December 31, 1998, 1997 and 1996

1. Organization and Operation

Realty Income Corporation (“Realty Income”, the “Company”, “we” or “our”) was organized in the State of Delaware in September 1993 to facilitate the merger, which was effected on August 15, 1994 (the “Consolidation”), of 10 private and 15 public real estate limited partnerships with and into the Company. In August 1995, the Company became self-administered and self-managed after acquiring R.I.C. Advisor, Inc. (the “Advisor”). In May 1997, we reincorporated as a Maryland corporation pursuant to a merger of the Company into a wholly-owned Maryland subsidiary and the conversion of each outstanding share of common stock of the Company into one share of common stock of the surviving corporation. We invest in commercial retail real estate and have elected to be taxed as a real estate investment trust (“REIT”). As of December 31, 1998, we owned 970 properties in 45 states containing over 7.8 million leasable square feet.

2. Summary of Significant Accounting Policies and Procedures

Principles of Consolidation The accompanying consolidated financial statements include the accounts of Realty Income and partnerships we control (subsidiaries) after elimination of all material intercompany balances and transactions.

Cash Equivalents We consider all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.

Depreciation and Amortization Depreciation of buildings and improvements, and amortization of goodwill are computed using the straight-line method over an estimated useful life of 25 years. Amortization of goodwill for the years ended December 31, 1998, 1997 and 1996 was $924,000, $924,000 and $916,000, respectively.

Leases All leases are accounted for as operating leases. Under this method, lease payments are recognized as revenue over the term of the lease on a straight-line basis.

Federal Income Taxes We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. We believe Realty Income has qualified and continues to qualify as a REIT and therefore will be permitted to deduct distributions paid to its stockholders, eliminating the federal taxation of income represented by such distributions at the Company’s level. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

Distributions Paid and Payable Realty Income pays distributions monthly. The following is a summary of the regular monthly cash distributions per share for the years ended December 31, 1998, 1997 and 1996. In January 1996, we also paid a special distribution of $0.23 per share. Including this special distribution, the 1996 distributions totaled $2.0925 per share.

The following presents the federal income tax characterization of distributions paid or deemed to be paid to stockholders for the years ended December 31: