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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 SEPTEMBER 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                (IRS EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)

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

                                 (631) 694-6900
               (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
                  ---------------------------------------------

       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 ___.


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

      THE COMPANY HAS ONE CLASS OF COMMON STOCK, PAR VALUE $.01 PER SHARE,
           WITH 76,028,209 SHARES OUTSTANDING AS OF NOVEMBER 2, 2004

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<PAGE>


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

                                TABLE OF CONTENTS

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


Item 1.      Financial Statements

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

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

             Consolidated Statements of Cash Flows for the nine
                months ended September 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...    39
Item 4.      Controls and Procedures......................................    40

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

Item 1.      Legal Proceedings............................................    45
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds..    45
Item 3.      Defaults Upon Senior Securities..............................    45
Item 4.      Submission of Matters to a Vote of Securities Holders........    45
Item 5.      Other Information............................................    46
Item 6.      Exhibits.....................................................    46

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SIGNATURES
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1
<PAGE>


PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                  SEPTEMBER 30,  DECEMBER 31,
                                                                                       2004          2003
                                                                                  ------------   -----------
                                                                                   (UNAUDITED)
<S>                                                                                <C>            <C>
ASSETS:

Commercial real estate properties, at cost:

    Land .......................................................................   $   398,790    $   378,479

    Building and improvements ..................................................     2,664,258      2,211,566

Developments in progress:

    Land .......................................................................        98,468         90,706

    Development costs ..........................................................        27,889         68,127

Furniture, fixtures and equipment ..............................................        11,862         11,338
                                                                                   -----------    -----------
                                                                                     3,201,267      2,760,216

Less accumulated depreciation ..................................................      (542,124)      (464,382)
                                                                                   -----------    -----------
Investment in real estate, net of accumulated deprecation ......................     2,659,143      2,295,834


Properties and related assets held for sale, net of accumulated depreciation ...            --         52,517
Investments in real estate joint ventures ......................................         6,574          5,904
Investments in mortgage notes and notes receivable .............................        53,525         54,986
Investments in affiliate loans and joint ventures ..............................        60,270         71,614
Cash and cash equivalents ......................................................        53,275         22,330
Tenant receivables .............................................................        10,903         11,929
Deferred rents receivable ......................................................       127,672        111,962
Prepaid expenses and other assets ..............................................        61,645         35,371
Contract and land deposits and pre-acquisition costs ...........................            77         20,203
Deferred leasing and loan costs ................................................        74,880         64,345
                                                                                   -----------    -----------

TOTAL ASSETS ...................................................................   $ 3,107,964    $ 2,746,995
                                                                                   ===========    ===========

LIABILITIES:
Mortgage notes payable .........................................................   $   712,337    $   721,635
Unsecured credit facility ......................................................        90,000        169,000
Senior unsecured notes .........................................................       697,911        499,445
Liabilities associated with properties held for sale ...........................            --            881
Accrued expenses and other liabilities .........................................       111,634         93,885
Dividends and distributions payable ............................................        35,174         28,290
                                                                                   -----------    -----------
TOTAL LIABILITIES ..............................................................     1,647,056      1,513,136

Minority partners' interests in consolidated partnerships ......................       212,057        233,070
Preferred unit interest in the operating partnership ...........................         1,200         19,662
Limited partners' minority interest in the operating partnership ...............        50,737         44,518
                                                                                   -----------    -----------

TOTAL MINORITY INTERESTS .......................................................       263,994        297,250
                                                                                   -----------    -----------

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

STOCKHOLDERS' EQUITY:

Preferred Stock, $.01 par value, 25,000,000 shares authorized Series A
    preferred stock, 5,320,485 and 8,834,500 shares issued and
    outstanding, respectively ..................................................            53             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
    75,535,562 and 58,275,367 shares issued and outstanding, respectively ......           755            583
Retained earnings ..............................................................            --         35,757
Additional paid in capital .....................................................     1,264,598        968,653
Treasury stock, 3,318,600 shares ...............................................       (68,492)       (68,492)
                                                                                   -----------    -----------
TOTAL STOCKHOLDERS' EQUITY .....................................................     1,196,914        936,609
                                                                                   -----------    -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....................................   $ 3,107,964    $ 2,746,995
                                                                                   ===========    ===========
</TABLE>


                           (see accompanying notes to financial statements)

2
<PAGE>


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

<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                               SEPTEMBER 30,                   SEPTEMBER 30,
                                                                       ----------------------------    ----------------------------
                                                                           2004            2003            2004            2003
                                                                       ------------    ------------    ------------    ------------
<S>                                                                    <C>             <C>             <C>             <C>
PROPERTY OPERATING REVENUES:
   Base rents ......................................................   $    111,260    $     93,225    $    332,060    $    282,110
   Tenant escalations and reimbursements ...........................         19,517          16,244          55,110          44,186
                                                                       ------------    ------------    ------------    ------------
        Total property operating revenues ..........................        130,777         109,469         387,170         326,296
                                                                       ------------    ------------    ------------    ------------
EXPENSES:
   Property operating expenses .....................................         54,644          46,222         156,735         132,041
   Marketing, general and administrative ...........................          7,681           8,163          22,122          24,527
   Depreciation and amortization ...................................         29,584          25,063          86,496          79,121
                                                                       ------------    ------------    ------------    ------------
      Total operating expenses......................................         91,909          79,448         265,353         235,689
                                                                       ------------    ------------    ------------    ------------
      Operating income .............................................         38,868          30,021         121,817          90,607
                                                                       ------------    ------------    ------------    ------------
NON-OPERATING INCOME AND EXPENSES:
Interest income on mortgage notes and notes receivable
   (including $479, $1,100, $1,608 and $3,100, respectively,
    from related parties) ..........................................          1,963           1,724           5,455           4,814
Investment and other income ........................................          5,358           4,660          10,852          13,717
Interest:
   Expense incurred ................................................        (24,120)        (19,883)        (74,388)        (60,125)
   Amortization of deferred financing costs ........................         (1,005)           (807)         (2,831)         (2,513)
                                                                       ------------    ------------    ------------    ------------
    Total non-operating income and expenses ........................        (17,804)        (14,306)        (60,912)        (44,107)
                                                                       ------------    ------------    ------------    ------------
Income before minority interests, preferred dividends and
   distributions, equity (loss) in earnings of real estate
   joint ventures and discontinued operations ......................         21,064          15,715          60,905          46,500
Minority partners' interests in consolidated partnerships ..........         (4,135)         (4,117)        (14,738)        (12,580)
Distributions to preferred unit holders ............................            (41)           (273)           (541)           (820)
Limited partners' minority interest in the operating partnership ...           (334)           (658)         (1,434)         (1,793)
Equity (loss) in earnings of real estate joint ventures ............            112             134             520             (30)
                                                                       ------------    ------------    ------------    ------------
Income before discontinued operations ..............................         16,666          10,801          44,712          31,277
Discontinued operations (net of limited partners' and minority
interests):
   Gain on sales of real estate ....................................          2,228              --          11,069              --
   Income from discontinued operations .............................            100           4,524             653          10,930
                                                                       ------------    ------------    ------------    ------------
Net Income .........................................................         18,994          15,325          56,434          42,207
Dividends to preferred shareholders ................................         (3,437)         (5,316)        (11,868)        (15,950)
Redemption charges on Series A preferred stock .....................         (6,717)             --          (6,717)             --
                                                                       ------------    ------------    ------------    ------------
Net income allocable to common shareholders ........................   $      8,840    $     10,009    $     37,849    $     26,257
                                                                       ============    ============    ============    ============
Net income allocable to:
   Common shareholders .............................................   $      8,840    $      7,613    $     37,849    $     19,977
   Class B common shareholders .....................................             --           2,396              --           6,280
                                                                       ------------    ------------    ------------    ------------
Total ..............................................................   $      8,840    $     10,009    $     37,849    $     26,257
                                                                       ============    ============    ============    ============
Basic net income per weighted average common share:

   Income from continuing operations ...............................   $        .10    $        .09    $        .39    $        .25
   Discontinued operations .........................................            .03             .07             .18             .17
                                                                       ------------    ------------    ------------    ------------
   Basic net income per common share ...............................   $        .13    $        .16    $        .57    $        .42
                                                                       ============    ============    ============    ============

   Class B common - income from continuing operations ..............   $         --    $        .13    $         --    $        .37
   Discontinued operations .........................................             --             .11              --             .26
                                                                       ------------    ------------    ------------    ------------
   Basic net income per Class B common share .......................   $         --    $        .24    $         --    $        .63
                                                                       ============    ============    ============    ============

Basic weighted average common shares outstanding:
   Common stock ....................................................     70,236,721      48,009,138      66,178,835      48,069,657
   Class B common stock ............................................             --       9,915,313              --       9,915,313

Diluted net income per weighted average common share:
   Common share ....................................................   $        .13    $        .16    $        .57    $        .41
                                                                       ============    ============    ============    ============
   Class B common share ............................................   $         --    $        .17    $         --    $        .45
                                                                       ============    ============    ============    ============

Diluted weighted average common shares outstanding:
   Common stock ....................................................     70,510,301      48,179,428      66,533,225      48,205,207
   Class B common stock ............................................             --       9,915,313              --       9,915,313
</TABLE>


                           (see accompanying notes to financial statements)

3
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                              NINE MONTHS ENDED
                                                                                                SEPTEMBER 30,
                                                                                            ----------------------
                                                                                               2004         2003
                                                                                            ---------    ---------
<S>                                                                                         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ..............................................................................   $  56,434    $  42,207
Adjustments to reconcile net income to net cash provided by operating activities:
      Gain on sales of real estate ......................................................     (13,724)          --
      Depreciation and amortization (including discontinued operations) .................      86,496       89,959
      Minority partners' interests in consolidated partnerships .........................      17,271       13,404
      Limited partners' minority interest in the operating partnership ..................       2,090        3,072
      (Equity) loss in earnings of real estate joint ventures ...........................        (520)          30
Changes in operating assets and liabilities:
      Tenant receivables ................................................................         450         (654)
      Prepaid expenses and other assets .................................................      (1,936)       4,822
      Deferred rents receivable .........................................................     (13,863)     (13,755)
      Accrued expenses and other liabilities ............................................      (2,369)       3,932
                                                                                            ---------    ---------
      Net cash provided by operating activities .........................................     130,329      143,017
                                                                                            ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Additions to developments in progress .............................................     (20,454)     (15,104)
      Purchases of commercial real estate ...............................................    (138,894)     (40,500)
      Additions to commercial real estate properties ....................................     (28,014)     (36,080)
      Additions to furniture, fixtures and equipment ....................................        (528)        (192)
      Payment of leasing costs ..........................................................     (13,951)     (13,185)
      Distributions from (contributions to) investments in real estate joint ventures ...        (150)         243
      Additions to mortgage notes and notes receivable ..................................     (15,619)     (15,000)
      Repayments of mortgage notes & notes receivable ...................................      17,658           --
      Proceeds from sales of real estate ................................................      64,337           --
                                                                                            ---------    ---------
      Net cash used in investing activities .............................................    (135,615)    (119,818)
                                                                                            ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from issuance of common stock net of issuance costs ......................     286,990           --
      Proceeds from options exercised ...................................................      57,796           74
      Repurchases of common stock .......................................................          --       (4,538)
      Redemption of Series A preferred stock ............................................     (47,580)          --
      Principal payments on secured borrowings ..........................................    (259,298)      (8,932)
      Payment of loan and equity issuance costs .........................................      (4,232)        (164)
      Proceeds from issuance of senior unsecured notes ..................................     300,000           --
      Repayment of senior unsecured notes ...............................................    (100,000)          --
      Proceeds from unsecured credit facility ...........................................     312,498      112,000
      Repayment of unsecured credit facility ............................................    (391,498)      (5,000)
      Distribution from affiliate joint venture .........................................      10,603           --
      Distributions to minority partners in consolidated partnerships ...................     (29,786)     (16,313)
      Distributions to limited partners in the operating partnership ....................      (3,805)      (9,264)
      Distributions to preferred unit holders ...........................................        (723)        (820)
      Dividends to common shareholders ..................................................     (81,462)     (80,496)
      Dividends to preferred shareholders ...............................................     (13,829)     (15,950)
                                                                                            ---------    ---------
      Net cash provided by (used in) financing activities ...............................      35,674     (29,403)
                                                                                            ---------    ---------
      Net increase (decrease) in cash and cash equivalents ..............................      30,388       (6,204)

      Cash and cash equivalents at beginning of period ..................................      22,887       30,827
                                                                                            ---------    ---------
      Cash and cash equivalents at end of period ........................................   $  53,275    $  24,623
                                                                                            =========    =========
</TABLE>

                (see accompanying notes to financial statements)

4
<PAGE>


                         RECKSON ASSOCIATES REALTY CORP.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 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 September 30, 2004, the Company's  ownership  percentage in the
Operating  Partnership was approximately  95.7%. 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) interests in 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 September 30, 2004 and December 31, 2003 and the
results of their  operations  for the three and nine months ended  September 30,
2004 and 2003,  respectively,  and,  their cash flows for the nine months  ended
September  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. and Reckson  Construction  &
Development LLC (the "Service Companies"). All significant intercompany balances
and transactions have been eliminated in the consolidated financial statements.

Minority  partners'  interests  in  consolidated  partnerships  represent  a 49%
non-affiliated  interest in RT Tri-State LLC,  owner of a six 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  4.3% and 11.1% at September  30, 2004 and 2003,
respectively.

Reckson Construction Group New York, Inc. and Reckson Construction & Development
LLC   (the   successor   to   Reckson   Construction   Group,   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.

The Company  follows the guidance  provided for under the  Financial  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
<PAGE>


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 September 30, 2004 and for
the three and nine month periods ended  September 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 three months or
less when purchased to be cash equivalents.

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  allocates  a portion  of the  purchase  price to  tangible  assets
including  the fair  value  of the  building  and  building  improvements  on an
as-if-vacant basis and to land determined either by real estate tax assessments,
independent  appraisals  or  other  relevant  data.  Additionally,  the  Company
assesses fair value of identified  intangible  assets and  liabilities  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 elected to follow FASB Statement No. 123,
"Accounting  for Stock Based  Compensation"  ("Statement  No.  123").  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
<PAGE>


The  following  table sets forth the  Company's  pro forma  information  for its
common  stockholders  for the three and nine month periods  ended  September 30,
2004 and 2003. For purposes of pro forma  disclosures,  the estimated fair value
of the options is  amortized to expense  over the  options'  vesting  period (in
thousands except earnings per share data):

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                  SEPTEMBER 30,               SEPTEMBER 30,
                                                             ------------------------    -----------------------
                                                                 2004          2003          2004         2003
                                                             ----------    ----------    ----------   ----------
<S>                                                          <C>           <C>           <C>          <C>
Net income as reported ...................................   $    8,840    $    7,613    $   37,849   $   19,977
Add:  Stock option expense included in net income ........            1             1             4            4
Less: Stock option expense determined under fair value
      recognition method for all awards ..................          (94)          (64)         (290)        (208)
                                                             ----------    ----------    ----------   ----------
Pro forma net income .....................................   $    8,747    $    7,550    $   37,563   $   19,773
                                                             ==========    ==========    ==========   ==========

Net income per share as reported:
   Basic .................................................   $      .13    $      .16    $      .57   $      .42
                                                             ==========    ==========    ==========   ==========
   Diluted ...............................................   $      .13    $      .16    $      .57   $      .41
                                                             ==========    ==========    ==========   ==========

Pro forma net income per share:
   Basic .................................................   $      .12    $      .16    $      .57   $      .41
                                                             ==========    ==========    ==========   ==========
   Diluted ...............................................   $      .12    $      .16    $      .56   $      .41
                                                             ==========    ==========    ==========   ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                  SEPTEMBER 30,               SEPTEMBER 30,
                                                             ------------------------    -----------------------
                                                                 2004          2003          2004         2003
                                                             ----------    ----------    ----------   ----------
<S>                                                          <C>           <C>           <C>          <C>
Risk free interest rate ..................................        3.00%         3.00%         3.00%        3.00%
Dividend yield ...........................................        6.96%         7.38%         6.96%        7.38%
Volatility factor of the expected market price of the
   Company's common stock ................................         .199          .193          .199         .193
Weighted average expected option life (in years) .........          5.0           5.0           5.0          5.0
</TABLE>


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  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
<PAGE>


3.    MORTGAGE NOTES PAYABLE

As of  September  30,  2004,  the Company had  approximately  $712.3  million of
mortgage notes payable, which mature at various times between 2005 and 2027. The
notes  are  secured  by 19  properties  with  an  aggregate  carrying  value  of
approximately  $1.5 billion which are pledged as collateral against the mortgage
notes payable.  Approximately $43.2 million of the $712.3 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. 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.

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

<TABLE>
<CAPTION>
                                                    Principal         Interest          Maturity         Amortization
Property                                           Outstanding          Rate              Date           Term (Years)
----------------------------------------------    ---------------    -----------     ---------------    ---------------
<C>                                                  <C>                <C>          <C>                 <C>
395 North Service Road, Melville, NY                 $  18,995          6.45%         October, 2005      $34 per month
200 Summit Lake Drive, Valhalla, NY                     18,584          9.25%         January, 2006            25
1350 Avenue of the Americas, NY, NY                     73,228          6.52%            June, 2006            30
Landmark Square, Stamford, CT (a)                       43,175          8.02%         October, 2006            25
100 Summit Lake Drive, Valhalla, NY                     16,600          8.50%           April, 2007            15
333 Earle Ovington Blvd, Mitchel Field, NY (b)          52,071          7.72%          August, 2007            25
810 Seventh Avenue, NY, NY (e)                          80,079          7.73%          August, 2009            25
100 Wall Street, NY, NY (e)                             34,701          7.73%          August, 2009            25
6900 Jericho Turnpike, Syosset, NY                       7,132          8.07%            July, 2010            25
6800 Jericho Turnpike, Syosset, NY                      13,514          8.07%            July, 2010            25
580 White Plains Road, Tarrytown, NY                    12,308          7.86%       September, 2010            25
919 Third Ave, NY, NY (c)                              242,240          6.87%          August, 2011            30
One Orlando Center, Orlando, FL (d)                     37,275          6.82%        November, 2027            28
120 West 45th Street, NY, NY (d)                        62,435          6.82%        November, 2027            28
                                                  ---------------

Total/Weighted Average                               $ 712,337          7.24%
                                                  ===============
</TABLE>

----------
(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
      $31.2 million.

(c)   The  Company  has a 51%  membership  interest  in  this  property  and its
      proportionate  share of the aggregate  principal  amount is  approximately
      $123.5 million.

(d)   The mortgage debt on these properties,  which was  cross-collateralized at
      September 30, 2004, was repaid without penalty on November 1, 2004.

(e)   The debt on these properties is cross-collateralized.


In addition,  the Company has a 60% interest in an unconsolidated  joint venture
property.  The  Company's  share of the mortgage  debt at September  30, 2004 is
approximately  $7.4 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 August 9,  2004,  the  Company  made an  advance  under its  Credit  Facility
(defined  below) in the amount of $222.5 million and,  along with  cash-on-hand,
paid off the $250 million  balance of the mortgage debt on the property  located
at 1185 Avenue of the Americas in New York City.

On November 1, 2004, the Company  exercised its right to prepay the  outstanding
mortgage debt of approximately $99.6 million, without penalty, on the properties
located at One Orlando  Center in  Orlando,  Florida and 120 West 45th Street in
New York City.  The Company  made an advance  under its Credit  Facility to fund
such repayment.

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.

8
<PAGE>


On  March  15,  2004,   the  Company   repaid  $100  million  of  the  Operating
Partnership's  7.4% senior unsecured notes at maturity.  These notes were repaid
with funds  received from the Company's  March 2004 common equity  offering (see
Note 7).

On August 13,  2004,  the  Operating  Partnership  issued $150 million of 5.875%
senior  unsecured  notes due  August  15,  2014.  Interest  on the notes will be
payable  semi-annually  on February 15 and August 15,  commencing  February  15,
2005.  The notes were priced at 99.151% of par value to yield  5.989%.  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,  these  instruments  were
settled and the Company  received a net benefit of  approximately  $1.9 million.
Such benefit will be amortized over the term of the notes to effectively  reduce
interest  expense.  The  Operating  Partnership  used the net proceeds from this
offering to repay a portion of the Credit  Facility  borrowings  used to pay off
the outstanding mortgage debt on 1185 Avenue of the Americas (see Note 3).

As  of  September  30,  2004,   the  Operating   Partnership   had   outstanding
approximately  $697.9  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
   August 13, 2004      150,000       5.875%       10 years    August 15, 2014
                     ----------
                     $  700,000
                     ==========

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
$2.5 million.  Such  discounts are being  amortized  over the term of the Senior
Unsecured Notes to which they relate.

5.    UNSECURED CREDIT FACILITY

On July 1, 2004, the Company had an outstanding $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, 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,  an increase to the
maximum  revolving  credit amount to $750 million.  In August 2004,  the Company
amended  and  extended  the  Credit  Facility  to  mature  in  August  2007 with
substantially similar terms and conditions as existed prior to the amendment and
extension.  As of September  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 September 30, 2004, the outstanding  borrowings under the
Credit Facility  aggregated $90 million and carried a weighted  average interest
rate of 2.64%.

The  Company  utilizes  the Credit  Facility  primarily  to finance  real estate
investments, fund its real estate development activities and for working capital
purposes.  At September 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 and Emerging Issues
Task Force ("EITF") 87-24, the Company allocated  approximately $2.8 million and
$7.8  million  of its  unsecured  corporate  interest  expense  to  discontinued
operations for the three and nine month periods ended  September 30, 2003.  EITF
87-24 states that "interest on debt that is required to be repaid as a result of
the  disposal  transaction  should be  allocated  to  discontinued  operations".
Pursuant to the terms of our Credit Facility,  the Company was required to repay
the Credit Facility to the extent of the net proceeds, as defined, received from
the sales of  unencumbered  properties.  As such,  the Company has  allocated to
discontinued  operations  the  interest  expense  incurred on the portion of its
Credit  Facility,  which was required to be repaid.  In August 2004, the Company
amended and extended its Credit Facility, whereby such repayment requirement was
eliminated.

9
<PAGE>


6.    COMMERCIAL REAL ESTATE INVESTMENTS

As of September 30, 2004,  the Company  owned and operated 78 office  properties
(inclusive of eight office  properties owned through joint ventures)  comprising
approximately  14.8  million  square  feet  and 8  industrial  / R&D  properties
comprising approximately 863,000 square feet located in the Tri-State Area.

As of September 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 September 30, 2004,  the Company had invested  approximately
$126.4 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 nine month  periods
ended September 30, 2004, the Company has capitalized approximately $2.7 million
and $7.8 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  September  30,  2004  was
approximately $5.9 million. The closing is scheduled to occur upon the rezoning,
which is anticipated to occur within 12 to 24 months. 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 of approximately $60 million. There can be no assurances
that the actual cost of this development will not exceed the anticipated amount.
This  development is located within the Company's  existing  404,000 square foot
executive office park in Melville, New York.

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 $0 and $5.0 million and, $3.3 million and
$13.4 million has been recognized  during the three and nine month periods ended
September 30, 2004 and 2003,  respectively,  and is included in  investment  and
other income on the accompanying consolidated statements of income.

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,  120
Mineola Boulevard,  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 matured in August
2004 at which time the Company satisfied the outstanding debt through an advance
under  its  Credit  Facility  along  with  the  cash-on-hand.  The  property  is
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 $5.8 million for the
three and nine month periods ended September 30, 2004. In addition, amortization
expense on the value of lease origination  costs was approximately  $700,000 and
$2.0 million for the three and nine month periods  ended  September 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
<PAGE>


In April 2004,  the Company  sold a 175,000  square  foot office  building,  400
Garden City Plaza,  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. As described  below, the Company
has since  identified  and  acquired  an  interest  in a  qualified  replacement
property for purposes of this exchange.  The disposition of the other industrial
property, which is subject to certain environmental issues, was conditioned upon
the approval of the buyer's  lender,  which was not 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,  3 Giralda  Farms,  located in  Madison,  NJ for  approximately  $22.7
million. The Company made this acquisition through available cash-on-hand.

During September 2004, the Company,  through Reckson  Construction  Group, Inc.,
acquired  the  remaining  49%  interest  in the  property  located at 90 Merrick
Avenue,  East Meadow,  NY, from the Company's  joint venture  partner,  Teachers
Insurance  and  Annuity  Association,  for  approximately  $14.9  million.  This
acquisition was financed,  in part, from the remaining sales proceeds being held
by the  previously  referenced  qualified  intermediary  as the  property was an
identified,  qualified replacement property. The balance of this acquisition was
financed  with  cash-on-hand.  As a  result  of this  acquisition,  the  Company
successfully  completed the Section 1031 Exchange and thereby deferred the taxes
related to the gain  recognized on the sale  proceeds  received from the sale of
the two remaining industrial properties from the Disposition.

During September 2004, the Company acquired a 215,000 square foot Class A office
property, 44 Whippany Road, located in Morristown,  New Jersey for approximately
$30 million. The Company made this acquisition,  in part, through funds received
from the Company's  September 2004 common equity offering,  cash-on-hand and the
issuance  of  approximately  34,000 OP Units  which were priced at $28.70 per OP
Unit.

During  September  2004,  the  Company  sold a  92,000  square  foot  industrial
property,   500  Saw  Mill  River  Road,   located  in  Westchester  County  for
approximately $7.3 million.  In connection with this sale the Company recorded a
net gain of  approximately  $2.2  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.

On October 1, 2004,  the Company  acquired a 260,500  square foot Class A office
property,   300  Broadhollow  Road,  located  in  Melville,   Long  Island,  for
approximately $41.0 million. The Company made this acquisition, in part, through
an advance under the Credit Facility and cash-on-hand.

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"). At September 30, 2004, the Mezz Note had an outstanding balance of
approximately  $27.6 million and a weighted  average interest rate of 12.86% per
annum.  Such interest rate is based on a minimum  spread over LIBOR of 1.63% per
annum.  The Mezz Note matures in  September  2005 and the borrower has rights to
extend  its term for  three  additional  one-year  periods  and,  under  certain
circumstances, prepay amounts outstanding.

The Company  also held three  other  notes  receivable  which  aggregated  $21.5
million  which  carried  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.  As of September 30, 2004, the Operating  Partnership  had received
approximately $13.1 million from the preferred unit holder to be applied against
amounts owned under the Other Notes,  including accrued interest.  Subsequent to
September 30, 2004 the Company received an additional $2.8 million. As a result,
the remaining  Other Notes  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 September 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

11
<PAGE>


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 was
cross-collateralized  under a $99.7 million mortgage note payable along with one
of the  Company's  New York City  buildings.  On November  1, 2004,  the Company
exercised its right to prepay this note in its entirety, without penalty.

The Company  also owns a 60% interest in a 172,000  square foot office  building
located at 520 White Plains Road in White Plains, New York (the "520JV"),  which
is managed by its wholly owned  subsidiary.  As of September 30, 2004, the 520JV
had total assets of $20.7 million,  a mortgage note payable of $11.5 million and
other  liabilities  of  $726,000.  The  Company's  allocable  share of the 520JV
mortgage note payable is approximately $7.4 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  approvals  from members on certain
decisions including sale of the property, refinancing of the property's mortgage
debt, and material  renovations  to the property.  The Company has evaluated the
impact of FIN 46R on its  accounting  for the 520JV and has  concluded  that the
520JV is not a VIE. 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  $112,000 and
$520,000 and $134,000 and  $(30,000)  for the three and nine month periods ended
September 30, 2004 and 2003, respectively.

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.  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. In addition,  during  September 2004, the Company  acquired TIAA's
49% interest in the property located at 90 Merrick Avenue,  East Meadow,  NY for
approximately $14.9 million. As a result of these transactions, the Tri-State JV
owns six Class A suburban office properties  aggregating  approximately  943,000
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.

7.    STOCKHOLDERS' EQUITY

A  Class  A  OP  Unit  and  a  share  of  common  stock  have  similar  economic
characteristics  as they effectively share equally in the net income or loss and
distributions  of the  Operating  Partnership.  As of September  30,  2004,  the
Operating  Partnership had issued and outstanding 3,118,556 Class A OP Units and
465,845  Class C OP Units.  The Class A OP Units  currently  receive a quarterly
distribution of $.4246 per unit. 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.
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.

On  September  16,  2004,  the Board of  Directors  of the  Company  declared  a
quarterly cash dividend on the Company's  common stock of $.4246 per share which
was paid on  October  20,  2004 to its  stockholders  of record as of October 7,
2004. The dividend is based on an annualized dividend rate of $1.6984 per share.

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

12
<PAGE>


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 nine month period ended September 30, 2004, approximately 2.5 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 $57.8 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 for
general  corporate  purposes  including the redemption of the Series A preferred
stock, discussed below.

On September 14, 2004, the Company  completed an equity offering of five million
shares of its common  stock  raising  approximately  $137.5  million,  net of an
underwriting  discount,  or $27.39 per share.  Net proceeds  received  from this
transaction  were used to redeem the Company's Series A preferred stock (defined
below) and for general corporate purposes.

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 nine months ended
September 30, 2004.

The  Company  had issued and  outstanding  8,834,500  shares of 7.625%  Series A
Convertible  Cumulative  Preferred Stock (the "Series A preferred  stock").  The
Series A  preferred  stock was  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,  was 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 on the open market and retired 140,600 shares of the Series A
preferred stock for approximately $3.4 million or $24.45 per share.  During July
2004, the Company completed an exchange with a holder of 1,350,000 shares of the
Series A preferred  stock for  1,304,602  shares of common  stock.  In addition,
during August 2004, the Company  announced the redemption of 2,000,000 shares of
its then outstanding shares of Series A preferred stock at a redemption price of
$25.7625 per share plus accumulated and unpaid dividends. On September 20, 2004,
the Company redeemed  1,841,905 of such shares for approximately  $47.9 million,
including  accumulated  and unpaid  dividends.  The remaining  158,095 shares of
Series A preferred  stock were exchanged into common stock of the Company at the
election of the Series A preferred  shareholders.  During  September  2004,  the
Company announced the redemption of all of its then outstanding shares of Series
A preferred stock aggregating 5,343,900 shares at a redemption price of $25.7625
per share plus  accumulated  and unpaid  dividends.  On October  15,  2004,  the
Company redeemed  4,965,062 shares of Series A preferred stock for approximately
$129.9  million,  including  accumulated  and unpaid  dividends.  The  remaining
378,838  shares of Series A preferred  stock were exchanged into common stock of
the Company, at the election of the Series A preferred shareholders. As a result
of the  100%  retirement  of the  Series  A  preferred  stock  annual  preferred
dividends will decrease by approximately  $16.8 million.  In accordance with the
EITF Topic D-42 the  Company  incurred  an  accounting  charge  during the third
quarter of 2004 of  approximately  $6.7 million in connection with the July 2004
exchange and  September  2004  redemption  of the Series A preferred  stock.  In
addition,  the Company will incur a charge of approximately  $9.1 million during
the fourth quarter of 2004 in connection with the October 2004 redemption.

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
decreased by approximately $4.4 million.

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 an 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 exercised his rights to
exchange them into OP Units. The Operating  Partnership  converted the Preferred
Units,  including accrued and unpaid dividends,  into  approximately  531,000 OP
Units, which were

13
<PAGE>


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  exchange and
conversion,  the  preferred  unit  holder  delivered  notice  to  the  Operating
Partnership  of his intent to repay $15.5  million of the amounts  owed from the
preferred  unit holder under the Other Notes (see Note 6). As of  September  30,
2004, there remain 1,200 Preferred Units outstanding with a stated  distribution
rate of 7.0%,  which is subject to reduction  based upon terms of their  initial
issuance.  The  terms of the  Preferred  Units  provide  for this  reduction  in
distribution rate in order to address the effect of certain mortgages with above
market  interest  rates  which were  assumed  by the  Operating  Partnership  in
connection with properties contributed to the Operating Partnership in 1998. Due
to this  reduction,  the Preferred Units are currently not entitled to receive a
distribution.

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 September 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 $290,000 and
$846,000 of  compensation  expense  were  recorded  for the three and nine month
periods ended  September 30, 2004,  respectively,  related to these LTIP grants.
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 September  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 September 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 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 September 30, 2004,  there remains,  reserved for
future  issuance,  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
nine month periods ended September 30, 2004 the Company  recorded  approximately
$101,000 and $302,000,  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.

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
September 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 $2.1 million
of compensation expense for the three and nine month periods ended September 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.

The Board of Directors  has approved an amendment to the LTIP to revise the peer
group used to measure relative  performance.  The amendment eliminated the mixed
office and industrial  companies and added certain other "pure office" companies
in order to limit the peer group to office sector companies.  The Board has also
approved the revision of the  performance  measurement  dates for future vesting
under the core  component of the LTIP from the  anniversary of the date of grant
to December  31st of each year.  This was done in order to have the  performance
measurement  coincide with the performance period that the Company believes many
investors use to judge the performance of the Company.

14
<PAGE>


Basic net income per share on the Company's  common stock was  calculated  using
the weighted  average number of shares  outstanding of 70,236,721 and 48,009,138
for the three  months  ended  September  30,  2004 and 2003,  respectively,  and
66,178,835 and 48,069,657 for the nine months ended September 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 nine month periods ended September 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):

<TABLE>
<CAPTION>
                                                                                 THREE MONTHS ENDED     NINE MONTHS ENDED
                                                                                   SEPTEMBER 30,          SEPTEMBER 30,
                                                                               --------------------    --------------------
                                                                                 2004        2003        2004        2003
                                                                               --------    --------    --------    --------
<S>                                                                            <C>         <C>         <C>         <C>
Numerator:
   Income before discontinued operations, dividends to preferred
      shareholders and (income) allocated to Class B shareholders ..........   $ 16,666    $ 10,801    $ 44,712    $ 31,277
   Discontinued operations (net of share applicable to limited partners,
      minority interests and Class B shareholders) .........................      2,328       3,440      11,722       8,314
   Dividends to preferred shareholders .....................................     (3,437)     (5,316)    (11,868)    (15,950)
   Redemption charges on Series A preferred stock ..........................     (6,717)         --      (6,717)         --
   (Income) allocated to Class B common shareholders .......................         --      (1,312)         --      (3,664)
                                                                               --------    --------    --------    --------
Numerator for basic and diluted earnings per common share ..................   $  8,840    $  7,613    $ 37,849    $ 19,977
                                                                               ========    ========    ========    ========

Denominator:
   Denominator for basic earnings per share - weighted average
      common shares ........................................................     70,237      48,009      66,179      48,070
   Effect of dilutive securities:
      Common stock equivalents .............................................        273         170         354         135
                                                                               --------    --------    --------    --------
Denominator for diluted earnings per common share - adjusted
   weighted average shares and assumed conversions .........................     70,510      48,179      66,533      48,205
                                                                               ========    ========    ========    ========

Basic earnings per weighted average common share:
   Income from continuing operations .......................................   $    .10    $    .09    $    .39    $    .25
   Discontinued operations .................................................        .03         .07         .18         .17
                                                                               --------    --------    --------    --------
   Net income per common share .............................................   $    .13    $    .16    $    .57    $    .42
                                                                               ========    ========    ========    ========

Diluted earnings per weighted average common share:
   Income from continuing operations .......................................   $    .10    $    .09    $    .39    $    .24
   Discontinued operations .................................................        .03         .07         .18         .17
                                                                               --------    --------    --------    --------
   Diluted net income per common share .....................................   $    .13    $    .16    $    .57    $    .41
                                                                               ========    ========    ========    ========
</TABLE>

In calculating  diluted net income per weighted average common share the Company
considers all potentially  dilutive securities with respect to its common stock.
For the  three  and  nine  month  periods  ended  September  30,  2003  and 2004
potentially  dilutive securities  considered,  to the extent  outstanding,  were
stock option grants,  OP Units,  Class B common stock,  Series A preferred stock
and Series B preferred stock. OP Units have a distribution  rate equivalent to a
share of common  stock and are  convertible  into common  stock on a one for one
basis.  As such,  OP Units are not dilutive  with  respect to the common  stock.
Shares of Class B common stock  received a higher per share dividend as compared
to the common  stock and were  convertible  into  common  stock on a one for one
basis. As such, shares of Class B common stock were not dilutive with respect to
the common  stock.  In  addition,  there were no shares of Class B common  stock
outstanding  after  November 25, 2003 and no shares of Series B preferred  stock
outstanding after January 15, 2004.


15
<PAGE>


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):

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED   NINE MONTHS ENDED
                                                                        SEPTEMBER 30, 2003   SEPTEMBER 30, 2003
                                                                        ------------------   ------------------
<S>                                                                         <C>                  <C>
Numerator:
   Income before discontinued operations, dividends to preferred
      shareholders and (income) allocated to common shareholders ........   $   10,801           $   31,277
   Discontinued operations (net of share applicable to limited
      partners and common shareholders) .................................        1,084                2,615
   Dividends to preferred shareholders ..................................       (5,316)             (15,950)
   (Income) allocated to common shareholders ............................       (4,173)             (11,662)
                                                                            ----------           ----------
Numerator for basic earnings per Class B common share ...................        2,396                6,280
Add back:
   Income allocated to common shareholders ..............................        7,613               19,977
   Limited partner's minority interest in the operating partnership .....        1,202                3,072
                                                                            ----------           ----------
Numerator for diluted earnings per Class B common share .................   $   11,211           $   29,329
                                                                            ==========           ==========

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 ........................       48,009               48,070
      Weighted average OP Units outstanding .............................        7,554                7,370
      Common stock equivalents ..........................................          170                  135
                                                                            ----------           ----------
Denominator for diluted earnings per Class B common share -
      adjusted weighted average shares and assumed conversions ..........       65,648               65,490
                                                                            ==========           ==========

Basic earnings per weighted average common share:
   Income from continuing operations ....................................   $      .13           $      .37
   Discontinued operations ..............................................          .11                  .26
                                                                            ----------           ----------
   Net income per Class B common share ..................................   $      .24           $      .63
                                                                            ==========           ==========

Diluted earnings per weighted average common share:
   Income from continuing operations ....................................   $      .15           $      .41
   Discontinued operations ..............................................          .02                  .04
                                                                            ----------           ----------
   Diluted net income per Class B common share ..........................   $      .17           $      .45
                                                                            ==========           ==========
</TABLE>

The  Company's  computation  for purposes of  calculating  the diluted  weighted
average Class B common shares  outstanding is based on the  assumption  that the
Class B common stock is converted to the Company's common stock.

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

<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                                                                  SEPTEMBER 30,
                                                                            --------------------------
                                                                               2004            2003
                                                                            ----------      ----------
<S>                                                                         <C>             <C>
     Cash paid during the period for interest ..........................    $   83,781      $   79,193
                                                                            ==========      ==========

     Interest capitalized during the period ............................    $    6,008      $    5,804
                                                                            ==========      ==========
</TABLE>

16
<PAGE>


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):

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                             ---------------------------------------------------------------------------------------
                                                         SEPTEMBER 30, 2004                            SEPTEMBER 30, 2003
                                             -----------------------------------------    ------------------------------------------
                                                Core                      CONSOLIDATED        Core                      CONSOLIDATED
                                              Portfolio        Other         TOTALS        Portfolio        Other          TOTALS
                                             -----------    -----------   ------------    -----------    -----------    ------------
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
PROPERTY OPERATING REVENUES:
Base rents, tenant
   escalations and reimbursements .........  $   130,719    $        58    $   130,777    $   107,931    $     1,538    $   109,469
                                             -----------    -----------    -----------    -----------    -----------    -----------


EXPENSES:
Property operating expenses ...............       53,975            669         54,644         45,388            834         46,222
Marketing, general and administrative .....        4,220          3,461          7,681          3,819          4,344          8,163
Depreciation and amortization .............       28,513          1,071         29,584         24,037          1,026         25,063
                                             -----------    -----------    -----------    -----------    -----------    -----------
Total Operating Expenses ..................       86,708          5,201         91,909         73,244          6,204         79,448
                                             -----------    -----------    -----------    -----------    -----------    -----------
Operating Income ..........................       44,011         (5,143)        38,868         34,687         (4,666)        30,021
                                             -----------    -----------    -----------    -----------    -----------    -----------
NON-OPERATING INCOME AND EXPENSES
Interest, investment and other income .....        5,578          1,743          7,321            670          5,714          6,384
Interest:
   Expense incurred .......................      (13,857)       (10,263)       (24,120)       (12,285)        (7,598)       (19,883)
   Amortization of deferred
      financing costs .....................         (271)          (734)        (1,005)          (262)          (545)          (807)
                                             -----------    -----------    -----------    -----------    -----------    -----------
Total Non-Operating Income and Expenses ...       (8,550)        (9,254)       (17,804)       (11,877)        (2,429)       (14,306)
                                             -----------    -----------    -----------    -----------    -----------    -----------
Income (loss) before minority interests,
   preferred dividends and distributions,
   equity in earnings of real estate
   joint ventures and discontinued
   operations .............................  $    35,461    $   (14,397)   $    21,064    $    22,810    $    (7,095)   $    15,715
                                             ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

17
<PAGE>


<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                             ---------------------------------------------------------------------------------------
                                                         SEPTEMBER 30, 2004                            SEPTEMBER 30, 2003
                                             -----------------------------------------    ------------------------------------------
                                                Core                      CONSOLIDATED        Core                      CONSOLIDATED
                                              Portfolio        Other         TOTALS        Portfolio        Other          TOTALS
                                             -----------    -----------   ------------    -----------    -----------    ------------
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
PROPERTY OPERATING REVENUES:
Base rents, tenant
   escalations and reimbursements .........  $   383,201    $     3,969    $   387,170    $   321,151    $     5,145    $   326,296
                                             -----------    -----------    -----------    -----------    -----------    -----------


EXPENSES:
Property operating expenses ...............      154,457          2,278        156,735        129,305          2,736        132,041
Marketing, general and administrative .....       12,499          9,623         22,122         11,827         12,700         24,527
Depreciation and amortization .............       83,327          3,169         86,496         76,037          3,084         79,121
                                             -----------    -----------    -----------    -----------    -----------    -----------
Total Operating Expenses ..................      250,283         15,070        265,353        217,169         18,520        235,689
                                             -----------    -----------    -----------    -----------    -----------    -----------
Operating Income ..........................      132,918        (11,101)       121,817        103,982        (13,375)        90,607
                                             -----------    -----------    -----------    -----------    -----------    -----------
NON-OPERATING INCOME AND EXPENSES

Interest, investment and other income .....        7,565          8,742         16,307          2,468         16,063         18,531
Interest:
   Expense incurred .......................      (45,334)       (29,054)       (74,388)       (36,857)       (23,268)       (60,125)
   Amortization of deferred
      financing costs .....................         (858)        (1,973)        (2,831)          (896)        (1,617)        (2,513)
                                             -----------    -----------    -----------    -----------    -----------    -----------
Total Non-Operating Income and Expenses ...      (38,627)       (22,285)       (60,912)       (35,285)        (8,822)       (44,107)
                                             -----------    -----------    -----------    -----------    -----------    -----------
Income (loss) before minority
   interests, preferred dividends
   and distributions, equity (loss)
   in earnings of real estate
   joint ventures and discontinued
   operations .............................  $    94,291    $   (33,386)   $    60,905    $    68,697    $   (22,197)   $    46,500
                                             -----------    -----------    -----------    -----------    -----------    -----------

Total Assets ..............................  $ 2,898,666    $   209,298    $ 3,107,964    $ 2,426,455    $   515,619    $ 2,942,074
                                             ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>


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.

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 Company  exchanged  approximately  3,081 of the Preferred
Units,  with an aggregate stated value of  approximately  $3.1 million with such
amount  applied to amounts owed from the  preferred  unit holder under the Other
Notes.

During July 2004, the Company  exchanged  approximately  15,381 of the Preferred
Units,  with an  aggregate  stated  value of  approximately  $15.4  million into
approximately  531,000 OP Units.  Subsequent  to this exchange the OP Units were
exchanged for an equal number of shares of the Company's common stock.

During  July  2004,  the  Company  exchanged  1,350,000  shares of its  Series A
preferred stock, with a par value of approximately $33.8 million,  for 1,304,602
shares of its common stock with a fair market value, on the date of the exchange
of approximately $36.1 million. In addition,  as a result of this exchange,  the
Company incurred a non-cash accounting charge of approximately $3.4 million.

On September 20, 2004, the Company redeemed  approximately 1.8 million shares of
its Series A preferred stock resulting in an accounting  charge of approximately
$3.4 million of which approximately $2.0 million was non-cash.

During September 2004,  181,510 shares of the Company's Series A preferred stock
was exchanged by the Series A preferred  shareholders into 159,134 shares of the
Company's common stock which was valued at approximately  $4.5 million or $28.47
per common share.

During September 2004, in connection with the Company's acquisition of a 215,000
square  foot  Class  A  office  property,   the  Operating   Partnership  issued
approximately  34,000 OP Units for a total non-cash  investment of approximately
$1 million.

18
<PAGE>


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 exchange for the right to terminate its existing
lease at 225  Broadhollow  Road eighteen  months early,  the Company amended the
terms of its option to acquire such property by providing certain Rechler family
members with  customary tax  protection in the event the Company were to acquire
the  property  and then  dispose of it within five  years.  This  amendment  was
negotiated and approved by the Independent Directors of the Company.

In addition, in April 2004, the Company completed the sale to the Rechler family
of 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 nine month periods ended  September 30, 2004 and
2003, Reckson Construction Group, Inc. or its successor,  Reckson Construction &
Development,  LLC billed  approximately  $170,000  and  $848,000 and $86,000 and
$317,000,  respectively,  of market rate services and Reckson  Management Group,
Inc.  billed  approximately  $68,000 and  $206,000  and  $67,000  and  $207,000,
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.  Reckson Management Group, Inc., 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  $287,000 was paid by RCD during the six month period
ended  September 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. This lease has recently been extended for an additional
sixteen  month  period at market  terms.  Such  extension  was  approved  by the
disinterested members of the Company's Board of Directors.

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 September 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 September 30,
2004,  interest  accrued (net of reserves) under the FrontLine  Facility and the
RSVP Facility was approximately $19.6 million.

19
<PAGE>


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 August 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 completed an initial public offering ("IPO") of its common
stock. RSVP and the joint venture between RSVP and a subsidiary of the Operating
Partnership sold its entire ownership position in ACC in connection with the IPO
transaction. The Company through its ownership position in the joint venture and
outstanding  advances  made  under  the  RSVP  facility  anticipates   realizing
approximately  $30 million in the aggregate  from the sale. To date, the Company
has received  approximately $10.6 million of such proceeds. The remaining amount
is expected to be received  subsequent to the United States  Bankruptcy  Court's
approval of a Plan of re-organization  of FrontLine.  There can be no assurances
as to the final outcome of such Plan of re-organization.

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  $55.2 million which was reassessed with
no change by management as of September 30, 2004. Such amount has been reflected
in  investments  in  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  serves  as a member  of the Board of
Directors of ACC.

20
<PAGE>


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 $1.3 million and $3.1 million,  and $373,000
and $3.7  million of bad debt  expense  during the three and nine month  periods
ended September 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
<PAGE>


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 & 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.

The Company  follows the guidance  provided for under the  Financial  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.

Gains 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.

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  allocates  a portion  of the  purchase  price to  tangible  assets
including  the fair  value  of the  building  and  building  improvements  on an
as-if-vacant basis and to land determined either by real estate tax assessments,
independent  appraisals  or  other  relevant  data.  Additionally,  the  Company
assesses fair value of identified  intangible  assets and  liabilities  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.

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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, and Emerging Issues Task
Force("EITF")  87-24, the Company allocated  approximately $2.8 million and $7.8
million of its unsecured  corporate interest expense to discontinued  operations
for the three and nine months ended  September 30, 2003.  EITF 87-24 states that
"interest  on debt that is  required  to be  repaid as a result of the  disposal
transaction  should be allocated to  discontinued  operations".  Pursuant to the
terms of our Credit  Facility,  the  Company  was  required  to repay the Credit
Facility to the extent of the net proceeds, as defined,  received from the sales
of unencumbered  properties.  As such, the Company has allocated to discontinued
operations the interest  expense incurred on the portion of its Credit Facility,
which was  required  to be repaid.  In August  2004,  the  Company  amended  and
extended its Credit Facility, whereby such repayment requirement was eliminated.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid  investments with a maturity of three months
or less when purchased to be cash equivalents.

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 September 30, 2004,  the Company  owned and operated 78 office  properties
(inclusive of eight office  properties owned through joint ventures)  comprising
approximately  14.8  million  square  feet  and 8  industrial  / R&D  properties
comprising approximately 863,000 square feet located in the Tri-State Area.

As of September 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 September
30,  2004,  the  Company  had  invested  approximately  $126.4  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 nine month periods ended September 30, 2004, the
Company  has   capitalized   approximately   $2.7  million  and  $7.8   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 September 30, 2004 was  approximately  $5.9 million.
The closing is scheduled to occur upon the  rezoning,  which is  anticipated  to
occur within 12 to 24 months.  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  of
approximately  $60 million.  There can be no assurances  that the actual cost of
this  development  will not exceed the anticipated  amount.  This development is
located within the Company's  existing 404,000 square foot executive office park
in Melville, New York.

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<PAGE>


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 $0 and $5.0 million and $3.3 million and
$13.4 million has been recognized  during the three and nine month periods ended
September 30, 2004 and 2003,  respectively,  and is included in  investment  and
other income on the Company's consolidated statements of income.

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 Company's unsecured
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.  Also, in exchange for the right to terminate its existing  lease
at 225 Broadhollow  Road eighteen months early, the Company amended the terms of
its option to acquire such property by providing  certain Rechler family members
with  customary  tax  protection  in the event the  Company  were to acquire the
property and then dispose of it within five years. This amendment was negotiated
and approved by the Independent Directors of the Company.

In January 2004,  the Company sold a 104,000  square foot office  property,  120
Mineola Boulevard,  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 matured in August
2004 at which time the Company satisfied the outstanding debt through an advance
under its unsecured  credit  facility  along with cash on hand.  The property is
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 $5.8 million for the
three and nine month periods ended September 30, 2004. In addition, amortization
expense on the value of lease origination  costs was approximately  $700,000 and
$2.0  million for the three and nine month  periods  ended  September  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.

In April 2004,  the Company  sold a 175,000  square  foot office  building,  400
Garden City Plaza,  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. As described  below, the Company
has since  identified  and  acquired  an  interest  in a  qualified  replacement
property for purposes of this exchange.  The disposition of the other industrial
property, which is subject to certain environmental issues, was conditioned upon
the approval of the buyer's  lender,  which was not 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.

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<PAGE>


In July  2004,  the  Company  acquired  a  141,000  square  foot  Class A office
property,  3 Giralda  Farms,  located in  Madison,  NJ for  approximately  $22.7
million. The Company made this acquisition through available  cash-on-hand.  The
building is 100% occupied by a tenant which intends to fully vacate the premises
by June  2005.  On  September  30,  2004,  the  Company  signed a lease  with an
international pharmaceutical company to lease 100% of the building for 12 years,
commencing  on July 1, 2005,  with  options to renew for two  additional  5 year
periods.

During September 2004, the Company,  through Reckson  Construction  Group, Inc.,
acquired  the  remaining  49%  interest  in the  property  located at 90 Merrick
Avenue,  East Meadow,  NY, from the Company's  joint venture  partner,  Teachers
Insurance  and  Annuity  Association,  for  approximately  $14.9  million.  This
acquisition was financed,  in part, from the remaining sales proceeds being held
by the  previously  referenced  qualified  intermediary  as the  property was an
identified,  qualified replacement property. The balance of this acquisition was
financed  with  cash-on-hand.  As a  result  of this  acquisition,  the  Company
successfully  completed the Section 1031 Exchange and thereby deferred the taxes
related to the gain  recognized on the sale  proceeds  received from the sale of
the two remaining industrial properties from the Disposition.

During September 2004, the Company acquired a 215,000 square foot Class A office
property, 44 Whippany Road, located in Morristown,  New Jersey for approximately
$30 million. The Company made this acquisition,  in part, through funds received
from the Company's  September 2004 common equity offering,  cash-on-hand and the
issuance  of  approximately  34,000 OP Units  which were priced at $28.70 per OP
Unit.

During  September  2004,  the  Company  sold a  92,000  square  foot  industrial
property,   500  Saw  Mill  River  Road,   located  in  Westchester  County  for
approximately $7.3 million.  In connection with this sale the Company recorded a
net gain of  approximately  $2.2  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.

On October 1, 2004,  the Company  acquired a 260,500  square foot Class A office
property,   300  Broadhollow  Road,  located  in  Melville,   Long  Island,  for
approximately $41.0 million. The Company made this acquisition, in part, through
an advance under the Credit Facility and cash-on-hand.

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"). At September 30, 2004, the Mezz Note had an outstanding balance of
approximately  $27.6 million and a weighted  average interest rate of 12.86% per
annum.  Such interest rate is based on a minimum  spread over LIBOR of 1.63% per
annum.  The Mezz Note matures in  September  2005 and the borrower has rights to
extend  its term for  three  additional  one-year  periods  and,  under  certain
circumstances, prepay amounts outstanding.

The Company held three other notes  receivable  which  aggregated  $21.5 million
which carried 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.  As of  September  30,  2004,  the  Operating  Partnership  had  received
approximately $13.1 million from the preferred unit holder to be applied against
amounts owed under the Other Notes,  including accrued  interest.  Subsequent to
September 30, 2004 the Company received an additional $2.8 million. As a result,
the remaining  Other Notes  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 September 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 was
cross-collateralized  under a $99.7 million mortgage note payable along with one
of the  Company's  New York City  buildings.  On November  1, 2004,  the Company
exercised its right to prepay this note in its entirety, without penalty.

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<PAGE>


The Company  also owns a 60% interest in a 172,000  square foot office  building
located at 520 White Plains Road in White Plains, New York (the "520JV"),  which
is managed by its wholly owned  subsidiary.  As of September 30, 2004, the 520JV
had total assets of $20.7 million,  a mortgage note payable of $11.5 million and
other  liabilities  of  $726,000.  The  Company's  allocable  share of the 520JV
mortgage note payable is approximately $7.4 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  approvals  from members on certain
decisions including sale of the property, refinancing of the property's mortgage
debt, and material  renovations  to the property.  The Company has evaluated the
impact of FIN 46R on its  accounting  for the 520JV and has  concluded  that the
520JV is not a VIE. 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  $112,000 and
$520,000 and $134,000 and  $(30,000)  for the three and nine month periods ended
September 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 nine months ended  September  30, 2004 and 2003,
Reckson  Construction  Group,  Inc. or its  successor,  Reckson  Construction  &
Development,  LLC billed  approximately  $170,000  and  $848,000 and $86,000 and
$317,000,  respectively,  of market rate services and Reckson  Management Group,
Inc.  billed  approximately  $68,000 and  $206,000  and  $67,000  and  $207,000,
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.  Reckson Management Group, Inc. 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  $287,000  was  paid by RCD  during  the six  month  period  ended
September  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. This lease has recently been extended for an additional
sixteen-month  period  at market  terms.  Such  extension  was  approved  by the
disinterested members of the Company's Board of Directors.

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.  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. In addition,  during  September 2004, the Company  acquired TIAA's
49% interest in the property located at 90 Merrick Avenue,  East Meadow,  NY for
approximately $14.9 million. As a result of these transactions, the Tri-State JV
owns six Class A suburban office properties  aggregating  approximately  943,000
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.

26
<PAGE>


The total  market  capitalization  of the  Company  at  September  30,  2004 was
approximately $3.8 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 $28.75 per  share/unit  (based on the closing price of
the  Company's  common  stock on  September  30,  2004),  (ii)  the  liquidation
preference  value of the  Company's  Series A preferred  stock of $25 per share,
(iii) the liquidation preference value of the Operating  Partnership's preferred
units of $1,000 per unit and (iv) the approximately  $1.4 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 September  30, 2004. As a result,  the  Company's  total debt to
total market  capitalization  ratio at September 30, 2004 equaled  approximately
36.2%.

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 September 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 September 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.

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.

27
<PAGE>


In August 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 completed an initial public offering ("IPO") of its common
stock. RSVP and the joint venture between RSVP and a subsidiary of the Operating
Partnership sold its entire ownership position in ACC in connection with the IPO
transaction. The Company through its ownership position in the joint venture and
outstanding  advances  made  under  the  RSVP  facility  anticipates   realizing
approximately  $30 million in the aggregate  from the sale. To date, the Company
has received  approximately $10.6 million of such proceeds. The remaining amount
is expected to be  received  subsequent  the United  States  Bankruptcy  Court's
approval of a Plan of re-organization  of FrontLine.  There can be no assurances
as to the final outcome of such Plan of re-organization.

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 $55.2 million, which was reassessed with
no change by management as of September 30, 2004. Such amount has been reflected
in  investments  in  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  serves  as a member  of the Board of
Directors of ACC.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED SEPTEMBER 30,
                                                  ----------------------------------------
                                                                             CHANGE
                                                                        ------------------

                                                    2004       2003     DOLLARS    PERCENT
                                                  --------   --------   --------   -------
<S>                                               <C>        <C>        <C>         <C>
PROPERTY OPERATING REVENUES:
   Base rents .................................   $111,260   $ 93,225   $ 18,035    19.3%
   Tenant escalations and reimbursements ......     19,517     16,244      3,273    20.1%
                                                  --------   --------   --------

   TOTAL PROPERTY OPERATING REVENUES ..........   $130,777   $109,469   $ 21,308    19.5%
                                                  ========   ========   ========

PROPERTY OPERATING EXPENSES:
   Operating expenses .........................   $ 32,779   $ 27,517   $  5,262    19.1%
   Real estate taxes ..........................     21,865     18,705      3,160    16.9%
                                                  --------   --------   --------

   TOTAL PROPERTY OPERATING EXPENSES ..........   $ 54,644   $ 46,222   $  8,422    18.2%
                                                  ========   ========   ========

INVESTMENT AND OTHER INCOME ...................   $  7,321   $  6,384   $    937    14.7%
                                                  ========   ========   ========

OTHER EXPENSES:
   Interest expense incurred ..................   $ 24,120   $ 19,883   $  4,237    21.3%
   Amortization of deferred financing costs ...      1,005        807        198    24.5%
   Marketing, general and administrative ......      7,681      8,163       (482)   (5.9)%
                                                  --------   --------   --------

   TOTAL OTHER EXPENSES .......................   $ 32,806   $ 28,853   $  3,953    13.7%
                                                  ========   ========   ========
</TABLE>

The Company's property operating  revenues,  which include base-rents and tenant
escalations and  reimbursements  ("Property  Operating  Revenues")  increased by
$21.3  million for the three months ended  September 30, 2004 as compared to the
2003 period. Property Operating Revenues increased $14.7 million attributable to
lease up of redeveloped  properties and from the acquisitions of 3 Giralda Farms
in July 2004,  1185 Avenue of the Americas in January  2004 and 1055  Washington
Boulevard 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 a $2.0 million increase in termination  fees.  Property
Operating  Revenues  also  increased  by  approximately  $1.8  million  due to a
weighted  average  occupancy  increase in our "same  store"  properties.  Tenant
escalations and reimbursements  increased $2.1 million attributable to increased
operating  expense and real estate tax costs  being  passed  through to tenants.
These  increases in Property  Operating  Revenues  were offset by  approximately
$600,000 in same space rental rate decreases and an increase in reserves against
certain tenant receivables.

28
<PAGE>


The Company's  property operating  expenses,  real estate taxes and ground rents
("Property  Expenses")  increased  by  approximately  $8.4 million for the three
months ended September 30, 2004 as compared to the 2003 period.  The increase is
primarily  attributable  the Company's  acquisitions  of 3 Giralda  Farms,  1185
Avenue of the Americas and 1055 Washington  Boulevard amounting to approximately
$7.7  million.   The  remaining  increase  in  property  operating  expenses  is
attributable  to $700,000 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  increased by $937,000 or 14.7%.  This  increase is
primarily  attributable to the increase in successful real estate tax certiorari
proceedings  in the third  quarter of 2004 in the amount of  approximately  $1.3
million,  income tax refunds  through a Service  Company of  approximately  $1.0
million  and  approximately  $2.8  million  received  as  consideration  for the
assignment of certain  mortgage  indebtedness.  These  increases were off-set by
gain  recognized  in the  third  quarter  of 2003  relating  to a land  sale and
build-to-suit  transaction of  approximately  $4.2 million with no corresponding
gain in 2004.

Interest expense incurred  increased by $4.2 million or 21.3%.  This increase is
attributable to the net increase in the Operating Partnership's senior unsecured
notes  of  $200  million,  which  resulted  in  approximately  $1.3  million  of
additional  interest  expense.  Interest  expense  incurred  also  increased  by
approximately $1.4 million from 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  September 30, 2003 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  $383,000  incurred  under the Company's  "same store"
mortgage portfolio and a decrease in interest expense of approximately  $920,000
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  September 30, 2004 as compared to $352.2 million for the
three months ended September 30, 2003.

Marketing,  general and  administrative  expenses decreased by $482,000 or 5.9%.
This  overall  net  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.  These overall cost savings
were impacted by additional  professional  fees incurred  during the three month
period ended  September 30, 2004 relating to the Company's  initiative to comply
with  the  provisions  of the  Sarbanes-Oxley  Act of  2002  in  the  amount  of
approximately  $200,000 with no such costs applicable to the comparative  period
of 2003.

Discontinued  operations,  net of  limited  partners'  and  minority  interests,
decreased by  approximately  $2.2 million.  This net decrease is attributable to
the gain on sales related to those  properties sold during the current period of
approximately  $2.2  million,  which was off-set by the  decrease of income from
discontinued  operations for those  properties  sold between October 1, 2003 and
June 30, 2004.

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

<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED SEPTEMBER 30,
                                                   ---------------------------------------------
                                                                                    CHANGE
                                                                              ------------------

                                                      2004          2003      DOLLARS    PERCENT
                                                   ---------     ---------    --------   -------
<S>                                                <C>           <C>          <C>          <C>
PROPERTY OPERATING REVENUES:
   Base rents ..................................   $ 332,060     $ 282,110    $ 49,950     17.7%
   Tenant escalations and  reimbursements ......      55,110        44,186      10,924     24.7%
                                                   ---------     ---------    --------

   TOTAL PROPERTY OPERATING REVENUES ...........   $ 387,170     $ 326,296    $ 60,874     18.7%
                                                   =========     =========    ========

PROPERTY OPERATING EXPENSES:
   Operating expenses ..........................   $  94,185     $  79,307    $ 14,878     18.8%
   Real estate taxes ...........................      62,550        52,734       9,816     18.6%
                                                   ---------     ---------    --------

   TOTAL PROPERTY OPERATING EXPENSES ...........   $ 156,735     $ 132,041    $ 24,694     18.7%
                                                   =========     =========    ========

INVESTMENT AND OTHER INCOME ....................   $  16,307     $  18,531    $ (2,224)   (12.0)%
                                                   =========     =========    ========

OTHER EXPENSES:
   Interest expense ............................   $  74,388     $  60,125    $ 14,263     23.7%
   Amortization of deferred financing  costs ...       2,831         2,513         318     12.7%
   Marketing, general and  administrative ......      22,122        24,527      (2,405)    (9.8)%
                                                   ---------     ---------    --------

   TOTAL OTHER EXPENSES ........................   $  99,341     $  87,165    $ 12,176     14.0%
                                                   =========     =========    ========
</TABLE>

29
<PAGE>


The Company's  Property  Operating  Revenues  increased by $60.9 million for the
nine months ended  September  30, 2004 as compared to the 2003 period.  Property
Operating  Revenues  increased  $39.3  million   attributable  to  lease  up  of
redeveloped  properties  and from the  acquisitions  of 3 Giralda  Farms in July
2004, 1185 Avenue of the Americas in January 2004 and 1055 Washington  Boulevard
in August  2003.  In addition,  Property  Operating  Revenues  increased by $4.1
million from  built-in rent  increases for existing  tenants in our "same store"
properties  and  by a  $7.1  million  increase  in  termination  fees.  Property
Operating  Revenues  also  increased  by  approximately  $4.4 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  $6.5 million  attributable  to increased  operating  expense and real
estate tax costs being passed through to tenants. These increases were offset by
approximately $500,000 in same space rental rate decreases.

The Company's Property Expenses increased by approximately $24.7 million for the
nine  months  ended  September  30, 2004 as  compared  to the 2003  period.  The
increase is primarily  attributable  to the Company's  acquisitions of 3 Giralda
Farms,  1185 Avenue of the Americas and 1055 Washington  Boulevard  amounting to
approximately  $21.5  million.  The remaining  increase in Property  Expenses is
attributable  to  approximately  $3.2 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 $2.2 million or 12.0 % from the nine
month  period ended  September  30, 2003 as compared to the same 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  $8.3
million. These decreases were off-set by increases in successful real estate tax
certiorari  proceedings  during 2004 of approximately  $1.9 million,  income tax
refunds through a Service Company of approximately  $1.0 million,  approximately
$2.8 million  received as  consideration  for the assignment of certain mortgage
indebtedness, and approximately $360,000 in interest income due to net increases
in the Company's  weighted average balances on its investments in mortgage notes
and notes receivable.

Interest  expense  incurred  increased  by $14.3  million or 23.7% from the nine
month  period ended  September  30, 2003 as compared to the same period of 2004.
The  increase  is  attributable  to the  net  increase  of $200  million  in the
Operating  Partnership's  senior unsecured notes which resulted in approximately
$2.6 million of additional  interest expense and  approximately  $8.0 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 nine month period
ended September 30, 2003, the Company  allocated  approximately  $7.8 million of
its interest  expense to discontinued  operations 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  $634,000  incurred under the Company's "same
store"  mortgage  portfolio,   increases  in  capitalized  interest  expense  of
approximately $201,000 attributable to an increase in development projects and a
decrease in interest  expense of  approximately  $3.3 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 $99.9 million for the nine months ended
September  30,  2004 as compared  to $319.7  million  for the nine months  ended
September 30, 2003.

Marketing, general and administrative expenses decreased by $2.4 million or 9.8%
from the nine month  period  ended  September  30,  2003 as compared to the same
period of 2004.  This  overall net  decrease is  primarily  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.  In
addition,  the Company had an overall decrease in contributions and sponsorships
of  approximately  $250,000 from the nine month period ended 2003 as compared to
the 2004  period.  These  overall  cost  savings  were  impacted  by  additional
professional fees incurred during the nine month period ended September 30, 2004
relating to the Company's  initiative  to comply with the  provisions of section
404 of the  Sarbanes-Oxley  Act of 2002 in the amount of approximately  $200,000
with no such costs applicable to the comparative period of 2003.

Discontinued  operations,  net of  limited  partners'  and  minority  interests,
increased by  approximately  $792,000.  This net increase is attributable to the
gain on sales of real estate for those properties sold during the current period
of approximately $11.1 million, which was off-set by the decrease of income from
discontinued  operations for those  properties  sold between October 1, 2003 and
December 31, 2003.

30
<PAGE>


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 space  vacated as a result of early  terminations  of leases.  The Company is
also  expending  costs on tenants that are  renewing or  extending  their leases
earlier than  scheduled.  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 nine month  periods  ended  September 30,
2004,  the Company  paid $12.8  million  and $34.4  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,  it
anticipates  that it will  continue  to 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 nine months ended September 30, 2004, the
Company  issued  $287.5  million of common stock and the  Operating  Partnership
issued  $300  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
Operating  Partnership  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 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.  The Company  believes  that these  trends are
beginning to adjust, and that the above average tenant costs relating to leasing
are  decreasing.  This trend is  supported by  increased  occupancy  and reduced
vacancy  rates in all of our markets,  by the general  economic  recovery in the
market resulting in job growth and the limited new supply of office space.

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 2005. 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.

31
<PAGE>


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.

On July 1, 2004, the Company had an outstanding $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, 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,  an increase to the
maximum  revolving  credit amount to $750 million.  In August 2004,  the Company
amended  and  extended  the  Credit  Facility  to  mature  in  August  2007 with
substantially similar terms and conditions as existed prior to the amendment and
extension.  As of September  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 September 30, 2004, the outstanding  borrowings under the
Credit Facility  aggregated $90 million and carried a weighted  average interest
rate of 2.64%.

The  Company  utilizes  the Credit  Facility  primarily  to finance  real estate
investments, fund its real estate development activities and for working capital
purposes.  At September 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.

On  March  15,  2004,   the  Company   repaid  $100  million  of  the  Operating
Partnership's  7.4% senior unsecured notes at maturity.  These notes were repaid
with funds received from the Company's March 2004 common equity offering.

On August 9, 2004, the Company made an advance under its Credit  Facility in the
amount of $222.5 million and, along with cash-on-hand, paid off the $250 million
balance of the  mortgage  debt on the  property  located  at 1185  Avenue of the
Americas in New York City.

On November 1, 2004, the Company  exercised its right to prepay the  outstanding
mortgage debt of approximately $99.6 million, without penalty, on the properties
located at One Orlando  Center in  Orlando,  Florida and 120 West 45th Street in
New York City.  The Company  made an advance  under its Credit  Facility to fund
such repayment.

On August 13,  2004,  the  Operating  Partnership  issued $150 million of 5.875%
senior  unsecured  notes due  August  15,  2014.  Interest  on the notes will be
payable  semi-annually  on February 15 and August 15,  commencing  February  15,
2005.  The notes were priced at 99.151% of par value to yield  5.989%.  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,  these  instruments  were
settled and the Company  received a net benefit of  approximately  $1.9 million.
Such benefit will be amortized over the term of the notes to effectively  reduce
interest  expense.  The  Operating  Partnership  used the net proceeds from this
offering to repay a portion of the Credit  Facility  borrowings  used to pay off
the outstanding mortgage debt on 1185 Avenue of the Americas.

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 nine months ended September 30, 2004,
the Company has sold assets or interests in assets with  aggregate  sales prices
of  approximately  $51.4  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.

32
<PAGE>


A  Class  A  OP  Unit  and  a  share  of  common  stock  have  similar  economic
characteristics  as they effectively share equally in the net income or loss and
distributions  of the  Operating  Partnership.  As of September  30,  2004,  the
Operating  Partnership had issued and outstanding 3,118,556 Class A OP Units and
465,845  Class C OP Units.  The Class A OP Units  currently  receive a quarterly
distribution of $.4246 per unit. 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.
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.

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 nine month period ended September 30, 2004, approximately 2.5 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 $57.8 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 for
general  corporate  purposes  including the redemption of the Series A preferred
stock, discussed below.

On September 14, 2004, the Company  completed an equity offering of five million
shares of its common  stock  raising  approximately  $137.5  million,  net of an
underwriting  discount,  or $27.39 per share.  Net proceeds  received  from this
transaction  were used to redeem the Company's Series A preferred stock (defined
below) and for general corporate purposes.


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 nine months ended
September 30, 2004.

The  Company  had issued and  outstanding  8,834,500  shares of 7.625%  Series A
Convertible  Cumulative  Preferred Stock (the "Series A preferred  stock").  The
Series A  preferred  stock was  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,  was 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 on the open market and retired 140,600 shares of the Series A
preferred stock for approximately $3.4 million or $24.45 per share.  During July
2004, the Company completed an exchange with a holder of 1,350,000 shares of the
Series A preferred  stock for  1,304,602  shares of common  stock.  In addition,
during August 2004, the Company  announced the redemption of 2,000,000 shares of
its then outstanding shares of Series A preferred stock at a redemption price of
$25.7625 per share plus accumulated and unpaid dividends. On September 20, 2004,
the Company redeemed  1,841,905 of such shares for approximately  $47.9 million,
including  accumulated  and unpaid  dividends.  The remaining  158,095 shares of
Series A preferred  stock were exchanged into common stock of the Company at the
election of the Series A preferred  shareholders.  During  September  2004,  the
Company announced the redemption of all of its then outstanding shares of Series
A preferred stock aggregating 5,343,900 shares at a redemption price of $25.7625
per share plus  accumulated  and unpaid  dividends.  On October  15,  2004,  the
Company redeemed  4,965,062 shares of Series A preferred stock for approximately
$129.9  million,  including  accumulated  and unpaid  dividends.  The  remaining
378,838  shares of Series A preferred  stock were exchanged into common stock of
the Company, at the election of the Series A preferred shareholders. As a result
of the  100%  retirement  of the  Series  A  preferred  stock  annual  preferred
dividends will decrease by approximately  $16.8 million.  In accordance with the
EITF Topic D-42 the  Company  incurred  an  accounting  charge  during the third
quarter of 2004 of  approximately  $6.7 million in connection with the July 2004
exchange and  September  2004  redemption  of the Series A preferred  stock.  In
addition,  the Company will incur a charge of approximately  $9.1 million during
the fourth quarter of 2004 in connection with the October 2004 redemption.

33
<PAGE>


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
decreased by approximately $4.4 million.

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 an 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 exercised his rights to
exchange 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 exchange and conversion, the preferred unit holder delivered notice to
the  Operating  Partnership  of his intent to repay $15.5 million of the amounts
owed from the preferred  unit holder under the Other Notes.  As of September 30,
2004, there remain 1,200 Preferred Units outstanding with a stated  distribution
rate of 7.0%,  which is subject to reduction  based upon terms of their  initial
issuance.  The  terms of the  Preferred  Units  provide  for this  reduction  in
distribution rate in order to address the effect of certain mortgages with above
market  interest  rates,  which were  assumed by the  Operating  Partnership  in
connection with properties contributed to the Operating Partnership in 1998. Due
to this  reduction,  the Preferred Units are currently not entitled to receive a
distribution.

Effective  January 1, 2002 the Company has elected to follow FASB  Statement No.
123, "Accounting for Stock Based Compensation"  ("Statement No. 123"). 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 nine  month  periods  ended  September  30,  2004 and 2003,  the  Company
recorded  approximately  $4,000 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 September 30, 2004 totaled  approximately  $1.4
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  $697.9 million of senior unsecured notes and approximately $580.3
million  of  mortgage   indebtedness.   Based  on  the  Company's  total  market
capitalization  of approximately  $3.8 billion at September 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 $1.4 billion of debt), the
Company's   debt   represented   approximately   36.2%  of  its   total   market
capitalization.

34
<PAGE>


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  September  30, 2004 (in
thousands):

<TABLE>
<CAPTION>
                                                               MATURITY DATE
                                 --------------------------------------------------------------------------
                                    2004         2005         2006         2007         2008      THEREAFTER      TOTAL
                                 ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                              <C>          <C>          <C>          <C>          <C>          <C>          <C>
Mortgage notes payable (1)       $    3,555   $   13,887   $   13,478   $   10,969   $    9,989   $  105,178   $  157,056
Mortgage notes payable (2) (3)           --       18,553      129,920       60,539           --      346,269      555,281
Senior unsecured notes                   --           --           --      200,000           --      500,000      700,000
Unsecured credit facility                --           --           --       90,000           --           --       90,000
Land lease obligations (4)              943        3,776        3,828        3,753        3,753       78,672       94,725
Operating leases                        317        1,282        1,198          844          359           --        4,000
Air rights lease obligations             83          333          333          333          333        3,680        5,095
                                 ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                 $    4,898   $   37,831   $  148,757   $  366,438   $   14,434   $1,033,799   $1,606,157
                                 ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

(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 September
      30, 2004 is approximately $7.4 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.

On  September  30,  2004,  the Company had  approximately  $1.5  billion of debt
outstanding  consisting of  approximately  $712.3 million of fixed rate mortgage
notes payable, approximately $697.9 million of fixed rate senior unsecured notes
payable  and $90 million of variable  rate debt under its Credit  Facility.  The
$1.5 billion of debt had a weighted average interest rate of approximately 6.65%
per annum and a weighted  average term of  approximately  6.2 years.  During the
three and nine month  periods  ended  September  30, 2004 and 2003,  the Company
incurred interest costs,  including  capitalized  interest, of $27.1 million and
$83.2 million and $25.6 million and $76.7 million,  respectively.  The Company's
rental  revenues  are its  principal  source  of funds  along  with its net cash
provided by operating activities to meet these and future interest obligations.

On November 1, 2004, the Company  exercised its right to prepay the  outstanding
mortgage debt of  approximately  $99.6 million,  which was due in 2027,  without
penalty, on the properties located at One Orlando Center in Orlando, Florida and
120 West 45th Street in New York City.

At September 30, 2004,  the Company had  approximately  $940,000 in  outstanding
undrawn standby letters of credit issued under the Credit Facility. In addition,
approximately  $43.2 million,  or 6.1%, of the Company's  consolidated  mortgage
debt is recourse to the Company.

CORPORATE GOVERNANCE

Eight 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 2014.

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.

35
<PAGE>


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.

OTHER MATTERS

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 September 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 $290,000 and
$846,000 of  compensation  expense  were  recorded  for the three and nine month
periods ended  September 30, 2004,  respectively,  related to these LTIP grants.
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 September  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 September 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 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 September 30, 2004,  there remains,  reserved for
future  issuance,  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
nine month periods ended September 30, 2004 the Company  recorded  approximately
$101,000 and $302,000,  respectively,  of  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.

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
September 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 $2.1 million
of compensation expense for the three and nine month periods ended September 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.

36
<PAGE>


The Board of Directors  has approved an amendment to the LTIP to revise the peer
group used to measure relative  performance.  The amendment eliminated the mixed
office and industrial  companies and added certain other "pure office" companies
in order to limit the peer group to office sector companies.  The Board has also
approved the revision of the  performance  measurement  dates for future vesting
under the core  component of the LTIP from the  anniversary of the date of grant
to December  31st of each year.  This was done in order to have the  performance
measurement  coincide with the performance period that the Company believes many
investors use to judge the performance of the Company.

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  properties  have been  subjected  to a Phase I or similar
environmental  audit (which involved general  inspections without soil sampling,
ground water analysis or radon testing)  completed by independent  environmental
consultant   companies.   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.

37
<PAGE>


FUNDS FROM OPERATIONS

Funds from  Operations  ("FFO") is defined by the National  Association  of Real
Estate Investment  Trusts  ("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.  The  Company  presents  FFO  because  it  considers  it an  important
supplemental  measure of the Company's operating  performance and believes it is
frequently used by securities  analysts,  investors and other interested parties
in the  evaluation  of REITs,  many of which  present FFO when  reporting  their
results.  FFO is intended  to exclude  GAAP  historical  cost  depreciation  and
amortization of real estate and related assets,  which assumes that the value of
real estate diminishes  ratably over time.  Historically,  however,  real estate
values have risen or fallen with market conditions.  As a result, FFO provides a
performance  measure that, when compared year over year,  reflects the impact to
operations  from trends in  occupancy  rates,  rental  rates,  operating  costs,
development  activities,  interest costs and other matters without the inclusion
of depreciation and amortization, providing perspective that may not necessarily
be apparent from net income.

The Company computes FFO in accordance with the standards established by NAREIT.
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):

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED     NINE MONTHS ENDED
                                                                                              SEPTEMBER 30,        SEPTEMBER 30,
                                                                                          -------------------   -------------------
                                                                                            2004       2003       2004       2003
                                                                                          --------   --------   --------   --------
<S>                                                                                       <C>        <C>        <C>        <C>
Net income allocable to common shareholders ...........................................   $  8,840   $ 10,009   $ 37,849   $ 26,257
Adjustments for basic funds from operations:
   Add:
      Limited partners' minority interest in the operating partnership ................        453      1,202      2,090      3,072
      Real estate depreciation and amortization .......................................     26,758     24,407     78,100     78,249
      Minority partners' interests in consolidated partnerships .......................      7,117      7,437     23,931     23,074
   Less:
      Gain on sales of real estate.....................................................      2,381         --     11,322         --
      Amounts distributable to minority partners in consolidated partnerships .........      6,070      6,339     20,985     19,914
                                                                                          --------   --------   --------   --------

Basic Funds From Operations ("FFO") ...................................................     34,717     36,716    109,663    110,738

   Add:
      Dividends and distributions on dilutive shares and units ........................         41      4,485        541     13,452
                                                                                          --------   --------   --------   --------
      Diluted FFO .....................................................................   $ 34,758   $ 41,201   $110,204   $124,190
                                                                                          ========   ========   ========   ========

   Weighted average common shares outstanding .........................................     70,237     57,924     66,179     57,985

   Weighted average units of limited partnership interest outstanding .................      3,552      7,554      3,551      7,370
                                                                                          --------   --------   --------   --------

   Basic weighted average common shares and units outstanding .........................     73,789     65,478     69,730     65,355

   Adjustments for dilutive FFO weighted average shares and units outstanding:
      Add:
         Weighted average common stock equivalents ....................................        274        170        354        136
         Weighted average shares of Series A Preferred Stock ..........................         --      7,747         --      7,747
         Weighted average shares of preferred limited partnership interest ............        127        661        455        661
                                                                                          --------   --------   --------   --------

   Dilutive FFO weighted average shares and units outstanding .........................     74,190     74,056     70,539     73,899
                                                                                          ========   ========   ========   ========
</TABLE>

38
<PAGE>


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 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.

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   derivative
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,  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 were  scheduled  to
coincide with an August 2004 debt  maturity,  totaling $100 million,  to protect
itself  against  potentially  rising  interest  rates.  On August 13, 2004,  the
Operating  Partnership  issued $150 million of senior unsecured notes due August
15, 2014 and  simultaneously  settled  certain  interest rate hedge  instruments
resulting in a net benefit to the Company of  approximately  $1.9 million.  Such
benefit will be amortized against interest expense over the term of the notes to
effectively reduce interest expense.

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 September 30, 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                            For the Year Ended December 31,
                             --------------------------------------------------------------
                                2004         2005         2006         2007         2008      Thereafter     Total (1)       FMV
                             ----------   ----------   ----------   ----------   ----------   -----------   -----------   ----------
<S>                          <C>          <C>          <C>          <C>          <C>          <C>           <C>           <C>
Long term debt:
   Fixed rate .............  $    3,555   $   32,440   $  143,398   $  271,508   $    9,989   $   951,447   $ 1,412,337   $1,486,609
   Weighted average
     interest rate ........       7.45%        6.90%        7.37%        7.14%        7.23%         7.45%         7.37%

   Variable rate ..........  $       --   $       --   $       --   $   90,000   $       --   $        --   $    90,000   $   90,000
   Weighted average
      interest rate .......          --           --           --        2.64%           --            --         2.64%
</TABLE>

(1)   Includes  aggregate  unamortized  issuance discounts of approximately $2.1
      million  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 2007.

39
<PAGE>


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
September 30, 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                             For the Year Ended December 31,
                               -------------------------------------------------------------

                                 2004         2005         2006         2007          2008      Thereafter    Total (1)       FMV
                               -------      -------       -------      -------       -------    ----------    ---------     -------
<S>                            <C>          <C>           <C>          <C>           <C>          <C>          <C>           <C>
Mortgage notes and
   notes receivable:

Fixed rate .................   $ 1,250      $ 2,500       $    --      $16,990       $    --      $ 2,500      $23,240       $24,159
   Weighted average
   interest rate ...........    10.50%       12.00%            --       12.00%            --       10.50%       11.76%

Variable rate ..............   $    --      $27,592       $    --      $    --       $    --      $    --      $27,592       $27,592
   Weighted average
   interest rate ...........        --       12.86%            --           --            --           --       12.86%
</TABLE>

(1)   Excludes   interest   receivables   and  unamortized   acquisition   costs
      aggregating approximately $2.7 million dollars.


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 members of senior  management  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
supports 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 senior 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.

40
<PAGE>


SELECTED PORTFOLIO INFORMATION

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

<TABLE>
<CAPTION>
                                     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
  ------------------------------- ---------------- -------------------- ------------------------- -------------------------
<S>                                    <C>               <C>                      <C>                       <C>
 *Debevoise & Plimpton                 17.3              465,420                  3.2%                      5.5%
  King & Spalding                       7.5              180,391                  2.2%                      2.0%
  Verizon Communications Inc.           2.4              263,569                  1.9%                      1.7%
 *American Express                      9.0              129,818                  1.8%                      1.6%
 *Schulte Roth & Zabel                 16.2              279,746                  1.7%                      2.8%
 *Fuji Photo Film USA                   7.9              194,984                  1.3%                      1.2%
  United Distillers                     0.5              137,918                  1.3%                      1.1%
 *WorldCom/MCI                          2.3              244,730                  1.2%                      1.1%
 *Bank of America/Fleet Bank            6.1              162,050                  1.2%                      1.1%
  Dun & Bradstreet Corp.                8.0              123,000                  1.2%                      1.0%
  Arrow Electronics Inc.                9.3              163,762                  1.1%                      1.0%
  Amerada Hess Corporation              8.3              127,300                  1.1%                      0.9%
  Atlantic Mutual Insurance
  Co., Inc. (4)                         0.5              158,157                  1.0%                      0.9%
  T.D. Waterhouse                       2.9              103,381                  1.0%                      0.8%
  Westdeutsche Landesbank              11.6              53,000                   1.0%                      0.8%
  D.E. Shaw                            11.3              79,515                   0.9%                      0.8%
  Practicing Law Institute              9.4              77,500                   0.9%                      0.8%
 *Banque Nationale De Paris            11.8              145,834                  0.9%                      1.5%
  North Fork Bank                      14.3              126,770                  0.9%                      0.7%
 *Kramer Levin Nessen Kamin             0.6              158,144                  0.8%                      1.4%
  Heller Ehrman White                   0.7              64,526                   0.8%                      0.7%
  Vytra Healthcare                      3.2              105,613                  0.8%                      0.7%
 *State Farm                            4.1              189,310                  0.8%                      1.1%
  P.R. Newswire Associates              3.6              67,000                   0.8%                      0.7%
  Laboratory Corp. Of America           2.7              108,000                  0.7%                      0.7%
</TABLE>

(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 nine
month period ended September 30, 2004 for the Company's  consolidated office and
industrial / R&D properties other than One Orlando Centre in Orlando, FL:

<TABLE>
<CAPTION>
                                                                                     Average           YTD
                                   2000             2001              2002            2003          2000-2003           2004
                               ------------     ------------     ------------     ------------     ------------     ------------
<S>                            <C>              <C>              <C>              <C>              <C>              <C>
Suburban Office Properties
   Total                       $  3,289,116     $  4,606,069     $  5,283,674     $  6,791,336     $  4,992,549     $  4,491,046
   Per Square Foot             $       0.33     $       0.45     $       0.53     $       0.67     $       0.49     $       0.44

NYC Office Properties
   Total                       $    946,718     $  1,584,501     $  1,939,111     $  1,922,209     $  1,598,135     $  1,797,457
   Per Square Foot             $       0.38     $       0.45     $       0.56     $       0.55     $       0.48     $       0.40

Industrial Properties
   Total                       $    813,431     $    711,666     $  1,881,627     $  1,218,401(1)  $  1,156,281     $     81,389
   Per Square Foot             $       0.11     $       0.11     $       0.28     $       0.23     $       0.18     $       0.09
                               ------------     ------------     ------------     ------------     ------------     ------------
TOTAL PORTFOLIO
   Total                       $  5,049,265     $  6,902,236     $  9,104,412     $  9,931,946     $  7,746,965     $  6,369,892
   Per Square Foot             $       0.25     $       0.34     $       0.45     $       0.52     $       0.39     $       0.41
</TABLE>

(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.

41
<PAGE>


The  following  table sets forth  annual  and per  square  foot  non-incremental
revenue-generating  tenant  improvement costs and leasing  commissions 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 nine month period ended  September 30, 2004 for the  Company's  consolidated
office and industrial / R&D properties other than One Orlando Centre in Orlando,
FL:

<TABLE>
<CAPTION>

                                      2000          2001           2002            2003
                                   ----------    ----------    -----------     -----------
<S>                                <C>           <C>           <C>             <C>
Long Island Office Properties
  Tenant Improvements              $2,853,706    $2,722,457    $ 1,917,466     $ 3,774,722
  Per Square Foot Improved         $     6.99    $     8.47    $      7.81     $      7.05
  Leasing Commissions              $2,208,604    $1,444,412    $ 1,026,970     $ 2,623,245
  Per Square Foot Leased           $     4.96    $     4.49    $      4.18     $      4.90
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $    11.95    $    12.96    $     11.99     $     11.95
                                   ==========    ==========    ===========     ===========

Westchester Office Properties
  Tenant Improvements              $1,860,027    $2,584,728    $ 6,391,589(2)  $ 3,732,370
  Per Square Foot Improved         $     5.72    $     5.91    $     15.05     $     15.98
  Leasing Commissions              $  412,226    $1,263,012    $ 1,975,850(2)  $   917,487
  Per Square Foot Leased           $     3.00    $     2.89    $      4.65     $      3.93
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $     8.72    $     8.80    $     19.70     $     19.91
                                   ==========    ==========    ===========     ===========

Connecticut Office Properties
  Tenant Improvements              $  385,531    $  213,909    $   491,435     $   588,087
  Per Square Foot Improved         $     4.19    $     1.46    $      3.81     $      8.44
  Leasing Commissions              $  453,435    $  209,322    $   307,023     $   511,360
  Per Square Foot Leased           $     4.92    $     1.43    $      2.38     $      7.34
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $     9.11    $     2.89    $      6.19     $     15.78
                                   ==========    ==========    ===========     ===========

New Jersey Office Properties
  Tenant Improvements              $1,580,323    $1,146,385    $ 2,842,521     $ 4,327,295
  Per Square Foot Improved         $     6.71    $     2.92    $     10.76     $     11.57
  Leasing Commissions              $1,031,950    $1,602,962    $ 1,037,012     $ 1,892,635
  Per Square Foot Leased           $     4.44    $     4.08    $      3.92     $      5.06
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $    11.15    $     7.00    $     14.68     $     16.63
                                   ==========    ==========    ===========     ===========

New York City Office Properties
  Tenant Improvements              $   65,267    $  788,930    $ 4,350,106     $ 5,810,017(3)
  Per Square Foot Improved         $     1.79    $    15.69    $     18.39     $     32.84
  Leasing Commissions              $  418,185    $1,098,829    $ 2,019,837     $ 2,950,330(3)
  Per Square Foot Leased           $    11.50    $    21.86    $      8.54     $     16.68
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $    13.29    $    37.55    $     26.93     $     49.52
                                   ==========    ==========    ===========     ===========

Industrial Properties
  Tenant Improvements              $  650,216    $1,366,488    $ 1,850,812     $ 1,249,200
  Per Square Foot Improved         $     0.95    $     1.65    $      1.97     $      2.42
  Leasing Commissions              $  436,506    $  354,572    $   890,688     $   574,256
  Per Square Foot Leased           $     0.64    $     0.43    $      0.95     $      1.11
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $     1.59    $     2.08    $      2.92     $      3.53
                                   ==========    ==========    ===========     ===========

TOTAL PORTFOLIO
  Tenant Improvements              $7,395,070    $8,822,897    $17,843,929     $19,481,691
  Per Square Foot Improved         $     4.15    $     4.05    $      7.96     $     10.22
  Leasing Commissions              $4,960,906    $5,973,109    $ 7,257,380     $ 9,469,313
  Per Square Foot Leased           $     3.05    $     2.75    $      3.24     $      4.97
                                   ----------    ----------    -----------     -----------
   Total Per Square Foot           $     7.20    $     6.80    $     11.20     $     15.19
                                   ==========    ==========    ===========     ===========


<CAPTION>
                                     Average          YTD
                                    2000-2003       2004 (1)            New             Renewal
                                   -----------    -----------       -----------       ----------
<S>                                <C>            <C>               <C>               <C>
Long Island Office Properties
  Tenant Improvements              $ 2,817,088    $ 3,912,154       $ 2,012,053       $1,900,101
  Per Square Foot Improved         $      7.58    $      8.22       $     14.37       $     5.66
  Leasing Commissions              $ 1,825,808    $ 1,822,373       $   756,282       $1,066,091
  Per Square Foot Leased           $      4.63    $      3.83       $      5.40       $     3.18
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $     12.21    $     12.05       $     19.77       $     8.84
                                   ===========    ===========       ===========       ==========

Westchester Office Properties
  Tenant Improvements              $ 3,642,178    $ 5,516,541       $ 4,593,189       $  923,352
  Per Square Foot Improved         $     10.66    $     13.46       $     21.15       $     4.79
  Leasing Commissions              $ 1,142,144    $ 2,099,540       $ 1,667,746       $  431,794
  Per Square Foot Leased           $      3.62    $      5.12       $      7.68       $     2.25
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $     14.28    $     18.58       $     28.83       $     7.04
                                   ===========    ===========       ===========       ==========

Connecticut Office Properties
  Tenant Improvements              $   419,740    $ 2,910,018       $ 1,326,598       $1,583,420
  Per Square Foot Improved         $      4.47    $     12.44       $     26.53       $     8.61
  Leasing Commissions              $   370,285    $ 1,448,056       $   380,444       $1,067,612
  Per Square Foot Leased           $      4.02    $      6.19       $      7.61       $     5.80
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $      8.49    $     18.63       $     34.14       $    14.41
                                   ===========    ===========       ===========       ==========

New Jersey Office Properties
  Tenant Improvements              $ 2,474,131    $ 1,194,305       $ 1,141,315       $   52,990
  Per Square Foot Improved         $      7.99    $      7.36       $     16.83       $     0.56
  Leasing Commissions              $ 1,391,140    $   692,593       $   460,177       $  232,416
  Per Square Foot Leased           $      4.38    $      4.27       $      6.79       $     2.46
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $     12.37    $     11.63       $     23.62       $     3.02
                                   ===========    ===========       ===========       ==========

New York City Office Properties
  Tenant Improvements              $ 2,753,580    $ 6,098,113(3)(4) $ 4,041,654       $2,056,459(3)(4)
  Per Square Foot Improved         $     17.18    $     21.88       $     29.19       $    14.66
  Leasing Commissions              $ 1,621,795    $ 1,915,195(3)(4) $   970,691       $  944,504(3)(4)
  Per Square Foot Leased           $     14.64    $      6.87       $      7.01       $     6.73
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $     31.82    $     28.75       $     36.20       $    21.39
                                   ===========    ===========       ===========       ==========

Industrial Properties
  Tenant Improvements              $ 1,279,179    $   205,104       $   157,661       $   47,443
  Per Square Foot Improved         $      1.75    $      2.11       $      1.73       $     7.46
  Leasing Commissions              $   564,005    $   225,539       $   225,539       $        0
  Per Square Foot Leased           $      0.78    $      2.32       $      2.48       $     0.00
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $      2.53    $      4.43       $      4.21       $     7.46
                                   ===========    ===========       ===========       ==========

TOTAL PORTFOLIO
  Tenant Improvements              $13,385,896    $19,836,235       $13,272,470       $6,563,765
  Per Square Foot Improved         $      6.66    $     11.96       $     18.84       $     6.88
  Leasing Commissions              $ 6,915,177    $ 8,203,296       $ 4,460,879       $3,742,417
  Per Square Foot Leased           $      3.54    $      4.95       $      6.33       $     3.93
                                   -----------    -----------       -----------       ----------
   Total Per Square Foot           $     10.20    $     16.91       $     25.17       $    10.81
                                   ===========    ===========       ===========       ==========
</TABLE>

(1)   Excludes  $3.2 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  2004.  Sandler  O'Neil  leasing  costs  are
      reflected in 2Q04 numbers.

(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.

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

42
<PAGE>


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

                                 TOTAL PORTFOLIO
--------------------------------------------------------------------------------
                         Number of     Square     % of Total      Cumulative
Year of                   Leases        Feet       Portfolio      % of Total
Expiration               Expiring     Expiring       Sq Ft      Portfolio Sq Ft
--------------------------------------------------------------------------------
2004                        64          318,657       2.0%           2.0%
2005                       170        1,308,031       8.4%          10.4%
2006                       193        1,713,654      10.9%          21.3%
2007                       117        1,288,378       8.2%          29.6%
2008                       117        1,056,558       6.7%          36.3%
2009                       111        1,195,610       7.6%          43.9%
2010 and thereafter        343        7,684,935      49.1%          93.0%
--------------------------------------------------------------------------------
Total/Weighted Average   1,115       14,565,823      93.0%
--------------------------------------------------------------------------------
Total Portfolio Square Feet          15,657,275
--------------------------------------------------------------------------------

                                OFFICE PORTFOLIO
--------------------------------------------------------------------------------
                         Number of     Square     % of Total      Cumulative
Year of                   Leases        Feet        Office        % of Total
Expiration               Expiring     Expiring       Sq Ft      Portfolio Sq Ft
--------------------------------------------------------------------------------
2004                        61          287,037       1.9%           1.9%
2005                       168        1,260,881       8.5%          10.5%
2006                       189        1,616,688      10.9%          21.4%
2007                       113        1,218,886       8.2%          29.6%
2008                       114        1,013,715       6.9%          36.5%
2009                       110        1,150,629       7.8%          44.3%
2010 and thereafter        338        7,339,071      49.6%          93.9%
--------------------------------------------------------------------------------
Total/Weighted Average   1,093       13,886,907      93.9%
--------------------------------------------------------------------------------
Total Office Portfolio Square Feet   14,793,880
--------------------------------------------------------------------------------

                                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         3.7%           3.7%
2005                        2          47,150         5.5%           9.1%
2006                        4          96,966        11.2%          20.4%
2007                        4          69,492         8.0%          28.4%
2008                        3          42,843         5.0%          33.4%
2009                        1          44,981         5.2%          38.6%
2010 and thereafter         5         345,864        40.1%          78.6%
--------------------------------------------------------------------------------
Total/Weighted Average     22         678,916        78.6%
--------------------------------------------------------------------------------
Total Industrial/R&D Portfolio
Square Feet                           863,395
--------------------------------------------------------------------------------


43
<PAGE>


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):

                                                             NINE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                           ---------------------
                                                             2004         2003
                                                           --------      -------
Capital expenditures:
     Non-incremental .................................     $  6,370      $ 7,523
     Incremental .....................................        2,690        1,674
Tenant improvements:
     Non-incremental .................................       15,405       23,410
     Incremental .....................................        3,549        3,473
                                                           --------      -------
Additions to commercial real estate properties .......     $ 28,014      $36,080
                                                           ========      =======

Leasing costs:
     Non-incremental .................................     $ 12,007      $ 9,952
     Incremental .....................................        1,944        3,233
                                                           --------      -------
Payment of deferred leasing costs ....................     $ 13,951      $13,185
                                                           ========      =======
Acquisition and development costs ....................     $159,348      $55,604
                                                           ========      =======


44
<PAGE>

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. Unregistered Sales of Equity Securities and Use of Proceeds

<TABLE>
<CAPTION>
                                                  ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------------------------------------------------------------------
                                                                              (C) TOTAL NUMBER OF      (D)  MAXIMUM NUMBER
                     (A)  TOTAL NUMBER                                        SHARES (OR UNITS)        (OR APPROXIMATE DOLLAR VALUE)
                     OF SHARES                         (B)  AVERAGE PRICE     PURCHASED AS PART OF     OF SHARES (OR UNITS) THAT MAY
                     (OR UNITS)                        PAID PER SHARE         PUBLICLY ANNOUNCED       YET BE PURCHASED UNDER THE
PERIOD               PURCHASED                         (OR UNIT)              PLANS OR PROGRAMS        PLANS OR PROGRAMS
------------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                      <C>                   <C>                           <C>
July 1 - 31                   1,350,000                       $27.74                     ---                      ---
                     Series A preferred stock (1)
------------------------------------------------------------------------------------------------------------------------------------

August 1 - 31                    ---                           ---                       ---                      ---
------------------------------------------------------------------------------------------------------------------------------------

September 1 - 30              1,841,905                      $25.7625               1,841,905 (2)                 0 (2)
                     Series A preferred stock (2)
------------------------------------------------------------------------------------------------------------------------------------

Total                         3,191,905                       $26.60                  1,841,905                   0 (3)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  On July 27, 2004, the Company exchanged 1,350,000 shares of its Series A
     preferred stock, with a par value of approximately $33.8 million, for
     1,304,602 shares of its common stock with a fair market value on the date
     of the exchange of approximately $36.1 million in a privately negotiated
     transaction.

(2)  On August 18, 2004, the Company announced the redemption of 2,000,000
     shares of its Series A preferred stock. On September 20, 2004, the Company
     redeemed 1,841,905 shares of its Series A preferred stock at a price of
     $25.7625 per share, pursuant to the terms of such security, for an
     aggregate purchase price of approximately $47.6 million. The remaining
     158,095 shares of Series A preferred stock were exchanged into common stock
     of the Company at the election of the Series A shareholders.

(3)  On September 14, 2004, the Company announced the redemption of its
     remaining shares of Series A preferred stock. On October 15, 2004, the
     Company redeemed its remaining 4,965,062 shares of Series A preferred stock
     at a price of $25.7625 per share, pursuant to the terms of such security,
     for an aggregate purchase price of approximately $127.9 million.

Item 3. Defaults Upon Senior Securities - None

Item 4. Submission of Matters to a Vote of Securities Holders - None


45
<PAGE>

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

      Exhibits

            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.


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, Chief Executive          Michael Maturo,
Officer and President                      Executive Vice President,
                                           Treasurer and Chief Financial Officer
DATE: November 2, 2004



46