(AMOUNTS IN THOUSANDS) 2003 Net income applicable to common shares $439,888 Depreciation and amortization 59,015 Straight-line rent adjustments (35,856) Book to tax differences in gain recognition on sale of real estate (88,155) Book to tax differences in earnings of partially-owned entities 41,198 Stock option expense (78,125) Amortization of acquired below market leases, net of above market leases (7,733) Other (1,727) Estimated taxable income $328,505 The following table reconciles net income to estimated taxable income for the year ended December 31, 2003. The Company owns stock in corporations that have elected to be tr eated for Federal income tax purposes, as taxable REIT subsidiaries (“TRS”). The value of the combined TRS stock cannot and does not exceed 20% of the value of the Company’s total assets. A TRS is taxable on its net income at regular corporate tax rates. The total income tax paid for the 2003 and 2002 tax years was $2,486,000 and $1,430,000. INCOME TAXES: The Company operates in a manner intended to enable it 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. The Company will distribute to its  shareholders 100% of its taxable income and therefore, no provision for Federal income taxes is required. Dividend distributions for the year ended December 31, 2003, wer characterized for Federal income tax purposes as 94.4% ordinary income and 5.6% long-term capital gain income. Dividend distributions for the year ended December 31, 2002 and 2001 were characterized as ordinary income. Expense Reimbursements—revenue arising from tenant leases which pr ovide 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. Contingent rents are not recognized until r ealized. Trade Show Revenues—income arising from the operation of trade shows, including rentals of booths. This revenue is recognized in accordance with the booth rental contracts when the trade shows have occurred. Hotel Revenues—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 r ooms are occupied. Food and beverage and banquet revenue are recognized when the services have been rendered. Percentage Rents—income arising from retail tenant leases which ar e contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accordance with SAB 104, which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved). Base Rents—income arising from tenant leases. These rents are r ecognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and r ent abatements under the leases. REVENUE RECOGNITION: The Company has the following revenue sources and revenue recognition policies: with a fair value of $25,780,000 at December 31, 2003, which is included in Other Assets on the Company’s consolidated balance sheet. Accounting for these swaps also requires the Company to recognize changes in the fair value of the debt during each reporting period. At December 31, 2003, the fair value adjustment of $25,780,000, based on the fair value of the swaps, is included in the balance of the Senior Unsecured Notes. Because the hedging relationship qualifies for the “short-cut” method, no hedge ineffectiveness on these fair value hedges was r ecognized during 2003 and 2002. VORNADO REALTY TRUST 56 NOTES TO CONSOLIDATED FINANCIAL STA TEMENTS