Page Overview 65 Overview - Leasing Activity 71 Critical Accounting Policies 73 Results of Operations:
Years Ended December 31, 2008 and 2007 83 Years Ended December 31, 2007 and 2006 89 Supplemental Information:
Summary of Net Income and EBITDA for the Three Months Ended December 31, 2008 and 2007 97 Changes in EBITDA by segment for the Three Months Ended December 31, 2008 as compared to December 31, 2007 100 Changes in EBITDA by segment for the Three Months Ended December 31, 2008 as compared to September 30, 2008 100 Related Party Transactions 101 Liquidity and Capital Resources 102 Certain Future Cash Requirements 104 Financing Activities and Contractual Obligations 105 Cash Flows for the Year Ended December 31, 2008 109 Cash Flows for the Year Ended December 31, 2007 111 Cash Flows for the Year Ended December 31, 2006 113 Funds From Operations for the Years Ended December 31, 2008 and 115 2007

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.

Year Ended December 31, 2008 Financial Results Summary

Net income applicable to common shares for the year ended December 31, 2008 was $337,952,000, or $2.14 per diluted share, versus $511,729,000, or $3.23 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 and certain other items that affect comparability, which are listed in the table below. The aggregate of these items and net gains on sale of real estate, net of minority interest, increased net income applicable to common shares for the years ended December 31, 2008 and 2007 by $17,621,000 and $131,023,000, or $0.11 and $0.83 per diluted share, respectively.

Funds from operations applicable to common shares plus assumed conversions ("FFO") for the year ended December 31, 2008 was $844,568,000, or $5.16 per diluted share, compared to $966,638,000, or $5.89 per diluted share, for the prior year. FFO for the years ended December 31, 2008 and 2007 also include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of minority interest, decreased FFO for the year ended December 31, 2008 by $36,216,000, or $0.22 per diluted share and increased FFO for the year ended December 31, 2007 by $91,975,000, $0.56 per diluted share.

                                                                                                        For the Year Ended
(Amounts in thousands)                                                                                     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 )
Minority limited partners' share of above adjustments                                                     (3,553 )      9,021
Total items that affect comparability                                                                 $   36,216   $  (91,975 )

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 20th Street, 1229-1231 25th 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   Washington, DC            Merchandise
                                           Office        Office       Retail      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.

Quarter Ended December 31, 2008 Financial Results Summary

Net loss applicable to common shares for the quarter ended December 31, 2008 was $216,786,000, or $1.40 per diluted share, versus net income of $90,923,000, or $0.57 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 and certain other items that affect comparability, which are listed in the table below. The aggregate of these items, net of minority interest, increased net loss applicable to common shares for the quarter ended December 31, 2008 by $251,841,000, or $1.63 per diluted share and increased net income applicable to common shares for the quarter ended December 31, 2007 by $20,414,000, or $0.13 per diluted share.

FFO for the quarter ended December 31, 2008 was a negative $77,989,000, or $0.50 per diluted share, compared to a positive $193,412,000, or $1.18 per diluted share, for the prior year's quarter. FFO for the quarters ended December 31, 2008 and 2007 include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of minority interest, increased negative FFO for the quarter ended December 31, 2008 by $253,506,000, or $1.64 per diluted share and decreased FFO for the quarter ended December 31, 2007 by $11,146,000, or $0.07 per diluted share.

                                                                                                 For the Three Months
(Amounts in thousands)                                                                            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
Minority limited partners' 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   Washington, DC            Merchandise
                                            Office        Office       Retail      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%

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.

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, net of minority interest" 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, net of minority interest" 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.

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
. . .