<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

For the fiscal year ended December 31, 2005

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

For the transition period from __________________ to __________________

Commission File No. 001-12056

                           THE TOWN AND COUNTRY TRUST
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                                       <C>
                MARYLAND                                        52-6613091
      (State or Other Jurisdiction                             (IRS Employer
   of Incorporation or Organization)                      Identification Number)
</TABLE>

<TABLE>
<S>                                                             <C>
        300 East Lombard Street
          Baltimore, Maryland                                      21202
(Address of Principal Executive Office)                         (ZIP Code)
</TABLE>

                                 (410) 539-7600
              (Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: ______

<TABLE>
<CAPTION>
         Title of Each Class           Name of Exchange on Which Registered
         -------------------           ------------------------------------
<S>                                    <C>
Common Shares of Beneficial Interest          New York Stock Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "Accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [ ]   Accelerated filer [X]   Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2).  Yes [ ]   No [X]

Aggregate market value of voting stock held by non-affiliates of the Registrant
as of June 30, 2005: $500,984,876.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practical date: 17,700,981 Common Shares of
Beneficial Interest, $.01 Par Value, at March 15, 2006

================================================================================

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                                                           Part of Form 10-K Document
                        Document                              In Which Incorporated
                        --------                           --------------------------
<S>                                                        <C>
Portions of the Registrant's 2006 Proxy Statement to be             Part III
filed with the Securities and Exchange Commission (SEC)
</TABLE>

None of the Report of the Compensation Committee of the Board of Trustees on
Executive Compensation, the Audit Committee Report or the Performance Graph
contained in the 2006 Registrant's Proxy Statement to be filed with the SEC
shall be deemed incorporated by reference herein.

<PAGE>

                              SAFE HARBOR STATEMENT

The matters discussed herein include certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Town and
Country Trust (the "Company") intends that such forward-looking statements be
subject to the safe harbors created by such Acts. Words and phrases such as
"looking ahead," "we are confident," "should be," "will be," "predicted,"
"believe," "expect," "anticipate," and similar expressions identify
forward-looking statements. These forward-looking statements reflect the
Company's current views regarding future events and financial performance but
are subject to many known and unknown risks, uncertainties, and other factors
relating to the Company's operations and business environment which may cause
the actual results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to the following:

     -    Interest rate fluctuations;

     -    Competition for tenants and acquisitions from others, many of whom may
          have greater financial resources than the Company;

     -    Changes in rental rates which may be charged by the Company in
          response to market rental rate changes or otherwise;

     -    Changes in federal income tax laws and regulations;

     -    Any changes in the Company's capacity to acquire additional apartment
          properties and any changes in the Company's financial condition or
          operating results due to the acquisition of additional apartment
          properties;

     -    Unanticipated increases in rental expenses due to factors such as
          casualties to the Company's apartment properties or adverse weather
          conditions in the geographic locations of the Company's apartment
          properties;

     -    Local economic and business conditions, including, without limitation,
          conditions that may affect public securities markets generally, the
          real estate investment trust industry, or the markets in which the
          Company's apartment properties are located.

Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, there can be no
assurance that such statements will prove to be accurate. In view of the
significant uncertainties associated with such forward-looking statements, the
inclusion of this information should not be construed as a representation by the
Company that the results or conditions described in such statements will be
achieved. The Company undertakes no obligation to update publicly or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.


                                       1

<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

The Registrant, The Town and Country Trust (the "Trust" and, together with its
consolidated subsidiaries and other controlled entities, the "Company"), is a
self administered and self managed real estate investment trust ("REIT"),
organized in Maryland in 1993. The Company operates in one industry segment, the
ownership and operation of multifamily apartment communities. The Trust conducts
substantially all of its operations through its operating partnership, The TC
Operating Limited Partnership (the "Operating Partnership" or "TCOLP"), in which
it holds an 88% general partnership interest at March 15, 2006. The remaining
12% limited partnership interest in the Operating Partnership is held by certain
of the indirect predecessor owners of the Company's original 26 properties,
including the successors of the late Alfred Lerner, the Trust's former Chairman,
and Harvey Schulweis, the Trust's Chairman of the Board, President and Chief
Executive Officer. At December 31, 2005, the Company owned 39 apartment
communities (the "Properties") with 13,329 apartment units located in selected
markets in the Mid-Atlantic region and Florida. The Company's headquarters are
located at 300 East Lombard Street, Baltimore Maryland 21202 and its telephone
number is (410) 539-7600.

The Registrant makes available free of charge, through its website
(www.tctrust.com), its reports on Form 10-K, 10-Q and 8-K as soon as practicable
after they are electronically filed with the Securities and Exchange Commission.

At December 31, 2005, approximately 37.5% of the Company's apartments were
located in the greater Baltimore metropolitan area and an additional 25.4% were
located in the greater Washington, D.C. metropolitan area.

The Company had continued to implement the ongoing program of reinvesting
significant capital in its existing portfolio. During 2005, the Company began or
continued renovations to seven of its communities containing 4,167 units. The
renovations include the installation of new kitchens and baths, washers and
dryers, new entranceways and windows. At several of these properties the
renovations included the addition of a new clubhouse. Renovations at 884 units
were completed during 2005, bringing the total completed to 2,756 units.

MERGER TRANSACTION

On December 19, 2005 we entered into an Agreement and Plan of Merger, by and
among us, TCOLP, Magazine Acquisition GP LLC, Magazine Acquisition LP and
Magazine Acquisition LLC, which we amended on February 16, 2006, pursuant to
Amendment No. 1 to Agreement and Plan of Merger, by and among us, TCOLP,
Magazine Acquisition GP LLC, Magazine Acquisition LP and Magazine Acquisition
LLC ("Magazine Acquisition") (the Agreement and Plan of Merger, as amended, the
"Merger Agreement"). Magazine Acquisition is a joint venture investment vehicle
formed by affiliates of Morgan Stanley Real Estate and Onex Real Estate.
Pursuant to the terms of the Merger Agreement, we will merge with and into
Magazine Acquisition LP, with Magazine Acquisition LP continuing as the
surviving entity, and Magazine Acquisition LLC will merge with and into TCOLP,
with TCOLP continuing as the surviving entity (collectively referred to as "the
merger").

Under the terms of the Merger Agreement, holders of our common shares of
beneficial interest will receive $40.20 per share, without interest, plus a
pro-rated dividend payable for the number of days since the end of the last
fiscal quarter for which a dividend was declared and paid through the date of
the closing of the merger ("the Merger Consideration"). Holders of limited
partnership units in TCOLP will be entitled to receive $40.20 per unit, without
interest, plus a pro-rated distribution payable for the number of days since the
end of the last fiscal quarter for which a distribution was paid through the
date of the closing of the merger. Also, in connection with the merger, any
restrictions with respect to outstanding restricted shares awarded shall
terminate and all holders of outstanding share options shall receive payment of
the excess of the Merger Consideration over the exercise price per share of such
options. Pursuant to the terms of the indenture for our 5.375% Convertible
Senior Notes, due 2023, we are required to give public notice to the holders of
such notes two days before the date that is fifteen days before the anticipated
closing of the mergers (and mail notice to such holders ten days prior to such
anticipated closing). Such holders may surrender their notes for conversion at
any time from the date which is 15 days prior to the anticipated closing until
15 days after the actual closing.

The Board of Trustees unanimously approved the merger, the Merger Agreement and
the other transactions contemplated by the Merger Agreement and declared the
merger fair to, advisable and in the best interests of the trust, TCOLP, our
shareholders and the holders of units of limited partnership in TCOLP. On March
9, 2006, the shareholders of the trust approved the merger and the other


                                       2

<PAGE>

transactions contemplated by the Merger Agreement by an affirmative vote in
excess of two thirds of the votes that were entitled to be cast.

The merger is expected to occur during the first quarter of 2006. However, no
assurance can be given that the merger will occur or as to the timing of its
completion.

The foregoing description of the merger is qualified in its entirety by the full
text of the Merger Agreement that has been filed with the Securities and
Exchange Commission.

PROPERTY MANAGEMENT

Each of the apartment communities is managed by the Operating Partnership. The
management staff for each community includes on-site management and maintenance
personnel as well as off-site support staff. On-site staff performs leasing and
rent collection functions and coordinates maintenance and resident services.
Property management staffs are supervised by regional managers.

COMPETITION

All of the Company's apartments are located in developed areas and compete with
numerous other apartment communities within their respective sub-markets. In
many of the Company's apartment markets, the competition for residents is
intense. Some competing communities are larger or newer than the Company's
apartments and many offer features that the Company's communities do not have.
The competitive position of each of the Company's apartment communities varies.
Certain of the Company's competitors may have greater financial resources and
other competitive advantages over the Company.

FINANCING

Thirty-eight of the thirty-nine of the Company's properties are encumbered by
mortgage debt. Thirty-three properties are pledged as collateral for the
Company's master credit facility with Fannie Mae. Five properties are encumbered
by individual mortgage loans from Freddie Mac.

The Company has a credit facility with Fannie Mae of $488.2 million. This
secured facility matures in 2008. At December 31, 2005, outstanding borrowings
under the facility were $422.5 million, including amounts allocated to
properties held for disposition. Of the $422.5 million, $300 million bears
interest at a fixed rate of 6.91%. The remaining $122.5 million outstanding has
a weighted-average variable rate of 4.45% at December 31, 2005 and can be
converted to a fixed-rate term loan at the Company's option. The Company is
party to floating-to-fixed interest rate swaps that effectively fix the interest
rate on $40 million of this floating rate debt, changing the weighted average
rate on its floating rate debts at December 31, 2005 to 4.69%.

Total outstanding borrowings under the facility at December 31, 2004 were $340
million. Of the $340 million, $300 million bears interest at a fixed rate of
6.91%. The remaining $40 million was outstanding at a weighted-average variable
rate of 2.43% at December 31, 2004. After giving effect to the interest rate
swaps, the weighted average interest rate on the $40 million was 4.66%.

The Company has a $50 million bank line of credit. Advances under the line bear
interest at 120 basis points over LIBOR and are due on demand. Up to $10 million
of the line may be used for working capital purposes and $40 million may be used
to fund acquisitions. This line of credit matures in October 2006. The Company
has the option to extend the line through October 2008. At December 31, 2005, no
amounts were outstanding under the line. As of December 31, 2004, $2,000,000 was
outstanding under the line.

The Company has $74.75 million aggregate principal amount of 5.375% Convertible
Senior Notes outstanding. The notes mature on August 15, 2023 and are
convertible into the Company's common shares under certain circumstances,
provided that the share price exceeds $30.61 for a specified period of time. The
initial conversion rate of the notes is 39.20185 shares per $1,000 principal
amount of notes (equivalent to $25.51 per share). The conversion rate will be
adjusted under certain circumstances, including stock splits, stock dividends
and increases in the dividend rate over the current quarterly rate of $.43 per
share. The shares would be considered in diluted earnings per share if the
effect of including the conversion of debt were dilutive to earnings per share
from continuing operations. The notes are redeemable at the Company's option for
shares or cash at any time on or after August 21, 2010 and are subject to
repurchase at the option of the holder on August 15, 2008, August 15, 2010,
August 15, 2013 and August 15, 2018, or upon the occurrence of certain events.
The notes are unsecured and unsubordinated obligations of the Company.
Concurrent with the offering in 2003, the Company used approximately $15.0
million of the proceeds to purchase and retire 646,800 of its common shares
($23.19 per share) in privately negotiated transactions. The notes will become
convertible for a period commencing on March 16,


                                       3
<PAGE>

2006 (which is 15 days prior to March 31, 2006, the anticipated effective date
of the merger transaction discussed above) until 15 days after the actual
effective date of the merger.

The Company uses interest rate protection agreements to reduce the potential
impact of increases in interest rates as required by its secured credit
facility. The Company maintains two interest rate protection agreements for $139
million and $49.2 million, capping the Company's exposure to LIBOR at 9.35% and
7.5%, respectively, through March 2007. In addition, the Company executed two
$20 million floating to fixed interest rate swaps to effectively fix the
interest rate on $40 million of floating rate debt under the secured credit
facility at a blended rate of approximately 4.66%. The Company simultaneously
sold two $20 million interest rate caps, capping the Company's exposure to LIBOR
at 9.35%. These interest rate protection agreements hedge interest payments
consistent with the Company's risk management objective and strategy to reduce
exposure to variability in cash flows attributable to increases in LIBOR.

ENVIRONMENTAL MATTERS

Under various Federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for costs of
removal or remediation of certain hazardous or toxic substances on, under or in
such property. Such enactments often impose liability without regard to whether
the owner knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may affect adversely the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for release
of asbestos-containing materials ("ACMs") into the air and third parties may
seek recovery from owners or operators of real property for personal injury
associated with ACMs. In connection with its ownership and operation of the
Properties, the Trust, the Operating Partnership, or any of their respective
direct or indirect subsidiaries, as the case may be, potentially may be liable
for such costs.

All of the Properties have been subjected to a Phase I or similar environmental
assessment which generally does not involve invasive techniques such as soil or
ground water sampling. These assessments have not revealed any environmental
conditions that the Company believes will have a material adverse effect on its
business, assets, financial condition or results of operations, nor is the
Company aware of any material environmental liability.

EMPLOYEES

As of December 31, 2005, the Company had 428 employees.

ITEM 2. PROPERTIES.

The Properties consist of 39 multifamily properties comprising 13,329 apartment
units located in suburban Baltimore, Maryland; suburban Washington, D.C. and
northern Virginia; southeastern Pennsylvania; Delaware; and Florida.

The average occupancy rate for all Properties for fiscal 2005 and fiscal 2004
was 91.8% and 92.6%, respectively. Tenant leases are generally for one-year
terms and often require security deposits. Approximately 96% of the apartments
in the Properties are one-bedroom and two-bedroom apartments. The balance are
three-bedroom apartments or townhomes. The Properties typically consist of two-
and three-story buildings in a landscaped setting, many with amenities such as
swimming pools, tennis courts, playgrounds and community buildings. All
apartments offer air conditioning. The majority of such buildings are of brick
construction and all of the Properties are located in mature, fully-developed
neighborhoods.

The following table presents certain additional information concerning the
Properties:

<TABLE>
<CAPTION>
                                                                               2005
                                                                NUMBER       AVERAGE
PROPERTY NAME                         PROPERTY LOCATION        OF UNITS   OCCUPANCY (1)
-------------                    ---------------------------   --------   -------------
<S>                              <C>                           <C>        <C>
BALTIMORE
Seneca Bay                       Baltimore, Maryland               461        87.2%
</TABLE>


                                             4

<PAGE>

<TABLE>
<CAPTION>
                                                                               2005
                                                                NUMBER       AVERAGE
PROPERTY NAME                         PROPERTY LOCATION        OF UNITS   OCCUPANCY (1)
-------------                    ---------------------------   --------   -------------
<S>                              <C>                           <C>        <C>
Excalibur at Avalon (2)          Pikesville, Maryland              147        91.2%
Howard Crossing                  Ellicott City, Maryland         1,350        90.6%
Hallfield Manor                  Perry Hall, Maryland               75        95.1%
Skylark Pointe                   Carney, Maryland                  336        93.6%
Quail Hollow                     Glen Burnie, Maryland             336        93.5%
Ridgeview                        Rossville, Maryland               257        92.4%
Eagles Walk at White Marsh (3)   Rossville, Maryland               692        78.6%
Steeplechase                     Cockeysville, Maryland            540        89.5%
The Courts of Avalon             Pikesville, Maryland              258        95.4%
Versailles                       Towson, Maryland                  210        95.0%
Woodhill                         Glen Burnie, Maryland             334        92.9%

WASHINGTON, D.C.
Barton's Crossing                Alexandria, Virginia              532        92.1%
Carlyle Station                  Manassas, Virginia                408        92.3%
Fox Run                          Germantown, Maryland              218        90.9%
Lionsgate                        Herndon, Virginia                 328        93.6%
Tall Oaks                        Laurel, Maryland                  352        91.5%
The Glen                         Leesburg, Virginia                134        91.2%
The Village at McNair Farms      Herndon, Virginia                 283        95.7%
University Heights               Ashburn, Virginia                 466        91.5%
Willow Lake                      Laurel, Maryland                  456        92.6%
Watkins Station                  Gaithersburg, Maryland            210        89.7%

PENNSYLVANIA
Colonial Crest Emmaus            Emmaus, Pennsylvania              329        93.1%
Hanover                          Hanover, Pennsylvania             215        95.9%
Hidden Village                   Allentown, Pennsylvania           264        94.7%
Oakview Estates                  Lancaster, Pennsylvania           272        86.3%
Wheatland Hills                  Lancaster, Pennsylvania           413        80.0%
Rolling Hills                    York, Pennsylvania                184        96.6%
York                             York, Pennsylvania                396        92.9%

NEWARK, DELAWARE
Christina Mill                   Newark, Delaware                  228        95.7%
Stonegate                        Elkton, Maryland                  260        91.9%
Brandywine Woods                 Bear, Delaware                    265        82.0%

FLORIDA
Gardens East Apartments          Palm Beach Gardens, Florida       448        95.9%
Heron's Run                      Sarasota, Florida                 274        97.2%
Kirkman                          Orlando, Florida                  370        94.9%
McIntosh                         Sarasota, Florida                 212        96.9%
Perico                           Bradenton, Florida                256        96.1%
Twelve Oaks                      Orlando, Florida                  284        94.9%
Windermere Lakes                 Orlando, Florida                  276        93.2%
                                                                ------
Total                                                           13,329        91.8%
                                                                ======
</TABLE>

----------
(1)  Average occupancy is defined as total market rent at 100% less market rent
     on vacant units divided by total market rent for the period, expressed as a
     percentage.


                                        5

<PAGE>

(2)  Property held for disposition at December 31, 2005 and sold in January
     2006.

(3)  Property is undergoing major renovation.

ITEM 3. LEGAL PROCEEDINGS

There were no legal proceedings pending at December 31, 2005 or as of the date
of this report, except as noted below, to which the Registrant, the Operating
Partnership or any of the separate general partnerships and limited liability
companies which own the Properties is a party or to which the Properties are
subject that are likely to have a material adverse impact on the Registrant's
operations.

On February 2, 2006, an individual shareholder, Lee Foster, filed a putative
class action, styled as Lee Foster v. The Town and Country Trust, et. al., in
the Circuit Court for Baltimore City, Maryland, against us and each of our
trustees. The complaint asserted that the trustees breached alleged fiduciary
duties to plaintiff (and other shareholders) by entering into the December 19,
2005 merger agreement with Magazine Acquisition. The complaint sought, among
other things, an injunction preventing Magazine Acquisition from acquiring us.
By order dated February 21, 2006, the Court on our motion dismissed the
complaint for failure to state a claim upon which relief may be granted, but
allowed plaintiff 30 days within which to file an amended complaint.

Plaintiff filed his amended complaint on March 2, 2006. The amended complaint
seeks disgorgement of benefits allegedly received by our trustees as a result of
alleged breaches of duties, monetary damages, and an award of attorneys' fees,
expenses and costs. The amended complaint alleges that our trustees breached
their fiduciary duties to plaintiff (and other shareholders) by entering into
the December 19, 2005 merger agreement with Magazine Acquisition without,
according to plaintiff, having fully informed themselves about our "true value";
by agreeing to the initial $20 million break-up fee under such agreement; and by
subsequently approving an amendment to the merger agreement on February 16, 2006
and agreeing to increase the break-up fee to $28 million in connection with the
execution of the amendment. In addition, the amended complaint accuses our
trustees of having favored their own interests over the interests of our
shareholders. Finally, the amended complaint alleges that our trustees breached
their fiduciary duties to plaintiff (and other shareholders) by allegedly not
making full disclosure of all material facts in the proxy statement, dated
January 26, 2006, which was mailed to shareholders on or around January 30,
2006, and the supplement to the proxy statement, dated February 24, 2006, which
was mailed to shareholders on or around February 27, 2006.

We believe the amended complaint described above is without merit and we intend
to vigorously defend against the claims and allegations in the complaint.
However, there can be no assurance that the outcome will be favorable and
defending this action may require the attention and resources of management and,
regardless of the outcome, result in significant legal expenses.


                                        6

<PAGE>


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE REGISTRANT

Harvey Schulweis: Age 65. Mr. Schulweis has been the Chairman of the Board of
the Trust since December 2002 and the Chief Executive Officer of the Trust since
October 1997. Mr. Schulweis was President of the Trust from its formation in May
1993 until November 2004. Mr. Schulweis has been the President of Schulweis
Realty, Inc., a private real estate investment and development firm, since 1991.
Formerly a general partner of Lazard Freres & Co., he is a Certified Public
Accountant and was a partner in a predecessor firm to Ernst & Young LLP, a major
international accounting firm.

Thomas Brodie: Age 43. Mr. Brodie has served as President and Chief Operating
Officer of the Registrant since November 2004. Prior thereto, he served as
Executive Vice President--Co-Chief Operating Officer of the Registrant from
February 2003 to November 2004. He served as Senior Vice President and Chief
Investment Officer of the Registrant from May 2001 to February 2003. Mr. Brodie
also has served as Managing Director of Schulweis Realty, Inc., a private real
estate investment and development firm, since 1991. Prior to 1991, Mr. Brodie
was a Senior Vice President of Lazard Realty, Inc.

Alan W. Lasker: Age 59. Mr. Lasker has served as Senior Vice President--Finance,
Chief Financial Officer and Assistant Secretary of the Registrant since February
2003. Prior thereto, he served as Senior Vice President--Finance of the
Registrant since February 2000 and Vice President--Finance of the Registrant
since July 1997. Mr. Lasker also has served as Senior Vice President of
Schulweis Realty, Inc., a private real estate investment and development firm,
since 1991. Prior to 1991, Mr. Lasker was a Senior Vice President of Lazard
Realty, Inc. Mr. Lasker is a Certified Public Accountant.

W. Daniel Brown: Age 55. Mr. Brown has served as Senior Vice President - Human
Resources of the Registrant since May of 2001. Prior to joining the Company he
held the same position at Prime Retail, LP beginning in 1998. From 1994 through
1998, Mr. Brown was a Vice President in Human Resources at T. Rowe Price
Associates. Prior to joining T. Rowe Price, Mr. Brown was a member of the
Principle Professional Staff of the Johns Hopkins University Applied Physics
Laboratory (APL) from 1984 through 1994. Mr. Brown holds professional
certifications in both human resources and compensation.

William J. Fishell: Age 51. Mr. Fishell has served as Vice President - Treasurer
of the Registrant since February 2004. Previously, he served as Vice President -
Controller of the Registrant since February 2003 and Vice President - Controller
since the Registrant's initial public offering in 1993. He has been the
Principal Accounting Officer of the Registrant since February 2003. Prior
thereto, Mr. Fishell served as Assistant Vice President - Assistant Controller
since 1979.


                                        7
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES OF BENEFICIAL INTEREST AND RELATED
SHAREHOLDER MATTERS

The Company's common shares of beneficial interest are listed on the New York
Stock Exchange under the trading symbol "TCT."

<TABLE>
<CAPTION>
                       SALES PRICE
                     ---------------   CASH DIVIDENDS
   QUARTER ENDED      HIGH      LOW       DECLARED
   -------------     ------   ------   --------------
<S>                  <C>      <C>      <C>
March 31, 2004       $27.20   $24.99        $.43
June 30, 2004        $27.93   $22.50        $.43
September 30, 2004   $25.86   $24.00        $.43
December 31, 2004    $29.21   $25.25        $.43
March 31, 2005       $28.00   $25.20        $.43
June 30, 2005        $29.26   $25.66        $.43
September 30, 2005   $29.70   $27.22        $.43
December 31, 2005    $33.82   $26.79        $.43
</TABLE>

On February 3, 2006, a cash dividend for the quarter ended December 31, 2005 of
$.43 per share was declared, payable March 10, 2006, to shareholders of record
as of February 17, 2006.

At December 31, 2005, the approximate number of record holders of the Trust's
shares was 437. This does not include beneficial owners for whom Cede & Co. or
others act as nominee.

                      EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information concerning the Amended and Restated
1993 Long Term Incentive Plan and the 1997 Long Term Incentive Plan, both of
which have been approved by the shareholders of the Trust. The figures shown are
for the year ended December 31, 2005.

<TABLE>
<CAPTION>
                                                                                               Number of Securities
                                   Number of Securities To be   Weighted-Average Exercise    Remaining Available for
                                     Issued Upon Exercise of      Price of Outstanding        Future Issuance Under
                                       Outstanding Options                Options           Equity Compensation Plans
                                   --------------------------   -------------------------   -------------------------
<S>                                <C>                          <C>                         <C>
Equity Compensation Plans
   Approved by the Shareholders               162,316                      $20.34                    209,784
</TABLE>


                                       8

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                     ----------------------------------------------------
(In thousands, except per share data)                  2005       2004       2003       2002       2001
                                                     --------   --------   --------   --------   --------
<S>                                                  <C>        <C>        <C>        <C>        <C>
OPERATING DATA
Rental income                                        $131,697   $124,564   $116,485   $110,232   $107,401
Operating expenses                                     56,794     52,505     49,838     44,978     42,105
                                                     --------   --------   --------   --------   --------
   Net operating income                                74,903     72,059     66,647     65,254     65,296
Depreciation and amortization                          25,792     29,398     20,871     18,483     17,645
Interest expense                                       33,702     32,446     28,450     25,216     24,387
General and administrative expenses                     7,191      5,866      4,744      4,595      4,355
Separation expense                                         --      1,533         --         --      3,338
Merger related expenses                                 2,540         --         --         --         --
                                                     --------   --------   --------   --------   --------
Income before discontinued operations and minority
   interest                                             5,678      2,816     12,582     16,960     15,571
Income allocated to minority interest from
   continuing operations                                 (714)      (364)    (1,702)    (2,269)    (2,110)
Minority interest distributions less than
   (in excess of) earnings                                 --         --        576       (576)        --
                                                     --------   --------   --------   --------   --------
Income from continuing operations                       4,964      2,452     11,456     14,115     13,461

Discontinued operations:
Income from discontinued operations before
   impairment of assets and gains on involuntary
   conversion and sales of properties                     261        358      1,282      3,669      1,730
Impairment of assets held for sale and gain on
   involuntary conversion                                  --     (1,114)    (3,379)        --         --
Gain on sales of properties                                --         --     80,081         --         --
(Income) loss allocated to minority interest from
   discontinued operations                                (33)       100    (10,672)      (492)      (235)
                                                     --------   --------   --------   --------   --------
Income (loss) from discontinued operations                228       (656)    67,312      3,177      1,495
                                                     --------   --------   --------   --------   --------
Net income(1)                                        $  5,192   $  1,796   $ 78,768   $ 17,292   $ 14,956
                                                     ========   ========   ========   ========   ========
Basic earnings per share:
   Income from continuing operations                 $   0.29   $   0.15   $   0.72   $   0.88   $   0.86
   Income (loss) from discontinued operations            0.01      (0.04)      4.27       0.20       0.09
                                                     --------   --------   --------   --------   --------
   Net income                                        $   0.30   $   0.11   $   4.99   $   1.08   $   0.95
                                                     ========   ========   ========   ========   ========
Diluted earnings per share:
   Income from continuing operations                 $   0.29   $   0.14   $   0.71   $   0.87   $   0.84
   Income (loss) from discontinued operations            0.01      (0.04)      4.19       0.20       0.09
                                                     --------   --------   --------   --------   --------
   Net income                                        $   0.30   $   0.10   $   4.90   $   1.07   $   0.93
                                                     ========   ========   ========   ========   ========
</TABLE>

<TABLE>
<CAPTION>
(in thousands)
BALANCE SHEET DATA AT YEAR-END                         2005       2004       2003       2002       2001
                                                     --------   --------   --------   --------   --------
<S>                                                  <C>        <C>        <C>        <C>        <C>
Real estate assets, at cost                          $870,594   $793,358   $787,280   $665,998   $643,271
Net real estate assets                                579,824    522,412    514,413    412,854    407,902
Real estate and other assets held for disposition      20,801     21,188     54,168     73,336     74,119
Total assets                                          622,286    562,084    588,990    503,785    498,962
Mortgage notes payable                                488,782    407,856    419,930    422,003    390,587
Notes payable                                              --      2,000         --         --     16,000
5.375% Convertible Senior Notes                        74,750     74,750         --         --         --
Mortgage notes payable and other liabilities held
   for disposition                                      8,260      7,409     31,275     71,346     70,175
Minority interest                                       3,518      6,592      7,556         --        905
Shareholders' equity (deficit)                         25,174     46,717     39,362     (1,610)     9,492

(in thousands, except per share data)
SUPPLEMENTAL INFORMATION
Dividends declared per share                         $   1.72   $   1.72   $   1.72   $   1.72   $   1.72
                                                     ========   ========   ========   ========   ========
Net cash provided by operating activities            $ 39,473   $ 37,546   $ 43,107   $ 42,875   $ 42,221
Net cash used in investing activities                 (83,292)    (7,542)   (30,585)   (25,615)   (21,335)
Net cash provided by (used in) financing
   activities                                          46,391    (31,326)   (12,896)   (16,311)   (20,456)
Reconciliation of net income to funds from
   operations:
</TABLE>


                                       9

<PAGE>

<TABLE>
<S>                                                  <C>        <C>        <C>        <C>        <C>
Net income                                           $  5,192   $  1,796   $ 78,768   $ 17,292   $ 14,956
Income allocated to minority interest                     747        264     11,798      3,337      2,345
Gain on involuntary conversion                           (171)      (558)      (621)        --         --
Gain on sales of properties                                --         --    (80,081)        --         --
Real estate depreciation                               25,479     28,859     23,175     21,153     20,359
                                                     --------   --------   --------   --------   --------
  Funds from operations (1)                          $ 31,247   $ 30,361   $ 33,039   $ 41,782   $ 37,660
                                                     ========   ========   ========   ========   ========
</TABLE>

(1)  Funds from operations ("FFO") is computed as net income (loss) (computed in
     accordance with U. S. generally accepted accounting principles) ("U.S.
     GAAP") excluding gains and losses from sales and involuntary conversions of
     operating properties, plus real estate depreciation and income allocated to
     minority interest. This computation of FFO is consistent with the formal
     definition promulgated by the National Association of Real Estate
     Investment Trusts (NAREIT). The reconciliation of FFO to Net Income, the
     most directly comparable financial measure calculated in accordance with
     GAAP, is included in the table above. Management generally considers FFO to
     be a useful measure for reviewing the comparative operating performance of
     the Trust between periods or as compared to other companies, without giving
     effect to real estate depreciation and amortization, which assumes that the
     value of real estate diminishes predictably over time and which can vary
     among owners of similar assets based upon historical cost and useful life
     estimates. FFO should not be considered an alternative to net income as a
     measure of performance nor does it represent cash generated from operating
     activities in accordance with GAAP and, therefore, it should not be
     considered indicative of cash available to fund cash needs.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

The Town and Country Trust owns an approximate 88% general partnership interest
in The TC Operating Limited Partnership which, through wholly-owned subsidiary
entities, holds the operating assets of the Company. The remaining 12% is owned
by minority interest partners that hold limited partnership units, which are
convertible by the holders into the Company's common shares of beneficial
interest on a one-for-one basis. The general and limited partnership interests
in the TC Operating Limited Partnership are represented by Operating Partnership
units ("OP Units"). At December 31, 2005, the Company owned 17,655,222 OP Units
and the minority interests held 2,466,535 OP Units.

On December 19, 2005 we entered into an Agreement and Plan of Merger, by and
among us, TCOLP, Magazine Acquisition GP LLC, Magazine Acquisition LP and
Magazine Acquisition LLC, which we amended on February 16, 2006, pursuant to
Amendment No. 1 to Agreement and Plan of Merger, by and among us, TCOLP,
Magazine Acquisition GP LLC, Magazine Acquisition LP and Magazine Acquisition
LLC ("Magazine Acquisition") (the Agreement and Plan of Merger, as amended, the
"Merger Agreement"). Magazine Acquisition is a joint venture investment vehicle
formed by affiliates of Morgan Stanley Real Estate and Onex Real Estate.
Pursuant to the terms of the Merger Agreement, we will merge with and into
Magazine Acquisition LP, with Magazine Acquisition LP continuing as the
surviving entity, and Magazine Acquisition LLC will merge with and into TCOLP,
with TCOLP continuing as the surviving entity (collectively referred to as "the
merger").

Under the terms of the Merger Agreement, holders of our common shares of
beneficial interest will receive $40.20 per share, without interest, plus a
pro-rated dividend payable for the number of days since the end of the last
fiscal quarter for which a dividend was declared and paid through the date of
the closing of the merger ("the Merger Consideration"). Holders of limited
partnership units in TCOLP will be entitled to receive $40.20 per unit, without
interest, plus a pro-rated distribution payable for the number of days since the
end of the last fiscal quarter for which a distribution was paid through the
date of the closing of the merger. Also, in connection with the merger, any
restrictions with respect to outstanding restricted shares awarded shall
terminate and all holders of outstanding share options shall receive payment of
the excess of the Merger Consideration over the exercise price per share of such
options. Pursuant to the terms of the indenture for our 5.375% Convertible
Senior Notes, due 2023, we are required to give public notice to the holders of
such notes two days before the date that is fifteen days before the anticipated
closing of the mergers (and mail notice to such holders ten days prior to such
anticipated closing). Such holders may surrender their notes for conversion at
any time from the date which is 15 days prior to the anticipated closing until
15 days after the actual closing.

The Board of Trustees unanimously approved the merger, the Merger Agreement and
the other transactions contemplated by the Merger Agreement and declared the
merger fair to, advisable and in the best interests of the trust, TCOLP, our
shareholders and the holders of units of limited partnership in TCOLP. On March
9, 2006, the shareholders of the trust approved the merger and the other
transactions contemplated by the Merger Agreement by an affirmative vote in
excess of two thirds of the votes that were entitled to be cast.


                                       10
<PAGE>

The merger is expected to occur during the first quarter of 2006. However, no
assurance can be given that the merger will occur or as to the timing of its
completion.

The foregoing description of the merger is qualified in its entirety by the full
text of the Merger Agreement that has been filed with the Securities and
Exchange Commission.

The Town and Country Trust, organized in 1993, is a real estate investment trust
("REIT") focused on the ownership and operation of multifamily apartment
communities in selected markets in the Mid-Atlantic region of the U.S. and
Florida. The Company owns 38 multifamily apartment communities with 13,182
apartment homes classified as real estate held for investment and one apartment
community with 147 apartment homes classified as held for disposition in
selected markets in the Mid-Atlantic region of the U. S. and Florida. In 2004,
the Company exited the Charlotte, North Carolina market through the strategic
disposition of its two apartment communities located there. On October 6, 2005,
the Company acquired an apartment community consisting of 264 apartment homes
and one townhome in Bear, Delaware for approximately $41.6 million including
acquisition costs.

In October 2005, the Company entered into an agreement to sell an apartment
community in Baltimore, Maryland. This community is currently classified as held
for disposition on the Company's balance sheets. The sale was completed on
January 19, 2006 for net proceeds of approximately $37.3 million and the Company
expects to record a gain of approximately $17 million in the first quarter 2006.

The Company continues to aggressively reinvest in its existing portfolio.
Renovation projects include modernization of kitchens and bathrooms, new
building entrances and windows, new business and fitness centers, and the
addition of washers and dryers inside apartment homes.

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.

IMPAIRMENT OF REAL ESTATE ASSETS The Company periodically evaluates its
apartment communities for potential impairment indicators. Judgments regarding
the existence of impairment indicators are based on legal factors, market
conditions and operational performance of the apartment communities. Future
events could cause management to conclude that impairment indicators exist and
that the Company's portfolio of apartment communities is impaired. Any resulting
impairment loss could have a material adverse impact on the Company's financial
condition and results of operations.

REAL ESTATE The Company capitalizes expenditures made to acquire new assets,
substantially improve the value of an existing asset or extend an asset's useful
life. Any expenditure to repair or maintain an existing asset in normal
operating condition is expensed as incurred.

Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets. In assessing estimated useful lives, the Company
makes assumptions based on historical experience acquired from both within and
outside the Company.

The Company accounts for property acquisitions utilizing the purchase method,
and accordingly, the results of the acquisition properties are included in the
Company's results of operations from the date of acquisition. The Company
allocates the purchase price to the acquired tangibles, consisting of land,
building and improvements, and if material, to identified intangible assets and
liabilities, consisting of above/below market leases and at-market leases in
place based on their fair values.

REVENUE RECOGNITION Revenue from rental property is recognized on a
straight-line basis over the terms of the lease. Leases are generally for one
year or less.

Gains on sales of real estate assets are recognized pursuant to the provisions
of SFAS No. 66, Accounting for Sales of Real Estate. The specific timing of the
recognition of the sale and the related gain is measured against the various
criteria in SFAS No. 66 related


                                       11

<PAGE>

to the terms of the transactions and the Company's continuing involvement, if
any, associated with the assets sold. To the extent the sales criteria are not
met, the Company defers gain recognition until the sales criteria are met.

DISCONTINUED OPERATIONS SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, requires that the assets and liabilities and the results
of operations of any communities that have been sold since January 1, 2002, or
otherwise qualify as held for sale, be presented as discontinued operations in
the Company's Consolidated Financial Statements in both current and prior
periods presented. The community specific components of net income that are
presented as discontinued operations include net operating income, depreciation
expense, minority interest, interest expense and gains or losses on involuntary
conversion. In addition, the net gain or loss (including any impairment charge)
on the disposition of communities held for sale is presented as discontinued
operations. A change in presentation for discontinued operations would not have
any impact on the Company's financial conditions or results of operations. Real
estate assets held for sale are measured at the lower of the carrying amount or
the fair value less costs to sell, and would be presented separately in the
Consolidated Balance Sheet. Subsequent to classification of a community as held
for sale, no further depreciation is recorded on the assets.

HEDGE ACCOUNTING The Company carries all derivative financial instruments as
assets or liabilities on its balance sheets at fair value. Changes in fair value
of these instruments, which qualify as cash flow hedges, are recorded as a
component of other comprehensive income (loss). Any ineffective portion of the
change in value is recorded to interest expense in current period earnings.
Furthermore, should any change in management strategy, or other circumstance,
cause an existing highly effective hedge to become entirely ineffective, the
accumulated loss or gain in the value of the derivative instrument since its
inception may be required to be immediately reclassified from the shareholders'
equity section of the balance sheet to the income statement.

NEW ACCOUNTING PRONOUNCEMENT In December 2004, the Financial Accounting
Standards Board (FASB) issued a revision to SFAS No. 123 (revised 2004), Share
Based Payment ("Statement No.123(R)"). Statement No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recorded as an expense based on their fair values. The grant-date fair
value of employee share options and similar instruments will be estimated using
an option-pricing model adjusted for any unique characteristics of a particular
instrument. If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. The Company will adopt the provisions of
SFAS No. 123(R) during the first quarter 2006. The adoption of this new standard
is not expected to have a material effect on the financial position or financial
results of the Company.

RESULTS OF OPERATIONS

The Company's results include the results of both continuing and discontinued
operations. Income from Discontinued Operations in the accompanying statement of
operations for 2005 reflects the operations of a community under contract for
sale in Baltimore, Maryland (147 apartment homes). Income from Discontinued
Operations for 2004 and 2003 includes the property held for sale at December 31,
2005 as well as the apartment communities that were sold during 2004 and 2003
(580 and 2,325 apartment homes, respectively). The Company's results from
continuing operations consist of both "Same Store" results and results of new
acquisitions. "Same Store" results, as discussed in the comparison of 2005 to
2004, reflect results from 12,917 apartment homes owned and operated throughout
both 2005 and 2004. "Same Store" results, as discussed in the comparison of 2004
to 2003, reflect results from 12,332 apartment homes owned and operated
throughout both 2004 and 2003. Results for 2005 from new acquisitions include
results from one community (265 apartment homes) acquired in October 2005.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Net income for 2005 was $5,192,000, or $0.30 per diluted share, an increase of
$3,396,000 from $1,796,000, or $0.10 per diluted share, for the year ended
December 31, 2004. Real estate depreciation in 2005 is $25,015,000 compared to
$28,174,000 in 2004, a decrease of $3,159,000. Included in 2004 is a charge for
additional depreciation of $6,493,000 relating to the Company's change in the
estimated useful lives of certain depreciable assets, principally carpet, to
more closely approximate their current economic lives based on experience. Net
income for 2004 includes $1,672,000 of impairment charges offset by a $558,000
gain on involuntary conversion related to a fire on properties reported as
discontinued operations. Net income for 2004 includes a separation charge of
$1,533,000 related to the departure of two senior executives consisting
primarily of cash payments that were paid during 2005 and will be paid in 2006.
The results for 2004 also include expenses aggregating $573,000 relating to
damage sustained in Florida during the 2004 hurricane season and $403,000
related to compensation expense recorded on the cashless exercise of certain
stock options. The 2005 net income includes $2,540,000 in merger related fees
and $2,211,000, of additional compensation expense associated with the
accelerated vesting of certain restricted shares and the accelerated approval of
bonuses by the compensation committee.

CONTINUING OPERATIONS

SAME STORE COMMUNITIES

Operating results for the Same Store communities are set forth in the table
below:


                                       12

<PAGE>

<TABLE>
<CAPTION>
                             YEAR ENDED DECEMBER 31,
                       ----------------------------------
(in thousands)           2005       2004        CHANGE
                       --------   --------   ------------
<S>                    <C>        <C>        <C>      <C>
Rental income          $130,844   $124,564   $6,280   5.0%
Operating expenses       56,491     52,505    3,986   7.6%
                       --------   --------   ------   ---
Net operating income   $ 74,353   $ 72,059   $2,294   3.2%
                       ========   ========   ======   ===
</TABLE>

A reconciliation between net income and Same Store net operating income is as
follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED
                                                    DECEMBER 31,
                                                -------------------
(in thousands)                                     2005      2004
                                                --------   --------
<S>                                             <C>        <C>
Same Store net operating income                 $ 74,353   $ 72,059
Add (deduct):
   Real estate depreciation                      (25,015)   (28,174)
   Interest expense                              (33,702)   (32,446)
   General and administrative                     (7,191)    (5,866)
   Other depreciation and amortization              (948)    (1,224)
   Separation expense                                 --     (1,533)
   Gain on involuntary conversion                    171         --
   Merger related expenses                        (2,540)        --
   Income (loss) from discontinued operations        261       (756)
   Net operating income from acquisitions            550         --
   Income allocated to minority interest            (747)      (264)
                                                --------   --------
Net income                                      $  5,192   $  1,796
                                                ========   ========
</TABLE>

The Company uses net operating income (NOI) to measure the operating results of
its communities and to compare the operating performance of single assets or
groups of assets. The Company defines NOI as property rental income less
property operating expenses and does not include general and administrative
expenses, interest expense, depreciation and amortization, discontinued
operations, or gains/(losses) on sales of properties. Accordingly, this
performance measure is not intended as a replacement for net income determined
in accordance with U.S. GAAP. NOI is widely used by management and investors in
the real estate industry in connection with the valuation of income-producing
real estate and as a supplemental measure of operating performance. NOI measures
presented by the Company may not be comparable to other similarly titled
measures of other companies.

Same Store rental income for the year ended December 31, 2005, grew by
$6,280,000 or 5.0%, reflecting an average rental rate increase of 5.9% despite a
decline in occupancy of 80 basis points from 92.6% to 91.8%. Occupancy and
average rent statistics for the Company's operating markets are as follows:

<TABLE>
<CAPTION>
                                                AVERAGE MONTHLY RENT           OCCUPANCY
                                  % OF       -------------------------   --------------------
                              PORTFOLIO(1)    2005    2004(2)   CHANGE   2005   2004   CHANGE
                              ------------   ------   -------   ------   ----   ----   ------
<S>                           <C>            <C>      <C>       <C>      <C>    <C>    <C>
Baltimore, Maryland               37.5%      $  859    $  803    7.0%    90.1%  91.3%  (1.2)%
Metropolitan Washington, DC
   Northern Virginia              16.1%       1,181     1,112    6.2%    92.7%  93.8%  (1.1)%
   Maryland Suburbs               9.3%          983       945    4.0%    91.4%  92.6%  (1.2)%
Pennsylvania                      15.6%         689       664    3.8%    90.4%  91.1%  (0.7)%
Orlando, Florida                  7.0%          784       724    8.3%    94.4%  94.5%  (0.1)%
Sarasota/Bradenton, Florida       5.6%          815       762    7.0%    96.7%  95.6%   1.1%
Newark, Delaware                  5.6%          924       896    3.1%    93.6%  93.1%   0.5%
Palm Beach Gardens, Florida       3.3%          963       900    7.0%    95.9%  94.7%   1.2%
                                  -----      ------    ------    ---     ----   ----   ----
   Same Store Total              100.0%      $  895    $  845    5.9%    91.8%  92.6%  (0.8)%
                                  =====      ======    ======    ===     ====   ====   ====
</TABLE>

(1)  Based on number of Same Store apartment homes

(2)  Amounts have been restated for comparative purposes

Same Store operating expenses for the year ended December 31, 2005, increased
7.6% or $3,986,000, to $56,491,000 from $52,505,000 in 2004. Operating expenses
reflect an increase in repairs and maintenance of $1,044,000 or 6.7%, to
$16,697,000 from $15,653,000 due primarily to increased costs associated with
the turnover process offset by $573,000 of hurricane damages sustained at our
Florida properties in 2004. Utilities increased $975,000, or 13.3%, to
$8,323,000 from $7,348,000 as a result of rate increases for the purchase of
electric, natural gas and water. Specifically, $449,000 of the increase directly
relates to rate increases associated with the purchase of natural gas. Marketing
and advertising increased $543,000, or 11.6%, from $4,693,000 to $5,236,000, of
which


                                       13
<PAGE>

$179,000 is related to the Company starting to use third party call centers as a
first response to prospective customers and the remainder to increased print and
Internet advertising. Other operating expenses increased $678,000, or 12.3%, to
$6,177,000 from $5,499,000 as the Company accrued a $300,000 liability related
to an unresolved resident complaint and experienced a $159,000 increase in
professional fees associated with successful real estate tax appeals and $56,000
in cost related to the termination of a contract with a cable television
provider. As a result, net operating income increased $2,294,000, or 3.2%, to
$74,353,000 from $72,059,000.

ACQUISITIONS

The community acquired in October 2005 had net operating income of $550,000.

INTEREST EXPENSE

Interest expense increased $1,256,000, or 3.9%, to $33,702,000 from $32,446,000
last year. This is due principally to the amount of debt outstanding. The
weighted average debt outstanding increased from $413.8 million at December 31,
2004 to $437.3 million at year end in 2005. The 6.40% weighted average interest
rate in 2005 is flat compared to 6.42% last year.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased by $1,325,000, or 22.6% from
$5,866,000 last year to $7,191,000 due primarily to $1,553,000 in additional
compensation expense associated with the accelerated vesting of certain
restricted shares and the accelerated approval of bonuses by the compensation
committee. In 2004, the Company accrued $140,000 in state franchise taxes that
relate to two of the Company's wholly owned subsidiaries and is discussed
further in Note 13 to the Company's Consolidated Financial Statements.

DISCONTINUED OPERATIONS

For the year ended December 31, 2005, the Company recorded net income of
$228,000 compared to a loss on discontinued operations of $656,000 for the year
ended December 31, 2004. The loss from discontinued operations for the prior
year includes $1,672,000 of impairment charges offset by a $558,000 gain on
involuntary conversion related to a fire.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

Net income for 2004 was $1,796,000, or $0.10 per diluted share, a decrease of
$76,972,000 from $78,768,000 or $4.90 per diluted share, for the year ended
December 31, 2003. Included in net income in 2003 is an $80,081,000 gain
resulting from the sale of five communities in 2003. Included in net income for
2004 and 2003 is $1,672,000 and $4,000,000, respectively, of impairment charges
recorded on properties that were sold during 2004. Net income for 2004 also
includes a separation charge of $1,533,000 related to the departure of two
senior executives consisting primarily of cash payments that will be paid during
2005 and 2006. During 2004, the Company revised the estimated useful lives of
certain depreciable assets, principally carpet, to more closely approximate
their current economic lives based upon the Company's capital improvement and
renovation plans. This change in accounting estimate resulted in additional
depreciation expense of $6,493,000.

CONTINUING OPERATIONS

SAME STORE COMMUNITIES

Operating results for the Same Store communities are set forth in the table
below:

<TABLE>
<CAPTION>
                             YEAR ENDED DECEMBER 31,
                       ----------------------------------
(in thousands)           2004       2003        CHANGE
                       --------   --------   ------------
<S>                    <C>        <C>        <C>      <C>
Rental income          $115,710   $112,660   $3,050   2.7%
Operating expenses       49,581     48,570    1,011   2.1%
                       --------   --------   ------   ---
Net operating income   $ 66,129   $ 64,090   $2,039   3.2%
                       ========   ========   ======   ===
</TABLE>

A reconciliation between net income and Same Store net operating income is as
follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED
                                                    DECEMBER 31,
                                                -------------------
(in thousands)                                    2004       2003
                                                --------   --------
<S>                                             <C>        <C>
Same Store net operating income                 $ 66,129   $ 64,090
Add (deduct):
   Real estate depreciation                      (28,174)   (20,159)
   Interest expense                              (32,446)   (28,450)
   General and administrative                     (5,866)    (4,744)
   Other depreciation and amortization            (1,224)      (712)
   Separation expense                             (1,533)        --
   (Loss) income from discontinued operations       (756)    77,984
Net operating income from acquisitions             5,930      2,557
</TABLE>


                                       14

<PAGE>

<TABLE>
<S>                                             <C>        <C>
   Income allocated to minority interest            (264)   (11,798)
                                                --------   --------
Net income                                      $  1,796   $ 78,768
                                                ========   ========

</TABLE>

The Company uses net operating income (NOI) to measure the operating results of
its communities and to compare the operating performance of single assets or
groups of assets. The Company defines NOI as property rental income less
property operating expenses and does not include general and administrative
expenses, interest expense, depreciation and amortization, discontinued
operations, or gains/losses on sales of properties. Accordingly, this
performance measure is not intended as a replacement for net income determined
in accordance with U.S. GAAP. NOI is widely used by management and investors in
the real estate industry in connection with the valuation of income-producing
real estate and as a supplemental measure of operating performance. NOI measures
presented by the Company may not be comparable to other similarly titled
measures of other companies.

Same Store rental income for the year ended December 31, 2004, grew by
$3,050,000 or 2.7%, reflecting an average rental rate increase of 3.3% despite a
decline in occupancy of 110 basis points from 93.6% to 92.5%. Occupancy and
average rent statistics for the Company's operating markets are as follows:

<TABLE>
<CAPTION>
                                               AVERAGE MONTHLY RENT           OCCUPANCY
                                  % OF       ------------------------   --------------------
                              PORTFOLIO(1)    2004     2003    CHANGE   2004   2003   CHANGE
                              ------------   ------   ------   ------   ----   ----   ------
<S>                           <C>            <C>      <C>      <C>      <C>    <C>    <C>
Baltimore, Maryland               37.2%      $  770   $  734    4.9%    91.1%  93.2%  (2.1)%
Metropolitan Washington, DC
   Northern Virginia              14.8%       1,070    1,036    3.3%    94.0%  94.4%  (0.4)%
   Maryland Suburbs               10.0%         938      908    3.3%    92.6%  92.9%  (0.3)%
Pennsylvania                      16.8%         654      638    2.5%    91.1%  94.4%  (3.3)%
Orlando, Florida                   7.6%         724      715    1.3%    94.5%  91.7%   2.8%
Sarasota/Bradenton, Florida        6.0%         760      744    2.2%    95.6%  93.2%   2.4%
Newark, Delaware                   4.0%         888      881    0.8%    93.1%  94.1%  (1.0)%
Palm Beach Gardens, Florida        3.6%         900      901   (0.1)%   94.7%  94.3%   0.4%
                                 -----       ------   ------   ----     ----   ----   ----
   Same Store Total              100.0%      $  817   $  791    3.3%    92.5%  93.6%  (1.1)%
                                 =====       ======   ======   ====     ====   ====   ====
</TABLE>

(1)  Based on number of Same Store apartment homes

Same Store operating expenses for the year ended December 31, 2004, increased
2.1% or $1,011,000, to $49,581,000 from $48,570,000 in 2003. Operating expenses
reflect an increase in repairs and maintenance of $486,000 or 3.4%, to
$14,811,000 from $14,325,000 as the Company experienced approximately $573,000
in damages sustained in the 2004 hurricane season and annual salary increases
offset by reduced snow removal cost reflecting return to historical levels of
snowfall in 2004 following the record snowfall experienced on the East Coast in
early 2003. Marketing and advertising increased $433,000 or 10.9% to $4,395,000
from $3,962,000 related to increased leasing costs as well as increased
advertising for newly renovated properties. As a result, Same Store net
operating income increased $2,039,000 or 3.2% to $66,129,000 from $64,090,000.

ACQUISITIONS

During the year ended December 31, 2004, the two communities acquired in 2003
and included in continuing operations had net operating income of $5,930,000
compared to $2,557,000 for the prior year.

INTEREST EXPENSE

During 2003, the Company issued $74,750,000 of 5.375% Convertible Senior Notes
due 2023. Interest expense for 2004 related to the notes was $4,106,000 compared
to $1,659,000 for the year ended December 31, 2003. Interest expense on mortgage
debt increased $1,737,000 or 6.4% to $28,863,000 from $27,126,000 in the prior
year. Despite a decrease in average debt outstanding attributable to continuing
operations, from $457 million to $421 million, the weighted average interest
rate attributable to this debt, excluding the Convertible Senior Notes, was
6.42% compared to 5.67% for the prior year resulting in an increase to interest
expense.

DISCONTINUED OPERATIONS

For the year ended December 31, 2004, the Company recorded a loss on
discontinued operations of $656,000 compared to net income of $67,312,000 for
the year ended December 31, 2003. The income from discontinued operations for
the prior year includes an $80,081,000 gain related to the sale of five
apartment communities containing 2,325 apartment homes in the Baltimore,
Maryland suburbs. Discontinued operations for 2004 and 2003, included impairment
charges of $1,672,000 and a $4,000,000, respectively, recorded on the Charlotte
properties sold during 2004.

DISTRIBUTIONS TO MINORITY INTEREST IN EXCESS OF EARNINGS


                                       15

<PAGE>

U.S. GAAP requires that, for financial reporting purposes, an additional
allocation of income be made to the minority interest account in an amount
necessary to keep such balance from falling below zero since there is no
requirement for the unit holders to make additional contributions. During 2003,
earnings were in excess of distributions to minority interests and, therefore,
the Company reallocated the $576,000 that had previously been so allocated to
the minority interests.

FUNDS FROM OPERATIONS

Funds from operations ("FFO") is computed as net income (loss) (computed in
accordance with U.S. GAAP) excluding gains and losses from sales and involuntary
conversions of operating properties, plus real estate depreciation. This
computation of FFO is consistent with the formal definition promulgated by the
National Association of Real Estate Investment Trusts (NAREIT). The
reconciliation of FFO to Net Income, the most directly comparable financial
measure calculated in accordance with U.S. GAAP, is included in the table below.
Management generally considers FFO to be a useful measure for reviewing the
comparative operating performance of the Trust between periods or as compared to
other companies, without giving effect to real estate depreciation and
amortization, which assumes that the value of real estate diminishes predictably
over time and which can vary among owners of similar assets based upon
historical cost and useful life estimates. FFO should not be considered an
alternative to net income as a measure of performance nor does it represent cash
generated from operating activities in accordance with U.S. GAAP and, therefore,
it should not be considered indicative of cash available to fund cash needs.

While the NAREIT definition of FFO does not specifically address involuntary
conversions of operating properties, management believes that such conversions
are, in substance, sales of property. Since the NAREIT definition of FFO
excludes gains and losses on property sales, the reported gain on involuntary
conversion has, likewise, been excluded from FFO.

A reconciliation between net income and FFO is as follows:

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                        ----------------------------
(in thousands)                            2005      2004      2003
                                        -------   -------   --------
<S>                                     <C>       <C>       <C>
Net Income                              $ 5,192   $ 1,796   $ 78,768
Income allocated to minority interest       747       264     11,798
Gain on involuntary conversion             (171)     (558)      (621)
Gain on sales of operating properties        --        --    (80,081)
Real estate depreciation                 25,479    28,859     23,175
                                        -------   -------   --------
Funds from operations                   $31,247   $30,361   $ 33,039
                                        =======   =======   ========
</TABLE>

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS

The following table summarizes the Company's contractual obligations as of
December 31, 2005:

<TABLE>
<CAPTION>
                                         Less than                           More than
(in thousands)                  Total      1 year    1-3 years   3-5 years    5 years
                              --------   ---------   ---------   ---------   ---------
<S>                           <C>        <C>         <C>         <C>         <C>
Long-term debt obligations    $571,685      $736      $446,639    $49,560     $74,750
Operating lease obligations      3,402       338           705        744       1,615
</TABLE>

See Note 6 to the Consolidated Financial Statements for a discussion of the
Company's off-balance sheet obligations upon the exercise of the right of the
holders of the 5.375% Convertible Senior Notes to convert their notes into
common shares. In connection with the Company's improvement program discussed
below, the Company currently has contracts pending that aggregate $9,520,000
for work to be performed over the next one to three years. However, these
contracts contain certain provisions to allow for termination without
significant penalties.

LIQUIDITY AND CAPITAL RESOURCES

A summary of the Company's cash flow activities is as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      ------------------------------
(in thousands)                                          2005       2004       2003
                                                      --------   --------   --------
<S>                                                   <C>        <C>        <C>
Net cash provided by operating activities             $ 39,473   $ 37,546   $ 43,107
Net cash used in investing activities                  (83,292)    (7,542)   (30,585)
Net cash provided by (used in) financing activities     46,391    (31,326)   (12,896)
</TABLE>

Operating activities provided unrestricted cash for 2005 of $39,473,000 compared
to $37,546,000 for 2004, and $43,107,000 for 2003. The increase in operating
cash flow is primarily the result of an improvement in operating performance
offset by increased interest


                                       16
<PAGE>

expense. Net cash flow used in investing activities has increased as compared to
2004 as a result of the purchase of an apartment community and as a result of
the continued interior/exterior renovations programs at seven of the Company's
communities. In 2004, cash flow from investing activities also included proceeds
from the disposition of two properties. In 2005, financing activities provided
cash flow of $46,391,000 as compared to net cash used of $31,326,000 for 2004,
mainly as a result of net borrowings in 2005 compared to net repayment of
mortgage debt in 2004 net of the additional funds received in connection with
the share offering in 2004. The pending merger is anticipated to close before
the end of the first quarter 2006. A prorated dividend, based on $0.43 per
share, will be included as part of the merger consideration.

During 2005, the Company acquired an apartment community in Bear, Delaware a
suburb of Wilmington, Delaware that contains 264 garden-style apartment homes
and one townhome for approximately $41.6 million, including acquisition costs.
The properties were acquired through an intermediary in anticipation of the
completion of a like-kind exchange under Section 1031 of the Internal Revenue
Code. The Company funded the acquisition using its existing credit facilities.
In October 2005, the Company entered into an agreement to sell an apartment
community in Baltimore, Maryland. This community is classified as held for
disposition on the Company's balance sheets. This transaction, which occurred in
January 2006, completed the like-kind exchange transaction discussed above. The
Company expects to record a gain of approximately $17 million in the first
quarter of 2006 as a result of the sale.

The Company makes capital improvements to certain of its properties. These
capital improvements include expenditures that increase the value and extend the
useful life of an asset. Expenditures for ordinary repairs and maintenance are
expensed as incurred. Normal, recurring capital expenditures generally relate to
items having economic lives of 10 years or less and include the replacement of
appliances, carpeting and tile plus other routine capital expenditures such as
landscaping, parking lot sealing and striping, HVAC equipment and various
interior and exterior building improvements. The Company also makes certain
expenditures that are considered to be non-recurring or revenue-enhancing in
nature and generally relate either to (i) items having economic lives of more
than 10 years or (ii) renovation projects such as the modernization of kitchen
and bathrooms, new building entrances and windows, new business and fitness
centers, and the addition of new appliances such as washers and dryers. In
conjunction with certain of these renovation projects, the Company enters into
commitments to purchase goods and services with vendors performing the work. The
Company finances its capital improvements through a revolving credit facility
and working capital. The following table details these expenditures for the year
ended December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                                      ---------------------------------------
                                             2005                 2004
                                      ------------------   ------------------
(in thousands except per unit data)    Amount   Per Unit    Amount   Per Unit
                                      -------   --------   -------   --------
<S>                                   <C>       <C>        <C>       <C>
Recurring                             $ 6,128    $  467    $ 6,598    $  494
Non-recurring                          35,026     2,668     30,389     2,273
                                      -------    ------    -------    ------
Total capital                         $41,154    $3,135    $36,987    $2,767
                                      =======    ======    =======    ======
</TABLE>

The Company has a credit facility with Fannie Mae of $488.2 million. This
secured facility matures in 2008. At December 31, 2005, outstanding borrowings
under the facility were $422.5 million, including amounts allocated to
properties held for disposition. Of the $422.5 million, $300 million bears
interest at a fixed rate of 6.91%. The remaining $122.5 million outstanding has
a weighted-average variable rate of 4.45% at December 31, 2005 and can be
converted to a fixed-rate term loan at the Company's option. The Company is
party to floating-to-fixed interest rate swaps that effectively fix the interest
rate on $40 million of this floating rate debt, changing the weighted average
rate on its floating rate debts at December 31, 2005 to 4.69%.

Total outstanding borrowings under the facility at December 31, 2004 were $340
million. Of the $340 million, $300 million bears interest at a fixed rate of
6.91%. The remaining $40 million was outstanding at a weighted-average variable
rate of 2.43% at December 31, 2004. After giving effect to the interest rate
swaps, the weighted average interest rate on the $40 million was 4.67%.

The Company has a $50 million bank line of credit. Advances under the line bear
interest at 120 basis points over LIBOR and are due on demand. Up to $10 million
of the line may be used for working capital purposes and $40 million may be used
to fund acquisitions. This line of credit matures in October 2006. The Company
has the option to extend the line through October 2008. At December 31, 2005, no
amounts were outstanding under the line. As of December 31, 2004, $2,000,000 was
outstanding under the line.

The Company has $74.75 million aggregate principal amount of 5.375% Convertible
Senior Notes outstanding. The notes mature on August 15, 2023 and are
convertible into the Company's common shares under certain circumstances,
provided that the share price exceeds $30.61 for a specified period of time. The
initial conversion rate of the notes is 39.20185 shares per $1,000 principal
amount of notes (equivalent to $25.51 per share). The conversion rate will be
adjusted under certain circumstances, including stock splits, stock dividends
and increases in the dividend rate over the current quarterly rate of $.43 per
share. The shares would be considered in diluted earnings per share if the
effect of including the conversion of debt were dilutive to earnings per share
from continuing operations. The notes are redeemable at the Company's option for
shares or cash at any time on or after August 21, 2010 and are subject to
repurchase at the option of the holder on August 15, 2008, August 15, 2010,
August 15, 2013 and August 15, 2018, or upon


                                       17

<PAGE>

the occurrence of certain events. The notes are unsecured and unsubordinated
obligations of the Company. Concurrent with the offering in 2003, the Company
used approximately $15.0 million of the proceeds to purchase and retire 646,800
of its common shares ($23.19 per share) in privately negotiated transactions.
The notes will become convertible for a period commencing on March 16, 2006
(which is 15 days prior to March 31, 2006, the anticipated effective date of the
merger transaction discussed above) until 15 days after the actual effective
date of the merger.

The following table sets forth certain information regarding the Company's
outstanding indebtedness as of December 31, 2005:

<TABLE>
<CAPTION>
                                                          % Of   Interest
(Dollar amounts in thousands)                  Amount     Debt   Rate (2)    Maturity
                                              --------   -----   --------   -----------
<S>                                           <C>        <C>     <C>        <C>
Mortgage Debt:
Secured facility
   Fixed (1)                                  $333,580    58.4%    6.65%           2008
   Floating                                     80,767    14.1%    4.70%           2008
Conventional mortgages                          74,435    13.0%    6.19%    2007 - 2009
                                              --------   -----     ----
   Total mortgage debt                         488,782    85.5%    6.20%

Convertible Senior Notes                        74,750    13.1%    5.38%           2023

Mortgage debt held for disposition:
   Secured Fixed rate                            6,420     1.1%    6.65%           2008
   Secured Floating rate                         1,733     0.3%    4.70%           2008
                                              --------   -----     ----
   Total mortgage debt held for disposition      8,153     1.4%    6.27%
                                              --------   -----     ----
Total debt                                    $571,685   100.0%    6.14%
                                              ========   =====     ====
</TABLE>

(1)  The information shown for this debt gives effect to two interest rate swap
     agreements that have the effect of fixing the interest rate on $40 million
     of debt at approximately 4.66% from January 2003 to April 2007.

(2)  Weighted average

The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For debt obligations, the table presents principal
cash flows and related weighted average interest rates by expected maturity
dates. For interest rate swaps and caps, the table presents notional amounts and
weighted average interest rates or strike rates by contractual maturity dates.

<TABLE>
<CAPTION>
                                                                                                           FAIR
                                                                                                         VALUE AT
(in thousands)                           2006     2007       2008       2009    THERE-AFTER     TOTAL    12/31/05
                                         ----   --------   --------   -------   -----------   --------   --------
<S>                                      <C>    <C>        <C>        <C>       <C>           <C>        <C>
Long-term Debt
   Fixed Rate                            $736    $23,841   $300,298   $49,560     $74,750     $449,185   $447,440
   Avg. Interest Rate                     6.2%       6.2%       6.7%      7.2%        5.4%

   Floating Rate                           --         --    122,500        --          --      122,500    122,500
   Avg. Interest Rate                      (1)        (1)        (1)       (1)         --

Interest Rate Swaps
   Pay Fixed/Receive Variable Notional     --     40,000         --        --          --       40,000        288
      amount
   Avg. Pay Rate                         4.16%      4.16%        --        --          --
   Avg. Receive Rate                       (2)        (2)        --        --          --

Interest Rate Caps
   Notional Amount                         --    148,172         --        --          --      148,172         --
   Strike Rate                             --        8.7%        --        --          --
</TABLE>

(1)  Average variable interest rate is equivalent to the Fannie Mae MBS
     pass-through rate plus 49 basis points.

(2)  Average receive rate is equivalent to LIBOR.

At December 31, 2004, the Company had fixed rate debt outstanding of
$449,882,000, which had a fair value of $448,339,000.


                                       18

<PAGE>

The Company's primary market risk exposure relates to changes in interest rates
associated with the variable rate portion of its secured credit facility and its
bank line of credit. The Company had $82.5 million in variable rate debt
outstanding at December 31, 2005, excluding amounts on which the interest rates
are effectively fixed by floating to fix interest rate swap agreements. A
hypothetical 100 basis point increase in interest rates in 2006 over the rates
in effect during 2005 would result in an increase of interest expense and a
corresponding decrease in income before discontinued operations and minority
interest of approximately $709,000. This estimate incorporates only those
exposures that exist as of December 31, 2005 and does not consider exposures
that could arise after that date.

The Company uses interest rate protection agreements to reduce the potential
impact of increases in interest rates as required by its secured credit
facility. The Company maintains two interest rate protection agreements for $139
million and $49.2 million, capping the Company's exposure to LIBOR at 9.35% and
7.5%, respectively, through March 2007. In addition, the Company executed two
$20 million floating to fixed interest rate swaps to effectively fix the
interest rate on $40 million of floating rate debt under the secured facility at
a blended rate of approximately 4.66%. The Company simultaneously sold two $20
million interest rate caps, capping the Company's exposure to LIBOR at 9.35%.
These interest rate protection agreements hedge interest payments consistent
with the Company's risk management objective and strategy to reduce exposure to
variability in cash flows attributable to increases in LIBOR.

Debt agreements typically contain representations and financial or other
covenants that must be adhered to in order for a borrower to avoid default on
the agreement. The Company monitors its compliance with the covenants set forth
in its debt agreements and does not believe that it will breach any of them in
the ordinary course of business. A breach of a material covenant would normally
result in the inability of the Company to maintain funds available until such
breach is remedied or would allow the lender to require the Company to repay the
debt obligation.

The Company has an effective shelf registration statement on file with the SEC
that provides for the issuance of up to $75 million in securities. The Company
believes that it is prudent to maintain shelf registration capacity in order to
facilitate future capital raising activities. In February 2004, the Company sold
1,410,000 of its common shares pursuant to its shelf registration in a private
sale at a negotiated price of $24.80 per share. After the sale, approximately
$40 million in securities remains available under the shelf registration
statement. The net proceeds of approximately $34.7 million from the sale, along
with the proceeds of the debt offering in August 2003, were used to pay down
floating rate debt.

Management believes that the Company has and will have access to the capital
resources necessary to adequately fund its business. At December 31, 2005, the
Company had $3,517,000 in cash and cash equivalents and $10 million available
under its working capital line of credit. The Company also had $65.7 million in
unused capacity on its secured credit facility which it intends to use primarily
to fund acquisitions as well as its on-going capital improvements program. In
addition, another $40 million is available for acquisitions on its bank line of
credit. The Company expects that adequate cash will be available to fund its
operating and administrative expenses, normal capital expenditures, debt service
obligations and payments of dividends in the foreseeable future.

The Company believes that the direct effects of inflation upon its operations
are immaterial. Substantially all of its apartment unit leases are for a term of
one year or less, which enables the Company to seek increased rents upon renewal
or reletting of apartment units. Such short-term leases minimize the risk of the
adverse effects of inflation; however, as a general rule, such leases permit
tenants to leave at the end of the lease term without penalty.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information in response to this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Recourses" included in Item 7 of this Form
10-K and is incorporated herein by reference.


                                       19

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(A) FINANCIAL STATEMENTS

                           THE TOWN AND COUNTRY TRUST
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)                                   ---------------------
                                                                       2005        2004
                                                                    ---------   ---------
<S>                                                                 <C>         <C>
ASSETS
Real estate held for investment:
   Land                                                             $ 105,674   $ 101,160
   Buildings and improvements                                         759,753     688,448
   Other                                                                5,167       3,750
                                                                    ---------   ---------
                                                                      870,594     793,358
Less accumulated depreciation                                         290,770     270,946
                                                                    ---------   ---------
                                                                      579,824     522,412
Real estate and other assets held for disposition                      20,801      21,188
Cash and cash equivalents                                               3,517         945
Restricted cash                                                         2,680       2,390
Deferred financing costs, net                                           4,385       5,531
Other assets                                                           11,079       9,618
                                                                    ---------   ---------
   Total assets                                                     $ 622,286   $ 562,084
                                                                    =========   =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable                                              $ 488,782   $ 407,856
5.375% Convertible Senior Notes                                        74,750      74,750
Mortgage notes payable and other liabilities held for disposition       8,260       7,409
Notes payable                                                              --       2,000
Accrued interest                                                        3,805       3,984
Accounts payable and other liabilities                                 14,571       9,510
Security deposits                                                       3,426       3,266
Minority interest                                                       3,518       6,592
                                                                    ---------   ---------
   Total liabilities                                                  597,112     515,367

Shareholders' equity:
   Common shares of beneficial interest ($0.01 par value),
      500,000,000 shares authorized, 17,655,222
      and 17,479,576 issued and outstanding at December 31,
      2005 and 2004, respectively                                         177         175
   Additional paid-in capital                                         356,420     351,727
   Distributions in excess of accumulated earnings                   (325,400)   (300,372)
   Deferred compensation - restricted stock                            (6,051)     (3,799)
   Accumulated other comprehensive income (loss)                           28      (1,014)
                                                                    ---------   ---------
      Total shareholders' equity                                       25,174      46,717
                                                                    ---------   ---------
   Total liabilities and shareholders' equity                       $ 622,286   $ 562,084
                                                                    =========   =========
</TABLE>

See accompanying notes.


                                       20
<PAGE>

                           THE TOWN AND COUNTRY TRUST
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                   ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)                                2005       2004       2003
                                                                   --------   --------   --------
<S>                                                                <C>        <C>        <C>
REVENUES:
Rental income                                                      $131,697   $124,564   $116,485

EXPENSES:
Operating expenses:
   Real estate taxes and insurance                                   12,762     12,561     12,016
   Utilities                                                          8,370      7,348      7,117
   Repairs and maintenance                                           16,797     15,653     14,684
   Marketing and advertising                                          5,288      4,693      4,136
   Management expense                                                 7,352      6,751      6,604
   Other                                                              6,225      5,499      5,281
                                                                   --------   --------   --------
   Total operating expenses                                          56,794     52,505     49,838
Real estate depreciation                                             25,015     28,174     20,159
Interest expense                                                     33,702     32,446     28,450
General and administrative expenses                                   7,191      5,866      4,744
Separation expense                                                       --      1,533         --
Merger related expenses                                               2,540         --         --
Other depreciation and amortization                                     777      1,224        712
                                                                   --------   --------   --------
                                                                    126,019    121,748    103,903
                                                                   --------   --------   --------
Income before discontinued operations and minority interest           5,678      2,816     12,582
Income allocated to minority interest from continuing operations       (714)      (364)    (1,702)
Minority interest distribution less than earnings                        --         --        576
                                                                   --------   --------   --------
Income from continuing operations                                     4,964      2,452     11,456
                                                                   --------   --------   --------
Discontinued operations:
   Income from discontinued operations before impairment of
      assets and gains on involuntary conversion and sales of
      properties                                                        261        358      1,282
   Impairment of assets held for sale and gain on involuntary
      conversion                                                         --     (1,114)    (3,379)
   Gain on sales of properties                                           --         --     80,081
   (Income) loss allocated to minority interest from
      discontinued operations                                           (33)       100    (10,672)
                                                                   --------   --------   --------
Income (loss) from discontinued operations                              228       (656)    67,312
                                                                   --------   --------   --------
Net income                                                         $  5,192   $  1,796   $ 78,768
                                                                   ========   ========   ========
Basic earnings per share:
   Income from continuing operations                               $   0.29   $   0.15   $   0.72
   Income (loss) from discontinued operations                          0.01      (0.04)      4.27
                                                                   --------   --------   --------
   Net income                                                      $   0.30   $   0.11   $   4.99
                                                                   ========   ========   ========
Diluted earnings per share:
   Income from continuing operations                               $   0.29   $   0.14   $   0.71
   Income (loss) from discontinued operations                          0.01      (0.04)      4.19
                                                                   --------   --------   --------
   Net income                                                      $   0.30   $   0.10   $   4.90
                                                                   ========   ========   ========
Weighted average common shares outstanding - basic                   17,167     16,896     15,773
Dilutive effect of outstanding options, restricted shares and
   convertible shares                                                   264        278        298
                                                                   --------   --------   --------
Weighted average common shares outstanding - diluted                 17,431     17,174     16,071
                                                                   ========   ========   ========
Dividends declared and paid per share outstanding                  $   1.72   $   1.72   $   1.72
                                                                   ========   ========   ========
</TABLE>

See accompanying notes.


                                       21

<PAGE>

                           THE TOWN AND COUNTRY TRUST
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                 Common
                                                Shares of
                                               Beneficial                Distributions                 Accumulated
                                                Interest     Additional   in Excess of                    Other
                                             --------------    Paid-In    Accumulated     Deferred    Comprehensive
                                             Shares  Amount    Capital      Earnings    Compensation  Income (Loss)    Total
                                             ------  ------  ----------  -------------  ------------  -------------  --------
<S>                                          <C>     <C>     <C>         <C>            <C>           <C>            <C>
Balance at January 1, 2003                   16,259   $163    $326,789     $(323,541)     $(2,997)       $(2,024)    $ (1,610)
Comprehensive income:
   Net income                                    --     --          --        78,768           --             --       78,768
   Unrealized loss on derivative financial
      instruments                                --     --          --            --           --            (30)         (30)
                                             ------   ----    --------     ---------      -------        -------     --------
Comprehensive Income                             --     --          --        78,768           --            (30)      78,738
Dividends declared ($1.72 per share)             --     --          --       (27,597)          --             --      (27,597)
Amortization of deferred compensation            --     --          --            --          738             --          738
Share options exercised                          52     --         709            --           --             --          709
Issuance of restricted share awards, net of
   4 shares surrendered                          51      1       1,035            --       (1,040)            --           (4)
Issuance of common shares through Dividend
   Reinvestment and Share Purchase Plan         144      1       3,386            --           --             --        3,387
Repurchase of common shares of beneficial
   interest                                    (647)    (6)    (14,993)           --           --             --      (14,999)
                                             ------   ----    --------     ---------      -------        -------     --------
Balance at December 31, 2003                 15,859    159     316,926      (272,370)      (3,299)        (2,054)      39,362
Comprehensive income:
   Net income                                    --     --          --         1,796           --             --        1,796
   Unrealized gain on derivative financial
      instruments                                --     --          --            --           --          1,040        1,040
                                             ------   ----    --------     ---------      -------        -------     --------
Comprehensive Income                             --     --          --         1,796           --          1,040        2,836
Dividends declared ($1.72 per share)             --     --          --       (29,798)          --             --      (29,798)
Amortization of deferred compensation            --     --          --            --          897             --          897
Share options exercised, net of 184 shares
   surrendered                                  158      1       1,498            --           --             --        1,499
Issuance of restricted share awards, net of
   29 shares surrendered                         46      1       1,413            --       (1,397)            --           17
Issuance of common shares through Dividend
   Reinvestment and Share Purchase Plan           7     --         174            --           --             --          174
Issuance of common shares                     1,410     14      34,731            --           --             --       34,745
Adjustment to minority interest from change
   in ownership in TCOLP                         --     --      (3,015)           --           --             --       (3,015)
                                             ------   ----    --------     ---------      -------        -------     --------
Balance at December 31, 2004                 17,480    175     351,727      (300,372)      (3,799)        (1,014)      46,717
Comprehensive income:
   Net income                                    --     --          --         5,192           --             --        5,192
   Unrealized gain on derivative financial
      instruments                                --     --          --            --           --          1,042        1,042
                                             ------   ----    --------     ---------      -------        -------     --------
Comprehensive Income                             --     --          --         5,192           --          1,042        6,234
Dividends declared ($1.72 per share)             --     --          --       (30,220)          --             --      (30,220)
Amortization of deferred compensation            --     --          --            --          933             --          933
Share options exercised, net of 16 shares
   surrendered                                   61      1         967            --           --             --          968
Issuance and accelerated vesting of
   restricted share awards, net of 36
   shares surrendered                           110      1       4,015            --       (3,185)            --          831
Issuance of common shares through Dividend
   Reinvestment and Share Purchase Plan           4     --         132            --           --             --          132
Adjustment to minority interest from change
   in ownership in TCOLP                         --     --        (421)           --           --             --         (421)
                                             ------   ----    --------     ---------      -------        -------     --------
Balance at December 31, 2005                 17,655   $177    $356,420     $(325,400)     $(6,051)       $    28     $ 25,174
                                             ======   ====    ========     =========      =======        =======     ========
</TABLE>

See accompanying notes.


                                       22
<PAGE>

                           THE TOWN AND COUNTRY TRUST
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                    -------------------------------
                                                                      2005       2004        2003
                                                                    --------   --------   ---------
<S>                                                                 <C>        <C>        <C>
OPERATING ACTIVITIES
Net income                                                          $  5,192   $  1,796   $  78,768
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation and amortization                                      27,159     30,582      21,926
   Depreciation and amortization from discontinued operations            500        733       3,122
   Income allocated to minority interest                                 747        264      11,798
   Stock based compensation                                            1,985        897         738
   Gain on sales of properties                                            --         --     (80,081)
   Impairment on assets held for disposition                              --      1,672       4,000
   Changes in operating assets and liabilities:
      (Increase) decrease in restricted cash                            (290)        25         245
      (Increase) decrease in other assets                             (1,657)       174        (530)
      Increase in accounts payable, other liabilities, accrued
         interest and security deposits                                5,837      1,403       3,121
                                                                    --------   --------   ---------
Net cash provided by operating activities                             39,473     37,546      43,107

INVESTING ACTIVITIES
Acquisitions of operating properties                                 (41,611)        --    (117,435)
Net proceeds from disposition of properties                               --     31,072     117,209
Capital expenditures, net                                            (41,681)   (38,614)    (30,359)
                                                                    --------   --------   ---------
Net cash used in investing activities                                (83,292)    (7,542)    (30,585)

FINANCING ACTIVITIES
Net borrowings (payments) on mortgage notes payable                   81,803    (35,661)    (41,224)
Net (payments) borrowings on notes payable - unsecured                (2,000)     2,000          --
Proceeds from issuance of Convertible Senior Notes                        --         --      74,750
Payment of financing costs                                               (50)       (60)     (3,676)
Proceeds from issuance of shares under dividend reinvestment plan        132        174       3,387
Proceeds from exercise of share options                                  968      1,516         705
Issuance of common shares                                                 --     34,745          --
Repurchase of common shares of beneficial interest                        --         --     (14,999)
Dividends paid to shareholders                                       (30,220)   (29,798)    (27,597)
Distributions to minority interest holders                            (4,242)    (4,242)     (4,242)
                                                                    --------   --------   ---------
Net cash provided by (used in) financing activities                   46,391    (31,326)    (12,896)
                                                                    --------   --------   ---------
Increase (decrease) in cash and cash equivalents                       2,572     (1,322)       (374)
Cash and cash equivalents at beginning of year                           945      2,267       2,641
                                                                    --------   --------   ---------
Cash and cash equivalents at end of year                            $  3,517   $    945   $   2,267
                                                                    ========   ========   =========
Cash interest paid                                                  $ 34,033   $ 32,082   $  29,074
                                                                    ========   ========   =========
</TABLE>

See accompanying notes.


                                       23

<PAGE>

                           THE TOWN AND COUNTRY TRUST
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Significant Accounting Policies

Organization

The Town and Country Trust (the "Company" or the "Trust"), a Maryland real
estate investment trust, is a self-administered and self-managed real estate
investment trust ("REIT") organized in 1993 to own and operate a portfolio of
multifamily residential properties. The Company conducts all of its business and
owns all of its properties through The TC Operating Limited Partnership
("TCOLP"). At December 31, 2005, the Company owned 13,329 apartment homes in 39
apartment communities in selected markets in the Mid-Atlantic and Southeast.

On December 19, 2005, the Company entered into an Agreement and Plan of Merger,
by and among us, TCOLP, Magazine Acquisition GP LLC, Magazine Acquisition LP and
Magazine Acquisition LLC, which the Company amended on February 16, 2006,
pursuant to Amendment No. 1 to Agreement and Plan of Merger, by and among the
Company, TCOLP, Magazine Acquisition GP LLC, Magazine Acquisition LP and
Magazine Acquisition LLC ("Magazine Acquisition") (the Agreement and Plan of
Merger, as amended, the "Merger Agreement"). Magazine Acquisition is a joint
venture investment vehicle formed by affiliates of Morgan Stanley Real Estate
and Onex Real Estate. Pursuant to the terms of the Merger Agreement, the Company
will merge with and into Magazine Acquisition LP, with Magazine Acquisition LP
continuing as the surviving entity, and Magazine Acquisition LLC will merge with
and into TCOLP, with TCOLP continuing as the surviving entity (collectively
referred to as "the merger").

Under the terms of the Merger Agreement, holders of common shares of
beneficial interest will receive $40.20 per share, without interest, plus a
pro-rated dividend payable for the number of days since the end of the last
fiscal quarter for which a dividend was declared and paid through the date of
the closing of the merger ("the Merger Consideration"). Holders of limited
partnership units in TCOLP will be entitled to receive $40.20 per unit, without
interest, plus a pro-rated distribution payable for the number of days since the
end of the last fiscal quarter for which a distribution was paid through the
date of the closing of the merger. Also, in connection with the merger, any
restrictions with respect to outstanding restricted shares awarded shall
terminate and all holders of outstanding share options shall receive payment of
the excess of the Merger Consideration over the exercise price per share of such
options. Pursuant to the terms of the indenture for our 5.375% Convertible
Senior Notes, due 2023, the Company is required to give public notice to the
holders of such notes two days before the date that is fifteen days before the
anticipated closing of the mergers (and mail notice to such holders ten days
prior to such anticipated closing). Such holders may surrender their notes for
conversion at any time from the date which is 15 days prior to the anticipated
closing until 15 days after the actual closing.

The Board of Trustees unanimously approved the merger, the Merger Agreement and
the other transactions contemplated by the Merger Agreement and declared the
merger fair to, advisable and in the best interests of the Trust, TCOLP, the
Company's shareholders and the holders of units of limited partnership in TCOLP.
On March 9, 2006, the shareholders of the trust approved the merger and the
other transactions contemplated by the Merger Agreement by an affirmative vote
in excess of two thirds of the votes that were entitled to be cast.

The merger is expected to occur during the first quarter of 2006. However, no
assurance can be given that the merger will occur or as to the timing of its
completion. The Company had incurred approximately $2,540,000 in merger related
costs as of December 31, 2005.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions and
accounts have been eliminated.

Real Estate Assets, Depreciation and Impairment

Real estate assets held for investment are carried at historical cost, less
accumulated depreciation. Expenditures for repairs and maintenance are expensed
as incurred. Significant expenditures for improvements, renovations and
replacements are capitalized.

The Company accounts for the acquisitions of real estate in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, utilizing the purchase method and includes the results of the
acquisition properties in the Company's results of operations from the date of
acquisition. The Company allocates the purchase price to the acquired tangibles,
consisting of land, building and improvements, and, if material, identified
intangible assets and liabilities consisting of above/below market leases and
at-market leases in place based on their fair values.


                                       24

<PAGE>

If there is an event or change in circumstance that indicates an impairment in
the value of an apartment community has occurred, the Company's policy is to
assess any impairment in value by comparing the current and estimated future
undiscounted operating cash flows of the community over its remaining useful
life to the carrying amount of the asset. If such carrying amounts exceed the
estimated projected operating cash flows of the community, the Company would
recognize an impairment loss equal to the amount necessary to adjust the
carrying amount of the asset to its estimated fair market value. The Company did
not recognize any impairment losses in 2005, 2004 or 2003 on any of its
properties held for investment. However, as discussed in Note 4, the Company
recognized impairment losses in 2004 and 2003 related to the properties sold
during 2004.

Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets which are 27 1/2 to 40 years for buildings, 15 to 20
years for major improvements and 3 to 12 years for furniture, fixtures and
equipment. Depreciation expense was $25,964,000, $29,398,000 and $20,871,000 for
2005, 2004 and 2003, respectively. Intangible assets relating to the value of
in-place leases for community acquisitions are amortized over the remaining term
of the tenant leases. Amortization expense for in-place leases was $60,000,
$217,000 and $472,000 in 2005, 2004 and 2003, respectively.

During the year ended December 31, 2004, the Company revised the estimated
useful life on certain depreciable assets, principally carpet, to more closely
approximate their current economic lives based upon the Company's capital
improvement and renovation plans. Consequently, in 2004 the Company recorded an
additional depreciation charge of $6,493,000.

Discontinued Operations

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
requires that the assets and liabilities and the results of operations of any
communities which have been sold since January 1, 2002, or otherwise qualify as
held for sale, be presented as discontinued operations in the Company's
Consolidated Financial Statements in both current and prior periods presented.
The community specific components of net income that are presented as
discontinued operations include net operating income, depreciation expense,
minority interest and interest expense. In addition, the net gain or loss
(including any impairment charge) on the disposition of communities held for
sale is presented as discontinued operations. A change in presentation for
discontinued operations would not have any impact on the Company's financial
conditions or results of operations. Real estate assets held for sale are
measured at the lower of the carrying amount or the fair value less costs to
sell, and are presented separately in the accompanying Consolidated Balance
Sheet. Subsequent to classification of a community as held for sale, no further
depreciation is recorded on the assets. Interest was allocated to discontinued
operations based on the relative value of the collateral as determined by the
lender.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

Deferred Financing Costs

Deferred financing costs include certain fees and other external costs incurred
in connection with debt financings and are amortized to interest expense using
the straight-line method, which approximates the effective interest method, over
the term of the related debt. Deferred financing costs at December 31, 2005 and
2004 are presented net of accumulated amortization of $5,429,000 and $4,283,000,
respectively. Amortization of deferred financing costs are included in interest
expense and totaled $1,195,000, $1,184,000 and $1,041,000, during 2005, 2004 and
2003, respectively.

Interest Rate Risk Management

SFAS No. 133, Accounting for Certain Derivative Instruments and Hedging
Activities, as amended, establishes accounting and reporting standards requiring
all derivative financial instruments to be carried in the balance sheet as
either an asset or liability measured at its fair value. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and on the type
of hedge transaction. For derivative financial instruments that qualify as cash
flow hedges, changes in fair value of the derivative instrument are reported as
a component of other comprehensive income with a corresponding offset to other
assets and reclassified into earnings during the same period or periods during
which the hedged transaction affects earnings. For hedges where a change in the
fair value of the derivative exceeds the change in the fair value of the hedged
item or the notional amount of the hedge exceeds the expected proceeds under the
debt agreements, the ineffective portion, if any, is recognized in other
income/expense in current period earnings. The Company uses derivative financial
instruments in the normal course of business to limit its exposure to
fluctuations in interest rates. The Company does not enter into derivative
instruments for speculative purposes.

To manage interest rate risk, the Company may employ interest rate swaps, caps
and floors, options, forwards or a combination thereof, depending on the
underlying exposure. Interest rate swaps and collars are contractual agreements
between the Company and third parties to exchange fixed and floating interest
payments periodically without the exchange of the underlying principal amounts
(notional amounts). In the unlikely event that a counterparty fails to meet the
terms of an interest rate swap contract or collar agreement, the Company's
exposure would be limited to the interest rate differential on the notional
amount. The Company does not


                                       25

<PAGE>

anticipate non-performance by any of its counterparties. Net interest
differentials to be paid or received under a swap contract and/or collar
agreement are accrued as interest expense as incurred or earned.

Revenue Recognition

Revenues from rental property are recognized on a straight-line basis over the
term of the lease. Leases are generally for terms of one year or less.

Real Estate Sales

Gains on sales of real estate assets are recognized pursuant to the provisions
of SFAS No. 66, Accounting for Sales of Real Estate. The specific timing of the
recognition of the sale and the related gain are measured against the various
criteria in SFAS No. 66 related to the terms of the transactions and any
continuing involvement associated with the assets sold. To the extent the sales
criteria are not met, the Company defers gain recognition until the sales
criteria are met.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred. Total advertising and
promotion expense for each of the years ended December 31, 2005, 2004 and 2003
was $1,616,000, $1,139,000 and $1,084,000, respectively.

Earnings Per Common Share

Basic earnings per common share is computed based upon the weighted average
number of common shares outstanding during the year. Diluted earnings per common
share is computed based upon common shares outstanding plus the effect of
dilutive stock options and other potentially dilutive common stock equivalents.
The dilutive effect of stock options and other potentially dilutive common stock
equivalents is determined using the treasury stock method based on the Company's
average stock price. The Company adopted Emerging Issues Task Force Issue No.
04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings
per Share" which requires convertible debt or preferred stock to be included in
diluted earnings per share computations if only one or more specified
contingencies are required to occur, such as the underlying common stock
achieving a specified price target, regardless of whether the market price
trigger has been met. The adoption of this new pronouncement had no impact on
the Company's diluted earnings per share for any year presented, as the effect
was anti-dilutive to earnings per share from continuing operations.

Minority Interest

Minority interest is comprised of TCOLP common units that are not held by the
Company. Minority interest is increased and decreased, respectively, for income
and loss as well as distributions allocated to units held by outside interests.
Periodically, the Company raises additional equity through the issuance of
common shares and contributes the proceeds to TCOLP for an equivalent number of
common units. The Company records adjustments to minority interest and
shareholders' equity to reflect the Company's increased ownership in TCOLP. The
minority interest represented 12.26% and 12.37% of the units in the partnership
at December 31, 2005 and 2004, respectively.

As of December 31, 2005 and 2004, there were 2,466,535 common units of TCOLP
that were not held by the Company. These units are exchangeable by the holders
into the Company's common shares of beneficial interest on a one-for-one basis.
This exchange right has not been considered in the computation of per share
data, as it does not have a dilutive effect.

Use of Estimates

The Company's financial statements have been prepared in accordance with U.S.
generally accepted accounting principles ("U.S. GAAP"). The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, equity, revenues and
expenses. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.

Stock Based Compensation

The Company accounts for its stock based employee compensation plans using the
intrinsic value method under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under APB No. 25, since the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, and other criteria are met, no compensation expense is recognized.

In December 2004, the Financial Accounting Standards Board (FASB) issued a
revision to SFAS No. 123 (revised 2004), Share Based Payment ("Statement
No.123(R)"). Statement No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recorded as an
expense based on their fair values. The grant-date fair value of employee share
options and similar instruments will be estimated using an option-pricing model
adjusted for any unique characteristics of a particular instrument. If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification.


                                       26

<PAGE>

The Company will adopt the provisions of FAS 123(R) during the first quarter
2006. The adoption of this new standard is not expected to have a material
effect on the financial position or financial results of the Company. The
Company accounts for compensation cost for restricted stock awards that are
subject to acceleration of vesting upon retirement over the explicit service
period. Upon adoption of FAS 123(R) on January 1, 2006, the Company will change
the policy for all new restricted stock grants to record compensation cost over
the period the employee is required to provide service. The impact on recognized
compensation expense had the Company currently used the period the employee is
required to provide service would have been $2,454,000.

Reclassifications

Certain previously reported amounts have been reclassified to conform to the
current presentation.

2. Restricted Cash

The Company maintains certificates of deposit, all with maturities of three
months or less, to cover the aggregate amount of resident security deposits
retained by the respective communities in certain states.

3. Real Estate

The following is a reconciliation of the carrying amount of real estate held for
investment:

<TABLE>
<CAPTION>
(in thousands)                   2005       2004
                               --------   --------
<S>                            <C>        <C>
Balance at January 1           $793,358   $787,280
Real estate purchased            41,611         --
Improvements                     41,054     36,263
Real estate disposed/retired     (5,429)   (30,185)
                               --------   --------
Balance at December 31         $870,594   $793,358
                               ========   ========
</TABLE>

The Company's operating properties are located in the Mid-Atlantic region and in
Florida. The following is a summarization of the cost, accumulated depreciation
and indebtedness of the Company's real estate held for investment by operating
market.

<TABLE>
<CAPTION>
                                 Number of    Carrying    Accumulated   Net Carrying
                                Communities   Value(1)   Depreciation      Value       Encumbrances(2)
                                -----------   --------   ------------   ------------   ---------------
                                                            (in thousands)
<S>                             <C>           <C>        <C>            <C>            <C>
Baltimore                            11       $296,348     $122,140       $174,208         $153,696
Metropolitan Washington D.C.
   Northern Virginia                  6        194,923       54,812        140,111          107,861
   Maryland Suburbs                   4         65,380       32,254         33,126           46,672
Newark, Delaware                      3         74,358        9,427         64,931           59,788
Pennsylvania                          7         93,998       50,021         43,977           40,234
Orlando, Florida                      3         64,838       10,272         54,566           33,746
Sarasota/ Bradenton, Florida          3         44,906        6,684         38,222           23,310
Palm Beach Gardens, Florida           1         35,843        5,160         30,683           23,475
                                    ---       --------     --------       --------         --------
                                     38       $870,594     $290,770       $579,824         $488,782
                                    ===       ========     ========       ========         ========
</TABLE>

(1)  Carrying value consists of initial acquisition costs plus improvements
     subsequent to acquisition.

(2)  32 properties, including the properties held for disposition, are
     cross-collateralized with $422.5 million outstanding at December 31, 2005
     under the Company's existing credit facility.

During October 2005, the Company acquired an apartment community in Bear,
Delaware a suburb of Wilmington, Delaware that contains 264 garden-style
apartment homes and one townhome for approximately $41.6 million, including
acquisition costs. The property was acquired through an intermediary in
anticipation of the completion of a like-kind exchange under Section 1031 of the
Internal Revenue Code (see Note 4). The Company funded the acquisition using its
existing credit facilities.

The Company accounted for the acquisition utilizing the purchase method, and
accordingly, the results of the acquisition property is included in the
Company's results of operations from the date of acquisition. The Company
allocated the purchase price to the acquired tangibles, consisting of land,
building and improvements, and, if material, identified intangible assets and
liabilities consisting of above/below market leases and at-market leases in
place based on their fair values, as follows (in thousands):

<TABLE>
<S>                         <C>
Land                        $ 4,515
Building and improvements    36,895
Other                           201
                            -------
Total                       $41,611
                            =======
</TABLE>


                                       27
<PAGE>

The following unaudited pro forma results of operations of the Company reflect
the acquisition as if this transaction had occurred on January 1, 2005 and 2004,
and 2003. Pro forma results for 2003 include results of the Company as if the
properties acquired in 2003 had occurred on January 1, 2003.

<TABLE>
<CAPTION>
(in thousands, except per share data)     2005       2004       2003
                                        --------   --------   --------
<S>                                     <C>        <C>        <C>
Revenues                                $134,689   $128,631   $121,528
Net income                              $  4,581   $  1,439   $ 78,619
Income per share - basic                $   0.27   $   0.09   $   4.98
Income per share - diluted              $   0.26   $   0.08   $   4.89
</TABLE>

4. Discontinued Operations

At December 31, 2005, the Company had one apartment community under contract for
sale and classified in the Company's balance sheets as "Real estate and other
assets held for disposition". The sale was completed on January 19, 2006 for net
proceeds of approximately $37.3 million and the Company will record a gain of
approximately $17 million in the first quarter 2006. The sale completed the
like-kind exchange transaction under Section 1031 of the Internal Revenue Code
discussed in Note 3 above. During 2004, the Company's two Charlotte communities
were classified as held for disposition in the accompanying balance sheet as the
Company made the strategic decision to exit the Charlotte, North Carolina
market. The communities were sold during 2004 for net proceeds of approximately
$31.1 million. Based on the carrying value of each community and the related net
sales proceeds, the Company recorded impairment charges totaling approximately
$1,672,000 during 2004 and $4,000,000 during 2003. During 2003, the Company sold
five apartment communities containing 2,325 units for $117.2 million resulting
in a gain on sales of $80.1 million. Also during 2004, the Company recorded a
$558,000 gain on involuntary conversion relating to insurance proceeds received
related to fires at two of these communities sold in 2003.

The results of operations for these properties are classified on the
Consolidated Statements of Operations as, "Discontinued Operations" while the
assets and liabilities of these properties are included in "Real estate and
other assets held for disposition" and "Mortgage notes payable and other
liabilities held for disposition" on the Company's Consolidated Balance Sheets
until their respective date of sale. Unaudited condensed summary results of
operations of the apartment communities is as follows:

<TABLE>
<CAPTION>
(in thousands)                                             2005      2004      2003
                                                         -------   -------   --------
<S>                                                      <C>       <C>       <C>
Rental income                                            $ 2,423   $ 4,529   $ 16,663
Operating expenses                                        (1,156)   (2,494)    (8,306)
Real estate depreciation                                    (464)     (686)    (3,016)
Interest expense (1)                                        (542)     (991)    (4,059)
Gain on sale of properties and involuntary conversions        --       558     80,702
Impairment of fixed assets                                          (1,672)    (4,000)
(Income) loss allocated to minority interest                 (33)      100    (10,672)
                                                         -------   -------   --------
Income (loss) from discontinued operations               $   228   $  (656)  $ 67,312
                                                         =======   =======   ========
</TABLE>

(1)  Interest was allocated to discontinued operations based on the relative
     value of the collateral as determined by the lender.

Assets and liabilities of the apartment communities held for disposition at
December 31, 2005 and 2004 consisted of the following:

<TABLE>
<CAPTION>
(in thousands)                                                        2005      2004
                                                                    -------   -------
<S>                                                                 <C>       <C>
Land                                                                $ 2,166   $ 2,166
Building and improvements                                            19,789    19,727
Other                                                                    63        66
Accumulated depreciation                                             (1,462)   (1,038)
Other assets                                                            245       267
                                                                    -------   -------
Real estate and other assets held for disposition                   $20,801   $21,188
                                                                    =======   =======
Mortgage notes payable                                              $ 8,153   $ 7,276
Other liabilities                                                       107       133
                                                                    -------   -------
Mortgage notes payable and other liabilities held for disposition   $ 8,260   $ 7,409
                                                                    =======   =======
</TABLE>

5. Mortgage Notes Payable and Notes Payable

The Company has a credit facility with Fannie Mae of $488.2 million. This
secured facility matures in 2008. At December 31, 2005, outstanding borrowings
under the facility were $422.5 million, including amounts allocated to
properties held for disposition. Of the $422.5 million, $300 million bears
interest at a fixed rate of 6.91%. The remaining $122.5 million outstanding has
a weighted-average variable rate of 4.45% at December 31, 2005 and can be
converted to a fixed-rate term loan at the Company's option. The


                                       28

<PAGE>

Company is party to floating-to-fixed interest rate swaps that effectively fix
the interest rate on $40 million of this floating rate debt, changing the
weighted average rate on its floating rate debts at December 31, 2005 to 4.69%.

Total outstanding borrowings under the facility at December 31, 2004 were $340
million. Of the $340 million, $300 million bears interest at a fixed rate of
6.91%. The remaining $40 million was outstanding at a weighted-average variable
rate of 2.43% at December 31, 2004. After giving effect to the interest rate
swaps, the weighted average interest rate on the $40 million was 4.67%.

The Company has a $50 million bank line of credit. Advances under the line bear
interest at 120 basis points over LIBOR and are due on demand. Up to $10 million
of the line may be used for working capital purposes and $40 million may be used
to fund acquisitions. This line of credit matures in October 2006. The Company
has the option to extend the line through October 2008. At December 31, 2005, no
amounts were outstanding under the line. As of December 31, 2004, $2,000,000 was
outstanding under the line.

The Company uses interest rate protection agreements to reduce the potential
impact of increases in interest rates as required by the loan agreement covering
its secured credit facility. The Company maintains two interest rate protection
agreements for $139 million and $49.2 million, capping the Company's exposure to
LIBOR at 9.35% and 7.5%, respectively, through March 2007. In addition, the
Company executed two $20 million floating to fixed interest rate swaps to
effectively fix the interest rate on $40 million of floating rate debt under the
secured facility at a blended rate of approximately 4.66%. The Company
simultaneously sold two $20 million interest rate caps, capping LIBOR at 9.35%.
These interest rate protection agreements hedge interest payments consistent
with the Company's risk management objective and strategy to reduce exposure to
variability in cash flows attributable to increases in LIBOR. At December 31,
2005, the Company had an unrealized gain totaling $28,000.

The Company also has mortgages that were obtained in connection with the
purchase or refinancing of certain properties. Information concerning these
mortgages is summarized below (in thousands):

<TABLE>
<CAPTION>
                                                Balance at
                                               December 31,
                                            -----------------
     Type        Interest Rate   Maturity     2005      2004
     ----        -------------   --------   -------   -------
<S>              <C>             <C>        <C>       <C>
Amortizing        4.11%-4.18%      2007     $24,046   $24,507
Non-amortizing       6.81%         2009     $33,175   $33,175
Amortizing           7.85%         2009     $17,214   $17,450
</TABLE>

38 of the Company's 39 properties are secured by first and/or second priority
mortgages. In connection with the mortgages, the Company maintains annually
renewable bank letters of credit totaling $7,320,000 in lieu of maintaining real
estate tax escrow deposits. Certain loan agreements contain restrictive
covenants relating to the maintenance of specified financial performance ratios.
As of December 31, 2005, the Company was in compliance with these covenants.

The following is a summary of scheduled debt maturities that includes the
Company's mortgage notes payable, and convertible senior notes (see Note 5):

<TABLE>
<CAPTION>
(in thousands)
<S>                               <C>
2006                              $    736
2007                                23,841
2008                               422,798
2009                                49,560
Thereafter                          74,750
                                  --------
Total scheduled debt maturities   $571,685
                                  ========
</TABLE>

6. 5.375% Convertible Senior Notes

The Company has $74.75 million aggregate principal amount of 5.375% Convertible
Senior Notes outstanding. The notes mature on August 15, 2023 and are
convertible into the Company's common shares under certain circumstances,
provided that the share price exceeds $30.61 for a specified period of time. The
initial conversion rate of the notes is 39.20185 shares per $1,000 principal
amount of notes (equivalent to $25.51 per share). The conversion rate will be
adjusted under certain circumstances, including stock splits, stock dividends
and increases in the dividend rate over the current quarterly rate of $.43 per
share. The shares are considered in diluted earnings per share if the effect of
including the conversion of debt is dilutive to earnings per share from
continuing operations. The notes are redeemable at the Company's option for
shares or cash at any time on or after August 21, 2010 and are subject to
repurchase at the option of the holder on August 15, 2008, August 15, 2010,
August 15, 2013 and August 15, 2018, or upon the occurrence of certain events.
The notes are unsecured and unsubordinated obligations of the Company. The notes
will become convertible for a period commencing on March 16, 2006 (which is 15
days prior to March 31, 2006, the anticipated effective date of the merger
transaction discussed above) until 15 days after the actual effective date of
the merger.


                                       29
<PAGE>

7. Income Taxes

Since its inception, the Company has elected to be taxed as a real estate
investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code. As a REIT, the Company generally is not subject to Federal income taxes
provided that it meets certain conditions, including the requirement that it
distributes at least 90% of its REIT taxable income to its shareholders.
Management believes that the Company has qualified as a REIT for all years
presented. Accordingly, no provision has been made for Federal income taxes.
Although the Company qualifies for taxation as a REIT, it may be subject to
certain state and local taxes on its income and property, and to Federal income
and excise taxes on its undistributed income, if any.

TCOLP makes a number of special allocations for tax purposes only. In general,
100% of the interest deductions related to $232,000,000 of borrowings are
allocated to the Trust and 85% of depreciation deductions related to certain
communities are allocated to the minority interest ownership.

The following table reconciles GAAP net income to Federal taxable income for the
years ended December 31, 2005, 2004 and 2003:

<TABLE>
<CAPTION>
(in thousands, unaudited)                                                           2005      2004      2003
                                                                                  -------   -------   --------
<S>                                                                               <C>       <C>       <C>
GAAP net income                                                                   $ 5,192   $ 1,796   $ 78,768
Book/tax depreciation and amortization difference                                   1,430     5,682        404
Book/tax gain on 1031 tax deferred exchange difference                                 --        --    (80,036)
Book impairment on property held for disposition/tax loss on sale of properties        --    (2,952)     4,000
Separation expense, timing differences                                               (884)    1,344       (406)
Deferred compensation, timing differences                                            (288)   (2,124)       734
Other operating book/tax differences, net                                           2,498    (1,263)    (1,417)
Book/tax minority interest allocation difference                                    7,000     5,327     14,925
                                                                                  -------   -------   --------
REIT taxable income before dividends                                              $14,948   $ 7,810   $ 16,972
                                                                                  =======   =======   ========
Dividends paid                                                                    $30,220   $29,798   $ 27,597
                                                                                  =======   =======   ========
</TABLE>

For income tax purposes, dividends to common shareholders consist of ordinary
income and return of capital. For the years ended December 31, 2005, 2004 and
2003, dividends paid per share were taxable as follows:

<TABLE>
<CAPTION>
                         2005             2004            2003
                    --------------   -------------   --------------
(unaudited)         Amount     %     Amount    %     Amount     %
                    ------   -----   ------  -----   ------   -----
<S>                 <C>      <C>     <C>     <C>     <C>      <C>
Ordinary income      $ .97    56.3%   $ .48   28.0%   $1.10    64.2%
Return of capital      .75    43.7%    1.24   72.0%     .62    35.8%
                     -----   -----    -----  -----    -----   -----
Total dividend       $1.72   100.0%   $1.72  100.0%   $1.72   100.0%
                     =====   =====    =====  =====    =====   =====
</TABLE>

8. Separation Expenses

During the fourth quarter of 2004, the Company recorded a charge of
approximately $1.5 million, relating to the departure of two senior executives.
The charge consists primarily of cash payments made to the executives in 2005
and cash payments to be made in 2006.

9. Employee Benefit Plans

Share Option Plans

In 1993 and 1997, the Company established long-term incentive plans for the
purpose of attracting and retaining executive officers, other key employees and
non-employee trustees (the "Plans"). The Plans provide for the granting of
restricted shares and share options (incentive and non-qualified) to purchase up
to 1,950,000 of the Company's common shares at a price not less than the fair
market value at the date of grant.

Under the Plans, options generally become exercisable in equal installments over
a three-year period, commencing with the first anniversary of the date of grant.
All options expire ten years from the date of grant.

A summary of the Company's share option activity during the three years ended
December 31, 2005 is as follows:

<TABLE>
<CAPTION>
                                     Incentive   Non-qualified       Option      Weighted Average
                                      Options       Options          Price        Exercise Price
                                     ---------   -------------   -------------   ----------------
<S>                                  <C>         <C>             <C>             <C>
Balance at January 1, 2003            261,637       373,201      $13.50-$22.00        $18.00
Granted                                    --         8,000      $       21.28        $21.28
Exercised                             (54,260)      (12,000)     $14.00-$22.00        $15.79
Forfeited                                  --        (4,000)     $14.75-$22.00        $22.00
                                      -------       -------
Balance at December 31, 2003          207,377       365,201      $13.50-$21.28        $18.28
</TABLE>


                                       30

<PAGE>

<TABLE>
<S>                                  <C>         <C>             <C>             <C>
Granted                                    --         8,000      $       25.40        $25.40
Exercised                             (92,211)     (249,167)     $14.00-$21.30        $17.41
Forfeited                              (7,895)       (3,639)     $       21.30        $21.30
                                      -------      --------
Balance at December 31, 2004          107,271       120,395      $13.50-$25.40        $19.67
Granted                                    --        12,000      $27.41-$27.69        $27.60
Exercised                             (33,773)      (43,277)     $13.50-$27.69        $19.49
Forfeited                                (300)           --      $       21.30        $21.30
                                      -------      --------
Balance at December 31, 2005           73,198        89,118      $14.75-$27.69        $20.34
                                      =======      ========
Shares exercisable at December 31:
   2005                                73,198        89,118      $14.75-$27.69        $20.34
                                      =======      ========
   2004                                86,838       101,097      $13.50-$25.40        $19.32
                                      =======      ========
   2003                               130,548       276,699      $13.50-$21.28        $17.11
                                      =======      ========
</TABLE>

An additional 209,784 common shares have been authorized for issuance in future
grants of options under the 1997 Plan as of December 31, 2005. The option price
of future grants may not be less than the fair market value of the shares on the
date of grant.

Pro forma information regarding net income and earnings per share as required by
SFAS No. 148, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement, is set forth in
the table below:

<TABLE>
<CAPTION>
(in thousands, except per share information)                2005     2004      2003
                                                           ------   ------   -------
<S>                                                        <C>      <C>      <C>
Net income, as reported                                    $5,192   $1,796   $78,768
Add: Total stock compensation expense included
   in reported net income                                     816      897       738
Less: Total stock based compensation expense
   determined under the fair value method for all awards     (831)    (963)     (812)
                                                           ------   ------   -------
Pro forma net income                                       $5,177   $1,730   $78,694
                                                           ======   ======   =======
Earnings per share:
   Basic, as reported                                      $ 0.30   $ 0.11   $  4.99
   Basic, pro forma                                        $ 0.30   $ 0.10   $  4.99
   Diluted, as reported                                    $ 0.30   $ 0.10   $  4.90
   Diluted, pro forma                                      $ 0.30   $ 0.10   $  4.90
</TABLE>

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

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

<TABLE>
<CAPTION>
                                            2005   2004   2003
                                            ----   ----   ----
<S>                                         <C>    <C>    <C>
Risk free interest rate                     3.7%   3.4%   3.0%
Dividend yield                              8.2%   8.8%   9.3%
Volatility factor                           .18    .18    .18
Weighted-average expected life (in years)     5      5      5
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected share price volatility. Because
the Company's employee share options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee share options.

The weighted average per share fair value of options granted during the years
ended December 31, 2005, 2004 and 2003 was $1.43, $1.10, and $.87, respectively.
The weighted average remaining contractual life of options granted is 5.32
years.

401(k) Plan

The Company has a 401(k) Plan that covers substantially all of its associates
with more than six months of service. Participants may enter the Plan on January
1 or July 1 provided that they have reached six months of service and the age of
20 1/2. The 401(k) Plan complies with Internal Revenue Service requirements as a
401(k) Safe Harbor Plan whereby discretionary contributions made by the


                                       31

<PAGE>

Company are 100% vested. The aggregate cost of the Company's contributions to
the 401(k) Plan was $464,000, $464,000, and $483,000 for the years ended
December 31, 2005, 2004, and 2003, respectively.

Restricted Shares

From 1995 through 2004, the Company granted 554,000 restricted common shares to
certain officers, pursuant to the 1993 and 1997 Plans. In February and December
2005, the Company granted an additional 64,500 and 81,250 restricted shares,
respectively, under the 1997 Plan. The stock prices on the date of grant were
$26.28 and $30.43, respectively. Under the terms of the grants issued prior to
2003, the shares become fully vested upon termination of the
officer-shareholder's employment due to (i) retirement from the Company; (ii)
death or disability; or (iii) a change of control, as defined in the Plans.
Should an officer-shareholder leave the Company for any other reason, the
restricted shares are subject to forfeiture. Under the terms of the subsequent
grants, the shares generally become vested 20% per year in years four through
eight of the restricted stock agreement. Should the officer-shareholder leave
prior to full vesting, any unvested portion of the grant is subject to
forfeiture. The market value of the shares awarded as of the dates of grant has
been recorded as Unearned Compensation - Restricted Stock and the unamortized
portion ($6,051,000 and $3,799,000 at December 31, 2005 and 2004, respectively)
is reflected in the accompanying Balance Sheet as a separate component of
Shareholders' Equity and is amortized into income as deferred compensation
expense over the estimated vesting period. Such deferred compensation totaled
$933,000, $897,000 and $738,000 for the years ended December 31, 2005, 2004, and
2003, respectively. In December 2005, the restriction on an aggregate of 45,950
shares for certain officers was lifted, resulting in a charge of $1,061,000 in
additional compensation expense.

Supplemental Employees Retirement Plan

The Company has a split-dollar life insurance plan for certain officers. Through
2003, the Company advanced the premiums on life insurance policies for certain
officers where such advances were not considered loans under the Sarbanes-Oxley
Act of 2002. In 2004, the Company elected to discontinue paying premiums on all
split- dollar policies. The policies are assigned to the Company. In the event
of retirement or death, the Company will be repaid the aggregate amount of
premiums paid from the cash surrender value at the time the benefits are paid.
The remaining value is paid to the employee or beneficiary. The aggregate
premiums advanced under the policies totaled $447,000 and are recorded as an
asset to the Company. As part of the separation agreement for one of the senior
officers, the Company agreed to defer collection of the amount due until the
separated officer reaches the age of 65 or the policy is surrendered, during
which time, the former officer will pay interest at 4.68% per annum.

10. Leases

The Company leases certain office facilities under noncancellable operating
leases. The lease on the corporate office in Baltimore, Maryland contains
escalating annual payments through December 31, 2014 with two five-year renewal
options. Future minimum rental commitments under noncancellable leases with
remaining terms in excess of one year are as follows at December 31, 2005:

<TABLE>
<CAPTION>
(In thousands)
<S>                        <C>
2006                       $  338
2007                          348
2008                          357
2009                          367
2010                          377
Thereafter                  1,615
                           ------
Total rental commitments   $3,402
                           ======
</TABLE>

Total rent expense for the years ended December 31, 2005, 2004, and 2003, was
approximately $676,000, $559,000 and $552,000, respectively.

11. Dividend Reinvestment and Share Purchase Plan

Until February 16, 2006, the Company maintained a Dividend Reinvestment and
Share Purchase Plan (the "Plan") pursuant to which shareholders could purchase
additional shares of beneficial interest through reinvestment of dividends or by
optional cash investment. Shares could have been acquired by the Plan either
from the Company issuing new shares or by the Plan administrator acquiring
shares in the open market. The Company had registered 750,000 common shares of
beneficial interest for potential issuance under the Plan. At December 31, 2005,
592,540 shares remained available for future purchases under the Plan until the
Plan's termination on February 16, 2006. The following is a summary of the
Plan's activity for the years ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                    2005     2004
                                   ------   ------
<S>                                <C>      <C>
Total shares acquired               4,656    6,804
Shares purchased from Company       4,656    6,804
Weighted average price per share   $28.28   $25.63
</TABLE>


                                       32
<PAGE>

12.  Distributions to Minority Interest Less than Earnings

During 2002, the amount reported under the caption "Minority interest" in the
Balance Sheet was reduced to zero. U.S. GAAP requires that, for financial
reporting purposes, an additional allocation of income be made to the minority
interest account in an amount necessary to keep such balance from falling below
zero since there is no requirement for the unit holders to make additional
contributions. During 2003, earnings were in excess of distributions to the
minority interests and, therefore, the Company reallocated the $576,000 that had
previously been so allocated to the minority interests.

13.  Contingencies

During 2004, the Company determined that two of its wholly owned subsidiaries
were subject to filing requirements and franchise taxes in a state in which the
Company owns property. The Company has prepared and filed these returns and paid
approximately $84,000 of the original accrued provision for taxes of
approximately $140,000. However, certain provisions of the state's regulations
may be subject to varying interpretation as to their applicability to the
Company's subsidiaries. The Company is seeking clarification from the state,
which, if determined to be adverse to the Company, would subject the Company to
additional taxes of approximately $860,000. The Company has made certain changes
to its corporate structure such that it is no longer subject to such taxes.

There were no legal proceedings pending at December 31, 2005 or as of the date
of this report, except as noted below, to which the Registrant, the Operating
Partnership or any of the separate general partnerships and limited liability
companies which own the Properties is a party or to which the Properties are
subject that are likely to have a material adverse impact on the Registrant's
operations.

On February 2, 2006, an individual shareholder, Lee Foster, filed a putative
class action, styled as Lee Foster v. The Town and Country Trust, et. al., in
the Circuit Court for Baltimore City, Maryland, against us and each of our
trustees. The complaint asserted that the trustees breached alleged fiduciary
duties to plaintiff (and other shareholders) by entering into the December 19,
2005 merger agreement with Magazine Acquisition. The complaint sought, among
other things, an injunction preventing Magazine Acquisition from acquiring us.
By order dated February 21, 2006, the Court on our motion dismissed the
complaint for failure to state a claim upon which relief may be granted, but
allowed plaintiff 30 days within which to file an amended complaint.

Plaintiff filed his amended complaint on March 2, 2006. The amended complaint
seeks disgorgement of benefits allegedly received by our trustees as a result of
alleged breaches of duties, monetary damages, and an award of attorneys' fees,
expenses and costs. The amended complaint alleges that our trustees breached
their fiduciary duties to plaintiff (and other shareholders) by entering into
the December 19, 2005 merger agreement with Magazine Acquisition without,
according to plaintiff, having fully informed themselves about our "true value";
by agreeing to the initial $20 million break-up fee under such agreement; and by
subsequently approving an amendment to the merger agreement on February 16, 2006
and agreeing to increase the break-up fee to $28 million in connection with the
execution of the amendment. In addition, the amended complaint accuses the
trustees of having favored their own interests over the interests of the
shareholders. Finally, the amended complaint alleges that the trustees breached
their fiduciary duties to plaintiff (and other shareholders) by allegedly not
making full disclosure of all material facts in the proxy statement, dated
January 26, 2006, which was mailed to shareholders on or around January 30,
2006, and the supplement to the proxy statement, dated February 24, 2006, which
was mailed to shareholders on or around February 27, 2006.

The Company believes the amended complaint described above is without merit and
the Company intends to vigorously defend against the claims and allegations in
the complaint. However, there can be no assurance that the outcome will be
favorable and defending this action may require the attention and resources of
management and, regardless of the outcome, result in significant legal expenses.

                                       33

<PAGE>


In addition, the Company is subject to various legal proceedings and claims
arising in the ordinary course of business. During the year ended December 31,
2005, the Company recorded an accrual of $300,000 related to an unresolved
resident complaint. The Company estimates its maximum liability in this matter
to be $2.1 million. The Company cannot determine the ultimate liability with
respect to such legal proceedings and claims at this time. The Company believes
that such liability, to the extent not reimbursed, will not have a material
adverse effect on the Company's financial condition, results of operations or
cash flow.

14.  Shareholders Equity

On February 3, 2004, the Company sold 1.41 million of its common shares of
beneficial interest in a private sale at a negotiated price of $24.80 per share
for net proceeds of approximately $34.7 million. The sale was made pursuant to
the Company's existing shelf registration statement as previously filed with the
Securities and Exchange Commission.

15.  Financial Instruments

The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments as of December 31, 2005 and 2004. SFAS No.
107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.

<TABLE>
<CAPTION>
                                   December 31, 2005     December 31, 2004
                                  -------------------   -------------------
                                  Carrying     Fair     Carrying     Fair
(in thousands)                     Amount      Value     Amount      Value
                                  --------   --------   --------   --------
<S>                               <C>        <C>        <C>        <C>
Fixed rate mortgages              $374,435   $381,403   $375,132   $374,717
Floating rate mortgages           $122,500   $122,500   $ 40,000   $ 40,000
5.375% Convertible Senior Notes   $ 74,750   $ 66,037   $ 74,750   $ 73,622
Notes Payable                     $     --   $     --   $  2,000   $  2,000
</TABLE>

The carrying amounts shown in the above table are included in the accompanying
Balance Sheet under the captions "Mortgage notes payable," "5.375% Convertible
Senior Notes due 2023," "Notes payable," and "Mortgage notes payable and other
liabilities held for disposition." The fair value of the fixed rate portion of
the Company's mortgage notes payable is estimated by discounting expected cash
flows based on the Company's incremental borrowing rate for similar types of
borrowing arrangements. The floating rate portion of the Company's mortgage
notes payable approximated market. Cash equivalents, other assets, accounts
payable and other liabilities are carried at amounts that reasonably approximate
their fair value.

The following table presents the fair value of outstanding derivative financial
instruments, based on external market quotations as of December 31, 2005 and
2004.

<TABLE>
<CAPTION>
                                                                                   Fair Value as of
                                                                                     December 31,
   Notional     Fixed            Type of             Effective       Contract    --------------------
    Amount       Rate           Contract                Date         Maturity      2005        2004
-------------   -----   ------------------------   -------------   -----------   --------   ---------
<C>             <C>     <C>                        <C>             <C>           <C>        <C>
$139,000,000    9.35%              Cap             April, 2002     April, 2007   $     --   $   2,000
$ 49,172,000    7.50%              Cap             April, 2003     April, 2007   $     --   $   4,000
$(40,000,000)   9.35%              Cap             January, 2003   April, 2007   $     --   $  (1,000)
$ 20,000,000    4.84%   Swap (Floating to Fixed)   January, 2003   April, 2007   $(22,000)  $(624,000)
$ 20,000,000    3.48%   Swap (Floating to Fixed)   January, 2003   April, 2007   $310,000   $ (28,000)
</TABLE>

The following is a summary of the derivative transactions for years ended
December 31, 2005, 2004 and 2003.

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                               -------------------------
(in thousands)                                  2005     2004      2003
                                               ------   ------   -------
<S>                                            <C>      <C>      <C>
Net income                                     $5,192   $1,796   $78,768
Other comprehensive income (loss)-unrealized
   gain (loss) on hedge instruments             1,042    1,040       (30)
                                               ------   ------   -------
Comprehensive income                           $6,234   $2,836   $78,738
                                               ======   ======   =======

Adjustment to net income related to the
   ineffective portion of hedge instruments    $ (108)  $ (188)  $    34
</TABLE>


                                       34

<PAGE>

The Company expects to reclassify approximately $448,000 of unrealized losses
into earnings in the next twelve months.

16.  Unaudited Quarterly Results of Operations

The following is a summary of quarterly results of operations for the years
ended December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                 Quarter ended
                                                -----------------------------------------------
(in thousands, except per share data)           March 31   June 30   September 30   December 31
                                                --------   -------   ------------   -----------
<S>                                             <C>        <C>       <C>            <C>
2005
Revenues                                        $31,804    $32,517      $33,394       $33,982
Income (loss) before discontinued operations
   and minority interest                          2,196      3,286        3,172        (2,976)
Income (loss) from continuing operations          1,920      2,873        2,773        (2,602)
Income from discontinued operations                   7          5           38           178
Net income (loss) (1)                             1,927      2,878        2,811        (2,424)
Basic earnings per share
   Income (loss) from continuing operations     $   .11    $   .17      $   .16       $  (.15)
   Income from discontinued operations               --         --           --           .01
                                                -------    -------      -------       -------
   Net income (loss)                            $   .11    $   .17      $   .16       $  (.14)
                                                =======    =======      =======       =======

Diluted earnings per share
   Income (loss) from continuing operations     $   .11    $   .17      $   .16       $  (.15)
   (Loss) income from discontinued operations        --         --           --           .01
                                                -------    -------      -------       -------
   Net income (loss)                            $   .11    $   .17      $   .16       $  (.14)
                                                =======    =======      =======       =======

2004
Revenues                                        $30,162    $30,723      $31,369       $32,310
Income (loss) before discontinued operations
   and minority interest                          2,229     (3,382)       2,008         1,961
Income (loss) from continuing operations          1,939     (2,955)       1,755         1,713
(Loss) income from discontinued operations       (1,127)       511          (12)          (28)
Net income (loss)                                   812     (2,444)       1,743         1,685
Basic earnings (loss) per share
   Income (loss) from continuing operations     $   .12    $ (.17)      $   .10       $   .10
   (Loss) income from discontinued operations      (.07)      .03            --            --
                                                -------    -------      -------       -------
   Net income (loss)                            $   .05    $ (.14)      $   .10       $   .10
                                                =======    =======      =======       =======

Diluted earnings (loss) per share
   Income (loss) from continuing operations     $   .12    $ (.17)      $   .10       $   .10
   (Loss) income from discontinued operations      (.07)      .03            --            --
                                                -------    -------      -------       -------
   Net income (loss)                            $   .05    $ (.14)      $   .10       $   .10
                                                =======    =======      =======       =======
</TABLE>

(1)  Net income (loss) for the quarter ended December 31, 2005 includes $
     2,540,000 in merger related fees and $2,211,000 of additional compensation
     expense associated with the accelerated vesting of certain restricted
     shares and the accelerated approval of bonuses by the compensation
     committee.


                                       35
<PAGE>

             Report of Independent Registered Public Accounting Firm

To The Board of Trustees and Shareholders
The Town and Country Trust

We have audited the accompanying consolidated balance sheets of The Town and
Country Trust (the "Company") as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Town and
Country Trust at December 31, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of The Town and
Country Trust's internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2006 expressed an unqualified opinion thereon.

                                        /s/ Ernst & Young LLP

McLean, Virginia
March 10, 2006


                                       36

<PAGE>

             SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
                           THE TOWN AND COUNTRY TRUST
                                DECEMBER 31, 2005

<TABLE>
<CAPTION>

                                    INITIAL COST (C)                       GROSS AMOUNT AT WHICH
                                 ---------------------                   CARRIED AT CLOSE OF PERIOD
                          NON-                           IMPROVEMENTS  ------------------------------
                        RECOURSE            BUILDINGS       MADE                  BUILDINGS            ACCUMULATED
        PROPERTY        MORTGAGE               AND      SUBSEQUENT TO               AND        TOTAL  DEPRECIATION   YEAR   USEFUL
    DESCRIPTION (A)     DEBT (B)   LAND   IMPROVEMENTS ACQUISITION (D)   LAND   IMPROVEMENTS    (E)        (F)     ACQUIRED  LIFE
    ---------------     -------- -------- ------------ --------------- -------- ------------ -------- ------------ -------- ------
<S>                     <C>      <C>      <C>          <C>             <C>      <C>          <C>      <C>          <C>      <C>
MARYLAND
   Howard Crossing/
      West Commercial   $ 45,263 $  8,822   $ 37,785       $ 35,895    $  8,822   $ 73,680   $ 82,502   $ 32,913   1993 (h)   (g)
   The Courts of Avalon   19,279    4,277     38,490            217       4,277     38,707     42,984      3,176   2003       (g)
   Watkins Station         8,534    1,505      6,889          5,031       1,505     11,920     13,425      6,286   1993 (h)   (g)
   Quail Hollow            9,449    1,424     10,401          4,314       1,424     14,715     16,139      8,749   1993 (h)   (g)
   Woodhill                9,220    1,317     10,097          3,988       1,317     14,085     15,402      8,746   1993 (h)   (g)
   Hallfield Manor         1,905      320      2,240          1,616         320      3,856      4,176      1,882   1993 (h)   (g)
   Ridgeview               5,639    1,138      7,513          2,006       1,138      9,519     10,657      5,992   1993 (h)   (g)
   Seneca Bay              9,563    1,795     10,549          7,165       1,795     17,714     19,509      9,068   1993 (h)   (g)
   Skylark Pointe          9,601    1,474     10,511          7,172       1,474     17,683     19,157      9,044   1993 (i)   (g)
   Tall Oaks              12,306    1,397      9,845          3,667       1,397     13,512     14,909      8,151   1993 (h)   (g)
   Willow Lake            15,164    1,781     14,088          6,249       1,781     20,337     22,118     12,133   1993 (h)   (g)
   Steeplechase           20,345    2,749     18,151          9,496       2,749     27,647     30,396     15,939   1993 (h)   (g)
   Eagles Walk at White
      Marsh               15,050    3,136     19,944         14,182       3,136     34,126     37,262     17,014   1993 (h)   (g)
   Versailles              8,382    1,599     10,921          5,644       1,599     16,565     18,164      9,617   1993 (h)   (g)
   Fox Run                10,668    2,498     11,412          1,018       2,498     12,430     14,928      5,684   1993       (g)
   Stonegate               9,830    2,887     13,261          1,854       2,887     15,115     18,002      5,112   1994       (g)

PENNSYLVANIA
   Hidden Village          5,334    1,229      7,447          2,321       1,229      9,768     10,997      6,435   1993 (h)   (g)
   Emmaus                  8,268    1,394      9,577          3,590       1,394     13,167     14,561      8,225   1993 (h)   (g)
   Hanover                 4,039      590      4,946          1,762         590      6,708      7,298      4,566   1993 (h)   (g)
   Oakview Estates         5,029      812      8,249          5,571         812     13,820     14,632      7,353   1993 (h)   (g)
   Wheatland Hills         7,734    1,285     12,794          8,842       1,285     21,636     22,921     11,069   1993 (h)   (g)
   York                    6,439    1,951     10,622          2,572       1,951     13,194     15,145      9,341   1993 (h)   (g)
   Rolling Hills           3,391    1,282      5,842          1,320       1,282      7,162      8,444      3,032   1993       (g)

VIRGINIA
   Barton's Crossing      26,213    7,320     33,845          8,380       7,320     42,225     49,545     17,864   1993       (g)
   Lionsgate              22,974    6,361     46,649             41       6,361     46,690     53,051      3,290   2003       (g)
   The Glen                5,143    1,157      5,269          1,300       1,157      6,569      7,726      2,916   1993       (g)
   McNair Farms           13,145    3,564     16,237          2,642       3,564     18,879     22,443      9,031   1993       (g)
   University Heights     22,365    5,789     26,371          2,420       5,789     28,791     34,580     14,191   1993       (g)
   Carlyle Station        18,021    4,259     19,610          3,709       4,259     23,319     27,578      7,520   1994       (g)

DELAWARE
   Christina Mill          8,458    2,288     10,454          1,847       2,288     12,301     14,589      3,995   1994       (g)
   Brandywine Woods       41,500    4,515     37,096            156       4,515     37,252     41,767        320   2005       (g)

FLORIDA
   Windermere              9,700    2,809     12,797          1,623       2,809     14,420     17,229      2,795   1998       (g)
   Twelve Oaks             9,214    3,100     13,711          2,088       3,100     15,799     18,899      3,063   1998       (g)
   Heron's Run             6,096    2,795     12,754          1,491       2,795     14,245     17,040      2,575   1999       (g)
   Kirkman                14,832    4,565     20,795          3,350       4,565     24,145     28,710      4,414   1999       (g)
   Gardens East           23,475    5,970     27,182          2,691       5,970     29,873     35,843      5,160   2000       (g)
   Perico                  9,823    2,491     11,248          1,774       2,491     13,022     15,513      2,212   1999       (g)
   McIntosh                7,391    2,029      9,194          1,130       2,029     10,324     12,353      1,897   1999       (g)
                        -------- --------   --------       --------    --------   --------   --------   --------
      TOTAL             $488,782 $105,674   $594,786       $170,134    $105,674   $764,920   $870,594   $290,770
                        ======== ========   ========       ========    ========   ========   ========   ========
</TABLE>


                                       F-1
<PAGE>

                              NOTES TO SCHEDULE III
                           THE TOWN AND COUNTRY TRUST
                                 (IN THOUSANDS)

(a)  All properties are garden apartment communities with the exception of one
     commercial building included in the Howard Crossing/West Commercial
     Partnership.

(b)  See description of mortgages payable in Note 5 of Notes to Consolidated
     Financial Statements of the Company.

(c)  Initial cost for properties originally acquired from the Predecessor (see
     note (h) below) represents the historical cost as of August 23, 1993 plus
     the acquisition of non-controlled interests in the Predecessor on August
     23, 1993. The initial cost of all other property acquisitions represents
     the cost to purchase the property at the date of acquisition.

(d)  The aggregate cost of land, buildings and equipment on a Federal Income Tax
     basis is $699,204 at December 31, 2005.

(e)  Reconciliation of Real Estate Properties

<TABLE>
<S>                                                  <C>
     Balance at January 1, 2003                      $665,998
     Acquisition of new operating properties           95,776
     Other additions                                   25,950
     Other dispositions                                  (444)
                                                     --------
     Balance at December 31, 2003                     787,280
     Other additions                                   36,263
     Other dispositions/retirements                   (30,185)
                                                     --------
     Balance at December 31, 2004                    $793,358
     Acquisition of new operating property             41,611
     Other additions                                   41,054
     Other dispositions/retirements                    (5,429)
                                                     --------
     Balance at December 31, 2004                    $870,594
                                                     ========
</TABLE>

(f)  Reconciliation of Accumulated Depreciation

<TABLE>
<S>                                                  <C>
     Balance at January 1, 2003                      $253,144
     2003 depreciation expense, net of retirements     19,723
                                                     --------
     Balance at December 31, 2003                     272,867
     2004 depreciation expense, net of retirements     (1,921)
                                                     --------
     Balance at December 31, 2004                     270,946
     2005 depreciation expense, net of retirements     19,824
                                                     --------
     Balance at December 31, 2005                    $290,770
                                                     ========
</TABLE>

(g)  Depreciation is computed based upon the following estimated lives:

<TABLE>
<CAPTION>
                                    Assets acquired    Assets acquired
                                     subsequent to         prior to
                                    January 1, 1994   December 31, 1993
                                    ---------------   -----------------
<S>                                 <C>               <C>
Buildings                           27.5 years        40 years
Building improvements               15 to 19 years    20 years
Furniture, fixtures and equipment   3 to 12 years     5 to 12 years
</TABLE>

(h)  Denotes property originally purchased in 1979 by the Predecessor.


                                      F-2

<PAGE>

(B)  SUPPLEMENTARY DATA

Information in response to this Item is set forth in the financial statement
schedules appearing on pages F-1 through F-2 of this Form 10-K.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of December 31, 2005, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Exchange Act). Based on that evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of December 31, 2005. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2005.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of The Town and Country Trust (the "Company") is responsible for
establishing and maintaining adequate internal controls over financial reporting
and for the assessment of the effectiveness of internal controls over financial
reporting. As defined by the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or supervised by, the
Company's principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in accordance with U.S
generally accepted accounting principles.

The Company's internal controls over financial reporting are supported by
written policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the consolidated
financial statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of the Company's management and trustees;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the consolidated financial statements taken as a
whole.

In connection with the preparation of the Company's annual consolidated
financial statements, management has undertaken an assessment of the
effectiveness of the Company's internal controls over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management's assessment included an evaluation of the
design of the Company's internal controls over financial reporting and testing
of the operational effectiveness of those controls.

Based on this assessment, management has concluded that the Company's internal
controls over financial reporting were effective as of December 31, 2005.

Ernst & Young LLP, the independent registered public accounting firm that
audited the Company's consolidated financial statements included in this report,
have issued an attestation report on management's assessment of internal
controls over financial reporting, a copy of which is included in this Annual
Report on Form 10-K.


                                       37

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To The Board of Trustees and Shareholders
The Town and Country Trust

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that The Town
and Country Trust (the "Company") maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and trustees of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that The Town and Country Trust
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, The Town and Country Trust maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2005 consolidated financial
statements of The Town and Country Trust and our report dated March 10, 2006,
expressed an unqualified opinion thereon.

                                        /s/ Ernst & Young LLP

McLean, Virginia
March 10, 2006

ITEM 9B. OTHER INFORMATION

None.


                                       38

<PAGE>

                                    PART III

ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information required by this item concerning the Registrant's Trustees
and Executive Officers is set forth under the captions "Election of Trustees,"
"Board of Trustees; Committees of the Board of Trustees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Registrant's 2006 Proxy
Statement to be filed with the SEC which information is incorporated herein by
reference. The information required by this Item in respect of the Registrant's
Executive Officers who are not Trustees is set forth in Item 4 of this Form 10-K
and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this Item is set forth under the caption
"Compensation of Executive Officers" in the Registrant's 2006 Proxy Statement to
be filed with the SEC which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this Item concerning security ownership of certain
beneficial owners and management is set forth under the caption "Ownership of
Common Shares of Beneficial Interest" in the Registrant's 2006 Proxy Statement
to be filed with the SEC, which information is incorporated herein by reference.
Information in response to this Item concerning equity compensation plan
information is set forth in Item 5 of this Form 10-K and is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in response to this Item is set forth under the caption "Certain
Related Transactions" in the Registrant's 2006 Proxy Statement to be filed with
the SEC which information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information in response to this Item concerning fees paid to the independent
auditors is set forth under the caption "Selection of Accountants" in the
Registrant's 2006 Proxy Statement to be filed with the SEC, which information is
incorporated herein by reference. The Audit Committee of the Board of Trustees
must pre-approve all auditing services and all non-audit services (including the
fees and terms thereof) to be performed by the independent auditors. The Audit
Committee may delegate to the Audit Committee Chairman the authority to grant
pre-approvals for audit and permitted non-audit services to be performed for the
Company by the independent auditor, provided that decisions of such members to
grant pre-approvals shall be presented to the full Committee at its next
regularly scheduled meeting.


                                       39
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this report:

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                           -----
<S>                                                                        <C>
(1)  Financial Statements:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets of the Registrant at December 31, 2005
   and at December 31, 2004
Consolidated Statements of Operations of the Registrant for the years
   ended December 31, 2005, December 31, 2004 and December 31, 2003
Consolidated Statements of Shareholders' Equity of the Registrant for
   the years ended December 31, 2005, December 31,2004 and
   December 31, 2003
Consolidated Statements of Cash Flows of the Registrant for the years
   ended December 31, 2005, December 31, 2004 and December 31, 2003
Notes to Consolidated Financial Statements of the Registrant

(2)  Financial Statement Schedules:

Schedule III--Real Estate and Accumulated Depreciation
</TABLE>

All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

(3)  Exhibits

<TABLE>
<CAPTION>
Exhibit
 Number
-------
<S>       <C>
3.1       First Amended and Restated Declaration of Trust (incorporated by
          reference to Exhibit 3.1 to the Registrant's Registration Statement on
          Form S-11 (No. 333-63150)).

3.2       By-Laws (incorporated by reference to Exhibit 3.2 to the Registrant's
          Registration Statement on Form S-11 (No. 33-63150)).

4.1       Indenture, dated as of August 4, 2003, between The Town and Country
          Trust and The Bank of New York, as trustee (incorporated by reference
          to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3
          (No. 333-109157)).

4.2       First Supplemental Indenture dated as of December 1, 2005, by and
          between The Town and Country Trust and The Bank of New York, as
          Trustee (incorporated by reference into Exhibit 4.1 to the
          Registrant's Current Report on Form 8-K filed on December 21, 2005).

4.3       Form of 5.375% Convertible Senior Note due 2023 (incorporated by
          reference to Exhibit 4.1 to the Registrant's Registration Statement on
          Form S-3 (No. 333-109157)).

4.4       Registration Rights Agreement, dated as of August 4, 2003, between The
          Town and Country Trust and Banc of America Securities LLC
          (incorporated by reference to Exhibit 4.3 to the Registrant's
          Registration Statement on Form S-3 (No. 333-109157)).

10.1      Third Amended and Restated Agreement of Limited Partnership of The TC
          Operating Limited Partnership dated as of August 4, 2003.

10.2*     Registrant's Amended and Restated 1993 Long Term Incentive Plan
          (incorporated by reference to Exhibit 10.2 to the Registrant's Annual
          Report on Form 10-K for the fiscal year ended December 31, 2002).

10.3*     Registrant's 1997 Long Term Incentive Plan (incorporated by reference
          to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the
          fiscal year ended December 31, 2002).
</TABLE>


                                       40

<PAGE>

<TABLE>
<S>       <C>
10.4      Amended and Restated Master Credit Facility Agreement, dated as of
          April 25, 2002, entered into by and among the Registrant, the TC
          Operating Limited Partnership, The Town and Country Holding
          Corporation, The TC Property Company, The Town and Country Oriole
          Corporation, each of the Property Partnerships and Prudential
          Multifamily Mortgage, Inc. (incorporated by reference to Exhibit 10.1
          to the Registrant's Quarterly Report on Form 10-Q for the quarter
          ended March 31, 2002).

10.5      Financing Agreement dated September 25, 1998, by and among the
          Registrant, The TC Operating Limited Partnership, The TC Property
          Company II and Allfirst Bank (fka The First National Bank of Maryland)
          (incorporated by reference to Exhibit 10.5 to the Registrant's Annual
          Report on Form 10-K for the fiscal year ended December 31, 2002).

10.6      Letter Agreement dated March 8, 2001 and effective March 1, 2001,
          between Michael H. Rosen and the Registrant (incorporated by reference
          to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed
          on April 4, 2001).

10.7      Letter Agreement dated March 2, 2001 between Jennifer C. Munch and the
          Registrant (incorporated by reference to Exhibit 10.2 to the
          Registrant's Current Report on Form 8-K filed on April 4, 2001).

10.8      Form of Severance Agreement (incorporated by reference to Exhibit 10.1
          to the Registrant's Current Report on Form 8-K filed on February 8,
          2005).

10.9      Separation Agreement and General Release dated December 21, 2004
          between James Dolphin and the Registrant (incorporated by reference to
          Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the
          fiscal year ended December 31, 2004).

10.10     Separation Agreement and General Release dated December 17, 2004
          between Gerald Haak and the Registrant (incorporated by reference to
          Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the
          fiscal year ended December 31, 2004).

10.11     Agreement and Plan of Merger dated as of December 19, 2005, by and
          between Magazine Acquisition GP LLC, Magazine Acquisition LP, Magazine
          Acquisition LLC, The Town and Country Trust and The TC Operating
          Limited Partnership (incorporated by reference to Exhibit A to the
          Registrant's Definitive Proxy Statement on Schedule 14A filed on
          January 30, 2006).

10.12     Amendment No. 1 to Agreement and Plan of Merger dated February 16,
          2006 by and between Magazine Acquisition GP LLC, Magazine Acquisition
          LP, Magazine Acquisition LLC, The Town and Country Trust and The TC
          Operating Limited Partnership (incorporated by reference to Exhibit A
          to the Registrant's Definitive Additional Materials on Schedule 14A
          filed on February 24, 2006).

12        Computation of Ratio of Earnings to Combined Fixed Charges

14        Code of Ethics is available on the Company's website at
          www.tctrust.com.

21        Subsidiaries of the Registrant

23        Consent of Independent Registered Public Accounting Firm

24        Powers of Attorney

31        Rule 13a-14(a)/15d-14(a) Certifications

32        Section 1350 Certifications
</TABLE>

*    Compensation plan or arrangement required to be filed as an exhibit hereto.


                                       41

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                        THE TOWN AND COUNTRY TRUST


                                        By: /s/ Harvey Schulweis
                                            ------------------------------------
                                            Harvey Schulweis
                                            Chairman of the Board and
                                            Chief Executive Officer

Dated: March 16, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                         Title                  Date
---------                               -------------------------   --------------
<S>                                     <C>                         <C>


/s/ Harvey Schulweis                    Chairman of the Board,      March 16, 2006
-------------------------------------   Chief Executive Officer,
Harvey Schulweis                        Principal Executive
                                        Officer and Trustee


/s/ Alan W. Lasker                      Senior Vice President-      March 16, 2006
-------------------------------------   Chief Financial Officer
Alan W. Lasker                          and Principal Financial
                                        Officer


/s/ William J. Fishell                  Vice President -Treasurer   March 16, 2006
-------------------------------------   and Principal Accounting
William J. Fishell                      Officer


James H. Berick*                        Trustee
Thomas L. Brodie*                       Trustee
Nancy L. Fisher*                        Trustee
Alan S. Jaffe*                          Trustee
H. Grant Hathaway*                      Trustee
Forrest D. Hayes*                       Trustee


*By: /s/ Harvey Schulweis                                           March 16, 2006
     --------------------------------
     Harvey Schulweis
     Attorney-in-Fact
</TABLE>

----------
*    Powers of attorney authorizing Harvey Schulweis to sign this annual report
     on Form 10-K on behalf of certain Trustees of the Registrant is being filed
     with the Securities and Exchange Commission herewith (Exhibit 24).


                                       42