VORNADO REALTY TRUST 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Funds From Operations Applicable to Common Shares (“FFO”)  FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. FFO should not be considered as an alternative to net income as an indicator of the Company’ operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a relevant supplemental measur of operating performance because it provides a basis for com- parison among REITs. FFO is computed in accordance with NAREIT’ s definition, which may not be comparable to FFO report- ed by other REITs that do not compute FFO in accordance with NAREIT’s definition.  FFO was $518,242,000, or $4.44 per diluted shar for the year ended December 31, 2003, compared to $439,775,000, or $3.91 per diluted share for the year ended December 31, 2002, an incr ease of $78,467,000 or $.53 per share. Income from the straight-lining of rents included in FFO amounted to $34,023,000, or $.24 per diluted share for the year ended December 31, 2003, and $27,295,000, or $.24 per diluted shar for the year ended December 31, 2002. Income from the amortization of acquired below market leases net of above market leases included in FFO amounted to $9,047,000, or $.06 per diluted share for the year ended December 31, 2003 and $12,634,000, or $.11 per diluted share for the year ended December 31, 2002. Also included in FFO are certain items that affect comparability as detailed below. Before these items, the year ended December 31, 2003 FFO is 6.5% higher than the year ended December 31, 2002 on a per share basis. For The Year Ended Year Ended December 31, 2003 vs. December 31, 2002 Funded by the Company New Y ork City Merchandise CESCR (AMOUNTS IN THOUSANDS) Total Of fice Retail Mart Other (34% Interest) Leasing Commissions: Recurring $ 19,536 $ 18,546 $ 336 $ 381 $ 273 $ 1,142 Non-recurring 7,902 7,902 — — — 28 $ 27,438 $ 26,448 $ 336 $ 381 $ 273 $ 1,170 Total Capital Expenditures and Leasing Commissions: Recurring $ 60,629 $ 47,682 $ 1,860 $ 10,526 $ 561 $ 10,242 Non-recurring 33,899 26,783 — 7,116 — 6,896 $ 94,528 $ 74,465 $ 1,860 $ 17,642 $ 561 $ 17,138 Development and Redevelopment Expenditures: Palisades—Fort Lee, NJ $ 66,173 $ — $ — $ — $ 66,173 $ — Market Square on Main Street 29,425 — — 29,425 — — Other 50,219 25,703 6,378 4,350 13,788 14,067 $ 145,817 $ 25,703 $ 6,378 $ 33,775 $ 79,961 $ 14,067 December 31, 2003 December 31, 2002 Per Per (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Amount Share Amount Share FFO as reported above $ 518,242 $4.44 $439,775 $3.91 Items that affect comparability of FFO: Alexander’s stock appreciation rights compensation expense $ 14,868 $ .13 $ — $ — Gain on early extinguishment of debt of a partially- owned entity (Newkirk MLP) (1,600) (.01) — — Primestone loss on settlement of guarantees (2003)  and foreclosure and impairment losses (2002) 1,388 .01 35,757 .32 Write-off of Series D-1 preferred unit offering costs 2,187 .02 — — Gain on sale of condominiums (282) .00 (2,156) (.02)