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Multimodal Art Projection 238

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## Consolidated Statement of Comprehensive Income Consolidated Edison, Inc. <img src='content_image/9011.jpg'> The accompanying notes are an integral part of these financial statements.

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## Consolidated Statement of Common Shareholders' Equity Consolidated Edison, Inc. <img src='content_image/76931.jpg'> The accompanying notes are an integral part of these financial statements.

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## Consolidated Statement of Cash Flows Consolidated Edison, Inc. <img src='content_image/7019.jpg'> The accompanying notes are an integral part of these financial statements.

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<img src='content_image/102909.jpg'> <img src='content_image/102911.jpg'>

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## Consolidated Statement of Capitalization Consolidated Edison, Inc. <img src='content_image/131483.jpg'>

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## General These combined notes accompany and form an integral part of the consolidated financial statements of each of Consolidated Edison, Inc., a holding company, and its subsidiaries (Con Edison), Consolidated Edison Company of New York, Inc. and its subsidiaries (Con Edison of New York) and Orange & Rockland Utilities, Inc. and its subsidiaries (O&R). Con Edison of New York and O&R, which are regulated utilities, are sub- sidiaries of Con Edison. Con Edison also has the following unregulated subsidiaries: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and gas to delivery customers of utilities, includ- ing Con Edison of New York and O&R, and also offers energy- related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply company; Consolidated Edison Development, Inc. (Con Edison Development), a com- pany that owns and operates generating plants and energy and other infrastructure projects; and Con Edison Communications, LLC (Con Edison Communications), a company that builds and operates fiber optic networks to provide telecommunications services. Con Edison of New York and O&R are referred to in these notes as the “Utilities.” Con Edison and the Utilities are collectively referred to in these combined notes as the “Companies.” Neither Con Edison of New York nor O&R makes any representation as to information relating to Con Edison or the subsidiaries of Con Edison other than itself. ## Note A – Summary of Significant Accounting Policies Principles of Consolidation Con Edison’s consolidated financial statements include the accounts of Con Edison and its consolidated subsidiaries, including the Utilities. All intercompany balances and transactions have been eliminated. ## Accounting Policies The accounting policies of Con Edison and its subsidiaries con- form to accounting principles generally accepted in the United States of America. For the Utilities, these accounting principles include the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” and, in accordance with SFAS No. 71, the accounting require- ments of the Federal Energy Regulatory Commission (FERC) and the state public utility regulatory commissions having jurisdiction. SFAS No. 71 specifies the economic effects that result from the cause and effect relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or “regulatory assets” under SFAS No. 71. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or “regulatory liabilities” under SF AS No. 71. The Utilities’ principal regulatory assets and liabilities are detailed in Note B. The Utilities are receiving or being credited with a return on all of their regulatory assets for which a cash outflow has been made, and are paying or being charged with return on all of their regulatory liabilities for which a cash inflow has been received. The Utilities’ regulatory assets and liabilities will be recovered from customers, or applied for cus- tomer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission. Other significant accounting policies of the Companies are referenced in Note E (Pension Benefits), Note F (Other Postretirement Benefits), Note K (Leases), Note L (Goodwill and Intangible Assets) and Note P (Derivative Instruments and Hedging Activities) to the financial statements. ## Plant and Depreciation Utility Plant Utility plant is stated at original cost. The capitalized cost of additions to utility plant includes indirect costs such as engi- neering, supervision, payroll taxes, pensions, other benefits and an allowance for funds used during construction (AFDC). The original cost of property is charged to accumulated deprecia- tion as property is retired. The cost of repairs and maintenance is charged to expense and the cost of betterments is capital- ized. At December 31, 2003, the Utilities reclassified the cost of removal less salvage value originally included in the accumu- lated depreciation reserve to a regulatory liability in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” The amounts reclassified for Con Edison, Con Edison of New York and O&R were $777 million, $721 million and $56 million in 2003 and $813 million, $773 million and $40 million in 2002, respectively. Rates used for AFDC include the cost of borrowed funds and a reasonable rate on the regulated utilities own funds when so used, determined in accordance with regulations of the FERC and the state public utility regulatory authority having jurisdic- tion. The rate is compounded semiannually, and the amounts

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applicable to borrowed funds are treated as a reduction of interest charges, while the amounts applicable to the regulated utilities’ own funds are credited to other income (deductions). The AFDC rates for the Utilities were as follows: <img src='content_image/19921.jpg'> The Utilities generally compute annual charges for depreciation using the straight-line method for financial statement purposes, with rates based on average service lives and net salvage factors. The average depreciation rates for the Utilities were as follows: <img src='content_image/19922.jpg'> The estimated lives for utility plant for Con Edison of New York range from 25 to 80 years for electric, 15 to 85 years for gas, 30 to 75 years for steam and 8 to 50 years for general plant. For O&R, the estimated lives for utility plant range from 5 to 65 years for electric, 7 to 75 years for gas and 5 to 55 years for general plant. ## Non-Utility Plant Non-utility plant is stated at original cost. For the Utilities, non- utility plant consists primarily of land and telecommunication facilities that are currently not utilized within electric, gas or steam utility operations. For Con Edison’s unregulated sub- sidiaries, non-utility plant consists primarily of generating assets and telecommunication facilities. Depreciation on these assets is computed using the straight-line method for financial state- ment purposes over their estimated useful lives, which range from 5 to 40 years for generating assets, 3 to 20 years for telecommunication facilities and 3 to 50 years for other property. The average non-utility depreciation rates for Con Edison Development and Con Edison Communications were as follows: <img src='content_image/19923.jpg'> In 2002, in accordance with SFAS No. 34, “Capitalization of Interest Costs,” Con Edison capitalized interest on its borrowings associated with the unregulated subsidiaries’ capital projects in progress. Capitalized interest is added to the asset cost, and is amortized over the useful lives of the assets. The amount of such capitalized interest cost for 2003 and 2002 was $6 million and $14 million, respectively. No amounts were capitalized in 2001. ## Revenues The Utilities and Con Edison Solutions recognize revenues for electric, gas or steam service on a monthly billing cycle basis. The Utilities defer over a 12-month period all net interruptible gas revenues not authorized by the New York State Public Service Commission (PSC) to be retained by the Utilities for refund to firm gas sales and transportation customers. O&R and Con Edison Solutions accrue revenues at the end of each month for estimated energy usage not yet billed to customers, while Con Edison of New York does not accrue such revenues, in accordance with current regulatory agreements. Unbilled revenues included in Con Edison’s and O&R’s balance sheets at December 31, 2003 and 2002 were as follows: <img src='content_image/19927.jpg'> ## Recoverable Energy Costs The Utilities generally recover all of their prudently incurred fuel, purchased power and gas costs, including hedging gains and losses, in accordance with rate provisions approved by the applicable state public utility commissions. If the actual energy costs for a given month are more or less than the amounts billed to customers for that month, the difference is recoverable from or refundable to customers. Differences between actual and billed energy costs are generally deferred for charge or refund to customers during the next billing cycle (normally with- in one or two months). For Con Edison of New York, rate pro- visions also include a possible incentive or penalty of up to $25 million annually relating to electric costs (see “Energy Price Hedging” in Note P). For O&R gas costs, differences between actual and billed gas costs during the 12-month period ending each August are charged or refunded to customers during a subsequent 12-month period. The difference between purchased power costs initially billed to the Utilities by the New York Independent System Operator (NYISO) and the cost of power subsequently determined by the NYISO to have actually been supplied is refunded by the NYISO to the Utilities, or paid to the NYISO by the Utilities. The reconciliation payments or receipts are recoverable from or refundable to the Utilities’ customers. At December 31, 2003, Con Edison of New York had deferred $134 million of refunds received from the NYISO as a regulatory liability. In New Jersey, O&R’s subsidiary purchases energy under competitive bidding supervised by the New Jersey Board of Public Utilities (NJBPU) for contracts ranging from one to three years. Base

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rates are adjusted to conform to contracted amounts when new contracts take effect and differences between actual costs and revenues collected, chiefly attributable to differences between estimated and actual customer consumption, are reconciled at a later date. See “Rate and Restructuring Agreements-Electric” in Note B for 2003 NJBPU ruling regarding previously deferred purchased power costs. In Pennsylvania, O&R’s subsidiary recovers fuel costs based on a rate allowed by the Pennsylvania Public Utility Commission (PPUC). ## Temporary Cash Investments Temporary cash investments are short-term, highly liquid investments that generally have maturities of three months or less. They are stated at cost, which approximates market. The Companies consider temporary cash investments to be cash equivalents. ## Investments Investments consist primarily of the investments of Con Edison’s unregulated subsidiaries, which, depending on the subsidiaries’ ownership, are recorded at cost, accounted for under the equity method or accounted for as leveraged leases in accordance with SFAS No. 13, “Accounting for Leases.” See Note K for a discussion of investments in Lease In/Lease Out transactions and Note H for a discussion of Con Edison Development’s impairment charge related to its Genor generat- ing asset. Con Edison of New York’s investments are recorded under the equity method. ## Federal Income Tax In accordance with SFAS No. 109, “Accounting for Income Taxes,” the Companies have recorded an accumulated deferred federal income tax liability for temporary differences between the book and tax bases of assets and liabilities at cur- rent tax rates. In accordance with rate agreements, the Utilities have recovered amounts from customers for a portion of the tax liability they will pay in the future as a result of the reversal or “turn-around” of these temporary differences. As to the remaining tax liability, in accordance with SFAS No. 71, the Utilities have established regulatory assets for the net revenue requirements to be recovered from customers for the related future tax expense (see Note M). In 1993, the PSC issued a Policy Statement approving accounting procedures consistent with SFAS No. 109 and providing assurances that these future increases in taxes will be recoverable in rates. Accumulated deferred investment tax credits are amortized rat- ably over the lives of the related properties and applied as a reduction to future federal income tax expense. Con Edison and its subsidiaries file a consolidated federal income tax return. The consolidated income tax liability is allocated to each member of the consolidated group using the separate return method. Each member pays tax or receives a benefit based on its own taxable income or loss in accordance with tax sharing agreements between the members of the consolidated group. ## State Income Tax The New York State tax laws applicable to utility companies were changed effective January 1, 2000. Certain revenue- based taxes were repealed or reduced and replaced by a net income-based tax. In June 2001, the PSC issued its Final Order relating to the tax law changes. It authorized each utility to use deferral accounting to record the difference between taxes being collected and the actual tax expense under the new tax law until that expense is incorporated in base rates. Con Edison and its subsidiaries file a combined New York State Corporation Business Franchise Tax Return. Similar to a federal consolidated income tax return, the income of all entities in the combined group is subject to New York State taxation, after adjustments for differences between federal and New York law and apportionment of income among the states in which the company does business. Each member of the group pays or receives a benefit based on its own New York State taxable income or loss. ## Taxes Other than Income Taxes The PSC requires New York regulated utility companies to r ecord gross receipts tax revenues and expenses on a gross income statement presentation basis (i.e., included in both rev- enue and expense). The recovery of these taxes is part of the PSC approved revenue requirement within each of the respec- tive rate agreements. ## Research and Development Costs Research and development costs are charged to operating expenses as incurred. Research and development costs were as follows: <img src='content_image/78958.jpg'> ## Reclassification Certain prior year amounts have been reclassified to conform with the current year presentation.

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infrastructure investment programs while maintaining strong financial performance. ## Preparing for Tomorrow Today We operate our business for the long term. That means we do not — and will not — sacrifice our financial health, or jeopardize the reliable delivery of energy on which our customers so depend, for the sake of short-term gains. Over the decades, Con Edison has established a record of financial health and stability, and of reliable service. We have worked hard to earn and retain the trust and respect of customers, shareholders, and all our stakeholders. Today we’re building, maintaining, and improving an energy system that affirms our commitment to the region’s future — and to our customers’ present needs. We are planning for tomorrow today. As we do so, I know that we can draw upon deep and significant resources. These include the commitment and skills of our employees; the wise counsel of our board of directors; the constructive relationships we have with regulators, public officials, and community leaders; and the strong long-term support of you, our investors. T ogether, we can look forward to the coming years with confidence. Eugene R. McGrath Chairman, President, and Chief Executive Officer <img src='content_image/108411.jpg'>

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## Earnings Per Common Share In accordance with SFAS No. 128, “Earnings per Share,” Con Edison presents basic and diluted earnings per share on the face of its consolidated income statement. Basic earnings per share is calculated by dividing earnings available to common shareholders (“Net Income For Common Stock” on Con Edison’s consolidated income statement) by the weighted average number of Con Edison common shares outstanding during the period. In the calculation of diluted EPS, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities for Con Edison consist of restricted stock and stock options whose exercise price is less than the average market price of the common shares during the reporting period. See Note N. Basic and diluted EPS for Con Edison are calculated as follows: <img src='content_image/125406.jpg'> Stock options to purchase 7 million, 6 million and 5 million Con Edison common shares for the years ended December 31, 2003, 2002 and 2001, respectively, were not included in the respective period’s computation of diluted earnings per share because the exercise price of the option was greater than the average market price of the common shares. ## Stock-Based Compensation Con Edison accounts for its stock-based compensation plans using the intrinsic value model of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. All options and units granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. No compensation expense has been reflected in the income statement for any period presented except as shown below and as described in Note N. The following table illus- trates the effect on net income and earnings per share if Con Edison had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123,” for the purposes of recognizing compensation expense on employee stock-based arrange- ments.

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<img src='content_image/134452.jpg'> These pro forma amounts may not be representative of future year pr o forma amount disclosures due to changes in future market conditions and additional grants in future years.

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## Estimates The preparation of financial statements in conformity with gen- erally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those esti- mates. ## Note B – Regulatory Matters ## Rate and Restructuring Agreements Electric In September 1997, the PSC approved a restructuring agree- ment between Con Edison of New York, the PSC staff and cer- tain other parties (the 1997 Restructuring Agreement). The 1997 Restructuring Agreement provided for a transition to a competitive electric market through the development of a retail access plan, a rate plan for the period ended March 31, 2002, a reasonable opportunity for recovery of “strandable costs” and the divestiture of electric generation capacity by the company. At December 31, 2003, approximately 92,000 Con Edison of New York customers representing approximately 28 percent of aggregate customer peak load were purchasing electricity from other suppliers under the electric retail access program (which is available to all of the company’s electric customers). The company delivers electricity to customers in this program through its regulated transmission and distribution systems. In general, its delivery rates for retail access customers are equal to the full-service rates applicable to other comparable cus- tomers, less an amount reflecting costs otherwise associated with supplying customers with energy and capacity. Pursuant to the 1997 Restructuring Agreement, Con Edison of New York reduced electric rates, on an annual basis, by $129 million in 1998, $80 million in April 1999, $103 million in April 2000 and $209 million in April 2001. The effect of the April 2001 decrease for the rate year ended March 31, 2002 was partially offset by recognition in income of $36 million relating to rates for distributing electricity to customers of the New York Power Authority (NYPA) and $50 million (after-tax) of deferred generation divestiture gain. Rates were also reduced, on an annual basis, effective September 2001 by $313 million to reflect the divestiture of the company’s nuclear generating facility and the Roseton generating plant, which resulted in a reduction in operating and other expenses. See Note J. Pursuant to the 1997 Restructuring Agreement, as amended by a July 1998 PSC order, Con Edison of New York sold approximately 7,780 MW of the approximately 8,300 MW of generating capacity that it owned at the time the 1997 Restructuring Agreement was executed. See Note J. In November 2000, the PSC approved an agreement (the 2000 Electric Rate Agreement) that revised and extended the rate plan provisions of the 1997 Restructuring Agreement. Pursuant to the 2000 Electric Rate Agreement, the company reduced the distribution component of its electric rates by $170 million on an annual basis, effective October 2000. In general under the 2000 Electric Rate Agreement, Con Edison of New York’s base electric transmission and distribu- tion rates will not otherwise be changed during the five-year period ending March 2005 except (i) with respect to certain changes in costs above anticipated annual levels resulting from legal or regulatory requirements, inflation in excess of a 4 per- cent annual rate, property tax changes and environmental cost increases or (ii) if the PSC determines that circumstances have occurred that either threaten the company’s economic viability or ability to provide, safe and adequate service, or render the company’s rate of return unreasonable for the provision of safe and adequate service. Under the 2000 Electric Rate Agreement, as approved by the PSC and as modified in December 2001, 35 percent of any earnings in each of the rate years ending March 2002 through 2005 above a specified rate of return on electric common equity will be retained for shareholders and the balance will be applied for customer benefit as determined by the PSC. In 2002 and 2003, Con Edison of New York established an elec- tric shared earnings reserve of $49 million for the rate year ending March 2003. An electric shared earnings reserve has not been established for the rate year ending March 2004 based on results through the end of calendar year 2003, and there was no sharing of earnings for the rate year ended March 2002. The earnings threshold for rate years ending March 2003 through March 2005 of 11.75 percent can be increased up to 50 basis points. The threshold will increase by 25 basis points if certain demand reductions and supply increases exceed targeted projections and by an additional 25 basis points if certain customer service and reliability objectives are achieved. The company could be required to pay up to $40 million annually in penalties if certain threshold service and reli- ability objectives are not achieved. The company recorded penalties relating to reliability objectives of $8 million and $3 million in 2003 and 2002, respectively. Con Edison of New York’s potential electric strandable costs are utility investments and commitments that may not be recoverable in a competitive electric supply market. The com- pany is recovering these costs in the rates it charges all of its electric customers. The 2000 Electric Rate Agreement contin- ues the stranded cost recovery provisions of the 1997 Restructuring Agreement, stating that Con Edison of New York “will be given a reasonable opportunity to recover stranded and

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strandable costs remaining at March 31, 2005, including a rea- sonable return on investments, under the parameters and dur- ing the time periods set forth therein.” The 2000 Electric Rate Agreement also continues the rate pro- visions pursuant to which Con Edison of New York recovers prudently incurred purchased power and fuel costs from cus- tomers. See “Recoverable Energy Costs” below. In 1997, the PSC approved a four-year O&R restructuring plan effective through December 31, 2002, pursuant to which O&R sold all of its generating assets, made retail access available to all of its electric customers effective May 1999 and reduced its electric rates by $32 million through rate reductions implement- ed in December 1997 and 1998. In 1998 and 1999, similar plans for O&R’s utility subsidiaries in Pennsylvania and New Jersey were approved by state regulators. The Pennsylvania plan provided for retail access for all customers effective May 1999. The New Jersey plan provided for retail access for all customers effective August 1999 and rate reductions of $7 mil- lion effective August 1999, an additional reduction of $3 million effective January 2001 and a final reduction of $6 million effec- tive August 2002. In accordance with the April 1999 PSC order approving Con Edison’s acquisition of O&R, Con Edison of New York reduced its annual electric and gas rates by $12 million and $2 million, respectively, and O&R reduced its annual electric and gas rates by $6 million and $1 million, respectively. In October 2003, the PSC approved agreements among O&R, the staff of the PSC and other parties with respect to the rates O&R can charge to its New York customers for electric service. The electric agreement, which covers the period from July 1, 2003 through October 31, 2006, provides for no changes to electric base rates and contains provisions for the amortization and offset of regulatory assets and liabilities, the net effect of which will reduce electric operating income by a total of $11 million (pre-tax) over the period covered by the agreement. The agreement continues to provide for recovery of energy costs from customers on a current basis and for O&R to share equal- ly with customers earnings in excess of a 12.75 percent return on common equity during the three year period from July 2003 through June 2006. The period from July 2006 through October 2006 will not be subject to earnings sharing. In July 2003, the NJBPU ruled on the petitions of Rockland Electric Company (RECO), the New Jersey utility subsidiary of O&R, for an increase in electric rates and recovery of deferred purchased power costs. The NJBPU ordered a $7 million decrease in RECO's electric base rates, effective August 2003, authorized RECO's recovery of approximately $83 million of previously deferred purchased power costs and associated interest and disallowed recovery of approximately $19 million of such costs and associated interest. At December 31, 2002, the company had accrued a reserve for $13 million of the disal- lowance, and at June 30, 2003 reserved an additional $6 mil- lion for the disallowance. ## Gas In November 2000, the PSC approved an agreement between Con Edison of New York, the PSC staff and certain other par- ties that revised and extended the 1996 gas rate settlement agreement through September 2001. The 1996 agreement, with limited exceptions, continued base rates at September 1996 levels through September 2000. Under the 2000 agreement, the rate of return on gas common equity above which Con Edison of New York shared with cus- tomers 50 percent of earnings was increased from 13 percent to 14 percent. In addition, customer bills were reduced by $20 million during the January through March 2001 period. At December 31, 2001, Con Edison of New York reserved $12 million for customers’ share of gas earnings in excess of the 14 percent threshold for the rate year ended September 2001. No additional amounts were reserved for the rate year ended September 2002. In April 2002, the PSC approved a Con Edison of New York gas rate agreement for the three-year period ending September 30, 2004. The rate agreement reduced gas rates, on an annu- alized basis, by $25 million. During the term of the 2002 agreement, Con Edison of New York retains 100 percent of the rate year return on equity up to 11.5 percent. If the return on equity is between 11.5 percent and 12.0 percent, 100 percent of the incremental return over 11.5 percent will be set aside for customer benefit. If the return on equity is above 12.0 percent, 50 percent of the incremental return over 12.0 percent will be retained by shareholders, and the remaining 50 percent will be shared with customers. Earnings on gas common equity did not exceed the specified rate of return for the rate year ended September 30, 2003. The 2002 agreement also continued the retail access credit for firm transportation customers and other programs designed to increase customer and marketer participation in the gas retail access program, the net costs of which are to be recovered fr om customers. In May 2002, Con Edison of New York established a $36 mil- lion reserve, funded by previously deferred customer credits, to recover unreimbursed costs directly related to the World Trade Center attack.

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In November 2003, Con Edison of New York filed a request with the PSC to increase charges for gas service by $108 mil- lion (9.8 percent increase), effective October 2004. The filing with the PSC reflects a return on equity of 12 percent and an equity ratio of 49.3 percent and assumes firm gas sales and transportation delivery volume increases of 0.8 percent annual- ly. The filing includes a proposal for a multi-year rate plan to continue the proposed level of charges through September 2007 provided charges would be adjusted, effective October 2005 and October 2006, to reflect inflation and changes in pension and health insurance expenses, property taxes, capital expenditures, environmental expenditures and certain other costs. In addition, the filing would continue the provisions pur- suant to which energy costs are recovered from customers on a current basis and the effects of weather-related changes on net income are moderated. In November 2000, the PSC authorized implementation of a gas rate agreement between O&R, the PSC staff, and certain other parties covering the period November 2000 through April 2002. In October 2001, the PSC approved an extension of this agreement covering the period May 2002 through October 2003. With limited exceptions, the agreement provided for no changes to base rates. O&R was permitted to retain, and amortized to income over the period November 2000 through October 2003, $18 million of deferred credits that otherwise would have been credited to customers. In October 2003, the PSC approved agreements among O&R, the PSC staff and other parties with respect to the rates O&R can charge to its New York customers for gas service. The O&R gas agreement, which covers the period from November 1, 2003 through October 31, 2006, provides for increases in gas base rates of $9 million (5.8 percent) effective November 2003, $9 million (4.8 percent) effective November 2004 and $5 million (2.5 percent) effective November 2005. The O&R gas agreement also continues a weather normalization clause that moderates, but does not eliminate, the effect of weather-relat- ed changes on net income. The agreement continues to pro- vide for recovery of energy costs from customers on a current basis and for O&R to share equally with customers earnings in excess of an 11 percent return on common equity. The agree- ment also contains incentives under which, among other things, the company earns additional amounts based on attaining specified targets for customer subscription to its retail access programs and the achievement of certain net revenue targets for interruptible sales and transportation customers. ## Steam In November 2000, the PSC authorized implementation of an agreement between Con Edison of New York, the PSC staff and certain other parties, that provided for a $17 million steam rate increase in October 2000 and, with limited exceptions, no further changes in steam rates prior to October 2004. The company is required to share with customers 50 percent of any earnings for any rate year covered by the agreement above a specified rate of return on steam common equity (11.0 percent for the first rate year, the 12-month period ended September 2001; 10.5 percent thereafter if the repowering of its steam-electric generating plant is not completed). The net revenue effect associated with sales increases related to colder than normal winter weather (November through April) will be excluded from any earnings measurement. Earnings on steam common equity did not exceed the specific rates of return for the rate years ended September 30, 2001, 2002 or 2003. Under the steam rate agreement, upon completion of the proj- ect to add incremental generating capacity at the East River steam-electric generating plant, the net benefits of the project (including the net after-tax gain from the sale of a nine-acre development site in mid-town Manhattan along the East River) allocable to steam operations will inure to the benefit of steam customers. It is now expected that this project will not be completed until after the expiration of the current steam rate agreement. Con Edison of New York believes the same provi- sions would apply in the next rate agreement. The agreement continues the rate provisions pursuant to which Con Edison of New York recovers prudently incurred pur- chased steam and fuel costs and requires Con Edison of New York to develop a strategy for hedging price variations for a portion of the steam produced each year. In November 2003, Con Edison of New York filed a request with the PSC to increase charges for steam service by $129 million (14.6 percent increase), net of an estimated $64 million of expected fuel savings associated with the ongoing East River Repowering Project, effective October 2004. The filing with the PSC reflects a return on equity of 12 percent and an equity ratio of 49.3 percent. The filing includes a proposal for a multi-year rate plan to continue the proposed level of charges through September 2007 provided charges would be adjusted, effective October 2005 and October 2006, to reflect inflation and changes in pension and health insurance expenses, prop- erty taxes, capital expenditures, environmental expenditures and certain other costs. In addition, the filing would continue the provisions pursuant to which fuel and purchased power costs are recovered from customers on a current basis.

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## Regulatory Assets and Liabilities Regulatory assets and liabilities at December 31, 2003 and 2002 wer e comprised of the following items: <img src='content_image/93257.jpg'>

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## Note C – Capitalization ## Common Stock At December 31, 2003 and 2002, Con Edison owned all of the issued and outstanding shares of common stock of the Utilities. Con Edison of New York owns $962 million of Con Edison stock, which it purchased in 1998 and 1999 in connection with Con Edison’s stock repurchase plan. ## Capitalization of Con Edison The outstanding capitalization for Con Edison is shown on its Consolidated Statement of Capitalization, and includes the Utilities’ outstanding preferred stock and debt. ## Preferred Stock of Utility Subsidiaries As of December 31, 2003, 1,915,319 shares of Con Edison of New York’s $5 Cumulative Preferred Stock (the “$5 Preferred”) and 375,626 shares of its Cumulative Preferred Stock ($100 par value) were outstanding. Dividends on the $5 Preferred stock are $5 per share per annum, payable quarterly, and dividends on the Cumulative Preferred Stock are $4.65 per share per annum, payable quarterly. The preferred dividends must be declared by Con Edison of New York’s Board of Trustees to become payable. See “Dividends” below. With respect to any corporate action to be taken by a vote of shareholders of Con Edison of New York, Con Edison (which owns all of the 235,488,094 shares of Con Edison of New York’s common shares that are outstanding) and the holders of the $5 Preferred are each entitled to one vote for each share held. Except as otherwise required by law, holders of the Cumulative Preferred Stock have no right to vote; provided, however, that if the $5 Preferred is no longer outstanding, the holders of the Cumulative Preferred Stock are entitled to one vote for each share with respect to any corporate action to be taken by a vote of the shareholders of Con Edison of New York. In addition, if dividends are in arrears for certain periods, the holders are entitled to certain rights with respect to the election of Con Edison of New York's Trustees. Without the consent of the holders of the Cumulative Preferred Stock, Con Edison of New York may not create or authorize any kind of stock ranking prior to the Cumulative Preferred Stock or, if such actions would affect the holders of the Cumulative Preferred Stock adversely, be a party to any consolidation or merger, create or amend the terms of the Cumulative Preferred Stock or reclassify the Cumulative Preferred Stock. Con Edison of New York may redeem the $5 Preferred at a redemption price of $105 per share and the Cumulative Preferred Stock at a redemption price of $101 per share (in each case, plus accrued and unpaid dividends). In the event of the dissolution, liquidation or winding up of the affairs of Con Edison of New York, before any distribution of capital assets could be made to the holders of the company’s common stock, the holders of the $5 Preferred and the Cumulative Preferred Stock would each be entitled to receive $100 per share, in the case of an involuntary liquidation, or an amount equal to the redemption price per share, in the case of a voluntary liquidation, in each case together with all accrued and unpaid dividends. ## Dividends In accordance with PSC requirements, the dividends that the Utilities may pay are limited to not more than 100 percent of their respective income available for dividends calculated on a two-year rolling average basis. Excluded from the calculation of “income available for dividends” are non-cash charges to income resulting from accounting changes or charges to income resulting from significant unanticipated events. The restriction also does not apply to dividends paid in order to transfer to Con Edison proceeds from major transactions, such as asset sales, or to dividends reducing each utility subsidiary's equity ratio to a level appropriate to its business risk. In addition, no dividends may be paid, or funds set apart for payment, on Con Edison of New York’s common stock until all dividends accrued on the $5 Preferred Stock and Cumulative Preferred Stock have been paid, or declared and set apart for payment. ## Long-term Debt Long-term debt maturing in the period 2004-2008 is as follows: <img src='content_image/80605.jpg'> Long-term debt includes notes issued by O&R to the New York State Energy Research and Development Authority (NYSERDA) for the net proceeds of NYSERDA’s $55 million aggregate prin- cipal amount of Series 1994A and $44 million aggregate princi- pal amount of Series 1995A Pollution Control Refunding Revenue Bonds. The interest rate determination method for this debt is subject to change in accordance with the related indenture, and the debt currently bears interest at a weekly rate determined by its remarketing agent. The debt is subject to optional and, in certain circumstances, mandatory tender for purchase by O&R. See “Interest Rate Hedging” in Note P. Long-term debt is stated at cost, which, as of December 31, 2003, approximates fair value (estimated based on current rates for debt of the same remaining maturities), except for

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$225 million of Con Edison of New York’s tax-exempt financing. See “Interest Rate Hedging” in Note P. At December 31, 2003, long-term debt includes $23 million of mortgage bonds collateralized by substantially all the utility plant and other physical property of O&R’s New Jersey and Pennsylvania utility subsidiaries, $141 million of non-recourse debt of a Con Edison Development subsidiary collateralized by a pledge of a New Jersey power plant, a related power pur- chase agreement and project assets, and $339 million of debt secured by a New Hampshire power plant and related assets. See Note T. At December 31, 2003, restricted cash relating to the operations of the New Jersey power plant was $17 million. ## Significant Debt Covenants There are no significant debt covenants under the financing arrangements for the debentures of Con Edison, Con Edison of New York or O&R, other than obligations to pay principal and interest when due and covenants not to consolidate with or merge into any other corporation unless certain conditions are met, and no cross default provisions. The tax-exempt financing arrangements of the Utilities are subject to these covenants and the covenants discussed below. The tax-exempt financing arrangements involved the issuance of uncollateralized promissory notes of the Utilities to NYSER- DA in exchange for the net proceeds of a like amount of tax- exempt bonds with substantially the same terms sold to the public by NYSERDA. The tax-exempt financing arrangements include covenants with respect to the tax-exempt status of the financing, including covenants with respect to the use of the facilities financed. The failure to comply with these covenants would, except as otherwise provided, constitute an event of default with respect to the debt to which such provisions applied. The arrangements for certain series of Con Edison of New York’s tax-exempt financing (Series 1999A, 2001A and 2001B), aggregating $615 million, and O&R’s tax-exempt financing (Series 1994A and Series 1995A), aggregating $99 million, include provisions for the maintenance of liquidity and credit facilities, the failure to comply with which would, except as otherwise provided, constitute an event of default with respect to the debt to which such provisions applied. Additional series of Con Edison of New York tax-exempt financing issued in 2004 (Series 2004A and 2004B), aggregat- ing $245 million, also include such covenants and provisions. If an event of default were to occur, the principal and accrued interest on the debt to which such event of default applied might and, in certain circumstances would, become due and payable immediately. The liquidity and credit facilities currently in effect for the tax- exempt financing include covenants that the ratio of debt to total capital of the obligated utility will not at any time exceed 0.65 to 1 and that, subject to certain exceptions, the utility will not mortgage, lien, pledge or otherwise encumber its assets. Certain of the facilities also include as events of default, defaults in payments of other debt obligations in excess of specified levels ($100 million for Con Edison of New York; $13 million for O&R). ## Note D – Short-Term Borrowing At December 31, 2003, Con Edison and the Utilities had com- mercial paper programs under which short-term borrowings are made at prevailing market rates, totaling $950 million. These programs are supported by revolving credit agreements with banks. At December 31, 2003, $42 million was outstanding under Con Edison’s $350 million program, $99 million was out- standing under Con Edison of New York’s $500 million pro- gram, and $15 million was outstanding under O&R’s $100 mil- lion program, at a weighted average interest rate of 1.0 per- cent. The Utilities change the amount of their programs from time to time, subject to FERC-authorized limits of $1 billion for Con Edison of New York and $150 million for O&R. Bank commitments under the revolving credit agreements total $950 million, of which $563 million was renewed in November 2003. The commitments may terminate upon a change of con- trol of Con Edison, and borrowings under the agreements are subject to certain conditions, including that the ratio (calculated in accordance with the agreements) of debt to total capital of the borrower not at any time exceed 0.65 to 1. At December 31, 2003, this ratio was 0.52 to 1 for Con Edison, 0.50 to 1 for Con Edison of New York and 0.46 to 1 for O&R. Borrowings under the agreements are not subject to maintenance of credit rating levels. The fees charged the Companies for the revolv- ing credit facilities and borrowings under the agreements reflect their respective credit ratings. See Note U for information about short-term borrowing between related parties, which the FERC has authorized. ## Note E – Pension Benefits Con Edison maintains a tax-qualified, non-contributory pension plan that covers substantially all employees of Con Edison of New York and O&R and certain employees of other Con Edison subsidiaries. The plan is designed to comply with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Investment gains and losses are fully recognized in expense over a 15-year period. Other actuarial gains and losses are fully recognized in expense over a 10-year period. This amortization is in accordance with the Statement of Policy issued by the PSC and is permitted under SFAS No. 87, “Employers’

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Accounting for Pensions,” which provides a “corridor method” for moderating the effect of investment gains and losses on pension expense, or alternatively, allows for any systematic method of amortization of unrecognized gains and losses that is faster than the corridor method and is applied consistently to both gains and losses. Consistent with the provisions of SFAS No. 71 and its rate agreements, O&R defers for future recovery any difference between expenses recognized under SFAS No. 87 and the current rate allowance for its New York operations. Con Edison uses a measurement date of December 31 for its pension plan.

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## Net Periodic Benefit Cost The components of the Companies’ net periodic benefit costs for 2003, 2002 and 2001 were as follows: <img src='content_image/2290.jpg'> *Relates to increases in Con Edison of New York’s pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program. ## Funded Status The funded status at December 31, 2003, 2002 and 2001 was as follows: <img src='content_image/2291.jpg'> * Being amortized over approximately 15 years.

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## On It Every Day ## Con Edison Delivers Every hour of every day, the metropoli- tan New York City area, the world’s most demanding marketplace, relies on the power Con Edison provides. And every hour of every day, it is Con Edison’s job to deliver that power. This is a responsibility we’ve carried out successfully for more than 180 years. The electronic landscape of our lives continues to change. In our homes and workplaces, at our favorite stores and children’s schools, even in the way we pay our bills and move from place to place — more electronic equipment and devices are being used than at any time in the past. In 2003, for example, the number of high- speed lines connecting homes and businesses to the Internet increased 45 percent nationwide. And in the last three years an estimated 80 million electronic game systems were purchased in the United States. The computers, printers, home enter- tainment systems, air conditioners, refrigerators, hair dryers, and other devices that are so integral to our quality of life require a reliable supply of energy Such a supply is equally important to meet the needs of new businesses putting down roots in our area, for the new homes and apart- ments that house a steadily increasing population, and for developers plan- ning large-scale r esidential and com- mercial projects. As the Public Service Commission recently noted, “it is indis- putable that Con Edison provides a vital foundation to the economies of the city the state, and the nation.” According to many indicators, the economy of our region is turning the corner. Businesses ar e hiring in New York City and the surr ounding area. Residential property values in New York City are more than 20 percent higher than a year ago, and the demand for housing has increased throughout the city as well as in Westchester Orange, Rockland, and Bergen counties. Steady increases in construction, retail, and tourism are helping drive this gr owth. The large number of commercial build- ing projects throughout our service area vividly illustrates the continuing development of the re gion — and the demand for energy it represents. These include a 48-story office build- PA Consulting Group recognizes Con Edison’s sustained leadership and achievement in the area of electric reliability. Working in the most challenging urban conditions, the company consis- tently provides its customers with the highest levels of service. ## Derek HasBrouck, Senior Partner, PA Consulting Group ing at 7 Times Square in Manhattan, a 32-story state court building now rising in downtown Brooklyn, and the $350 million, residential-retail White Plains City Center. In Rockland County, construction of a $100 million research and development facility for Avon Products, Inc., is underway. Each new project means new opportunities for our customers and new business for Con Edison. <img src='content_image/49491.jpg'>

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The amounts recognized in the consolidated balance sheet at December 31, 2003 and 2002 were as follows: <img src='content_image/121136.jpg'>

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## Assumptions The actuarial assumptions were as follows: <img src='content_image/44856.jpg'> The expected return assumption reflects anticipated returns on the plan's current and future assets. The Companies use his- torical investment data as well as the plan's target asset class and investment management mix to determine the expected return on plan assets. This analysis incorporates such factors as real return, inflation, and expected investment manager per- formance for each broad asset class applicable to the plan. Historical plan performance and peer data are also reviewed to check for reasonability and appropriateness. ## Expected Contributions Based on current estimates, the Companies are not required under funding regulations and laws to make any contributions to the pension plan during 2004. O&R and Con Edison’s unregulated subsidiaries expect to make discretionary contribu- tions of $22 million and $2 million, respectively, in 2004. ## Plan Assets The asset allocation for the pension plans at the end of 2003, 2002 and 2001, and the target allocation for 2004, by asset category, are as follows: <img src='content_image/44857.jpg'> Con Edison has established a pension trust for the investment of assets to be used for the exclusive purpose of providing retirement benefits to participants and beneficiaries. Pursuant to resolutions adopted by Con Edison’s Board of Directors, the Management Development and Compensation Committee of the Board of Directors (the Committee) has gen- eral oversight responsibility for Con Edison’s pension and other employee benefit plans. The plans’ Named Fiduciaries have been granted the authority to control and manage the opera- tion and administration of the plans, including overall responsi- bility for the investment of assets in the trust and the power to appoint and terminate investment managers. The Named Fiduciaries consist of Con Edison’s chief executive, chief finan- cial and chief accounting officers and others the Board of Directors may appoint in addition to or in place of the designat- ed Named Fiduciaries. The long-term investment objective for the pension trust is to maximize the total real return on trust assets while limiting risk, reflected in volatility of returns, to prudent levels. To that end, the investment strategy focuses on preserving and enhancing the value of assets in real terms over time through selection of investment managers within a framework that provides diversifi- cation between and among asset classes, investment styles, and managers. The target asset allocation is reviewed periodi- cally based on asset/liability studies and may be modified as appropriate. The target asset allocation for 2004 reflects the results of such a study conducted in 2003. Individual managers operate under written guidelines provided by Con Edison, which cover such areas as investment objec- tives, performance measurement, permissible investments, investment restrictions, trading and execution, and communi- cation and reporting requirements. Manager performance, total fund performance, and compliance with asset allocation guide- lines are monitored on an ongoing basis, and reviewed by the Named Fiduciaries and reported to the Committee on a quar- terly basis. A change in fund managers and/or rebalancing of the portfolio is undertaken as appropriate. The Named Fiduciaries approve such changes, which are also reported to the Committee. The Companies also offer a defined contribution savings plan that covers substantially all employees and made contributions to the plan as follows: <img src='content_image/44858.jpg'> ## Note F – Other Postretirement Benefits The Utilities have contributory comprehensive hospital, medical and prescription drug programs for all retirees, their depend- ents and surviving spouses.

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Con Edison of New York also has a contributory life insurance program for bargaining unit employees and provides basic life insurance benefits up to a specified maximum at no cost to retired management employees. O&R has a non-contributory life insurance program for retirees. Certain employees of other Con Edison subsidiaries are eligible to receive benefits under these programs. The company has reserved the right to amend or terminate these programs. Investment plan gains and losses are fully recognized in expense over a 15-year period for the Utilities. Other actuarial gains and losses are fully recognized in expense over a 10-year period. For O&R, plan assets are used to pay benefits and expenses for participants who retired on or after January 1, 1995. O&R pays benefits for other participants who retired prior to 1995. Plan assets include amounts owed by the plan trust to O&R of $1 million in 2003 and 2002, and less than $1 million in 2001. Consistent with the provisions of SFAS No. 71, O&R defers for future recovery any difference between expenses recognized under SFAS No. 106, “Employers' Accounting for Postretirement Benefits Other Than Pensions,” and the current rate allowances for its Pennsylvania and New York operations.

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## Net Periodic Benefit Cost <img src='content_image/67467.jpg'> ## Funded Status The funded status of the programs at December 31, 2003, 2002 and 2001 was as follows: <img src='content_image/67471.jpg'>

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## Assumptions The actuarial assumptions were as follows: <img src='content_image/86289.jpg'> Refer to Note E for descriptions of the basis for determining the expected return on assets and investment policies and strategies. The health care cost trend rate used to determine net periodic benefit cost for the year ended December 31, 2003 was 9.00%. This rate was assumed to decrease gradually to 4.75% for 2009 and remain at that level thereafter. The health care cost trend rate used to determine benefit obligations at December 31, 2003 was 9.00%. This rate was assumed to decrease gradually to 4.50% for 2009 and remain at that level thereafter. A one-percentage point change in the assumed health care cost trend rate would have the following effects at December 31, 2003: <img src='content_image/86290.jpg'> ## Expected Contributions Based on current estimates, Con Edison of New York and O&R expect to contribute $27 million and $8 million, respectively, to the other postretirement benefit plans in 2004. ## Plan Assets The asset allocation for Con Edison of New York’s other postretirement benefit plans at the end of 2003, 2002 and 2001, and the target allocation for 2004, by asset category, ar e as follows: <img src='content_image/86288.jpg'> The asset allocation for O&R’s other postretirement benefit plans at the end of 2003, 2002 and 2001 was approximately 90% and 10% in debt and equity securities, respectively. The company plans to align its asset allocation to the target shown above. Con Edison has established postretirement health and life insurance benefit plan trusts for the investment of assets to be used for the exclusive purpose of providing other postretire- ment benefits to participants and beneficiaries. Refer to Note E for a discussion of Con Edison’s investment strategy . ## Effect of Medicare Prescription Subsidy In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. As permitted by the FASB, the Companies have elected not to defer recognition of this Act. See Note V. To reflect the effect of the Act on the plans, the 2003 year-end accumulated postretirement benefit obligations were reduced for Con Edison, Con Edison of New York and O&R by $128 million, $114 million and $14 million, respectively, and the 2004 after-tax postretirement benefit costs are estimated to be reduced by $10 million for Con Edison, $9 million for Con Edison of New York and $1 million for O&R. The Companies will recognize the 28% subsidy (reflected as an unrecognized net gain to each plan) as an offset to plan costs. The 28% sub- sidy is expected to reduce prescription drug plan costs by about 25%. The Companies’ actuaries have determined that each prescription drug plan provides a benefit that is at least actuarially equivalent to the Medicare prescription drug plan and projections indicate that this will be the case for 20 years. (For a small number of pension recipients, whose benefits total less than $12,000 per year, this will be the case indefinitely.) When the plans’ benefits are no longer actuarially equivalent to the Medicare plan, 25% of the retirees in each plan are assumed to begin to decline participation in the Companies’ pr escription programs. Specific authoritative guidance on the accounting for the federal subsidy is pending and guidance, when issued, could require a change to previously reported information.

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## Note G – Environmental Matters ## Superfund Sites Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investi- gation and remediation costs (which includes costs of demoli- tion, removal, disposal, storage, replacement, containment and monitoring) and environmental damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas sites, are referred to herein as “Superfund Sites.” For Superfund Sites where there are other potentially responsi- ble parties and the Utilities are not managing the site investiga- tion and remediation, the accrued liability represents an esti- mate of the amount the Utilities will need to pay to discharge their related obligations. For Superfund Sites (including the manufactured gas sites) for which one of the Utilities is manag- ing the investigation and remediation, the accrued liability rep- resents an estimate of the undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites in light of the information available, applicable remediation standards and experience with similar sites. For the 12 months ended December 31, 2003, Con Edison of New York and O&R incurred approximately $21 million and $5 million, respectively, for environmental remediation costs. No insurance recoveries were received. For the 12 months ended December 31, 2002, Con Edison of New York and O&R incurred approximately $22 million and $2 million, respectively, for environmental remediation costs, and O&R received insurance recoveries of $7 million. The accrued liabilities and regulatory assets related to Superfund Sites for each of the Companies at December 31, 2003 and December 31, 2002 were as follows: <img src='content_image/107936.jpg'> Most of the accrued Superfund Site liability relates to Superfund Sites that have been investigated, in whole or in part. As investigations progress on these and other sites, the Companies expect that additional liability will be accrued, the amount of which is not presently determinable but may be material. The Utilities are permitted under their current rate agreements to recover or defer as regulatory assets (for subse- quent recovery through rates) certain site investigation and re mediation costs. Con Edison of New York estimated in 2002 that for its manu- factured gas sites, many of which have not been investigated, its aggregate undiscounted potential liability for the investiga- tion and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range from approximately $65 million to $1.1 billion. O&R estimated in 2002 that for its manufactured gas sites the aggregate undis- counted potential liability for the remediation of such contami- nants could range from approximately $25 million to $95 mil- lion. These estimates were based on the assumption that there is contamination at each of the sites and additional assump- tions regarding the extent of contamination and the type and extent of remediation that may be required. Actual experience may be materially different. ## Asbestos Proceedings Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining thousands of suits total billions of dollars but the Companies believe that these amounts are greatly exaggerated, as experienced through the disposition of previous claims. Con Edison of New York estimated in 2002 that its aggregate undiscounted potential liability for these suits and additional such suits that may be brought over the next 50 years ranges from approximately $38 million to $162 million (with no amount within the range considered

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more reasonable than any other). The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, workers’ compensation administrative proceedings have been commenced, wherein current and former employ- ees claim benefits based on alleged disability from exposure to asbestos. Con Edison of New York is permitted under its current rate agreements to defer as regulatory assets (for subsequent recovery through rates) liabilities incurred for its asbestos law- suits and workers’ compensation claims. O&R defers as regu- latory assets (for subsequent recovery through rates), liabilities incurred for asbestos claims by employees relating to its divested generating plants. The accrued liability for asbestos suits and workers’ compen- sation proceedings (including those related to asbestos expo- sure) and the amounts deferred as regulatory assets for each of the Companies at December 31, 2003 and December 31, 2002 were as follows: <img src='content_image/30655.jpg'> ## Note H – Impairment of Long-Lived Assets In 2003, continuing adverse market conditions affecting Con Edison’s unregulated telecommunications and generation businesses led to the testing of their assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” For Con Edison Communications, it was determined that the book value of its assets were likely not fully recoverable. Therefore, in accordance with SFAS No. 144, Con Edison Communications reduced its assets to their fair value by recording a pre-tax impairment charge of $140 million. At the same time, $1 million (pre-tax) of capitalized interest at Con Edison, which was relat- ed to the investment in Con Edison Communications, was deemed impaired. For Con Edison Development, the analysis resulted in a total pre-tax impairment charge of $18 million related to two combustion turbines and its equity investment in a 42 MW electric generating plant in Guatemala. Estimated fair values were determined based upon market prices of compa- rable assets. ## Note I – Non-Utility Generators The Utilities have long-term contracts with non-utility genera- tors (NUGs) for electric generating capacity. Assuming per- formance by the NUGs, the Utilities are obligated over the terms of the contracts (which extend for various periods, up to 2036) to make capacity and other fixed payments. For the years 2004 through 2008, the capacity and other fixed payments under the contracts are estimated to be the following: <img src='content_image/30656.jpg'> Such payments gradually increase to approximately $650 mil- lion in 2013, and thereafter decline significantly. For energy delivered under most of these contracts, the Utilities are obli- gated to pay variable prices that are estimated to be lower overall than expected market levels. In addition, for energy delivered under one of the contracts (for 20 MW), O&R is obli- gated to pay variable prices that are currently estimated to be above market levels. At December 31, 2003, the aggregate capacity produced under the NUG contracts was approximately 3,200 MW, including capacity (commitment ends 2005) from the approxi- mately 1,000 MW nuclear generating unit that Con Edison of New York sold in 2001. For energy from the unit, the company has a commitment (which ends in 2004) under which it is obli- gated to pay an average annual price of 3.9 cents per kWh. From time to time, certain parties have petitioned governmental authorities to close this plant. If this were to occur, the owner would not be obligated to provide the company with replace- ment power. Additionally, the contracts include 500 MW of energy and capacity that the company agreed to purchase annually for 10 years from a plant in Queens County, New York that is scheduled to begin operation in 2006. Under the terms of its electric rate agreements, Con Edison of New York is recovering in rates the charges it incurs under mandated contracts with NUGs. The 2000 Electric Rate Agreement provides that, after March 31, 2005, Con Edison of New York will be given a reasonable opportunity to recover, through a non-bypassable charge to customers, the amount, if any, by which the actual costs of its purchases under the contracts exceed market value. The PSC specifically approved rate recovery of the nuclear capacity and energy purchases. O&R recovers costs under its NUG contracts pursuant to rate

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provisions approved by the state public utility regulatory author- ity having jurisdiction. ## Note J – Generation Divestiture Pursuant to restructuring agreements approved by the PSC (See “Rate and Restructuring Agreements” in Note B), the Utilities have divested all of their electric generating assets other than approximately 630 MW of Con Edison of New York’s steam/electric generating stations located in New York City. Con Edison of New York sold approximately 6,300 MW of elec- tric generating assets in 1999 and approximately 1,480 MW in 2001. O&R completed the sale of all of its generating assets prior to the completion of Con Edison’s purchase of O&R in 1999. Pursuant to the 2000 Electric Rate Agreement, the net after-tax gain (including interest accrued thereon) from Con Edison of New York’s 1999 generation divestiture was applied in 2000 as follows: $188 million was credited against electric distribution plant balances; $107 million was used to offset a like amount of regulatory assets (including deferred power contract termina- tion costs); $50 million (after-tax) was deferred for recognition in income during the 12 months ended March 31, 2002; and $12 million was deferred to be used for low-income customer pro- grams. In addition, $30 million of employee retirement incentive expenses related to the generation divestiture was deferred for amortization over 15 years and $15 million of such expenses was charged to income in 2000. The 2000 Electric Rate Agreement provides for Con Edison of New York to amortize to income a $74 million regulatory asset representing incremental electric capacity costs incurred prior to May 2000 to purchase capacity from the buyers of the gen- erating assets the company sold in 1999. Amortization to income will take place in years in which the company would otherwise share excess earnings with customers, in amounts corresponding to the company’s share of the excess earnings. By March 2005, any remaining unrecovered balance will be charged to expense. Of this amount, $30 million was charged to expense in 2002 and $15 million was expensed in 2001. In January 2001, Con Edison of New York completed the sale of its 480 MW interest in the jointly-owned Roseton generating station for $138 million. The gain from the sale, which has been deferred as a regulatory liability, was $55 million at December 31, 2003, and $64 million at December 31, 2002. In September 2001, the company completed the sale of its approximately 1,000 MW nuclear generating plant and related assets for $505 million. The proceeds were net of a $74 million payment to increase the value of the nuclear decommissioning trust funds being transferred to $430 million (the amount pro- vided for in the sales agreement). The net after-tax loss from the sale was deferred as a regulatory asset. The company was authorized, effective September 2001, to continue to recover the cost of the nuclear assets, which is included in rates, and to amortize the regulatory asset, until the loss on divestiture has been recovered. The unrecovered amount was $159 mil- lion at December 31, 2003 and $215 million at December 31, 2002. The 2000 Electric Agreement provides that the company “will be given a reasonable opportunity to recover stranded and strandable costs remaining at March 31, 2005, including a rea- sonable return on investments.” ## Note K – Leases Con Edison’s subsidiaries lease electric generating and gas dis- tribution facilities, other electric transmission and distribution facilities, office buildings and equipment. In accordance with SFAS No. 13, these leases are classified as either capital leas- es or operating leases. Most of the operating leases provide the option to renew at the fair rental value for future periods. Generally, it is expected that leases will be renewed or replaced in the normal course of business. Capital leases: For ratemaking purposes capital leases are treated as operating leases; therefore, in accordance with SFAS No. 71, the amortization of the leased asset is based on the rental payments recovered through rates. The following assets and obligations under capital leases are included in the accompanying consolidated balance sheet at December 31, 2003 and 2002: <img src='content_image/53352.jpg'> The accumulated amortization of the capital leases for Con Edison and Con Edison of New York was $32 million and $29 million as of December 31, 2003 and 2002, respectively.

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The future minimum lease commitments for the above assets are as follows: <img src='content_image/49248.jpg'> In November 2000, a Con Edison Development subsidiary entered into an operating lease arrangement with a limited partnership to finance construction of a 525 MW gas-fired electric generating facility in Newington, New Hampshire (Newington Project). See Note T. Operating leases: The future minimum lease commitments under Con Edison’s non-cancelable operating lease agree- ments, excluding the Newington Project, are as follows: <img src='content_image/49246.jpg'> As part of a broad initiative, the Internal Revenue Service is reviewing certain categories of transactions. Among these are transactions in which a taxpayer leases property and then immediately subleases it back to the lessor (termed “Lease In/Lease Out,” or LILO transactions). In 1997 and 1999, Con Edison’s unregulated subsidiaries invested $93 million in two LILO transactions, involving gas distribution and electric gener- ating facilities in the Netherlands, which represented approxi- mately 36 percent of the purchase price; the remaining 64 per- cent or $166 million was furnished by third-party financing in the form of long-term debt that provides no recourse against the subsidiaries and is primarily secured by the assets, except for guarantees of up to $10 million of the debt. Approximately half of these guarantees expired prior to December 31, 2002 and the other half will expire at the end of May 2004. At December 31, 2003, the company’s investment of $202 million in these leveraged leases net of deferred tax liabilities of $142 million amounted to $60 million, which was included at cost on Con Edison’s consolidated balance sheet. On audit, the Internal Revenue Service has proposed that the tax losses rec- ognized in connection with the 1997 LILO transaction be disal- lowed for the tax year 1997. Con Edison believes its position is correct and is currently appealing the auditors’ proposal within the Internal Revenue Service. The estimated total tax savings from the two LILO transactions during the tax years 1997 through 2003, in the aggregate, was $100 million. ## Note L – Goodwill and Intangible Assets On January 1, 2002, Con Edison adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 pro- vides that goodwill (i.e., the excess of cost over fair value of the net assets of a business acquired) and intangible assets with indefinite useful lives will no longer be amortized, but instead be tested for impairment at least annually. Other intangible assets will continue to be amortized over their finite useful lives. In 2002, the company recognized a loss of $34 million ($20 million after-tax) as an offset to goodwill recorded by Con Edison Development relating to certain of its generation assets. During 2003, Con Edison completed the impairment test for its goodwill of $406 million and determined that it was not impair ed. Had Con Edison been accounting for goodwill under SFAS No. 142 for all periods presented, its income and earnings per share would have been as follows: <img src='content_image/49247.jpg'>

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Con Edison’s intangible assets consist of the following: <img src='content_image/127607.jpg'> The power purchase agreement was written up to its fair value of $112 million upon implementation of new FASB guidance on derivatives (Derivatives Implementation Group Issue C20), and is being amortized over its remaining useful life of 11 years. See Note V. The amortization expense was $6 million and $4 million for the years ended December 31, 2003 and 2002 respectively, and is expected to be $10 million annually for the years 2004-2008. ## Note M – Income Tax The components of income tax are as follows: <img src='content_image/127608.jpg'>

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During the next five years, Con Edison will make the significant capital invest- ments necessary to upgrade our electric system. Our investment in critical infrastructure is imperative if we are to meet — and meet reliably — the increasing demand for energy in our service area. A reliable, safe energy supply is crucial to the region’s economic growth. The careful, focused investments we are now making in our infrastructure reflect both Con Edison’s deep experience and understanding of our region’s needs and a determination to ensure that we continue to success- fully deliver power to the world’s most dynamic and demanding marketplace. ## On It in the Field ## Accomplishments in Electric Operations In 2003, as our customers found new and greater uses for electricity, Con Edison of New York’s weather- adjusted peak load rose to 12,600 megawatts, up 200 megawatts from 2002. Adjusted for weather, our peak load is expected to increase by an average annual rate of 1.6 percent over the next five years. To meet this increased demand and ensure our ability to meet future demand, in 2003 we invested more than $660 million to enhance the reliability and security of our electric transmission and distribu- tion systems. As we do each year, we invested significant resources to prepar for the summer peak load season. In 2003, we re placed 158 miles of underground and aerial feeder cables, replaced 345 thermally sensitive cable joints, installed 211 new transformers, and upgraded several substations. Each year Con Edison invests in research and development projects that ar closely integrated with the company’ business objectives and strategy. We have been especially successful in identifying and developing innovative uses for new technologies and tools that meet the unique needs of our densely populated region. By using advanced analytic systems, such as computer models that evaluate individual components within our system, we manage resources more effectively. For example, we developed the Poly Voltage Load Flow (PVLF) program to analyze how electric usage impacts network components under both normal and emergency operating conditions. The analysis helps us to determine the resiliency of electric networks during consecutive, hot summer days. Such efforts help us channel resources so that they improve overall perform- ance and reliability. Every year, a large portion of our investment is devoted to ensuring that our system can accommodate growth. We are preparing our New York City transmission system so that it will be ready to accept power from the new generating plants that are coming on line in our service area. We’re also working to build the delivery infrastruc- ture needed for both new customers and existing customers who are using more energy. Our major projects pro- vide load relief for existing facilities that are near or have reached capacity. One such facility is a new substation <img src='content_image/76505.jpg'>

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The tax effect of temporary differences, which gave rise to deferred tax assets and liabilities, is as follows: <img src='content_image/63674.jpg'> Reconciliation of the difference between income tax expense and the amount computed by applying the prevailing statutory income tax rate to income before income taxes is as follows: <img src='content_image/63673.jpg'>

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## Note N – Stock-Based Compensation Under Con Edison’s Stock Option Plan (the Plan), options may be granted to officers and key employees of Con Edison and its subsidiaries for up to a total of 10 million shares of Con Edison’s common stock. Generally options vest three years after the grant date and expire 10 years from the grant date. As permitted by SFAS No. 123, the Companies elected to fol- low APB No. 25 and related interpretations in accounting for their employee stock options. Under the intrinsic value method of APB No. 25, no compensation expense is recognized because the exercise price of Con Edison’s employee stock options equals the market price of the underlying stock on the date of grant. Under the Plan, exercise of Con Edison’s employee stock options requires payment in full of the exercise price, unless the committee of Con Edison’s Board of Directors that administers the Plan determines that options may be settled by paying to the option holder the difference between the fair market value of the common stock subject to the option and the exercise price (cash settlement). In 2002, to ensure that the exercise of currently exercisable options would comply with certain techni- cal requirements of the Sarbanes-Oxley Act of 2002 applicable to certain officers of the Companies, the committee determined that 1996 and 1997 stock options covering 295,500 shares of common stock held by those officers may be settled by the cash settlement method. Charges to expense are recognized with respect to these options to the extent the fair market value of the common shares changes. The following table summarizes the expense recognized in relation to the stock options subject to cash settlement: <img src='content_image/93478.jpg'> Disclosure of pro forma information regarding net income and earnings per share is required by SFAS No. 123. See “Stock- Based Compensation” in Note A for an illustration of the effect on net income and earnings per share if the Companies had applied the fair value recognition provisions of SFAS No. 123 to their stock-based employee compensation. The fair values of options granted in 2003, 2002 and 2001 are $4.30, $6.37 and $5.23 per share, respectively. These values were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: <img src='content_image/93477.jpg'>

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A summary of changes in the status of stock options awarded to of ficers and employees of the Companies as of December 31, 2003, 2002 and 2001 is as follows: <img src='content_image/73147.jpg'> The following table summarizes stock options outstanding at December 31, 2003 for each plan year for the Companies: <img src='content_image/73148.jpg'>

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Pursuant to employment agreements, effective September 2000, certain senior officers of Con Edison and its subsidiaries were granted an aggregate of 350,000 restricted stock units, subject to the officers meeting the terms and conditions of the agreements. In June 2002, an additional 150,000 restricted stock units were granted to certain senior officers of Con Edison and its subsidiaries under similar terms. The units, each of which represents the right to receive one share of Con Edison common stock and related dividends, vest ratably through August 2005 or immediately upon the occurrence of certain events. Pursuant to APB No. 25, Con Edison is recog- nizing compensation expense and accruing a liability for the units over the vesting period. The following table summarizes the expense recognized in relation to the restricted stock units: <img src='content_image/134436.jpg'> In June 2002, Con Edison terminated its Directors’ Retirement Plan applicable to non-officer directors (the termination is not applicable to directors who had previously retired from the board) and adopted a deferred stock compensation plan for these directors. Under this plan, directors were granted stock units for accrued service. Pursuant to APB No. 25, Con Edison is recognizing compensation expense and accruing a liability for these units. The following table summarizes the expense recognized in relation to the non-officer director deferred stock compensation plan: <img src='content_image/134437.jpg'> Con Edison’s shareholders, at their annual meeting in May 2003, approved the Con Edison Long-Term Incentive Plan under which up to 10 million shares of its common stock may be issued. No shares have been issued under the plan. ## Note O – Financial Information By Business Segment The business segments of each of the Companies were deter- mined based on similarities in economic characteristics, the regulatory environment, and management’s reporting require- ments. Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility activities, O&R’s regulated electric and gas utility activities and other operations, Con Edison’s unregulated subsidiaries and other (parent holding company interest and other expenses and con- solidation adjustments). All revenues of these business segments, excluding revenues earned by Con Edison Development on certain energy infra- structure projects, which are deemed to be immaterial, are from customers located in the United States of America. Also, all assets of the business segments, excluding certain invest- ments in energy infrastructure projects by Con Edison Development ($216 million at December 31, 2003), are located in the United States of America. The accounting policies of the segments are the same as those described in Note A to the financial statements of this report. Common services shared by the business segments are assigned directly or allocated based on various cost factors, depending on the nature of the service provided.

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The financial data for the business segments are as follows: <img src='content_image/13499.jpg'>

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## Note P – Derivative Instruments and Hedging Activities Effective January 2001, the Companies adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133). Under SFAS No. 133, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the standard. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under SFAS No. 133. ## Energy Price Hedging Con Edison's subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity and natural gas by using derivative instruments including futures, forwards, basis swaps, transmission congestion contracts and financial transmission rights contracts. The fair values of these hedges at December 31, 2003 and 2002 were as follows: <img src='content_image/125929.jpg'> ## Cash Flow Hedges Con Edison’s subsidiaries designate a portion of derivative instruments held for purposes other than trading as cash flow hedges under SFAS No. 133. Under cash flow hedge account- ing, to the extent a hedge is determined to be “effective,” the unrealized gain or loss on the hedge is recorded in other com- prehensive income (OCI) and reclassified to earnings at the time the underlying transaction is completed. A gain or loss relating to any portion of the hedge determined to be “ineffec- tive” is recognized in earnings in the period in which such determination is made. For the Companies, unrealized gains and losses on cash flow hedges for energy transactions, net of tax, included in accumulated OCI for the years ended December 31, 2003 and 2002 were as follows: <img src='content_image/125931.jpg'> The following table presents selected information related to these cash flow hedges included in accumulated OCI at December 31, 2003: <img src='content_image/125928.jpg'> The actual amounts that will be reclassified to earnings may vary from the expected amounts presented above as a result of changes in market prices. The effect of reclassification from accumulated OCI to earnings will generally be offset by the recognition of the hedged transaction in earnings. For the years ended December 31, 2003 and 2002, the Companies recognized in net earnings unrealized pre-tax net gains and losses relating to hedge ineffectiveness of these cash flow hedges as follows: <img src='content_image/125930.jpg'> ## Other Derivatives Con Edison of New York enters into certain non-trading deriva- tive instruments, some of which are on behalf of O&R, that are not designated as hedges for accounting purposes. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices. The Utilities, with limited exceptions, recover all gains and losses on these instruments. See “Recoverable Energy Costs” in Note A. Con Edison Solutions and Con Edison Energy also enter into certain other contracts that are deriva- tives, but do not qualify for hedge accounting under SFAS No. 133. Changes in the fair market value of these derivative con- tracts are recorded in earnings in the reporting period in which they occur. In the years ended December 31, 2003 and 2002, the Companies recognized in earnings unrealized pre-tax net gains and losses relating to these hedges as follows: <img src='content_image/125932.jpg'> ## Energy Trading Activities Con Edison Energy engages in energy-trading activities. Con Edison Energy makes wholesale purchases and sales of elec-

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tric, gas and related energy trading products and provides risk management services to other unregulated Con Edison sub- sidiaries in order to optimize the value of their electric generat- ing facilities and retail supply contracts. It also engages in a limited number of other wholesale commodity transactions. Con Edison Energy utilizes forward contracts for the purchase and sale of electricity and capacity, over-the-counter swap contracts, exchange-traded natural gas and crude oil futures and options, transmission congestion contracts and other physical and financial contracts. As of December 31, 2003, these contracts had terms of three years or less and their fair value was $4 million as of December 31, 2003 and $5 million as of December 31, 2002. Con Edison’s unregulated sub- sidiaries recognized in earnings pre-tax net losses relating to energy trading contracts of $3 million and $1 million, including the amortization of premiums paid and received, and excluding the cumulative effect of a change in accounting principle, for the years ended December 31, 2003 and 2002, respectively. Effective October 1, 2002, all derivative energy-trading con- tracts are reported at fair value, with corresponding changes in value recognized immediately in earnings in accordance with SFAS No. 133 and Emerging Issues Task Force (EITF) Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” Prior to October 2002, energy-trading contracts were accounted for under EITF Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities,” which was rescinded in October of 2002. As a result, previous- ly recognized mark-to-market gains and losses on non-deriva- tive contracts were reversed. Con Edison reported a $2 million after-tax loss for the effect of the rescission as a cumulative effect of a change in accounting principle. ## Interest Rate Hedging Con Edison’s subsidiaries use interest rate swaps to manage interest rate exposure associated with debt. The fair values of these interest rate swaps at December 31, 2003 and 2002 were as follows: Con Edison <img src='content_image/62864.jpg'> Con Edison of New York’s swap (related to $225 million of tax-exempt debt) is designated as a fair value hedge, which qualifies for “short-cut” hedge accounting under SFAS No. 133. Under this method, changes in fair value of the swap are recorded directly against the carrying value of the hedged bonds and have no impact on earnings. Con Edison Development and O&R’s swaps are designated as cash flow hedges under SFAS No. 133. Any gain or loss on the hedges is recorded in OCI and reclassified to interest expense and included in earnings during the periods in which the hedged interest payments occur. The contractual compo- nents of the interest rate swaps accounted for as cash flow hedges are as follows: <img src='content_image/62861.jpg'> Unrealized gains and losses on these cash flow hedges, net of tax, included in accumulated OCI for the years ended December 31, 2003 and 2002 were as follows: <img src='content_image/62862.jpg'> The following table presents selected information related to these cash flow hedges included in the accumulated OCI at December 31, 2003: <img src='content_image/62863.jpg'> The actual amounts that will be reclassified to earnings may vary from the expected amounts presented above as a result of changes in interest rates. The effect of reclassification from accumulated OCI to earnings will generally be offset by the recognition of the hedged transaction in earnings. The reclas- sification to earnings has no impact on O&R’s results of opera- tions because these costs are currently recovered in O&R’s rates. ## Note Q – Northeast Utilities Litigation In March 2001, Con Edison commenced an action in the United States District Court for the Southern District of New

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York, entitled Consolidated Edison, Inc. v. Northeast Utilities (the First Federal Proceeding), seeking a declaratory judgment that Northeast Utilities has failed to meet certain conditions precedent to Con Edison's obligation to complete its acquisi- tion of Northeast Utilities pursuant to their agreement and plan of merger, dated as of October 13, 1999, as amended and restated as of January 11, 2000 (the merger agreement). In May 2001, Con Edison amended its complaint. As amended, Con Edison's complaint seeks, among other things, recovery of damages sustained by it as a result of the material breach of the merger agreement by Northeast Utilities, the court's decla- ration that under the merger agreement Con Edison has no fur- ther or continuing obligations to Northeast Utilities and that Northeast Utilities has no further or continuing rights against Con Edison. In June 2001, Northeast Utilities withdrew the separate action it commenced in March 2001 in the same court and filed as a counter-claim to the First Federal Proceeding its claim that Con Edison materially breached the merger agreement and that, as a result, Northeast Utilities and its shareholders have suffered substantial damages, including the difference between the con- sideration to be paid to Northeast Utilities shareholders pur- suant to the merger agreement and the market value of Northeast Utilities common stock, expenditures in connection with regulatory approvals and lost business opportunities. Pursuant to the merger agreement, Con Edison agreed to acquire Northeast Utilities for $26.00 per share (an estimated aggregate of not more than $3.9 billion) plus $0.0034 per share for each day after August 5, 2000 through the day prior to the completion of the transaction, payable 50 percent in cash and 50 percent in stock. In March 2003, the court ruled on certain motions filed by Con Edison and Northeast Utilities in the First Federal Proceeding. The court ruled that Con Edison’s claim against Northeast Utilities for hundreds of millions of dollars for breach of the merger agreement, as well as Con Edison’s claim that Northeast Utilities underwent a material adverse change, will go to trial. The court also dismissed Con Edison’s fraud and mis- representation claims. In addition, the court ruled that Northeast Utilities’ claims on behalf of its shareholders against Con Edison for damages in excess of $1.2 billion will go to trial. The court has not yet ruled on subsequent motions by both parties regarding evidence to be presented at trial. In May 2003, a lawsuit by a purported class of Northeast Utilities’ shareholders, entitled Rimkoski, et al. v. Consolidated Edison, Inc., was filed in New York County Supreme Court (the State Proceeding) alleging breach of the merger agreement. The complaint defines the putative class as holders of Northeast Utilities' common stock on March 5, 2001, and alleges that the class members were intended third party bene- ficiaries of the merger agreement. The complaint seeks dam- ages believed to be substantially duplicative of those sought by Northeast Utilities on behalf of its shareholders in the First Federal Proceeding. In December 2003, the court granted the State Proceeding plaintiffs’ motion to intervene in the First Federal Proceeding and in February 2004, the State Proceeding was dismissed without prejudice. In January 2004, Rimkoski filed a motion to certify his action as a class action on behalf of all holders of Northeast Utilities’ common stock on March 5, 2000 and to appoint Rimkoski as class rep- resentative. Northeast Utilities has opposed the motion. In October 2003, a lawsuit by a purported class of Northeast Utilities’ shareholders, entitled Siegel et al. v. Consolidated Edison, Inc., was commenced in the United States District Court for the Southern District of New York (the Second Federal Proceeding). The putative class in the Second Federal Proceeding is the same putative class as in the State Proceeding. The amended complaint in the Second Federal Proceeding seeks unspecified injunctive relief and damages believed to be substantially duplicative of the damages sought from Con Edison in the First Federal Proceeding and in the State Proceeding. In January 2004, both Con Edison and Northeast Utilities (which has sought to intervene in the Second Federal Proceeding) moved to dismiss the Second Federal Proceeding and the plaintiffs in the Second Federal Proceeding moved to consolidate that proceeding with the First Federal Pr oceeding. Con Edison believes that Northeast Utilities materially breached the merger agreement, and that Con Edison did not materially breach the merger agreement. Con Edison believes it was not obligated to acquire Northeast Utilities because Northeast Utilities did not meet the merger agreement's conditions that Northeast Utilities perform all of its obligations under the merg- er agreement. Those obligations include the obligation that it carry on its businesses in the ordinary course consistent with past practice; that the representations and warranties made by it in the merger agreement were true and correct when made and remain true and correct; and that there be no material adverse change with respect to Northeast Utilities. Con Edison is unable to predict whether or not any Northeast Utilities related lawsuits or other actions will have a material adverse effect on Con Edison’s financial position, results of operations or liquidity. ## Note R – Lower Manhattan Restoration Con Edison of New York estimates that it will incur $430 million of costs for emergency response to the September 11, 2001 attack on the World Trade Center, and for resulting temporary

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- $25 million for a parental guarantee provided by Con Edison - on Con Edison Solution’s indemnity agreement for - surety bonds. ## Note T – Consolidation of Variable Interest Entities In December 2003, the FASB issued a revised Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which addresses the consolidation of variable interest entities (VIE’s) by business enterprises that are the primary beneficiar- ies. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial inter- est. The primary beneficiary of a VIE is the enterprise with the majority of the risks or rewards associated with the VIE. FIN 46 is effective no later than the end of the first fiscal year or interim period that ends after March 15, 2004. However, as it relates to special-purpose entities, FIN 46 is effective no later than the end of the fiscal year or interim period that ends after December 15, 2003. Earlier application is permitted. In accor- dance with FIN 46, in December 2003, Con Edison consolidat- ed the Newington Project and a Con Edison Solutions’ project, which are described in the following paragraphs. In November 2000, a Con Edison Development subsidiary entered into an operating lease arrangement with Hawkeye L.P. (Lessor) to finance construction of a 525 MW gas-fired electric generating facility in Newington, New Hampshire. In accor- dance with SFAS No. 13, and related EITF issues (including EITF Issue No. 90-15, “Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions” and EITF Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction”), the Newington Project and the related obligations were not included on Con Edison’s con- solidated balance sheet prior to December 2003. At the expiration of the initial lease term in June 2010, the Con Edison Development subsidiary has the option to extend the lease or purchase the project for the then outstanding amounts expended by the Lessor for the project. In the event the sub- sidiary chooses not to extend the lease or acquire the project, Con Edison has guaranteed a residual value of the Newington Project for an amount not to exceed $239.7 million. The sub- sidiary also has contingent payment obligations to the Lessor if an event of default should occur during the lease period. If the subsidiary were to default, its obligation would equal up to 100% of the Lessor’s investment in the Newington Project plus all other amounts then due under the lease, which could exceed the aforementioned residual value guarantee. The sub- sidiary’s payment and performance obligations relating to the Newington Project are fully and unconditionally guaranteed by Con Edison. Future minimum rental payments under the Newington Project operating lease are as follows: <img src='content_image/9588.jpg'> At December 31, 2003, Con Edison included $339 million of assets related to the Newington Project and $344 million of long-term debt and other liabilities on its consolidated balance sheet. In addition, Con Edison recorded a cumulative effect of a change in accounting principle after-tax charge of $5 million. Substantial completion on the Newington project occurred in the fourth quarter of 2002. The subsidiary and the construction contractor for this plant have initiated legal proceedings with respect to whether the subsidiary is entitled to damages for a delay in completion of this plant and whether the contractor is entitled to additional project costs. Con Edison does not expect that this dispute will have a material adverse effect on its financial position, results of operations or liquidity. In 2001, Con Edison Solutions formed a partnership to own and operate a cogeneration facility that was accounted for under the equity method. The plant became fully operational in early 2002. Upon the adoption of FIN 46, Con Edison Solutions included $2 million of the cogeneration facility’s assets and the related debt on its consolidated balance sheet with no earnings impact. Con Edison Development has a sole limited interest in an affordable housing partnership which began in August 2000. Under FIN 46, the partnership was determined to be a VIE where Con Edison Development is not the primary beneficiary. The partnership was established to acquire economic interests in residential housing rental properties expected to qualify for tax credits under Section 42 of the Internal Revenue Code of 1986, as amended. At December 31, 2003, Con Edison Development's maximum exposure to loss as a result of its involvement with the VIE was $7 million. In addition, Con Edison has guaranteed the amounts of the debt undertaken by the partnership. See Note S. ## Note U – Related Party Transactions The Utilities and Con Edison’s other subsidiaries provide administrative and other services to each other pursuant to cost allocation procedures approved by the PSC. For O&R the services received include substantially all administrative support operations, such as corporate directorship and associated

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<img src='content_image/37590.jpg'> in Manhattan’s Chelsea neighborhood. Chelsea grew at a very rapid pace in the late 1990s, fueled by new residential buildings and commercial developments that house new media companies, art galleries, and studios. In 2003, we began construction on a new $140 million substation on West 30th Street. This summer, the substation will begin to serve a portion of the neighborhood and alleviate high loads at adjacent substations, thus enhancing reliability and providing capacity for future growth. The new substation we are constructing in Valhalla, in Westchester County, will perform a similar function for that growing area. The foundation for the restoration and rebuilding of Lower Manhattan has been laid, with plans underway for the Freedom Tower, a 1,776-foot-tall structure that will reinvigorate New York City’s skyline; a new $2 billion transportation hub that will serve 250,000 commuters and visitors each day; and numerous residential develop- ments. The new World Trade Center substation we are building is designed to meet the energy needs of these vital projects, and of existing homes and businesses in Lower Manhattan. <img src='content_image/37591.jpg'> In May 2003, Con Edison opened its new Cable and Splice Center for Excellence at our Va Nest facility in the Bronx. Developed in conjunction with the Electric Power Research Institute (EPRI), the center is a state- of-the-art laboratory for the research and testing of electric distribution cables. It includes a diagnostic testing lab for reviewing failed cable, a high- voltage test center, a 70-foot conduit and manhole system, and an 11-foot “weatherized” manhole that can simulate conditions under a New York City street. By acting as a magnet for multidisciplinary expertise from utilities, universities, and manufactur- ers, the center will allow us to maintain and replace cable mor e effectively. ## Accomplishments in Gas Operations Con Edison of New Yo rk distributes natural gas to more than 1.1 million customers, making it one of the largest gas distribution companies in the United States. The company's gas system contains more than 4,200 miles of mains and nearly 400,000 gas service pipes. Firm gas delivery volumes in 2003 rose 3.6 percent on a weather- normalized basis over the previous year. ## Center for Excellence <img src='content_image/37592.jpg'> Demand is expected to increase as natural gas emerges as a more popu- lar and strategic component of the nation’s energy supply. New gener- ation facilities planned for the New York City area will require significant sup- plies of natural gas. We are making substantial investments to ensure reliable gas delivery. In 2003, work was completed to connect our Hunts Point Station in the Bronx to the Iroquois Pipeline. In addition, as part of a long-term plan to improve the system, Con Edison replaced approximately 150,000 feet of older gas mains. Con Edison has long been recognized as an industry leader in “no-dig” tech- nologies. Our leadership continued in 2003 as our crews began deploying Starline, a process that allows us to insert new pipe inside existing pipe and realize significant savings. ## Accomplishments in Steam Operations Con Edison’s steam system, which serves more than 1,800 customers and comprises 105 miles of mains and service lines, is the largest district steam system in the world. Steam delivery volumes rose 0.9 percent in

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ministerial duties, accounting, treasury, investor relations, infor- mation resources, legal, human resources, fuel supply and energy management services. The costs of administrative and other services provided by, and received from, Con Edison and its subsidiaries for the years ended December 31, 2003, 2002 and 2001 were as follows: <img src='content_image/18628.jpg'> In addition, O&R purchased from Con Edison of New York $128 million, $102 million and $141 million of natural gas for the years ended December 31, 2003, 2002 and 2001, respec- tively. O&R purchased from Con Edison of New York $16 mil- lion and $25 million of electricity for the years ended December 31, 2003 and 2002, respectively. O&R also purchased from Con Edison Energy $1 million of electricity for the year ended December 31, 2003. In December 2003, the FERC authorized Con Edison of New York to lend funds to O&R, for periods of not more than 12 months, in amounts not to exceed $150 million outstanding at any time, at prevailing market rates. O&R has not borrowed any funds from Con Edison of New York. ## Note V – New Financial Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). For discussion of FIN 46, see Note T. In January 2003, the Companies adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” See “Plant and Depreciation – Utility Plant” in Note A. SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which was effective in January 2003, requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of this statement had no impact on the Companies’ financial position, results of operations or liquidity. In June 2003, the FASB issued final guidance on the use of broad market indices in power purchase and sale contracts (Derivatives Implementation Group Issue C20). In particular, this guidance clarifies whether the pricing in a contract that con- tains broad market indices (e.g., consumer price index) could qualify as a normal purchase or normal sale scope exception and therefore not be subject to fair value accounting under SFAS No. 133. The guidance became effective in the fourth quarter of 2003. Upon implementation of this guidance, Con Edison recognized to fair value certain power sales contracts at Con Edison Development. The cumulative effect of this change in accounting principle was an increase to net income of $8 million. In June 2003, the Companies adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which revises and expands the definition of a liability (FASB Concept Statement No. 5, “Elements of Financial Statements”) and provides accounting and reporting guidance. Effective July 1, 2003, the Companies adopted EITF 01-8, "Determining Whether an Arrangement Contains a Lease." The adoption of SFAS No. 149, SFAS No. 150 and EITF 01-8, had no material impact on the Companies' financial position, results of operations or liq- uidity . In August 2003, the EITF reached a consensus that realized gains and losses on derivative contracts not "held for trading purposes" should be reported on a net or gross basis based on the relevant facts and circumstances of the contract. In analyzing these facts and circumstances, Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," should be applied. The EITF consensus is effective for new transactions or arrangements entered into beginning in the fourth quarter of 2003. The adoption of this EITF consensus had no material impact on the Companies' financial position, results of operations or liquidity. In January 2004, the FASB issued FASB Staff Position (FSP) No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." The FSP gives plan sponsors an option to defer recognizing the effects of the Act in the accounting for its plan under FASB Statement No. 106, "Employers’ Accounting for Postretirement Benefits Other Than Pensions," and in providing disclosures required by FASB Statement No. 132, "Employers’ Disclosures about Pensions and Other Postretirement Benefits," until authoritative guidance is issued, or until certain other events (such as plan amend- ments) occur. Con Edison has elected not to defer the recogni- tion of the Act. See Note F. ## Note W – East 11th Street Accident In January 2004, a woman died when she came into contact with the metal frame of a Con Edison of New York service box that had been installed in a New York City street. The frame

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was energized by a low voltage cable that in January 2003 was repaired by the company in a manner that varied from its writ- ten procedures. Following this accident, the company began "stray-voltage" inspection testing of its transformer vaults, man- holes and service boxes in the portion of its service area in which its distribution facilities are underground. The company also tested certain of the City's Department of Transportation's street lights. The company has substantially completed this testing and has eliminated stray voltage conditions at the few locations tested where there was measurable voltage. The company has committed to add this testing to its annual inspection programs. In February 2004, the PSC instituted a proceeding as to whether Con Edison of New York violated the safety require- ments of the New York Public Service Law and ordered the company to show cause why the PSC should not commence an action seeking penalties from the company. The PSC also instituted a proceeding to examine the safety of the company's electric transmission and distribution systems and ordered the company to complete testing for stray voltage and any neces- sary repair of additional equipment in the company's service area. Con Edison of New York believes that its utility systems are safe and reliable. The company, however, is unable to predict whether or not any proceedings or other actions relating to this accident will have a material adverse effect on its financial con- dition, results of operations or liquidity.

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## Operating Statistics Continued <img src='content_image/31278.jpg'> ** For 1999, represents average for 6 months only, excluding the period prior to the July 1999 acquisition by Con Edison.

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## Management ## Consolidated Edison, Inc. Eugene R. McGrath Chairman, President and Chief Executive Officer Stephen B. Bram Energy and Communications Group President Joan S. Freilich Executive Vice President and Chief Financial Officer Charles E. McTiernan, Jr. General Counsel Saddie L. Smith Secretary Edward J. Rasmussen Vice President, Controller and Chief Accounting Officer Robert P. Stelben Vice President and Treasurer ## Consolidated Edison Company of New York, Inc. Eugene R. McGrath Chairman and Chief Executive Officer Kevin Burke President and Chief Operating Officer Joan S. Freilich Executive Vice President and Chief Financial Officer James P. O’Brien Vice President and General Auditor Saddie L. Smith Secretary and Associate General Counsel Charles E. McTiernan, Jr. General Counsel Edward J. Rasmussen Vice President and Controller Robert P. Stelben Vice President and Treasurer Senior Vice Presidents Mary Jane McCartney Gas Operations Louis L. Rana Electric Operations Frances A. Resheske Public Affairs Robert A. Saya Central Operations Luther Tai Central Services Vice Presidents Terry Agriss Energy Management John H. Banks Government Relations James S. Baumstark Central Engineering Ronald Bozgo Steam Operations Marilyn Caselli Customer Operations David Davidowitz Gas Engineering George W. Greenwood, Jr. Emergency Management Peter A. Irwin Legal Services Paul H. Kinkel Special Projects William G. Longhi System and Transmission Operations Chanoch Lubling Regulatory Services William J. McGrath Bronx and Westchester John F. Miksad Manhattan John Mucci Central Field Services Thomas T. Newell Brooklyn and Queens Joseph P. Oates Randolph S. Price Environment, Health and Safety Stephen E. Quinn Substation Operations Hyman Schoenblum Corporate Planning W anda M. Skalba Information Resources Car ole Sobin Purchasing Claude Trahan Human Resources Kevin E. Walker Maintenance and Construction Services Stephen F. Wood Staten Island and Engineering Services Nancy Yieh Gas Operations ## Orange and Rockland Utilities, Inc. John D. McMahon President and Chief Executive Officer Louis M. Bevilacqua Chief Financial Officer and Controller John E. Perkins Tr easurer Peter A. Irwin Secr etary Vi ce Presidents Car ol Monti Barris Services James J. O’Brien, Jr. Customer Service James Tarpey Operations ## Energy and Communications Group Stephen B. Bram Gr oup President ## Consolidated Edison Solutions, Inc. JoAnn F. Ryan President and Chief Executive Officer ## Consolidated Edison Development, Inc. Charles Weliky Pr esident ## Consolidated Edison Energy, Inc. Charles Weliky Pr esident ## Con Edison Communications, LLC Peter A. Rust President and Chief Executive Officer

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## Board of Directors ## Consolidated Edison, Inc. Vincent A. Calarco Chairman, President, Chief Executive Officer, and Director Crompton Corporation, Middlebury, Connecticut (specialty chemicals, polymer products, and equipment) George Campbell, Jr. President The Cooper Union for the Advancement of Science and Art New York, New York Gordon J. Davis Senior Partner Le Boeuf, Lamb, Greene & MacRae, LLP, New York, New York Michael J. Del Giudice Senior Managing Director Millennium Credit Markets, LLC, New York, New York Joan S. Freilich Executive Vice President and Chief Financial Officer Ellen V. Futter President and Trustee American Museum of Natural History, New York, New York Sally Hernandez-Piñero Practicing Attorney at Law, New York, New York Peter W. Likins Pr esident The University of Arizona, Tucson, Arizona Eugene R. McGrath Chairman, President and Chief Executive Officer Fr ederic V. Salerno Chairman Lynch Interactive Corporation, Rye, New York Retired Vice Chairman, Verizon Communications Richar d A. Voell Private investor and retired President and Chief Executive Officer The Rockefeller Group, Inc., New York, New York (real estate, real estate services, communications and communications services) Stephen R. Volk Chairman Credit Suisse First Boston, New York, New York

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## Investor Information ## Annual Stockholders’ Meeting The 2004 Annual Meeting of Stockholders will be held at 10:00am on Monday, May 17, 2004, at the auditorium on the 19th floor of the Con Edison Building, 4 Irving Place between 14th and 15th Streets, New York, NY. Proxies will be requested from stockholders when the notice of meeting and proxy statement are mailed on or about April 5, 2004. ## Stock Listing The Common Stock is listed on the New York Stock Exchange. The Common Stock ticker symbol is “ED.” The press listing is “ConEdison” or “ConEd.” The following securities of Con Edison or Con Edison of New York are listed on the NYSE: <img src='content_image/44198.jpg'> ## Transfer Agent and Registrar The Bank of New York Investor Relations Department P. O. Box 11258 Church Street Station New York, NY 10286 toll-free telephone: 1-800-522-5522 email: shareowner-svcs@bankofny.com For up-to-date stock account information 24 hours a day, shareholders may call an automated toll-free number, 1-800-522-5522. At the same phone number, callers may speak with an Investor Services representative Monday through Friday, 8:30 AM to 4:00 PM. Address email messages and correspon- dence to The Bank of New York, as indicated above. ## Dividend Reinvestment Stockholders of record of the company’s Common Stock are eligible to participate in the company’s Automatic Dividend Reinvestment and Cash Payment Plan. For more information and a copy of the Plan prospectus, please call The Bank of New York Investor Relations Department at 1-800-522-5522. ## Duplicate Mailings and Duplicate Accounts Stockholders with more than one account or stockholders who share the same address may receive more than one annual report and other mailings. To eliminate duplicate mailings, please contact the Transfer Agent and Registrar (see above), enclosing labels from the mailings or label information where possible. Separate dividend checks and form of Proxies will continue to be sent for each account on our records. ## Additional Information A supplement containing additional financial and operating data for the latest six-year period may be obtained by writing to the Secretary of the company. The company reports details concerning its operations and other matters annually to the Securities and Exchange Commission on Form 10-K, which is available without charge to the company’s security holders on written request to: Saddie L. Smith Secr etary Con Edison 4 Irving Place, Room 1618-S New York, NY 10003 email: CorporateSecretary@conEd.com ## CEO and CFO Certifications The certifications of Con Edison’s chief executive officer and chief financial officer required pursuant to Section 302 of Sarbanes- Oxley Act of 2002 have been filed as exhibits to Con Edison’s annual report on Form 10-K. ## Investor Relations Inquiries from security analysts, investment managers, and other members of the financial community should be addressed to: Jan C. Childress Director of Investor Relations Consolidated Edison, Inc. Irving Place, Room 700 New York, NY 10003 telephone: 1-212-460-6611 email: childressj@conEd.com For additional financial, operational, and customer service information, visit the Consolidated Edison, Inc. Web site at www.conEdison.com.

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## How To Reach Us Consolidated Edison, Inc. 4 Irving Place New York, NY 10003 1-212-460-4600 www.conEdison.com ## Regulated Utility Businesses Consolidated Edison Company of New York, Inc. 4 Irving Place New York, NY 10003 1-212-460-4600 www.conEd.com Orange and Rockland Utilities, Inc. One Blue Hill Plaza Pearl River, NY 10965 1-845-352-6000 www.oru.com ## Energy and Communications Group Businesses Consolidated Edison Solutions, Inc. 701 Westchester Avenue, Suite 300 East White Plains, NY 10604 1-914-286-7000 www.conEdisonsolutions.com Consolidated Edison Energy, Inc. 701 Westchester Avenue, Suite 201 West White Plains, NY 10604 1-914-993-2189 www.conEdenergy.com Consolidated Edison Development, Inc. 111 Broadway, 16th Floor New York, NY 10006 1-212-393-9242 www.conEddev.com Con Edison Communications, Llc 55 Broad Street, 22nd Floor New York, NY 10004 1-212-324-5000 www.conEdcom.com Consolidated Edison, Inc. is one of the nation’s largest investor- owned energy companies, with $10 billion in annual revenues and approximately $21 billion in assets. The company provides a wide range of energy-related products and services to its customers through its six subsidiaries: Consolidated Edison Company of New York, Inc., a regulated utility providing electric, gas and steam service in New York City and Westchester County, New York; Orange and Rockland Utilities, Inc., a regulated utility serving customers in a 1,350 square mile area in southeastern New York State and adjacent sections of northern New Jersey and northeastern Pennsylvania; Con Edison Solutions, a retail energy services company; Con Edison Energy, a wholesale energy supply company; Con Edison Development, an infrastruc- ture development company; and Con Edison Communications, a telecommunications infrastructure company and service provider. <img src='content_image/10663.jpg'> This annual report is printed on recycled paper.

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<img src='content_image/14571.jpg'> <img src='content_image/14573.jpg'> www.conEdison.com Consolidated Edison, Inc. 4 Irving Place New York, NY 10003 1-212-460-4600 <img src='content_image/14572.jpg'> <img src='content_image/14574.jpg'>

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# VORNADO REALTY TRUST 2003 ANNUAL REPORT <img src='content_image/70498.jpg'>

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## VORNADO COMPANY PROFILE Vornado Realty Trust is a fully-integrated real estate investment trust. The Company owns: ## Office Properties: ■ all or portions of 83 office properties aggregating approximately 27.3 million square feet in the New York City metropolitan area (primarily Manhattan) and in the Washington D.C. and Northern Virginia area; ## Retail Properties: ■ 60 retail properties in six states and Puerto Rico aggregating approximately 12.9 million square feet; ## Merchandise Mart Properties: ■ 8.6 million square feet of showroom and office space, including the 3.4 million square foot Merchandise Mart in Chicago; ## Temperature Controlled Logistics: ■ a 60% interest in the Vornado Crescent Portland Partnership that owns 87 cold storage warehouses nationwide with an aggregate of approximately 440.7 million cubic feet of refrigerated space leased to AmeriCold Logistics; ## Other Real Estate Investments: ■ 33.1% of the outstanding common stock of Alexander’s, Inc.; ■ the Hotel Pennsylvania in New York City consisting of a hotel portion containing 1.0 million square feet with 1,700 rooms and a commercial portion containing 400,000 square feet of retail and office space; ■ a 22.6% interest in The Newkirk Master Limited Partnership which owns office, retail and industrial properties net leased primarily to credit rated tenants, and various debt interests in such properties; and ■ other investments, including eight dry warehouse/industrial properties in New Jersey containing approximately 2.0 million square feet and interests in other real estate, loans and notes receivable and marketable securities. Vornado’s common shares are listed on the New York Stock Exchange and are traded under the symbol: VNO. Alexander’s common stock is also listed on the New York Stock Exchange and is traded under the symbol: ALX.

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Our current financial model of the effect on Vornado’s FFO of PTO’s move-outs and our forecasted subsequent lease- up is based upon (i) an increase in average straight-lined escalated rent from the current $26.61 per square foot to replacement straight-lined rent of $33.50 per square foot, (ii) one year of downtime with a corresponding reduction in variable expenses, and (iii) taking 901,000 square feet out of service for 9–18 months including capitalizing appli- cable costs. ## To summarize: ■ PTO is moving out of 1,939,000 square feet over the next couple of years. (Recently, the PTO advised us they intend to retain approximately 200,000 square feet through at least 2007.) ■ We will take 901,000 square feet in the four oldest build- ings out of service for modernization that will take 9-18 months. Our capital budget for this is $122 million ($135 per square foot). Our capital budget for the remaining space is approximately $30 million. (10) And please remember, all this is still a forecast. ■ We forecast FFO to decline as PTO vacates and then rebound as we lease-up as follows. <img src='content_image/84788.jpg'> * 2005 by quarter—Q1 ($3,100,000), Q2 ($3,900,000), Q3 ($4,400,000), Q4 ($2,900,000). We believe our business is certainly large enough and strong enough to absorb the PTO blip in 2004–2006 with- out missing a beat. At the end of the day, we forecast an increase in FFO of $13.5 million from the PTO space—the result of replacing $26.61 per square foot rents with $33.50 per square foot rents. Looking at it another way, we expect about a 9% return on the incremental capital invested.

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## Year Ended December 31, <img src='content_image/69266.jpg'> <img src='content_image/69270.jpg'> The Company periodically reviews its assumptions for the rate of retur n on each Plan’s assets. The assumptions are based primarily on the long-term historical performance of the assets of the Plans. Differences in the rates of return in the near term are recognized as gains or losses in the periods that they occur. ## Plan Assets The Company has consistently applied what it believes to be a conservative investment strategy for the Vornado Plan, investing primarily in cash and cash equivalents and fixed income funds, including money market funds, United States treasury bills, government bonds and mortgage back securities. Vornado Plan’ weighted-average asset allocations by asset category are as follows: <img src='content_image/69267.jpg'> The Company has consistently applied what it believes to be an appr opriate investment strategy for the Mart Plan, by invest- ing in mutual funds and funds held by insurance companies. Mart Plan’ s weighted average asset allocations by asset category are as follows: <img src='content_image/69268.jpg'>

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The Company’ debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its senior unsecured notes due 2007 and 2010 and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. Although the Company believes that it has adequate insurance coverage under these agreements, the Company may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further if lenders insist on greater coverage than the Company is able to obtain, it could adversely affect the Company’s ability to finance and/or refinance its properties and expand its portfolio. From time to time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness that cannot be quantified by the Company. There are various legal actions against the Company in the or dinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company’s financial condition, results of operations or cash flow. The Company enters into agreements for the purchase and r esale of U.S. government obligations for periods of up to one week. The obligations purchased under these agreements ar e held in safekeeping in the name of the Company by various money center banks. The Company has the right to demand additional collateral or return of these invested funds at any time the collateral value is less than 102% of the invested funds plus any accrued earnings thereon. The Company had $30,310,000 and $33,393,000 of cash invested in these agreements at December 31, 2003 and 2002, ## 13. Related Party Transactions ## LOAN AND COMPENSATION AGREEMENTS At December 31, 2003, the loan due from Mr. Roth in accor dance with his employment arrangement was $13,123,000 ($4,704,500 of which is shown as a reduction in shar eholders’ equity). The loan bears interest at 4.49% per annum (based on the applicable Federal rate) and matures in January 2006. The Company also provided Mr. Roth with the right to draw up to $15,000,000 of additional loans on a revolving basis. Each additional loan will bear interest, payable quarterly, at the applicable Federal rate on the date the loan is made and will matur e on the sixth anniversary of the loan. On May 29, 2002, Mr. Roth replaced common shares of the Company securing the Company’s outstanding loan to Mr. Roth with options to purchase common shares of the Company with a value of not less than two times the loan amount. In 2002, as a result of the decline in the value of the options, Mr Roth supplemented the collateral with cash and marketable securities. At December 31, 2003, loans due from Mr. Fascitelli, in accor dance with his employment agreement, aggregated $8,600,000. The loans mature in December 2006 and bear interest, payable quarterly, at a weighted average interest rate of 3.97% (based on the applicable Federal rate). Pursuant to Mr. Fascitelli’s 1996 employment agreement, Mr . Fascitelli became entitled to a deferred payment consisting of $5 million in cash and a convertible obligation payable November 30, 2001, at the Company’s option, in either 919,540 common shares or the cash equivalent of their appreciated value, so long as such appreciated value is not less than $20 million. The Company delivered 919,540 shares to a rabbi trust upon execution of the 1996 employment agreement. The Company accounted for the stock compensation as a variable arrangement in accor dance with Plan B of EITF No. 97-14 “Accounting for Deferred Compensation Arrangements Where Amounts Earned Ar e Held in a Rabbi Trust and Invested” as the agreement permitted settlement in either cash or common shares. Following the guidance in EITF 97-14, the Company recorded changes in the fair value of its compensation obligation with a corresponding incr ease in the liability “Officer’s Compensation Payable.” Effective as of June 7, 2001, the payment date was deferred until November 30, 2004. Effective as of December 14, 2001, the payment to Mr Fascitelli was converted into an obligation to deliver a fixed number of shares (919,540 shares) establishing a measurement date for the Company’s stock compensation obligation; accor dingly the Company ceased accounting for the Rabbi Trust under Plan B of the EITF and began Plan A accounting. Under Plan A, the accumulated liability representing the value of the shares on December 14, 2001, was reclassified as a component of Shareholders’ Equity as “Deferred compensation shares

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earned but not yet delivered.” In addition, futur changes in the value of the shares are no longer recognized as additional compensation expense. The fair value of this obligation was $50,345,000 at December 31, 2003. The Company has reflected this liability as Deferred Compensation Shares Not Yet Delivered in the Shareholders’ Equity section of the balance sheet. For the year ended December 31, 2001, the Company recognized appr oximately $4,744,000 of compensation expense of which $2,612,000 represented the appreciation in value of the shares and $2,132,000 represented dividends paid on the shares. Effective January 1, 2002, the Company extended its employment agr eement with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant to the extended employment agreement, Mr . Fascitelli is entitled to receive a deferred payment on December 31, 2006 of 626,566 Vornado common shares which ar e valued for compensation purposes at $27,500,000 (the value of the shares on March 8, 2002, the date the extended employment agreement was executed). The shares are being held in a rabbi trust for the benefit of Mr Fascitelli and vested 100% on December 31, 2002. The extended employment agreement does not permit diversification, allows settlement of the deferred compensation obligation by delivery of these shares only, and permits the deferred delivery of these shares. The value of these shares was amortized ratably over the one year vesting period as compensation expense. Pursuant to the Company’s annual compensation review in February 2002 with Joseph Macnow, the Company’s Chief Financial Officer, the Compensation Committee approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable federal rate of 4.65% per annum and due January 1, 2006. The loan, which was funded on July 23, 2002, was made in conjunction with Mr. Macnow’s June 2002 exercise of options to pur chase 225,000 shares of the Company’s common stock. The loan is collateralized by assets with a value of not less than two times the loan amount. In 2002, as a result of the decline in the value of the options, Mr Macnow supplemented the collateral with cash and marketable securities. One other executive officer of the Company has a loan outstanding pursuant to an employment agreement totaling $500,000 at December 31, 2003. The loan matures in April 2005 and bears inter est at the applicable Federal rate provided (4.5% at December 31, 2003). ## Transactions with Affiliates and Officers and Trustees of the Company ## ALEXANDER’S The Company owns 33.1% of Alexander’s. Mr. Roth and Mr. Fascitelli ar e Officers and Directors of Alexander’s and the Company provides various services to Alexander’s in accordance with management, development and leasing agreements and the Company has made loans to Alexander’s aggregating $124,000,000 at December 31, 2003. See Note—5 Investments in Partially-Owned Entities for further details. In 2002, the Company constructed a $16.3 million community facility and low-income residential housing development (the “30th Street Venture”), in order to receive 163,728 squar feet of transferable development rights, generally referred to as “air rights”. The Company donated the building to a charitable or ganization. The Company sold 106,796 square feet of these air rights to third parties at an average price of $120 per squar foot. An additional 28,821 square feet of air rights was purchased by Alexander’s at a price of $120 per square foot for use at Alexander’ s 59th Street development project (the “59th Street Project”). In each case, the Company received cash in exchange for air rights. The Company identified third party buyers for the remaining 28,111 square feet of air rights related to the 30th Street Venture. These third party buyers wanted to use the air rights for the development of two projects located in the general ar ea of 86th Street which was not within the required geo- graphical radius of the construction site nor in the same Community Board as the low-income housing and community facility project. The 30th Street Venture asked Alexander’s to sell 28,111 squar e feet of the air rights it already owned to the third party buyers (who could use them) and the 30th Street Venture would r eplace them with 28,111 square feet of air rights. In October 2002, the Company sold 28,111 squar feet of air rights to Alexander’s for an aggregate purchase price of $3,058,000

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14. Minority Interest The minority interest represents limited partners’, other than the Company, interests in the Operating Partnership and are comprised of: <img src='content_image/127081.jpg'> (1) Class A units are redeemable at the option of the holder for common shares of beneficial interest in Vornado, on a one-for-one basis, or at the Company’s option for cash. (2) In February 2004, all of the Series E-1 units were converted into 5,679,727 V ornado common shares. (3) The holders of the Series F-1 preferred units have the right to require the Company to redeem the units for cash equal to the liqui- dation preference or, at the Company’s option, by issuing a variable number of V ornado common shares with a value equal to the liquidation value. On July 1, 2003, upon the adoption of SFAS No. 150—Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity the Company was required to include the liquidation value of these F-1 preferred units as a liability on the consolidated balance sheet as opposed to their prior classification as minority interest because of the possible settlement of this obligation by issuing a variable number of Vornado common shares. In addition, from July 1, 2003, distributions to the holders of the F-1 preferred units are included as a component of interest expense as opposed to their prior classification as minority interest expense. (4) Convertible at the option of the holder for an equivalent amount of the Vornado preferred shares and redeemable at the Company’s option after the 5th anniversar of the date of issuance (ranging from December 1998 to September 2001). (5) The Company redeemed all of its 8.5% Series D-1 Cumulative Redeemable Preferred Units on November 11, 2003 at a redemption price equal to the par value of $25.00 per unit or an aggregate of $87.5 million. This amount exceeded the carrying amount by $2,100,000 representing the original issuance costs. Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to common shares in accordance with the July 2003 EITF clarification of Topic D-42. (6) The Company redeemed all of its 8.375% Series D-2 Cumulative Redeemable Preferred Units on January 6, 2004 at a redemption price equal to $50 per unit or an aggregate of $27.5 million.

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## 15. Income Per Share The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share—which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share—which includes the weighted average common shares and dilutive share equivalents. Potential dilutive shar e equivalents include the Company’s Series A Convertible Preferred shares as well as Vornado Realty L.P.’s convertible preferred units. Year Ended December 31, <img src='content_image/104474.jpg'>

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## 16. Summary of Quarterly Results (Unaudited) The following summary represents the results of operations for each quarter in 2003, 2002 and 2001: <img src='content_image/76053.jpg'> (1) The total for the year may differ from the sum of the quarters as a result of weighting. (2) Includes gains on sale of real estate of $158,378. ## 17. Costs of Acquisitions and Development Not Consummated In 2002, the Company had a 70% interest in a joint ventur e to develop an office tower over the Port Authority Bus Terminal in New York City. Market conditions existing in 2002 resulted in the joint venture writing off $9,700,000, representing all pre-development costs capitalized to date, of which the Company’s share is $6,874,000. In 2001, the Company was unable to reach a final agreement with the Port Authority of NY & NJ to conclude a net lease of the World Trade Center. Accordingly in 2001 the Company wrote off costs of $5,223,000 primarily associated with the World Trade Center. ## 18. Segment Information The Company has four business segments: Office, Retail, Mer chandise Mart Properties and Temperature Controlled Logistics. In 2003, the Company revised how it presents EBITDA, a measure of performance of its segments, and has revised the disclo- sure for all periods presented. EBITDA as disclosed represents “Earnings before Interest, Taxes, Depreciation and Amortization.” This change is consistent with the Securities and Exchange Commission’s Regulation G.

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## Real Estate Lending We like the real estate lending business. From time to time, we provide real estate financing on assets that we understand as well as the assets we own. Mike and I twice declined to buy New York’s General Motors Building for about $800 million, in 1998 and again in 2000. In September 2003, the General Motors Building sold for $1.4 billion to a private New York investor. We bid $1.2 billion. This time around, we participated in the financing of this deal by lending $225 million of mezzanine debt (11) at an average rate of LIBOR plus 8.833% subordi- nate to $900 million of senior debt. (See Note 3 to the Financial Statements for the full details of this investment.) Recently, the borrower began discussions with us about prepaying/recasting a portion of the loan. ## Alexander’ s This year Alexander’s deserves its own section. And this year we intend, in conjunction with Alexander’s Board of Dir ectors, to determine the end game for this investment which may include selling it, or simply leaving it to seek its natural value as a free standing, separately traded REIT, as it now is, or other options. Vo rnado owns 1,654,000 shares of Alexander’s, Inc., a 33% stake in this NYSE-listed REIT. The shares, which had a value of $65 on January 1, 2003 are trading now at about $150, making Vornado’s equity investment worth $248 million at market (12) which, when taken together with Vo rnado’s $124 million loan to Alexander’s, represents a total investment of $372 million. Alexander’ s has no corporate level employees. Vornado serves as its for-fee external manager, leasing agent, developer , etc.

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December 31, 2003 <img src='content_image/118530.jpg'> See notes on page 89

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<img src='content_image/110747.jpg'> See notes on following page

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(1) Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other EBITDA is comprised of: For the Year Ended December 31, <img src='content_image/112674.jpg'> (3) Interest and debt expense and depreciation and amortization included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities.

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## INDEPENDENT AUDITORS’ REPORT Shareholders and Board of Trustees Vornado Realty Trust New York, New York We have audited the accompanying consolidated balance sheets of Vornado Realty Trust as of December 31, 2003 and 2002, and the related consolidated statements of income, shar eholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain r easonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly , in all material respects, the financial position of Vornado Realty Trust at December 31, 2003 and 2002, and the r esults of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.” As discussed in Note 4 to the consolidated financial statements, the Company applied the pr ovisions of Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” ## DELOITTE & TOUCHE LLP Parsippany, New Jersey March 2, 2004

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## MARKET PRICE OF VORNADO COMMON STOCK AND RELATED INFORMATION Vornado’s common shares are traded on the New York Stock Exchange under the symbol “VNO”. Quarterly closing price ranges of the common shares and dividends paid per share for the years ended December 31, 2003 and 2002 were as follows: <img src='content_image/52001.jpg'> (1) Comprised of a regular quarterly dividend of $.71 per share and a special capital gain cash dividend of $.16 per share. On March 1, 2004, there were 1,707 holders of recor of the Company’s common shares. ## Recent Sales of Unregistered Securities During 2003, 2002, and 2001 the Company issued 737,212, 176,848, and 6,002 common shares, respectively, upon the redemption of Class A units of the Operating Partnership held by persons who received units in private placements in earlier periods in exchange for their interests in limited partnerships that owned real estate. The common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) of that Act.

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## VORNADO CORPORATE INFORMATION ## Trustees STEVEN ROTH Chairman of the Board Managing Partner, Interstate Properties MICHAEL D. FASCITELLI President ROBERT P. KOGOD DAVID M. MANDELBAUM Partner, Interstate Properties STANLEY SIMON* Principal, Stanley Simon and Associates, Management and Financial Consultants ROBERT H. SMITH Chairman of Charles E. Smith Commercial Realty, a division of Vornado Realty Trust RONALD G. TARGAN* President, Malt Products Corporation RICHARD R. WEST* Dean Emeritus, Leonard N. Stern School of Business, New York University RUSSELL B. WIGHT, JR. Partner, Interstate Properties * Members of the Audit Committee ## Of ficers STEVEN ROTH Chair man of the Board and Chief Executive Officer MICHAEL D. FASCITELLI Pr esident MEL VYN H. BLUM Executive V ice President— Development ANTHONY COSSENTINO Acting Chief Executive Officer and Senior V ice President— Chief Financial Officer T emperatur e Controlled Logistics MICHELLE FELMAN Executive V ice President— Acquisitions DA VID R. GREENBAUM Pr esident of the New York Office Division CHRISTOPHER KENNEDY Pr esident of the Merchandise Mart Division JO SEPH MACNOW Executive V ice President— Finance and Administration and Chief Financial Officer SANDEEP MATHRANI Executive V ice President— Retail Real Estate Division MITCHELL N. SCHEAR Pr esident of Charles E. Smith Commercial Realty, division of Vornado Realty Trust WENDY SILVERSTEIN Executive V ice President— Capital Markets

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## Company Data EXECUTIVE OFFICES 888 Seventh Avenue New York, New York 10019 INDEPENDENT AUDITORS Deloitte & Touche LLP Parsippany, New Jersey GENERAL COUNSEL Sullivan & Cromwell New York, New York TRANSFER AGENT AND REGISTRAR Wachovia Bank, N.A. Charlotte, North Carolina ## REPORT 10-K Shareholders may obtain a copy of the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission free of charge (except for exhibits), by writing to the Secretary, Vornado Realty Trust, 888 Seventh Avenue, New York, New York 10019; or, visit the Company’s website at www.vno.com and refer to the Company’s SEC Filings. ## ANNUAL MEETING The annual meeting of shareholders of Vornado Realty Trust, will be held at 12:30 PM on Thursday, May 27, 2004 at the Marriott Hotel, Interstate 80 and the Garden State Parkway, Saddle Brook, New Jersey 07663.

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Alexander’s was a New York area department store chain which was rich in real estate, but long suffering as a retail operation. Alexander’s is now a real estate business with a small, static collection of wonderful assets: ■ Bloomberg Tower/ One Beacon Court mixed-use development at 59th Street and Lexington Avenue, NY ■ Kings Plaza Regional Shopping Center, Brooklyn, NY ■ Rego Park Shopping Center, Queens, NY ■ Ikea Property, Paramus, NJ Please see page 22 for the full property table. The development of the 59th Street property—a full square block on the Upper East Side of Manhattan—has been a long, wonderful adventure. It is situated where Manhattan’ Plaza District meets the Silk Stocking District, blocks from the best hotels in the world and, of course, directly across the street from Bloomingdale’s. This 814- foot tower is now topped out, curtain wall is nearly com- plete and tenants Bloomberg, Home Depot and H&M are doing fit-out. On behalf of Alexander’s, we did some things right here. ■ We had the patience to hold this great site for years until the New York market recovered. I think we got the timing right. ■ David and Mike made a great 700,000 square foot anchor lease with Bloomberg. (13) ■ We were able to internally finance the cost of this project (about $650 million of hard and soft costs without land) without diluting shareholders by selling stock or taking in partners. We generated the needed capital by leasing and financing Paramus, refinancing Kings Plaza, and the debt from a Hypo Bank construction loan arranged by Wendy Silverstein, our capital markets queen. ■ Alexander’s hired Vornado as a for-fee developer, again without suffering any dilution. (14) ■ We engaged Cesar Pelli as design architect. (15) Creating a “great building” rather than a “developer’s building” has paid off in spades. ■ The building’s grand gesture is an 11,000 square foot, open-to-the-sky, mid-block courtyard—an off street refuge available for both vehicles and pedestrians that serves as the entrance for residential tenants and Bloomberg. This six-story high, oval-shaped space is unique and quite wonderful from a design perspective, and quite wonderfully profitable too. (16) ■ With a full block in Bloomingdale’s country, the retail value was obvious. We discarded the idea of building a multi- story interior mall and chose instead to have all stores

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front on the wide avenues. We expanded the site by building two, twenty foot high below-grade floors (nine foot basements would not have worked), one of which Sandeep leased to The Home Depot and the other was leased to Bloomberg. ■ The office component makes money, and also serves as a pedestal 475 feet in the air on which sits the 23 story apart- ment component, creating towering views and terrific value. In February 2004, Alexander’s completed a $400 million ten-year financing of the office portion of the 59th Street project, at a 5.33% interest rate. Thanks again Wendy. Last year’s annual letter had a section entitled “The Anti- Reality Show Called Accounting.” Here’s another interesting accounting quirk. Alexander’s has outstanding 100,000 stock options and 850,000 stock appreciation rights (SARs) at an average strike price of about $72. Accounting requires that these SARs be marked-to-market each quarter . Let’s look at the effect. Alexander’s trading price has been bouncing around, but let’s assume a price of $150 per share, a price that exceeds the strike price by about $78. Therefore, Alexander’s earnings has or will be charged about $66 million and Vornado’s share of this charge is about $22 million—all this at the same time Vornado is enjoying a $129 million mark-to-market increase in the value of its Alexander’s investment, which under today’s account- ing is not reflected in earnings—strange. ## Corporate Governance It is our foremost priority to conduct our business with the highest level of ethics and corporate responsibility— and we do. Our trustees’ refined sense of right and wrong, knowledge of our business, questioning nature, devotion to and ownership stake in Vornado are the foundation of our gover nance. W e have now completed codification of our Corporate Gover nance Program, putting us in compliance with the applicable securities laws and stock exchange requirements. This program included the adoption/amendment of charters, guidelines and codes which are all available on our website. In addition, our Board has determined that five existing trustees, constituting a majority, are independent. Our Corporate Governance Committee and the Board have the following observations: ■ Six of our nine Trustees have a nine-figure investment in Vornado and a seventh has an eight-figure investment— extraordinary. And, believe me, these Trustees really care about their investment. ■ Six of our nine Trustees are life-long real estate profes- sionals, which is very helpful. But, it should be noted that the Board believes that it would benefit from the addition of one or more generalist members. ■ Our Board believes it would benefit from a dose of youth. ■ Our Board thinks that it would be better to increase the current five to four ratio of independent to non-inde- T rustees, and we will. pendent Trustees by adding one or two independent ■ For the moment, our Board has determined to maintain its classified structure and that it is okay for me to serve as Chairman and CEO. (17)

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## State of the REIT Market REIT stocks have outperformed the S&P and almost all other financial indices over every measuring period for the last ten years. (18) Vornado’ stock has also done well. The following table presents the data. <img src='content_image/72085.jpg'> In real estate, the private market has driven cap rates (19) down to the 5s and 6s, leading the public market. Cap rates are sticky—they may bounce a bit, but I believe they will stay lower for longer than people seem to think. We won’t see 8% cap rates again for better properties for years. This swing to lower cap rates is a secular phenom- enon that will survive a bounce in interest rates. It’s obvious that for a long time now we have been in a worldwide period of easy money. The universal consensus is that America is recovering, inflation is in the wind and (18) I admit this is a little REIT propaganda from yours truly the just retired Chairman of NAREIT. rates are going up. I guess I sort of agree, but I still feel that easy money is a secular phenomenon. In any event, in the current environment, we will run the business defen- sively with respect to rates. As I write this letter, REIT stocks are bouncing. The logic seems to be that stronger jobs reports point to a stronger economy, which points to higher interest rates, which points to declining real estate values. I don’t get it. History clearly shows that a dose of inflation and growth has been good to great for rents and the value of existing real estate. And while I don’t wish for it, higher rates, if they were to happen, will take out new-builds as competi- tion for our in-place real estate. My guess is that REIT stocks just got a little ahead of themselves. Mike and I think that our great assets, financial might, brand recognition, and deal flow are important to our future success. While we have become a large company, we believe we still can achieve a good rate of growth. We continue to think that simplicity is a virtue and on-the- fairway investments (mainstream) are our franchise. Perhaps we should have been even more aggressive over the past couple of years—we will see. In the current environment, while it is difficult to buy assets, we have and we will continue to find our opportunities. And, our best business today seems to be working our assets while we watch the market mark them up. (19) Market value of real estate is generally determined by the quotient of the asset’s EBITDA and the market determined capitalization rate (cap rate). Simply a cap rate is the yield on the investment.

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## People Mike and I appreciate and value Vornado’s human capital as highly as our financial capital. Starting with the eight Executive Vice Presidents, who are division heads and our direct reports, and extending to the 108 Vice Presidents, who are so essential to the success of our businesses, they have our praise and thanks. We welcome Alan Rice, a talented attorney as Corporation Counsel and Secretary. We also welcome Cathy Creswell, Director of Investor Relations, a talented professional well known to many of our investors, who is helping our efforts to continually improve communications and accessibility. This year Paul Larner, EVP of Administration, resigned to pursue his private entrepreneurial instincts and Ken McVearry, long time EVP of Smith, left to pursue other interests. Paul will not be replaced, and Mitchell Schear, President of Smith, has assumed Ken’s duties. As announced in February 2004, Alec Covington, President and CEO of AmeriCold, resigned to pursue an opportunity with a food distribution company. Alec has left us with a stable business and a sound organization. We wish him well. Mike O’Connell, who has been with AmeriCold for over ten years, has been promoted to be in char ge of all warehouse operations and, until a successor is in place, will report to Anthony Cossentino, Chief Financial Officer. After 34 years, Ralph Richards, a super-duper retail leas- ing representative and a nice man, has retired. Thanks and Godspeed. Michelle is still always right, Clarice is some fine painter, and Sherri had a baby boy. An important part of our business is keeping our proper- ties very well-maintained, which involves periodic remod- els and freshening, as needed. Long-time readers of Vo rnado’s annual report may notice that this year we have fr eshened and updated this report’s presentation—but, be assured, our culture will remain the same. Similarly, we ar in the process of freshening, updating and improving our website. Mike and I deeply believe in the future of Vornado. We thank our colleagues and shareholders. <img src='content_image/121658.jpg'> April 14, 2004

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## APPENDIX Below is a reconciliation of Net Income to EBITDA befor e minority interest and gains on sale of real estate: <img src='content_image/69431.jpg'> Below is a reconciliation of Net Income to Funds from Operations: <img src='content_image/69432.jpg'> Below is a reconciliation of Hotel Pennsylvania Net Income to Hotel Pennsylvania EBITDA: <img src='content_image/69433.jpg'> Below is a reconciliation of the impact on Net Income and on Funds from Operations of the PTO vacating space it previously occupied and its subsequent lease up: <img src='content_image/69434.jpg'>

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## PROPERTIES <img src='content_image/39703.jpg'>

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<img src='content_image/116071.jpg'> <img src='content_image/116072.jpg'> <img src='content_image/116073.jpg'> <img src='content_image/116075.jpg'> <img src='content_image/116074.jpg'>

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## ALEXANDER’S PROPERTIES (A 33.1% Owned Investment) <img src='content_image/103529.jpg'> ## THE NEWKIRK MASTER LIMITED PARTNERSHIP (A 22.6% Owned Investment) The Newkirk Master Limited Partnership owns an aggregate of 19.6 million square feet of office, retail and industrial properties located throughout the United States, which ar net leased primarily to credit rated tenants. ## TEMPERATURE CONTROLLED LOGISTICS (A 60% Owned Investment) The Temperature Controlled Logistics business owns 87 refrigerated war ehouses with an aggregate capacity of approximately 440.7 million cubic feet. The warehouses are located in 32 states.

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## TABLE OF CONTENTS <img src='content_image/50331.jpg'>

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## SELECTED FINANCIAL DATA <img src='content_image/25774.jpg'> See notes on following page.

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Year Ended December 31, <img src='content_image/117840.jpg'> (1) Funds From Operations (“FFO”) does not represent cash generated from operating activities in accordance with accounting princi- ples generally accepted in the United States of America and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. FFO should not be considered as an alterna- tive to net income as an indicator of the Company’ operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a relevant supplemental measure of operating performance because it provides a basis for comparison among REITs. FFO is computed in accordance with NAREIT’ definition, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with NAREIT’s definition. (2) Operating results for the year ended December 31, 2002, reflect the Company’s Januar y 1, 2002 acquisition of the remaining 66% of Charles E. Smith Commercial Realty L.P (“CESCR”) and the resulting consolidation of CESCR’s operations.

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## MANAGEMENT’S DISCUSSION AND ANAL YSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ## INDEX <img src='content_image/104357.jpg'>

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## Overview—Leasing Activity The following table summarizes, by business segment, the leasing statistics which the Company views as key performance indicators. As of December 31, 2003 <img src='content_image/107383.jpg'> In addition to the leasing activity in the table above, in the year ended December 31, 2003, 66,000 square feet of retail space included in the New York City Office segment was leased at an initial rent of $220.97 per square foot and in the three months ended December 31, 2003, 21,000 square feet of retail space was leased at an initial rent of $278.27 per square foot.

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## To Our Shareholders Vornado’s Funds From Operations for the year ended December 31, 2003 was $518.2 million, $4.44 per diluted share, compared to $439.8 million, $3.91 per diluted share, for the year ended December 31, 2002. Net Income applicable to common shares for the year ended December 31, 2003 was $439.9 million, $3.80 per diluted shar e, versus $209.7 million, $1.91 per diluted share, for the pr evious year. Here are the financial results by segment: <img src='content_image/17052.jpg'> Internally, at budget meetings and such, Joe Macnow uses as an earnings metric Funds from Operations Adjusted for Comparability . This metric allows us to focus on the core business by eliminating certain one-time items. One-timers are inevitable, can be either good or bad, but I admit we sometimes have a few too many of them. The following chart reconciles Funds from Operations as Reported to Funds from Operations Adjusted for Comparability:

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## Overview—Leasing Activity As of December 31, 2002 <img src='content_image/29052.jpg'> (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

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these assets at acquisition or in connection with impairment testing, or incorrectly estimates the useful lives of finite-life intangible assets, the impact to the Company’ consolidated financial statements could be material. ## NOTES AND MORTGAGE LOANS RECEIVABLE The Company’s policy is to record mortgages and notes receivable at the stated principal amount net of any discount or premiums. As of December 31, 2003, the carrying amount of Notes and Mortgage Loans receivable was $285,965,000. The Company accretes or amortizes any discounts or premiums over the life of the related loan receivable utilizing the effective interest method. The Company evaluates the collectibility of both inter est and principal of each of its loans, if circumstances warrant, to determine whether it is impaired. A loan is considered to be impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the loss accrual is calculated by comparing the recorded investment to the value determined by discounting the expected futur cash flows at the loan’s effective interest rate or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. ## PARTIALLY-OWNED ENTITIES As of December 31, 2003, the carrying amount of investments and advances to partially-owned entities, including Alexander’s, was $900,600,000. The Company considers APB 18—The Equity Method of Accounting for Investments in Common Stock, SOP 78-9—Accounting for Investments in Real Estate Ventures, EITF 96-16—Investors Accounting for an Investee When the Investor has the Majority of the Voting Interest but the Minority Partners have Certain Approval or Veto Rights, to determine the method of accounting for each of its partially-owned entities. In determining whether the Company has a controlling interest in a partially-owned entity and the requirement to consolidate the accounts of that entity, it considers factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members. The Company has concluded that it does not control a partially- owned entity, despite an ownership interest of 50% or greater if the approval of all of the partners/members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of real property, the hiring of a chief executive officer the commencement, compromise or settlement of any lawsuit, legal proceeding or arbitration or the placement of new or additional financing secured by assets of the venture. This is the case with respect to the Company’s 60% interest in Temperature Controlled Logistics, 80% interest in Starwood Ceruzzi Venture, and 50% interests in Monmouth Mall, MartParc Wells, MartPar Orleans, and 825 Seventh Avenue. If the Company is able to unilaterally make decisions for a partially-owned entity, the Company has concluded that it controls the entity and therefore consolidates the entity The Company accounts for investments on the equity method when its ownership interest is greater than 20% and less than 50%, and the Company does not have direct or indirect control. When partially-owned entities are in partnership form, the 20% threshold may be reduced. Equity method investments are initially recorded at cost and subsequently adjusted for the Company’s shar e of net income or loss and cash contributions and distributions to and from these entities. All other investments ar accounted for on the cost method. On a periodic basis the Company evaluates whether there ar any indicators that the value of the Company’s investments in partially-owned entities are impaired. The ultimate realization of the Company’s investment in partially-owned entities is dependent on a number of factors including the performance of the investee and market conditions. If the Company determines that a decline in the value of the investee is other than temporary, an impairment charge would be recorded. ## ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company periodically evaluates the collectibility of amounts due fr om tenants and maintains an allowance for doubtful accounts ($15,246,000 as at December 31, 2003) for estimated losses r esulting from the inability of tenants to make required payments under the lease agreement. The Company also maintains an allowance for receivables arising from the straight-

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lining of rents ($2,830,000 as at December 31, 2003). This r eceivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exer cises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. If estimates differ from actual results, this would impact reported results. ## REVENUE RECOGNITION The Company has the following revenue sources and revenue r ecognition policies: • Base Rents—income arising from tenant leases. These r ents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases. • Percentage Rents—income arising from retail tenant leases which are contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accor dance with SAB 104, which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved). • Hotel Revenues—income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is r ecognized when rooms are occupied. Food and beverage and banquet revenue are recognized when the services have been rendered. • Trade Show Revenues—income arising from the operation of trade shows, including rentals of booths. This revenue is recognized in accordance with the booth rental contracts when the trade shows have occurred. • Expense Reimbursements—revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the r espective property. This revenue is accrued in the same periods as the expenses are incurred. Before the Company recognizes revenue, it assesses among other things, its collectibility. If the Company incorrectly deter- mines the collectibility of its revenue, its net income and assets could be misstated. ## INCOME TAXES The Company operates in a manner intended to enable it to continue to qualify as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a dividend to its shar eholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to distribute to its shareholders 100% of its taxable income. Therefore, no provision for Federal income taxes is required. If the Company fails to distribute the required amount of income to its shar eholders, it would fail to qualify as a REIT and substantial adverse tax consequences may result.

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## Net income and EBITDA for the years ended December 31, 2003, 2002 and 2001 Below is a summary of Net income and EBITDA (1) by segment for the years ended December 31, 2003, 2002 and 2001. On January 1, 2003, the Company revised its definition of EBITDA to comply with the Securities and Exchange Commission’s Regulation G concerning non-GAAP financial measures. The revised definition of EBITDA includes minority interest, gains (losses) on the sale of depreciable real estate and income arising from the straight-lining of rent and the amortization of acquired in-place leases. Accordingly, EBITDA for all periods disclosed represents “Earnings before Interest, Taxes, Depreciation and Amortization.” Management considers EBITDA a supplemental measur e for making decisions and assessing the unlevered performance of its segments as it is related to the retur on assets as opposed to the levered return on equity. As properties ar bought and sold based on a multiple of EBITDA, management utilizes this measure to make investment decisions as well as to compar the performance of its assets to that of its peers. EBITDA is not a surrogate for net income because net income is after interest expense and accordingly, is a measure of retur on equity as opposed to return on assets. December 31, 2003 <img src='content_image/87379.jpg'> Included in EBITDA are gains on sale of real estate of $161,789, of which $157,200 and $4,589 relate to the Office and Retail segments, respectively.

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<img src='content_image/38556.jpg'> See Notes on page 12.

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December 31, 2001 <img src='content_image/127930.jpg'> Included in EBITDA are gains on sale of real estate of $15,495, of which and $12,445 and $3,050 relate to the Office and Retail segments, respectively. (1) EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Interest and debt expense and depreciation and amortization included in the reconciliation of net income to EBITDA include amounts which are netted in income from partially-owned entities in order to present the income from partially-owned entities on an EBITDA basis.

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(3) Other EBITDA is comprised of: For the Year Ended December 31, <img src='content_image/98424.jpg'> (A) Includes net gains of $9,200 on sales of real estate and $1,600 on the early extinguishment of debt, partially offset by a charge of $1,210 for an impairment loss and a litigation settlement. (B) EBITDA for the year ended December 31, 2003, reflects the Company’ share of Alexander’s stock appreciation rights compensation expense of $14,868 and the Company’ $1,589 share of EBITDA resulting from the commencement of Alexander’s lease with Bloomberg (87% of the space) on November 15, 2003 at Alexander’ s 731 Lexington Avenue property. EBITDA for the year ended December 31, 2002 and 2001 includes $3,524 and $6,298, respectively representing the Company’s share of Alexander’s gain on the sale of its Third Avenue and Fordham Road properties. The following table sets forth the percentage of the Company’s EBITDA by segment for the years ended December 31, 2003, 2002 and 2001. EBITDA for the year ended December 31, 2003, includes gains on sale of real estate of $161,789,000, of which $157,200,000 and $4,589,000 relate to the New York Office and Retail segments, respectively. The pro forma column gives effect to the January 1, 2002 acquisition by the Company of the remaining 66% interest in CESCR described previously as if it had occurred on January 1, 2001. Year Ended December 31, Percentage of EBITDA <img src='content_image/98425.jpg'>

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## Results Of Operations ## Years Ended December 31, 2003 and December 31, 2002 ## Revenues The Company’s revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below market leases net of above market leases pursuant to SFAS No. 141 and 142, and fee income, were $1,503,055,000 for the year ended December 31, 2003, compared to $1,392,239,000 in the prior year, an increase of $110,816,000. Below are the details of the increase by segment: <img src='content_image/83016.jpg'> See Leasing Activity on page 5 for further details and corresponding changes in occupancy. (1) Average occupancy and REVPAR for the Hotel Pennsylvania were 64% and $58 for the year ended December 31, 2003 compared to 65% and $58 for the prior year. (2) Reflects an increase of $2,841 resulting from the rescheduling of two trade shows from the fourth quarter of 2002, in which they were previously held to the first quarter of 2003, and $1,400 relates to a new show held for the first time in 2003, partially offset by lower trade show revenue in 2003 primarily due to a smaller April Market show as a result of a conversion of trade show space to permanent space.

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(3) Reflects increases of $12,953 from New York City Office leasing activity and $2,901 from CESCR’s leasing activity. These increases resulted primarily from higher rents for space relet in 2003 and 2002 (full year impact in 2003 as compared to a partial year in 2002) and an increase in CESCR occupancy of .3% this year partially offset by a decrease in NYC office occupancy of .6%. Initial rent for the 677 square feet of space relet in New York City was $44.41 per square foot in 2003, a 15.3% increase over prior esca- lated rent. Initial rent for the 2,510 square feet of space relet in CESCR portfolio was $30.62 per square foot a 2.5% increase over prior escalated rents. For further details of NYC and CESCR office leasing activity see page 5. (4) Resulted primarily from (i) an increase in the occupancy rate from 88.3% at December 31, 2002 to 93.0% at December 31, 2003 as a result of leasing space previously vacated by Bradlees and Kmart and (ii) higher rents for space relet in 2003 and 2002 (full year impact in 2003 as compared to a partial year in 2002). Initial rent for the 1,046 square feet of space relet in 2003 was $15.56 per square foot, a 13.2% increase over prior rent. For further details of Retail leasing activity see page 5. (5) Reflects an increase in occupancy of Merchandise Mart office space of 0.9% from 2002, higher rents for 1,157 square feet of showroom space relet in 2003 and 911 square feet relet in 2002 (full year impact in 2003 as compared to partial year impact in 2002), partially offset by a decrease in Merchandise Mart showroom occupancy of .1% from 2002 and lower rents for 270 square feet of office space relet in 2003. Initial rents for the 1,157 square feet of showroom space relet in 2003 was $23.43, a 0.6% increase over prior escalated rent. Initial rents for the 270 square feet of office space relet in 2003 was $21.24, a 5.3% decrease over prior escalated rent. For further details of Merchandise Mart leasing activity see page 5. (6) Reflects higher reimbursements from tenants resulting primarily from increases in real estate taxes. The increases in Office and Retail were $19,383 and $3,247, before reductions of $2,215 and $1,407 in the current quarter relating to the true-up of prior year’s billings. (7) Results primarily from a $3,444 decrease in CESCR third party leasing revenue from $7,100 in 2002 to $3,656 in 2003 as a result of the closing of one of the CESCR leasing offices. ## Expenses The Company’s expenses wer $921,097,000 for the year ended December 31, 2003, compared to $852,370,000 in the prior year, an increase of $68,727,000. Below ar the details of the increase (decrease) by segment: <img src='content_image/128482.jpg'> (1) The increase in Hotel Pennsylvania’ operating expenses was primarily due to a $1,700 increase in real estate taxes and a $500 increase in utility costs over the prior year. (2) Results primarily from the rescheduling of two trade shows from the fourth quarter of 2002, in which they were previously held to the first quarter of 2003, and due to a new trade show held for the first time in 2003.