertible into, or exchangeable for, any other property or any other security of the Company. We, at our option, may redeem the Series D-10 Preferred Shares at a redemption price of $25.00 per share, plus any accrued and unpaid dividends through the date of redemption. The Series D-10 Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

Series E Cumulative Redeemable Preferred Shares of Beneficial Interest

Holders of Series E Preferred Shares of beneficial interest are entitled to receive dividends at an annual rate of 7.0% of the liquidation preference of $25.00 per share, or $1.75 per Series E Preferred Share per annum. These dividends are cumulative and payable quarterly in arrears. The Series E Preferred Shares are not convertible into, or exchangeable for, any other property or any other security of the Company. On or after August 20, 2009 (or sooner under limited circumstances), we, at our option, may redeem Series E Preferred Shares at a redemption price of $25.00 per share, plus any accrued and unpaid dividends through the date of redemption. The Series E Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

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10. Shareholders’ Equity - continued

Series F Cumulative Redeemable Preferred Shares of Beneficial Interest

Holders of Series F Preferred Shares of beneficial interest are entitled to receive dividends at an annual rate of 6.75% of the liquidation preference of $25.00 per share, or $1.6875 per Series F Preferred Share per annum. These dividends are cumulative and payable quarterly in arrears. The Series F Preferred Shares are not convertible into, or exchangeable for, any other property or any other security of the Company. On or after November 17, 2009 (or sooner under limited circumstances), we, at our option, may redeem Series F Preferred Shares at a redemption price of $25.00 per share, plus any accrued and unpaid dividends through the date of redemption. The Series F Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

Series G Cumulative Redeemable Preferred Shares of Beneficial Interest

Holders of Series G Preferred Shares of beneficial interest are entitled to receive dividends at an annual rate of 6.625% of the liquidation preference of $25.00 per share, or $1.656 per Series G Preferred Share per annum. These dividends are cumulative and payable quarterly in arrears. The Series G Preferred Shares are not convertible into, or exchangeable for, any other property or any other security of the Company. On or after December 22, 2009 (or sooner under limited circumstances), we, at our option, may redeem Series G Preferred Shares at a redemption price of $25.00 per share, plus any accrued and unpaid dividends through the date of redemption. The Series G Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

Series H Cumulative Redeemable Preferred Shares of Beneficial Interest

Holders of the Series H Preferred Shares of beneficial interest are entitled to receive dividends at an annual rate of 6.75% of the liquidation preference of $25.00 per share, or $1.6875 per Series H Preferred Share per annum. The dividends are cumulative and payable quarterly in arrears. The Series H Preferred Shares are not convertible into, or exchangeable for, any other property or any other security of the Company. On or after June 17, 2010 (or sooner under limited circumstances), we, at our option, may redeem Series H Preferred Shares at a redemption price of $25.00 per share, plus any accrued and unpaid dividends through the date of redemption. The Series H Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

Series I Cumulative Redeemable Preferred Shares of Beneficial Interest

Holders of the Series I Preferred Shares of beneficial interest are entitled to receive dividends at an annual rate of 6.625% of the liquidation preference of $25.00 per share, or $1.656 per Series I Preferred Share per annum. The dividends are cumulative and payable quarterly in arrears. The Series I Preferred Shares are not convertible into, or exchangeable for, any other property or any other security of the Company. On or after August 31, 2010 (or sooner under limited circumstances), we, at our option, may redeem Series I Preferred Shares at a redemption price of $25.00 per share, plus any accrued and unpaid dividends through the date of redemption. The Series I Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

Accumulated Other Comprehensive Income

Accumulated other comprehensive (loss) income was ($6,899,000) and $29,772,000 as of December 31, 2008 and 2007, respectively, and primarily consists of accumulated unrealized (loss) income from the mark-to-market of marketable equity securities classified as available-for-sale.

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11. Stock-based Compensation

Our Share Option Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, stock appreciation rights and performance shares to certain employees and officers. We have approximately 2,400,000 shares available for future grant under the Plan at December 31, 2008.

In March 2006, our Board of Trustees (the “Board”) approved an amendment to the Plan to permit the Compensation Committee of the Board (the “Compensation Committee”) to grant awards in the form of limited partnership units (“OP Units”) of the Operating Partnership. OP Units can be granted either as free-standing awards or in tandem with other awards under the Plan. OP Units may be converted into the Operating Partnership’s Class A common units and, consequently, become convertible by the holder on a one-for-one basis for our common shares or the cash value of such shares at our election.

We account for all stock-based compensation in accordance with SFAS 123R: Stock based compensation expense for the year ended December 31, 2007 and 2006 consists of stock option awards, restricted stock and Operating Partnership unit awards and out-performance plan awards.

2006 Out-Performance Plan

In March 2006, the Board approved the terms of the Vornado Realty Trust 2006 Out-Performance Plan (the “2006 OPP”), a long-term “pay-for-performance” incentive compensation program. The purpose of the 2006 OPP was to further align the interests of our shareholders and management by encouraging our senior officers and employees to create shareholder value. On April 25, 2006, our Compensation Committee approved 2006 OPP awards to a total of 54 employees and officers of the Company, which aggregated 91% of the total 2006 OPP. The fair value of the awards on the date of grant, as adjusted for estimated forfeitures, was approximately $46,141,000 and is being amortized into expense over the five-year vesting period beginning on the date of grant, using a graded vesting attribution model.

Under the 2006 OPP, award recipients share in a performance pool when our total return to shareholders exceeds a cumulative 30% (for a period of 30 consecutive days), including both share appreciation and dividends paid, from a price per share of $89.17 (the average closing price per common share for the 30 trading days prior to March 15, 2006). The size of the pool is 10% of the amount in excess of the 30% benchmark, subject to a maximum cap of $100,000,000. Each award was designated as a specified percentage of the $100,000,000 maximum cap. Awards were issued in the form of a new class of Operating Partnership units (“OPP Units”) and are subject to achieving the performance threshold, time vesting and other conditions. OPP Units are convertible by the holder into an equivalent number of the Operating Partnership’s Class A units, which are redeemable by the holder for Vornado common shares on a one-for-one basis or the cash value of such shares, at our election. All awards earned vest 33.3% on each of March 15, 2009, 2010 and 2011 subject to continued employment. Once a performance pool has been established, each OPP Unit will receive a distribution equal to the distribution paid on a Class A unit, including an amount payable in OPP Units representing distributions paid on a Class A unit during the performance period. As of January 12, 2007, the maximum performance threshold under the Out-Performance Plan was achieved, concluding the performance period.  

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11. Stock-based Compensation - continued

2008 Out-Performance Plan

On March 31, 2008, our Compensation Committee approved a $75,000,000 out-performance plan (the “2008 OPP”) that requires the achievement of performance objectives against both absolute and relative thresholds. The 2008 OPP establishes a potential performance pool in which 78 members of senior management have the opportunity to share if the total return to our shareholders (the “Total Return”) resulting from both share appreciation and dividends for the four-year period from March 31, 2008 to March 31, 2012 exceeds both an absolute and a relative hurdle. The initial value from which to determine the Total Return is $86.20 per share, a 0.93% premium to the trailing 10-day average closing price on the New York Stock Exchange for our common shares on the date the plan was adopted.

The size of the out-performance pool for the 2008 OPP is 6% of the aggregate “out-performance return” subject to a maximum total award of $75,000,000 (the “Maximum Award”). The “out-performance return” is comprised of (i) 3% of the total dollar value of the Total Return in excess of 10% per annum (the “Absolute Component”), plus (ii) 3% of the total dollar value of the Total Return in excess of the Relative Threshold (the “Relative Component”), based on the SNL Equity REIT Index (the “Index”) over the four-year performance period. In the event that the Relative Component creates a negative award as a result of underperforming the Index, the value of any out-performance award potentially earned under the Absolute Component will be reduced dollar for dollar. In addition, awards potentially earned under the Relative Component will be reduced on a ratable sliding scale to the extent the Total Return is less than 10% per annum and to zero to the extent the Total Return is less than 7% per annum. The size of this out-performance pool, if any, will be determined based on the highest 30-trading day trailing average price of our common shares during the final 150 days of the four-year period. During the four-year performance period, participants are entitled to receive 10% of the common dividends paid on Vornado’s common shares for each OPP unit awarded, regardless of whether the OPP units are ultimately earned.

The 2008 OPP also provides participants an opportunity to earn partial awards during two interim measurement periods (the “Interim Periods”): (a) one for a period consisting of the first two years of the performance period and (b) one for a period consisting of the final two years of the performance period. For each Interim Period, participants may be entitled to share in 40% ($30,000,000) of the maximum $75,000,000 performance pool if the performance thresholds have been met for the applicable Interim Periods on a pro rated basis. The starting share price for the first Interim Period is $86.20 per share. The starting share price for the second Interim Period is equal to the greater of our common share price on March 31, 2010, or the initial starting share price of $86.20 per share less dividends paid during the first two years of the plan. If the maximum award is earned during the first Interim Period, participants lose the potential to earn the second Interim Period award, but not the potential to earn the remainder of the maximum award over the four-year period. The size of any out-performance pool for an Interim Period will be determined based on the highest 30-day trailing average price of our shares during the final 120 days of the applicable Interim Period. Awards earned under the program (including any awards earned for the Interim Periods), will vest 50% on March 31, 2012 and 50% on March 31, 2013. The fair value of the OPP awards on the date of grant, as adjusted for estimated forfeitures, was approximately $21,600,000, and is being amortized into expense over a five-year period beginning on the date of grant through the final vesting period, using a graded vesting attribution model.

For the years ended December 31, 2008, 2007 and 2006, we recognized $16,021,000, $12,734,000 and $8,293,000 of compensation expense, respectively, in connection with our 2006 and 2008 out-performance plans. The remaining unrecognized compensation expense of $29,551,000 will be recognized over a weighted-average period of 2.0 years. Distributions paid on unvested OPP Units are charged to “net income attributable to noncontrolling interests” on our consolidated statements of income and amounted to $2,918,000, $2,694,000 and $0 in 2008, 2007 and 2006, respectively.

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11. Stock-based Compensation - continued

Stock Options

Stock options are granted at an exercise price equal to 100% of the average of the high and low market price of our common shares on the NYSE on the date of grant, generally vest pro-rata over five years and expire 10 years from the date of grant. In 2008, our senior executives were granted options with an exercise price of 17.5% in excess of the average of the high and low market price of our common shares on the NYSE on the date of the grant.

Compensation expense is recognized on a straight-line basis over the vesting period. During the years ended December 31, 2008, 2007, and 2006, we recognized $9,051,000, $4,549,000 and $1,705,000, of compensation expense, respectively, for the portion of stock option awards that vested during each year. Below is a summary of our stock option activity under the Plan for the year ended December 31, 2008.

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2008		9,725,311		$	49.41
Granted		2,806,615			101.23
Exercised		(2,420,749	)		35.56
Cancelled		(120,694	)		106.70
Outstanding at December 31, 2008		9,990,483		$	66.64		5.2	$	123,360,000
Options vested and expected to vest at December 31, 2008		9,970,106		$	66.57		5.2	$	123,360,000
Options exercisable at December 31, 2008		5,595,718		$	39.68		2.4	$	123,356,000

The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions for grants in the years ended December 31, 2008, 2007 and 2006.

	December 31
	2008	2007	2006
Expected volatility	19%	17%	17%
Expected life	7.7 years	5 years	5 years
Risk-free interest rate	3.2%	4.5%	4.4%
Expected dividend yield	4.8%	5.0%	5.0%

The weighted average grant date fair value of options granted during the years ended December 31, 2008, 2007 and 2006 was $6.80, $12.55 and $10.23, respectively. Cash received from option exercises for the years ended December 31, 2008, 2007 and 2006 was $27,587,000, $34,648,000 and $75,665,000, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $79,997,000, $99,656,000 and $244,694,000, respectively.

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11. Stock-based Compensation - continued

Restricted Stock

Restricted stock awards are granted at the average of the high and low market price of our common shares on the NYSE on the date of grant and generally vest over five years. Compensation expense is recognized on a straight-line basis over the vesting period. During the years ended December 31, 2008, 2007 and 2006, we recognized $3,201,000, $4,079,000 and $3,820,000 of compensation expense, respectively, for the portion of restricted stock awards that vested during each year. As of December 31, 2008, there was $3,772,000 of total unrecognized compensation cost related to nonvested shares granted under the Plan. This cost is expected to be recognized over a weighted-average period of 1.74 years. Dividends paid on unvested shares are charged directly to retained earnings and amounted to $308,000, $533,000 and $842,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The total fair value of shares vested during the years ended December 31, 2008, 2007 and 2006 was $4,472,000, $8,907,000 and $6,170,000, respectively.

Below is a summary of restricted stock activity under the Plan for the year ended December 31, 2008.

Non-vested Shares	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at January 1, 2008		159,388		$	70.07
Granted		6,987			85.20
Vested		(75,593	)		57.25
Forfeited		(2,922	)		99.81
Non-vested at December 31, 2008		87,860			81.31

Restricted Operating Partnership Units (“OP Units”)

Restricted OP Units are granted at the average of the high and low market price of our common shares on the NYSE on the date of grant, vest ratably over five years and are subject to a taxable book-up event, as defined. The fair value of these awards on the date of grant, as adjusted for estimated forfeitures, was approximately $7,167,000, $10,696,000, and $3,480,000 for the awards granted in 2008, 2007 and 2006, respectively, and is amortized into expense over the five-year vesting period using a graded vesting attribution model. During the years ended December 31, 2008, 2007 and 2006, we recognized $6,257,000, $5,493,000, and $1,053,000, of compensation expense, respectively, for the portion of Restricted OP Units that vested during last year. As of December 31, 2008, there was $8,150,000 of total remaining unrecognized compensation cost related to non-vested OP units granted under the Plan and the cost is expected to be recognized over a weighted-average period of 1.78 years. Distributions paid on unvested OP Units are charged to “net income attributable to noncontrolling interests” on our consolidated statements of income and amounted to $938,000, $444,000, and $147,000 in 2008, 2007 and 2006, respectively. The total fair value of units vested during the year ended December 31, 2008 was $1,952,000.

Below is a summary of restricted OP unit activity under the Plan for the year ended December 31, 2008.

Non-vested Units	Units		Weighted-Average Grant-Date Fair Value
Non-vested at January 1,2008	155,028		$	83.37
Granted	112,726			63.58
Vested	(32,993	)		82.55
Forfeited	(1,682	)		62.31
Non-vested at December 31, 2008	233,079			74.07

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12. Retirement Plans

Prior to December 2008, we had two defined benefit pension plans, a Vornado Realty Trust Retirement Plan (“Vornado Plan”) and a Merchandise Mart Properties Pension Plan (“Mart Plan”). The benefits under the Vornado Plan and the Mart Plan (collectively, the “Plans”) were frozen in December 1997 and June 1999, respectively. Benefits under the Plans are or were primarily based on years of service and compensation during employment or on years of credited service and established monthly benefits. Funding policy for the Plans was based on contributions at the minimum amounts required by law. In December 2008, we finalized the termination of the Vornado Plan which resulted in a $4,600,000 pension settlement expense which is included as a component of “general and administrative” expense on our consolidated statement of income. In addition, during the first quarter of 2009, we expect to finalize the termination of the Mart Plan, which will result in the recognition of a $2,800,000 pension settlement expense. The financial results of the Mart Plan, using a December 31, measurement date, are provided below.

Obligations and Funded Status

The following table sets forth the Mart Plan’s funded status and amounts recognized in our balance sheets:

	2008			2007
(Amounts in thousands)
Fair value of plan assets at end of year	$	11,850		$	13,113
Benefit obligation at end of year		13,355			12,430
Funded status at end of year	$	(1,505	)	$	683
Amounts recorded in the consolidated balance sheet:
Other assets (prepaid benefit cost)	$	—		$	683
Other liabilities (accrued benefit cost)	$	(1,505	)	$	—

	Pension Benefits
	Year Ended December 31,
	2008		2007		2006
Amounts recognized in accumulated other comprehensive (loss) income consist of:
Net loss	$	2,488	$	274	$	—

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13. Leases

As lessor:

We lease space to tenants under operating leases. Most of the leases provide for the payment of fixed base rentals payable monthly in advance. Office building leases generally require the tenants to reimburse us for operating costs and real estate taxes above their base year costs. Shopping center leases provide for the pass-through to tenants the tenants’ share of real estate taxes, insurance and maintenance. Shopping center leases also provide for the payment by the lessee of additional rent based on a percentage of the tenants’ sales. As of December 31, 2008, future base rental revenue under non-cancelable operating leases, excluding rents for leases with an original term of less than one year and rents resulting from the exercise of renewal options, is as follows:

(Amounts in thousands)
Year Ending December 31:
2009	$	1,792,000
2010		1,732,000
2011		1,576,000
2012		1,417,000
2013		1,300,000
Thereafter		7,216,000

These amounts do not include rentals based on tenants’ sales. These percentage rents approximated $7,322,000, $9,379,000, and $7,593,000, for the years ended December 31, 2008, 2007, and 2006, respectively.

None of our tenants accounted for more than 10% of total revenues for the years ended December 31, 2008, 2007 and 2006.

Former Bradlees Locations

Pursuant to the Master Agreement and Guaranty, dated May 1, 1992, we are due $5,000,000 per annum of additional rent from Stop & Shop which was allocated to certain of Bradlees former locations. On December 31, 2002, prior to the expiration of the leases to which the additional rent was allocated, we reallocated this rent to other former Bradlees leases also guaranteed by Stop & Shop. Stop & Shop is contesting our right to reallocate and claims that we are no longer entitled to the additional rent. At December 31, 2008, we are due an aggregate of $30,400,000. We believe the additional rent provision of the guaranty expires at the earliest in 2012 and we are vigorously contesting Stop & Shop’s position.

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13. Leases - continued

As lessee:

We are a tenant under operating leases for certain properties. These leases have terms that expire during the next thirty years. Future minimum lease payments under operating leases at December 31, 2008, are as follows:

(Amounts in thousands)
Year Ending December 31:
2009	$	26,346
2010		25,066
2011		24,657
2012		24,865
2013		24,872
Thereafter		1,005,370

Rent expense was $29,320,000, $24,503,000, and $18,655,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

We are also a lessee under capital leases for real estate. Lease terms generally range from 5-20 years with renewal or purchase options. Capitalized leases are recorded at the present value of future minimum lease payments or the fair market value of the property. Capitalized leases are depreciated on a straight-line basis over the estimated life of the asset or life of the related lease, whichever is shorter. Amortization expense on capital leases is included in “depreciation and amortization” on our consolidated statements of income. As of December 31, 2008, future minimum lease payments under capital leases are as follows:

(Amounts in thousands)
Year Ending December 31:
2009	$	706
2010		707
2011		706
2012		707
2013		706
Thereafter		18,134
Total minimum obligations		21,666
Interest portion		(14,878	)
Present value of net minimum payments	$	6,788

At December 31, 2008 and 2007, $6,788,000 and $6,820,000, respectively, representing the present value of net minimum payments are included in “Other Liabilities” on our consolidated balance sheets. Property leased under capital leases had a total cost of $6,216,000, and related accumulated depreciation of $1,717,000 and $1,562,000, at December 31, 2008 and 2007, respectively.

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14. Commitments and Contingencies

Insurance

We carry commercial liability and all risk property insurance ((i) fire, (ii) flood, (iii) extended coverage, (iv) “acts of terrorism” as defined in the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”), which expires in December 2014, and (v) rental loss insurance) with respect to our assets. Our New York Office, Washington, DC Office, Retail and Merchandise Mart divisions have $2.0 billion of per occurrence all risk property insurance coverage, including terrorism coverage in effect through September 15, 2009. Our California properties have earthquake insurance with coverage of $150,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, and a $150,000,000 annual aggregate.

In June 2007 we formed Penn Plaza Insurance Company, LLC (“PPIC”), a wholly owned consolidated subsidiary, to act as a re-insurer with respect to a portion of our earthquake insurance coverage and as a direct insurer for coverage for “certified” acts of terrorism and for nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). Coverage for “certified” acts of terrorism is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. Prior to the formation of PPIC, we were uninsured for losses under NBCR coverage. Subsequently, we have $2.0 billion of NBCR coverage under TRIPRA, for which PPIC is responsible for 15% of each NBCR loss and the insurance company deductible of $1,000,000. We are ultimately responsible for any loss borne by PPIC.

We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.

Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), senior unsecured notes, exchangeable senior debentures, convertible senior debentures and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.

Other Contractual Obligations

At December 31, 2008, there were $44,565,000 of outstanding letters of credit under our $0.965 billion revolving credit facility. Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also contain customary conditions precedent to borrowing, including representations and warranties and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.

We are committed to fund additional capital to certain of our partially owned entities aggregating approximately $213,352,000. Of this amount, $80,923,000 is committed to IPF and is pledged as collateral to IPF’s lender.

From time to time, we have disposed of substantial amounts of real estate to third parties for which, as to certain properties, we remain contingently liable for rent payments or mortgage indebtedness that we cannot quantify.

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14. Commitments and Contingencies – continued

Litigation

We are from time to time involved in various other legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters, including the matters referred to above, are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) claiming that we had no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty, because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, froze our right to reallocate which effectively terminated our right to collect the additional rent from Stop & Shop. On March 3, 2003, after we moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint. On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint. We removed the action to the United States District Court for the Southern District of New York. In January 2005 that court remanded the action to the New York Supreme Court. On February 14, 2005, we served an answer in which we asserted a counterclaim seeking a judgment for all the unpaid additional rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the additional rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. On May 17, 2005, we filed a motion for summary judgment. On July 15, 2005, Stop & Shop opposed our motion and filed a cross-motion for summary judgment. On December 13, 2005, the Court issued its decision denying the motions for summary judgment. Both parties appealed the Court’s decision and on December 14, 2006, the Appellate Court division issued a decision affirming the Court’s decision. On January 16, 2007, we filed a motion for the reconsideration of one aspect of the Appellate Court’s decision which was denied on March 13, 2007. We are currently engaged in discovery and anticipate that a trial date will be set for some time in 2009. We intend to vigorously pursue our claims against Stop & Shop. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.

On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas and the 555 California Street complex. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump. In August 2005, Mr. Trump brought a lawsuit in the New York State Supreme Court against, among others, the general partners of the partnerships referred to above.   Mr. Trump’s claims arose out of a dispute over the sale price of and use of proceeds from, the sale of properties located on the former Penn Central rail yards between West 59th and 72nd Streets in Manhattan which were formerly owned by the partnerships. In decisions dated September 14, 2005 and July 24, 2006, the Court denied several of Mr. Trump’s motions and ultimately dismissed all of Mr. Trump’s claims, except for his claim seeking access to books and records. In a decision dated October 1, 2007, the Court determined that Mr. Trump had already received access to the books and records to which he was entitled, with the exception of certain documents which were subsequently delivered to Mr. Trump. Mr. Trump sought re-argument and renewal on, and filed a notice of appeal in connection with, his dismissed claims.  In a decision dated January 6, 2009, the Court denied all of Mr. Trump’s motions. Mr. Trump has filed a notice appealing the 2007 and 2009 decisions. In connection with the acquisition, we agreed to indemnify the sellers for liabilities and expenses arising out of Mr. Trump’s claim that the general partners of the partnerships we acquired did not sell the rail yards at a fair price or could have sold the rail yards for a greater price and any other claims asserted in the legal action; provided however, that if Mr. Trump prevails on certain claims involving partnership matters, other than claims relating to sale price, the sellers will be required to reimburse us for certain costs related to those claims. We believe that the claims relating to the sale price are without merit. All other allegations are not asserted as a basis for damages and regardless of merit, and in our opinion, after consultation with legal counsel, will not have a material effect on our financial condition, results of operations or cash flows.

In July 2005, we acquired H Street Building Corporation (“H Street”) which has a subsidiary that owns, among other things, a 50% tenancy in common interest in land located in Arlington County, Virginia, known as "Pentagon Row," leased to two tenants. In April 2007, H-Street acquired the remaining 50% interest in that fee. In April 2007, we received letters from those tenants, Street Retail, Inc. and Post Apartment Homes, L.P., claiming they had a right of first offer triggered by each of those transactions. On September 25, 2008, both tenants filed suit against us and the former owners. The claim alleges the right to purchase the fee interest, damages in excess of $75,000,000 and punitive damages. We believe this claim is without merit and in our opinion, after consultation with legal counsel, will not have a material effect on our financial condition, results of operations or cash flows.

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15. Related Party Transactions

Loan and Compensation Agreements

Pursuant to our annual compensation review in February 2002 with Joseph Macnow, our Chief Financial Officer, the Compensation Committee approved a $2,000,000 loan to Mr. Macnow, which bore interest at the applicable federal rate of 4.65% per annum and was scheduled to mature in June 2007. The loan was funded on July 23, 2002 and was collateralized by assets with a value of not less than two times the loan amount. On March 26, 2007, Mr. Macnow repaid to us his $2,000,000 outstanding loan.

Effective as of April 19, 2007, we entered into a new employment agreement with Mitchell Schear, the President of our Washington, DC Office Division. This agreement, which replaced his prior agreement, was approved by the Compensation Committee of our Board of Trustees and provides for a term of five years and is automatically renewable for one-year terms thereafter. The agreement also provides for a minimum salary of $1,000,000 per year and bonuses and other customary benefits. Pursuant to the terms of the agreement, on April 19, 2007, the Compensation Committee granted options to Mr. Schear to acquire 200,000 of our common shares at an exercise price of $119.94 per share. These options vest ratably over three years beginning in 2010 and accelerate on a change of control or if we terminate his employment without cause or by him for breach by us. The agreement also provides that if we terminate Mr. Schear’s employment without cause or by him for breach by us, he will receive a lump-sum payment equal to one year’s salary and bonus, up to a maximum of $2,000,000.

Transactions with Affiliates and Officers and Trustees of the Company

Alexander’s

We own 32.5% of Alexander’s. Steven Roth, the Chairman of our Board and Chief Executive Officer, and Michael D. Fascitelli, our President, are officers and directors of Alexander’s. We provide various services to Alexander’s in accordance with management, development and leasing agreements. These agreements are described in Note 6 - Investments in Partially Owned Entities to our consolidated financial statements in this Annual Report on Form 10-K.

On September 9, 2008, Alexander’s Board of Directors declared a special dividend of $7.00 per share, payable on October 30, 2008, to shareholders of record on October 14, 2008. The dividend was attributable to the liquidation of the wholly owned 731 Lexington Avenue taxable REIT subsidiary into Alexander’s. Accordingly, on October 30, we received $11,578,000, which was accounted for as a reduction of our investment in Alexander’s.

On September 15, 2008 and October 14, 2008, Steven Roth, the Chairman of our Board of Directors and Chief Executive Officer, who holds the same positions in Alexander’s, exercised an aggregate of 200,000 of his SARs, which were scheduled to expire on March 4, 2009, and received gross proceeds of $62,809,000.

On March 13, 2007, Michael Fascitelli, our President, who also holds the same position in Alexander’s, exercised 350,000 of his SARs, which were scheduled to expire on March 14, 2007, and he received gross proceeds of $50,465,000.

Interstate Properties (“Interstate”)

Interstate is a general partnership in which Steven Roth, the Chairman of our Board and Chief Executive Officer, is the managing general partner. David Mandelbaum and Russell B. Wight, Jr., Trustees of Vornado and Directors of Alexander’s, are Interstate’s two other partners. As of December 31, 2008, Interstate and its partners beneficially owned approximately 8.8% of the common shares of beneficial interest of Vornado and 27.0% of Alexander’s common stock.

We manage and lease the real estate assets of Interstate pursuant to a management agreement for which we receive an annual fee equal to 4% of annual base rent and percentage rent. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on sixty days’ notice at the end of the term. We believe based upon comparable fees charged by other real estate companies that the management agreement terms are fair to us. We earned $803,000, $800,000 and $798,000 of management fees under the agreement for the years ended December 31, 2008, 2007 and 2006.

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16. Redeemable Noncontrolling Interests

Redeemable noncontrolling interests on our consolidated balance sheets represent Operating Partnership units held by third-parties and are comprised of (i) Class A units, (ii) Series B convertible preferred units, and (iii) Series D-10, D-11, D-12, D-14 and D-15 (collectively, “Series D”) cumulative redeemable preferred units. Class A units of the Operating Partnership may be tendered for redemption to the Operating Partnership for cash; we, at our option, may assume that obligation and pay the holder either cash or Vornado common shares on a one-for-one basis. Because the number of Vornado common shares outstanding at all times equals the number of Class A units owned by Vornado, the redemption value of each Class A unit is equivalent to the market value of one Vornado common share, and the quarterly distribution to a Class A unitholder is equal to the quarterly dividend paid to a Vornado common shareholder. Below are the details of Operating Partnership units held by third-parties that are included in “redeemable noncontrolling interests” as of December 31, 2008 and 2007:

	Outstanding Units at		Per Unit		Preferred or Annual		Conversion
Unit Series	December 31, 2008	December 31, 2007	Liquidation Preference		Distribution Rate		Rate Into Class A Units
Common:
Class A	14,627,005	15,530,125		N/A	$	3.65	N/A
Convertible Preferred:
B-1 Convertible Preferred (1)	139,798	139,798	$	50.00	$	2.50	(1)
B-2 Convertible Preferred (1)	304,761	304,761	$	50.00	$	4.00	(1)
Perpetual Preferred: (2)
7.00% D-10 Cumulative Redeemable	3,200,000	3,200,000	$	25.00	$	1.75	N/A
7.20% D-11 Cumulative Redeemable	1,400,000	1,400,000	$	25.00	$	1.80	N/A
6.55% D-12 Cumulative Redeemable	800,000	800,000	$	25.00	$	1.637	N/A
6.75% D-14 Cumulative Redeemable	4,000,000	4,000,000	$	25.00	$	1.6875	N/A
6.875% D-15 Cumulative Redeemable	1,800,000	1,800,000	$	25.00	$	1.71875	N/A

__________________________________

(1) Class B-1 and B-2 units are convertible into Class A units at a rate of 100 Class A units for each pairing of 100 Class B-1 units and 218 Class B-2 units. Class B-1 unitholders are entitled to receive, in liquidation, an amount equal to the positive difference, if any, between the amount paid in liquidation for a Class A unit and the amount paid in respect of a Class B-2 unit multiplied by 2.18. Class B-2 unitholders are entitled to receive in liquidation the lesser of $50 per unit or the amount paid in respect of a Class A unit on liquidation divided by 2.18. Class B-1 unitholders receive distributions only if, and to the extent that, we pay quarterly dividends on the Class A units in excess of $0.85 per unit. Class B-2 unitholders are expected to receive quarterly distributions of $0.39 per unit.

(2) Holders may tender units for redemption to the Operating Partnership for cash at their stated redemption amount; we, at our option, may assume that obligation and pay the hold either cash or Vornado preferred shares on a one-for-one basis. These units are redeemable at our option after the 5th anniversary of the date of issuance (ranging from November 2008 to December 2011).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. Redeemable Noncontrolling Interests – continued

As of December 31, 2008, as part of our preparation for the adoption of SFAS 160, which became effective for us on January 1, 2009, we have retroactively adopted the measurement provisions of EITF Topic D-98, Classification and Measurement of Redeemable Securities, and accordingly, have reduced the carrying amounts of these Class A units by $400,647,000 and $464,114,000, as of December 31, 2008 and 2007, respectively, to reflect the change in their redemption value at the end of each reporting period. The corresponding entry for these adjustments was recorded to “additional capital.” As of December 31, 2008 and December 31, 2007, the aggregate value of the redeemable noncontrolling interests was $882,740,000 and $1,365,874,000, respectively. Below is a table reflecting the activity of the redeemable noncontrolling interests.

(Amounts in thousands)
Balance at December 31, 2006	$	2,212,967
Net income		69,788
Distributions		(74,265	)
Conversion of Class A redeemable units into common shares, at redemption value		(116,085	)
Mark-to-market adjustments on Class A redeemable units, in accordance with Topic D-98		(464,114	)
Other, net		30,012
Balance at December 31, 2007		1,658,303
Net income		55,411
Distributions		(75,939	)
Conversion of Class A redeemable units into common shares, at redemption value		(82,330	)
Mark-to-market adjustments on Class A redeemable units, in accordance with Topic D-98		(400,647	)
Other, net		23,180
Balance at December 31, 2008	$	1,177,978

Redeemable noncontrolling interests exclude our Series G convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for in accordance with FASB Statement No. 150, Accounting for Certain Financial Investments with Characteristics of both Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares. Accordingly the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $83,079,000 and $106,283,000 as of December 31, 2008 and December 31, 2007, respectively.

17. Comprehensive Income

(Amounts in thousands)	For The Years Ended December 31,
	2008			2007			2006
Net income	$	411,445		$	607,833		$	633,356
Other comprehensive (loss) income		(36,671	)		(63,191	)		9,557
Comprehensive income		374,774			544,642			642,913
Less: Comprehensive income attributable to noncontrolling interests		48,701			60,038			79,539
Comprehensive income attributable to Vornado	$	326,073		$	484,604		$	563,374

Substantially all of the other comprehensive (loss) income for the years ended December 31, 2009, 2008 and 2007 relates to losses or income from the mark-to-market of marketable equity securities classified as available-for-sale.

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18. Income Per Share

Income per share is computed in accordance with the provisions of SFAS 128. In January 2009, we adopted the provisions of FSP 03-6-1, which required us to include unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents as “participating securities” in the computation of basic and diluted income per share pursuant to the two-class method as described in SFAS 128. The adoption of FSP 03-6-1 did not have a material effect on our computation of income per share.

During 2009, we paid a portion of our first, second and third quarter dividends in Vornado common shares. In accordance with SFAS 128, we have included the 5,736,000 newly issued common shares in the computation of income per share retroactively for the periods presented below.

The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and potentially dilutive share equivalents. Potentially dilutive share equivalents include our Series A convertible preferred shares, employee stock options, restricted share awards and exchangeable senior debentures due 2025.

(Amounts in thousands, except per share amounts)	Year Ended December 31,
	2008			2007			2006
Numerator:
Income from continuing operations, net of income attributable to noncontrolling interests	$	204,855		$	483,150		$	522,567
Income from discontinued operations, net of income attributable to noncontrolling interests		154,442			58,389			32,215
Net income attributable to Vornado		359,297			541,539			554,782
Preferred share dividends		(57,091	)		(57,177	)		(57,511	)
Net income attributable to common shareholders		302,206			484,362			497,271
Earnings allocated to unvested participating securities		(328	)		(543	)		(815	)
Numerator for basic income per share		301,878			483,819			496,456
Impact of assumed conversions:
Series A convertible preferred share dividends		—			277			631
Convertible preferred unit distributions		—			—			485
Numerator for diluted income per share	$	301,878		$	484,096		$	497,572
Denominator:
Denominator for basic income per share – weighted average shares		159,637			157,686			147,882
Effect of dilutive securities (1):
Employee stock options and restricted share awards		4,219			6,491			7,829
Series A convertible preferred shares		—			122			278
Convertible preferred units		—			—			168
Denominator for diluted income per share – adjusted weighted average shares and assumed conversions		163,856			164,299			156,157
INCOME PER COMMON SHARE – BASIC:
Income from continuing operations	$	0.92		$	2.70		$	3.14
Income from discontinued operations		0.97			0.37			0.22
Net income per common share	$	1.89		$	3.07		$	3.36
INCOME PER COMMON SHARE – DILUTED:
Income from continuing operations	$	0.90		$	2.59		$	2.98
Income from discontinued operations		0.94			0.36			0.21
Net income per common share	$	1.84		$	2.95		$	3.19

__________________

(1)  The effect of dilutive securities in the years ended December 31, 2008, 2007 and 2006 excludes an aggregate of 25,914, 22,766 and 22,394 weighted average common share equivalents, respectively, as their effect was anti-dilutive.

114

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. Summary of Quarterly Results (Unaudited)

The following summary represents the results of operations for each quarter in 2008, 2007 and 2006:

			Net Income (Loss) Attributable			Income (Loss) Per Common Share (2)
	Revenues		to Common Shareholders (1)			Basic			Diluted
(Amounts in thousands, except per share amounts)
2008
December 31	$	696,259	$	(226,951	)	$	(1.42	)	$	(1.42	)
September 30		677,145		22,736			0.14			0.14
June 30		674,365		116,858			0.73			0.71
March 31		649,282		389,563			2.45			2.33
2007
December 31	$	657,166	$	82,709		$	0.52		$	0.50
September 30		637,078		108,476			0.69			0.66
June 30		583,220		143,485			0.91			0.88
March 31		533,052		149,692			0.95			0.91
2006
December 31	$	513,441	$	102,927		$	0.69		$	0.65
September 30		482,429		112,666			0.76			0.72
June 30		465,594		147,810			1.00			0.95
March 31		447,636		133,868			0.91			0.87

______________________________

(1) Fluctuations among quarters resulted primarily from the mark-to-market of derivative instruments, net gains on sale of real estate and wholly owned and partially owned assets other than depreciable real estate and from seasonality of business operations.

(2) The total for the year may differ from the sum of the quarters as a result of weighting.

20. Impairment Losses on Development Projects and Costs of Acquisitions Not Consummated

Below is a summary of non-cash Impairment losses on development projects and costs of acquisitions not consummated.

(Amounts in thousands)	For the Year Ended December 31,
		2008		2007
Impairment loss on residential condominium projects	$	50,625	$	—
Write-down of land held for development		12,500		—
Cost of acquisitions not consummated (1)		3,378		10,375
Other write-downs on development projects		14,944		—
	$	81,447	$	10,375

______________________________

(1) 2008 primarily represents costs related to the Hudson Rail Yards acquisition not consummated. 2007 primarily represents costs related to the Equity Office Properties Trust acquisition not consummated.

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VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. Segment Information

The financial information summarized below is presented by reportable operating segment, consistent with how we review and manage our businesses.

(Amounts in thousands)	For the Year Ended December 31, 2008
	Total			New York Office			Washington, DC Office (2)			Retail			Merchandise Mart (2)			Toys		Other (4)
Property rentals	$	2,024,075		$	722,445		$	509,377		$	349,763		$	245,400		$	—	$	197,090
Straight-line rents:
Contractual rent increases		58,159			28,023			6,764			16,622			5,954			—		796
Amortization of free rent		32,901			14,743			10,778			4,156			2,703			—		521
Amortization of acquired below- market leases, net		96,176			60,355			4,423			26,765			161			—		4,472
Total rentals		2,211,311			825,566			531,342			397,306			254,218			—		202,879
Tenant expense reimbursements		358,437			135,788			61,523			128,496			18,567			—		14,063
Fee and other income:
Tenant cleaning fees		56,416			71,833			—			—			—			—		(15,417	)
Management and leasing fees		13,397			6,411			8,940			1,673			349			—		(3,976	)
Lease termination fees		8,634			3,088			2,635			2,281			630			—		—
Other		48,856			15,699			22,360			2,603			7,059			—		1,135
Total revenues		2,697,051			1,058,385			626,800			532,359			280,823			—		198,684
Operating expenses		1,070,118			439,012			220,139			201,397			137,971			—		71,599
Depreciation and amortization		537,427			190,925			137,255			92,353			51,833			—		65,061
General and administrative		194,027			20,217			26,548			29,866			29,254			—		88,142
Impairment losses on development projects and costs of acquisitions not consummated		81,447			—			—			595			—			—		80,852
Total expenses		1,883,019			650,154			383,942			324,211			219,058			—		305,654
Operating income (loss)		814,032			408,231			242,858			208,148			61,765			—		(106,970	)
Income applicable to Alexander’s		36,671			763			—			650			—			—		35,258
Income applicable to Toys		2,380			—			—			—			—			2,380		—
(Loss) income from partially owned entities		(195,878	)		5,319			6,173			9,721			1,106			—		(218,197	)
Interest and other investment (loss) income, net		(2,682	)		2,288			2,116			494			356			—		(7,936	)
Interest and debt expense		(625,904	)		(139,146	)		(126,508	)		(86,787	)		(52,148	)		—		(221,315	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		7,757			—			—			—			—			—		7,757
Income (loss) before income taxes		36,376			277,455			124,639			132,226			11,079			2,380		(511,403	)
Income tax benefit (expense)		204,537			—			220,973			(82	)		(1,206	)		—		(15,148	)
Income (loss) from continuing operations		240,913			277,455			345,612			132,144			9,873			2,380		(526,551	)
Income (loss) from discontinued operations		170,532			—			59,068			(448	)		—			—		111,912
Net income (loss)		411,445			277,455			404,680			131,696			9,873			2,380		(414,639	)
Net (income) loss attributable to noncontrolling interests, including unit distributions		(52,148	)		(4,762	)		—			157			(125	)		—		(47,418	)
Net income (loss) attributable to Vornado		359,297			272,693			404,680			131,853			9,748			2,380		(462,057	)
Interest and debt expense (3)		821,940			132,406			130,310			102,600			53,072			147,812		255,740
Depreciation and amortization (3)		710,526			181,699			143,989			98,238			52,357			136,634		97,609
Income tax (benefit) expense (3)		(142,415	)		—			(220,965	)		82			1,260			59,652		17,556
EBITDA(1)	$	1,749,348		$	586,798		$	458,014		$	332,773		$	116,437		$	346,478	$	(91,152	)
Balance Sheet Data:
Real estate, at cost	$	17,879,374		$	5,362,129		$	4,583,519		$	4,581,478		$	1,344,093		$	—	$	2,008,155
Investments in partially owned entities		1,083,250			129,934			115,121			20,079			6,969			293,096		518,051
Total Assets		21,418,048			5,287,544			3,934,039			3,733,586			1,468,470			293,096		6,701,313

________________

See notes on page 119.

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VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. Segment Information - continued

(Amounts in thousands)	For the Year Ended December 31, 2007
	Total			New York Office			Washington, DC Office (2)			Retail			Merchandise Mart (2)			Toys			Other (4)
Property rentals	$	1,816,698		$	640,739		$	455,416		$	328,911		$	237,199		$	—		$	154,433
Straight-line rents:
Contractual rent increases		42,431			13,281			11,856			12,257			4,193			—			844
Amortization of free rent		34,602			15,935			14,115			1,138			1,836			—			1,578
Amortization of acquired below- market leases, net		83,292			47,861			4,615			25,960			193			—			4,663
Total rentals		1,977,023			717,816			486,002			368,266			243,421			—			161,518
Tenant expense reimbursements		323,544			125,940			45,138			120,756			19,570			—			12,140
Fee and other income:
Tenant cleaning fees		46,238			58,837			—			—			—			—			(12,599	)
Management and leasing fees		15,713			4,928			12,539			1,770			7			—			(3,531	)
Lease termination fees		7,453			3,500			453			2,823			677			—			—
Other		40,545			16,239			16,299			2,257			6,997			—			(1,247	)
Total revenues		2,410,516			927,260			560,431			495,872			270,672			—			156,281
Operating expenses		951,582			395,357			183,776			172,557			131,332			—			68,560
Depreciation and amortization		441,209			150,268			117,496			78,286			47,105			—			48,054
General and administrative		189,041			17,252			27,629			27,476			28,168			—			88,516
Costs of acquisitions not consummated		10,375			—			—			—			—			—			10,375
Total expenses		1,592,207			562,877			328,901			278,319			206,605			—			215,505
Operating income (loss)		818,309			364,383			231,530			217,553			64,067			—			(59,224	)
Income applicable to Alexander’s		50,589			757			—			812			—			—			49,020
Loss applicable to Toys “R” Us		(14,337	)		—			—			—			—			(14,337	)		—
Income from partially owned entities		31,891			4,799			8,728			9,041			1,053			—			8,270
Interest and other investment income, net		226,425			2,888			5,982			534			390			—			216,631
Interest and debt expense		(599,804	)		(133,804	)		(126,163	)		(78,234	)		(52,237	)		—			(209,366	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		39,493			—			—			—			—			—			39,493
Income (loss) before income taxes		552,566			239,023			120,077			149,706			13,273			(14,337	)		44,824
Income tax expense		(9,179	)		—			(2,909	)		(185	)		(969	)		—			(5,116	)
Income (loss) from continuing operations		543,387			239,023			117,168			149,521			12,304			(14,337	)		39,708
Income (loss) from discontinued operations		64,446			—			62,481			6,397			—			—			(4,432	)
Net income (loss)		607,833			239,023			179,649			155,918			12,304			(14,337	)		35,276
Net (income) loss attributable to noncontrolling interests, including unit distributions		(66,294	)		(3,583	)		—			96			—			—			(62,807	)
Net income (loss) attributable to Vornado		541,539			235,440			179,649			156,014			12,304			(14,337	)		(27,531	)
Interest and debt expense (3)		853,448			131,418			131,013			89,537			53,098			174,401			273,981
Depreciation and amortization (3)		676,660			147,340			132,302			82,002			47,711			155,800			111,505
Income tax expense (benefit) (3)		4,234			—			6,738			185			969			(10,898	)		7,240
EBITDA(1)	$	2,075,881		$	514,198		$	449,702		$	327,738		$	114,082		$	304,966		$	365,195
Balance Sheet Data:
Real estate, at cost	$	17,038,511		$	5,279,314		$	4,408,459		$	4,084,040		$	1,301,532		$	––		$	1,965,166
Investments in partially owned entities		1,504,831			146,784			120,561			111,152			6,283			298,089			821,962
Total Assets		22,478,717			5,091,848			3,315,333			3,056,915			1,475,876			298,089			9,240,656

___________________

See notes on page 119.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. Segment Information - continued

(Amounts in thousands)	For the Year Ended December 31, 2006
	Total			New York Office			Washington, DC Office (2)			Retail			Merchandise Mart (2)			Toys			Other (4)
Property rentals	$	1,458,201		$	487,421		$	394,997		$	264,727		$	224,341		$	—		$	86,715
Straight-line rents:
Contractual rent increases		31,947			4,431			13,632			7,908			6,142			—			(166	)
Amortization of free rent		31,103			7,245			16,155			5,080			2,623			—			—
Amortization of acquired below- market leases, net		23,490			976			4,178			15,513			43			—			2,780
Total rentals		1,544,741			500,073			428,962			293,228			233,149			—			89,329
Tenant expense reimbursements		260,772			102,488			34,618			101,737			17,810			—			4,119
Fee and other income:
Tenant cleaning fees		33,779			42,317			—			—			—			—			(8,538	)
Management and leasing fees		10,256			1,111			7,643			1,463			39			—			—
Lease termination fees		29,362			25,188			2,798			371			1,005			—			—
Other		30,190			12,307			11,247			1,588			4,963			—			85
Total revenues		1,909,100			683,484			485,268			398,387			256,966			—			84,995
Operating expenses		737,452			301,583			152,121			130,520			103,644			—			49,584
Depreciation and amortization		319,066			98,474			106,592			50,806			42,132			—			21,062
General and administrative		180,167			16,942			34,074			21,683			26,572			—			80,896
Total expenses		1,236,685			416,999			292,787			203,009			172,348			—			151,542
Operating income (loss)		672,415			266,485			192,481			195,378			84,618			—			(66,547	)
(Loss) income applicable to Alexander’s		(14,530	)		772			—			716			—			—			(16,018	)
Loss applicable to Toys “R” Us		(47,520	)		—			—			—			—			(47,520	)		—
Income from partially owned entities		60,355			3,844			13,302			5,950			1,076			—			36,183
Interest and other investment income, net		255,391			913			1,782			812			275			—			251,609
Interest and debt expense		(400,540	)		(84,134	)		(97,972	)		(79,202	)		(28,672	)		—			(110,560	)
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate		76,073			—			—			—			—			—			76,073
Income (loss) before income taxes		601,644			187,880			109,593			123,654			57,297			(47,520	)		170,740
Income tax (expense) benefit		(491	)		—			(1,066	)		—			575			—			—
Income (loss) from continuing operations		601,153			187,880			108,527			123,654			57,872			(47,520	)		170,740
Income (loss) from discontinued operations		32,203			—			25,714			9,206			5,682			—			(8,399	)
Net income (loss)		633,356			187,880			134,241			132,860			63,554			(47,520	)		162,341
Net (income) loss attributable to noncontrolling interests, including unit distributions		(78,574	)		—			—			84			5			—			(78,663	)
Net income (loss) attributable to Vornado		554,782			187,880			134,241			132,944			63,559			(47,520	)		83,678
Interest and debt expense (3)		698,465			86,861			107,477			89,748			29,551			196,259			188,569
Depreciation and amortization (3)		542,515			101,976			125,674			56,168			42,717			137,176			78,804
Income tax (benefit) expense (3)		(11,848	)		—			8,976			—			(575	)		(22,628	)		2,379
EBITDA(1)	$	1,783,914		$	376,717		$	376,368		$	278,860		$	135,252		$	263,287		$	353,430
Balance Sheet Data:
Real estate, at cost	$	11,617,126		$	3,283,405		$	3,501,927		$	2,829,947		$	1,272,883		$	––		$	728,964
Investments in partially owned entities		1,440,124			106,394			286,108			143,028			6,547			317,145			580,902
Total Assets		17,954,384			3,733,819			2,427,378			2,507,452			1,580,691			317,145			7,387,899

____________________

See notes on following page.

118

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. Segment Information - continued

Notes to preceding tabular information:

(1) EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.” Management considers EBITDA a supplemental measure for making decisions and assessing the un-levered performance of its segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, management utilizes this measure to make investment decisions as well as to compare the performance of its assets to that of its peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.

(2) As of January 1, 2008, we transferred the operations and financial results related to 409 3^rd Street, NW (Washington Office Center) from the Merchandise Mart segment to the Washington, DC Office segment for both the current and prior periods presented.

(3) Interest and debt expense and depreciation and amortization and income tax (benefit) expense in the reconciliation of net income to EBITDA include our share of these items from partially owned entities.

(4) Other EBITDA is comprised of:

(Amounts in thousands)	For the Year Ended December 31,
	2008			2007			2006
Alexander’s	$	64,683		$	78,375		$	14,130
555 California Street (acquired 70% interest in May 2007)		48,316			34,073			—
Hotel Pennsylvania		42,269			37,941			27,495
Lexington		35,150			24,539			51,737
GMH (sold in June 2008)		—			22,604			10,737
Industrial warehouses		5,264			4,881			5,582
Other investments		6,321			7,322			13,253
		202,003			209,735			122,934
Non-cash asset write-downs:
Investment in Lexington		(107,882	)		—			—
Marketable equity securities		(76,352	)		—			—
Real estate development projects:
Partially owned entities		(96,037	)		—			—
Wholly owned entities (including costs of acquisitions not consummated)		(80,852	)		(10,375	)		—
MPH mezzanine loan loss reversal (accrual)		10,300			(57,000	)		—
Derivative positions in marketable equity securities		(33,740	)		113,503			111,107
Corporate general and administrative expenses		(77,763	)		(76,799	)		(76,071	)
Investment income and other, net		87,322			181,277			207,832
Net income attributable to noncontrolling interests, including unit distributions		(47,418	)		(62,807	)		(78,663	)
Discontinued operations of Americold (including a $112,690 net gain on sale in 2008)		129,267			67,661			66,291
	$	(91,152	)	$	365,195		$	353,430

119

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fourth quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Vornado Realty Trust, together with its consolidated subsidiaries (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As of December 31, 2008, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2008 was effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the trustees of us; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Our internal control over financial reporting as of December 31, 2008 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on page 121, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2008.

120

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Trustees

Vornado Realty Trust

New York, New York

We have audited the internal control over financial reporting of Vornado Realty Trust, together with its consolidated subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of trustees, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of December 31, 2008 and the related consolidated statements of income, statement of changes in equity, and cash flows for the year then ended of the Company and our report dated February 24, 2009 (October 13, 2009, as to the effects of the retrospective application of FSP APB 14-1, SFAS No. 160, and FSP EITF 03-6-1 as disclosed in Note 2) expressed an unqualified opinion on those financial statements and financial statement schedules. 

/s/ Deloitte & Touche LLP 

Parsippany, New Jersey

February 24, 2009

121

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

December 31, 2008

(Amounts in Thousands)

Column A	Column B		Column C			Column D			Column E
Description	Balance at Beginning of Year		Additions Charged Against Operations			Uncollectible Accounts Written-off			Balance at End of Year
Year Ended December 31, 2008: Allowance for doubtful accounts	$	79,227	$	20,931	(1)	$	(14,851	)(2)	$	85,307
Year Ended December 31, 2007: Allowance for doubtful accounts	$	18,199	$	65,680	(1)	$	(4,652	)	$	79,227
Year Ended December 31, 2006: Allowance for doubtful accounts	$	21,202	$	2,844		$	(5,847	)	$	18,199
________________________

(1) 2007 includes a $57,000 allowance on one of our investments in a mezzanine loan, of which $10,300 was reversed in 2008 upon sale of a participation in that loan.

(2) Includes $9,482 for tenants that filed for bankruptcy, of which $5,135 relates to Circuit City.

122

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AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC					COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)							Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land			Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
Office Buildings
New York
Manhattan
1290 Avenue of the Americas	$	444,666		$	515,539	$	932,629	$	6,964	$	515,539	$	939,593	$	1,455,132	$	48,061	1963	2007	(4)
350 Park		430,000			265,889		363,381		7,005		265,889		370,386		636,275		19,104	1960	2006	(4)
One Penn Plaza		-			-		412,169		141,215		-		553,384		553,384		147,616	1972	1998	(4)
100 W.33rd St (Manhattan Mall)		159,361			242,776		247,970		1,432		242,776		249,402		492,178		12,249	1911	2007	(4)
Two Penn Plaza		287,386			53,615		164,903		85,471		52,689		251,300		303,989		77,267	1968	1997	(4)
770 Broadway		353,000			52,898		95,686		72,857		52,898		168,543		221,441		50,263	1907	1998	(4)
90 Park Avenue		-			8,000		175,890		28,606		8,000		204,496		212,496		60,442	1964	1997	(4)
888 Seventh Avenue		318,554			-		117,269		91,163		-		208,432		208,432		53,571	1980	1998	(4)
640 Fifth Avenue		-			38,224		25,992		107,230		38,224		133,222		171,446		35,607	1950	1997	(4)
Eleven Penn Plaza		206,877			40,333		85,259		41,972		40,333		127,231		167,564		38,895	1923	1997	(4)
1740 Broadway		-			26,971		102,890		36,323		26,971		139,213		166,184		32,838	1950	1997	(4)
909 Third Avenue		214,075			-		120,723		27,814		-		148,537		148,537		39,545	1969	1999	(4)
150 East 58th Street		-			39,303		80,216		26,031		39,303		106,247		145,550		30,303	1969	1998	(4)
595 Madison Avenue		-			62,731		62,888		15,523		62,731		78,411		141,142		18,795	1968	1999	(4)
866 United Nations Plaza		44,978			32,196		37,534		12,313		32,196		49,847		82,043		18,348	1966	1997	(4)
20 Broad Street		-			-		28,760		21,876		-		50,636		50,636		11,359	1956	1998	(4)
40 Fulton Street		-			15,732		26,388		4,110		15,732		30,498		46,230		9,441	1987	1998	(4)
689 Fifth Avenue		-			19,721		13,446		10,437		19,721		23,883		43,604		7,129	1925	1998	(4)
330 West 34th Street		-			-		8,599		11,403		-		20,002		20,002		6,370	1925	1998	(4)
40-42 Thompson Street		-			6,503		10,057		375		6,503		10,432		16,935		865	1928	2005	(4)
1540 Broadway Garage		-			4,086		8,914		-		4,086		8,914		13,000		558	1990	2006	(4)
Other		-			-		5,548		18,880		-		24,428		24,428		2,300
Total New York		2,458,897			1,424,517		3,127,111		769,000		1,423,591		3,897,037		5,320,628		720,926
Washington, DC
2011-2451 Crystal Drive		88,732			100,935		409,920		86,464		100,228		497,091		597,319		100,531	1984-1989	2002	(4)
Warner Building		292,700			70,853		246,169		21,347		81,983		256,386		338,369		21,945	1992	2005	(4)
2001 Jefferson Davis Highway, 2100/2200 Crystal Drive, 223  23rd  Street, 2221 South Clark Street, 2100  Crystal Drive Retail		40,701			57,213		131,206		142,840		48,657		282,602		331,259		34,011	1964-1969	2002	(4)
1550-1750 Crystal Drive/ 241-251 18th Street		130,444			64,817		218,330		38,033		64,652		256,528		321,180		55,995	1974-1980	2002	(4)
H Street Apartments		259,546			118,421		125,078		46,461		138,696		151,264		289,960		5,651		2007	(4)
Skyline Place (6 buildings)		442,500			41,986		221,869		20,637		41,862		242,630		284,492		49,329	1973-1984	2002	(4)
1215, 1225 S. Clark Street/ 200, 201 12th Street S.		145,594			47,594		177,373		21,371		47,465		198,873		246,338		42,742	1983-1987	2002	(4)
1800, 1851 and 1901 South Bell Street		27,801			37,551		118,806		16,114		37,551		134,920		172,471		26,028	1968	2002	(4)
2101 L Street		150,000			32,815		51,642		69,234		39,768		113,923		153,691		2,938	1975	2003	(4)
Bowen Building		115,022			30,077		98,962		1,631		30,176		100,494		130,670		9,313	2004	2005	(4)
2200-2300 Courthhouse Plaza		70,774			-		105,475		24,177		-		129,652		129,652		26,611	1988-1989	2002	(4)

123

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AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC				COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)						Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land		Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
1999 K Street		73,747		55,438		3,012		63,234		-		121,684		121,684		-		2006	(4)
1875 Connecticut Ave NW		30,770		36,303		82,004		832		35,886		83,253		119,139		7,589	1963	2007	(4)
1229-1231 25th Street		24,620		67,049		5,039		37,647		-		109,735		109,735		-		2007	(4)
Reston Executive		93,000		15,424		85,722		7,299		15,380		93,065		108,445		19,376	1987-1989	2002	(4)
One Skyline Tower		100,800		12,266		75,343		15,339		12,231		90,717		102,948		17,329	1988	2002	(4)
H Street - North 10-1D Land Parcel		-		104,473		55		(9,971	)	90,522		4,035		94,557		1		2007	(4)
1825 Connecticut Ave NW		28,958		33,090		61,316		(769	)	32,726		60,911		93,637		11,395	1956	2007	(4)
409 3rd Street		-		10,719		69,658		7,258		10,719		76,916		87,635		21,187	1990	1998	(4)
Commerce Executive		50,213		13,401		58,705		12,711		13,363		71,454		84,817		15,865	1985-1989	2002	(4)
1235 S. Clark Street		54,128		15,826		53,894		10,884		15,826		64,778		80,604		10,238	1981	2002	(4)
Seven Skyline Place		134,700		10,292		58,351		(3,607	)	10,262		54,774		65,036		11,970	2001	2002	(4)
1150 17th Street		29,659		23,359		24,876		13,823		24,723		37,335		62,058		8,198	1970	2002	(4)
Crystal City Hotel		-		8,000		47,191		5,108		8,000		52,299		60,299		5,518	1968	2004	(4)
1750 Penn Avenue		46,570		20,020		30,032		1,244		21,170		30,126		51,296		6,306	1964	2002	(4)
1101 17th Street		24,561		20,666		20,112		8,151		21,818		27,111		48,929		6,312	1963	2002	(4)
H Street Ground Leases		-		71,893		-		(26,893	)	45,000		-		45,000		-		2007	(4)
1227 25th Street		-		16,293		24,620		1,194		17,047		25,060		42,107		875		2007	(4)
1140 Connecticut Avenue		18,166		19,017		13,184		6,899		19,801		19,299		39,100		5,033	1966	2002	(4)
1730 M. Street		15,336		10,095		17,541		8,704		10,687		25,653		36,340		6,350	1963	2002	(4)
Democracy Plaza I		-		-		33,628		(304)		-		33,324		33,324		10,130	1987	2002	(4)
1726 M Street		-		9,450		22,062		150		9,455		22,207		31,662		1,244	1964	2006	(4)
Crystal City Shop		-		-		20,465		5,779		-		26,244		26,244		4,682	2004	2004	(4)
1101 South Capitol Street		-		11,541		178		57		11,597		179		11,776		96		2007	(4)
South Capital		-		4,009		6,273		(5,074	)	-		5,208		5,208		-		2005	(4)
H Street		-		1,763		641		35		1,763		676		2,439		57		2005	(4)
Tysons Dulles		-		19,146		79,095		(98,241	)	-		-		-		-	1986-1990	2002	(4)
1707 H Street		-		27,058		1,002		(28,060	)	-		-		-		-		2007	(4)
Other		-		-		51,767		(41,063	)	-		10,704		10,704		-
Total Washington, DC		2,489,042		1,238,853		2,850,596		480,675		1,059,014		3,511,110		4,570,124		544,845
New Jersey
Paramus		-		-		-		23,134		1,033		22,101		23,134		11,785	1967	1987	(4)
California
555 California Street		720,671		221,903		899,839		10,747		221,903		910,586		1,132,489		48,086	1922/1969/1970	2007	(4)
Total Office Buildings		5,668,610		2,885,273		6,877,546		1,283,556		2,705,541		8,340,834		11,046,375		1,325,642
Shopping Centers
California
Los Angeles (Beverly Connection)		100,000		72,996		131,510		-		72,996		131,510		204,506		6,907		2005	(4)
Sacramento		-		3,897		31,370		-		3,897		31,370		35,267		2,405		2006	(4)
San Francisco (The Cannery)		18,561		20,100		11,923		2,521		20,100		14,444		34,544		550		2007	(4)
Walnut Creek (1149 S. Main St)		-		2,699		19,930		-		2,699		19,930		22,629		1,528		2006	(4)

124

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AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC				COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)						Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land		Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
Pasadena		-		-		18,337		152		-		18,489		18,489		849		2007	(4)
San Francisco (3700 Geary Blvd)		-		11,857		4,444		27		11,857		4,471		16,328		345		2006	(4)
Signal Hill		-		10,218		3,118		-		10,218		3,118		13,336		172		2006	(4)
Redding		-		3,075		3,030		13		3,075		3,043		6,118		167		2006	(4)
Walnut Creek (1556 Mount Diablo Blvd)		-		5,909		-		53		5,909		53		5,962		-		2007	(4)
Merced		-		1,829		2,022		216		1,829		2,238		4,067		135		2006	(4)
San Bernadino (1522 E. Highland Ave)		-		1,651		1,810		-		1,651		1,810		3,461		200		2004	(4)
Orange		-		1,487		1,746		-		1,487		1,746		3,233		193		2004	(4)
Vallejo		-		-		3,123		-		-		3,123		3,123		174		2006	(4)
Corona		-		-		3,073		-		-		3,073		3,073		339		2004	(4)
Westminster		-		1,673		1,192		-		1,673		1,192		2,865		132		2004	(4)
San Bernadino (648 W. 4th St)		-		1,597		1,119		-		1,597		1,119		2,716		124		2004	(4)
Costa Mesa (2180 Newport Blvd)		-		2,239		308		-		2,239		308		2,547		34		2004	(4)
Mojave		-		-		2,250		-		-		2,250		2,250		248		2004	(4)
Ontario		-		713		1,522		-		713		1,522		2,235		168		2004	(4)
Barstow		-		856		1,367		-		856		1,367		2,223		151		2004	(4)
Colton		-		1,239		954		-		1,239		954		2,193		105		2004	(4)
Anaheim		-		1,093		1,093		-		1,093		1,093		2,186		121		2004	(4)
Rancho Cucamonga		-		1,051		1,051		-		1,051		1,051		2,102		116		2004	(4)
Garden Grove		-		795		1,254		-		795		1,254		2,049		138		2004	(4)
Costa Mesa (707 W. 19th St)		-		1,399		635		-		1,399		635		2,034		70		2004	(4)
Calimesa		-		504		1,463		-		504		1,463		1,967		162		2004	(4)
Santa Ana		-		1,565		377		-		1,565		377		1,942		42		2004	(4)
Moreno Valley		-		639		1,156		-		639		1,156		1,795		128		2004	(4)
Fontana		-		518		1,100		-		518		1,100		1,618		122		2004	(4)
Rialto		-		434		1,173		-		434		1,173		1,607		129		2004	(4)
Desert Hot Springs		-		197		1,355		-		197		1,355		1,552		150		2004	(4)
Beaumont		-		206		1,321		-		206		1,321		1,527		146		2004	(4)
Colton		-		1,157		332		-		1,157		332		1,489		37		2004	(4)
Yucaipa		-		663		426		-		663		426		1,089		47	2008	2004	(4)
Riverside (9155 Jurupa Road)		-		251		783		-		251		783		1,034		86		2004	(4)
Riverside (5571 Mission Blvd)		-		209		704		-		209		704		913		76		2004	(4)
Total California		118,561		154,716		258,371		2,982		154,716		261,353		416,069		16,496
Colorado
Littleton		-		5,867		2,557		-		5,867		2,557		8,424		141		2006	(4)
Grand Junction		-		2,321		2,071		-		2,321		2,071		4,392		115		2006	(4)
Total Colorado		-		8,188		4,628		-		8,188		4,628		12,816		256
Connecticut
Waterbury		5,683	*	667		4,504		4,876		667		9,380		10,047		4,476	1965	1965	(4)
Newington		6,030	*	2,421		1,200		475		2,421		1,675		4,096		514	1969	1969	(4)
Total Connecticut		11,713		3,088		5,704		5,351		3,088		11,055		14,143		4,990

125

VORNADO REALTY TRUST

AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC				COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)						Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land		Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
Florida
Coral Springs		-		3,942		2,326		160		3,942		2,486		6,428		128		2006	(4)
Tampa		-		3,871		2,532		-		3,871		2,532		6,403		140		2006	(4)
Vero Beach		-		2,194		1,908		-		2,194		1,908		4,102		106		2006	(4)
Total Florida		-		10,007		6,766		160		10,007		6,926		16,933		374
Illinois
Bourbonnais		-		2,379		3,792		-		2,379		3,792		6,171		209		2006	(4)
Lansing		-		2,264		1,128		-		2,264		1,128		3,392		62		2006	(4)
Total Illinois		-		4,643		4,920		-		4,643		4,920		9,563		271
Iowa
Dubuque		-		-		1,568		-		-		1,568		1,568		87		2006	(4)
Maryland
Rockville		14,344		3,470		20,599		208		3,470		20,807		24,277		1,969		2005	(4)
Baltimore (Towson)		10,489	*	581		3,227		7,794		581		11,021		11,602		3,404	1968	1968	(4)
Annapolis		-		-		9,652		-		-		9,652		9,652		1,551		2005	(4)
Wheaton		-		-		5,691		-		-		5,691		5,691		314		2006	(4)
Glen Burnie		5,398	*	462		2,571		523		462		3,094		3,556		2,468	1958	1958	(4)
Total Maryland		30,231		4,513		41,740		8,525		4,513		50,265		54,778		9,706
Massachusetts
Dorchester		-		2,797		4,023		10,820		13,617		4,023		17,640		222		2006	(4)
Springfield		2,878	*	-		2,471		3,237		2,797		2,911		5,708		415	1993	1966	(4)
Chicopee		-		13,617		-		(12,722	)	895		-		895		-	1969	1969	(4)
Cambridge		-		895		-		(641	)	-		254		254		11			(4)
Total Massachusetts		2,878		17,309		6,494		694		17,309		7,188		24,497		648
Michigan
Roseville		-		30		6,128		1,373		30		7,501		7,531		1,136		2005	(4)
Battle Creek		-		1,340		2,273		-		1,340		2,273		3,613		126		2006	(4)
Midland		-		-		141		86		-		227		227		11		2006	(4)
Total Michigan		-		1,370		8,542		1,459		1,370		10,001		11,371		1,273
New Hampshire
Salem		-		6,083		-		-		6,083		-		6,083		-		2006	(4)
New Jersey
Paramus (Bergen Town Center)		228,731		19,884		81,723		286,758		23,525		364,840		388,365		11,296	1957	2003	(4)
North Bergen (Tonnelle Ave)				24,493		-		41,507		16,012		49,988		66,000		51	2006	2006	(4)
Union (Springfield Avenue)		-		19,700		45,090		-		19,700		45,090		64,790		1,697		2007	(4)
East Rutherford		-		-		35,274		-		-		35,274		35,274		997		2007	(4)
Garfield		-		96		8,068		22,847		45		30,966		31,011		15,814	1979	1998	(4)

126

VORNADO REALTY TRUST

AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC				COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)						Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land		Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
East Hanover I and II		25,136	*	2,232		18,241		7,602		2,671		25,404		28,075		10,820	1962	1962	(4)
Lodi (Washington Street)		10,738		7,606		13,125		227		7,606		13,352		20,958		1,353		2004	(4)
Englewood		12,380		2,300		17,245		1		2,300		17,246		19,546		651		2007	(4)
Bricktown		15,015	*	1,391		11,179		6,176		1,391		17,355		18,746		8,562	1968	1968	(4)
Totowa		27,201	*	1,102		11,994		4,479		1,099		16,476		17,575		10,250	1957/1999	1957	(4)
Hazlet		-		7,400		9,412		-		7,400		9,412		16,812		355		2007	(4)
Carlstadt		7,690		-		16,457		-		-		16,457		16,457		468		2007	(4)
North Plainfield		10,023	*	500		13,983		1,546		500		15,529		16,029		9,072	1955	1989	(4)
East Brunswick II (339-341 Route 18 S.)		-		2,098		10,949		2,643		2,098		13,592		15,690		6,742	1972	1972	(4)
Manalapan		11,540	*	725		7,189		7,748		1,046		14,616		15,662		7,937	1971	1971	(4)
Marlton		11,221	*	1,611		3,464		8,287		1,611		11,751		13,362		4,820	1973	1973	(4)
Union (Route 22 and Morris Ave)		30,892	*	3,025		7,470		2,006		3,025		9,476		12,501		3,978	1962	1962	(4)
Hackensack		23,033	*	692		10,219		963		692		11,182		11,874		7,931	1963	1963	(4)
Cherry Hill		13,809	*	5,864		2,694		2,114		5,864		4,808		10,672		3,558	1964	1964	(4)
Watchung		12,464	*	4,178		5,463		811		4,441		6,011		10,452		2,618	1994	1959	(4)
South Plainfield		-		-		10,044		24		-		10,068		10,068		378		2007	(4)
Eatontown		-		4,653		4,999		279		4,653		5,278		9,931		440		2005	(4)
Dover		6,767	*	559		6,363		2,867		559		9,230		9,789		4,871	1964	1964	(4)
Lodi (Route 17 N.)		8,647	*	238		9,446		-		238		9,446		9,684		2,183	1999	1975	(4)
East Brunswick I (325-333 Route 18 S.)		20,965	*	319		6,220		2,792		319		9,012		9,331		7,916	1957	1957	(4)
Jersey City		17,633	*	652		7,495		329		652		7,824		8,476		1,773	1965	1965	(4)
Morris Plains		11,088	*	1,104		6,411		604		1,104		7,015		8,119		6,597	1961	1985	(4)
Middeltown		15,147	*	283		5,248		1,280		283		6,528		6,811		4,400	1963	1963	(4)
Woodbridge		20,362	*	1,509		2,675		1,774		1,539		4,419		5,958		2,001	1959	1959	(4)
Delran		5,919	*	756		4,468		587		756		5,055		5,811		4,538	1972	1972	(4)
Lawnside		9,757	*	851		3,164		1,426		851		4,590		5,441		3,402	1969	1969	(4)
Kearny		3,443	*	309		3,376		1,152		309		4,528		4,837		2,651	1938	1959	(4)
Bordentown		7,430	*	713		3,349		687		713		4,036		4,749		3,989	1958	1958	(4)
Turnersville		3,763	*	900		1,342		856		900		2,198		3,098		2,021	1974	1974	(4)
North Bergen (Kennedy Blvd)		3,651	*	2,308		636		34		2,308		670		2,978		329	1993	1959	(4)
Montclair		1,773	*	66		419		381		66		800		866		631	1972	1972	(4)
Total New Jersey		576,218		120,117		404,894		410,787		116,276		819,522		935,798		157,090
New York
Bronx (Bruckner Blvd)		-		66,100		259,503		582		66,100		260,085		326,185		12,975		2007	(4)
Valley Stream (Green Acres Mall)		335,000		147,172		134,980		41,422		146,969		176,605		323,574		34,275	1956	1997	(4)
Manhattan Mall		72,639		88,595		113,473		55,488		88,595		168,961		257,556		5,592		2007	(4)
Hicksville (Broadway Mall)		94,879		126,324		48,904		2,316		126,324		51,220		177,544		3,724		2005	(4)
Huntington		16,073		21,200		33,667		-		21,200		33,667		54,867		958		2007	(4)
Mount Kisco		29,992		22,700		26,700		-		22,700		26,700		49,400		546		2007	(4)
Poughkeepsie		-		12,733		12,026		20,976		7,632		38,103		45,735		638		2005	(4)
Staten Island		17,448		11,446		21,262		221		11,446		21,483		32,929		2,647		2004	(4)
Inwood		-		12,419		19,097		500		12,419		19,597		32,016		1,958		2004	(4)
Queens (99-01 Queens Blvd)		-		7,839		20,392		1,766		7,839		22,158		29,997		2,384		2004	(4)
Bronx (Gun Hill Road)		-		6,427		11,885		9,148		4,485		22,975		27,460		288		2005	(4)

127

VORNADO REALTY TRUST

AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC				COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)						Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land		Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
West Babylon		6,687		6,720		13,786		97		6,720		13,883		20,603		618		2007	(4)
Dewitt		-		-		7,546		-		-		7,546		7,546		423		2006	(4)
Freeport (437 E. Sunrise Highway)		13,630	*	1,231		4,747		1,454		1,231		6,201		7,432		4,412	1981	1981	(4)
Oceanside		-		2,710		2,306		-		2,710		2,306		5,016		87		2007	(4)
Albany (Menands)		5,726	*	460		2,091		2,412		460		4,503		4,963		3,146	1965	1965	(4)
Buffalo (Amherst)		6,453	*	636		4,056		26		636		4,082		4,718		3,709	1968	1968	(4)
Rochester (Henrietta)		-		-		2,647		1,096		-		3,743		3,743		3,017	1971	1971	(4)
Rochester		-		2,172		-		-		2,172		-		2,172		-	1966	1966	(4)
Freeport (240 Sunrise Highway)		-		-		-		260		-		260		260		17		2005	(4)
Commack		-		-		43		-		-		43		43		1		2006	(4)
New Hyde Park		6,879	*	-		4		-		-		4		4		126	1970	1976	(4)
Manhattan
1540 Broadway		-		105,914		214,208		-		105,914		214,208		320,122		13,238		2006	(4)
828-850 Madison Avenue		80,000		107,937		28,261		-		107,937		28,261		136,198		2,532		2005	(4)
4 Union Square South		-		24,079		55,220		343		24,079		55,563		79,642		6,301	1965/2004	1993	(4)
478-482 Broadway				20,000		13,375		20,577		20,000		33,952		53,952		509		2007	(4)
40 East 66th Street		-		13,616		34,635		-		13,616		34,635		48,251		2,482		2005	(4)
25 W. 14th Street		-		29,169		17,878		341		29,169		18,219		47,388		2,183		2004	(4)
155 Spring Street		-		13,700		30,544		441		13,700		30,985		44,685		1,295		2007	(4)
435 7th Avenue		-		19,893		19,091		37		19,893		19,128		39,021		3,057		1997	(4)
692 Broadway		-		6,053		22,908		779		6,053		23,687		29,740		1,983		2005	(4)
715 Lexington Avenue		-		-		26,903		-		-		26,903		26,903		2,876	1923	2001	(4)
211-217 Columbus Avenue		-		18,907		7,316		385		18,907		7,701		26,608		633		2005	(4)
677-679 Madison Avenue		-		13,070		9,640		319		13,070		9,959		23,029		605		2006	(4)
431 7th Avenue		-		16,700		2,751		-		16,700		2,751		19,451		115		2007	(4)
484-486 Broadway		-		10,000		6,688		1,845		6,916		11,617		18,533		202		2007	(4)
1135 Third Avenue		-		7,844		7,844		-		7,844		7,844		15,688		2,157		1997	(4)
387 West Broadway		-		5,858		7,662		364		5,858		8,026		13,884		920		2004	(4)
488 8th Avenue		-		10,650		1,767		133		10,650		1,900		12,550		49		2007	(4)
148 Spring Street		-		7,629		3,957		6		7,629		3,963		11,592		65		2008	(4)
150 Spring Street		-		5,295		4,763		84		5,295		4,847		10,142		79		2008	(4)
386 West Broadway		4,518		2,624		6,160		-		2,624		6,160		8,784		620		2004	(4)
484 8th Avenue		-		3,856		762		-		3,856		762		4,618		225		1997	(4)
825 7th Avenue		-		1,483		697		-		1,483		697		2,180		204		1997	(4)
Total New York		689,924		981,161		1,262,145		163,418		970,831		1,435,893		2,406,724		123,871
Pennsylvania
Wilkes Barre		21,165		6,053		26,646		-		6,053		26,646		32,699		583		2007	(4)
Philadelphia		8,246	*	933		23,650		6,069		933		29,719		30,652		5,853	1977	1994	(4)
Allentown		21,403	*	334		15,580		289		334		15,869		16,203		10,158	1957	1957	(4)
Bensalem		5,915	*	2,727		6,698		1,806		2,727		8,504		11,231		2,123	1972/1999	1972	(4)
Bethlehem		3,744	*	827		5,200		568		839		5,756		6,595		5,669	1966	1966	(4)
Wyomissing		-		-		2,646		2,265		-		4,911		4,911		1,387		2005	(4)
York		3,785	*	409		2,568		1,811		409		4,379		4,788		3,016	1970	1970	(4)
Broomall		9,001	*	850		2,171		749		850		2,920		3,770		2,792	1966	1966	(4)

128

VORNADO REALTY TRUST

AND SUBSIDIARIES

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC				COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)						Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land		Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
Lancaster		-		3,140		63		483		3,140		546		3,686		395	1966	1966	(4)
Upper Mooreland		6,400	*	683		1,868		900		683		2,768		3,451		2,494	1974	1974	(4)
Glenolden		6,752	*	850		1,820		471		850		2,291		3,141		1,660	1975	1975	(4)
Levittown		3,025	*	183		1,008		364		183		1,372		1,555		1,368	1964	1964	(4)
Springfield		-		-		254		-		-		254		254		-		2005	(4)
Total Pennsylvania		89,436		16,989		90,172		15,775		17,001		105,935		122,936		37,498
South Carolina
Charleston		-		-		3,854		-		-		3,854		3,854		213		2006	(4)
Tennessee
Antioch		-		1,613		2,530		-		1,613		2,530		4,143		140		2006	(4)
Texas
Texarkana		-		-		485		28		-		513		513		27		2006	(4)
Utah
Ogden		-		1,818		2,578		-		1,818		2,578		4,396		102		2007	(4)
Virginia
Springfield (Springfield Mall)		180,642		35,168		265,964		21,481		35,173		287,440		322,613		19,751		2006	(4)
Norfolk		-		-		3,927		15		-		3,942		3,942		1,360		2005	(4)
Total Virginia		180,642		35,168		269,891		21,496		35,173		291,382		326,555		21,111
Washington
Bellingham		-		1,942		2,265		-		1,942		2,265		4,207		90		2005	(4)
Washington, DC
3040 M Street		-		7,830		27,490		45		7,830		27,535		35,365		1,996		2006	(4)
Wisconsin
Fond Du Lac		-		-		186		100		-		286		286		22		2006	(4)
Puerto Rico
Las Catalinas		60,766		15,280		64,370		7,523		15,280		71,893		87,173		18,371	1996	2002	(4)
Montehiedra		120,000		9,182		66,751		3,252		9,267		69,918		79,185		20,556	1996	1997	(4)
Total Puerto Rico		180,766		24,462		131,121		10,775		24,547		141,811		166,358		38,927
Total Retail Properties		1,880,369		1,401,017		2,536,344		641,595		1,386,948		3,192,008		4,578,956		415,188

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REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in thousands)

COLUMNA	COLUMNB		COLUMNC					COLUMND		COLUMNE						COLUMNF		COLUMNG	COLUMNH	COLUMNI
			Initialcosttocompany(1)							Grossamountatwhich carriedatcloseofperiod										Lifeonwhich depreciation
Description	Encumbrances		Land			Buildingsand improvements		Costs capitalized subsequent toacquisition		Land		Buildings and improvements		Total(2)		Accumulated depreciation and amortization		Dateof construction(3)	Date acquired	inlatest income statement iscomputed
Merchandise Mart Properties
Illinois
Merchandise Mart, Chicago		550,000			64,528		319,146		165,368		64,535		484,507		549,042		116,281	1930	1998	(4)
350 North Orleans, Chicago		-			14,238		67,008		83,167		14,246		150,167		164,413		42,105	1977	1998	(4)
527 W. Kinzie, Chicago		-			5,166		-		-		5,166		-		5,166		-
Total Illinois		550,000			83,932		386,154		248,535		83,947		634,674		718,621		158,386
Washington, DC
Washington Design Center		44,992			12,274		40,662		13,558		12,274		54,220		66,494		14,377	1919	1998	(4)
North Carolina
Market Square Complex,
High Point		220,361			13,038		102,239		78,508		15,047		178,738		193,785		42,353	1902 - 1989	1998	(4)
New York
7 West 34th Street		-			34,614		94,167		35,745		34,614		129,912		164,526		23,564	1901	2000	(4)
MMPI Piers		-			-		-		3,990		-		3,990		3,990		-		2008	(4)
Total New York		-			34,614		94,167		39,735		34,614		133,902		168,516		23,564
Massachusetts
Boston Design Center		70,740			-		93,915		5,946		-		99,861		99,861		7,808	1918	2005	(4)
California
Gift and Furniture Mart,
Los Angeles		-			10,141		43,422		23,277		10,141		66,699		76,840		14,080	1958	2000	(4)
Total Merchandise Mart		886,093			153,999		760,559		409,559		156,023		1,168,094		1,324,117		260,568
Warehouse/Industrial
New Jersey
East Hanover		25,268			576		7,752		7,793		691		15,430		16,121		13,827	1972	1972	(4)
Edison		-			704		2,839		1,424		704		4,263		4,967		3,915	1962	1962	(4)
Total Warehouse/Industrial		25,268			1,280		10,591		9,217		1,395		19,693		21,088		17,742
Other Properties
Wasserman		150,486			28,052		-		244,139		87,702		184,489		272,191		11,048		2005	(4)
Hotel Pennsylvania		-			29,903		121,712		57,341		29,903		179,053		208,956		49,879	1919	1997	(4)
220 Central Park South		130,000			115,720		16,420		63,262		115,720		79,682		195,402		13,413		2005	(4)
40 East 66th Residential		-			29,199		85,798		(5,124)		32,114		77,759		109,873		2,118		2005	(4)
677-679 Madison		-			1,462		1,058		1,293		2,212		1,601		3,813		87		2006	(4)
Total Other Properties		280,486			204,336		224,988		360,911		267,651		522,584		790,235		76,545
Leasehold Improvements
Equipment and Other		-			-		-		118,603		-		118,603		118,603		73,312
TOTAL
December 31, 2008	$	8,740,826		$	4,645,905	$	10,410,028	$	2,823,441	$	4,517,558	$	13,361,816	$	17,879,374	$	2,168,997

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REAL ESTATE AND ACCUMULATED DEPRECIATION

*These encumbrances are cross-collateralized under a blanket mortgage in the amount of $448,115,000 as of December 31, 2008.

Notes:

(1) Initial cost is cost as of January 30, 1982 (the date on which Vornado commenced real estate operations) unless acquired subsequent to that date see Column H.

(2) The net basis of the Company’s assets and liabilities for tax purposes is approximately $3.4 billion lower than the amount reported for financial statement purposes.

(3) Date of original construction –– many properties have had substantial renovation or additional construction –– see Column D.

(4) Depreciation of the buildings and improvements are calculated over lives ranging from the life of the lease to forty years.

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SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(AMOUNTS IN THOUSANDS)

The following is a reconciliation of real estate assets and accumulated depreciation:

	Year Ended December 31,
	2008		2007		2006
Real Estate
Balance at beginning of period	$	17,038,511	$	11,617,118	$	9,594,370
Additions during the period:
Land		95,980		1,956,602		552,381
Buildings & improvements		1,087,944		3,617,881		1,860,881
		18,222,435		17,191,601		12,007,632
Less: Assets sold and written-off		343,061		153,090		390,514
Balance at end of period	$	17,879,374	$	17,038,511	$	11,617,118
Accumulated Depreciation
Balance at beginning of period	$	1,810,151	$	1,448,540	$	1,208,328
Additions charged to operating expenses		407,753		445,150		353,473
Additions due to acquisitions		—		20,817		—
		2,217,904		1,914,507		1,561,801
Less: Accumulated depreciation on assets sold and written-off		48,907		104,356		113,261
Balance at end of period	$	2,168,997	$	1,810,151	$	1,448,540

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