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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

COMMISSION FILE NUMBER: 1-13762



RECKSON ASSOCIATES REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


MARYLAND 11-3233650
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

225 BROADHOLLOW ROAD, MELVILLE, NY 11747
- ---------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)

(631) 694-6900
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) YES [X] NO[ ], AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO[ ].

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

YES [X] NO[ ].

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THE COMPANY HAS ONE CLASS OF COMMON STOCK, PAR VALUE $.01 PER SHARE, WITH
69,941,988 SHARES OUTSTANDING AS OF AUGUST 6, 2004

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RECKSON ASSOCIATES REALTY CORP.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 2004

TABLE OF CONTENTS

INDEX PAGE
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2004
(unaudited) and December 31, 2003 ................. 2

Consolidated Statements of Income for the three
and six months ended June 30, 2004 and 2003
(unaudited) ....................................... 3

Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 (unaudited) ... 4

Notes to the Consolidated Financial Statements
(unaudited) ....................................... 5


Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 21

Item 3. Quantitative and Qualitative Disclosures about
Market Risk ....................................... 38

Item 4. Controls and Procedures ........................... 39

- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------

Item 1. Legal Proceedings ................................. 44

Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities .................... 44

Item 3. Defaults Upon Senior Securities.................... 44

Item 4. Submission of Matters to a Vote of Securities
Holders............................................ 44

Item 5. Other Information.................................. 45

Item 6. Exhibits and Reports on Form 8/K................... 45

- --------------------------------------------------------------------------------
SIGNATURES
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
(UNAUDITED)
ASSETS:

Commercial real estate properties, at cost:
Land ............................................. $ 384,137 $ 378,479
Building and improvements ........................ 2,608,867 2,211,566
Developments in progress:
Land ............................................. 95,600 90,706
Development costs ................................ 28,900 68,127
Furniture, fixtures and equipment .................... 11,625 11,338
---------- ----------
3,129,129 2,760,216
Less accumulated depreciation ........................ (515,961) (464,382)
---------- ----------
Investment in real estate, net of accumulated
deprecation ........................................ 2,613,168 2,295,834

Properties and related assets held for sale, net
of accumulated depreciation ........................ 5,069 52,517
Investments in real estate joint ventures ............ 6,462 5,904
Investments in mortgage notes and notes receivable ... 68,433 54,986
Investments in service companies and affiliate
loans and joint ventures ........................... 70,563 71,614
Cash and cash equivalents ............................ 82,670 22,330
Tenant receivables ................................... 11,661 11,929
Deferred rents receivable ............................ 122,672 111,962
Prepaid expenses and other assets .................... 82,523 35,371
Contract and land deposits and pre-acquisition costs . 60 20,203
Deferred leasing and loan costs ...................... 69,573 64,345
---------- ----------

TOTAL ASSETS ......................................... $3,132,854 $2,746,995
========== ==========


LIABILITIES:
Mortgage notes payable ............................... $ 965,561 $ 721,635
Unsecured credit facility ............................ 90,000 169,000
Senior unsecured notes ............................... 549,132 499,445
Liabilities associated with properties held for sale . 311 881
Accrued expenses and other liabilities ............... 120,498 93,885
Dividends and distributions payable .................. 32,994 28,290
---------- ----------
TOTAL LIABILITIES .................................... 1,758,496 1,513,136
---------- ----------

Minority partners' interests in consolidated
partnerships ....................................... 223,405 233,070
Preferred unit interest in the operating partnership . 16,581 19,662
Limited partners' minority interest in the operating
partnership ........................................ 46,659 44,518
---------- ----------

TOTAL MINORITY INTERESTS ............................. 286,645 297,250
---------- ----------

Commitments and contingencies ........................ -- --

STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 25,000,000 shares
authorized
Series A preferred stock, 8,693,900 and 8,834,500
shares issued and outstanding, respectively ...... 87 88
Series B preferred stock, 0 and 2,000,000 shares
issued and outstanding, respectively ............. -- 20
Common Stock, $.01 par value, 100,000,000 shares
authorized 67,256,850 and 58,275,367 shares issued
and outstanding, respectively ...................... 673 583
Retained earnings .................................... 7,412 35,757
Additional paid in capital ........................... 1,142,832 968,653
Accumulated other comprehensive income ............... 5,201 --
Treasury stock, 3,318,600 shares ..................... (68,492) (68,492)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ........................... 1,087,713 936,609
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $3,132,854 $2,746,995
========== ==========

(see accompanying notes to financial statements)

2



RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)



THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------

REVENUES:
Property operating revenues:
Base rents ...................................................... $ 109,765 $ 94,141 $ 220,800 $ 188,885
Tenant escalations and reimbursements ........................... 17,478 13,907 35,593 27,943
------------ ------------ ------------ ------------
Total property operating revenues .................................. 127,243 108,048 256,393 216,828
Interest income on mortgage notes and notes receivable
(including $539, $1,045, $1,128 and $2,078,
respectively from related parties) .............................. 1,876 1,539 3,492 3,010
Investment and other income ........................................ 1,447 3,349 5,494 9,137
------------ ------------ ------------ ------------
TOTAL REVENUES .................................................. 130,566 112,936 265,379 228,975
------------ ------------ ------------ ------------
EXPENSES:
Property operating expenses ........................................ 50,626 42,438 102,091 85,818
Marketing, general and administrative .............................. 7,374 8,795 14,441 16,364
Interest ........................................................... 24,607 20,145 50,268 40,242
Depreciation and amortization ...................................... 29,617 26,983 58,738 55,763
------------ ------------ ------------ ------------
TOTAL EXPENSES ................................................ 112,224 98,361 225,538 198,187
------------ ------------ ------------ ------------
Income before minority interests, preferred dividends and
distributions, equity (loss) in earnings of real estate
joint ventures and discontinued operations ...................... 18,342 14,575 39,841 30,788
Minority partners' interests in consolidated partnerships .......... (4,422) (4,062) (10,603) (8,463)
Distributions to preferred unit holders ............................ (227) (274) (500) (547)
Limited partners' minority interest in the operating partnership ... (506) (482) (1,100) (1,135)
Equity (loss) in earnings of real estate joint ventures ............ 294 (270) 408 (164)
------------ ------------ ------------ ------------
Income before discontinued operations and preferred dividends ...... 13,481 9,487 28,046 20,479
Discontinued operations (net of limited partners' and minority
interests):
Gain on sales of real estate .................................... 3,639 -- 8,841 --
Income from discontinued operations ............................. 95 3,415 552 6,403
------------ ------------ ------------ ------------
Net Income ......................................................... 17,215 12,902 37,439 26,882
Dividends to preferred shareholders ................................ (4,172) (5,317) (8,432) (10,634)
------------ ------------ ------------ ------------
Net income allocable to common shareholders ........................ $ 13,043 $ 7,585 $ 29,007 $ 16,248
============ ============ ============ ============
Net income allocable to:
Common shareholders ............................................. $ 13,043 $ 5,769 $ 29,007 $ 12,364
Class B common shareholders ..................................... -- 1,816 -- 3,884
------------ ------------ ------------ ------------
Total .............................................................. $ 13,043 $ 7,585 $ 29,007 $ 16,248
============ ============ ============ ============
Basic net income per weighted average common share:
Income from continuing operations ............................... $ .13 $ .07 $ .30 $ .16
Discontinued operations ......................................... .06 .05 .15 .10
------------ ------------ ------------ ------------
Basic net income per common share ............................... $ .19 $ .12 $ .45 $ .26
============ ============ ============ ============

Class B common - income from continuing operations .............. $ -- $ .10 $ -- $ .24
Discontinued operations ......................................... -- .08 -- .15
------------ ------------ ------------ ------------
Basic net income per Class B common share ....................... $ -- $ .18 $ -- $ .39
============ ============ ============ ============

Basic weighted average common shares outstanding:
Common stock .................................................... 66,892,096 48,000,995 64,127,596 48,100,418
Class B common stock ............................................ -- 9,915,313 -- 9,915,313

Diluted net income per weighted average common share:
Common share .................................................... $ .19 $ .12 $ .45 $ .26
============ ============ ============ ============
Class B common share ............................................ $ -- $ .13 $ -- $ .28
============ ============ ============ ============

Diluted weighted average common shares outstanding:
Common stock .................................................... 67,326,754 48,118,172 64,522,390 48,218,598
Class B common stock ............................................ -- 9,915,313 -- 9,915,313


(see accompanying notes to financial statements)

3



RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)



SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ........................................................................... $ 37,439 $ 26,882
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of real estate ................................................... (11,330) --
Depreciation and amortization (including discontinued operations) .............. 59,069 61,887
Minority partners' interests in consolidated partnerships ...................... 13,136 9,025
Limited partners' minority interest in the operating partnership ............... 1,637 1,870
(Equity) loss in earnings of real estate joint ventures ........................ (408) 164
Changes in operating assets and liabilities:
Tenant receivables ............................................................. 278 6,326
Prepaid expenses and other assets .............................................. (8,674) (6,710)
Deferred rents receivable ...................................................... (8,983) (9,207)
Accrued expenses and other liabilities ......................................... (5,452) (9,057)
------------ ------------
Net cash provided by operating activities ...................................... 76,712 81,180
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to developments in progress .......................................... (12,977) (9,732)
Purchase of commercial real estate ............................................. (72,691) (6,505)
Additions to commercial real estate properties ................................. (17,802) (25,149)
Additions to furniture, fixtures and equipment ................................. (288) (94)
Payment of leasing costs ....................................................... (8,677) (8,765)
Distributions (contributions) from investments in real estate joint ventures ... (150) 243
Additions to mortgage notes and notes receivable ............................... (15,619) --
Repayments of mortgage notes and notes receivable .............................. 2,691 --
Proceeds from sales of real estate ............................................. 57,056 --
------------ ------------
Net cash used in investing activities .......................................... (68,457) (50,002)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock net of issuance costs ................... 149,490 --
Proceeds from options exercised ................................................ 27,205 --
Repurchases of common stock .................................................... -- (4,538)
Principal payments on secured borrowings ....................................... (6,074) (5,878)
Payment of loan and equity issuance costs ...................................... (2,635) (29)
Proceeds from issuance of senior unsecured notes ............................... 150,000 --
Repayment of senior unsecured notes ............................................ (100,000) --
Proceeds from unsecured credit facility ........................................ 90,000 55,000
Repayment of unsecured credit facility ......................................... (169,000) --
Distributions to minority partners in consolidated partnerships ................ (22,800) (11,507)
Distributions to limited partners in the operating partnership ................. (2,278) (6,177)
Distributions to preferred unit holders ........................................ (538) (547)
Dividends to common shareholders ............................................... (52,635) (53,699)
Dividends to preferred shareholders ............................................ (9,208) (10,634)
------------ ------------
Net cash provided by (used in) financing activities ............................ 51,527 (38,009)
------------ ------------

Net increase (decrease) in cash and cash equivalents ........................... 59,782 (6,831)
Cash and cash equivalents at beginning of period ............................... 22,888 30,827
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 82,670 $ 23,996
============ ============


(see accompanying notes to financial statements)

4



RECKSON ASSOCIATES REALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)

1. ORGANIZATION AND FORMATION OF THE COMPANY

Reckson Associates Realty Corp. (the "Company") is a self-administered and self
managed real estate investment trust ("REIT") engaged in the ownership,
management, operation, leasing and development of commercial real estate
properties, principally office and to a lesser extent industrial buildings and
also owns land for future development (collectively, the "Properties") located
in the New York City tri-state area (the "Tri-State Area").

The Company was incorporated in Maryland in September 1994. In June 1995, the
Company completed an initial public offering (the "IPO") and commenced
operations.

The Company became the sole general partner of Reckson Operating Partnership,
L.P. (the "Operating Partnership") by contributing substantially all of the net
proceeds of the IPO in exchange for an approximate 73% interest in the Operating
Partnership. At June 30, 2004, the Company's ownership percentage in the
Operating Partnership was approximately 94.8%. All Properties acquired by the
Company are held by or through the Operating Partnership. In conjunction with
the IPO, the Operating Partnership executed various option and purchase
agreements whereby it issued common units of limited partnership interest in the
Operating Partnership ("OP Units") to certain continuing investors in exchange
for (i) interests in certain property partnerships, (ii) fee simple and
leasehold interests in properties and development land, (iii) certain other
business assets and (iv) 100% of the non-voting preferred stock of Reckson
Management Group, Inc. and Reckson Construction Group, Inc.

2. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the consolidated
financial position of the Company, the Operating Partnership and the Service
Companies (as defined below) at June 30, 2004 and December 31, 2003 and the
results of their operations for the three and six months ended June 30, 2004 and
2003, respectively, and, their cash flows for the six months ended June 30, 2004
and 2003, respectively. The Operating Partnership's investments in majority
owned and controlled real estate joint ventures are reflected in the
accompanying financial statements on a consolidated basis with a reduction for
the minority partners' interest. The Operating Partnership also invests in real
estate joint ventures where it may own less than a controlling interest. Such
investments are reflected in the accompanying financial statements under the
equity method of accounting. The Service Companies which provide management,
development and construction services to the Company and the Operating
Partnership are Reckson Management Group, Inc., RANY Management Group, Inc.,
Reckson Construction Group New York, Inc., Reckson Construction Group, Inc. and
Reckson Construction & Development LLC (the "Service Companies"). All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.

Reckson Construction Group, Inc., Reckson Construction Group New York, Inc. and
Reckson Construction & Development LLC use the percentage-of-completion method
for recording amounts earned on their contracts. This method records amounts
earned as revenue in the proportion that actual costs incurred to date bear to
the estimate of total costs at contract completion.

Minority partners' interests in consolidated partnerships represent a 49%
non-affiliated interest in RT Tri-State LLC, owner of a seven property suburban
office portfolio, a 40% non-affiliated interest in Omni Partners, L.P., owner of
a 579,000 square foot suburban office property and a 49% non-affiliated interest
in Metropolitan 919 Third Avenue, LLC, owner of the property located at 919
Third Avenue, New York, NY. Limited partners' minority interest in the Operating
Partnership was approximately 5.2% and 10.5% at June 30, 2004 and 2003,
respectively.

The Company follows the guidance provided for under the Financing Accounting
Standards Board ("FASB") Statement No. 66, "Accounting for Sales of Real Estate"
("Statement No. 66"), which provides guidance on sales contracts that are
accompanied by agreements which require the seller to develop the property in
the future. Under Statement No. 66 profit is recognized and allocated to the
sale of the land and the later development or construction work on the basis of
estimated costs of each activity; the same rate of profit is attributed to each
activity. As a result, profits are recognized and reflected over the improvement
period on the basis of costs incurred (including land) as a percentage of total
costs estimated to be incurred. The Company uses the percentage of completion
method, as the future costs of development and profit are reliably estimated.

5



The accompanying interim unaudited financial statements have been prepared by
the Company's management pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosure normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") may have been
condensed or omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to not make the information presented
misleading. The unaudited financial statements as of June 30, 2004 and for the
three and six month periods ended June 30, 2004 and 2003 include, in the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. These
financial statements should be read in conjunction with the Company's audited
financial statements and the notes thereto included in the Company's Form 10-K
for the year ended December 31, 2003.

The Company intends to continue to qualify as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT,
the Company will not generally be subject to corporate Federal income taxes as
long as it satisfies certain technical requirements of the Code relating to
composition of its income and assets and requirements relating to distributions
of taxable income to shareholders.

The Company considers highly liquid investments with maturity of six months or
less when purchased to be cash equivalents. Cash balances at June 30, 2004
include approximately $46.5 million of the remaining net proceeds received
during the six month period ended June 30, 2004 relating to property sales,
issuance of the Company's equity (see Note 7) and the Operating Partnership's
January 2004 issuance of senior unsecured notes (see Note 4).

Certain prior period amounts have been reclassified to conform to the current
period presentation.

In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 provides
accounting guidance for financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement No. 144 supersedes Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". It also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
related to the disposal of a segment of a business. The Company adopted
Statement No. 144 on January 1, 2002. The adoption of this statement did not
have a material effect on the results of operations or the financial position of
the Company. The adoption of Statement No. 144 does not have an impact on net
income allocable to common shareholders. Statement No. 144 only impacts the
presentation of the results of operations and gain on sales of depreciable real
estate assets for those properties sold or held for sale during the period
within the consolidated statements of income.

On July 1, 2001 and January 1, 2002, the Company adopted FASB Statement No.141,
"Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangibles", respectively. As part of the acquisition of real estate assets,
the fair value of the real estate acquired is allocated to the acquired tangible
assets, consisting of land, building and building improvements, and identified
intangible assets and liabilities, consisting of the value of above-market and
below-market leases, other value of in-place leases, and value of tenant
relationships, based in each case on their fair values. The Company assesses
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. If the Company incorrectly estimates the values at acquisition or
the undiscounted cash flows, initial allocation of purchase price and future
impairment charges may be different.

Effective January 1, 2002 the Company has elected to follow FASB Statement No.
123, "Accounting for Stock Based Compensation". Statement No.123 requires the
use of option valuation models which determine the fair value of the option on
the date of the grant. All future employee stock option grants will be expensed
over the options' vesting periods based on the fair value at the date of the
grant in accordance with Statement No. 123. To determine the fair value of the
stock options granted, the Company uses a Black-Scholes option pricing model.
Prior to the adoption of Statement No. 123, the Company had applied Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock option plans and reported pro forma disclosures in its Form 10-K
filings by estimating the fair value of options issued and the related expense
in accordance with Statement No. 123.

In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("Statement No. 148"). Statement No.
148 amends Statement No. 123 to provide alternative methods of transition for an
entity that voluntarily adopts the fair value recognition method of recording
stock option expense. Statement No. 148 also amends the disclosure provisions of
Statement 123 and APB Opinion No. 28. "Interim Financial Reporting" to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock options on reported net
income and earnings per share in annual and interim financial statements.

6



The following table sets forth the Company's pro forma information for its
common stockholders for the three and six month periods ended June 30, 2004 and
2003 (in thousands except earnings per share data):



-----------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------

Net income as reported ............................. $ 13,043 $ 5,769 $ 29,007 $ 12,364
Add: Stock option expense included in net income ... 1 1 3 3
Less: Stock option expense determined under
fair value recognition method for all awards .... (104) (54) (196) (144)
----------- ----------- ----------- -----------
Pro forma net income ............................... $ 12,940 $ 5,716 $ 28,814 $ 12,223
=========== =========== =========== ===========

Net income per share as reported:
Basic ........................................... $ .19 $ .12 $ .45 $ .26
=========== =========== =========== ===========
Diluted ......................................... $ .19 $ .12 $ .45 $ .26
=========== =========== =========== ===========

Pro forma net income per share:
Basic ........................................... $ .19 $ .12 $ .45 $ .25
=========== =========== =========== ===========
Diluted ......................................... $ .19 $ .12 $ .45 $ .25
=========== =========== =========== ===========


The fair value for those options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:



-----------------------------------------------------
THREE MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------

Risk free interest rate ............................ 3.00% 3.00% 3.00% 3.00%
Dividend yield ..................................... 7.07% 7.39% 7.07% 7.39%
Volatility factor of the expected market price
of the Company's common stock ................... .200 .196 .200 .196
Weighted average expected option life (in years) ... 4.0 5.3 4.0 5.3



For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current
practice in the accounting for, and disclosure of, guarantees. Guarantees and
indemnification agreements meeting the characteristics described in FIN 45 are
required to be initially recorded as a liability at fair value. FIN 45 also
requires a guarantor to make significant new disclosures for virtually all
guarantees even if the likelihood of the guarantor having to make payment under
the guarantee is remote. The disclosure requirements within FIN 45 are effective
for financial statements for annual or interim periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The Company adopted FIN 45 on January 1, 2003. The adoption of this
interpretation did not have a material effect on the results of operations or
the financial position of the Company.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIEs") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in VIEs created before February 1, 2003,
which were non-special purpose entities. The Company adopted FIN 46R during the
period ended March 31, 2004. The Company has determined that its consolidated
and unconsolidated subsidiaries do not represent VIEs requiring consolidation
pursuant to such interpretation. The Company will continue to monitor any
changes in circumstances relating to certain of its consolidated and
unconsolidated joint ventures which could result in a change in the Company's
consolidation policy.

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("Statement No. 150"). Statement No. 150 is effective for financial instruments
entered into or modified after May 15, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
The adoption of Statement No. 150 did not have a material effect on the
Company's financial position or results of operations.

7



3. MORTGAGE NOTES PAYABLE

As of June 30, 2004, the Company had approximately $965.6 million of mortgage
notes payable, which mature at various times between 2004 and 2027. The notes
are secured by 20 properties with an aggregate carrying value of approximately
$1.84 billion which are pledged as collateral against the mortgage notes
payable. In addition, approximately $43.5 million of the $965.6 million is
recourse to the Company and certain of the mortgage notes payable are guaranteed
by certain limited partners in the Operating Partnership and / or the Company.

The following table sets forth the Company's mortgage notes payable as of June
30, 2004, by scheduled maturity date (dollars in thousands):



Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ------------------------------------------- ------------- ---------- ----------------- ---------------

1185 Avenue of the Americas, NY, NY $ 250,000 4.95% August, 2004 Interest only
395 North Service Road, Melville, NY 19,097 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 18,704 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 73,431 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 43,465 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 16,981 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field,
NY(b) 52,343 7.72% August, 2007 25
810 Seventh Avenue, NY, NY (e) 80,498 7.73% August, 2009 25
100 Wall Street, NY, NY (e) 34,883 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,165 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,576 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,365 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 242,904 6.87% August, 2011 30
One Orlando Center, Orlando, FL (d) 37,439 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 62,710 6.82% November, 2027 28
-------------

Total/Weighted Average $ 965,561 6.65%
=============


- ------------------------
(a) Encompasses six Class A office properties.

(b) The Company has a 60% general partnership interest in this property
and its proportionate share of the aggregate principal amount is
approximately $31.4 million.

(c) The Company has a 51% membership interest in this property and its
proportionate share of the aggregate principal amount is approximately
$123.9 million.

(d) Subject to interest rate adjustment on November 1, 2004 to the greater
of 8.82% per annum or the yield on non-callable U.S. treasury
obligations with a term of fifteen years plus 2% per annum. The
Company has the ability to pre-pay the loan at that time. In addition,
these properties are cross-collateralized.

(e) These properties are cross-collateralized.

(f) Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge
agreement was acquired to limit exposure to increases in LIBOR above
5.825%.


In addition, the Company has a 60% interest in an unconsolidated joint venture
property. The Company's share of the mortgage debt at June 30, 2004 is
approximately $7.6 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005 at which time the Company's share of
the mortgage debt will be approximately $6.9 million.

On March 19, 2004, the Company entered into two anticipatory interest rate hedge
instruments, which are scheduled to coincide with an August 2004 debt maturity,
totaling $100 million, to protect itself against potentially rising interest
rates. At June 30, 2004, the fair value of these instruments exceeded their
carrying value by approximately $5.2 million. Such amount has been reflected as
accumulated other comprehensive income with a corresponding increase to prepaid
expenses and other assets on the accompanying balance sheet. In addition, on
July 1, 2004, the Company entered into an additional anticipatory interest rate
hedge instrument totaling $12.5 million to coincide with the aforementioned
August 2004 debt maturity.

8



4. SENIOR UNSECURED NOTES

On January 22, 2004, the Operating Partnership issued $150 million of seven-year
5.15% (5.196% effective rate) senior unsecured notes. Prior to the issuance of
these notes the Company entered into several anticipatory interest rate hedge
instruments to protect itself against potentially rising interest rates. At the
time the notes were issued the Company incurred a net cost of approximately
$980,000 to settle these instruments. Such costs are being amortized over the
term of the notes. Net proceeds of approximately $148 million received from this
issuance were used to repay outstanding borrowings under the Credit Facility (as
defined below) and to invest in short-term liquid investments.

On March 15, 2004, the Company repaid $100 million of the Operating
Partnership's 7.4% senior unsecured notes at maturity.

As of June 30, 2004, the Operating Partnership had outstanding approximately
$549.1 million (net of issuance discounts) of senior unsecured notes (the
"Senior Unsecured Notes"). The following table sets forth the Operating
Partnership's Senior Unsecured Notes and other related disclosures by scheduled
maturity date (dollars in thousands):

FACE
ISSUANCE AMOUNT COUPON RATE TERM MATURITY
---------------- ---------- ----------- -------- ----------------
June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007

August 27, 1997 150,000 7.20% 10 years August 28, 2007

March 26, 1999 200,000 7.75% 10 years March 15, 2009

January 22, 2004 150,000 5.15% 7 years January 15, 2011
----------
$ 550,000
==========

Interest on the Senior Unsecured Notes are payable semi-annually with principal
and unpaid interest due on the scheduled maturity dates. In addition, certain of
the Senior Unsecured Notes were issued at discounts aggregating approximately
$1.2 million. Such discounts are being amortized over the term of the Senior
Unsecured Notes to which they relate.

5. UNSECURED CREDIT FACILITY

As of June 30, 2004, the Company had a $500 million unsecured revolving credit
facility (the "Credit Facility") from JPMorgan Chase Bank, as administrative
agent, Wells Fargo Bank, National Association, as syndication agent, and
Citicorp North America, Inc. and Wachovia Bank, National Association, as
co-documentation agents. The Credit Facility was scheduled to mature in December
2005, contained options for a one-year extension subject to a fee of 25 basis
points and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. As of June 30, 2004, based on a pricing
grid of the Operating Partnership's unsecured debt ratings, borrowings under the
Credit Facility were priced off LIBOR plus 90 basis points and the Credit
Facility carried a facility fee of 20 basis points per annum. In the event of a
change in the Operating Partnership's unsecured credit ratings the interest
rates and facility fee are subject to change. At June 30, 2004, the outstanding
borrowings under the Credit Facility aggregated $90 million and carried a
weighted average interest rate of 2.18%.

In August 2004, the Company amended and extended the Credit Facility to mature
in August 2007 with similar terms and conditions as existed prior to the
amendment and extension.

The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At June 30, 2004, the Company had availability under the Credit
Facility to borrow approximately an additional $410 million, subject to
compliance with certain financial covenants.

In connection with the acquisition of certain properties, contributing partners
of such properties have provided guarantees on indebtedness of the Company. As a
result, the Company maintains certain outstanding balances on its Credit
Facility.

In accordance with the provisions of FASB Statement No. 144, the Company
allocated approximately $2.6 million and $5.2 million of its unsecured corporate
interest expense to discontinued operations for the three and six month periods
ended June 30, 2003.


9



6. COMMERCIAL REAL ESTATE INVESTMENTS

As of June 30, 2004, the Company owned and operated 76 office properties
(inclusive of nine office properties owned through joint ventures) comprising
approximately 14.4 million square feet and 9 industrial / R&D properties
comprising approximately 955,000 square feet located in the Tri-State Area.

In June, 2004 the Company entered into a contract to sell a 92,000 square foot
industrial property located in Westchester for approximately $7.5 million. The
Company's basis in this property is approximately $4.8 million and is included
in properties and related assets held for sale on the accompanying balance
sheet.

As of June 30, 2004, the Company also owned approximately 313 acres of land in
12 separate parcels of which the Company can, based on current estimates,
develop approximately 3.0 million square feet of office space. The Company is
currently evaluating alternative land uses for certain of the land holdings to
realize the highest economic value. These alternatives may include rezoning
certain land parcels from commercial to residential use for potential
disposition. As of June 30, 2004, the Company had invested approximately $124.5
million in these development projects. Management has made subjective
assessments as to the value and recoverability of these investments based on
current and proposed development plans, market comparable land values and
alternative use values. In addition, during the three and six month periods
ended June 30, 2004, the Company has capitalized approximately $2.3 million and
$5.1 million, respectively related to real estate taxes, interest and other
carrying costs related to these development projects. In October 2003, the
Company entered into a contract to sell a 113 acre land parcel located in New
Jersey. The contract provides for a sales price ranging from $18 million to $36
million. The sale is contingent upon obtaining zoning for residential use of the
land and other customary approvals. The proceeds ultimately received from such
sale will be based upon the number of residential units permitted by the
rezoning. The cost basis of the land parcel at June 30, 2004 was approximately
$5.7 million. The closing is scheduled to occur upon the rezoning, which is
anticipated to occur within 12 to 24 months. However, there can be no assurances
such rezoning will occur. During February 2004, a 3.9 acre land parcel located
on Long Island was condemned by the Town of Oyster Bay. As consideration for the
condemnation the Company anticipates it will initially receive approximately
$1.8 million. The Company's cost basis in this land parcel was approximately
$1.4 million. The Company is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Company will be successful in obtaining any such
additional consideration. In July 2004, the Company commenced the ground-up
development of a 277,000 square foot Class A office building with a total
anticipated investment cost of approximately $60 million. This development is
located within the Company's existing 404,000 square foot executive office park
in Melville, NY.

In November 2003, the Company disposed of all but three of its 95 property, 5.9
million square foot, Long Island industrial building portfolio to members of the
Rechler family (the "Disposition") for approximately $315.5 million, comprised
of $225.1 million in cash and debt assumption and 3,932,111 OP Units valued at
approximately $90.4 million. Approximately $204 million of cash sales proceeds
from the Disposition were used to repay borrowings under the Credit Facility.
For information concerning certain litigation pertaining to this transaction see
Part II-Other Information; Item 1. Legal Proceedings of this Form 10-Q.

In January 2004, the Company sold a 104,000 square foot office property located
on Long Island for approximately $18.5 million. Net proceeds from the sale were
used to repay borrowings under the Credit Facility. As a result, the Company
recorded a net gain of approximately $5.2 million, net of limited partners'
minority interest. In accordance with FASB Statement No. 144, such gain has been
reflected in discontinued operations on the accompanying consolidated statements
of income.

In January 2004, the Company acquired 1185 Avenue of the Americas, a 42-story,
1.1 million square foot Class A office tower, located between 46th and 47th
Streets in New York, NY for $321 million. In connection with this acquisition,
the Company assumed a $202 million mortgage and $48 million of mezzanine debt.
The balance of the purchase price was paid through an advance under the Credit
Facility. The floating rate mortgage and mezzanine debt both mature in August
2004 and presently have a weighted average interest rate of 4.95%. Such rate is
based on the greater of one month LIBOR or 2.15% plus a weighted average spread
of approximately 2.80%. An interest rate hedge agreement was acquired to limit
exposure to increases in LIBOR above 5.825%. The property is also encumbered by
a ground lease which has a remaining term of approximately 40 years with rent
scheduled to be re-set at the end of 2005 and then remain constant for the
balance of the term. Pursuant to the terms of the ground lease, the Company and
the ground lessor have commenced arbitration proceedings relating to the
re-setting of the ground lease. There can be no assurances as to the outcome of
the rent re-set process. In accordance with FASB Statement No. 141, "Business
Combinations", the Company allocated and recorded net deferred intangible lease
income of approximately $14.2 million, representing the net value of acquired
above and below market leases, assumed lease origination costs and other value
of in-place leases. The net value of the above and below market leases is
amortized over the remaining terms of the respective leases to rental income
which amounted to approximately $2.0 million and $3.8 million for the three and
six month periods ended June 30, 2004 . In addition, amortization expense on the
value of lease origination costs was approximately $746,000 and $1.3 million for
the three and six month periods ended June 30, 2004. At acquisition, there were
31 in-place leases aggregating approximately one million square feet with a
weighted average remaining lease term of approximately 6 years.

10



In April 2004, the Company sold a 175,000 square foot office building located on
Long Island for approximately $30 million, of which the Company owned a 51%
interest, and a wholly owned 9,000 square foot retail property for approximately
$2.8 million. In addition, the Company completed the sale on two of the
remaining three properties from the Disposition for approximately $5.8 million.
Proceeds from the sale were used to establish an escrow account with a qualified
intermediary for a future exchange of real property pursuant to Section 1031 of
the Code (a "Section 1031 Exchange"). A Section 1031 Exchange allows for the
deferral of taxes related to the gain attributable to the sale of property if
qualified replacement property is identified within 45 days and such qualified
replacement property is then acquired within 180 days from the initial sale.
There can be no assurances that the Company will meet the requirements of
Section 1031 by identifying and acquiring qualified replacement properties in
the required time frame, in which case the Company would incur the tax liability
on the capital gain realized of approximately $1.5 million. The disposition of
the other industrial property, which is subject to certain environmental issues,
is conditioned upon the approval of the buyer's lender, which has not been
obtained. As a result, the Company will not dispose of this property as part of
the Disposition. Management believes that the cost to remediate the
environmental issues will not have a material adverse effect on the Company, but
there can be no assurance in this regard.

In July 2004, the Company acquired a 141,000 square foot Class A office
property, located in Chatham Township, NJ for approximately $22.7 million. The
Company made this acquisition through available cash-on-hand.

During February 2003, the Company, through Reckson Construction Group, Inc.,
entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has been
completed. In accordance with FASB Statement No. 66, the Company has recognized
a book gain, before taxes, on this land sale and build-to-suit transaction of
approximately $23.8 million, of which $400,000 and $5.0 million and, $4.3
million and $10.1 million has been recognized during the three and six month
periods ended June 30, 2004 and 2003, respectively, and is included in
investment and other income on the accompanying consolidated statements of
income.

The Company holds a $17.0 million note receivable, which bears interest at 12%
per annum and is secured by a minority partnership interest in Omni Partners,
L.P., owner of the Omni, a 579,000 square foot Class A office property located
in Uniondale, New York (the "Omni Note"). The Company currently owns a 60%
majority partnership interest in Omni Partners, L.P. and on March 14, 2007 may
exercise an option to acquire the remaining 40% interest for a price based on
90% of the fair market value of the property. The Company also holds a $30
million junior mezzanine loan which is secured by a pledge of an indirect
ownership interest of an entity which owns the ground leasehold estate under a
1.1 million square foot office complex located on Long Island, New York (the
"Mezz Note"). The Mezz Note matures in September 2005, currently bears interest
at 12.73%, and the borrower has the right to extend for three additional
one-year periods. The Company also holds three other notes receivable
aggregating $19.0 million which bear interest at rates ranging from 10.5% to 12%
per annum. These notes are secured in part by a minority partner's preferred
unit interest in the Operating Partnership, an interest in real property and a
personal guarantee (the "Other Notes" and collectively with the Omni Note and
the Mezz Note, the "Note Receivable Investments"). During April 2004,
approximately $2.7 million of the Other Notes, including accrued interest, were
repaid by the minority partner exchanging, and the Operating Partnership
redeeming, approximately 3,081 preferred units. The preferred units were
redeemed at a par value of $3.1 million. Approximately $420,000 of the
redemption proceeds was used to offset interest due from the minority partner
under the Other Notes and for prepaid interest. In July 2004, the minority
partner delivered notice to the Operating Partnership stating his intention to
repay $15.5 million of the 10.5% Other Notes. When repaid, the remaining Other
Notes will aggregate $3.5 million and carry a weighted average interest rate of
11.57%. The Operating Partnership has also agreed to extend the maturity of $2.5
million of such debt through January 31, 2005 and the remaining $1.0 million
through January 31, 2010. As of June 30, 2004, management has made subjective
assessments as to the underlying security value on the Company's Note Receivable
Investments. These assessments indicate an excess of market value over the
carrying value related to the Company's Note Receivable Investments. Based on
these assessments the Company's management believes there is no impairment to
the carrying value related to the Company's Note Receivable Investments.

The Company also owns a 355,000 square foot office building in Orlando, Florida.
This non-core real estate holding was acquired in May 1999 in connection with
the Company's initial New York City portfolio acquisition. This property is
cross-collateralized under a $100.1 million mortgage note payable along with one
of the Company's New York City buildings. The Company has the right to prepay
this note in November 2004, prior to its maturity.

The Company also owns a 60% non-controlling interest in a 172,000 square foot
office building located at 520 White Plains Road in White Plains, New York (the
"520JV"), which it manages. As of June 30, 2004, the 520JV had total assets of
$20.6 million, a mortgage note payable of $11.7 million and other liabilities of
$582,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.6 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting. In accordance with the equity method of accounting the
Company's proportionate share of the 520JV income (loss) was approximately
$294,000 and $408,000 and $(270,000) and $($164,000) for the three and six month
periods ended June 30, 2004 and 2003, respectively.

11



During September 2000, the Company formed a joint venture (the "Tri-State JV")
with Teachers Insurance and Annuity Association ("TIAA") and contributed nine
Class A suburban office properties aggregating approximately 1.5 million square
feet to the Tri-State JV for a 51% majority ownership interest. TIAA contributed
approximately $136 million for a 49% interest in the Tri-State JV which was then
distributed to the Company. In August 2003, the Company acquired TIAA's 49%
interest in the property located at 275 Broadhollow Road, Melville, NY, for
approximately $12.4 million. In addition, during April 2004, the Tri-State JV
sold a 175,000 square foot office building located on Long Island for
approximately $30 million. Net proceeds from this sale were distributed to the
members of the Tri-State JV. As a result of these transactions, the Tri-State JV
owns seven Class A suburban office properties aggregating approximately 1.2
million square feet. The Company is responsible for managing the day-to-day
operations and business affairs of the Tri-State JV and has substantial rights
in making decisions affecting the properties such as leasing, marketing and
financing. The minority member has certain rights primarily intended to protect
its investment. For purposes of its financial statements the Company
consolidates the Tri-State JV.

On December 21, 2001, the Company formed a joint venture with the New York State
Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby NYSTRS acquired a
49% indirect interest in the property located at 919 Third Avenue, New York, NY
for $220.5 million which included $122.1 million of its proportionate share of
secured mortgage debt and approximately $98.4 million of cash which was then
distributed to the Company. The Company is responsible for managing the
day-to-day operations and business affairs of the 919JV and has substantial
rights in making decisions affecting the property such as developing a budget,
leasing and marketing. The minority member has certain rights primarily intended
to protect its investment. For purposes of its financial statements the Company
consolidates the 919JV.

12



7. STOCKHOLDERS' EQUITY

An OP Unit and a share of common stock have essentially the same economic
characteristics as they effectively share equally in the net income or loss and
distributions of the Operating Partnership. Subject to certain holding periods,
OP Units may either be redeemed for cash or, at the election of the Company,
exchanged for shares of common stock on a one-for-one basis. The OP Units
currently receive a quarterly distribution of $.4246 per unit. As of June 30,
2004, the Operating Partnership had issued and outstanding 3,084,713 Class A OP
Units and 465,845 Class C OP Units. The Class C OP Units were issued in August
2003 in connection with the contribution of real property to the Operating
Partnership and currently receive a quarterly distribution of $.4664 per unit

During June, 2004, the Board of Directors of the Company declared the following
dividends on the Company's securities:



ANNUALIZED
DIVIDEND / RECORD PAYMENT THREE MONTHS DIVIDEND /
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------- ------------ ------------- -------------- ------------- ------------

Common stock $ .4246 July 7, 2004 July 20, 2004 June 30, 2004 $ 1.6984
Series A preferred stock $ .4766 July 15, 2004 August 2, 2004 July 31, 2004 $ 1.9063


On November 25, 2003 the Company exchanged all of its 9,915,313 outstanding
shares of Class B common stock for an equal number of shares of its common
stock. The Board of Directors declared a final cash dividend on the Company's
Class B common stock to holders of record on November 25, 2003 in the amount of
$.1758 per share which was paid on January 12, 2004. This payment covered the
period from November 1, 2003 through November 25, 2003 and was based on the
previous quarterly Class B common stock dividend rate of $.6471 per share. In
order to align the regular quarterly dividend payment schedule of the former
holders of Class B common stock with the schedule of the holders of common stock
for periods subsequent to the exchange date for the Class B common stock, the
Board of Directors also declared a cash dividend with regard to the common stock
to holders of record on October 14, 2003 in the amount of $.2585 per share which
was paid on January 12, 2004. This payment covered the period from October 1,
2003 through November 25, 2003 and was based on the current quarterly common
stock dividend rate of $.4246 per share. As a result, the Company declared
dividends through November 25, 2003 to all holders of common stock and Class B
common stock. The Board of Directors also declared the common stock cash
dividend for the portion of the fourth quarter subsequent to November 25, 2003.
The holders of record of common stock on January 2, 2004, giving effect to the
exchange transaction, received a dividend on the common stock in the amount of
$.1661 per share on January 12, 2004. This payment covered the period from
November 26, 2003 through December 31, 2003 and was based on the current
quarterly common stock dividend rate of $.4246 per share.

During the six month period ended June 30, 2004, approximately 1.3 million
shares of the Company's common stock was issued in connection with the exercise
of outstanding options to purchase stock under its stock option plans resulting
in proceeds to the Company of approximately $27.2 million.

In March 2004, the Company completed an equity offering of 5.5 million shares of
its common stock raising approximately $149.5 million, net of an underwriting
discount, or $27.18 per share. Net proceeds received from this transaction were
used to repay outstanding borrowings under the Credit Facility, repay $100
million of the Operating Partnership's 7.4% senior unsecured notes and to invest
in short-term liquid investments.

The Board of Directors of the Company authorized the purchase of up to five
million shares of the Company's common stock. Transactions conducted on the New
York Stock Exchange have been, and will continue to be, effected in accordance
with the safe harbor provisions of the Securities Exchange Act of 1934 and may
be terminated by the Company at any time. Since the Board's initial
authorization, the Company has purchased 3,318,600 shares of its common stock
for an aggregate purchase price of approximately $71.3 million. In June 2004,
the Board of Directors re-set the Company's common stock repurchase program back
to five million shares. No purchases were made during the six months ended June
30, 2004.

The Board of Directors of the Company also formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.

On June 30, 2004, the Company had issued and outstanding 8,693,900 shares of
7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred
stock"). The Series A preferred stock is redeemable by the Company on or after
April 13, 2004 at a price of $25.7625 per share with such price decreasing, at
annual intervals, to $25.00 per share on April 13, 2008. In addition, the Series
A preferred stock, at the option of the holder, is convertible at any time into
the Company's common stock at a price of $28.51 per share. On May 13, 2004, the
Company purchased and retired 140,600 shares of the Series A preferred stock for
approximately $3.4 million or $24.45 per share. In addition, during July 2004,
the Company exchanged 1,350,000 shares of the Series A preferred stock for
1,304,602 shares of common stock. As a result of these transactions annual
preferred dividends will decrease by approximately $2.8 million. In accordance
with the Emerging Issues Task Force ("EITF") Topic D-42 the Company will incur
an accounting charge during the third quarter of 2004 of approximately $3.4
million in connection with the July 2004 exchange of the Series A preferred
stock.

13



On January 1, 2004, the Company had issued and outstanding two million shares of
Series B Convertible Cumulative Preferred Stock (the "Series B preferred
stock"). The Series B preferred stock was redeemable by the Company as follows:
(i) on or after June 3, 2003 to and including June 2, 2004, at $25.50 per share
and (ii) on or after June 3, 2004 and thereafter, at $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's common stock at a price of $26.05 per share. On January
16, 2004, the Company exercised its option to redeem the two million shares of
outstanding Series B preferred stock for approximately 1,958,000 shares of its
common stock. As a result of this redemption, annual preferred dividends will
decrease by approximately $4.4 million.

On April 1, 2004, the Operating Partnership had issued and outstanding
approximately 19,662 preferred units of limited partnership interest with a
liquidation preference value of $1,000 per unit and a current annualized
distribution of $55.60 per unit (the "Preferred Units"). The Preferred Units
were issued in 1998 in connection with the contribution of real property to the
Operating Partnership. On April 12, 2004, the Operating Partnership redeemed
approximately 3,081 Preferred Units, at the election of the holder, for
approximately $3.1 million, including accrued and unpaid dividends which is
being applied to amounts owed from the unit holder under the Other Notes. In
addition, during July 2004, the holder of approximately 15,381 of the
outstanding Preferred Units exchanged them into OP Units. The Operating
Partnership converted the Preferred Units, including accrued and unpaid
dividends, into approximately 531,000 OP Units, which were valued at
approximately $14.7 million at the time of the conversion. Subsequent to the
conversion, the OP Units were exchanged for an equal number of shares of the
Company's common stock. In connection with the July 2004 exchanges and
conversions, the preferred unit holder delivered notice to the Operating
Partnership of his intent to repay $15.5 million owed from the unit holder under
the Other Notes.

The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the Company discontinued the use
of stock loans in its LTIP. In connection with LTIP grants made prior to the
enactment of the Sarbanes Oxley legislation the Company made stock loans to
certain executive and senior officers to purchase 487,500 shares of its common
stock at market prices ranging from $18.44 per share to $27.13 per share. The
stock loans were set to bear interest at the mid-term Applicable Federal Rate
and were secured by the shares purchased. Such stock loans (including accrued
interest) were scheduled to vest and be ratably forgiven each year on the
anniversary of the grant date based upon vesting periods ranging from four to
ten years based on continued service and in part on attaining certain annual
performance measures. These stock loans had an initial aggregate weighted
average vesting period of approximately nine years. As of June 30, 2004, there
remains 222,429 shares of common stock subject to the original stock loans which
are anticipated to vest between 2005 and 2011. Approximately $248,000 and
$556,000 of compensation expense was recorded for the three and six month
periods ended June 30, 2004, respectively related to these LTIP. Such amount has
been included in marketing, general and administrative expenses on the
accompanying consolidated statements of income.

The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.7 million at June 30, 2004, and have been included
as a reduction of additional paid in capital on the accompanying consolidated
balance sheets. Other outstanding loans to executive and senior officers at June
30, 2004 amounted to approximately $1.9 million primarily related to tax payment
advances on stock compensation awards and life insurance contracts made to
certain executive and non-executive officers.

In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of common stock if shares are then available
for grant under one of the Company's stock option plans or, if shares are not so
available, an amount of cash equivalent to the value of such stock on the
vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 62,835 shares of the Company's common stock and the 2003 Rights
aggregate 26,042 shares of common stock. As of June 30, 2004, there remains
47,126 shares of common stock related to the 2002 Rights and 26,042 shares of
common stock related to the 2003 Rights. During the three and six month periods
ended June 30, 2004 the Company recorded approximately$100,000 and $201,000,
respectively of compensation expense related to the Rights. Such amount has been
included in marketing, general and administrative expenses on the accompanying
consolidated statements of income.

14



In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award, which provides for compensation to be earned at the end of a four-year
period if the Company attains certain four-year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 827,776 shares of its
common stock under one of its existing stock option plans in connection with the
core award of this LTIP for eight of its executive and senior officers. On March
13, 2004, the Company met its annual performance measure with respect to the
prior annual period. As a result, the Company issued to the participants 206,944
shares of its common stock related to the core component of this LTIP. As of
June 30, 2004, there remains 620,832 shares of common stock reserved for future
issuance under the core award of this LTIP. With respect to the core award of
this LTIP, the Company recorded approximately $699,000 and $1.4 million of
compensation expense for the three and six month periods ended June 30, 2004,
respectively. Such amount has been included in marketing, general and
administrative expenses on the accompanying consolidated statements of income.
Further, no provision will be made for the special outperformance award of this
LTIP until such time as achieving the requisite performance measures is
determined to be probable.

Basic net income per share on the Company's common stock was calculated using
the weighted average number of shares outstanding of 66,892,096 and 48,000,995
for the three months ended June 30, 2004 and 2003, respectively and 64,127,596
and 48,100,148 for the six months ended June 30, 2004 and 2003, respectively.

Basic net income per share on the Company's Class B common stock was calculated
using the weighted average number of Class B shares outstanding of 9,915,313 for
the three and six month periods ended June 30, 2003.

The following table sets forth the Company's reconciliation of numerators and
denominators of the basic and diluted net income per weighted average common
share and the computation of basic and diluted net income per weighted average
share for the Company's common stock (in thousands except for earnings per share
data):



THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------

Numerator:
Income before discontinued operations, dividends to
preferred shareholders and (income) allocated
to Class B shareholders .................................... $ 13,481 $ 9,487 $ 28,046 $ 20,479
Discontinued operations (net of share applicable to limited
partners, minority interests and Class B shareholders) .... 3,734 2,597 9,393 4,872
Dividends to preferred shareholders ........................... (4,172) (5,317) (8,432) (10,634)
(Income) allocated to Class B common shareholders ............. -- (998) -- (2,353)
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per common share ........ $ 13,043 $ 5,769 $ 29,007 $ 12,364
=========== =========== =========== ===========

Denominator:
Denominator for basic earnings per share - weighted average
common shares .............................................. 66,892 48,001 64,128 48,100
Effect of dilutive securities:
Common stock equivalents ................................... 435 117 394 118
----------- ----------- ----------- -----------
Denominator for diluted earnings per common share - adjusted
weighted average shares and assumed conversions ............ 67,327 48,118 64,522 48,218
=========== =========== =========== ===========

Basic earnings per weighted average common share:
Income from continuing operations ............................. $ .13 $ .07 $ .30 $ .16
Discontinued operations ....................................... .06 .05 .15 .10
----------- ----------- ----------- -----------
Net income per common share ................................... $ .19 $ .12 $ .45 $ .26
=========== =========== =========== ===========

Diluted earnings per weighted average common share:
Income from continuing operations ............................. $ .13 $ .07 $ .30 $ .16
Discontinued operations ....................................... .06 .05 .15 .10
----------- ----------- ----------- -----------
Diluted net income per common share ........................... $ .19 $ .12 $ .45 $ .26
=========== =========== =========== ===========


15



The following table sets forth the Company's reconciliation of numerators and
denominators of the basic and diluted net income per weighted average common
share and the computation of basic and diluted net income per weighted average
share for the Company's Class B common stock (in thousands except for earnings
per share data):



THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
------------------ ----------------

Numerator:
Income before discontinued operations, dividends to preferred
shareholders and (income) allocated to common shareholders ...... $ 9,487 $ 20,479
Discontinued operations (net of share applicable to limited
partners and common shareholders) ............................... 818 1,531
Dividends to preferred shareholders ................................ (5,317) (10,634)
(Income) allocated to common shareholders .......................... (3,172) (7,492)
------------ ------------
Numerator for basic earnings per Class B common share ................. 1,816 3,884
Add back:
Income allocated to common shareholders ............................ 5,769 12,364
Limited partner's minority interest in the operating partnership ... 874 1,870
------------ ------------
Numerator for diluted earnings per Class B common share ............... $ 8,459 $ 18,118
============ ============
Denominator:
Denominator for basic earnings per share-weighted average
Class B common shares ........................................... 9,915 9,915
Effect of dilutive securities:
Weighted average common shares outstanding ...................... 48,001 48,100
Weighted average OP Units outstanding ........................... 7,276 7,276
Common stock equivalents ........................................ 117 118
------------ ------------
Denominator for diluted earnings per Class B common share -
adjusted weighted average shares and assumed conversions ........ 65,309 65,409
============ ============

Basic earnings per weighted average common share:
Income from continuing operations ................................ $ .18 $ .39
Discontinued operations .......................................... -- --
------------ ------------
Net income per Class B common share .............................. $ .18 $ .39
============ ============

Diluted earnings per weighted average common share:
Income from continuing operations ................................ $ .13 $ .28
Discontinued operations .......................................... -- --
------------ ------------
Diluted net income per Class B common share ...................... $ .13 $ .28
============ ============



8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)



SIX MONTHS ENDED
JUNE 30,
--------------------------------
2004 2003
------------ ------------

Cash paid during the period for interest ...................... $ 50,277 $ 47,304
============ ============


Interest capitalized during the period ........................ $ 4,000 $ 3,675
============ ============


16



9. SEGMENT DISCLOSURE

The Company owns all of the interests in its real estate properties directly or
indirectly through the Operating Partnership. The Company's portfolio consists
of Class A office properties located within the New York City metropolitan area
and Class A suburban office properties located and operated within the Tri-State
Area (the "Core Portfolio"). The Company's portfolio also includes one office
property located in Orlando, Florida. The Company has formed an Operating
Committee that reports directly to the President and Chief Financial Officer who
have been identified as the Chief Operating Decision Makers due to their final
authority over resource allocation, decisions and performance assessment.

The Company does not consider (i) interest incurred on its Credit Facility and
Senior Unsecured Notes, (ii) the operating performance of the office property
located in Orlando, Florida, (iii) the operating performance of those properties
reflected as discontinued operations in the Company's consolidated statements of
income, and (iv) the operating results of the Service Companies as part of its
Core Portfolio's property operating performance for purposes of its component
disclosure set forth below.

The accounting policies of the reportable segments are the same as those
described in the summary of significant account policies. In addition, amounts
reflected have been adjusted to give effect to the Company's discontinued
operations in accordance with FASB Statement No. 144.

The following table sets forth the components of the Company's revenues and
expenses and other related disclosures (in thousands):



THREE MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, 2004 JUNE 30, 2003
----------------------------------------- -----------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
------------ ------------ ------------ ------------ ------------ ------------

REVENUES:
Base rents, tenant
escalations and reimbursements ......... $ 125,324 $ 1,919 $ 127,243 $ 106,041 $ 2,007 $ 108,048
Interest, investment and other income ..... 562 2,761 3,323 1,097 3,791 4,888
------------ ------------ ------------ ------------ ------------ ------------

Total Revenues ............................ 125,886 4,680 130,566 107,138 5,798 112,936
------------ ------------ ------------ ------------ ------------ ------------

EXPENSES:
Property operating expenses ............... 49,785 841 50,626 41,426 1,012 42,438
Marketing, general and administrative ..... 4,076 3,298 7,374 3,987 4,808 8,795
Interest .................................. 15,847 8,760 24,607 10,054 10,091 20,145
Depreciation and amortization ............. 28,026 1,591 29,617 25,453 1,530 26,983
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses ............................ 97,734 14,490 112,224 80,920 17,441 98,361
------------ ------------ ------------ ------------ ------------ ------------

Income (loss) before minority
interests, preferred dividends and
distributions, equity (loss) in
earnings of real estate joint
ventures and discontinued operations ... $ 28,152 $ (9,810) $ 18,342 $ 26,218 $ (11,643) $ 14,575
============ ============ ============ ============ ============ ============


17





SIX MONTHS ENDED OR AS OF
------------------------------------------------------------------------------------
JUNE 30, 2004 JUNE 30, 2003
----------------------------------------- -----------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
------------ ------------ ------------ ------------ ------------ ------------

REVENUES:
Base rents, tenant
escalations and reimbursements ......... $ 252,483 $ 3,910 $ 256,393 $ 213,221 $ 3,607 $ 216,828
Interest, investment and other income ..... 1,986 7,000 8,986 1,797 10,350 12,147
------------ ------------ ------------ ------------ ------------ ------------

Total Revenues ............................ 254,469 10,910 265,379 215,018 13,957 228,975
------------ ------------ ------------ ------------ ------------ ------------

EXPENSES:
Property operating expenses ............... 100,608 1,483 102,091 83,962 1,856 85,818
Marketing, general and administrative ..... 8,280 6,161 14,441 7,963 8,401 16,364
Interest .................................. 31,477 18,791 50,268 20,060 20,182 40,242
Depreciation and amortization ............. 55,516 3,222 58,738 52,634 3,129 55,763
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses ............................ 195,881 29,657 225,538 164,619 33,568 198,187
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before minority
interests, preferred dividends and
distributions, equity (loss) in
earnings of real estate joint
ventures and discontinued operations ... $ 58,588 $ (18,747) $ 39,841 $ 50,399 $ (19,611) $ 30,788
============ ============ ============ ============ ============ ============

Total Assets .............................. $ 2,893,110 $ 239,744 $ 3,132,854 $ 2,425,189 $ 475,805 $ 2,900,994
============ ============ ============ ============ ============ ============



10. NON-CASH INVESTING AND FINANCING ACTIVITIES

During January 2004, in connection with the Company's acquisition of 1185 Avenue
of the Americas, New York, NY, the Company assumed a $202 million mortgage note
payable and $48 million of mezzanine debt (see Note 6).

During January 2004, the Company exercised its option to redeem two million
shares of its outstanding Series B preferred stock for approximately 1,958,000
shares of its common stock.

During April 2004, the OP redeemed approximately 3,081 Preferred Units, which
were valued at approximately $3.1 million which was applied to amounts owned
from the unit holder under the Other Notes.

18



11. RELATED PARTY TRANSACTIONS

In connection with the Disposition, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, New York (the Company's current headquarters) for five years and
to release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.

In addition, in April 2004, the Company completed the sale to the Rechler family
two of the three properties remaining in connection with the Disposition. The
third property has subsequently been excluded from the Disposition and will not
be transferred to the Rechler family (see Note 6).

As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Code. During the three and six month periods ended June 30, 2004 and 2003,
Reckson Construction Group, Inc. or its successor, Reckson Construction &
Development, LLC billed approximately $217,000 and $678,000 and $105,000 and
$231,000, respectively, of market rate services and Reckson Management Group,
Inc. billed approximately $72,000 and $138,000 and $69,000 and $140,000,
respectively, of market rate management fees to the Remaining Option Properties.

Reckson Management Group, Inc. leases approximately 26,000 square feet of office
space at the Remaining Option Property located at 225 Broadhollow Road,
Melville, New York for its corporate offices at an annual base rent of
approximately $750,000. The Company had also entered into a short term license
agreement at the property for 6,000 square feet of temporary space which expired
in January 2004. Reckson Management Group, Inc. also leases 10,722 square feet
of warehouse space used for equipment, materials and inventory storage at a
property owned by certain members of the Rechler family at an annual base rent
of approximately $75,000. In addition, commencing April 1, 2004, Reckson
Construction & Development, LLC ("RCD") has been leasing approximately 17,000
square feet of space at the Remaining Option Property, located at 225
Broadhollow Road, Melville, New York, which was formerly occupied by an
affiliate of First Data Corp. through September 30, 2006 (see Note 6). Base rent
of approximately $121,000 was paid by RCD during the three months ended June 30,
2004. RCD anticipates it will mitigate this obligation by sub-letting the space
to a third party. However, there can be no assurances that RCD will be
successful in sub-leasing the aforementioned space and mitigating its aggregate
costs.

A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Company at an annual base rent of
approximately $445,000.

During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and Reckson Strategic Venture Partners,
LLC ("RSVP"). RSVP is a real estate venture capital fund which invested
primarily in real estate and real estate operating companies outside the
Company's core office and industrial / R&D focus and whose common equity is held
indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company has advanced approximately $93.4 million under
the FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of June 30, 2004 approximately $109.1 million had been funded through the
RSVP Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of June 30, 2004, interest
accrued (net of reserves) under the FrontLine Facility and the RSVP Facility was
approximately $19.6 million.

19



A committee of the Board of Directors, comprised solely of independent
directors, considers any actions to be taken by the Company in connection with
the FrontLine Loans and its investments in joint ventures with RSVP. During the
third quarter of 2001, the Company noted a significant deterioration in
FrontLine's operations and financial condition and, based on its assessment of
value and recoverability and considering the findings and recommendations of the
committee and its financial advisor, the Company recorded a $163 million
valuation reserve charge, inclusive of anticipated costs, in its consolidated
statements of operations relating to its investments in the FrontLine Loans and
joint ventures with RSVP. The Company has discontinued the accrual of interest
income with respect to the FrontLine Loans. The Company has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.

At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.

FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.

In September 2003, RSVP completed the restructuring of its capital structure and
management arrangements. In connection with the restructuring, RSVP redeemed the
interest of the preferred equity holders of RSVP for an aggregate of
approximately $137 million in cash and the transfer to the preferred equity
holders of the assets that comprised RSVP's parking investment valued at
approximately $28.5 million. RSVP also restructured its management arrangements
whereby a management company formed by its former managing directors has been
retained to manage RSVP pursuant to a management agreement and the employment
contracts of the managing directors with RSVP have been terminated. The
management agreement provides for an annual base management fee, and disposition
fees equal to 2% of the net proceeds received by RSVP on asset sales. (The base
management fee and disposition fees are subject to a maximum over the term of
the agreement of $7.5 million.) In addition, the managing directors retained a
one-third residual interest in RSVP's assets which is subordinated to the
distribution of an aggregate amount of $75 million to RSVP and/or the Company in
respect of its joint ventures with RSVP. The management agreement has a
three-year term, subject to early termination in the event of the disposition of
all of the assets of RSVP.

In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP and or a joint
venture between RSVP and a subsidiary of the Operating Partnership.

In April 2004, American Campus Communities, Inc. ("ACC"), a student housing
company owned by RSVP and the joint venture between RSVP and a subsidiary of the
Operating Partnership, filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with a proposed initial public
offering ("IPO") of its common stock. RSVP and the joint venture between RSVP
and a subsidiary of the Operating Partnership plan to liquidate the ownership
position in ACC in connection with the IPO transaction.

As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $65 million which was reassessed with no
change by management as of June 30, 2004. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.

Scott H. Rechler, who serves as Chief Executive Officer, President and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP and has agreed to serve as a member of the
board of ACC upon consummation of its initial public offering.

20



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the historical
financial statements of Reckson Associates Realty Corp. (the "Company") and
related notes thereto.

The Company considers certain statements set forth herein to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
with respect to the Company's expectations for future periods. Certain
forward-looking statements, including, without limitation, statements relating
to the timing and success of acquisitions and the completion of development or
redevelopment of properties, the financing of the Company's operations, the
ability to lease vacant space and the ability to renew or relet space under
expiring leases, involve risks and uncertainties. Many of the forward-looking
statements can be identified by the use of words such as "believes", "may",
"expects", "anticipates", "intends" or similar expressions. Although the Company
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, the actual results may differ materially from
those set forth in the forward-looking statements and the Company can give no
assurance that its expectation will be achieved. Among those risks, trends and
uncertainties are: the general economic climate, including the conditions
affecting industries in which our principal tenants compete; changes in the
supply of and demand for office in the New York Tri-State area; changes in
interest rate levels; changes in the Company's credit ratings; changes in the
Company's cost and access to capital; downturns in rental rate levels in our
markets and our ability to lease or re-lease space in a timely manner at current
or anticipated rental rate levels; the availability of financing to us or our
tenants; financial condition of our tenants; changes in operating costs,
including utility, security, real estate tax and insurance costs; repayment of
debt owed to the Company by third parties (including FrontLine Capital Group);
risks associated with joint ventures; liability for uninsured losses or
environmental matters; and other risks associated with the development and
acquisition of properties, including risks that development may not be completed
on schedule, that the tenants will not take occupancy or pay rent, or that
development or operating costs may be greater than anticipated. Consequently,
such forward-looking statements should be regarded solely as reflections of the
Company's current operating and development plans and estimates. These plans and
estimates are subject to revisions from time to time as additional information
becomes available, and actual results may differ from those indicated in the
referenced statements.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements of the Company include accounts of the
Company and all majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States ("GAAP") requires management to make estimates and assumptions in
certain circumstances that affect amounts reported in the Company's consolidated
financial statements and related notes. In preparing these financial statements,
management has utilized information available including its past history,
industry standards and the current economic environment among other factors in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by management in
formulating its estimates inherent in these financial statements may not
materialize. However, application of the critical accounting policies below
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. In addition, other companies may utilize different estimates, which
may impact comparability of the Company's results of operations to those of
companies in similar businesses.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

Minimum rental revenue is recognized on a straight-line basis, which averages
minimum rents over the terms of the leases. The excess of rents recognized over
amounts contractually due are included in deferred rents receivable on the
Company's balance sheets. The leases also typically provide for tenant
reimbursements of common area maintenance and other operating expenses and real
estate taxes. Ancillary and other property related income is recognized in the
period earned.

The Company makes estimates of the collectibility of its tenant accounts
receivables related to base rents, tenant escalations and reimbursements and
other revenue or income. The Company specifically analyzes tenant receivables
and analyzes historical bad debts, customer credit worthiness, current economic
trends, changes in customer payment terms, publicly available information and,
to the extent available, guidance provided by the tenant when evaluating the
adequacy of its allowance for doubtful accounts. In addition, when tenants are
in bankruptcy the Company makes estimates of the expected recovery of
pre-petition administrative and damage claims. In some cases, the ultimate
resolution of those claims can exceed a year. These estimates have a direct
impact on the Company's net income because a higher bad debt reserve results in
less net income.

The Company incurred approximately $700,000 and $1.8 million, and $1.6 million
and $3.6 million of bad debt expense during the three and six month periods
ended June 30, 2004 and 2003, respectively, related to tenant receivables and
deferred rents receivable which accordingly reduced total revenues and reported
net income during the periods presented.

21



The Company records interest income on investments in mortgage notes and notes
receivable on an accrual basis of accounting. The Company does not accrue
interest on impaired loans where, in the judgment of management, collection of
interest according to the contractual terms is considered doubtful. Among the
factors the Company considers in making an evaluation of the collectibility of
interest are: (i) the status of the loan, (ii) the value of the underlying
collateral, (iii) the financial condition of the borrower and (iv) anticipated
future events.

Reckson Construction Group, Inc., Reckson Construction & Development LLC, (the
successor to Reckson Construction Group, Inc.) and Reckson Construction Group
New York, Inc. use the percentage-of-completion method for recording amounts
earned on their contracts. This method records amounts earned as revenue in the
proportion that actual costs incurred to date bear to the estimate of total
costs at contract completion.

Gain on sales of real estate are recorded when title is conveyed to the buyer,
subject to the buyer's financial commitment being sufficient to provide economic
substance to the sale and the Company having no substantial continuing
involvement with the buyer.

The Company follows the guidance provided for under the Financing Accounting
Standards Board ("FASB") Statement No. 66, "Accounting for Sales of Real Estate"
("Statement No. 66"), which provides guidance on sales contracts that are
accompanied by agreements which require the seller to develop the property in
the future. Under Statement No. 66 profit is recognized and allocated to the
sale of the land and the later development or construction work on the basis of
estimated costs of each activity; the same rate of profit is attributed to each
activity. As a result, profits are recognized and reflected over the improvement
period on the basis of costs incurred (including land) as a percentage of total
costs estimated to be incurred. The Company uses the percentage of completion
method, as the future costs of development and profit are reliably estimated.

REAL ESTATE

Land, buildings and improvements, furniture, fixtures and equipment are recorded
at cost. Tenant improvements, which are included in buildings and improvements,
are also stated at cost. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Renovations and / or replacements, which
improve or extend the life of the asset, are capitalized and depreciated over
their estimated useful lives.

Depreciation is computed utilizing the straight-line method over the estimated
useful lives of ten to thirty years for buildings and improvements and five to
ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the term of the related leases.

The Company is required to make subjective assessments as to the useful lives of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income. Should the Company lengthen the
expected useful life of a particular asset, it would be depreciated over more
years and result in less depreciation expense and higher annual net income.

Assessment by the Company of certain other lease related costs must be made when
the Company has a reason to believe that the tenant will not be able to execute
under the term of the lease as originally expected.

On July 1, 2001 and January 1, 2002, the Company adopted FASB Statement No.141,
"Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangibles", respectively. As part of the acquisition of real estate assets,
the fair value of the real estate acquired is allocated to the acquired tangible
assets, consisting of land, building and building improvements, and identified
intangible assets and liabilities, consisting of the value of above-market and
below-market leases, other value of in-place leases, and value of tenant
relationships, based in each case on their fair values. The Company assesses
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. If the Company incorrectly estimates the values at acquisition or
the undiscounted cash flows, initial allocation of purchase price and future
impairment charges may be different.

22



LONG LIVED ASSETS

On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's value is
impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.

The Company is required to make subjective assessments as to whether there are
impairments in the value of its real estate properties and other investments.
These assessments have a direct impact on the Company's net income because
recognizing an impairment results in an immediate negative adjustment to net
income. In determining impairment, if any, the Company has adopted FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets." In accordance with the provisions of Statement No. 144, the Company
allocated approximately $2.6 million and $5.2 million of its unsecured corporate
interest expense to discontinued operations for the three and six months ended
June 30, 2003.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments with a maturity of six months or
less when purchased to be cash equivalents. Cash balances at June 30, 2004
include approximately $46.5 million of the remaining net proceeds received
during the six month period ended June 30, 2004 relating to property sales, the
issuance of the Company's equity and the Operating Partnership's January 2004
issuance of senior unsecured notes.

OVERVIEW AND BACKGROUND

The Company is a self-administered and self-managed real estate investment trust
("REIT") specializing in the ownership, operation, acquisition, leasing,
financing, management and development of office and to a lesser extent
industrial / R&D properties and also owns land for future development. The
Company's growth strategy is focused on the commercial real estate markets in
and around the New York City tri-state area (the "Tri-State Area"). The Company
owns all of its interest in its real properties, directly or indirectly, through
Reckson Operating Partnership, L.P. (the "Operating Partnership").

As of June 30, 2004, the Company owned and operated 76 office properties
(inclusive of nine office properties owned through joint ventures) comprising
approximately 14.4 million square feet and 9 industrial / R&D properties
comprising approximately 955,000 located in the Tri-State Area.

In June 2004, the Company entered into a contract to sell a 92,000 square foot
industrial property located in Westchester for approximately $7.5 million. The
Company's basis in this property is approximately $4.8 million and is included
in properties and related assets held for sale on the Company's balance sheet.

As of June 30, 2004, the Company also owned approximately 313 acres of land in
12 separate parcels of which the Company can develop approximately 3.0 million
square feet of office space. The Company is currently evaluating alternative
land uses for certain of the land holdings to realize the highest economic
value. These alternatives may include rezoning certain land parcels from
commercial to residential use for potential disposition. As of June 30, 2004,
the Company had invested approximately $124.5 million in these development
projects. Management has made subjective assessments as to the value and
recoverability of these investments based on current and proposed development
plans, market comparable land values and alternative use values. In addition,
during the three and six month periods ended June 30, 2004, the Company has
capitalized approximately $2.3 million and $5.1 million, respectively related to
real estate taxes, interest and other carrying costs related to these
development projects. In October 2003, the Company entered into a contract to
sell a 113 acre land parcel located in New Jersey. The contract provides for a
sales price ranging from $18 million to $36 million. The sale is contingent upon
obtaining zoning for residential use of the land and other customary approvals.
The proceeds ultimately received from such sale will be based upon the number of
residential units permitted by the rezoning. The cost basis of the land parcel
at June 30, 2004 was approximately $5.7 million. The closing is scheduled to
occur upon the rezoning, which is anticipated to occur within 12 to 24 months.
However, there can be no assurances such rezoning will occur. During February
2004, a 3.9 acre land parcel located on Long Island was condemned by the Town of
Oyster Bay. As consideration from the condemnation the Company anticipates it
will initially receive approximately $1.8 million. The Company's cost basis in
this land parcel was approximately $1.4 million. The Company is currently
contesting this valuation and seeking payment of additional consideration from
the Town of Oyster Bay but there can be no assurances that the Company will be
successful in obtaining any such additional consideration. In July 2004, the
Company commenced the ground-up development of a 277,000 square foot Class A
office building with a total anticipated investment cost of approximately $60
million. This development is located within the Company's existing 404,000
square foot executive office park in Melville, NY.

23



In November 2003, the Company disposed of all but three of its 95 property, 5.9
million square foot, Long Island industrial building portfolio to members of the
Rechler family (the "Disposition") for approximately $315.5 million, comprised
of $225.1 million in cash and debt assumption and 3,932,111 common units of
limited partnership interest in the Operating Partnership ("OP Units") valued at
approximately $90.4 million. Approximately $204 million of cash sales proceeds
from the Disposition were used to repay borrowings under the Credit Facility.
For information concerning certain litigation matters pertaining to this
transaction see Part II-Other Information; Item 1. Legal Proceedings of this
Form 10-Q.

In connection with the Disposition, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, New York (the Company's current headquarters) for five years and
to release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.

In January 2004, the Company sold a 104,000 square foot office property located
on Long Island for approximately $18.5 million. Net proceeds from the sale were
used to repay borrowings under the Company's unsecured Credit Facility. As a
result, the Company recorded a net gain of approximately $5.2 million, net of
limited partners' minority interest. In accordance with FASB Statement No. 144,
such gain has been reflected in discontinued operations on the Company's
consolidated statements of income.

In January 2004, the Company acquired 1185 Avenue of the Americas, a 42-story,
1.1 million square foot Class A office tower, located between 46th and 47th
Streets in New York, NY for $321 million. In connection with this acquisition,
the Company assumed a $202 million mortgage and $48 million of mezzanine debt.
The balance of the purchase price was paid through an advance under the Credit
Facility. The floating rate mortgage and mezzanine debt both mature in August
2004 and presently have a weighted average interest rate of 4.95%. Such rate is
based on the greater of one month LIBOR or 2.15% plus a weighted average spread
of approximately 2.80%. An interest rate hedge agreement was acquired to limit
exposure to increases in LIBOR above 5.825%. The property is also encumbered by
a ground lease which has a remaining term of approximately 40 years with rent
scheduled to be re-set at the end of 2005 and then remain constant for the
balance of the term. Pursuant to the terms of the ground lease, the Company and
the ground lessor have commenced arbitration proceedings related to the
re-setting of the ground lease. There can be no assurances as to the outcome of
the rent re-set process. In accordance with FASB Statement No. 141, "Business
Combinations", the Company allocated and recorded net deferred intangible lease
income of approximately $14.2 million, representing the net value of acquired
above and below market leases, assumed lease origination costs and other value
of in-place leases. The net value of the above and below market leases is
amortized over the remaining terms of the respective leases to rental income
which amounted to approximately $2.0 million and $3.8 million for the three and
six month periods ended June 30, 2004. In addition, amortization expense on the
value of lease origination costs was approximately $746,000 and $1.3 million for
the three and six month periods ended June 30, 2004, respectively. At
acquisition, there were 31 in-place leases aggregating approximately one million
square feet with a weighted average remaining lease term of approximately 6
years.

During February 2004, the Company executed a lease with Nassau County for the
entire building and concourse level at 60 Charles Lindbergh Blvd., Long Island,
comprising approximately 200,000 square feet, including 127,000 square feet
previously vacated by WorldCom/MCI. 60 Charles Lindbergh Blvd. will be
repositioned to satisfy Nassau County's use.

In April 2004, the Company sold a 175,000 square foot office building located on
Long Island for approximately $30 million, of which the Company owned a 51%
interest, and a wholly owned 9,000 square foot retail property for approximately
$2.8 million. In addition, the Company completed the sale on two of the
remaining three properties from the Disposition for approximately $5.8 million.
Proceeds from the sale were used to establish an escrow account with a qualified
intermediary for a future exchange of real property pursuant to Section 1031 of
the Code (a "Section 1031 Exchange"). A Section 1031 Exchange allows for the
deferral of taxes related to the gain attributable to the sale of property if
qualified replacement property is identified within 45 days and such qualified
replacement property is then acquired within 180 days from the initial sale.
There can be no assurances that the Company will meet the requirements of
Section 1031 by identifying and acquiring qualified replacement properties in
the required time frame, in which case the Company would incur the tax liability
on the capital gain realized of approximately $1.5 million. The disposition of
the other industrial property, which is subject to certain environmental issues,
is conditioned upon the approval of the buyer's lender, which has not been
obtained. As a result, the Company will not dispose of this property as part of
the Disposition. Management believes that the cost to remediate the
environmental issues will not have a material adverse effect on the Company, but
there can be no assurance in this regard.

In July 2004, the Company acquired a 141,000 square foot Class A office
property, located in Chatham Township, NJ for approximately $22.7 million. The
Company made this acquisition through available cash-on-hand.

24



During February 2003, the Company, through Reckson Construction Group, Inc.,
entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has been
completed. In accordance with FASB Statement No. 66, the Company has recognized
a book gain, before taxes, on this land sale and build-to-suit transaction of
approximately $23.8 million, of which $400,000 and $5.0 million and $4.3 million
and $10.1 million has been recognized during the three and six month periods
ended June 30, 2004 and 2003, respectively, and is included in investment and
other income on the Company's consolidated statements of income.

The Company holds a $17.0 million note receivable, which bears interest at 12%
per annum and is secured by a minority partnership interest in Omni Partners,
L.P., owner of the Omni, a 579,000 square foot Class A office property located
in Uniondale, New York (the "Omni Note"). The Company currently owns a 60%
majority partnership interest in Omni Partners, L.P. and on March 14, 2007 may
exercise an option to acquire the remaining 40% interest for a price based on
90% of the fair market value of the property. The Company also holds a $30
million junior mezzanine loan which is secured by a pledge of an indirect
ownership interest of an entity which owns the ground leasehold estate under a
1.1 million square foot office complex located on Long Island, New York (the
"Mezz Note"). The Mezz Note matures in September 2005, currently bears interest
at 12.73%, and the borrower has the right to extend for three additional
one-year periods. The Company also holds three other notes receivable
aggregating $19.0 million which bear interest at rates ranging from 10.5% to 12%
per annum. These notes are secured in part by a minority partner's preferred
unit interest in the Operating Partnership, an interest in real property and a
personal guarantee (the "Other Notes" and collectively with the Omni Note and
the Mezz Note, the "Note Receivable Investments"). During April 2004,
approximately $2.7 million of the Other Notes, including accrued interest, were
repaid by the minority partner exchanging, and the Operating Partnership
redeeming, approximately 3,081 preferred units. The preferred units were
redeemed at a par value of $3.1 million. Approximately $420,000 of the
redemption proceeds was used to offset interest due from the minority partner
under the Other Notes and for prepaid interest. In July 2004, the minority
partner delivered notice to the Operating Partnership stating his intention to
repay $15.5 million of the 10.5% Other Notes. When repaid, the remaining Other
Notes will aggregate $3.5 million and carry a weighted average interest rate of
11.57%. The Operating Partnership has also agreed to extend the maturity of $2.5
million of such debt through January 31, 2005 and the remaining $1.0 million
through January 31, 2010. As of June 30, 2004, management has made subjective
assessments as to the underlying security value on the Company's Note Receivable
Investments. These assessments indicate an excess of market value over the
carrying value related to the Company's Note Receivable Investments. Based on
these assessments the Company's management believes there is no impairment to
the carrying value related to the Company's Note Receivable Investments.

The Company also owns a 355,000 square foot office building in Orlando, Florida.
This non-core real estate holding was acquired in May 1999 in connection with
the Company's initial New York City portfolio acquisition. This property is
cross-collateralized under a $100.1 million mortgage note payable along with one
of the Company's New York City buildings. The Company has the right to prepay
this note in November 2004, prior to its maturity.

The Company also owns a 60% non-controlling interest in a 172,000 square foot
office building located at 520 White Plains Road in White Plains, New York (the
"520JV"), which it manages. As of June 30, 2004, the 520JV had total assets of
$20.6 million, a mortgage note payable of $11.7 million and other liabilities of
$582,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.6 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting. In accordance with the equity method of accounting the
Company's proportionate share of the 520JV income (loss) was approximately
$294,000 and $408,000 and $(270,000) and $(164,000) for the three and six month
periods ended June 30, 2004 and 2003, respectively.

As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Code. During the three and six months ended June 30, 2004 and 2003, Reckson
Construction Group, Inc. or its successor, Reckson Construction & Development,
LLC billed approximately $217,000 and $678,000 and $105,900 and $231,000,
respectively, of market rate services and Reckson Management Group, Inc. billed
approximately $72,000 and $138,000, and $69,000 and $140,000, respectively, of
market rate management fees to the Remaining Option Properties.

Reckson Management Group, Inc. leases approximately 26,000 square feet of office
space at the Remaining Option Property located at 225 Broadhollow Road,
Melville, New York for its corporate offices at an annual base rent of
approximately $750,000. The Company had also entered into a short term license
agreement at the property for 6,000 square feet of temporary space which expired
in January 2004. Reckson Management Group, Inc. also leases 10,722 square feet
of warehouse space used for equipment, materials and inventory storage at a
property owned by certain members of the Rechler family at an annual base rent
of approximately $75,000. In addition, commencing April 1, 2004, Reckson
Construction & Development, LLC ("RCD") has been leasing approximately 17,000
square feet of space at the Remaining Option Property, located at 225
Broadhollow Road, Melville, New York, which was formerly occupied by an
affiliate of First Data Corp. through September 30, 2006. Base rent of
approximately $121,000 was paid by RCD during the three months ended June 30,
2004. RCD anticipates it will mitigate this obligation by sub-letting the space
to a third party. However, there can be no assurances that RCD will be
successful in sub-leasing the aforementioned space and mitigating its aggregate
costs.

25



A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Company at an annual base rent of
approximately $445,000.

During July 1998, the Company formed Metropolitan Partners, LLC ("Metropolitan")
for the purpose of acquiring Class A office properties in New York City.
Currently the Company owns, through Metropolitan and the Operating Partnership,
six Class A office properties, located in the New York City borough of
Manhattan, aggregating approximately 4.5 million square feet.

During September 2000, the Company formed a joint venture (the "Tri-State JV")
with Teachers Insurance and Annuity Association ("TIAA") and contributed nine
Class A suburban office properties aggregating approximately 1.5 million square
feet to the Tri-State JV for a 51% majority ownership interest. TIAA contributed
approximately $136 million for a 49% interest in the Tri-State JV which was then
distributed to the Company. In August 2003, the Company acquired TIAA's 49%
interest in the property located at 275 Broadhollow Road, Melville, NY, for
approximately $12.4 million. In addition, during April 2004, the Tri-State JV
sold a 175,000 square foot office building located on Long Island for
approximately $30 million. Net proceeds from this sale were distributed to the
members of the Tri-State JV. As a result of these transactions, the Tri-State JV
owns seven Class A suburban office properties aggregating approximately 1.2
million square feet. The Company is responsible for managing the day-to-day
operations and business affairs of the Tri-State JV and has substantial rights
in making decisions affecting the properties such as leasing, marketing and
financing. The minority member has certain rights primarily intended to protect
its investment. For purposes of its financial statements the Company
consolidates the Tri-State JV.

On December 21, 2001, the Company formed a joint venture with the New York State
Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby NYSTRS acquired a
49% indirect interest in the property located at 919 Third Avenue, New York, NY
for $220.5 million which included $122.1 million of its proportionate share of
secured mortgage debt and approximately $98.4 million of cash which was then
distributed to the Company. The Company is responsible for managing the
day-to-day operations and business affairs of the 919JV and has substantial
rights in making decisions affecting the property such as developing a budget,
leasing and marketing. The minority member has certain rights primarily intended
to protect its investment. For purposes of its financial statements the Company
consolidates the 919JV.

The total market capitalization of the Company at June 30, 2004 was
approximately $3.7 billion. The Company's total market capitalization is based
on the sum of (i) the market value of the Company's common stock and OP Units
(assuming conversion) of $27.46 per share/unit (based on the closing price of
the Company's common stock on June 30, 2004), (ii) the liquidation preference
value of the Company's Series A preferred stock of $1,000 per share, (iii) the
liquidation preference value of the Operating Partnership's preferred units of
$1,000 per unit and (iv) the approximately $1.5 billion (including its share of
consolidated and unconsolidated joint venture debt and net of minority partners'
interests share of consolidated joint venture debt) of debt outstanding at June
30, 2004. As a result, the Company's total debt to total market capitalization
ratio at June 30, 2004 equaled approximately 40.3%.

During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and Reckson Strategic Venture Partners,
LLC ("RSVP"). RSVP is a real estate venture capital fund, which invested
primarily in real estate and real estate, operating companies outside the
Company's core office and industrial / R&D focus and whose common equity is held
indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company has advanced approximately $93.4 million under
the FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of June 30, 2004, approximately $109.1 million had been funded through the
RSVP Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of June 30, 2004, interest
accrued (net of reserves) under the FrontLine Facility and the RSVP Facility was
approximately $19.6 million.

In September 2003, RSVP completed the restructuring of its capital structure. In
connection with the restructuring, RSVP redeemed the interest of the preferred
equity holders of RSVP for an aggregate of $137 million in cash and the transfer
to the preferred equity holders of the assets that comprised RSVP's parking
investments valued at approximately $28.5 million. As a result of this
transaction amounts formerly invested in the privatization, parking and medical
office platforms have been reinvested as part of the buyout transaction.

A committee of the Board of Directors, comprised solely of independent
directors, considers any actions to be taken by the Company in connection with
the FrontLine Loans and its investments in joint ventures with RSVP. During the
third quarter of 2001, the Company noted a significant deterioration in
FrontLine's operations and financial condition and, based on its assessment of
value and recoverability and considering the findings and recommendations of the
committee and its financial advisor, the Company recorded a $163 million
valuation reserve charge, inclusive of anticipated costs, in its consolidated
statements of operations relating to its investments in the FrontLine Loans and
joint ventures with RSVP. The Company has discontinued the accrual of interest
income with respect to the FrontLine Loans. The Company has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.

26



At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.

FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.

RSVP also restructured its management arrangements whereby a management company
formed by its former managing directors has been retained to manage RSVP
pursuant to a management agreement and the employment contracts of the managing
directors with RSVP have been terminated. The management agreement provides for
an annual base management fee, and disposition fees equal to 2% of the net
proceeds received by RSVP on asset sales. (The base management fee and
disposition fees are subject to a maximum over the term of the agreement of $7.5
million.) In addition, the managing directors retained a one-third residual
interest in RSVP's assets which is subordinated to the distribution of an
aggregate amount of $75 million to RSVP and/or the Company in respect of its
joint ventures with RSVP. The management agreement has a three-year term,
subject to early termination in the event of the disposition of all of the
assets of RSVP.

In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP and or a joint
venture between RSVP and a subsidiary of the Operating Partnership.

In April 2004, American Campus Communities, Inc. ("ACC"), a student housing
company owned by RSVP and the joint venture between RSVP and a subsidiary of the
Operating Partnership, filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with a proposed initial public
offering ("IPO") of its common stock. RSVP and the joint venture between RSVP
and a subsidiary of the Operating Partnership plan to liquidate the ownership
position in ACC in connection with the IPO transaction.

As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $65 million, which was reassessed with no
change by management as of June 30, 2004. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.

Scott H. Rechler, who serves as Chief Executive Officer, President and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP and has agreed to serve as a member of the
board of ACC upon consummation of its initial public offering.

27



RESULTS OF OPERATIONS

The following table is a comparison of the results of operations for the three
month period ended June 30, 2004 to the three month period ended June 30, 2003
(dollars in thousands):



THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------
CHANGE
----------------------------

2004 2003 DOLLARS PERCENT
------------ ------------ ------------ ------------

PROPERTY OPERATING REVENUES:
Base rents ............................... $ 109,765 $ 94,141 $ 15,624 16.6%
Tenant escalations and reimbursements ... 17,478 13,907 3,571 25.7%
------------ ------------ ------------

TOTAL PROPERTY OPERATING REVENUES ........ $ 127,243 $ 108,048 $ 19,195 17.8%
============ ============ ============

PROPERTY OPERATING EXPENSES:
Operating expenses ....................... $ 30,532 $ 25,351 $ 5,181 20.4%
Real estate taxes ........................ 20,094 17,087 3,007 17.6%
------------ ------------ ------------

TOTAL PROPERTY OPERATING EXPENSES ........ $ 50,626 $ 42,438 $ 8,188 19.3%
============ ============ ============

INVESTMENT AND OTHER INCOME ................ $ 3,323 $ 4,888 $ (1,565) (32.0)%
============ ============ ============

OTHER EXPENSES:
Interest expense ......................... $ 24,607 $ 20,145 $ 4,462 22.1%
Marketing, general and administrative .... 7,374 8,795 (1,421) (16.2)%
------------ ------------ ------------

TOTAL OTHER EXPENSES ..................... $ 31,981 $ 28,940 $ 3,041 10.5%
============ ============ ============


The Company's property operating revenues, which include base-rents and tenant
escalations and reimbursements ("Property Operating Revenues") increased by
$19.2 million for the three months ended June 30, 2004 as compared to the 2003
period. Property Operating Revenues increased $14.6 million attributable to
lease up of redeveloped properties and from the acquisitions of 1185 Avenue of
the Americas in January 2004 and 1055 Washington Avenue in August 2003. In
addition, Property Operating Revenues increased by $1.3 million from built-in
rent increases for existing tenants in our "same store" properties and by an
$800,000 increase in termination fees. Property Operating Revenues also
increased by approximately $1.6 million due to the reduction in tenant
receivable write-offs and to a weighted average occupancy increase in our "same
store" properties. Tenant escalations and reimbursements increased $2.3 million
attributable to increased operating expense and real estate tax costs being
passed through to tenants as base years for 2002 take effect. These increases
were offset by $500,000 in same space rental rate decreases and $800,000 of free
rent concessions.

The Company's property operating expenses, real estate taxes and ground rents
("Property Expenses") increased by approximately $8.2 million for the three
months ended June 30, 2004 as compared to the 2003 period. The increase is
primarily attributable the Company's acquisitions of 1185 Avenue of the Americas
and 1055 Washington Avenue amounting to approximately $7.6 million. The
remaining increase in property operating expenses is attributable to $ 600,000
in real estate taxes and operating expenses from the Company's "same store"
properties. Increases in real estate taxes is attributable to the significant
increases levied by certain municipalities, particularly in New York City and
Nassau County, New York which have experienced fiscal budget issues.

Investment and other income decreased by $1.6 million or 32.0%. This decrease is
primarily attributable to the decrease in the gain recognized of the Company's
land sale and build-to-suit transaction of approximately $3.9 million. This
decrease was off-set by cost savings achieved by the Company's service companies
related to the November 2003 restructuring.

Interest expense increased by $4.5 million or 22.1%. This increase is
attributable to approximately $3.4 million of interest expense incurred on the
mortgage debt on 1185 Avenue of the Americas which was acquired in January 2004
and approximately $2.8 million of corporate interest expense allocable to
discontinued operations for the three month period ended June 30, 2003 with no
such allocation in the current period. These increases were offset by decreases
in interest expense of approximately $400,000 incurred under the Company's "same
store" mortgage portfolio and a decrease in interest expense of approximately
$1.7 million incurred under the Company's unsecured credit facility as a result
of a decrease in the weighted average balance outstanding. The weighted average
balance outstanding under the Company's unsecured credit facility was $90
million for the three months ended June 30, 2004 as compared to $319.9 million
for the three months ended June 30, 2003.

28



Marketing, general and administrative expenses decreased by $1.4 million or
16.2%. This overall decrease is attributable to the efficiencies the Company
achieved as a result of its November 2003 restructuring and the related
termination of certain employees and settlement of the employment contracts of
certain former executive officers of the Company.

Discontinued operations, net of limited partners' and minority interests,
increased by approximately $319,000. This net increase is attributable to the
gain on sales related to those properties sold during the current period of
approximately $3.6 million, which was offset by the decrease of the operations
for those properties sold between July 1, 2003 and March 31, 2004.

The following table is a comparison of the results of operations for the six
month period ended June 30, 2004 to the six month period ended June 30, 2003
(dollars in thousands):



SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
CHANGE
---------------------------

2004 2003 DOLLARS PERCENT
------------ ------------ ------------ ------------

PROPERTY OPERATING REVENUES:
Base rents .............................. $ 220,800 $ 188,885 $ 31,915 16.9%
Tenant escalations and reimbursements ... 35,593 27,943 7,650 27.4%
------------ ------------ ------------

TOTAL PROPERTY OPERATING REVENUES ....... $ 256,393 $ 216,828 $ 39,565 18.2%
============ ============ ============

PROPERTY OPERATING EXPENSES:
Operating expenses ...................... $ 61,406 $ 51,789 $ 9,617 18.6%
Real estate taxes ....................... 40,685 34,029 6,656 19.6%
------------ ------------ ------------

TOTAL PROPERTY OPERATING EXPENSES ....... $ 102,091 $ 85,818 $ 16,273 19.0%
============ ============ ============

INVESTMENT AND OTHER INCOME ............... $ 8,986 $ 12,147 $ (3,161) (26.0)%
============ ============ ============

OTHER EXPENSES:
Interest expense ........................ $ 50,268 $ 40,242 $ 10,026 24.9%
Marketing, general and administrative ... 14,441 16,364 (1,923) (11.8)%
------------ ------------ ------------

TOTAL OTHER EXPENSES .................... $ 64,709 $ 56,606 $ 8,103 14.3%
============ ============ ============


The Company's Property Operating Revenues increased by $39.6 million for the six
months ended June 30, 2004 as compared to the 2003 period. Property Operating
Revenues increased $27.3 million attributable to lease up of redeveloped
properties and from the acquisitions of 1185 Avenue of the Americas in January
2004 and 1055 Washington Avenue in August 2003. In addition, Property Operating
Revenues increased by $2.6 million from built-in rent increases for existing
tenants in our "same store" properties and by a $5.0 million increase in
termination fees. Property Operating Revenues also increased by approximately
$2.8 million due to the reduction in tenant receivable write-offs and to a
weighted average occupancy increase in our "same store" properties. Tenant
escalations and reimbursements increased $4.3 million attributable to increased
operating expense and real estate tax costs being passed through to tenants as
base years for 2002 take effect. These increases were offset by $800,000 in same
space rental rate decreases and $1.5 million of free rent concessions.

The Company's Property Expenses increased by approximately $16.3 million for the
six months ended June 30, 2004 as compared to the 2003 period. The increase is
primarily attributable the Company's acquisitions of 1185 Avenue of the Americas
and 1055 Washington Avenue amounting to approximately $12.7 million. The
remaining increase in Property Expenses is attributable to approximately $3.6
million in real estate taxes and operating expenses from the Company's "same
store" properties. Increases in real estate taxes is attributable to the
significant increases levied by certain municipalities, particularly in New York
City and Nassau County, New York which have experienced fiscal budget issues.

Investment and other income decreased by $3.2 million or 26.0 % from the six
month period ended June 30, 2003 as compared to the same quarterly period of
2004. The decrease is primarily attributable to a decrease in the gain
recognized on the Company's land sale and build-to-suit transaction of
approximately $5.1 million. This decrease was off-set by net increases in
interest income on mortgage notes and notes receivable of approximately
$403,000, net increases in real estate tax recoveries, related to prior periods,
of approximately $600,000 and cost savings achieved by the Company's service
companies related to the November 2003 restructuring.

Interest expense increased by $10.0 million or 24.9 % from the six month period
ended June 30, 2003 as compared to the same quarterly period of 2004. The
increase is attributable to the net increase of $50 million in the Operating
Partnership's senior unsecured notes which

29



resulted in approximately $ 1.3 million of additional interest expense and
approximately $6.5 million of interest expense incurred on the mortgage debt on
1185 Avenue of the Americas which was acquired in January 2004. In addition,
during the six month period ended June 30, 2003, the Company allocated
approximately $5.5 million of its interest expense to discontinued operations in
accordance with FASB Statement No. 144 with no such allocation in the current
period. This allocation resulted in an additional increase in interest expense
from continuing operations. These increases were offset by decreases in interest
expense of approximately $691,000 incurred under the Company's "same store"
mortgage portfolio, in capitalized interest expense of approximately $326,000
attributable to a decrease in development projects and in interest expense of
approximately $2.3 million incurred under the Company's unsecured credit
facility as a result of a decrease in the weighted average balance outstanding.
The weighted average balance outstanding under the Company's unsecured credit
facility was $104.9 million for the six months ended June 30, 2004 as compared
to $303.0 million for the six months ended June 30, 2003.

Marketing, general and administrative expenses decreased by $1.9 million or
11.8% from the six month period ended June 30, 2003 as compared to the same
quarterly period of 2004. This overall decrease is attributable to the
efficiencies the Company achieved as a result of its November 2003 restructuring
and the related termination of certain employees and settlement of the
employment contracts of certain former executive officers of the Company.

Discontinued operations, net of limited partners' and minority interests,
increased by approximately $3.0 million. This net increase is attributable to
the gain on sales of real estate for those properties sold during the current
period of approximately $8.8 million, which was off-set by the decrease of the
operations for those properties sold between July 1, 2003 and January 1, 2004.

LIQUIDITY AND CAPITAL RESOURCES

Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Company. The Company expects
to meet its short-term liquidity requirements generally through its net cash
provided by operating activities along with its unsecured credit facility
described below. The credit facility contains several financial covenants with
which the Company must be in compliance in order to borrow funds thereunder.
During recent quarterly periods, the Company has incurred significant leasing
costs as a result of increased market demands from tenants and high levels of
leasing transactions that result from the re-tenanting of scheduled expirations
or early terminations of leases. The Company is currently experiencing high
tenanting costs including tenant improvement costs, leasing commissions and free
rent in all of its markets. For the three and six month periods ended June 30,
2004, the Company paid $11.5 million and $21.6 million, respectively for
tenanting costs including tenant improvement costs and leasing commissions. As a
result of these and / or other operating factors, the Company's cash flow from
operating activities was not sufficient to pay 100% of the dividends paid on its
common stock. To meet the short-term funding requirements relating to these
leasing costs, the Company has used proceeds of property sales or borrowings
under its credit facility. Based on the Company's forecasted leasing for 2004 it
anticipates that it will incur similar shortfalls. The Company currently intends
to fund any shortfalls with proceeds from non-income producing asset sales or
borrowings under its credit facility. The Company periodically reviews its
dividend policy to determine the appropriateness of the Company's dividend rate
relative to the Company's cash flows. The Company adjusts its dividend rate
based on such factors as leasing activity, market conditions and forecasted
increases and decreases in its cash flow as well as required distributions of
taxable income to maintain REIT status. There can be no assurance that the
Company will maintain the current quarterly distribution level on its common
stock.

The Company expects to meet certain of its financing requirements through
long-term secured and unsecured borrowings and the issuance of debt and equity
securities of the Company. During the six months ended June 30, 2004, the
Company issued $150 million of common equity securities and $150 million of
senior unsecured debt securities. There can be no assurance that there will be
adequate demand for the Company's equity at the time or at the price in which
the Company desires to raise capital through the sale of additional equity.
Similarly, there can be no assurance that the Company will be able to access the
unsecured debt markets at the time when the Company desires to sell its
unsecured notes. In addition, when valuations for commercial real estate
properties are high, the Company will seek to sell certain land inventory to
realize value and profit created. The Company will then seek opportunities to
reinvest the capital realized from these dispositions back into value-added
assets in the Company's core Tri-State Area markets. However, there can be no
assurances that the Company will be able to identify such opportunities that
meet the Company's underwriting criteria. The Company will refinance existing
mortgage indebtedness, senior unsecured notes or indebtedness under its credit
facility at maturity or retire such debt through the issuance of additional debt
securities or additional equity securities. The Company anticipates that the
current balance of cash and cash equivalents and cash flows from operating
activities, together with cash available from borrowings, equity offerings and
proceeds from sales of land and non-income producing assets, will be adequate to
meet the capital and liquidity requirements of the Company in both the short and
long-term. The Company's senior unsecured debt is currently rated "BBB-" by
Fitch, "BBB-" by Standard & Poors and "Ba1" by Moody's. The rating agencies
review the ratings assigned to an issuer such as the Company on an ongoing
basis. Negative changes in the Company's ratings would result in increases in
the Company's borrowing costs, including borrowings under the Company's
unsecured credit facility.

As a result of current economic conditions, certain tenants have either not
renewed their leases upon expiration or have paid the Company to terminate their
leases. In addition, a number of U.S. companies have filed for protection under
federal bankruptcy laws. Certain of these companies are tenants of the Company.
The Company is subject to the risk that other companies that are tenants of the
Company may file for bankruptcy protection. This may have an adverse impact on
the financial results and condition of the Company. Our results reflect vacancy
rates in our markets that are at the higher end of the range of historical
cycles and in some instances our asking rents in

30



our markets have trended lower and landlords have been required to grant greater
concessions such as free rent and tenant improvements. Our markets have also
been experiencing higher real estate taxes and utility rates. However, our
markets have begun to recover as evidenced by an increased level of leasing
activity, increased occupancy rates in our portfolio and decreases in vacancy
rates in certain of our markets.

The Company carries comprehensive liability, fire, extended coverage and rental
loss insurance on all of its properties. Six of the Company's properties are
located in New York City. As a result of the events of September 11, 2001,
insurance companies were limiting coverage for acts of terrorism in "all risk"
policies. In November 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law, which, among other things, requires insurance companies to offer
coverage for losses resulting from defined "acts of terrorism" through 2004. The
Company's current insurance coverage provides for full replacement cost of its
properties, including for acts of terrorism up to $500 million on a per
occurrence basis, except for one asset which is insured up to $393 million.

The potential impact of terrorist attacks in the New York City and Tri-State
Area may adversely affect the value of the Company's properties and its ability
to generate cash flow. As a result, there may be a decrease in demand for office
space in metropolitan areas that are considered at risk for future terrorist
attacks, and this decrease may reduce the Company's revenues from property
rentals.

In order to qualify as a REIT for federal income tax purposes, the Company is
required to make distributions to its stockholders of at least 90% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring,
non-incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term liquid investments.

As of June 30, 2004, the Company had a $500 million unsecured revolving credit
facility (the "Credit Facility") from JPMorgan Chase Bank, as administrative
agent, Wells Fargo Bank, National Association, as syndication agent, and
Citicorp North America, Inc. and Wachovia Bank, National Association, as
co-documentation agents. The Credit Facility was scheduled to mature in December
2005, contained options for a one-year extension subject to a fee of 25 basis
points and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. As of June 30, 2004, based on a pricing
grid of the Operating Partnership's unsecured debt ratings, borrowings under the
Credit Facility were priced off LIBOR plus 90 basis points and the Credit
Facility carried a facility fee of 20 basis points per annum. In the event of a
change in the Operating Partnership's unsecured credit ratings the interest
rates and facility fee are subject to change. At June 30, 2004, the outstanding
borrowings under the Credit Facility aggregated $90 million and carried a
weighted average interest rate of 2.18%.

In August 2004, the Company amended and extended the Credit Facility to mature
in August 2007 with similar terms and conditions as existed prior to the
amendment and extension.

The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At June 30, 2004, the Company had availability under the Credit
Facility to borrow an additional $410 million, subject to compliance with
certain financial covenants.

In connection with the acquisition of certain properties, contributing partners
of such properties have provided guarantees on indebtedness of the Company. As a
result, the Company maintains certain outstanding balances on its Credit
Facility.

On January 22, 2004, the Operating Partnership issued $150 million of seven-year
5.15% (5.196% effective rate) senior unsecured notes. Prior to the issuance of
these senior unsecured notes the Company entered into several anticipatory
interest rate hedge instruments to protect itself against potentially rising
interest rates. At the time the notes were issued the Company incurred a net
cost of approximately $980,000 to settle these instruments. Such costs are being
amortized over the term of the senior unsecured notes. During March 2004, the
Company also completed an equity offering of 5.5 million shares of its common
stock raising approximately $149.5 million, net of an underwriting discount, or
$27.18 per share. Net proceeds received from these transactions were used to
repay outstanding borrowings under the Credit Facility, repay $100 million of
the Operating Partnership's 7.4% senior unsecured notes and to invest in
short-term liquid investments.

The Company continues to seek opportunities to acquire real estate assets in its
markets. The Company has historically sought to acquire properties where it
could use its real estate expertise to create additional value subsequent to
acquisition. As a result of increased market values for the Company's commercial
real estate assets, the Company has sold certain non-core assets or interests in
assets where significant value has been created. During 2003, the Company sold
assets or interests in assets with aggregate sales prices of approximately
$350.6 million. In addition, during the six months ended June 30, 2004, the
Company has sold assets or interests in assets with aggregate sales prices of
approximately $44.1 million, net of minority partner's joint venture interest.
The Company used the proceeds from these sales primarily to pay down borrowings
under the Credit Facility, for general corporate purposes and to invest in
short-term liquid investments until such time as alternative real estate
investments can be made.

An OP Unit and a share of common stock have essentially the same economic
characteristics as they effectively share equally in the net income or loss and
distributions of the Operating Partnership. Subject to certain holding periods,
OP Units may either be redeemed for cash or, at the election of the Company,
exchanged for shares of common stock on a one-for-one basis. The OP Units
currently receive a quarterly distribution of $.4246 per unit. As of June 30,
2004, the Operating Partnership had issued and outstanding 3,084,708 Class A OP

31



Units and 465,845 Class C OP Units. The Class C OP Units were issued in August
2003 in connection with the contribution of real property to the Operating
Partnership and currently receive a quarterly distribution of $.4664 per unit.

On November 25, 2003, the Company exchanged all of its 9,915,313 outstanding
shares of Class B common stock for an equal number of shares of its common
stock. The Board of Directors declared a final cash dividend on the Company's
Class B common stock to holders of record on November 25, 2003 in the amount of
$.1758 per share which was paid on January 12, 2004. This payment covered the
period from November 1, 2003 through November 25, 2003 and was based on the
previous quarterly Class B common stock dividend rate of $.6471 per share. In
order to align the regular quarterly dividend payment schedule of the former
holders of Class B common stock with the schedule of the holders of common stock
for periods subsequent to the exchange date for the Class B common stock, the
Board of Directors also declared a cash dividend with regard to the common stock
to holders of record on October 14, 2003 in the amount of $.2585 per share which
was paid on January 12, 2004. This payment covered the period from October 1,
2003 through November 25, 2003 and was based on the current quarterly common
stock dividend rate of $.4246 per share. As a result, the Company declared
dividends through November 25, 2003 to all holders of common stock and Class B
common stock. The Board of Directors also declared the common stock cash
dividend for the portion of the fourth quarter subsequent to November 25, 2003.
The holders of record of common stock on January 2, 2004, giving effect to the
exchange transaction, received a dividend on the common stock in the amount of
$.1661 per share on January 12, 2004. This payment covered the period from
November 26, 2003 through December 31, 2003 and was based on the current
quarterly common stock dividend rate of $.4246 per share.

During the six month period ended June 30, 2004, approximately 1.3 million
shares of the Company's common stock was issued in connection with the exercise
of outstanding options to purchase stock under its stock option plans resulting
in proceeds to the Company of approximately $27.2 million.

The Board of Directors of the Company authorized the purchase of up to five
million shares of the Company's common stock. Transactions conducted on the New
York Stock Exchange have been, and will continue to be, effected in accordance
with the safe harbor provisions of the Securities Exchange Act of 1934 and may
be terminated by the Company at any time. Since the Board's initial
authorization, the Company has purchased 3,318,600 shares of its common stock
for an aggregate purchase price of approximately $71.3 million. In June 2004,
the Board of Directors re-set the Company's common stock repurchase program back
to five million shares. No purchases were made during the six months ended June
30, 2004.

The Board of Directors of the Company also formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.

On June 30, 2004, the Company had issued and outstanding 8,693,900 shares of
7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred
stock"). The Series A preferred stock is redeemable by the Company on or after
April 13, 2004 at a price of $25.7625 per share with such price decreasing, at
annual intervals, to $25.00 per share on April 13, 2008. In addition, the Series
A preferred stock, at the option of the holder, is convertible at any time into
the Company's common stock at a price of $28.51 per share. On May 13, 2004, the
Company purchased and retired 140,600 shares of the Series A preferred stock for
approximately $3.4 million or $24.45 per share. In addition, during July 2004,
the Company exchanged 1,350,000 shares of the Series A preferred stock for
1,304,602 shares of common stock. As a result of these transactions annual
preferred dividends will decrease by approximately $2.8 million. In accordance
with the Emerging Issues Task Force ("EITF") Topic D-42 the Company will incur
an accounting charge during the third quarter of 2004 of approximately $3.4
million in connection with the July 2004 exchange of the Series A preferred
stock.

On January 1, 2004, the Company had issued and outstanding two million shares of
Series B Convertible Cumulative Preferred Stock (the "Series B preferred
stock"). The Series B preferred stock was redeemable by the Company as follows:
(i) on or after June 3, 2003 to and including June 2, 2004, at $25.50 per share
and (ii) on or after June 3, 2004 and thereafter, at $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's common stock at a price of $26.05 per share. On January
16, 2004, the Company exercised its option to redeem the two million shares of
outstanding Series B preferred stock for approximately 1,958,000 shares of its
common stock. As a result of this redemption annual preferred dividends will
decrease by approximately $4.4 million.

On April 1, 2004, the Operating Partnership had issued and outstanding
approximately 19,662 preferred units of limited partnership interest with a
liquidation preference value of $1,000 per unit and a current annualized
distribution of $55.60 per unit (the "Preferred Units"). The Preferred Units
were issued in 1998 in connection with the contribution of real property to the
Operating Partnership. On April 12, 2004, the Operating Partnership redeemed
approximately 3,081 Preferred Units, at the election of the holder, for
approximately $3.1 million, including accrued and unpaid dividends which is
being applied to amounts owed from the unit holder under the Other Notes. In
addition, during July 2004, the holder of approximately 15,381 of the
outstanding Preferred Units exchanged them into OP Units. The Operating
Partnership converted the Preferred Units, including accrued and unpaid
dividends, into approximately 531,000 OP Units, which were valued at
approximately $14.7 million at the time of the conversion. Subsequent to the
conversion, the OP Units were exchanged for an equal number of shares of the
Company's common stock. In connection with the July 2004 exchanges and
conversions, the preferred unit holder delivered notice to the Operating
Partnership of his intent to repay $15.5 million owed from the unit holder under
the Other Notes.

Effective January 1, 2002 the Company has elected to follow FASB Statement No.
123, "Accounting for Stock Based Compensation".

32



Statement No.123 requires the use of option valuation models which determine the
fair value of the option on the date of the grant. All future employee stock
option grants will be expensed over the options' vesting periods based on the
fair value at the date of the grant in accordance with Statement No. 123. To
determine the fair value of the stock options granted, the Company uses a
Black-Scholes option pricing model. Prior to the adoption of Statement No. 123,
the Company had applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans and reported pro forma
disclosures in its Form 10-K filings by estimating the fair value of options
issued and the related expense in accordance with Statement No. 123. During each
of the six month periods ended June 30, 2004 and 2003, the Company recorded
approximately $2,700 of expense related to the fair value of stock options
issued. Such amounts have been included in marketing, general and administrative
expenses in the Company's consolidated statements of income.

The Company's indebtedness at June 30, 2004 totaled approximately $1.5 billion
(including its share of consolidated and unconsolidated joint venture debt and
net of minority partners' interests share of consolidated joint venture debt)
and was comprised of $90 million outstanding under the Credit Facility,
approximately $549.1 million of senior unsecured notes and approximately $833.2
million of mortgage indebtedness. Based on the Company's total market
capitalization of approximately $3.7 billion at June 30, 2004 (calculated based
on the sum of (i) the market value of the Company's common stock and OP Units,
assuming conversion, (ii) the liquidation preference value of the Company's
preferred stock, (iii) the liquidation preference value of the Operating
Partnership's preferred units and (iv) the $1.5 billion of debt), the Company's
debt represented approximately 40.3% of its total market capitalization.

33



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table sets forth the Company's significant consolidated debt
obligations, by scheduled principal cash flow payments and maturity date, and
its commercial commitments by scheduled maturity at June 30, 2004 (in
thousands):



MATURITY DATE
---------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------

Mortgage notes payable (1) $ 6,779 $ 13,887 $ 13,478 $ 10,969 $ 9,989 $ 105,178 $ 160,280
Mortgage notes payable (2) (3) 250,000 18,553 129,920 60,539 -- 346,269 805,281
Senior unsecured notes -- -- -- 200,000 -- 350,000 550,000
Unsecured credit facility -- 90,000 -- -- -- -- 90,000
Land lease obligations (4) 3,737 3,776 3,828 3,753 3,753 78,672 97,519
Operating leases 1,119 1,282 1,198 844 359 -- 4,802
Air rights lease
obligations 333 333 333 333 333 3,680 5,345
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 261,968 $ 127,831 $ 148,757 $ 276,438 $ 14,434 $ 883,799 $ 1,713,227
=========== =========== =========== =========== =========== =========== ===========


(1) Scheduled principal amortization payments.

(2) Principal payments due at maturity.

(3) In addition, the Company has a 60% interest in an unconsolidated joint
venture property. The Company's share of the mortgage debt at March 31,
2004 is approximately $7.6 million. This mortgage note bears interest at
8.85% per annum and matures on September 1, 2005 at which time the
Company's share of the mortgage debt will be approximately $6.9 million.

(4) The Company leases, pursuant to noncancellable operating leases, the land
on which twelve of its buildings were constructed. The leases, certain of
which contain renewal options at the direction of the Company, expire
between 2006 and 2090. The leases either contain provisions for scheduled
increases in the minimum rent at specified intervals or for adjustments to
rent based upon the fair market value of the underlying land or other
indices at specified intervals. Minimum ground rent is recognized on a
straight-line basis over the terms of the leases.

Certain of the mortgage notes payable are guaranteed by certain limited partners
in the Operating Partnership and/or the Company. In addition, consistent with
customary practices in non-recourse lending, certain non-recourse mortgages may
be recourse to the Company under certain limited circumstances including
environmental issues and breaches of material representations.

During August 2004 the mortgage note payable and mezzanine debt, aggregating
$250 million, on the property located at 1185 Avenue of the Americas, New York,
NY, matures. On March 19, 2004, the Company entered into two anticipatory
interest rate hedge instruments which are scheduled to coincide with an August
2004 debt maturity, totaling $100 million, to protect itself against potentially
rising interest rates. At June 30, 2004, the fair value of these instruments
exceeded their carrying value by approximately $5.2 million. Such amount has
been reflected as accumulated other comprehensive income with a corresponding
increase to prepaid expenses and other assets on the Company's balance sheet. On
July 1, 2004, the Company entered into an additional anticipatory interest rate
hedge instrument totaling $12.5 million to coincide with the aforementioned
August 2004 debt maturity.

At June 30, 2004, the Company had approximately $940,000 in outstanding undrawn
standby letters of credit issued under the Credit Facility. In addition,
approximately $43.5 million, or 4.5%, of the Company's mortgage debt is recourse
to the Company.

34



OTHER MATTERS

Seven of the Company's office properties which were acquired by the issuance of
OP Units are subject to agreements limiting the Company's ability to transfer
them prior to agreed upon dates without the consent of the limited partner who
transferred the respective property to the Company. In the event the Company
transfers any of these properties prior to the expiration of these limitations,
the Company may be required to make a payment relating to taxes incurred by the
limited partner. These limitations expire between 2007 and 2013.

Three of the Company's office properties are held in joint ventures which
contain certain limitations on transfer. These limitations include requiring the
consent of the joint venture partner to transfer a property prior to various
specified dates, rights of first offer, and buy / sell provisions.

With the recent appointment of Messrs. Crocker, Steinberg, Ruffle and Ms. McCaul
as additional independent directors and the retirement of Mr. Kevenides, the
Company's Board of Directors currently consists of seven independent directors
and two insiders. Mr. Peter Quick serves as the Lead Director of the Board. In
addition, each of the Audit, Compensation and Nominating and Governance
Committees is comprised solely of independent directors.

In May 2003, the Company revised its policy with respect to compensation of its
independent directors to provide that a substantial portion of the independent
director's compensation shall be in the form of common stock of the Company.
Such common stock may not be sold until such time as the director is no longer a
member of the Company's Board.

Recently, the Company has taken certain additional actions to enhance its
corporate governance policies. These actions included opting out of the Maryland
Business Combination Statute, de-staggering the Board of Directors to provide
that each director is subject to election by shareholders on an annual basis and
modifying the Company's "five or fewer" limitation on the ownership of its
common stock so that such limitation may only be used to protect the Company's
REIT status and not for anti-takeover purposes.

The Company has also adopted a policy which requires that each independent
director acquire $100,000 of common stock of the Company and a policy which
requires that at least one independent director be rotated off the Board every
three years.

The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the Company discontinued the use
of stock loans in its LTIP. In connection with LTIP grants made prior to the
enactment of the Sarbanes Oxley legislation the Company made stock loans to
certain executive and senior officers to purchase 487,500 shares of its common
stock at market prices ranging from $18.44 per share to $27.13 per share. The
stock loans were set to bear interest at the mid-term Applicable Federal Rate
and were secured by the shares purchased. Such stock loans (including accrued
interest) were scheduled to vest and be ratably forgiven each year on the
anniversary of the grant date based upon vesting periods ranging from four to
ten years based on continued service and in part on attaining certain annual
performance measures. These stock loans had an initial aggregate weighted
average vesting period of approximately nine years. As of June 30, 2004, there
remains 222,429 shares of common stock subject to the original stock loans which
are anticipated to vest between 2005 and 2011. Approximately $248,000 and
$556,000 of compensation expense was recorded for the three and six month
periods ended June 30, 2004, respectively related to these LTIP. Such amount has
been included in marketing, general and administrative expenses on the Company's
consolidated statements of income.

The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.7 million at June 30, 2004, and have been included
as a reduction of additional paid in capital on the Company's consolidated
balance sheets. Other outstanding loans to executive and senior officers at June
30, 2004 amounted to approximately $1.9 million primarily related to tax payment
advances on stock compensation awards and life insurance contracts made to
certain executive and non-executive officers.

In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of common stock if shares are then available
for grant under one of the Company's stock option plans or, if shares are not so
available, an amount of cash equivalent to the value of such stock on the
vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 62,835 shares of the Company's common stock and the 2003 Rights
aggregate 26,042 shares of common stock. As of June 30, 2004, there remains
47,126 shares of common stock related to the 2002 Rights and 26,042 shares of
common stock related to the 2003 Rights. During the three and six month periods
ended June 30, 2004 the Company recorded approximately $100,000 and $201,000,
respectively compensation expense related to the Rights. Such amount has been
included in marketing, general and administrative expenses on the Company's
consolidated statements of income.

35



In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award, which provides for compensation to be earned at the end of a four-year
period if the Company attains certain four-year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 827,776 shares of its
common stock under one of its existing stock option plans in connection with the
core award of this LTIP for eight of its executive and senior officers. On March
13, 2004, the Company met its annual performance measure with respect to the
prior annual period. As a result, the Company issued to the participants 206,944
shares of its common stock related to the core component of this LTIP. As of
June 30, 2004, there remains 620,832 shares of common stock reserved for future
issuance under the core award of this LTIP. With respect to the core award of
this LTIP, the Company recorded approximately $699,000 and $1.4 million of
compensation expense for the three and six month periods ended June 30, 2004,
respectively. Such amount has been included in marketing, general and
administrative expenses on the Company's consolidated statements of income.
Further, no provision will be made for the special outperformance award of this
LTIP until such time as achieving the requisite performance measures is
determined to be probable.

Under various Federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
any required remediation and the owner's liability therefore as to any property
is generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition, or in the event of
renovation or demolition. Such laws impose liability for release of ACMs into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental fines and
injuries to persons and property.

All of the Company's office and industrial / R&D properties have been subjected
to a Phase I or similar environmental audit after April 1, 1994 (which involved
general inspections without soil sampling, ground water analysis or radon
testing and, for the Company's properties constructed in 1978 or earlier, survey
inspections to ascertain the existence of ACMs were conducted) completed by
independent environmental consultant companies (except for 35 Pinelawn Road
which was originally developed by Reckson and subjected to a Phase 1 in April
1992). These environmental audits have not revealed any environmental liability
that would have a material adverse effect on the Company's business.

Soil, sediment and groundwater contamination, consisting of volatile organic
compounds ("VOCs") and metals, has been identified at the property at 32 Windsor
Place, Central Islip, New York. The contamination is associated with industrial
activities conducted by a tenant at the property over a number of years. The
contamination, which was identified through an environmental investigation
conducted on behalf of the Company, has been reported to the New York State
Department of Environmental Conservation. The Company has notified the tenant of
the findings and has demanded that the tenant take appropriate actions to fully
investigate and remediate the contamination. Under applicable environmental
laws, both the tenant and the Company are liable for the cost of investigation
and remediation. The Company does not believe that the cost of investigation and
remediation will be material and the Company has recourse against the tenant.
However, there can be no assurance that the Company will not incur liability
that would have a material adverse effect on the Company's business.

In March 2004, the Company received notification from the Internal Revenue
Service indicating that they have selected the 2001 tax return of the Operating
Partnership for examination. The examination process is currently on going.

36



FUNDS FROM OPERATIONS

The Company believes that Funds from Operations ("FFO") is a widely recognized
and appropriate measure of performance of an equity REIT. Although FFO is a
non-GAAP financial measure, the Company believes it provides useful information
to shareholders, potential investors and management. The Company computes FFO in
accordance with the standards established by the National Association of Real
Estate Investment Trusts ("NAREIT"). FFO is defined by NAREIT as net income or
loss, excluding gains or losses from sales of depreciable properties plus real
estate depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not indicative of cash
available to fund cash needs. FFO should not be considered as an alternative to
net income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.

Since all companies and analysts do not calculate FFO in a similar fashion, the
Company's calculation of FFO presented herein may not be comparable to similarly
titled measures as reported by other companies.

The following table presents the Company's FFO calculation (unaudited and in
thousands):



THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------

Net income allocable to common shareholders ..................................... $ 13,043 $ 7,585 $ 29,007 $ 16,248
Adjustments for basic funds from operations:
Add:
Limited partners' minority interest in the operating partnership .......... 701 874 1,637 1,870
Real estate depreciation and amortization ................................. 28,854 29,127 57,411 60,454
Minority partners' interests in consolidated partnerships ................. 6,811 4,335 13,136 9,025
Less:
Gain on sales of depreciable real estate .................................. 6,174 -- 11,330 --
Amounts distributable to minority partners in consolidated partnerships ... 6,411 6,769 14,915 13,576
---------- ---------- ---------- ----------
Basic Funds From Operations ("FFO") .......................................... 36,824 35,152 74,946 74,021
Add:
Dividends and distributions on dilutive shares and units .................. 227 273 500 8,968
---------- ---------- ---------- ----------
Diluted FFO ............................................................... $ 37,051 $ 35,425 $ 75,446 $ 82,989
========== ========== ========== ==========

Weighted average common shares outstanding ................................... 66,892 57,916 64,128 58,016
Weighted average units of limited partnership interest outstanding ........... 3,551 7,276 3,551 7,276
---------- ---------- ---------- ----------

Basic weighted average common shares and units outstanding ................... 70,443 65,192 67,679 65,292
Adjustments for dilutive FFO weighted average shares and units outstanding:
Add:
Weighted average common stock equivalents .............................. 435 117 394 118
Weighted average shares of Series A Preferred Stock .................... -- -- -- 7,747
Weighted average shares of preferred limited partnership interest ...... 581 661 635 661
---------- ---------- ---------- ----------

Dilutive FFO weighted average shares and units outstanding ................... 71,459 65,970 68,708 73,818
========== ========== ========== ==========


INFLATION

The office leases generally provide for fixed base rent increases or indexed
escalations. In addition, the office leases provide for separate escalations of
real estate taxes, operating expenses and electric costs over a base amount. The
industrial / R&D leases generally provide for fixed base rent increases, direct
pass through of certain operating expenses and separate real estate tax
escalations over a base amount. The Company believes that inflationary increases
in expenses will be offset by contractual rent increases and expense escalations
described above. As a result of the impact of the events of September 11, 2001,
the Company has realized increased insurance costs, particularly relating to
property and terrorism insurance, and security costs. The Company has included
these costs as part of its escalatable expenses. The Company has billed these
escalatable expense items to its tenants consistent with the terms of the
underlying leases and believes they are collectible. To the extent the Company's
properties contain vacant space, the Company will bear such inflationary
increases in expenses.

The Credit Facility, $250 million of the Company's mortgage notes payable and
the Mezz Note, bear interest at variable rates, which will be influenced by
changes in short-term interest rates, and are sensitive to inflation.

37



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary market risk facing the Company is interest rate risk on its long
term debt, mortgage notes and notes receivable. The Company will, when
advantageous, hedge its interest rate risk using financial instruments. The
Company is not subject to foreign currency risk.

The Company manages its exposure to interest rate risk on its variable rate
indebtedness by borrowing on a short-term basis under its Credit Facility until
such time as it is able to retire the short-term variable rate debt with either
a long-term fixed rate debt offering, long term mortgage debt, equity offerings
or through sales or partial sales of assets.

The Company will recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges will be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. On March 19, 2004, the Company entered into
two anticipatory interest rate hedge instruments which are scheduled to coincide
with an August 2004 debt maturity, totaling $100 million, to protect itself
against potentially rising interest rates. At June 30, 2004, the fair value of
these instruments exceeded their carrying value by approximately $5.2 million.
On July 1, 2004, the Company entered into an additional anticipatory interest
rate hedge instrument totaling $12.5 million to coincide with the aforementioned
August 2004 debt maturity.

The fair market value ("FMV") of the Company's long term debt, mortgage notes
and notes receivable is estimated based on discounting future cash flows at
interest rates that management believes reflect the risks associated with long
term debt, mortgage notes and notes receivable of similar risk and duration.

The following table sets forth the Company's long-term debt obligations by
scheduled principal cash flow payments and maturity date, weighted average
interest rates and estimated FMV at June 30, 2004 (dollars in thousands):



For the Year Ended December 31,
-----------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) FMV
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------

Long term debt:
Fixed rate ......... $ 6,779 $ 32,440 $ 143,398 $ 271,508 $ 9,989 $ 801,447 $ 1,265,561 $1,340,918
Weighted average
interest rate .... 7.47% 6.90% 7.37% 7.14% 7.23% 7.40% 7.33%

Variable rate ...... $ 250,000 $ 90,000 $ -- $ -- $ -- $ -- $ 340,000 $ 340,000
Weighted average
interest rate .... 4.95% 2.18% -- -- -- -- 4.22%


(1) Includes aggregate unamortized issuance discounts of approximately $868,000
on certain of the senior unsecured notes which are due at maturity.

In addition, a one percent increase in the LIBOR rate would have a $900,000
annual increase in interest expense on the $90 million of variable rate debt due
in 2005. A one percent increase in LIBOR would have no impact to interest
expense on the $250 million of variable rate debt due in 2004, as interest
reported in the current period is calculated using a LIBOR rate in excess of one
percent over the LIBOR rate at June 30, 2004.

The following table sets forth the Company's mortgage notes and note receivables
by scheduled maturity date, weighted average interest rates and estimated FMV at
June 30, 2004 (dollars in thousands):



For the Year Ended December 31,
-----------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) FMV
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------

Mortgage notes and notes receivable:

Fixed rate ............ $ 19,000 $ -- $ -- $ 16,990 $ -- $ -- $ 35,990 $39,239
Weighted average
interest rate ...... 10.70% -- -- 12.00% -- -- 11.31%

Variable rate ......... $ -- $ 30,000 $ -- $ -- $ -- $ -- $ 30,000 $30,000
Weighted average
interest rate ...... -- 12.73% -- -- -- -- 12.73%


(1) Excludes interest receivables and unamortized acquisition costs aggregating
approximately $2.4 million dollars.

38



ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is reported within the time periods specified in the SEC's
rules and forms. In this regard, the Company has formed a Disclosure Committee
currently comprised of all of the Company's executive officers as well as
certain other employees with knowledge of information that may be considered in
the SEC reporting process. The Committee has responsibility for the development
and assessment of the financial and non-financial information to be included in
the reports filed by the Company with the SEC and assists the Company's Chief
Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Company's SEC reports. The Committee meets
regularly and reports to the Audit Committee on a quarterly or more frequent
basis. Our Chief Executive Officer and Chief Financial Officer have evaluated,
with the participation of the Company's management, our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon the evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that such disclosure controls and procedures are effective.


There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

39



SELECTED PORTFOLIO INFORMATION

The following table sets forth the Company's schedule of its top 25 tenants
based on base rental revenue as of June 30, 2004:



WTD. AVG. PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED
TERM REMAINING TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE
TENANT NAME (1) (2) (YEARS) SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE
----------------------------- ---------------- -------------------- ------------------------- -------------------------

*Debevoise & Plimpton 17.5 465,420 3.3% 5.6%
King & Spalding 7.8 176,204 2.3% 2.0%
*Verizon Communications Inc. 2.7 263,569 1.9% 1.7%
*American Express 9.2 129,818 1.9% 1.7%
*Schulte Roth & Zabel 16.4 279,746 1.6% 2.7%
*Fuji Photo Film USA 8.4 186,484 1.3% 1.2%
Dun & Bradstreet Corp. 8.3 123,000 1.2% 1.0%
United Distillers 0.7 137,918 1.2% 1.0%
*Bank of America/Fleet Bank 6.7 125,903 1.2% 1.0%
*WorldCom/MCI 2.6 244,730 1.1% 1.1%
Arrow Electronics 9.5 163,762 1.1% 1.0%
Amerada Hess Corporation 8.5 127,300 1.1% 1.0%
T.D. Waterhouse 3.1 103,381 1.0% 0.9%
Westdeutsche Landesbank 11.8 53,000 1.0% 0.9%
D.E. Shaw 11.5 79,515 0.9% 0.8%
Practicing Law Institute 9.7 77,500 0.9% 0.8%
*Banque Nationale De Paris 12.1 145,834 0.9% 1.5%
North Fork Bank 11.5 126,770 0.9% 0.8%
Vytra Healthcare 3.5 105,613 0.9% 0.8%
*Kramer Levin Nessen Kamin 0.8 158,144 0.9% 1.5%
Heller Ehrman White 0.9 64,526 0.9% 0.7%
P.R. Newswire Associates 3.9 67,000 0.8% 0.7%
*JP Morgan Chase/ Bank One 5.6 87,737 0.8% 0.8%
*HQ Global 4.3 126,487 0.8% 0.8%
Laboratory Corp. Of America 2.9 108,000 0.8% 0.7%


(1) Ranked by pro-rata share of annualized base rental revenue adjusted for pro
rata share of joint venture interests.

(2) Excludes One Orlando Centre in Orlando, Florida.

* Part or all of space occupied by tenant is in a 51% or more owned joint
venture building.

HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS

The following table sets forth annual and per square foot non-incremental
revenue-generating capital expenditures in which the Company paid or accrued,
during the respective periods, to retain revenues attributable to existing
leased space (at 100% of cost) for the years 2000 through 2003 and for the six
month period ended June 30, 2004 for the Company's consolidated office and
industrial / R&D properties other than One Orlando Center in Orlando, FL:



Average YTD
2000 2001 2002 2003 2000-2003 2004
------------ ------------ ------------ ------------ ------------ ------------

Suburban Office Properties
Total $ 3,289,116 $ 4,606,069 $ 5,283,674 $ 6,791,336 $ 4,992,549 $ 2,835,587
Per Square Foot $ 0.33 $ 0.45 $ 0.53 $ 0.67 $ 0.49 $ 0.28

NYC Office Properties
Total $ 946,718 $ 1,584,501 $ 1,939,111 $ 1,922,209 $ 1,598,135 $ 1,210,758
Per Square Foot $ 0.38 $ 0.45 $ 0.56 $ 0.55 $ 0.48 $ 0.27

Industrial Properties
Total $ 813,431 $ 711,666 $ 1,881,627 $1,218,401 (1)$ 1,156,281 $ 22,923
Per Square Foot $ 0.11 $ 0.11 $ 0.28 $ 0.23 $ 0.18 $ 0.02

TOTAL PORTFOLIO
------------ ------------ ------------ ------------ ------------ ------------
Total $ 5,049,265 $ 6,902,236 $ 9,104,412 $ 9,931,946 $ 7,746,965 $ 4,069,268
Per Square Foot $ 0.25 $ 0.34 $ 0.45 $ 0.52 $ 0.39 $ 0.26


(1) Excludes non-incremental capital expenditures of $435,140 incurred during
the fourth quarter 2003 for the industrial properties which were sold
during the period.

40



The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions in which the
Company committed to perform, during the respective periods, to retain revenues
attributable to existing leased space for the years 2000 through 2003 and for
the six month period ended June 30, 2004 for the Company's consolidated office
and industrial / R&D properties other than One Orlando Center in Orlando, FL:



Average YTD
2000 2001 2002 2003 2000-2003 2004 (1) New Renewal
----------------------------------------------------------------------------------------------------------

Long Island Office Properties
Tenant Improvements $2,853,706 $ 2,722,457 $ 1,917,466 $ 3,774,722 $ 2,817,088 $2,394,114 $1,327,529 $1,066,585
Per Square Foot Improved $ 6.99 $ 8.47 $ 7.81 $ 7.05 $ 7.58 $ 9.05 $ 12.67 $ 6.67
Leasing Commissions $2,208,604 $ 1,444,412 $ 1,026,970 $ 2,623,245 $ 1,825,808 $1,333,976 $ 529,537 $ 804,439
Per Square Foot Leased $ 4.96 $ 4.49 $ 4.18 $ 4.90 $ 4.63 $ 5.04 $ 5.05 $ 5.03
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 11.95 $ 12.96 $ 11.99 $ 11.95 $ 12.21 $ 14.09 $ 17.72 $ 11.70
==========================================================================================================

Westchester Office Properties
Tenant Improvements $1,860,027 $2,584,728 $6,391,589(2) $ 3,732,370 $ 3,642,178 $4,937,356 $4,216,913 $ 720,443
Per Square Foot Improved $ 5.72 $ 5.91 $ 15.05 $ 15.98 $ 10.66 $ 14.64 $ 21.48 $ 5.12
Leasing Commissions $ 412,226 $1,263,012 $1,975,850(2) $ 917,487 $ 1,142,144 $2,003,752 $1,571,958 $ 431,794
Per Square Foot Leased $ 3.00 $ 2.89 $ 4.65 $ 3.93 $ 3.62 $ 5.94 $ 8.01 $ 3.07
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 8.72 $ 8.80 $ 19.70 $ 19.91 $ 14.28 $ 20.58 $ 29.49 $ 8.19
==========================================================================================================

Connecticut Office Properties
Tenant Improvements $ 385,531 $ 213,909 $ 491,435 $ 588,087 $ 419,740 $2,400,708 $1,047,111 $1,353,597
Per Square Foot Improved $ 4.19 $ 1.46 $ 3.81 $ 8.44 $ 4.47 $ 14.13 $ 29.54 $ 10.06
Leasing Commissions $ 453,435 $ 209,322 $ 307,023 $ 511,360 $ 370,285 $1,382,615 $ 347,634 $1,034,981
Per Square Foot Leased $ 4.92 $ 1.43 $ 2.38 $ 7.34 $ 4.02 $ 8.14 $ 9.81 $ 7.69
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 9.11 $ 2.89 $ 6.19 $ 15.78 $ 8.49 $ 22.27 $ 39.35 $ 17.75
==========================================================================================================

New Jersey Office Properties
Tenant Improvements $1,580,323 $ 1,146,385 $ 2,842,521 $ 4,327,295 $ 2,474,131 $ 710,890 $ 665,124 $ 45,766
Per Square Foot Improved $ 6.71 $ 2.92 $ 10.76 $ 11.57 $ 7.99 $ 7.50 $ 13.42 $ 1.01
Leasing Commissions $1,031,950 $ 1,602,962 $ 1,037,012 $ 1,892,635 $ 1,391,140 $ 252,534 $ 232,829 $ 19,705
Per Square Foot Leased $ 4.44 $ 4.08 $ 3.92 $ 5.06 $ 4.38 $ 2.66 $ 4.70 $ 0.44
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 11.15 $ 7.00 $ 14.68 $ 16.63 $ 12.37 $ 10.16 $ 18.12 $ 1.45
==========================================================================================================

New York City Office Properties
Tenant Improvements $ 65,267 $ 788,930 $ 4,350,106 $ 5,810,017(3) $ 2,753,580 $3,497,494(4) $2,393,044 $1,104,450(4)
Per Square Foot Improved $ 1.79 $ 15.69 $ 18.39 $ 32.84 $ 17.18 $ 21.01 $ 27.11 $ 14.12
Leasing Commissions $ 418,185 $ 1,098,829 $ 2,019,837 $ 2,950,330(3) $ 1,621,795 $1,041,336(4) $ 470,445 $ 570,891(4)
Per Square Foot Leased $ 11.50 $ 21.86 $ 8.54 $ 16.68 $ 14.64 $ 6.25 $ 5.33 $ 7.30
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 13.29 $ 37.55 $ 26.93 $ 49.52 $ 31.82 $ 27.26 $ 32.44 $ 21.42
==========================================================================================================

Industrial Properties
Tenant Improvements $ 650,216 $ 1,366,488 $ 1,850,812 $ 1,249,200 $ 1,279,179 $ 205,104 $ 157,661 $ 47,443
Per Square Foot Improved $ 0.95 $ 1.65 $ 1.97 $ 2.42 $ 1.75 $ 2.11 $ 1.73 $ 7.46
Leasing Commissions $ 436,506 $ 354,572 $ 890,688 $ 574,256 $ 564,005 $ 225,539 $ 225,539 $ 0
Per Square Foot Leased $ 0.64 $ 0.43 $ 0.95 $ 1.11 $ 0.78 $ 2.32 $ 2.48 $ 0.00
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 1.59 $ 2.08 $ 2.92 $ 3.53 $ 2.53 $ 4.43 $ 4.21 $ 7.46
==========================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO
Tenant Improvements $7,395,070 $ 8,822,897 $17,843,929 $19,481,691 $13,385,896 $14,145,666 $9,807,382 $4,338,284
Per Square Foot Improved $ 4.15 $ 4.05 $ 7.96 $ 10.22 $ 6.66 $ 12.51 $17. 35 $ 7.68
Leasing Commissions $4,960,906 $ 5,973,109 $ 7,257,380 $ 9,469,313 $ 6,915,177 $6,239,752 $3,377,942 $2,861,810
Per Square Foot Leased $ 3.05 $ 2.75 $ 3.24 $ 4.97 $ 3.54 $ 5.52 $ 5.97 $ 5.07
----------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 7.20 $ 6.80 $ 11.20 $ 15.19 $ 10.20 $ 18.03 $ 23.32 $ 12.75
==========================================================================================================



(1) Excludes $2.8 million of deferred leasing costs attributable to space
marketed but not yet leased.

(2) Excludes tenant improvements and leasing commissions related to a 163,880
square foot leasing transaction with Fuji Photo Film U.S.A. Leasing
commissions on this transaction amounted to $5.33 per square foot and
tenant improvement allowance amounted to $40.88 per square foot.

(3) Excludes $5.8 million of tenant improvements and $2.2 million of leasing
commissions related to a new 121,108 square foot lease to Debevoise with a
lease commencement date in 2005. Also excludes tenant improvements of $0.2
million for Sandler O'Neil & Partners (7,446 SF) for expansion space with a
lease commencement date in 2004.

(4) Excludes 86,800 square foot Westpoint Stevens early renewal. There were no
tenant improvement or leasing costs associated with this transaction. Also
excludes $1.4 million of tenant improvements and $1.2 million of leasing
commissions related to a 74,293 square foot lease to Harper Collins
Publishers with a lease commencement date in 2006.

41



The following table sets forth the Company's lease expiration table, as adjusted
for pre-leased space, at July 1, 2004 for its Total Portfolio of properties, its
Office Portfolio and its Industrial / R&D Portfolio:

TOTAL PORTFOLIO (1)
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 92 545,148 3.5% 3.5%
2005 185 1,523,110 9.9% 13.4%
2006 184 1,692,820 11.0% 24.4%
2007 109 1,140,838 7.4% 31.8%
2008 109 959,655 6.2% 38.1%
2009 102 1,131,680 7.4% 45.4%
2010 and thereafter 315 7,327,050 47.6% 93.0%
- --------------------------------------------------------------------------------
Total/Weighted Average 1,096 14,320,301 93.0%
- --------------------------------------------------------------------------------
Total Portfolio Square Feet 15,396,244
- --------------------------------------------------------------------------------

OFFICE PORTFOLIO (1)
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 89 513,528 3.6% 3.6%
2005 182 1,383,960 9.6% 13.1%
2006 180 1,595,854 11.1% 24.2%
2007 105 1,071,346 7.4% 31.6%
2008 106 916,812 6.3% 38.0%
2009 101 1,086,699 7.5% 45.5%
2010 and thereafter 310 6,981,186 48.3% 93.8%
- --------------------------------------------------------------------------------
Total/Weighted Average 1,073 13,549,385 93.8%
- --------------------------------------------------------------------------------
Total Office Portfolio Square Feet 14,440,849
- --------------------------------------------------------------------------------

INDUSTRIAL/R&D PORTFOLIO
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Industrial/R&D % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 3 31,620 3.3% 3.3%
2005 3 139,150 14.6% 17.9%
2006 4 96,966 10.1% 28.0%
2007 4 69,492 7.3% 35.3%
2008 3 42,843 4.5% 39.8%
2009 1 44,981 4.7% 44.5%
2010 and thereafter 5 345,864 36.2% 80.7%
- --------------------------------------------------------------------------------
Total/Weighted Average 23 770,916 80.7%
- --------------------------------------------------------------------------------
Total Industrial/R&D
Portfolio Square Feet 955,395
- --------------------------------------------------------------------------------

(1) Excludes One Orlando Centre in Orlando, Florida

42



The following table sets forth the Company's components of its paid or accrued
non-incremental and incremental revenue-generating capital expenditures, tenant
improvements and leasing costs for the periods presented as reported on its
"Statements of Cash Flows - Investment Activities" contained in its consolidated
financial statements (in thousands):

SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
------------ ------------
Capital expenditures:
Non-incremental ............................... $ 4,069 $ 4,297
Incremental ................................... 1,085 899
Tenant improvements:
Non-incremental ............................... 9,671 19,901
Incremental ................................... 2,976 52
------------ ------------
Additions to commercial real estate properties ... $ 17,801 $ 25,149
============ ============

Leasing costs:
Non-incremental ............................... $ 6,764 $ 6,554
Incremental ................................... 1,913 2,211
------------ ------------
Payment of deferred leasing costs ................ $ 8,677 $ 8,765
============ ============

Acquisition and development costs ................ $ 335,668 $ 16,237
============ ============

43



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

A number of shareholder derivative actions have been commenced purportedly on
behalf of the Company against the Board of Directors in the Supreme Court of the
State of New York, County of Nassau (Lowinger v. Rechler et al., Index No. 01
4162/03 (9/16/03)), the Supreme Court of the State of New York, County of
Suffolk (Steiner v. Rechler et al., Index No. 03 32545 (10/2/03) and Lighter v.
Rechler et al., Index No. 03 23593 (10/3/03)), the United States District Court,
Eastern District of New York (Tucker v. Rechler et al., Case No. cv 03 4917
(9/26/03), Clinton Charter Township Police and Fire Retirement System v. Rechler
et al., Case No. cv 03 5008 (10/1/03) and Teachers' Retirement System of
Louisiana v. Rechler et al., Case No. cv 03 5178 (10/14/03)) and the Circuit
Court for Baltimore County (Sekuk Global Enterprises Profit Sharing Plan v.
Rechler et al., Civil No. 24-C- 03007496 (10/16/03), Hoffman v. Rechler et al.,
24-C-03-007876 (10/27/03) and Chirko v. Rechler et al., 24-C-03-008010
(10/30/03)), relating to the sale of the Long Island Industrial Portfolio to
certain members of the Rechler family. The complaints allege, among other
things, that the process by which the directors agreed to the transaction was
not sufficiently independent of the Rechler family and did not involve a "
market check" or third party auction process and as a result was not for
adequate consideration. The Plaintiffs seek similar relief, including a
declaration that the directors violated their fiduciary duties, an injunction
against the transaction and damages. The Company believes that complaints are
without merit.

Kramer Levin Naftalis & Frankel commenced an action against Metropolitan 919 3rd
Avenue LLC in the Supreme Court of the State of New York, County of New York
(Kramer Levin Naftalis & Frankel LLP v. Metropolitan 919 3rd Avenue LLC, Index
No. 604512/2002 (12/16/02)) relating to alleged overcharges of approximately
$700,000 with respect to its lease at 919 3rd Avenue, New York, NY. Such
overcharges were primarily incurred during the period prior to the Company's
ownership of the property. Subsequent to the filing of the complaint, the
parties agreed to pursue private mediation. As of May 2004, the mediation effort
was discontinued and the parties have resumed litigation. The Company believes
that the complaint is without merit.

Except as provided above, the Company is not presently subject to any material
litigation nor, to the Company's knowledge, is any litigation threatened against
the Company, other than routine actions for negligence or other claims and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the
liquidity, results of operations or business or financial condition of the
Company.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities



ISSUER PURCHASE OF EQUITY SECURITIES

- ------------------------------------------------------------------------------------------------------------------------------------

(C) TOTAL NUMBER
OF SHARES (D) MAXIMUM NUMBER
(OR UNITS) (OR APPROXIMATE DOLLAR
(A) TOTAL NUMBER PURCHASED AS VALUE) OF SHARES (OR
OF SHARES (B) AVERAGE PRICE PART OF PUBLICLY UNITS) THAT MAY YET BE
(OR UNITS) PAID PER SHARE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED (OR UNIT) OR PROGRAMS PLANS OR PROGRAMS
- ------------------------------------------------------------------------------------------------------------------------------------
APRIL 1 --- --- --- ---
THROUGH
APRIL 30
- ------------------------------------------------------------------------------------------------------------------------------------

MAY 1 140,600 shares of Series A $24.45 140,600 shares of Series A Up to $63.6 million of preferred
THROUGH preferred stock (1) Preferred Stock stock (2)
MAY 31
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 1 --- --- --- ---
THROUGH
JUNE 30
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 140,600 $24.45 140,600 Up to $63.6 million of preferred
stock
- ------------------------------------------------------------------------------------------------------------------------------------


(1) All of the shares were purchased in a negotiated transaction from a seller
that is not affiliated with the Company.

(2) On May 2nd, 2002, the Company announced that its Board of Directors had
approved the purchase from time to time of up to $75 million of its
preferred stock.

Item 3. Defaults Upon Senior Securities - None

Item 4. Submission of Matters to a Vote of Securities Holders

On June 2, 2004, the Company held its annual meeting of stockholders. The
matters on which the stockholders voted, in person or by proxy, were (1) to
amend the Articles of Incorporation of the Company to eliminate the
classification of the board of directors, (2) to amend the Articles of
Incorporation to amend the provision regarding the Company's common stock
ownership limit, (3) the election of nine nominees as directors to serve until
the 2005 annual meeting of stockholders and until their respective successors
are duly elected and qualified and (4) to ratify the selection of Ernst & Young
LLP as the independent auditors of the Company for the fiscal year ending
December 31, 2004. The board was de-classified, the ownership limit was amended,
the nine nominees were elected and the auditors were ratified. The results of
the voting are set forth below:

VOTES CAST VOTES CAST
FOR WITHHELD AGAINST ABSTAIN
---------- ---------- --------- -------
ELIMINATE CLASSIFICATION
OF BOARD OF DIRECTORS 60,546,589 N/A 823,985 43,475

AMEND STOCK OWNERSHIP LIMIT 55,146,770 N/A 141,814 83,644

ELECTION OF DIRECTORS
Peter Quick 60,840,066 573,986 N/A N/A
Stanley Steinberg 44,166,846 17,247,206 N/A N/A
John Ruffle 60,945,966 468,086 N/A N/A
Elizabeth McCaul 60,945,966 468,086 N/A N/A
Douglas Crocker 61,313,942 100,110 N/A N/A
Scott Rechler 60,848,745 565,307 N/A N/A
Donald Rechler 60,848,745 565,307 N/A N/A
Lewis Ranieri 44,344,488 17,069,564 N/A N/A
Ronald Menaker 60,840,066 573,986 N/A N/A

RATIFICATION OF AUDITORS 60,625,939 N/A 755,864 32,248

44



Item 5. Other information

a) None

b) There have been no material changes to the procedures by which
stockholders may recommend nominees to the Company's Board of
Directors.


Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

3.1 Articles of Amendment, dated June 2, 2004

3.2 Articles of Amendment, dated June 2, 2004

3.3 Amended and Restated Bylaws

10.1 Third amended and restated credit agreement dated August 6,
2004 between Reckson Operating Partnership, L.P., as
Borrower and the institutions from time to time party
thereto as Lenders.

31.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of the Registrant, pursuant to Rule 13a -
14(a) or Rule 15(d) - 14(a).

31.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of the Registrant,
pursuant to Rule 13a - 14(a) or Rule 15(d) - 14(a).

32.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of the Registrant, pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code.

32.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code.

b) During the six months ended June 30, 2004, the Registrant filed
the following reports on Form 8-K:


On May 6, 2004, the Registrant submitted a report on Form 8-K
under Items 7 and 12 thereof in order to file a press release
announcing its consolidated financial results for the quarter
ended March 31, 2004.



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

RECKSON ASSOCIATES REALTY CORP.

By: /s/ Scott H. Rechler By: /s/ Michael Maturo
----------------------------------- -------------------------------------
Scott H. Rechler, Michael Maturo,
Chief Executive Officer Executive Vice President,
and President Treasurer and Chief Financial Officer

DATE: August 9, 2004

45