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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


FORM 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                             
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to           .                                 

Commission file number 1-10272

Archstone-Smith Operating Trust

(Exact name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|MARYLAND                                                           |  | 74-6056896                           
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS employer
    identification no.)

9200 E. Panorama Circle,
Suite 400

Englewood, Colorado 80112


(Address of principal executive offices and
zip code)


(303) 708-5959

(Registrants telephone number, including
area code)


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

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

Class A-1 Common Units


(Title of Class)


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 þ          No o

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.     þ

Indicate by check mark whether Archstone-Smith is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes þ          No o

Based on the closing price of Archstone-Smith
Trusts Common Shares on June 28, 2002, which are
issuable upon redemption of the A-1 Common Units, the aggregate
market value of the Class A-1 Common Units held by
non-affiliates was approximately $662,364,522.

At February 14, 2003, there were
approximately 18,204,357 Class A-1 and Class B Common
Units outstanding held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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TABLE OF CONTENTS



|                                                                                                            |                                                                                                         |              |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ |  |  |  |  |  | 
|Table of Contents                                                                                          
|GLOSSARY                                                                                                   
|PART I                                                                                                     
|                                                                                                            | Item 1. Business                                                                                       
|                                                                                                            | The Company                                                                                            
|                                                                                                            | Officers of the Operating Trust                                                                        
|                                                                                                            | Employees                                                                                              
|                                                                                                            | Insurance                                                                                              
|                                                                                                            |                                                                                                         | Risk Factors
|                                                                                                            | Item 2. Properties                                                                                     
|                                                                                                            | Geographic Distribution                                                                                
|                                                                                                            | Real Estate Portfolio                                                                                  
|                                                                                                            | Item 3. Legal Proceedings                                                                              
|                                                                                                            | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                                                                                    
|                                                                                                            | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                      
|                                                                                                            | Item 6. Selected Financial Data                                                                        
|                                                                                                            | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                                                            | Results of Operations                                                                                  
|                                                                                                            | Liquidity and Capital Resources                                                                        
|                                                                                                            | Critical Accounting Policies                                                                           
|                                                                                                            | Off Balance Sheet Arrangements                                                                         
|                                                                                                            | Contractual Commitments                                                                                
|                                                                                                            | Related Party Transactions                                                                             
|                                                                                                            | New Accounting Pronouncements                                                                          
|                                                                                                            | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                                                                            | Item 8. Financial Statements and Supplementary Data                                                    
|                                                                                                            | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|Part III                                                                                                   
|                                                                                                            | Item 10. Trustees and Executive Officers of the Registrant                                             
|                                                                                                            | Item 11. Executive Compensation                                                                        
|                                                                                                            | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                                                            | Item 13. Certain Relationships and Related Transactions                                                
|                                                                                                            | Item 14. Controls and Procedures                                                                       
|Part IV                                                                                                    
|                                                                                                            | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|INDEX TO FINANCIAL STATEMENTS AND SCHEDULE                                                                 
|INDEPENDENT AUDITORS REPORT                                                                               
|CONSOLIDATED BALANCE SHEETS                                                                                
|CONSOLIDATED STATEMENTS OF EARNINGS                                                                        
|CONSOLIDATED STATEMENTS OF UNITHOLDERS EQUITY, OTHER COMMON UNITHOLDERS INTEREST AND COMPREHENSIVE INCOME
|CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)                                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                 
|INDEPENDENT AUDITORS REPORT                                                                               
|SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION                                                      
|SIGNATURES                                                                                                 
|CERTIFICATIONS                                                                                             
|CERTIFICATIONS                                                                                             
|EX-10.6 Form of Change in Control Agreement                                                                
|EX-12.1 Computation of Ratio of Earnings                                                                   
|EX-12.2 Computation of Ratio of Earnings Combined                                                          
|EX-21 Subsidiaries                                                                                         
|EX-23.1 Consent of KPMG LLP                                                                                
|EX-99.1 Certification Pursuant to 18 USC Sec. 1350                                                         
|EX-99.2 Certification Pursuant to 18 USC Sec. 1350                                                         



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Table of Contents

|         |     |             |  |                                                                                                    |  |  |    | 
|-------- | --- | ----------- |  | -------------------------------------------------------------------------------------------------- |  |  | -- | 
|Item     |     | Description |  | Page                                                                                              
|         |     |             |  |                                                                                                   
|PART I  
|         |     |             |  | Glossary                                                                                           |  |  | 3  | 
|         | 1.  |             |  | Business                                                                                           |  |  | 7  | 
|         |     |             |  | The Company                                                                                        |  |  | 7  | 
|         |     |             |  | Officers of the Operating Trust                                                                    |  |  | 11 | 
|         |     |             |  | Employees                                                                                          |  |  | 13 | 
|         |     |             |  | Insurance                                                                                          |  |  | 13 | 
|         |     |             |  | Risk Factors                                                                                       |  |  | 13 | 
|         | 2.  |             |  | Properties                                                                                         |  |  | 17 | 
|         |     |             |  | Geographic Distribution                                                                            |  |  | 17 | 
|         |     |             |  | Real Estate Portfolio                                                                              |  |  | 19 | 
|         | 3.  |             |  | Legal Proceedings                                                                                  |  |  | 21 | 
|         | 4.  |             |  | Submission of Matters to a Vote of Security
    Holders                                            |  |  | 21 | 
|PART II 
|         | 5.  |             |  | Market for the Registrants Common Equity
    and Related Unitholder Matters                       |  |  | 22 | 
|         | 6.  |             |  | Selected Financial Data                                                                            |  |  | 23 | 
|         | 7.  |             |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |  | 25 | 
|         |     |             |  | Results of Operations                                                                              |  |  | 27 | 
|         |     |             |  | Liquidity and Capital Resources                                                                    |  |  | 33 | 
|         |     |             |  | Critical Accounting Policies                                                                       |  |  | 37 | 
|         |     |             |  | Off Balance Sheet Arrangements                                                                     |  |  | 39 | 
|         |     |             |  | Contractual Commitments                                                                            |  |  | 40 | 
|         |     |             |  | Related Party Transactions                                                                         |  |  | 40 | 
|         |     |             |  | New Accounting Pronouncements                                                                      |  |  | 41 | 
|         | 7A. |             |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |  | 42 | 
|         | 8.  |             |  | Financial Statements and Supplementary Data                                                        |  |  | 44 | 
|         | 9.  |             |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |  | 44 | 
|PART III
|         | 10. |             |  | Trustees and Executive Officers of the Registrant                                                  |  |  | 44 | 
|         | 11. |             |  | Executive Compensation                                                                             |  |  | 44 | 
|         | 12. |             |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |  | 44 | 
|         | 13. |             |  | Certain Relationships and Related Transactions                                                     |  |  | 45 | 
|         | 14. |             |  | Controls and Procedures                                                                            |  |  | 46 | 
|PART IV 
|         | 15. |             |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |  | 46 | 

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GLOSSARY

The following abbreviations, acronyms or defined
terms used in this document are defined below:

|                                         |  |                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abbreviation, Acronym or Defined Term    |  | Definition/Description                                                                                                                                                                                                                                                                                                            
|                                         |  |                                                                                                                                                                                                                                                                                                                                   
|A-1 Common Unitholders                   |  | Holders of A-1 Common Units.                                                                                                                                                                                                                                                                                                      
|A-1 Common Units                         |  | Class A-1 Common Units of beneficial
    interest, which are redeemable for A-2 Common Units. A-1 Common
    Units are the only common units of the Operating Trust not held
    by Archstone-Smith and represent approximately 12.0% of the
    Operating Trust at December 31, 2002.                                            
|A-2 Common Units                         |  | Class A-2 Common Units of beneficial
    interest. Archstone-Smith is the sole holder of our A-2 Common
    Units, which represent approximately an 88.0% interest in the
    Operating Trust at December 31, 2002.                                                                                                               
|Ameriton                                 |  | AMERITON Properties Incorporated is a taxable
    REIT subsidiary, which engages in the opportunistic acquisition,
    development and eventual disposition of real estate with a
    shorter-term investment horizon.                                                                                                            
|Ameriton Holdings                        |  | Ameriton Holdings LLC, which owns 100% of the
    voting stock of Ameriton.                                                                                                                                                                                                                                                       
|Annual Report                            |  | This Annual Report on Form 10-K filed with
    the Securities and Exchange Commission for the fiscal year ended
    December 31, 2002.                                                                                                                                                                                            
|APB                                      |  | Accounting Principles Board.                                                                                                                                                                                                                                                                                                      
|Archstone                                |  | Archstone Communities Trust.                                                                                                                                                                                                                                                                                                      
|Archstone-Smith                          |  | Archstone-Smith Trust.                                                                                                                                                                                                                                                                                                            
|Atlantic Merger                          |  | In July 1998, Security Capital Atlantic
    Incorporated was merged with and into Security Capital Pacific
    Trust and the combined company was renamed Archstone Communities
    Trust.                                                                                                                                        
|Board                                    |  | Collectively, refers to Archstone-Smiths
    Board of Trustees or to Archstone-Smith, our sole trustee,
    unless the context otherwise requires.                                                                                                                                                                               
|Charles E. Smith Division                |  | Charles E. Smith Residential high-rise division
    of the Operating Trust, which owns and operates high-rise
    apartment buildings.                                                                                                                                                                                            
|Class B Common Units                     |  | Common Units issued in connection with
    contributions of property between dividend distribution dates;
    they are entitled to receive a pro-rata distribution with
    respect to the quarter in which the property is contributed and,
    after that distribution date, they automatically convert to A-1
    Common Units.
|Common Share(s)                          |  | Archstone-Smith Common Shares of beneficial
    interest, par value $0.01 per share.                                                                                                                                                                                                                                              
|Common Unit(s)                           |  | For periods prior to the Smith Merger and
    reorganization into an UPREIT, Archstones common shares of
    beneficial interest are referred to as Common Units. For periods
    subsequent to the Smith Merger, Common Units refer collectively
    to our A-1 and A-2 Common Units.                                           
|Consolidated Engineering Services or CES |  | Consolidated Engineering Services was a taxable
    REIT subsidiary in the business of delivering mission critical
    facilities management services for corporate, government and
    institutional customers. CES was sold to a third party in
    December 2002 for $178 million.                                             

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|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abbreviation, Acronym or Defined Term |  | Definition/Description                                                                                                                                                                                                                                                                                                                                                                
|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                       
|Convertible Preferred Units           |  | Collectively, the Series A, H, J, K and L
    Convertible Preferred Units.                                                                                                                                                                                                                                                                                                            
|Declaration of Trust                  |  | The Operating Trusts Amended and Restated
    Declaration of Trust as filed with the State of Maryland on
    October 30, 2001, as amended and supplemented.                                                                                                                                                                                                                         
|DEU                                   |  | Dividend Equivalent Unit; an amount credited to
    certain options under Archstone-Smiths long-term incentive
    plan.                                                                                                                                                                                                                                                             
|Distributions                         |  | Refers to dividends paid by Archstone on either
    Archstone common or preferred shares of beneficial interest paid
    prior to the UPREIT reorganization and Smith Merger. Subsequent
    to the Smith Merger, refers to distributions paid on Operating
    Trust Common Units or Preferred Units.                                                                                
|DownREIT OP Units                     |  | Operating Partnership Units issued by Atlantic
    Multifamily Limited Partnership  I, Archstone
    Communities Limited Partnership and Archstone Communities
    Limited Partnership II, which are convertible into Common
    Units. The DownREIT OP Units were converted into A-1 Common
    Units in August 2002.                                                               
|DownREIT Perpetual Preferred Units    |  | Collectively, the Series E, F, and G
    Preferred Units issued by Archstone Communities Limited
    Partnership and Archstone Communities Limited
    Partnership II. These Units are convertible into the same
    series of Archstone-Smith preferred. The DownREIT Perpetual
    Preferred Units were converted into Operating Trust Perpetual
    Preferred Units in August 2002.
|FASB                                  |  | Financial Accounting Standards Board.                                                                                                                                                                                                                                                                                                                                                 
|Fannie Mae                            |  | Federal National Mortgage Association.                                                                                                                                                                                                                                                                                                                                                
|Freddie Mac                           |  | Federal Home Loan Mortgage Corporation.                                                                                                                                                                                                                                                                                                                                               
|GAAP                                  |  | Generally accepted accounting principles in the
    United States.                                                                                                                                                                                                                                                                                                                    
|Homestead                             |  | Homestead Village Incorporated.                                                                                                                                                                                                                                                                                                                                                       
|In Planning                           |  | Parcels of land owned or Under Control, which are
    in the development planning process, upon which construction of
    apartments is expected to commence within 36 months.                                                                                                                                                                                                        
|Lease-Up                              |  | The phase during which newly constructed
    apartment units are being leased for the first time, but prior
    to the community becoming Stabilized.                                                                                                                                                                                                                                 
|LIBOR                                 |  | London Interbank Offered Rate.                                                                                                                                                                                                                                                                                                                                                        
|Long-Term Unsecured Debt              |  | Collectively, the Operating Trusts
    long-term unsecured senior notes payable and tax-exempt
    unsecured bonds.                                                                                                                                                                                                                                                                  
|NAREIT                                |  | National Association of Real Estate Investment
    Trusts.                                                                                                                                                                                                                                                                                                                            
|Net Operating Income or NOI           |  | Represents rental revenues less rental expenses
    and real estate taxes.                                                                                                                                                                                                                                                                                                            
|NYSE                                  |  | New York Stock Exchange.                                                                                                                                                                                                                                                                                                                                                              
|Operating Trust                       |  | Archstone-Smith Operating Trust.                                                                                                                                                                                                                                                                                                                                                      
|Perpetual Preferred Units             |  | Collectively, the Series B, C, D, E, F, G
    and I Preferred Units. These units are not convertible, but
    are redeemable at the option of Archstone-Smith at certain
    future dates.                                                                                                                                                                                            
|Preferred Units                       |  | Collectively, the Series A, B, C, D, E, F,
    G, H, I, J, K, and L Preferred Units.                                                                                                                                                                                                                                                                                                  
|REIT                                  |  | Real estate investment trust.                                                                                                                                                                                                                                                                                                                                                         

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|                                      |  |                                                                                                                                                                                                                                                
|------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abbreviation, Acronym or Defined Term |  | Definition/Description                                                                                                                                                                                                                         
|                                      |  |                                                                                                                                                                                                                                                
|Restricted Share Unit or RSU          |  | Restricted Share Unit; a unit representing an
    interest in one Common Unit, subject to certain vesting
    provisions, through our long-term incentive plan.                                                                                
|Same-Store                            |  | Term used to refer to a group of operating
    communities that had attained stabilization and were fully
    operating during the entire time relating to two periods being
    compared.                                                     
|Security Capital                      |  | Security Capital Group Incorporated (acquired by
    a subsidiary of General Electric Capital Corporation in 2002).                                                                                                                            
|Series A Preferred Units              |  | Operating Trust Series A Cumulative
    Preferred Units of Beneficial Interest, par value $0.01 per
    unit.                                                                                                                                  
|Series B Preferred Units              |  | Operating Trust Series B Cumulative
    Perpetual Preferred Units of Beneficial Interest, par value
    $0.01 per unit, which were redeemed in full in May 2001.                                                                               
|Series C Preferred Units              |  | Operating Trust Series C Cumulative
    Perpetual Preferred Units of Beneficial Interest, par value
    $0.01 per unit, which were redeemed in full in August 2002.                                                                            
|Series D Preferred Units              |  | Operating Trust Series D Cumulative
    Perpetual Preferred Units of Beneficial Interest, par value
    $0.01 per unit.                                                                                                                        
|Series E Perpetual Preferred Units    |  | Operating Trust 8.375% Cumulative Perpetual
    Preferred Units, par value $0.01 per unit.                                                                                                                                                     
|Series F Perpetual Preferred Units    |  | Operating Trust 8.125% Cumulative Perpetual
    Preferred Units, par value $0.01 per unit.                                                                                                                                                     
|Series G Perpetual Preferred Units    |  | Operating Trust 8.625% Cumulative Perpetual
    Preferred Units, par value $0.01 per unit.                                                                                                                                                     
|Series H Preferred Units              |  | Operating Trust Series H Cumulative
    Convertible Perpetual Preferred Units of Beneficial Interest,
    par value $0.01 per unit.                                                                                                            
|Series I Preferred Units              |  | Operating Trust Series I Cumulative
    Perpetual Preferred Units of Beneficial Interest, par value
    $0.01 per unit.                                                                                                                        
|Series J Preferred Units              |  | Operating Trust Series J Cumulative
    Convertible Perpetual Preferred Units of Beneficial Interest,
    par value $0.01 per unit.                                                                                                            
|Series K Preferred Units              |  | Operating Trust Series K Cumulative
    Convertible Perpetual Preferred Units of Beneficial Interest,
    par value $0.01 per unit.                                                                                                            
|Series L Preferred Units              |  | Operating Trust Series L Cumulative
    Convertible Perpetual Preferred Units of Beneficial Interest,
    par value $0.01 per unit.                                                                                                            
|Service Businesses                    |  | Collectively, Consolidated Engineering Services
    and Smith Management Construction. Both of these entities were
    taxable REIT subsidiaries and were acquired in the Smith Merger.                                                        
|Smith Management Construction or SMC  |  | Smith Management Construction Incorporated was a
    taxable REIT subsidiary in the business of providing
    construction management and building maintenance services. SMC
    was sold to members of its senior management in February 2003.
|Smith Merger                          |  | The series of merger transactions in October 2001
    whereby Archstone-Smith merged with Smith Residential and
    Archstone merged with Smith Partnership.                                                                                   
|Smith Partnership                     |  | Charles E. Smith Residential Realty, L.P.                                                                                                                                                                                                      
|Smith Residential                     |  | Charles E. Smith Residential Realty, Inc.                                                                                                                                                                                                      
|SFAS                                  |  | Statement of Financial Accounting Standards.                                                                                                                                                                                                   

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|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abbreviation, Acronym or Defined Term |  | Definition/Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Stabilized or Stabilization           |  | The classification assigned to an apartment
    community that has achieved 93% occupancy, and for which the
    redevelopment, new management and new marketing programs (or
    development and marketing in the case of a newly developed
    community) have been completed.                                                                                                                                                                                                         
|Total Expected Investment             |  | For development communities, represents the total
    expected investment at completion; for operating communities,
    represents the total expected investment plus planned capital
    expenditures.                                                                                                                                                                                                                                                                                  
|Under Control                         |  | Land parcels which the Operating Trust does not
    own, yet has an exclusive right (through contingent contract or
    letter of intent) during a contractually agreed upon time period
    to acquire for the future development of apartment communities,
    subject to approval of contingencies during the due diligence
    process. There is no commitment by the Operating Trust to
    acquire such land and there can be no assurance that any such
    land will be acquired.
|UPREIT                                |  | Umbrella Partnership Real Estate Investment Trust.                                                                                                                                                                                                                                                                                                                                                                                                                                       

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PART I




Item 1.     Business

Archstone-Smith Operating Trust is a leading real
estate operating company focused on the operation, development,
redevelopment, acquisition, management and long-term ownership
of apartment communities in protected markets throughout the
United States. Our garden communities operate under the
Archstone Communities brand name; our high-rise communities
operate under the Charles E. Smith Residential brand name. As of
December 31, 2002, we own or have an ownership position in
236 garden-style communities and 51 high-rise
properties, representing 99,840 units, including
2,295 units under construction. At the end of 2002, 83.2%
of our wholly-owned operating portfolio was concentrated in
protected locations in our eight core markets, based on NOI:

|                                           |       |  |      |      |  
|------------------------------------------ | ----- |  | ---- | ---- | -
|Greater Washington, D.C. metropolitan area |       |  | 35.1 | %   
|Southern California                        |       |  | 13.2 |     
|San Francisco Bay area, California         |       |  | 9.0  |     
|Chicago, Illinois                          |       |  | 8.5  |     
|Southeast Florida                          |       |  | 6.6  |     
|Boston, Massachusetts                      |       |  | 5.2  |     
|Seattle, Washington                        |       |  | 3.4  |     
|Greater NYC metropolitan area              |       |  | 2.2  |     
|                                           |       |  |      |     
|                                           | Total |  |      | 83.2 | %
|                                           |       |  |      |     




The Company

We are engaged primarily in the operation,
development, redevelopment, acquisition, management and
long-term ownership of apartment communities throughout the
United States. The company is structured as an UPREIT, under
which all property ownership and business operations are
conducted through the Operating Trust. Archstone-Smith is our
sole trustee and owns 88.0% of our Common Units and its Common
Shares trade on the New York Stock Exchange (NYSE:ASN).

Our principal focus is to create unitholder value
by:



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maximizing the performance of our communities and
    strengthening our operating platform by improving our customer
    service delivery, strengthening our brand position, leveraging
    technology and solidifying our reputation for operational
    leadership;     
|
| |  | Owning and operating apartments in eight core
    protected markets, which are characterized by:
    (i) protected locations with limited land on which to build
    new housing; (ii) expensive single-family housing; and
    (iii) a strong, diversified economic base;
|
| |  | Generating long-term sustainable growth in
    operating cash flow;                                                                                                                                                                                                       
|
| |  | Creating incremental value by acquiring,
    developing, or redeveloping apartments in core protected
    markets; and                                                                                                                                                    
|
| |  | Managing our invested capital through the
    disposition of assets that no longer meet our investment
    objectives and redeploying that capital into investments in our
    core protected markets.                                                                    

Customer-focused Operations

One of our primary objectives is to be viewed as
a leading operating company in corporate America, not just a
well-run company within the real estate industry. We believe we
will achieve this objective by leveraging our operating platform
across our two well-respected customer-facing brands 
Archstone Communities and Charles E. Smith
Residential  and investing in innovation and
technology that improves our core business. We believe that
strong brands, a robust and scalable technology platform and
continued investment in our human capital improve our potential
for long-term cash flow growth.

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Powerful Brands.An
essential component of our strategy is to offer a consistent and
notably higher level of service at Archstone communities and
Charles E. Smith properties, coast to coast. Through
Archstones unconditional Seal of
Service guarantees and Charles
E. Smiths Commitment to Excellent
Service, we have adapted and implemented successful
customer service programs from other industries to create
customer loyalty and trust, while establishing the service
benchmarks for the apartment industry.

Attracting and retaining the best professionals
in our industry and giving them the tools to provide an
exceptional customer experience is a critical component to
ensuring the integrity of our brands. In 2002, we unified our
Customer-centered Sales Excellence training program across our
two brands to ensure consistent delivery of our brand promises.
The seven training modules cover all important aspects of our
sales process and are offered to associates in manageable
half-day classes. This uniform sales philosophy ensures that
from start to finish, our associates have the tools to
efficiently serve our customers at every community in our
national portfolio.

Strategic use of technology.The Internet is changing the way
people do business, and we are committed to staying ahead of the
curve by investing in technology that streamlines operations and
improves our core business. We continue to develop new
initiatives and improve upon existing programs and services to
make it easier for our customers to do business with us. In
2002, we launched two important web-based tools that we believe
will redefine the way customers lease an apartment and how we
manage our properties.

We pioneered the use of Lease Rent
Optimizer (LRO), the first revenue management software
system in the apartment industry, which enables us to more
precisely forecast and analyze market demand and unit
availability to optimize pricing for our apartments. We believe
this system has a significant positive impact on our community
revenues. In 2002, we completed the rollout of LRO to our
Archstone garden communities and expanded the LRO system to 75%
of the Charles E. Smith high-rise properties by year-end.
In addition, LRO allows us to accommodate new and renewing
customers lease term needs creating a level of flexibility
that previously has never been available in the apartment
industry.

In addition to LRO, we are also upgrading our
existing property management system with MRI Residential
Management (RM) software. Developed in conjunction with MRI, an
Intuit company (NASDAQ: INTU), RM is a customer-centric,
web-based property management software system that dramatically
improves our reporting capabilities, ability to accurately track
resident rental histories, and gives our customers
around-the-clock access to their information through
resident-only web sites. RM standardizes operations between the
Archstone and Charles E. Smith portfolios and is scalable
and flexible, allowing us to add new tools to the system as they
become available.

RM is fully integrated with other tools already
in use at our communities, including LRO and SafeRent, a
web-based applicant-screening product. Through the resident web
sites, our customers will be able to view and pay account
balances through direct debit, submit service requests and renew
or fully lease an apartment online. RM is customized so that
each associate can quickly access the features and data required
for his or her specific job responsibilities. This allows us to
execute leases much more smoothly, which not only helps us fill
our apartments faster, but also ensures a much better experience
for our customers. RM is expected to be fully rolled out across
our entire portfolio by mid 2004.

Investment Strategy

We use our extensive research to identify
investment opportunities that we believe will produce total
returns in excess of our long-term cost of capital. We estimate
our long-term cost of equity capital to be 11 to 12%. When
combined with current long-term debt rates, this gives us a
weighted average long-term cost of capital of approximately 9%.

Protected markets.We invest our capital in protected
markets with high barriers to entry. Barriers to entry exist in
areas where there is a very limited amount of vacant land, any
land that exists is not zoned for apartment development, and
local municipalities are reluctant to zone additional land for
apartment properties. Our eight core markets include the Greater
Washington, D.C. metropolitan area, Southern California,
the San Francisco Bay area, Seattle, Chicago, Southeast
Florida, Boston and the greater New York

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City metropolitan area. We believe that the
relatively stable demand, limited competition and diverse
economic base typical of our core markets maximizes our ability
to keep occupancy relatively constant and produce sustainable
long-term cash flow growth.


Capital recycling program.In 1995, we articulated a strategy
that still guides our decisions today: to build a national
apartment portfolio in protected locations in the nations
best apartment markets. To execute this strategy, we have sold
virtually all the assets we owned at that time and, utilizing a
sophisticated capital recycling strategy, we redeployed our
disposition proceeds principally into our eight core protected
markets. We believe that concentrating our portfolio in
protected markets improves our core growth rate and long-term
business fundamentals.

In 2002, we sold $420.1 million of real
estate assets, generating gains of over $108 million. We
realized an average unleveraged return during our holding period
for the disposition communities of 18.6%. Additionally, we
acquired $402.4 million of operating apartment communities,
representing a total of 1,795 units. Our acquisitions over
the last seven years were principally funded by capital recycled
through tax-deferred exchanges. We focus our acquisition
activity on assets in highly desirable residential locations
with minimal competition and strong, long-term growth prospects.
Our locally based investment infrastructure often allows us to
identify attractive opportunities before they are made available
to the general market, which often results in advantageous
pricing.

Development and redevelopment.We believe we create substantial value
through the development of new apartment communities and the
redevelopment of existing operating communities. At
December 31, 2002, we had $480.8 million of
development communities under construction, with 68.3%, or
$328.4 million, of this amount already funded. In 2002, we
completed $265.9 million of new development communities,
representing 1,469 units, in markets that include the
greater Washington, D.C. metropolitan area and Southern
California.

Through our redevelopment strategy, we reposition
assets by intelligently investing capital in renovations that
include upgrades to interiors, exteriors, leasing offices,
landscaping and amenities. In addition, we invest in
revenue-enhancing capital expenditures such as building
garages/carports and additional storage facilities. We also
invest in expense-reducing expenditures, including water
sub-metering systems and xeriscaping.

Conservative Balance Sheet
Management

One of our primary financial objectives is to
structure our balance sheet in order to have access to capital
when other competitors in the industry do not. We have a
significant equity base, with a total equity market
capitalization of $5.3 billion. During 2002, we financed
our investment activity primarily through internally-generated
cash flow from operations and asset dispositions. We are focused
on ensuring that we do not face liquidity issues in any given
quarter or year. As of February 14, 2003, we had
$381.9 million in total available capacity on our lines of
credit. We believe that careful balance sheet management will
enable us to take advantage of compelling investment
opportunities that are more likely to emerge in a
capital-constrained environment.

We are committed to preserving our strong balance
sheet in order to enhance our financial flexibility. Our
investment-grade debt ratings from Standard &
Poors (BBB+), Moodys Investors Service (Baa1) and
Fitch, Inc. (BBB+) are indicative of our solid financial
position.

Our long-term debt is structured to create a
relatively level principal maturity schedule, without
significant repayment obligations in any year. We have only
$223.9 million of long-term debt maturing in 2003,
representing 2.4% of our total market capitalization.

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The following summarizes our long-term debt
maturity profile for the next five years, and thereafter, as of
December 31, 2002 (dollar amounts in thousands):

|           |       |                |         |           |  |       |           |                   |  |   |           |           |  |  |      |      |  
|---------- | ----- | -------------- | ------- | --------- |  | ----- | --------- | ----------------- |  | - | --------- | --------- |  |  | ---- | ---- | -
|           |       | Long-term      |         |           |  |       |           | % of Total Market
|Year       |       | Unsecured Debt |         | Mortgages |  | Total |           | Capitalization(1)
|           |       |                |         |           |  |       |           |                  
|2003       |       | $              | 171,250 |           |  | $     | 52,632    |                   |  | $ | 223,882   |           |  |  | 2.4  | %   
|2004       |       |                | 51,250  |           |  |       | 51,727    |                   |  |   | 102,977   |           |  |  | 1.1  | %   
|2005       |       |                | 251,250 |           |  |       | 25,007    |                   |  |   | 276,257   |           |  |  | 2.9  | %   
|2006       |       |                | 51,250  |           |  |       | 292,407   |                   |  |   | 343,657   |           |  |  | 3.7  | %   
|2007       |       |                | 386,250 |           |  |       | 134,710   |                   |  |   | 520,960   |           |  |  | 5.6  | %   
|Thereafter |       |                | 864,853 |           |  |       | 1,404,344 |                   |  |   | 2,269,197 |           |  |  | 24.2 | %   
|           |       |                |         |           |  |       |           |                   |  |   |           |           |  |  |      |     
|           | Total |                | $       | 1,776,103 |  |       | $         | 1,960,827         |  |   | $         | 3,736,930 |  |  |      | 39.9 | %
|           |       |                |         |           |  |       |           |                   |  |   |           |           |  |  |      |     



---



|    |                                                        
|--- | -------------------------------------------------------
|(1) | Total market capitalization as of
    December 31, 2002

We made significant progress in reducing our
secured debt and increasing our unencumbered asset base during
the year. We repaid over $500 million of secured debt,
reducing our ratio of secured debt to total debt from 60.5% at
the end of 2001, to 47.8% at the end of 2002. As a result, we
have $5.0 billion of unencumbered assets as of
December 31, 2002.

Consistent distribution growth.We paid distributions of
$1.70 per Common Unit in 2002, a 3.7% increase over Common
Unit distributions paid in 2001. We also announced our
anticipated 2003 distribution level of $1.71 per share. We
have increased our annual distribution for 11 consecutive years
and have paid 110 consecutive quarterly distributions. Including
the announced increase for 2003, our annual distribution per
unit has increased 167% since 1991.

Registrants Website Address

A copy of this Annual Report on Form 10-K,
as well as our Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to such reports are
available, free of charge, on the Internet on our website
www.archstonesmith.com. All required reports are made
available on the website as soon as reasonably practicable after
they are electronically filed with or furnished to the
Securities and Exchange Commission. The reference to our website
address does not constitute incorporation by reference of the
information contained in the website and should not be
considered part of this document.

Affiliates

We own or owned the majority of the economic
interest in the following companies, which provide various
investment and operational services as described below:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ameritonutilizes
    our national development, acquisition and operating
    infrastructure to make real estate investments with a
    shorter-term ownership horizon. Ameriton creates the potential
    for additional positive earnings growth for us.                                                                                                                                                                                                                                                            
|
| | Archstone Management Services
    Incorporatedis a full-service,
    third-party property management company, which manages assets
    for private and institutional owners of apartment properties
    throughout the United States.                                                                                                                                                                                                                                                                                
|
| | Consolidated Engineering
    Servicesis a broad-based building
    technical services company with a network of leading regional
    companies that provide specialized technical services for
    building equipment, systems and operations. CES has particular
    expertise in operating mission critical facilities. We sold our
    interest in CES to a third party in December 2002; see
    Note 2 in our audited financial statements in this Annual
    Report for additional information on the CES sale.
|
| | Smith Management
    Constructionis a construction
    management service company that performs renovation,
    rehabilitation and tenant improvement services to both the
    private and governmental sector.                                                                                                                                                                                                                                                                                                      

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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | We sold SMC in February 2003; see Note 18 in
    our audited financial statements in this Annual Report for
    additional information on the SMC sale.

Management

We have several senior executives who possess the
leadership, operational, investment and financial skills and
experience to oversee the entire operations of our company.
Several of our senior officers could serve as our principal
executive officer and continue our strong performance. Our
management team emphasizes active training and organizational
development initiatives for associates at all levels of our
company in order to build long-term management depth and
facilitate succession planning.




Officers of
the Operating Trust

Archstone-Smith is the majority owner of the
Operating Trust and owns approximately 88.0% of our total
outstanding Common Units. Archstone-Smith is the Operating
Trusts sole Trustee.

References throughout this section are labeled
Operating Trust for the post-merger period as a
result of this name change. Pre-merger periods will be
referenced as follows: (i) as Operating Trust
for individuals who were associated with Archstone and/or its
affiliates; and (ii) as Smith Residential for
individuals who were associated with Smith Residential and/or
its affiliates. See Note 2 of the Operating Trusts
audited financial statements in this Annual Report or in
Managements Discussion and Analysis in this Annual Report
for additional information on the Smith Merger.

Senior
Officers of Archstone-Smith Operating Trust

The senior officers of Archstone-Smith Operating
Trust are:

|                        |  |                                                            
|----------------------- |  | -----------------------------------------------------------
|Name                    |  | Title                                                      
|                        |  |                                                            
|R. Scot Sellers         |  | Chief Executive Officer                                    
|J. Lindsay Freeman      |  | Chief Operating Officer                                    
|Charles E. Mueller, Jr. |  | Chief Financial Officer                                    
|Richard A. Banks        |  | President  West Division                                  
|James D. Rosenberg      |  | President  Charles E. Smith
    Residential Division      
|Dana K. Hamilton        |  | Executive Vice President  National
    Operations         
|Caroline Brower         |  | Executive Vice President, Secretary and General
    Counsel
|Daniel E. Amedro        |  | Senior Vice President and Chief Information
    Officer    
|Mark A. Schumacher      |  | Senior Vice President and Controller                       

Biographies
of Senior Officers

R. Scot
Sellers  46
Chairman and Chief Executive Officer of Archstone-Smith
Operating Trust since June 1997, with overall responsibility for
the Operating Trusts strategic direction, investments and
operations; Co-Chairman and Chief Investment Officer of the
Operating Trust from July 1998 to December 1998. From September
1994 to June 1997, Managing Director of the Operating Trust,
where he had overall responsibility for the Operating
Trusts investment strategy and implementation; Senior Vice
President of the Operating Trust from May 1994 to September
1994. Mr. Sellers is a member of the Executive Committee of
the Board of Governors of NAREIT and also is a member of the
Executive Committee of the Board of Directors of the National
Multi Housing Council.

J. Lindsay
Freeman  57
Chief Operating Officer since September 2002, with
responsibility for managing all investment and operating
activities for the Operating Trust; President-East Division of
the Operating Trust from October 2001 to September 2002, with
responsibility for all investments and operations

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of the East Division; from July 1998 to October
2001, Managing Director of the Operating Trust, with
responsibility for investments and operations in the East and
Central Regions; Managing Director of Security Capital Atlantic
Incorporated from December 1997 to July 1998; Senior Vice
President of Security Capital Atlantic Incorporated from May
1994 to November 1997; previously, Senior Vice President and
Operating Partner of Lincoln Property Company in Atlanta,
Georgia, where he was responsible for acquisitions, financing,
construction and management of apartment communities within the
Atlantic region and oversaw operations of 16,000 apartment units.


Charles E. Mueller,
Jr.  39
Chief Financial Officer of the Operating Trust since December
1998, with responsibility for the planning and execution of the
companys financial strategy and balance sheet management;
Mr. Mueller oversees the companys
accounting/financial reporting, corporate finance, investor
relations, corporate and property tax, due diligence and risk
management functions. Vice President of the Operating Trust from
September 1996 to December 1998; prior thereto, he held various
financial positions with Security Capital, where he provided
financial services to Security Capital and its affiliates.

Richard A.
Banks  55
President-West Division of the Operating Trust since October
2001, with responsibility for all investments and operations of
the West Division; from December 1997 to October 2001, Managing
Director of the Operating Trust, with responsibility for
investments and operations in the West Region; Senior Vice
President of the Operating Trust from August 1997 to December
1997; from January 1995 to August 1997, President and Chief
Executive Officer of Lincoln Residential Services, where he was
responsible for all aspects of leading a full service property
management company of approximately 40,000 apartment units in
the western United States; member of the Executive Committee of
the Board of Directors of the National Multi Housing Council.

James D.
Rosenberg  45
President-Charles E. Smith Residential Division of the
Operating Trust since November 2002, with responsibility for all
investments and operations of the Division; President and Chief
Operating Officer of Winston Hotels from January 1998 to
November 2002; Senior Vice President for Holiday Inn Worldwide
from January 1994 to January 1998, where he was responsible for
the operations of 85 hotel properties, including nearly 50
high-rise properties in urban areas; Mr. Rosenberg started
his career with the public accounting firm of Price Waterhouse.

Dana K.
Hamilton  34
Executive Vice President-National Operations for the Operating
Trust since May 2001, with responsibility for corporate
services, including human resources, training and development,
marketing and corporate communications, and new business
development; property operations in the central United States;
and Archstone Management Services Incorporated, the
companys third-party management business; Senior Vice
President of the Operating Trust from December 1998 to May 2001;
Vice President from December 1996 to December 1998, with
responsibility for new product development and revenue
enhancement through portfolio-wide initiatives.

Caroline
Brower  54
Executive Vice President, General Counsel and Secretary of the
Operating Trust since December 2002, with responsibility for
legal and corporate governance; Senior Vice President, General
Counsel and Secretary of the Operating Trust from September 1999
to December 2002; from September 1998 to September 1999,
President of Ameriton Properties Incorporated; prior thereto,
Ms. Brower was a partner of Mayer, Brown & Platt
(now Mayer, Brown, Rowe & Maw), where she practiced
transaction and real estate law.

Daniel E.
Amedro  46
Chief Information Officer and Senior Vice President of the
Operating Trust since May 1998, with primary responsibility for
the companys information technology functions and
initiatives; Chief Information Officer and Vice President from
May 1998 to January 1999; from September 1996 to March 1998,
Vice President of Information Services for American Medical
Response, the largest private ambulance operation in the United
States; prior thereto, Vice President of Information Services
for Hyatt Hotels and Resorts, where he was responsible for all
strategic information systems including Spirit,
Hyatts worldwide reservation system, which supported over
50,000 users and was recognized as the leading reservations
system in the hospitality industry.

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Mark A.
Schumacher  44
Senior Vice President and Corporate Controller of the Operating
Trust since January 2002, with principal responsibility for
accounting and financial reporting; prior thereto, Vice
President and Corporate Controller of Qwest Communications
International from December 2000 to December 2001 where he had
principal responsibility for accounting and financial reporting;
from April 1991 to December 2000, held various senior and
executive level positions in the accounting and financial
reporting department of Qwest Communications International and
predecessor entity US West; from April 1984 to April 1991 he
held various managerial level positions in the accounting and
financial reporting department of US West.




Employees

We currently employ approximately 3,450
individuals, of whom approximately 2,750 are focused on the
site-level operation of our garden communities and high-rise
properties. Of the site-level associates, approximately 100 are
subject to collective bargaining agreements with four unions in
Illinois and New York. The balance are professionals who manage
corporate and regional operations, including our investment
program, property operations, financial reporting and other
support functions. We consider our relationship with our
employees to be very good.




Insurance

We carry comprehensive general liability coverage
on our owned communities, with limits of liability customary
within the industry to insure against liability claims and
related defense costs. Similarly, we are insured against the
risk of direct physical damage in amounts necessary to reimburse
the company on a replacement cost basis for costs incurred to
repair or rebuild each property, including loss of rental income
during the reconstruction period. Our property policies for all
operating and development communities include coverages for the
perils of flood and earthquake shock with limits and deductibles
customary in the industry. We also obtain title insurance
policies when acquiring new properties, which insure fee title
to our real properties. We currently have coverage for losses
incurred in connection with both domestic and foreign
terrorist-related activities. The terms of our property and
general liability policies after June 30, 2002, may exclude
certain mold-related claims. Should an uninsured loss arise
against the company, we would be required to use our own funds
to resolve the issue, including litigation costs.




Risk Factors

The following factors could affect our future
financial performance:

We are
restricted in our ability to sell the properties located in the
Crystal City area of Arlington, Virginia without the consent of
Messrs. Smith and Kogod, which could result in our
inability to sell these properties at an opportune time and/or
at increased costs to us.

A sale of any of the properties acquired in the
Smith Merger prior to January 1, 2022, could result in
increased costs to us in light of the tax-related obligations
made to the former Smith Partnership unitholders. Under the
shareholders agreement between Archstone-Smith, the
Operating Trust, Robert H. Smith and Robert P. Kogod, we are
restricted from transferring specified high-rise properties
located in the Crystal City area of Arlington, Virginia until
October 31, 2016, without the consent of Messrs. Smith
and Kogod, which could result in our inability to sell these
properties at an opportune time and at increased costs to us.
However, we are permitted to transfer these properties in
connection with a sale of all of the properties in a single
transaction or pursuant to a bona fide mortgage of any or all of
such properties in order to secure a loan or other financing.

We depend on
our key personnel.

Our success depends on our ability to attract and
retain the services of executive officers, senior officers and
company managers. There is substantial competition for qualified
personnel in the real estate industry and the loss of several of
our key personnel could have an adverse effect on us.

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Debt
financing could adversely affect our performance.

We are subject to risks associated with debt
financing and preferred equity. These risks include the risks
that we will not have sufficient cash flow from operations to
meet required payments of principal and interest or to pay
distributions on our securities at expected rates, that we will
be unable to refinance current or future indebtedness, that the
terms of any refinancing will not be as favorable as the terms
of existing indebtedness, and that we will be unable to make
necessary investments in new business initiatives due to lack of
available funds. Increases in interest rates could increase
interest expense, which would adversely affect net earnings and
cash available for payment of obligations. If we are unable to
make required payments on indebtedness that is secured by a
mortgage on our property, the asset may be transferred to the
lender with a consequent loss of income and value to us.

Additionally, our debt agreements contain
customary covenants which, among other things, restrict our
ability to incur additional indebtedness and, in certain
instances, restrict our ability to engage in material asset
sales, mergers, consolidations and acquisitions. These debt
agreements also require us to maintain various financial ratios.
Failure to comply with these covenants could result in a
requirement to repay the indebtedness prior to its maturity,
which could have an adverse effect on our operations and ability
to make distributions to unitholders.

Some of our debt instruments bear interest at
variable rates. Increases in interest rates would increase our
interest expense under these instruments and would increase the
cost of refinancing these instruments and issuing new debt. As a
result, higher interest rates would adversely affect cash flow
and our ability to service our indebtedness.

We had $4.1 billion in total debt
outstanding as of December 31, 2002, of which
$2.0 billion was secured by real estate assets and
$784.8 million was subject to variable interest rates,
including $365.6 million outstanding on our short-term
credit facilities.

Archstone-Smith
may not have access to equity capital.

A prolonged period in which real estate operating
companies cannot effectively access the public equity markets
may result in heavier reliance on alternative financing sources
to undertake new investment activities. These alternative
sources of financing may be more costly than raising funds in
the public equity markets.

We are
subject to risks inherent in ownership of real
estate.

Real estate cash flows and values are affected by
a number of factors, including changes in the general economic
climate, local, regional or national conditions (such as an
oversupply of communities or a reduction in rental demand in a
specific area), the quality and philosophy of management,
competition from other available properties and the ability to
provide adequate property maintenance and insurance and to
control operating costs. Real estate cash flows and values are
also affected by such factors as government regulations,
including zoning, usage and tax laws, interest rate levels, the
availability of financing, property tax rates, utility expenses,
potential liability under environmental and other laws and
changes in environmental and other laws. Although we seek to
minimize these risks through our market research and property
management capabilities, they cannot be totally eliminated.

We are
subject to risks inherent in real estate
development.

We have developed or commenced development on a
substantial number of apartment communities and expect to
develop additional apartment communities in the future. Real
estate development involves risks in addition to those involved
in the ownership and operation of established communities,
including the risks that financing, if needed, may not be
available on favorable terms, construction may not be completed
on schedule, contractors may default, estimates of the costs of
developing apartment communities may prove to be inaccurate and
communities may not be leased or rented on profitable terms or
in the time frame anticipated. Timely construction may be
affected by local weather conditions, local moratoria on
construction, local or

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national strikes and local or national shortages
in materials, building supplies or energy and fuel for
equipment. These risks may cause the development project to fail
to perform as expected.


Real estate
investments are relatively illiquid and we may not be able to
sell properties when appropriate.

Equity real estate investments are relatively
illiquid, which may tend to limit our ability to react promptly
to changes in economic or other market conditions. Our ability
to dispose of assets in the future will depend on prevailing
economic and market conditions.

We are
subject to the Americans with Disabilities Act.

Our communities must comply with Title III
of the Americans with Disabilities Act to the extent that such
communities are or contain public accommodations and/or
commercial facilities as defined by the Act. The Act does not
consider apartment communities to be public accommodations or
commercial facilities, except for portions of such facilities
which are open to the public, such as the leasing office.
Noncompliance could result in imposition of fines or an award of
damages to private litigants. We believe our communities comply
with all present requirements under the Act and applicable state
laws.

Compliance
with environmental regulations may be costly.

We must comply with certain environmental and
health and safety laws and regulations related to the ownership,
operation, development and acquisition of apartments. Under
those laws and regulations, we may be liable for, among other
things, the costs of removal or remediation of certain hazardous
substances, including asbestos-related liability. Those laws and
regulations often impose liability without regard to fault. As
part of our due diligence procedures, we have conducted
Phase I environmental assessments on each of our
communities prior to acquisition; however, we cannot give any
assurance that those assessments have revealed all potential
liabilities.

Costs
associated with moisture infiltration and resulting mold
remediation may be costly.

As a general matter, concern about indoor
exposure to mold has been increasing as such exposure has been
alleged to have a variety of adverse effects on health. As a
result, there has been an increasing number of lawsuits in our
industry against owners and managers of apartment communities
relating to moisture infiltration and resulting mold. We have
implemented guidelines and procedures to address moisture
infiltration and resulting mold issues if and when they arise.
We believe that these measures will minimize the potential for
any adverse effect on our residents. The terms of our property
and general liability policies after June 30, 2002, may
exclude certain mold-related claims. Should an uninsured loss
arise against the company, we would be required to use our own
funds to resolve the issue, including litigation costs. While
mold issues have resulted in significant claims at only one of
our properties to date, we can make no assurance that
liabilities resulting from moisture infiltration and the
presence of or exposure to mold will not have a future material
impact on our financial results.

We are not aware of any other environmental
condition on any of our real estate investments that is likely
to have a material adverse effect on our financial position or
results of operations; however, we cannot give any assurance
that any such condition does not exist or may not arise in the
future.

Changes in
laws may result in increased cost.

We may not be able to pass on increased costs
resulting from increases in real estate taxes, income taxes or
other governmental requirements directly to our residents.
Substantial increases in rents, as a result of those increased
costs, may affect the ability of a resident to pay rent, causing
increased vacancy. Changes in laws increasing potential
liability for environmental conditions or increasing the
restrictions on discharges or other environmental conditions may
result in significant unanticipated expenditures.

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We intend to
qualify as a partnership, but we cannot guarantee that we will
qualify.

We intend to qualify as a partnership for federal
income tax purposes. However, we will be treated as an
association taxable as a corporation for federal income tax
purposes if we are deemed to be a publicly traded partnership,
unless at least 90% of our income is qualifying income as
defined in the tax code. Qualifying income for the 90% test
generally includes passive income, such as real property rents,
distributions and interest. The income requirements applicable
to REITs and the definition of qualifying income for purposes of
this 90% test are similar in most respects. We believe that we
will meet this qualifying income test, but cannot guarantee that
we will. If we were to be taxed as a corporation, we would incur
substantial tax liabilities, Archstone-Smith would fail to
qualify as a REIT for tax purposes and Archstone-Smiths
and the Operating Trusts ability to raise additional
capital would be impaired.

Archstone-Smiths
failure to qualify as a REIT would have adverse
consequences.

We believe that Archstone-Smith has qualified for
taxation as a REIT under the Internal Revenue Code and they plan
to continue to meet the requirements for taxation as a REIT.
They cannot, however, guarantee that they will continue to
qualify in the future as a REIT. They cannot give any assurance
that new legislation, regulations, administrative
interpretations or court decisions will not significantly change
the requirements relating to Archstone-Smiths
qualification. If they fail to qualify as a REIT, they would be
subject to federal income tax at regular corporate rates. Also,
unless the Internal Revenue Service granted them relief, they
would remain disqualified as a REIT for four years following the
year in which they failed to qualify. In the event that they
failed to qualify as a REIT, they would be required to pay
significant income taxes and would have less money available for
operations and distributions to unitholders. This would likely
have a significant adverse effect on the value of our securities
and our ability to raise additional capital. In order to
maintain its qualification as a REIT under the Internal Revenue
Code, Archstone-Smiths declaration of trust limits the
ownership of its shares by any person or group of related
persons to 9.8%, unless special approval is granted by our Board.

We are
subject to losses that may not be covered by
insurance.

There are certain types of losses (such as from
war) that may be uninsurable or not economically insurable.
Additionally, many of our communities in California are located
in the general vicinity of active earthquake fault lines.
Although we maintain insurance to cover most reasonably likely
risks, including earthquakes, if an uninsured loss or a loss in
excess of insured limits occurs, we could lose both our invested
capital in, and anticipated profits from, one or more
communities. We may also be required to continue to repay
mortgage indebtedness or other obligations related to such
communities. The terms of our property and general liability
policies after June 30, 2002, may exclude certain
mold-related claims. While mold issues have resulted in
significant claims at only one of our properties to date, we can
make no assurance that liabilities resulting from moisture
infiltration and the presence of or exposure to mold will not
have a future material impact on our financial results. Should
an uninsured loss arise against the company, we would be
required to use our own funds to resolve the issue, including
litigation costs. Any such loss could materially adversely
affect our business, financial condition and results of
operations.

We have a
concentration of investments in certain markets.

At December 31, 2002, approximately 35.1% of
our apartment communities are located in the Greater
Washington, D.C. Metropolitan Area, based on NOI.
Approximately 13.2% of our apartment communities are located in
Southern California at December 31, 2002, based on NOI.
Southern California is the geographic area comprised of the Los
Angeles, Inland Empire, Orange County, San Diego and
Ventura County markets. Additionally, approximately 9.0% of our
apartment communities are located in the San Francisco Bay
Area of California at December 31, 2002, based on NOI. We
are, therefore, subject to increased exposure (positive or
negative) to economic and other competitive factors specific to
protected markets within these geographic areas.

16



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##### Table of Contents



Our business
is subject to extensive competition.

There are numerous commercial developers, real
estate companies and other owners of real estate that we compete
with in seeking land for development, apartment communities for
acquisition and disposition and residents for apartment
communities. All of our apartment communities are located in
developed areas that include other apartment communities. The
number of competitive apartment communities in a particular area
could have a material adverse effect on our ability to lease
units and on the rents charged. In addition, single-family homes
and other residential properties provide housing alternatives to
residents and potential residents of our apartment communities.




Item 2.     Properties




Geographic Distribution

At December 31, 2002, the geographic
distribution for our eight core markets based on NOI was as
follows:

|                                           |       |  |      |      |  
|------------------------------------------ | ----- |  | ---- | ---- | -
|Greater Washington, D.C. Metropolitan Area |       |  | 35.1 | %   
|Southern California                        |       |  | 13.2 |     
|San Francisco Bay Area, California         |       |  | 9.0  |     
|Chicago, Illinois                          |       |  | 8.5  |     
|Southeast Florida                          |       |  | 6.6  |     
|Boston, Massachusetts                      |       |  | 5.2  |     
|Seattle, Washington                        |       |  | 3.4  |     
|Greater New York City Metropolitan Area    |       |  | 2.2  |     
|                                           |       |  |      |     
|                                           | Total |  |      | 83.2 | %
|                                           |       |  |      |     

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The following table summarizes the geographic
distribution of our garden communities and high-rise properties
at December 31, 2002 based on NOI:

|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |      |      |       |  
|----------------------------------------------------- | ------------------------------------------ | ------------------------------- | ------------------------ | ---- | ---- | ----- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                                                      |                                            |                                
|                                                      |                                            | Total Portfolio(1)             
|                                                      |                                            |                                
|                                                      |                                            | 2002                            |                          | 2001 |      | 2000 
|                                                      |                                            |                                 |                          |      |      |      
|East Division (garden communities):                   |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      | Atlanta, Georgia                           |                                 |                          | 3.1  | %    |       |   | 3.3  | %    |       |   | 6.3  | %   
|                                                      | Austin, Texas                              |                                 |                          | 0.5  |      |       |   | 0.6  |      |       |   | 2.6  |     
|                                                      | Boston, Massachusetts                      |                                 |                          | 3.7  |      |       |   | 3.5  |      |       |   | 4.2  |     
|                                                      | Charlotte, North Carolina                  |                                 |                          | 0.5  |      |       |   | 0.6  |      |       |   | 1.9  |     
|                                                      | Chicago, Illinois                          |                                 |                          | 3.4  |      |       |   | 3.2  |      |       |   | 1.9  |     
|                                                      | Dallas, Texas                              |                                 |                          | 1.2  |      |       |   | 1.2  |      |       |   | 1.9  |     
|                                                      | Denver, Colorado                           |                                 |                          | 2.4  |      |       |   | 2.7  |      |       |   | 4.9  |     
|                                                      | Houston, Texas                             |                                 |                          | 1.0  |      |       |   | 1.4  |      |       |   | 2.7  |     
|                                                      | Nashville, Tennessee                       |                                 |                          | 0.2  |      |       |   | 0.4  |      |       |   | 1.1  |     
|                                                      | Greater New York City Metropolitan Area    |                                 |                          | 0.3  |      |       |   |     |      |       |   |     |     
|                                                      | Orlando, Florida                           |                                 |                          | 0.3  |      |       |   | 0.4  |      |       |   | 1.4  |     
|                                                      | Raleigh, North Carolina                    |                                 |                          | 1.4  |      |       |   | 1.8  |      |       |   | 4.5  |     
|                                                      | San Antonio, Texas                         |                                 |                          | 0.5  |      |       |   | 0.8  |      |       |   | 1.8  |     
|                                                      | Southeast Florida                          |                                 |                          | 1.8  |      |       |   | 2.2  |      |       |   | 4.4  |     
|                                                      | Greater Washington, D.C. Metropolitan Area |                                 |                          | 14.4 |      |       |   | 12.3 |      |       |   | 7.2  |     
|                                                      | West Coast Florida                         |                                 |                          | 0.6  |      |       |   | 0.8  |      |       |   | 1.8  |     
|                                                      | Other                                      |                                 |                          |     |      |       |   |     |      |       |   | 2.6  |     
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      |                                            | East Division Total             |                          |      | 35.3 | %     |   |      | 35.2 | %     |   |      | 51.2 | %    
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|West Division (garden communities):                   |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      | Albuquerque, New Mexico                    |                                 |                          | 1.2  | %    |       |   | 1.1  | %    |       |   | 2.1  | %   
|                                                      | Las Vegas, Nevada                          |                                 |                          | 0.5  |      |       |   | 0.6  |      |       |   | 1.4  |     
|                                                      | Phoenix, Arizona                           |                                 |                          | 2.1  |      |       |   | 2.3  |      |       |   | 5.1  |     
|                                                      | Portland, Oregon                           |                                 |                          | 0.6  |      |       |   | 0.8  |      |       |   | 1.9  |     
|                                                      | Salt Lake City, Utah                       |                                 |                          | 0.7  |      |       |   | 0.7  |      |       |   | 2.8  |     
|                                                      | San Francisco Bay Area, California         |                                 |                          | 9.0  |      |       |   | 9.8  |      |       |   | 13.7 |     
|                                                      | Seattle, Washington                        |                                 |                          | 3.4  |      |       |   | 4.0  |      |       |   | 6.3  |     
|                                                      | Southern California                        |                                 |                          | 13.2 |      |       |   | 11.8 |      |       |   | 14.5 |     
|                                                      | Other                                      |                                 |                          |     |      |       |   | 0.4  |      |       |   | 1.0  |     
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      |                                            | West Division Total             |                          |      | 30.7 | %     |   |      | 31.5 | %     |   |      | 48.8 | %    
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      |                                            |                                 | Total garden communities |      |      | 66.0  | % |      |      | 66.7  | % |      |      | 100.0 | %
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|Charles E. Smith Division (high-rise
    properties): |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      | Boston, Massachusetts                      |                                 |                          | 1.5  | %    |       |   | 1.6  | %    |       |   |     | %   
|                                                      | Chicago, Illinois                          |                                 |                          | 5.1  |      |       |   | 5.8  |      |       |   |     |     
|                                                      | Greater New York City Metropolitan Area    |                                 |                          | 1.9  |      |       |   |     |      |       |   |     |     
|                                                      | Southeast Florida                          |                                 |                          | 4.8  |      |       |   | 5.0  |      |       |   |     |     
|                                                      | Greater Washington, D.C. Metropolitan Area |                                 |                          | 20.7 |      |       |   | 20.9 |      |       |   |     |     
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      |                                            | Charles E. Smith Division Total |                          |      | 34.0 | %     |   |      | 33.3 | %     |   |      |     |      
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     
|                                                      |                                            |                                 | Total All Markets        |      |      | 100.0 | % |      |      | 100.0 | % |      |      | 100.0 | %
|                                                      |                                            |                                 |                          |      |      |       |   |      |      |       |   |     



---



|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on NOI for the fourth quarter of each
    calendar year, excluding NOI from communities disposed of during
    the period. For 2001, includes an entire quarter of NOI for the
    assets acquired in the Smith Merger.

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Real Estate Portfolio

We are a leading real estate operating company
focused on the operation, development, redevelopment,
acquisition, management and long-term ownership of apartment
communities in protected markets throughout the United States.
We have a strategic national presence with 222 wholly-owned
communities representing 77,988 units, including
2,295 units in our development pipeline at
December 31, 2002. The following information summarizes our
real estate portfolio as of December 31, 2002 (dollar
amounts in thousands). Additional information on our real estate
portfolio is contained in Schedule III, Real Estate
and Accumulated Depreciation and in our audited financial
statements contained in this Annual Report:

|                                    |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |      |      |  
|----------------------------------- | ------------------------------------------ | ------------------------------- |  | --------- | -- | ---------- |  | ---------- | ------ |  | - | --------- | --------- |  |  | ---- | ---- | -
|                                    |                                            |                                 |  |           |    | Operating  |  |           
|                                    |                                            | Number of                       |  | Number of |    | Trust      |  | Percentage
|                                    |                                            | Communities                     |  | Units     |    | Investment |  | Leased(1) 
|                                    |                                            |                                 |  |           |    |            |  |           
|OPERATING APARTMENT COMMUNITIES:    |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     
|East Division (garden communities): |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     
|                                    | Atlanta, Georgia                           |                                 |  | 11        |    |            |  | 3,403      |        |  | $ | 257,322   |           |  |  | 96.6 | %   
|                                    | Austin, Texas                              |                                 |  | 2         |    |            |  | 714        |        |  |   | 33,662    |           |  |  | 96.8 | %   
|                                    | Boston, Massachusetts                      |                                 |  | 8         |    |            |  | 1,833      |        |  |   | 274,949   |           |  |  | 98.4 | %   
|                                    | Charlotte, North Carolina                  |                                 |  | 2         |    |            |  | 668        |        |  |   | 46,652    |           |  |  | 97.3 | %   
|                                    | Chicago, Illinois                          |                                 |  | 8         |    |            |  | 3,912      |        |  |   | 316,847   |           |  |  | 93.7 | %   
|                                    | Dallas, Texas                              |                                 |  | 6         |    |            |  | 1,616      |        |  |   | 98,930    |           |  |  | 96.0 | %   
|                                    | Denver, Colorado                           |                                 |  | 7         |    |            |  | 2,347      |        |  |   | 158,525   |           |  |  | 97.4 | %   
|                                    | Houston, Texas                             |                                 |  | 2         |    |            |  | 1,408      |        |  |   | 73,385    |           |  |  | 93.2 | %   
|                                    | Nashville, Tennessee                       |                                 |  | 2         |    |            |  | 445        |        |  |   | 23,670    |           |  |  | 91.2 | %   
|                                    | Greater New York City Metropolitan Area    |                                 |  | 1         |    |            |  | 160        |        |  |   | 35,486    |           |  |  | 99.4 | %   
|                                    | Orlando, Florida                           |                                 |  | 1         |    |            |  | 312        |        |  |   | 21,451    |           |  |  | 98.7 | %   
|                                    | Raleigh, North Carolina                    |                                 |  | 7         |    |            |  | 1,840      |        |  |   | 130,447   |           |  |  | 96.7 | %   
|                                    | San Antonio, Texas                         |                                 |  | 2         |    |            |  | 530        |        |  |   | 31,503    |           |  |  | 96.2 | %   
|                                    | Southeast Florida                          |                                 |  | 6         |    |            |  | 1,786      |        |  |   | 132,310   |           |  |  | 98.9 | %   
|                                    | Greater Washington, D.C. Metropolitan Area |                                 |  | 26        |    |            |  | 9,614      |        |  |   | 1,108,423 |           |  |  | 97.6 | %   
|                                    | West Coast Florida                         |                                 |  | 3         |    |            |  | 746        |        |  |   | 43,208    |           |  |  | 98.7 | %   
|                                    |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     
|                                    |                                            | East Division Subtotal/ Average |  |           | 94 |            |  |            | 31,334 |  |   | $         | 2,786,770 |  |  |      | 96.7 | %
|                                    |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     
|West Division (garden communities): |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     
|                                    | Albuquerque, New Mexico                    |                                 |  | 6         |    |            |  | 1,491      |        |  | $ | 76,690    |           |  |  | 97.9 | %   
|                                    | Inland Empire, California                  |                                 |  | 5         |    |            |  | 1,884      |        |  |   | 113,135   |           |  |  | 98.4 | %   
|                                    | Las Vegas, Nevada                          |                                 |  | 1         |    |            |  | 896        |        |  |   | 47,459    |           |  |  | 88.1 | %   
|                                    | Los Angeles County, California             |                                 |  | 6         |    |            |  | 1,373      |        |  |   | 166,596   |           |  |  | 97.3 | %   
|                                    | Orange County, California                  |                                 |  | 7         |    |            |  | 1,647      |        |  |   | 178,700   |           |  |  | 98.1 | %   
|                                    | Phoenix, Arizona                           |                                 |  | 5         |    |            |  | 2,268      |        |  |   | 136,273   |           |  |  | 95.6 | %   
|                                    | Portland, Oregon                           |                                 |  | 3         |    |            |  | 826        |        |  |   | 53,199    |           |  |  | 98.1 | %   
|                                    | Salt Lake City, Utah                       |                                 |  | 3         |    |            |  | 776        |        |  |   | 54,301    |           |  |  | 94.7 | %   
|                                    | San Francisco Bay Area, California         |                                 |  | 14        |    |            |  | 5,142      |        |  |   | 646,546   |           |  |  | 96.6 | %   
|                                    | San Diego, California                      |                                 |  | 8         |    |            |  | 2,791      |        |  |   | 316,431   |           |  |  | 98.8 | %   
|                                    | Seattle, Washington                        |                                 |  | 8         |    |            |  | 3,122      |        |  |   | 258,154   |           |  |  | 96.7 | %   
|                                    | Ventura County, California                 |                                 |  | 3         |    |            |  | 1,082      |        |  |   | 109,473   |           |  |  | 97.5 | %   
|                                    |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     
|                                    |                                            | West Division Subtotal/ Average |  |           | 69 |            |  |            | 23,298 |  |   | $         | 2,156,957 |  |  |      | 96.9 | %
|                                    |                                            |                                 |  |           |    |            |  |            |        |  |   |           |           |  |  |     

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|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |      |      |      |      |  
|----------------------------------------------------- | ------------------------------------------ | ----------------------------------------------------------------------- | ------------------------------------------------- | ----------------- | --- | ---------- | -- | ---------- | ------ | ------ | ----- | --------- | --------- | --------- | ------- | ---- | ---- | ---- | ---- | -
|                                                      |                                            |                                                                         |                                                   |                   |     | Operating  |    |           
|                                                      |                                            | Number of                                                               |                                                   | Number of         |     | Trust      |    | Percentage
|                                                      |                                            | Communities                                                             |                                                   | Units             |     | Investment |    | Leased(1) 
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |           
|Charles E. Smith Division (high-rise
    properties): |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      | Boston, Massachusetts                      |                                                                         |                                                   | 3                 |     |            |    | 693        |        |        | $     | 176,645   |           |           |         | 96.2 | %   
|                                                      | Chicago, Illinois                          |                                                                         |                                                   | 7                 |     |            |    | 3,359      |        |        |       | 554,398   |           |           |         | 89.2 | %   
|                                                      | Southeast Florida                          |                                                                         |                                                   | 6                 |     |            |    | 5,054      |        |        |       | 546,289   |           |           |         | 94.8 | %   
|                                                      | Greater New York City Metropolitan Area    |                                                                         |                                                   | 2                 |     |            |    | 630        |        |        |       | 229,848   |           |           |         | 93.8 | %   
|                                                      | Greater Washington, D.C. Metropolitan Area |                                                                         |                                                   | 31                |     |            |    | 11,325     |        |        |       | 1,929,872 |           |           |         | 95.9 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            | Charles E. Smith Division Subtotal/ Average                             |                                                   |                   | 49  |            |    |            | 21,061 |        |       | $         | 3,437,052 |           |         |      | 94.5 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            |                                                                         | Operating Apartment Communities Subtotal/ Average |                   |     | 212        |    |            |        | 75,693 |       |           | $         | 8,380,779 |         |      |      | 96.1 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|APARTMENT COMMUNITIES UNDER
    CONSTRUCTION:         |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|East Division (garden communities):                   |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      | Boston, Massachusetts                      |                                                                         |                                                   | 1                 |     |            |    | 134        |        |        | $     | 10,854    |           |           |         | N/A  |     
|                                                      | Denver, Colorado                           |                                                                         |                                                   | 1                 |     |            |    | 273        |        |        |       | 40,850    |           |           |         | N/A  |     
|                                                      | Greater Washington, D.C. Metropolitan Area |                                                                         |                                                   | 2                 |     |            |    | 506        |        |        |       | 53,296    |           |           |         | 31.2 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            | East Division Subtotal/ Average                                         |                                                   |                   | 4   |            |    |            | 913    |        |       | $         | 105,000   |           |         |      | 17.3 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|West Division (garden communities):                   |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      | Seattle, Washington                        |                                                                         |                                                   | 1                 |     |            |    | 108        |        |        | $     | 6,556     |           |           |         | N/A  |     
|                                                      | Southern California                        |                                                                         |                                                   | 4                 |     |            |    | 794        |        |        |       | 108,561   |           |           |         | N/A  |     
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            | West Division Subtotal/ Average                                         |                                                   |                   | 5   |            |    |            | 902    |        |       | $         | 115,117   |           |         |      | N/A  |     
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|Charles E. Smith Division (high-rise
    properties): |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      | Chicago, Illinois                          |                                                                         |                                                   | 1                 |     |            |    | 480        |        |        | $     | 108,273   |           |           |         | 53.8 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            | Charles E. Smith Division Subtotal/ Average                             |                                                   |                   | 1   |            |    |            | 480    |        |       | $         | 108,273   |           |         |      | 53.8 | %   
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            |                                                                         | Apartment Communities Under Construction          |                   |     |            |    |            |        |        |       |           |           |           |         |      |      |      |     
|                                                      |                                            |                                                                         |                                                   | Subtotal/ Average |     |            | 10 |            |        |        | 2,295 |           |           | $         | 328,390 |      |      |      | 18.1 | %
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|APARTMENT COMMUNITIES IN PLANNING AND
    OWNED:      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      | East Division                              |                                                                         |                                                   | 2                 |     |            |    | 640        |        |        | $     | 32,523    |           |           |         |      |     
|                                                      | West Division                              |                                                                         |                                                   | 2                 |     |            |    | 500        |        |        |       | 19,352    |           |           |         |      |     
|                                                      | Charles E. Smith Division                  |                                                                         |                                                   | 4                 |     |            |    | 1,730      |        |        |       | 37,626    |           |           |         |      |     
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            | Total Apartment Communities In Planning and Owned
    Subtotal/ Average |                                                   |                   | 8   |            |    |            | 2,870  |        |       | $         | 89,501    |           |         |      |      |     
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     
|                                                      |                                            | Total Apartment Communities Owned at
    December 31, 2002              |                                                   |                   | 230 |            |    |            | 80,858 |        |       | $         | 8,798,670 |           |         |      |      |     
|                                                      |                                            |                                                                         |                                                   |                   |     |            |    |            |        |        |       |           |           |           |         |     

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|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  |  |  | 
|----------------------------------------------------------- | ------------- | ------------------------------------------------------------- |  | --------- |  | ---------- | -------- | ---------- | ------ |  | ------ | - | --------- |  |  |  |  | 
|                                                            |               |                                                               |  |           |  | Operating  |          |           
|                                                            |               | Number of                                                     |  | Number of |  | Trust      |          | Percentage
|                                                            |               | Communities                                                   |  | Units     |  | Investment |          | Leased(1) 
|                                                            |               |                                                               |  |           |  |            |          |           
|OTHER REAL ESTATE ASSETS(2)                                 |               |                                                               |  |           |  |            |         |            |        |  | 9,697  |   |           |  |  | 
|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 
|OFFICE AND HOTEL ASSETS                                     |               |                                                               |  |           |  |            |         |            |        |  | 30,454 |   |           |  |  | 
|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 
|                                                            |               | Total Real Estate Owned at December 31, 2002                  |  |           |  |            |          |            | 80,858 |  |        | $ | 8,838,821 |  |  |  |  | 
|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 
|                                                            |               |                                                               |  |           |  |            | Expected |            |        |  |        |   |           |  |  | 
|                                                            |               |                                                               |  |           |  |            | Number   |            |        |  |        |   |           |  |  | 
|                                                            |               |                                                               |  |           |  | of Units   |          |            |        |  |        |   |           | 
|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 
|                                                           
|APARTMENT COMMUNITIES IN PLANNING AND UNDER
    CONTROL(3): |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 
|                                                            | East Division |                                                               |  |           |  |            |          | 112        |        |  |        |   |           |  |  |  | 
|                                                            | West Division |                                                               |  |           |  |            |          | 316        |        |  |        |   |           |  |  |  | 
|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 
|                                                            |               | Total Apartment Communities In Planning and Under
    Control |  |           |  |            |          |            | 428    |  |        |   |           |  |  |  |  | 
|                                                            |               |                                                               |  |           |  |            |          |            |        |  |        |   |           |  |  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the percentage leased as of
    December 31, 2002. For communities in Lease-Up, the
    percentage leased is based on leased units divided by total
    number of units in the community (completed and under
    construction) as of December 31, 2002. A N/ A
    indicates markets with communities under construction where
    Lease-Up has not yet commenced.
|   
|(2) | Includes land that is not In Planning.                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | As of December 31, 2002, our actual
    investment in communities In Planning and Under Control was
    $2.7 million, which is reflected in the Other
    assets caption of our Balance Sheet.                                                                                                                                                                                




Item 3.     Legal
Proceedings

We are subject to litigation in connection with
moisture infiltration and resulting mold issues at one of our
high-rise properties in Southeast Florida. A claim,
Henriques, et al. v. Archstone-Smith Operating
Trust, et al., was filed on August 27, 2002, and
another claim, Santos, et. al. v. Archstone-Smith
Operating Trust et. al., was filed on February 13,
2003, in the Circuit Court of the Eleventh Judicial Circuit
in and for Miami-Dade County, Florida, on behalf of classes of
residents of this Southeast Florida property. The cases allege
that mold contamination at this Southeast Florida property
caused by faulty air-conditioning resulted in both personal
injury to the plaintiffs and damage to their property.
Plaintiffs seek both injunctive relief and unspecified monetary
and punitive damages. We intend to vigorously contest the claims
asserted in this litigation. Due to the preliminary nature of
the litigation, it is not possible to predict or determine the
outcome of the legal actions nor is it reasonably possible to
estimate the amount of loss associated with adverse decisions.

We are party to various other claims and routine
litigation arising in the ordinary course of business. We do not
believe that the results of any such claims and litigation,
individually or in the aggregate, will have a material adverse
effect on our business, financial position or results of
operations.




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

None

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##### Table of Contents






PART II






|        |                                                                              
|------- | -----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Equity and Related Stockholder Matters

There is no established market for the Common
Units of the Operating Trust. Archstone-Smiths Common
Shares are listed on the New York Stock Exchange (NYSE: ASN).
The following table sets forth the distributions on units made
by Archstone-Smith Operating Trust during the past three years:

|                 |                 |       |   |      |      |      |   |      |      |  |   |      |      | 
|---------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                 |                 | 2002  |   | 2001 |      | 2000
|                 |                 |       |   |      |      |     
|Per Common Unit: |                 |       |   |      |      |      |   |      |      |  |   |     
|                 | Ordinary income |       | $ | 1.33 |      |      | $ | 0.89 |      |  | $ | 1.05 |     
|                 | Capital gains   |       |   | 0.37 |      |      |   | 0.75 |      |  |   | 0.49 |     
|                 |                 |       |   |      |      |      |   |      |      |  |   |     
|                 |                 | Total |   | $    | 1.70 |      |   | $    | 1.64 |  |   | $    | 1.54 | 
|                 |                 |       |   |      |      |      |   |      |      |  |   |     

|                                         |                 |       |   |      |      |      |   |      |      |  |   |      |      | 
|---------------------------------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                         |                 | 2002  |   | 2001 |      | 2000
|                                         |                 |       |   |      |      |     
|Per Series A Convertible Preferred Unit: |                 |       |   |      |      |      |   |      |      |  |   |     
|                                         | Ordinary income |       | $ | 1.79 |      |      | $ | 1.19 |      |  | $ | 1.41 |     
|                                         | Capital gains   |       |   | 0.50 |      |      |   | 1.02 |      |  |   | 0.66 |     
|                                         |                 |       |   |      |      |      |   |      |      |  |   |     
|                                         |                 | Total |   | $    | 2.29 |      |   | $    | 2.21 |  |   | $    | 2.07 | 
|                                         |                 |       |   |      |      |      |   |      |      |  |   |     

|                             |                 |       |   |         |   |      |   |      |      |  |   |      |      | 
|---------------------------- | --------------- | ----- | - | ------- | - | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                             |                 | 2002  |   | 2001(1) |   | 2000
|                             |                 |       |   |         |   |     
|Per Series B Preferred Unit: |                 |       |   |         |   |      |   |      |      |  |   |     
|                             | Ordinary income |       | $ |        |   |      | $ | 0.42 |      |  | $ | 1.53 |     
|                             | Capital gains   |       |   |        |   |      |   | 0.37 |      |  |   | 0.72 |     
|                             |                 |       |   |         |   |      |   |      |      |  |   |     
|                             |                 | Total |   | $       |  |      |   | $    | 0.79 |  |   | $    | 2.25 | 
|                             |                 |       |   |         |   |      |   |      |      |  |   |     

|                             |                 |         |   |      |      |      |   |      |      |  |   |      |      | 
|---------------------------- | --------------- | ------- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                             |                 | 2002(2) |   | 2001 |      | 2000
|                             |                 |         |   |      |      |     
|Per Series C Preferred Unit: |                 |         |   |      |      |      |   |      |      |  |   |     
|                             | Ordinary income |         | $ | 1.08 |      |      | $ | 1.16 |      |  | $ | 1.47 |     
|                             | Capital gains   |         |   | 0.30 |      |      |   | 1.00 |      |  |   | 0.69 |     
|                             |                 |         |   |      |      |      |   |      |      |  |   |     
|                             |                 | Total   |   | $    | 1.38 |      |   | $    | 2.16 |  |   | $    | 2.16 | 
|                             |                 |         |   |      |      |      |   |      |      |  |   |     

|                             |                 |       |   |      |      |      |   |      |      |  |   |      |      | 
|---------------------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                             |                 | 2002  |   | 2001 |      | 2000
|                             |                 |       |   |      |      |     
|Per Series D Preferred Unit: |                 |       |   |      |      |      |   |      |      |  |   |     
|                             | Ordinary income |       | $ | 1.71 |      |      | $ | 1.18 |      |  | $ | 1.49 |     
|                             | Capital gains   |       |   | 0.48 |      |      |   | 1.01 |      |  |   | 0.70 |     
|                             |                 |       |   |      |      |      |   |      |      |  |   |     
|                             |                 | Total |   | $    | 2.19 |      |   | $    | 2.19 |  |   | $    | 2.19 | 
|                             |                 |       |   |      |      |      |   |      |      |  |   |     

|                                      |                 |       |   |      |      |      |   |   |   |  |   |   |   | 
|------------------------------------- | --------------- | ----- | - | ---- | ---- | ---- | - | - | - |  | - | - | - | 
|                                      |                 | 2002  |   | 2001 |      | 2000
|                                      |                 |       |   |      |      |     
|Per Series H, K, L Preferred Unit(3): |                 |       |   |      |      |      |   |   |   |  |   |  
|                                      | Ordinary income |       | $ | 2.62 |      |      | $ |  |   |  | $ |  |  
|                                      | Capital gains   |       |   | 0.74 |      |      |   |  |   |  |   |  |  
|                                      |                 |       |   |      |      |      |   |   |   |  |   |  
|                                      |                 | Total |   | $    | 3.36 |      |   | $ |  |  |   | $ |  | 
|                                      |                 |       |   |      |      |      |   |   |   |  |   |  

22



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|                                |                 |       |   |          |          |      |   |   |   |  |   |   |   | 
|------------------------------- | --------------- | ----- | - | -------- | -------- | ---- | - | - | - |  | - | - | - | 
|                                |                 | 2002  |   | 2001     |          | 2000
|                                |                 |       |   |          |          |     
|Per Series I Preferred Unit(3): |                 |       |   |          |          |      |   |   |   |  |   |  
|                                | Ordinary income |       | $ | 5,982.46 |          |      | $ |  |   |  | $ |  |  
|                                | Capital gains   |       |   | 1,677.54 |          |      |   |  |   |  |   |  |  
|                                |                 |       |   |          |          |      |   |   |   |  |   |  
|                                |                 | Total |   | $        | 7,660.00 |      |   | $ |  |  |   | $ |  | 
|                                |                 |       |   |          |          |      |   |   |   |  |   |  

|                                |                 |         |   |      |      |      |   |   |   |  |   |   |   | 
|------------------------------- | --------------- | ------- | - | ---- | ---- | ---- | - | - | - |  | - | - | - | 
|                                |                 | 2002(4) |   | 2001 |      | 2000
|                                |                 |         |   |      |      |     
|Per Series J Preferred Unit(3): |                 |         |   |      |      |      |   |   |   |  |   |  
|                                | Ordinary income |         | $ | 1.34 |      |      | $ |  |   |  | $ |  |  
|                                | Capital gains   |         |   | 0.37 |      |      |   |  |   |  |   |  |  
|                                |                 |         |   |      |      |      |   |   |   |  |   |  
|                                |                 | Total   |   | $    | 1.71 |      |   | $ |  |  |   | $ |  | 
|                                |                 |         |   |      |      |      |   |   |   |  |   |  



---



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(1) | The Series B Preferred Units were redeemed
    in full plus accrued dividends during May 2001.   
|   
|(2) | The Series C Preferred Units were redeemed
    in full plus accrued dividends during August 2002.
|   
|(3) | The Series H, I, J, K and L Preferred
    Units were issued as a result of the Smith Merger.     
|   
|(4) | The Series J Preferred Units were converted
    into Common Units during July 2002.              

Distributions are paid on a quarterly basis and
equal one-fourth of the total annual amount listed above unless
otherwise noted. As of February 14, 2003, we had
approximately 884 record holders of A-1 Common Units and no
beneficial holders of A-1 Common Units.

Our tax return for the year ended
December 31, 2002 has not been filed, and the taxability
information for 2002 is based upon the best available data we
have. Our tax returns for prior years have not been examined by
the Internal Revenue Service and, therefore, the taxability of
the dividends may be subject to change.

We converted 684,931 Series J Perpetual
Preferred Units to Common Units in July 2002. In August 2002, we
redeemed 1,965,315 Series C Perpetual Preferred Units at
liquidation value plus accrued distributions. In addition,
75,000,000 Series E, F, and G Perpetual Preferred Units
converted to Operating Trust Perpetual Preferred Units and
870,523 DownREIT Operating Partnership Units converted to
Convertible Operating Trust Units in August. In September 2002,
480,000 of the Series E Units were redeemed at liquidation
value plus accrued distributions. All such securities were
issued in transactions exempt from registration under
Section 4(2) and the rules thereunder.




Item 6.     Selected
Financial Data

The following table provides selected financial
data relating to our historical financial condition and results
of operations as of and for each of the years ending
December 31, 1998 to 2002. We believe that NOI and net
earnings attributable to Common Units are the most relevant
measures of our operating performance and allow investors to
evaluate our business against our industry peers and against all
publicly traded companies as a whole. This data is qualified in
its entirety by, and should be read in conjunction with,
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the

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##### Table of Contents



financial statements and related notes that have
been included or incorporated by reference in this Annual Report
(in thousands, except per unit data):


|                                                                        |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         | 
|----------------------------------------------------------------------- | --------------------------------------- | ------------------------ | --------- | -------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                        |                                         |                         
|                                                                        |                                         | Years Ended December 31,
|                                                                        |                                         |                         
|                                                                        |                                         | 2002(1)                  |           | 2001(1)  |  | 2000(1) |         | 1999(1) |  | 1998(1)
|                                                                        |                                         |                          |           |          |  |         |         |         |  |        
|Operations Summary:                                                     |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |        
|Total revenues                                                          |                                         | $                        | 1,082,291 |          |  | $       | 679,545 |         |  | $       | 681,698 |         |  | $ | 630,042 |         |  | $ | 483,778 |        
|Property operating expenses (rental expenses and
    real estate taxes) |                                         |                          | 360,748   |          |  |         | 212,403 |         |  |         | 210,961 |         |  |   | 204,728 |         |  |   | 162,903 |        
|Net Operating Income                                                    |                                         |                          | 637,001   |          |  |         | 439,999 |         |  |         | 436,047 |         |  |   | 396,100 |         |  |   | 291,769 |        
|Depreciation on real estate investments                                 |                                         |                          | 192,447   |          |  |         | 123,308 |         |  |         | 135,465 |         |  |   | 125,492 |         |  |   | 89,392  |        
|Interest expense                                                        |                                         |                          | 194,955   |          |  |         | 130,027 |         |  |         | 134,999 |         |  |   | 111,795 |         |  |   | 74,335  |        
|General and administrative expense                                      |                                         |                          | 43,340    |          |  |         | 26,503  |         |  |         | 23,157  |         |  |   | 22,156  |         |  |   | 16,092  |        
|Nonrecurring expenses(2)                                                |                                         |                          | 12,679    |          |  |         | 17,576  |         |  |         |        |         |  |   |        |         |  |   | 2,193   |        
|Earnings from operations                                                |                                         |                          | 276,290   |          |  |         | 163,993 |         |  |         | 167,980 |         |  |   | 161,802 |         |  |   | 131,521 |        
|Gains on dispositions of depreciated real estate,
    net               |                                         |                          | 35,950    |          |  |         | 100,273 |         |  |         | 93,071  |         |  |   | 62,093  |         |  |   | 65,531  |        
|Net earnings from discontinued apartment
    communities                |                                         |                          | 84,050    |          |  |         | 11,404  |         |  |         | 8,486   |         |  |   | 7,537   |         |  |   | 3,050   |        
|Preferred Unit cash distributions                                       |                                         |                          | 34,024    |          |  |         | 22,277  |         |  |         | 25,340  |         |  |   | 23,733  |         |  |   | 20,938  |        
|Net earnings attributable to Common Units:                              |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |        
|                                                                        |  Basic                                 |                          |           | 322,701  |  |         |         | 243,297 |  |         |         | 236,045 |  |   |         | 204,526 |  |   |         | 177,022 | 
|                                                                        |  Diluted                               |                          |           | 322,701  |  |         |         | 254,517 |  |         |         | 244,625 |  |   |         | 204,526 |  |   |         | 186,999 | 
|Common Unit cash distributions paid                                     |                                         |                          | 344,590   |          |  |         | 221,196 |         |  |         | 201,257 |         |  |   | 208,018 |         |  |   | 165,190 |        
|Per Unit Data:                                                          |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |        
|Net earnings attributable to Common Units:                              |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |        
|                                                                        |  Basic                                 |                          | $         | 1.59     |  |         | $       | 1.81    |  |         | $       | 1.79    |  |   | $       | 1.46    |  |   | $       | 1.49    | 
|                                                                        |  Diluted                               |                          |           | 1.58     |  |         |         | 1.79    |  |         |         | 1.78    |  |   |         | 1.46    |  |   |         | 1.49    | 
|Common Unit cash distributions paid                                     |                                         |                          | 1.70      |          |  |         | 1.64    |         |  |         | 1.54    |         |  |   | 1.48    |         |  |   | 1.39    |        
|Cash distributions paid per unit:                                       |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |        
|                                                                        | Series A Preferred Unit                 |                          |           | 2.29     |  |         |         | 2.21    |  |         |         | 2.07    |  |   |         | 1.99    |  |   |         | 1.87    | 
|                                                                        | Series B Preferred Unit(3)              |                          |           |         |  |         |         | 0.79    |  |         |         | 2.25    |  |   |         | 2.25    |  |   |         | 2.25    | 
|                                                                        | Series C Preferred Unit(4)              |                          |           | 1.38     |  |         |         | 2.16    |  |         |         | 2.16    |  |   |         | 2.16    |  |   |         | 1.08    | 
|                                                                        | Series D Preferred Unit                 |                          |           | 2.19     |  |         |         | 2.19    |  |         |         | 2.19    |  |   |         | 0.88    |  |   |         |        | 
|                                                                        | Series E Preferred Unit(5)              |                          |           | 0.70     |  |         |         |        |  |         |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series F Preferred Unit(5)              |                          |           | 0.68     |  |         |         |        |  |         |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series G Preferred Unit(5)              |                          |           | 0.72     |  |         |         |        |  |         |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series H, J, K and L Preferred Units(6) |                          |           | 3.36     |  |         |         |        |  |         |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series I Preferred Unit (6)(7)          |                          |           | 7,660.00 |  |         |         |        |  |         |         |        |  |   |         |        |  |   |         |        | 
|Weighted average Common Units outstanding:                              |                                         |                          |           |          |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |        
|                                                                        |  Basic                                 |                          |           | 202,781  |  |         |         | 134,589 |  |         |         | 131,874 |  |   |         | 139,801 |  |   |         | 118,592 | 
|                                                                        |  Diluted                               |                          |           | 203,804  |  |         |         | 142,090 |  |         |         | 137,730 |  |   |         | 139,829 |  |   |         | 125,825 | 



---



|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net earnings from discontinued operations have
    been reclassified for all years presented.                                                                                                                                                                                                                                        
|(2) | Non-recurring expenses in 2002 include
    approximately $1.4 million of integration costs associated
    with the Smith Merger and $11.3 million of moisture
    infiltration and resulting mold related costs at one of our
    high-rise properties in Southeast Florida. Non-recurring
    expenses in 2001 include approximately

24



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | $5.3 million of integration costs associated
    with the Smith Merger and a $12.2 million in non-cash
    write-offs of investments in service and technology related
    companies. Non-recurring expenses in 1998 include
    $1.1 million in integration costs associated with the
    Atlantic Merger and $1.1 million associated with the
    introduction of Archstone-Smiths national branding
    strategy. Both are included within the other expense
    category in Archstone-Smiths Statement of Earnings for
    1998.
|(3) | All of the outstanding Series B Preferred
    Units were redeemed on May 7, 2001. During 2001, cash
    distributions of $0.79 per share were paid for the period
    from January 1, 2001 to May 7, 2001.                                                                                                                                                                                                                                                                                                                              
|(4) | All of the outstanding Series C Preferred
    Units were redeemed at liquidation value plus accrued
    distributions in August 2002.                                                                                                                                                                                                                                                                                                                                                                                                   
|(5) | In August 2002, the DownREIT Perpetual Preferred
    Units were converted into Operating Trust Perpetual Preferred
    Units.                                                                                                                                                                                                                                                                                                                                                                                                           
|(6) | Approximately 684,931 Series J Preferred
    Units were converted into Common Units in July 2002. During the
    fourth quarter 2001, we paid approximately $5.8 million of
    distributions on the Series H, I, J, K and L Preferred
    Units that were declared by Smith Residential prior to the Smith
    Merger.                                                                                                                                                                                                                 
|(7) | Series I Preferred Units have a par value of
    $100,000 per unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                             |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|------------------------------------------------------------ |  | ------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                                             |  |             
|                                                             |  | December 31,
|                                                             |  |             
|                                                             |  | 2002         |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                                                             |  |              |           |      |  |      |           |      |  |     
|Financial Position:                                          |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Real estate owned, at cost                                   |  | $            | 8,838,821 |      |  | $    | 8,276,004 |      |  | $    | 5,058,910 |  |  | $ | 5,086,486 |  |  | $ | 4,771,315 | 
|Investments in and advances to unconsolidated
    entities   |  |              | 346,946   |      |  |      | 437,365   |      |  |      | 226,020   |  |  |   | 130,845   |  |  |   | 98,486    | 
|Total assets                                                 |  |              | 8,855,068 |      |  |      | 8,549,915 |      |  |      | 5,016,131 |  |  |   | 5,302,437 |  |  |   | 5,059,898 | 
|Unsecured credit facilities                                  |  |              | 365,578   |      |  |      | 188,589   |      |  |      | 193,719   |  |  |   | 493,536   |  |  |   | 264,651   | 
|Long-Term Unsecured Debt                                     |  |              | 1,776,103 |      |  |      | 1,333,890 |      |  |      | 1,401,262 |  |  |   | 1,276,572 |  |  |   | 1,231,167 | 
|Total liabilities                                            |  |              | 4,473,809 |      |  |      | 4,154,368 |      |  |      | 2,671,188 |  |  |   | 2,679,628 |  |  |   | 2,410,114 | 
|Preferred Units                                              |  |              | 355,221   |      |  |      | 374,114   |      |  |      | 286,856   |  |  |   | 297,635   |  |  |   | 272,515   | 
|Unitholders equity                                          |  |              | 3,799,061 |      |  |      | 3,631,518 |      |  |      | 2,251,606 |  |  |   | 2,567,506 |  |  |   | 2,628,325 | 
|Other Common Unitholders interest (at
    redemption value) |  |              | 579,598   |      |  |      | 669,502   |      |  |      |          |  |  |   |          |  |  |   |          | 
|Number of Common Units outstanding                           |  |              | 205,328   |      |  |      | 199,973   |      |  |      | 122,838   |  |  |   | 139,008   |  |  |   | 143,313   | 

|                                      |                      |                          |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |          |  
|------------------------------------- | -------------------- | ------------------------ | - | -------- | - | ---- | - | -------- | - | ---- | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                      |                      |                         
|                                      |                      | Years Ended December 31,
|                                      |                      |                         
|                                      |                      | 2002                     |   | 2001     |   | 2000 |   | 1999     |   | 1998
|                                      |                      |                          |   |          |   |      |   |          |   |     
|Other Data:                           |                      |                          |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |         
|Net cash flows provided by (used in): |                      |                          |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |         
|                                      | Operating activities |                          | $ | 507,422  |   |      | $ | 309,305  |   |      | $ | 322,320  |   |  | $ | 296,010  |   |  | $ | 231,153  |  
|                                      | Investing activities |                          |   | (122,956 | ) |      |   | 434,330  |   |      |   | 105,563  |   |  |   | (223,914 | ) |  |   | (318,764 | )
|                                      | Financing activities |                          |   | (378,647 | ) |      |   | (745,685 | ) |      |   | (428,878 | ) |  |   | (72,143  | ) |  |   | 92,803   |  




Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations



| |                           
| | --------------------------
| | Forward-Looking Statements

Certain statements in this Annual Report that
are not historical facts are forward-looking
statements as that term is defined under the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements are based on our current expectations, beliefs,
assumptions, estimates and projections about the industry and
markets in which we operate. Words such as expects,
anticipates, intends, plans,
believes, seeks, estimates
and variations of such words and similar expressions are
intended to identify such forward-looking statements.
Information concerning expected investment balances, expected
funding sources, planned investments, forecasted dates and
revenue and expense growth assumptions are examples of

25



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forward-looking statements. These statements
are not guarantees of future performance and involve certain
risks, uncertainties and assumptions, which are difficult to
predict and many of which are beyond our control. Therefore,
actual outcomes and results may differ materially from what is
expressed, forecasted or implied in such forward-looking
statements. We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
applicable law.


Our operating results depend primarily on
income from apartment communities, which is substantially
influenced by supply and demand for apartment units, operating
expense levels, property level operations and the pace and price
at which we develop, acquire or dispose of apartment
communities. Capital and credit market conditions, which affect
our cost of capital, also influence operating results. See
Risk Factors in Item 1 of this Annual Report
for a complete discussion of the various risk factors that could
affect our future performance.



| |            
| | -----------
| | The Company

We are engaged primarily in the acquisition,
development, management and operation of apartment communities
throughout the United States. Archstone-Smith is structured as
an UPREIT, under which substantially all property ownership and
business operations are conducted through the Operating Trust
and our subsidiaries and affiliates. Archstone-Smith is our sole
trustee and owns approximately 88.0% of our Common Units.



| |                 
| | ----------------
| | The Smith Merger

During October 2001, shareholders of both
Archstone and Smith Residential (a publicly traded REIT which
primarily developed, owned and managed high-rise apartment
properties and garden apartment communities in Washington, D.C.,
Chicago, Boston and Southeast Florida) approved the Smith
Merger. The combined company operates under the name
Archstone-Smith Operating Trust. The Common Shares of our
majority owner, Archstone-Smith, are traded on the New York
Stock Exchange (NYSE: ASN). The total purchase price paid for
Smith Residential aggregated approximately $4.0 billion and
corresponds to a purchase price of approximately
$136,000 per operating apartment unit acquired. This
transaction was structured as a tax-free merger and was
accounted for under the purchase method of accounting. During
2002, all remaining purchase accounting adjustments were
finalized. Adjustments to the initial purchase price allocation
were less than one percent of the purchase price. In accordance
with the terms of the Smith Merger which closed on
October 31, 2001:



| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We acquired Smith Partnerships assets and
    assumed their debt and other liabilities upon consummation of
    the Smith Merger.                                                                                                                                           
|
| |  | Smith Residentials common shareholders
    received 1.975 Common Shares in exchange for each surrendered
    share of common stock and Smith Residentials preferred
    shareholders received one Archstone-Smith preferred share for
    each surrendered preferred share.
|
| |  | Smith Partnerships common unit holders
    received 1.975 A-1 Common Units in exchange for each surrendered
    common unit and Smith Partnerships preferred unit holders
    received one Operating Trust preferred unit for each surrendered
    preferred unit.         

In addition to approving the Smith Merger,
Archstones shareholders also approved the following
matters on October 29, 2001: (i) an amendment to
Archstones declaration of trust; (ii) the conversion
of Archstone into an UPREIT structure; and, (iii) the
merger of the Operating Trust with the Smith Partnership.

We believe the UPREIT structure significantly
enhances our acquisition capabilities. With this structure,
sellers are able to contribute their properties to us in
exchange for our A-1 Common Units, which allows them to realize
significant tax deferral benefits while achieving economic
returns similar to directly holding Common Units. Over time, the
contributors can redeem their A-1 Common Units for readily
tradable Common Shares or cash, triggering a taxable event. This
allows the contributors to incur their tax liabilities in
smaller increments, at a time of their choosing. A-1 Common
Units are redeemable for cash or, at our option,

26



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##### Table of Contents



for an equal number of Common Shares and receive
distributions equal to dividends paid on the Common Shares.


As a result of the Smith Merger, our Board and
management believe that the combined company has the following
important attributes:



| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | We own a highly desirable portfolio of
    well-located apartments in protected markets across the United
    States. Approximately 83% of our NOI comes from the greater
    Washington, D.C. metropolitan area, Southern California,
    San Francisco Bay area, Boston, Chicago, Southeast Florida,
    Seattle and the greater New York City metropolitan area. These
    are all markets that we believe will perform very well over the
    long term because of the difficulty of adding new supply;
|
| | (ii)  | We have significant in-house
    high-rise development and management capabilities, which we
    believe will allow us to expand the high-rise business into new
    markets;                                                                                                                                                                                                                                                                                                                            
|
| | (iii) | We are organized in a more typical UPREIT
    structure, which we believe will enhance our ability to acquire
    assets using tax deferred acquisition currency;                                                                                                                                                                                                                                                                                                                                          
|
| | (iv)  | The merger of Archstone and Smith Residential
    brings together what management and the Board believes are the
    two most respected brands in the apartment industry. The
    high-rise properties are operated under the Charles E. Smith
    Residential brand name and all garden communities are operated
    under the Archstone Communities brand name;                                                                                                                                          
|
| | (v)   | Archstone-Smith has a larger market
    capitalization and shareholder base which should provide
    increased liquidity to their shareholders and to our
    unitholders; and                                                                                                                                                                                                                                                                                                                             
|
| | (vi)  | We have a strong balance sheet that was further
    enhanced by the addition of $120 million of incremental
    commitments from four new financial institutions on our
    unsecured credit facilities, which were received in connection
    with the closing of the Smith Merger. These new commitments
    increased the borrowing capacity on our credit facilities from
    $680 million to $800 million, while retaining the same
    attractive pricing level of LIBOR plus 65 basis points.       




Results of Operations



| |         
| | --------
| | Overview

Basic net earnings attributable to Common Units
increased approximately $79.4 million, or 32.6%, in 2002 as
compared to 2001. This increase is largely attributable to:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | An increase in overall NOI due to the acquisition
    of properties in the Smith Merger;                                                      
|
| |  | Increased NOI due to the acquisition of operating
    communities and the continued lease-up and stabilization of
    development communities;
|
| |  | A $35.4 million gain on the sale of CES, an
    unconsolidated entity acquired in the Smith Merger; and,                                      
|
| |  | Increased income from Ameriton, our real estate
    joint ventures, as well as unconsolidated entities acquired in
    the Smith Merger.      

These increases were partially offset by:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The loss of NOI in 2002 due to the
    $1.2 billion of garden community dispositions in non-core
    markets during 2001 (including joint venture transactions) and
    $420.1 million of dispositions in 2002;
|
| |  | Same-Store NOI decline of 2.7% in 2002 as
    compared to 2001;                                                                                                                                                
|
| |  | Higher depreciation, interest and general and
    administrative expenses due principally to the Smith Merger;                                                                                                 
|
| |  | Charges of $11.3 million relating to
    moisture infiltration and resulting mold issues at one of our
    high-rise properties in Southeast Florida during the third and
    fourth quarters of 2002; and     

27



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| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | A $32.1 million increase in extraordinary
    items due to the prepayment of mortgages.

Our strongest core markets based on Same-Store
revenue growth during 2002 included Southern California,
Southeast Florida and the Greater Washington, D.C.
Metropolitan Area. The San Francisco Bay Area, Seattle and
Chicago continue to present the greatest challenges for revenue
growth.

Our basic net earnings attributable to Common
Units increased approximately $7.3 million, or 3.1%, in
2001 as compared to 2000. This increase is largely attributable
to:



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The inclusion of the results of operations for
    the last two months of 2001 for all properties acquired in the
    Smith Merger, which closed on October 31, 2001;                                                    
|
| |  | A 6.5% increase in NOI in our Same-Store
    portfolio, driven by 5.7% Same-Store revenue growth in 2001;                                                                                                                
|
| |  | An increase in gains on disposition of
    depreciated real estate in our non-core markets; and                                                                                                                          
|
| |  | Higher levels of income from unconsolidated
    entities, including our pro rata share of the results of
    operations for the last two months of 2001 for the
    unconsolidated entities acquired in the Smith Merger.

These increases were partially offset by:



| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The loss of garden community NOI resulting from
    the success achieved in advancing our investment strategy
    through our capital recycling program, by disposing of over
    $1.2 billion of garden communities in non-core markets
    during 2001;
|
| |  | Inclusion of a one-time $9.3 million gain
    recorded in 2000 associated with the exchange of the Homestead
    mortgage notes for Common Units and $13.6 million of
    interest income on these notes recorded during 2000;                           
|
| |  | Write-off of investment in service and technology
    companies totaling $12.2 million in 2001; and,                                                                                                                                                     
|
| |  | Merger-related costs of $5.3 million in 2001.                                                                                                                                                                                                            



| |                                   
| | ----------------------------------
| | Apartment Community
    Operations

At December 31, 2002, investments in
operating apartment communities comprised over 99% of our total
real estate portfolio, based on NOI. The following table
summarizes the overall performance of our apartment communities
during 2002, 2001 and 2000 (in thousands, except for units and
percentages):

|                                                            |  |         |         |         |  |         |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | - |  | - | ------- | -
|Garden Communities                                          |  | 2002(1) |         | 2001(1) |  | 2000(1)
|                                                            |  |         |         |         |  |        
|Rental revenues                                             |  | $       | 628,637 |         |  | $       | 591,816 |   |  | $ | 642,902 |  
|Property operating expenses                                 |  |         | 212,544 |         |  |         | 191,786 |   |  |   | 210,949 |  
|                                                            |  |         |         |         |  |         |         |   |  |   |         |  
|Net Operating Income                                        |  | $       | 416,093 |         |  | $       | 400,030 |   |  | $ | 431,953 |  
|                                                            |  |         |         |         |  |         |         |   |  |   |         |  
|Average number of operating units                           |  |         | 55,515  |         |  |         | 56,021  |   |  |   | 65,784  |  
|                                                            |  |         |         |         |  |         |         |   |  |   |         |  
|Operating margin (Net Operating Income/rental
    revenues) |  |         | 66.2    | %       |  |         | 67.6    | % |  |   | 67.2    | %
|                                                            |  |         |         |         |  |         |         |   |  |   |         |  
|Average occupancy percentage                                |  |         | 95.1    | %       |  |         | 94.9    | % |  |   | 96.1    | %
|                                                            |  |         |         |         |  |         |         |   |  |   |         |  

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|                                                            |  |         |         |         |  |      |        |   |  |  |     | 
|----------------------------------------------------------- |  | ------- | ------- | ------- |  | ---- | ------ | - |  |  | --- | 
|High-Rise Properties(2)                                     |  | 2002(1) |         | 2001(1) |  | 2000
|                                                            |  |         |         |         |  |     
|Rental revenues                                             |  | $       | 366,804 |         |  | $    | 56,480 |   |  |  | n/a | 
|Property operating expenses                                 |  |         | 148,900 |         |  |      | 20,108 |   |  |  | n/a | 
|                                                            |  |         |         |         |  |      |        |   |  |  |     | 
|Net Operating Income                                        |  | $       | 217,904 |         |  | $    | 36,372 |   |  |  | n/a | 
|                                                            |  |         |         |         |  |      |        |   |  |  |     | 
|Average number of operating units                           |  |         | 21,659  |         |  |      | 21,149 |   |  |  | n/a | 
|                                                            |  |         |         |         |  |      |        |   |  |  |     | 
|Operating margin (Net Operating Income/rental
    revenues) |  |         | 59.4    | %       |  |      | 64.4   | % |  |  | n/a | 
|                                                            |  |         |         |         |  |      |        |   |  |  |     | 
|Average occupancy percentage                                |  |         | 93.8    | %       |  |      | 95.4   | % |  |  | n/a | 
|                                                            |  |         |         |         |  |      |        |   |  |  |     | 



---



|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net earnings from discontinued operations have
    been reclassified for all years presented.                                                                                                                 
|(2) | High-rise properties were acquired in the Smith
    Merger on October 31, 2001. Therefore, 2001 includes only
    2 months of operating results. Additionally, no operating
    results are included for 2000.

NOI for the entire apartment portfolio, including
both garden and high-rise divisions, excluding properties
reported in discontinued operations, increased by
$197.6 million, or 45.3%, during 2002 as compared to 2001.
These increases were principally attributable to:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | The inclusion of a full year of NOI from
    high-rise properties acquired in the Smith Merger;
|
| |  | The continued successful Lease-Up and
    Stabilization of apartment communities; and,         
|
| |  | The acquisition of seven apartment communities in
    2002.                                    

These increases were partially offset by:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The loss of NOI due to $1.2 billion of
    dispositions in 2001 and $420.1 million of dispositions in
    2002; and                                                                                                                
|
| |  | The 2.7% decline in Same-Store NOI in 2002 and
    corresponding decline in operating margins, which are
    principally attributable to declining Same-Store revenue,
    combined with increases in property taxes and insurance.

NOI for the entire apartment portfolio, excluding
properties reported in discontinued operations, increased by
$4.4 million, or 1.0%, during 2001 as compared to 2000.
These increases were primarily attributable to:



| |   |                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The inclusion of approximately $36.4 million
    of NOI from properties acquired in the Smith Merger generated
    during the last two months of 2001;                                                                                                                            
|
| |  | The continued successful Lease-Up and
    Stabilization of development communities; and                                                                                                                                                                                           
|
| |  | Continued improvements in our property level
    operating margins, and growth in our Same-Store NOI, due
    primarily to increases in rental revenues from our operating
    communities and operating efficiencies achieved which
    contributed to controlled expense growth.

These increases were partially offset by:



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lower overall garden community NOI resulting from
    the success achieved in advancing our investment strategy
    through our capital recycling program, by disposing of
    approximately $1.2 billion of garden communities
    during 2001;
|
| |  | The impact of a deterioration of general
    macroeconomic conditions during the latter half of 2001 that
    negatively affected demand for apartments; and                                                                                    
|
| |  | Higher property level insurance costs experienced
    during the last six months of 2001, subsequent to the renewal of
    our insurance policies on June 30, 2001.                                                                             

29



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##### Table of Contents



The following table reflects revenue, expense and
NOI growth for Same-Store communities during each respective
comparison period:

|        |                    |               |  |               |   |               |  |      |  |  |  |       |  
|------- | ------------------ | ------------- |  | ------------- | - | ------------- |  | ---- |  |  |  | ----- | -
|        |                    | Same-Store(1) |  |               |   |              
|        |                    | Revenue       |  | Same-Store(1) |   | Same-Store(1)
|        |                    | Growth/       |  | Expense       |   | NOI Growth/  
|        |                    | (Reduction)   |  | Growth        |   | (Reduction)  
|        |                    |               |  |               |   |              
|2002    |                    |               |  |               |   |               |  |      |  |  |  |      
|        | Garden             |               |  | (1.3%         | ) |               |  | 3.2% |  |  |  | (3.3% | )
|        | High-Rise          |               |  | 1.5%          |   |               |  | 6.7% |  |  |  | (1.1% | )
|        | Total              |               |  | (0.4%         | ) |               |  | 4.4% |  |  |  | (2.7% | )
|2001(2) |                    |               |  |               |   |               |  |      |  |  |  |      
|        | Garden             |               |  | 5.1%          |   |               |  | 4.4% |  |  |  | 5.4%  |  
|        | High-Rise          |               |  | 7.0%          |   |               |  | 3.0% |  |  |  | 9.4%  |  
|        | Total              |               |  | 5.7%          |   |               |  | 3.9% |  |  |  | 6.5%  |  
|2000    |                    |               |  |               |   |               |  |      |  |  |  |      
|        | Total (all garden) |               |  | 6.7%          |   |               |  | 4.6% |  |  |  | 7.7%  |  



---



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | Same-Store results have been adjusted for items
    that result in lack of comparability.
|   
|(2) | Includes a full year of results for assets
    acquired in the Smith Merger.             

Based on the consensus of current economic
forecasts, which predict a slow recovery in 2003, we anticipate
Same-Store NOI growth of approximately negative one percent to
approximately positive one percent. We view job growth as one of
the most important drivers of demand in our business. If job
growth does not begin to improve throughout 2003, the
assumptions mentioned above may prove to be overly optimistic.
Conversely, if we experience substantial job growth earlier in
the year, our assumptions may be conservative.



| |                                        
| | ---------------------------------------
| | Income From Unconsolidated
    Entities

Income from unconsolidated entities increased by
$58.7 million in 2002 as compared to 2001 primarily as a
result of the following factors:



| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher net earnings contributions by Ameriton
    which increased by approximately $12.0 million in 2002,
    principally due to gains from the sales of real estate
    properties;                                                                                             
|
| |  | The $6.5 million increase in net earnings
    from CES and SMC, both acquired in the Smith Merger;                                                                                                                                                                               
|
| |  | The $35.4 million gain on sale of CES to a
    third party in December 2002; and                                                                                                                                                                                                 
|
| |  | The $4.8 million increase in our share of
    the net earnings from real estate joint ventures. This increase
    is primarily due to the formation timing of three operating
    community joint ventures during 2001 and three joint ventures
    acquired in the Smith Merger.

We expect lower levels of net earnings from our
unconsolidated entities in 2003 primarily as a result of the
sale of CES and SMC. See Note 5 in our audited financial
statements in this Annual Report for additional information on
income from unconsolidated entities and Note 2 for the sale
of CES and Note 18 for the sale of SMC.

Income from unconsolidated entities increased by
$11.6 million in 2001 as compared to 2000 primarily as a
result of the following factors:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our equity in the earnings of Ameriton increased
    from $2.8 million in 2000 to $9.8 million in 2001
    including the impact of gains on the sale of real estate
    properties by Ameriton;    
|
| |  | In connection with the Smith Merger, we acquired
    a majority of the economic interest in CES and SMC. Our equity
    in the earnings of these two entities during 2001 was
    $1.6 million; and

30



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##### Table of Contents





| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our equity in the earnings of the real estate
    joint ventures, including interest in the three joint ventures
    acquired in the Smith Merger, was $2.9 million during 2001
    as compared to a loss of $49,000 in 2000.



| |             
| | ------------
| | Other Income

Other income decreased by $1.3 million, or
10.2%, in 2002 as compared to 2001. This decrease is principally
attributable to lower interest income caused by lower restricted
cash balances because of reduced disposition activity, coupled
with lower interest rates. This decrease was partially offset by
higher fee income from our joint ventures and Ameriton.

The $19.2 million, or 60.0%, decrease in
other income from 2000 to 2001 resulted primarily from
$12.6 million of aggregate, one-time gains realized in 2000
in connection with the sale of the Spectrum Apartment Locator
business and the monetization of the Homestead mortgage notes
receivable, coupled with the recognition of $13.6 million
of interest income on these notes during 2000. These decreases
were partially offset by a $1.3 million increase in
interest income in 2001.



| |                     
| | --------------------
| | Depreciation Expense

The $69.1 million, or 56.1%, increase in
depreciation expense, excluding properties reported in
discontinued operations, in 2002 as compared to 2001 is due
principally to additional depreciation expense associated with
properties acquired in the Smith Merger. This increase was
partially offset by a reduction in depreciation expense
associated with our significant garden community disposition
volume during 2001 and 2002.

The $12.2 million, or 9.0%, decrease in
depreciation expense, excluding properties reported in
discontinued operations, in 2001 as compared to 2000 is
primarily influenced by the higher level of disposition activity
in 2001 relative to 2000. These decreases were partially offset
by incremental depreciation expense related to the real estate
assets acquired in the Smith Merger.



| |                 
| | ----------------
| | Interest Expense

The $64.9 million, or 49.9%, increase in
interest expense, excluding interest on properties reported in
discontinued operations, in 2002 as compared to 2001 is the
result of the incremental debt assumed in the Smith Merger,
which was partially offset by a lower average cost of variable
rate debt. Capitalized interest increased approximately
$1.4 million due to an increase in the number of properties
under construction from the addition of properties acquired in
the Smith Merger.

The $5.0 million, or 3.7%, decrease in
interest expense, excluding interest on properties reported in
discontinued operations, from 2000 to 2001 is primarily
attributable to lower average outstanding borrowings, coupled
with an overall reduction in interest rates. The level of
capitalized interest decreased approximately $4.0 million
due to the reduction in volume of our development activities.



| |                                        
| | ---------------------------------------
| | General and Administrative
    Expenses

The $16.8 million, or 63.5%, increase in
general and administrative expenses in 2002 as compared to 2001
relates primarily to the incremental overhead incurred in
connection with the Smith Merger. In addition, the amortization
of capitalized costs associated with our new revenue management
program called Lease Rent OptimizerTM, which began in
December 2001, contributed to the increase in 2002. The
$3.3 million, or 14.4%, increase in general and
administrative expenses in 2001 as compared to 2000 was also due
primarily to the Smith Merger.



| |                                                
| | -----------------------------------------------
| | Provisions for Possible Loss on
    Investments

Provisions for loss on investments were
$2.6 million in 2002 due to an impairment and related
write-down to the estimated fair value of a real estate
investment held for sale, which is included in net earnings from
discontinued apartment communities. Provisions for loss on
investments increased $9.7 million from 2000 to 2001. This
increase is principally attributable to a $12.2 million
write-off due to the reduction in the estimated fair value of
technology and service-related equity investments. This amount
is partially offset by a

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$2.5 million decrease in the write-downs to
the estimated fair value of certain real estate investments held
for sale.




| |               
| | --------------
| | Other Expenses

The $6.1 million, or 73.1%, increase in
other expenses in 2002 is principally due to a charge of
$11.3 million relating to moisture infiltration and
resulting mold issues at one of our high-rise properties in
Southeast Florida during the third and fourth quarters of 2002,
partially offset by the decrease in merger-related expenses
from 2001.

The $4.4 million increase in other expenses
in 2001 is principally attributable to merger-related costs
approximating $5.3 million. This amount is partially offset
by the $2.8 million write-off of the net unamortized
balance of the conversion factors associated with the Homestead
mortgages notes in 2000.



| |                                                       
| | ------------------------------------------------------
| | Minority Interest and Preferred Unit
    Distributions

The $2.6 million, or 33.7%, decrease in
minority interest in 2002 compared to 2001 is due to the
conversion of DownREIT Perpetual Preferred Units into Operating
Trust Perpetual Preferred Units in August 2002. The $552,000, or
7.6%, increase in minority interest in 2001 compared to 2000 is
principally attributable to the increase in the distribution
rate in 2001 coupled with a full year of distributions paid on
the Perpetual Preferred Units issued in 2000.

Preferred Unit distributions increased by
$11.7 million, or 52.7%, in 2002 due to the issuance of
Series H, I, J, K and L Preferred Units in connection with
the Smith Merger. Preferred Unit distributions decreased by
$3.1 million, or 12.1%, during 2001 principally as a result
of the redemption of Series B Preferred Units in May 2001
and lower distributions on Series A Preferred Units
resulting from periodic conversions by unitholders into Common
Units.



| |                        
| | -----------------------
| | Discontinued Operations

In October 2001, the FASB issued SFAS 144,
Accounting for Impairment or Disposal of Long-Lived
Assets which became effective on January 1, 2002. For
properties accounted for under SFAS 144, the results of
operations for properties sold during the period or designated
as held for sale at the end of the period are required to be
classified as discontinued operations. The property-specific
components of net earnings that are classified as discontinued
operations include net operating income, depreciation expense
and interest expense (actual interest expense for encumbered
properties and a pro-rata allocation of interest expense for any
unencumbered portion up to our weighted average leverage ratio),
as well as the net gain or loss on the eventual disposal of held
for sale properties and provisions for possible loss on real
estate investments.

We had 12 operating communities classified
as held for sale under SFAS 144 at December 31, 2002.
NOI from these properties increased $1.9 million, or 5.8%,
in 2002 due to the inclusion of two communities acquired in the
Smith Merger. We also sold eight operating communities and one
retail property during 2002, resulting in a net gain of
$72.9 million, and recorded a $2.6 million impairment
charge on another operating community. The results of operations
and the gains on the sale of these properties are included in
discontinued operations. Additionally, we sold six operating
communities during 2002 that were either held for sale at
December 31, 2001 or sold to our unconsolidated entities
and, therefore, are not included in discontinued operations in
accordance with SFAS 144. Net earnings from discontinued
operations have been reclassified for all years presented.



| |                                                     
| | ----------------------------------------------------
| | Gains on Dispositions of Real Estate
    Investments

We recognized $36.0 million,
$100.3 million and $93.1 million of net gains on the
disposition of depreciated real estate assets during 2002
(excluding properties reported in discontinued operations), 2001
and 2000, respectively. These gains have resulted from our
capital redeployment program, which involves the disposition of
operating communities in non-core markets with less attractive
growth prospects to fund investments in our core protected
markets.

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Liquidity and Capital Resources



| |                      
| | ---------------------
| | Financial Flexibility

We are committed to maintaining a strong balance
sheet and preserving our financial flexibility, which we believe
enhances our ability to capitalize on attractive investment
opportunities as they become available. As a result of the
significant cash flow generated by our operations, cash
positions at December 31, 2002, and the available capacity
under our unsecured credit facilities, we believe our liquidity
and financial condition are sufficient to meet all of our
reasonably anticipated cash flow needs in 2003.



| |                     
| | --------------------
| | Operating Activities

Our net cash flow provided by operating
activities increased by $198.1 million, or 64.1%, in 2002
as compared to 2001, principally due to an increase in earnings
from operations due to the Smith Merger, which was partially
offset by lower Same-Store NOI and lost NOI resulting from our
2002 and 2001 disposition activity.

During 2001, our net cash flow provided by
operating activities decreased by $13.0 million, or 4.0%,
as compared to 2000, due primarily to the $1.2 billion of
apartment community dispositions in 2001. For a more complete
discussion of the factors impacting our operating performance,
see Apartment Community Operations and our
accompanying Statement of Cash Flows in this Annual Report for
more detailed information.



| |                                       
| | --------------------------------------
| | Investing and Financing
    Activities

During 2002, cash flows from investing activities
decreased $557.3 million as compared to 2001. The decrease
was principally attributable to a $667.2 million reduction
in proceeds from dispositions, a $108.5 million increase in
investments in real estate, and an increase in purchases of
marketable securities and other assets. These decreases were
partially offset by the $236.9 million increase in cash
flows from restricted cash in tax-deferred exchange escrow, a
$70.1 million increase in cash flows from our investment in
and advances to our unconsolidated investees and other investing
activities.

During 2002, cash used in financing activities
decreased $367.0 million, or 49.2%, as compared to 2001.
This decrease is primarily attributable to the issuance of
$535.0 million in senior unsecured notes during 2002 and
the $401.1 million increase in the net proceeds provided by
our credit facilities used to finance investing activities.
These increases were partially offset by principal prepayments
on mortgages payable, including prepayment penalties, which
increased $502.0 million and dividends and distributions on
Common Units, Preferred Units and minority interest in the
amounts of $344.6 million, $34.4 million and
$5.2 million, respectively, during 2002 as compared to
$221.2 million, $17.8 million and $8.4 million,
respectively, during 2001.

During 2001 and 2000, we invested an average of
$600.9 million per year primarily in the development of new
communities and the acquisition of existing operating
communities and realized $923.7 million per year in
proceeds from community dispositions. During 2001 and 2000, we
also repurchased a total of $230.2 million of our Common
and Preferred Shares including 17.5 million Common Shares
repurchased from Security Capital in July 2000 in exchange for
Homestead mortgage notes with a face amount of
$221.3 million and cash of $178.7 million. See
Note 15 in our audited financial statements in this Annual
Report for additional information on this transaction.

We attempt to structure most of our acquisition
and disposition transactions as tax-deferred exchanges. When we
fund an investment using debt, we typically borrow under our
unsecured credit facilities, which are then repaid from other
long-term financing sources. See our Statement of Cash Flows in
this Annual Report for more detailed information.

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Our most significant non-cash investing and
financing activities during the three-year period ended
December 31, 2002 included:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Smith Merger during 2001; see Note 2 in
    our audited financial statements in this Annual Report for more
    information on assets acquired and liabilities assumed in the
    Smith Merger;
|
| |  | The conversion of Preferred Units into Common
    Units;                                                                                                                                           
|
| |  | Accruals related to moisture infiltration and
    resulting mold remediation costs at one of our high-rise
    properties in Southeast Florida in 2002;                                            
|
| |  | The assumption of mortgages payable in connection
    with the acquisition of real estate;                                                                                                         
|
| |  | The exchange of apartment communities and land
    for interests in joint ventures; see Note 5 in our audited
    financial statements in this Annual Report for more
    information; and         
|
| |  | The exchange of Homestead mortgage notes for
    Common Units in 2000.                                                                                                                             

See Note 17 in our audited financial
statements in this Annual Report for additional information on
non-cash investing and financing activities.



| |                                                                
| | ---------------------------------------------------------------
| | Scheduled Debt Maturities and Interest
    Payment Requirements

We have structured the repayments of our
long-term debt to create a relatively level principal maturity
schedule and to avoid significant repayment obligations in any
year, which would impact our financial flexibility. We had
$120.0 million in scheduled maturities during 2002, and we
have $223.9 million and $103.0 million of long-term
debt maturing during 2003 and 2004, respectively. See
Note 6 in our audited financial statements in this Annual
Report for additional information on scheduled debt maturities.

In October 2001, we increased the available
capacity on our unsecured line of credit by $120 million,
which enables us to borrow up to $700 million under this
facility with JPMorgan Chase Bank. The facility bears interest
at the greater of prime or the federal funds rate plus 0.50%, or
at our option, LIBOR plus 0.65%. The spread over LIBOR can vary
from LIBOR plus 0.50% to LIBOR plus 1.25% based upon the rating
of our Long-Term Unsecured Debt. The three-year facility matures
in December 2003 and includes an option in our favor for a
one-year extension. We also have a short-term unsecured
borrowing agreement with JPMorgan Chase Bank, which provides for
maximum borrowings of $100 million.

We had $416.2 million outstanding on our
unsecured line of credit, $1.9 million outstanding under
letters of credit and an available balance of
$381.9 million on our unsecured credit facilities at
February 14, 2003.

Our unsecured credit facilities, Long-Term
Unsecured Debt and mortgages payable had effective weighted
average interest rates of 3.04%, 6.83% and 5.75%, respectively,
as of December 31, 2002. All of these rates give effect to
debt issuance costs, fair value hedges, the amortization of fair
market value purchase adjustments and other fees and expenses,
as applicable.

Our debt instruments generally contain covenants
common to the type of facility or borrowing, including financial
covenants establishing minimum debt service coverage ratios and
maximum leverage ratios. We were in compliance with all
financial covenants pertaining to our debt instruments as of and
for the year ended December 31, 2002.

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| |                                         
| | ----------------------------------------
| | Unitholder Distribution
    Requirements

Based on anticipated distribution levels for 2003
and the number of shares and units outstanding as of
December 31, 2002, we anticipate that we will pay the
following distributions in 2003 (in thousands, except per unit
amounts):

|                                         |                              |                                 |          |       |  |  |       |         |         | 
|---------------------------------------- | ---------------------------- | ------------------------------- | -------- | ----- |  |  | ----- | ------- | ------- | 
|                                         |                              | Per Unit                        |          | Total
|                                         |                              |                                 |          |      
|Common unit distributions:               |                              |                                 |          |       |  |  |       |        
|                                         | Common Unit distributions(1) |                                 | $        | 1.71  |  |  | $     | 351,110 |        
|Series A Preferred Unit distributions    |                              |                                 | 2.30     |       |  |  | 6,732 |        
|Series D Preferred Unit distributions    |                              |                                 | 2.19     |       |  |  | 4,325 |        
|Series E Preferred Unit distributions(1) |                              |                                 | 2.09     |       |  |  | 2,341 |        
|Series F Preferred Unit distributions(1) |                              |                                 | 2.03     |       |  |  | 1,624 |        
|Series G Preferred Unit distributions(1) |                              |                                 | 2.16     |       |  |  | 1,296 |        
|Series H Preferred Unit distributions    |                              |                                 | 3.38     |       |  |  | 8,923 |        
|Series I Preferred Unit distributions(2) |                              |                                 | 7,660.00 |       |  |  | 3,830 |        
|Series K Preferred Unit distributions    |                              |                                 | 3.38     |       |  |  | 2,254 |        
|Series L Preferred Unit distributions    |                              |                                 | 3.38     |       |  |  | 2,167 |        
|                                         |                              |                                 |          |       |  |  |       |        
|                                         |                              | Total distribution requirements |          |       |  |  |       | $       | 384,602 | 
|                                         |                              |                                 |          |       |  |  |       |        



---



|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 9 in our audited financial
    statements in this Annual Report for more information on
    minority interests.
|   
|(2) | Series I Preferred Units have a par value of
    $100,000 per unit.                                                     



| |                                            
| | -------------------------------------------
| | Unit Repurchase and Redemption
    Activity

In July 2002, 684,931 Series J Preferred
Units were converted into Common Units. In August 2002, we
redeemed all of our Series C Preferred Units at
$25.00 per unit plus accrued distributions. In addition,
3,000,000 Series E, F, and G Preferred Units were issued in
exchange for the DownREIT Perpetual Preferred Units, and 870,523
DownREIT OP Units were issued in exchange for A-1 Common
Units in August 2002. In September 2002, 480,000 of the
Series E Units were redeemed at liquidation value plus
accrued distributions. In the fourth quarter of 2002,
Archstone-Smith repurchased 668,900 Common Units. The
repurchase of Common Units and the redemption of Series C
and E Units were funded through borrowings under our
unsecured credit facility, which was repaid with proceeds from
dispositions and the issuance of long-term debt.

In February 2001, we repurchased 2.3 million
of our Common Units from Security Capital for $50.0 million
at a price of $22.08 per unit. In May 2001, we redeemed all
of our Series B Preferred Units for $104.7 million at
$25.00 per unit plus accrued distributions. The repurchase
of Common Units and the redemption of Series B Preferred
Units were funded through borrowings under our unsecured credit
facilities, which we repaid primarily with proceeds from
dispositions. See Note 8 in our audited financial
statements of this Annual Report for additional information on
the Common Unit repurchase transaction and the concurrent sale
of other Common Units by Security Capital and the redemption of
the Series B, C and E Preferred Units.



| |                    
| | -------------------
| | Planned Investments

Following is a summary of unfunded planned
investments as of December 31, 2002 (dollar amounts in
thousands). The amounts labeled Discretionary
represent future investments that we plan to make, although
there is not a contractual commitment to do so. The amounts
labeled Committed represent the

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approximate amount that we are contractually
committed to fund for communities under construction in
accordance with construction contracts with general contractors.


|                                          |       |                     |       |               |  |           |         |         |  |   |         |         | 
|----------------------------------------- | ----- | ------------------- | ----- | ------------- |  | --------- | ------- | ------- |  | - | ------- | ------- | 
|                                          |       |                    
|                                          |       | Planned Investments
|                                          |       |                    
|                                          |       | Units               |       | Discretionary |  | Committed
|                                          |       |                     |       |               |  |          
|Communities under redevelopment           |       |                     | 7,405 |               |  | $         | 46,560  |         |  | $ | 41,033  |        
|Communities under construction            |       |                     | 2,295 |               |  |           |        |         |  |   | 152,375 |        
|Communities In Planning and Owned         |       |                     | 2,870 |               |  |           | 591,528 |         |  |   |        |        
|Communities In Planning and Under Control |       |                     | 428   |               |  |           | 59,862  |         |  |   |        |        
|Community acquisitions under contract     |       |                     | 623   |               |  |           | 87,000  |         |  |   |        |        
|                                          |       |                     |       |               |  |           |         |         |  |   |         |        
|                                          | Total |                     |       | 13,621        |  |           | $       | 784,950 |  |   | $       | 193,408 | 
|                                          |       |                     |       |               |  |           |         |         |  |   |         |        

In addition to the planned investments noted
above, we expect to make additional investments relating to
planned expenditures on recently acquired communities as well as
redevelopment and recurring expenditures to improve and maintain
our more established operating communities.

We anticipate completion of most of the
communities that are currently under construction and the
planned operating community improvements during the remainder of
2003 and 2004. We expect to start construction on approximately
$300-$400 million, based on Total Expected Investment, of
communities that are currently In Planning in 2003. We expect to
fund the costs of these development projects over a two-to-three
year period following the date construction commences. No
assurances can be given that communities we do not currently own
will be acquired or that planned developments will actually
occur. In addition, actual costs incurred could be greater or
less than our current estimates.



| |                
| | ---------------
| | Funding Sources

We anticipate financing our planned investment
and operating needs primarily with cash flow from operating
activities, disposition proceeds from our capital redeployment
program and borrowings under our unsecured credit facilities,
prior to arranging long-term financing. Consistent with our
performance in 2002, we anticipate that net cash flow from
operating activities during 2003 will be sufficient to fund
anticipated distribution requirements and debt principal
amortization payments. To fund planned investment activities, we
had $381.9 million in available capacity on our unsecured
credit facilities and approximately $8.0 million of cash on
hand at February 14, 2003. In addition, we expect to
complete the disposition of $300- $500 million of operating
communities during 2003.

In February 2002, we issued $200 million in
long-term unsecured ten-year senior notes with an effective
interest rate of 6.6% from our shelf registration statement. In
May 2002, Archstone-Smith filed a shelf registration statement
on Form S-3 to register $500 million in equity
securities, which can be issued in the form of Common or
Preferred Shares. In May 2002, we filed a shelf registration
statement on Form S-3 to register an additional
$422.8 million (for a total of $800 million) in
unsecured debt securities. These registration statements were
declared effective in June 2002. In August 2002, we issued
$300 million in long-term unsecured senior five-year notes
from our shelf registration statement with an effective interest
rate of 5.2%. In November 2002, we issued $35 million in
long-term unsecured five-year senior notes with an effective
interest rate of 4.9% from our shelf registration statement. As
of February 14, 2003, Archstone-Smith and the Operating
Trust collectively have $965.0 million available in shelf
registered securities which can be issued based on our ability
to effect offerings on satisfactory terms based on prevailing
market conditions.



| |                                               
| | ----------------------------------------------
| | Other Contingencies and Hedging
    Activities

For the year ended December 31, 2002, we
have accrued and/or incurred a liability for approximately
$30.8 million relating to moisture infiltration and
resulting mold issues at one of our high-rise properties in
Southeast Florida. Of this amount, approximately
$11.3 million represents amounts expensed during the second
half of 2002 for the estimated cost of repairing or replacing
residents property and incurred legal fees

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of $1.7 million. The remaining
$19.5 million represents costs capitalized in accordance
with GAAP pertaining to remediation and capital improvements to
the building.


We are in the process of addressing this issue,
and there are still considerable uncertainties that affect our
ability to estimate the ultimate cost of remediation efforts.
These uncertainties include the exact nature and extent of the
issues, the extent of required remediation efforts and varying
costs of alternative strategies for addressing the issues. The
accrual represents managements best estimate of the
probable and reasonably estimable costs and is based, in part,
on estimates obtained from third-party environmental contractors
and actual costs incurred to date. It is possible that these
estimates could increase or decrease as better information
becomes available.

We are also subject to litigation in connection
with these issues. We intend to vigorously contest the claims
asserted in the litigation. Due to the preliminary nature of the
litigation, it is not possible to predict or determine the
outcome of the legal actions nor is it reasonably possible to
estimate the amount of loss associated with an adverse decision.
Expected legal fees related to known litigation should
approximate $5.0 million in 2003.

We believe these costs are covered by our
insurance policies and are pursuing recovery from our carriers.
In addition, we believe there is a basis for other potential
recoveries from third parties. As of December 31, 2002, no
estimated recovery has been recorded because we have no basis
for making such an estimate at this time. While moisture
infiltration and resulting mold issues have resulted in
significant claims at only one of our properties to date, we can
make no assurance that liabilities resulting from moisture
infiltration and the presence of or exposure to mold will not
have a future material impact on our financial results.

We are party to various other claims and routine
litigation arising in the ordinary course of business. We do not
believe that the results of any such claims and litigation,
individually or in the aggregate, will have a material adverse
effect on our business, financial position or results of
operations.

Our involvement with derivative financial
instruments is limited, and we do not use them for trading or
other speculative purposes. We occasionally utilize derivative
financial instruments to manage the risks associated with our
overall borrowing costs. See Note 11 in our audited
financial statements in this Annual Report for additional
information on derivative financial instruments currently
in use.




Critical Accounting Policies

We define critical accounting policies as those
accounting policies that require our management to exercise
their most difficult, subjective and complex judgments. Our
management has discussed the development and selection of all of
these critical accounting policies with our audit committee, and
the audit committee has reviewed the disclosure relating to
these policies. Our critical accounting policies relate
principally to the following key areas:



| |                             
| | ----------------------------
| | Internal Cost Capitalization

We have an investment organization and
infrastructure that supports the due diligence, land
acquisition, development and redevelopment of apartment
communities. Consistent with GAAP, all direct and indirect
costs, including interest and real estate taxes, incurred during
construction relating to these activities are capitalized.
Included in these costs is managements estimate for the
portion of internal costs that are incremental and deemed
directly or indirectly related to such development activities.
Because the estimation of capitalizable internal costs requires
managements judgment, we believe internal cost
capitalization is a critical accounting estimate.

If future accounting rules limit our ability to
capitalize internal costs or if our development activity
decreased significantly without a proportionate decrease in
internal costs, there could be an increase in our operating
expenses. For example, if we were to hypothetically reduce our
development and land acquisition activity by 25% with no
corresponding decrease in internal costs, our net earnings per
unit could decrease by approximately 1.2% or $0.02 per unit
based on 2002 amounts.

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| |                    
| | -------------------
| | Purchase Accounting

During October 2001, we merged with Smith
Residential and recorded Smith Residentials assets and
assumed liabilities at their estimated fair values. Due to the
magnitude and complexity of the assumptions necessary to apply
purchase accounting, management is required to exercise
significant judgment, and therefore we view these assumptions as
critical accounting estimates. During 2002, all
remaining purchase accounting adjustments were finalized.
Adjustments to the initial purchase price allocation were less
than one percent of the purchase price.



| |                         
| | ------------------------
| | Valuation of Real Estate

Long-lived assets to be held and used are carried
at cost and evaluated for impairment when events or changes in
circumstances indicate such an evaluation is warranted. We also
evaluate assets for potential impairment when we deem them to be
held for sale. Valuation of real estate is considered a
critical accounting estimate because the evaluation
of impairment and the determination of fair values involve a
number of management assumptions relating to future economic
events that could materially affect the determination of the
ultimate value, and therefore, the carrying amounts of our real
estate.

When determining if there is an indication of
impairment, we estimate the assets NOI over the
anticipated holding period on an undiscounted cash flow basis
and compare this amount to its carrying value. Estimating the
expected NOI and holding period requires significant management
judgment. If it is determined that there is an indication of
impairment for assets to be held and used, or if an asset is
deemed to be held for sale, we then determine the assets
fair value.

The apartment industry uses capitalization rates
as the primary measure of fair value. Specifically, annual NOI
for a community is divided by an estimated capitalization rate
to determine the fair value of the community. Determining the
appropriate capitalization rate requires significant judgment
and is typically based on the prevailing rate for the market or
submarket. Further, capitalization rates can fluctuate up or
down due to a variety of factors in the overall economy or
within local markets. If the actual capitalization rate for a
community is significantly different from our estimated rate,
the impairment evaluation for an individual asset could be
materially affected. For example, we would value a community
with annual NOI of $10 million at $142.9 million using
a 7.0% capitalization rate, whereas that same community would be
valued at $125.0 million if the actual capitalization rate
were 8.0%. Historically we have had limited and infrequent
impairment charges, and the majority of our apartment community
sales have produced gains. For example, we have sold
$4.0 billion of real estate assets over the last seven
years, which produced $514.6 million in gains at an
unleveraged internal rate of return of approximately 12.7%. We
evaluate a real estate asset for potential impairment when
events or changes in circumstances indicate that its carrying
amount may not be recoverable.



| |                                               
| | ----------------------------------------------
| | Capital Expenditures and Depreciable
    Lives

We incur costs relating to redevelopment
initiatives, revenue enhancing and expense reducing capital
expenditures, and recurring capital expenditures that are
capitalized as part of our real estate. These amounts are
capitalized and depreciated over estimated useful lives
determined by management. Determining whether expenditures meet
the criteria for capitalization and the assignment of
depreciable lives requires our management to exercise
significant judgment and is therefore considered a
significant accounting estimate.

Total capital expenditures were 2.4% and 1.5% of
weighted average gross real estate as of December 31, 2002
and 2001, respectively. The growth in capital expenditures was
principally due to significant redevelopment efforts in our
high-rise portfolio acquired in the Smith Merger.

Additionally, depreciation expense as a
percentage of weighted average depreciable real estate was 3.0%,
2.7% and 3.4% or $2,542, $1,898 and $2,174 per unit for the
years ended December 31, 2002, 2001 and 2000, respectively.
If the actual weighted average useful life were determined to be
one year shorter or longer than managements current
estimate, our annual depreciation expense would increase or
decrease approximately

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3.0% or $0.03 per unit. See Note 1 in
our audited financial statements in this Annual Report for
additional detail on depreciable lives.




| |                                                     
| | ----------------------------------------------------
| | Moisture Infiltration and Mold Remediation
    Costs

Accounting for correction of moisture
infiltration and mold remediation costs is considered a
critical accounting estimate because significant
judgment is required by management to determine when to record a
liability, how much should be accrued as a liability and whether
such costs meet the criteria for capitalization.

We estimate and accrue costs related to
correcting the moisture infiltration and remediating resulting
mold when we anticipate incurring costs because of the threat of
litigation or the assertion of a legal claim. When we incur
costs at our own discretion, the cost is recognized as incurred.
Moisture infiltration and resulting mold remediation costs are
only capitalized when it is determined by management that such
remediation costs also extend the life, increase the capacity,
or improve the safety or efficiency of the property relative to
when the community was originally constructed or acquired, if
later. All other related costs are expensed.

For the year ended December 31, 2002, we
have incurred and/or accrued a liability for approximately
$30.8 million of which we expensed $11.3 million,
including incurred legal fees of $1.7 million, and
capitalized $19.5 million. There are considerable
uncertainties that affect our ability to estimate the ultimate
cost of correction and remediation efforts. These uncertainties
include, but are not limited to, assessing the exact nature and
extent of the issues, the extent of required remediation efforts
and the varying costs of alternative strategies for addressing
the issues. The accrual represents managements best
estimate of the probable and reasonably estimable costs and is
based, in part, on estimates obtained from third-party
environmental contractors and actual costs incurred to date. It
is possible that these estimates could increase or decrease as
better information becomes available. Further, due to the
preliminary nature of the litigation, it is not possible to
predict or determine the outcome of the legal actions nor is it
reasonably possible to estimate the amount of loss associated
with an adverse decision. Therefore, we have not accrued a
liability for litigation settlement costs.

Our eventual costs to correct moisture
infiltration and remediate resulting mold could be significantly
different than current estimates. For example, if our total
costs were 25% more or less than our current estimates, and the
ratio between the expensed and capitalized portion remained
constant, our net earnings per share would increase or decrease
by approximately $0.01 per unit.




Off Balance Sheet Arrangements

Investments in entities that are not controlled
through majority voting interest are not consolidated and are
reported as investments in unconsolidated entities. Our
investments in unconsolidated entities as of December 31,
2002, include real estate joint ventures, Ameriton and SMC. In
connection with our investments in Ameriton, we have extended a
$10 million committed unsecured credit facility with
$5.2 million of available capacity at December 31,
2002. Additionally, we have extended an uncommitted unsecured
credit facility with Ameriton whereby advances are made solely
at our discretion. Ameriton had $106.3 million of available
capacity on this facility at December 31, 2002. See
Note 5 in our audited financial statements in this Annual
Report for additional information on our investments in
unconsolidated entities. See Note 18 in our audited
financial statements in this Annual Report for additional
information on the sale of SMC.

Consolidated Engineering Services is a service
business that we acquired during the Smith Merger in 2001 and
prior to its sale had been reported as an unconsolidated entity
in our financial statements. CES provides engineering services
for commercial and residential real estate across the country.
On December 19, 2002, CES was sold to a third party for
$178 million in cash. We recorded a $35.4 million net
gain on the sale of the business or $0.16 per unit on a
fully diluted basis. The gain will be adjusted during the first
quarter of 2003 based on final net asset value calculations as
of the transaction date. Any adjustment is not expected to be
material. Excluded from the gain is approximately
$6.7 million in contingent proceeds related to
indemnification of accounts receivable over 120 days.

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As a condition of sale, we agreed to indemnify
the buyer for certain representations and warranties contained
in the sale contract. The indemnifications terminate on
June 30, 2004, and while we do not believe it is probable
that the indemnities will reach the maximum amount, the related
liability is limited to a maximum exposure of $44.5 million
with exceptions including third party claims, insurance,
arbitration, environmental issues and collection of specified
accounts receivable, each of which is without deduction or
limitation. There are no recourse provisions available to us to
recover any potential future payments from third parties.

We have extended guarantees of certain
obligations (such as performance bonds), which are customary to
the type of business in which we engage. The Operating Trust,
our subsidiaries and investees have not been required to perform
on these guarantees, nor do we anticipate being required to
perform on such guarantees. Since we believe that our risk of
loss under these contingencies is remote, no accrual for
potential loss has been made in the accompanying financial
statements. See Contractual Commitments for a
summary of the performance bonds we have guaranteed.




Contractual Commitments

The following table summarizes information
contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations and in our audited
financial statements in this Annual Report regarding contractual
commitments (amounts in millions):

|                                           |       |      |       |          |  |          |       |           |  |       |       |       |  |   |         |         |  |   |         |         | 
|------------------------------------------ | ----- | ---- | ----- | -------- |  | -------- | ----- | --------- |  | ----- | ----- | ----- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                           |       |      |       | 2004 and |  | 2006 and |       | 2008 thru |  |      
|                                           |       | 2003 |       | 2005     |  | 2007     |       | 2095      |  | Total
|                                           |       |      |       |          |  |          |       |           |  |      
|Scheduled long-term debt maturities        |       | $    | 223.9 |          |  | $        | 379.2 |           |  | $     | 864.6 |       |  | $ | 2,269.2 |         |  | $ | 3,736.9 |        
|Unsecured credit facilities                |       |      | 17.1  |          |  |          | 348.5 |           |  |       |      |       |  |   |        |         |  |   | 365.6   |        
|Ameriton credit facility                   |       |      | 5.2   |          |  |          |      |           |  |       |      |       |  |   |        |         |  |   | 5.2     |        
|Development and redevelopment expenditures |       |      | 193.4 |          |  |          |      |           |  |       |      |       |  |   |        |         |  |   | 193.4   |        
|Performance bond guarantees(1)             |       |      | 80.2  |          |  |          | 0.5   |           |  |       |      |       |  |   |        |         |  |   | 80.7    |        
|Lease commitments and other(2)             |       |      | 19.8  |          |  |          | 13.8  |           |  |       | 9.8   |       |  |   | 194.8   |         |  |   | 238.2   |        
|                                           |       |      |       |          |  |          |       |           |  |       |       |       |  |   |         |         |  |   |         |        
|                                           | Total |      | $     | 539.6    |  |          | $     | 742.0     |  |       | $     | 874.4 |  |   | $       | 2,464.0 |  |   | $       | 4,620.0 | 
|                                           |       |      |       |          |  |          |       |           |  |       |       |       |  |   |         |         |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Operating Trust, our subsidiaries and
    investees have not been required to perform on these guarantees,
    nor do we anticipate being required to perform on such
    guarantees. Since we believe that our risk of loss under these
    contingencies is remote, no accrual for potential loss has been
    made in the accompanying financial statements. We are still
    obligated for performance bond guarantees for CES and SMC
    subsequent to their sale, but there are recourse provisions
    available to us to recover any potential future payments from
    the new owners of CES and SMC.
|   
|(2) | Lease commitments relate principally to ground
    lease payments as of December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         




Related Party Transactions

We own 100% of the non-voting stock in Ameriton,
representing a 95% economic interest. In June 2001, Ameriton
Holdings acquired the voting stock of Ameriton from third
parties, representing the remaining 5% economic interest, for
approximately $5.8 million. We also own 95% of the
membership interests in Ameriton Holdings. Our chief executive
officer owns 5% of the membership interests in Ameriton Holdings
and is the manager of Ameriton Holdings. Our chief executive
officer did not receive any loans or other consideration from
the Operating Trust, our subsidiaries or our affiliates in
connection with the purchase of his interests in Ameriton.

Ameriton paid approximately $3.38 million to
certain other executive officers and employees of the Operating
Trust related to realized returns on investments sold during
2002. Four members of Ameritons board (James H.
Polk, III, John C. Schweitzer, R. Scot Sellers and Charles
E. Mueller, Jr.) are Trustees of Archstone-Smith or executive
officers of the Operating Trust.

40



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Prior to the sale in December 2002, our interest
in CES was structured similarly to that of our interest in
Ameriton, as described above, whereby an entity managed by our
chief executive officer held 100% of the voting stock. Our chief
executive officer did not receive any loans or other
consideration from the Operating Trust, our subsidiaries or our
affiliates in connection with the purchase of his interests in
CES. All CES board members (Ernest A Gerardi, Jr., Robert
H. Smith, Dana K. Hamilton and Messrs. Sellers and Mueller)
were Trustees of Archstone-Smith or executive officers of the
Operating Trust. Furthermore, Mr. Gerardi was an officer of
CES. In connection with the sale of CES, Mr. Gerardi
received a disposition incentive bonus of $2.75 million.

Our interest in SMC was structured similarly to
that of our interest in Ameriton, as described above, whereby an
entity managed by our chief executive officer held 100% of the
voting stock. Our chief executive officer did not receive any
loans or other consideration from the Operating Trust, our
subsidiaries or our affiliates in connection with the purchase
of his interests in SMC. All SMC board members (Robert P. Kogod,
Ms. Hamilton and Messrs. Smith, Sellers and Mueller)
were Trustees of Archstone-Smith or executive officers of the
Operating Trust. During February 2003, we sold our interest in
SMC. See Note 18 in our audited financial statements in
this Annual Report for additional information on the sale
of SMC.

During 1997, as part of the employee share
purchase plan, certain officers and other employees purchased
Common Shares of Archstone-Smith. Archstone-Smith financed 95%
of the total purchase price by issuing notes representing
approximately $17.1 million. As of December 31, 2002,
the aggregate outstanding balances on these notes were
approximately $2.0 million. In an effort to eliminate all
employee loans, Archstone-Smith made an offer to the remaining
participants of this plan to repurchase their Common Shares as
of December 27, 2002, using the closing price of
Archstone-Smith Common Shares on that date. The proceeds of the
repurchase were used to pay off the outstanding loan balance,
with any excess going to the participant. In addition, the
participant received one fully vested and exercisable option for
each share that was repurchased, with a term not to exceed the
remaining term on the promissory note for the outstanding loan.
A total of 81,685 Common Shares were repurchased for a total of
$1.9 million.




New Accounting Pronouncements

In April 2002, the FASB issued SFAS 145
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. We are required to adopt SFAS 145 on
January 1, 2003. SFAS 145 significantly limits the
treatment of losses associated with early extinguishment of debt
as an extraordinary item. SFAS 145 also impacts certain
sale-leaseback transactions. Upon adoption, early
extinguishments will not continue to qualify for extraordinary
item treatment and we do not anticipate that the adoption of
SFAS 145 will have a material impact on our financial
position, net earnings or cash flows.

In July 2002, the FASB issued SFAS 146
Accounting for Costs Associated with Exit or Disposal
Activities. We are required to adopt SFAS 146 on
January 1, 2003. SFAS 146 requires that certain
expenses associated with restructuring charges be accrued as
liabilities in the period in which the liability is incurred. We
do not anticipate the adoption of SFAS 146 will have a
material impact on our financial position, net earnings or cash
flows.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation
No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after
December 31, 2002. The company has not yet determined the
impact of the Interpretation. The disclosure requirements are
effective immediately.

In December 2002, the FASB issued SFAS 148
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement
No. 123. We are required to adopt SFAS 148
for financial statements for fiscal years ending after
December 15, 2002. We have modified the disclosure of

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our transition to the fair value based method of
accounting for stock-based compensation in this annual report to
reflect the additional requirements of this statement. The
adoption of SFAS 148 did not have a material impact on our
financial position, net earnings or cash flows.


In January 2003, the FASB issued Interpretation
No. 46 Consolidation of Variable Interest
Entities. We are required to adopt the Interpretation
for financial statements for the fiscal year or interim period
beginning after June 15, 2003. This Interpretation
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial
Statements, and requires that we consolidate the
results of variable interest entities in which we have a
majority variable interest. Although we have not yet determined
the total impact of adopting the Interpretation, it is
reasonably possible that we will be deemed the primary
beneficiary of Ameriton, which would result in consolidation of
this currently unconsolidated entity.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk



| |                  
| | -----------------
| | Stock Investments

We have both public and private investments in
equity securities. The publicly traded equity securities are
classified as available for sale securities and
carried at fair value, with unrealized gains and losses reported
as a separate component of unitholders equity. The private
investments, for which we lack the ability to exercise
significant influence, are accounted for at cost. Declines in
the value of public and private investments that our management
determines are other than temporary, are recorded as a provision
for possible loss on investments. Our evaluation of the carrying
value of these investments is primarily based upon a regular
review of market valuations (if available), each companys
operating performance and assumptions underlying cash flow
forecasts. In addition, our management considers events and
circumstances that may signal the impairment of an investment.
During 2001, we concluded that our investments in private
service and technology companies were impaired due to the
financial position of the investees. Since the decline was
deemed to be other than temporary, we recorded a
$12.2 million provision for possible loss on investments
during 2001.



| |                                             
| | --------------------------------------------
| | Use of Derivatives in Hedging
    Activities

We are exposed to the impact of interest rate
changes and will occasionally utilize interest rate swaps and
interest rate caps as hedges with the objective of lowering our
overall borrowing costs. We do not use these derivatives for
trading or other speculative purposes. Further, as a matter of
policy, we only enter into contracts with major financial
institutions with strong investment grade credit ratings. When
viewed in conjunction with the underlying and offsetting
exposure that the derivatives are designed to hedge, we have not
nor do we expect to sustain a material loss from the use of
these hedging instruments.

To determine the fair values of derivative and
other financial instruments, we use a variety of methods and
assumptions that are based on market conditions and risks
existing at each balance sheet date. These methods and
assumptions include standard market conventions and techniques
such as discounted cash flow analysis, option pricing models,
replacement cost and termination cost. All methods of assessing
fair value result in a general approximation of value, and
therefore, are not necessarily indicative of the actual amounts
that we could realize upon disposition.

The following table summarizes the notional
amount, carrying and estimated fair value of our derivative
financial instruments, as of December 31, 2002 (dollar
amounts in thousands). The notional amount

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represents the aggregate amount of a particular
security that is currently hedged at that time, but does not
represent exposure to credit, interest rate or market risks.


|                   |                            |                         |              |            |         |                |  |           |           |           |   |         |         |        |  
|------------------ | -------------------------- | ----------------------- | ------------ | ---------- | ------- | -------------- |  | --------- | --------- | --------- | - | ------- | ------- | ------ | -
|                   |                            |                         |              |            |         | Carrying and  
|                   |                            | Notional                |              | Maturity   |         | Estimated Fair
|                   |                            | Amount                  |              | Date Range |         | Value         
|                   |                            |                         |              |            |         |               
|Cash flow hedges:  |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   | Interest rate caps         |                         | $            | 34,508     |         |                |  | 2006      |           |           | $ | 3       |        
|                   | Interest rate swaps        |                         |              | 150,000    |         |                |  | 2005      |           |           |   | (13,361 | )      
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   |                            | Total cash flow hedges  |              | $          | 184,508 |                |  |           | 2005-2006 |           |   | $       | (13,358 | )     
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|Fair value hedges: |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   | Interest rate swaps        |                         | $            | 104,005    |         |                |  | 2006-2008 |           |           | $ | 11,050  |        
|                   | Total rate of return swaps |                         |              | 69,756     |         |                |  | 2004-2007 |           |           |   | 1,076   |        
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   |                            | Total fair value hedges |              | $          | 173,761 |                |  |           | 2004-2008 |           |   | $       | 12,126  |       
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   |                            |                         | Total hedges |            | $       | 358,269        |  |           |           | 2004-2008 |   |         | $       | (1,232 | )
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        



| |                                        
| | ---------------------------------------
| | Interest Rate Sensitive
    Liabilities

The table below provides information about our
liabilities that are sensitive to changes in interest rates as
of December 31, 2002. As the table incorporates only those
exposures that existed as of December 31, 2002, it does not
consider those exposures or positions, which could arise after
that date. Moreover, because there were no firm commitments to
actually sell these instruments at fair value as of
December 31, 2002, the information presented herein is an
estimate and has limited predictive value. As a result, our
ultimate realized gain or loss, if any, will depend on the
exposures that arise during future periods, hedging strategies,
prevailing interest rates and other market factors existing at
the time. The debt classification and interest rates shown below
give effect to fair value hedges and other fees or expenses,
where applicable (in thousands):

|                                     |                              |                                                                |                                  |           |         |      |   |         |        |      |   |            |         |         |   |          |         |      |   |   |         |      |   |   |           |      |   |         |           |   |   |         |           |   | 
|------------------------------------ | ---------------------------- | -------------------------------------------------------------- | -------------------------------- | --------- | ------- | ---- | - | ------- | ------ | ---- | - | ---------- | ------- | ------- | - | -------- | ------- | ---- | - | - | ------- | ---- | - | - | --------- | ---- | - | ------- | --------- | - | - | ------- | --------- | - | 
|                                     |                              |                                                               
|                                     |                              | Expected Maturity/Principal Repayment Schedule at December 31,
|                                     |                              |                                                               
|                                     |                              |                                                                |                                  | Estimated
|                                     |                              |                                                                |                                  | Total     |         | Fair
|                                     |                              | 2003                                                           |                                  | 2004      |         | 2005 |   | 2006    |        | 2007 |   | Thereafter |         | Balance |   | Value(1)
|                                     |                              |                                                                |                                  |           |         |      |   |         |        |      |   |            |         |         |   |         
|Interest rate sensitive liabilities: |                              |                                                                |                                  |           |         |      |   |         |        |      |   |            |         |         |   |          |         |      |   |   |         |      |   |   |           |      |   |         |           |   |   |        
|                                     | Unsecured Credit Facilities: |                                                                | $                                | 17,078    |         |      | $ | 348,500 |        |      | $ |           |         |         | $ |         |         |      | $ |  |         |      | $ |  |           |      | $ | 365,578 |           |   | $ | 365,578 |          
|                                     |                              |                                                                | Average nominal interest rate(2) |           |         | 3.00 | % |         |        | 3.00 | % |            |         |        |   |          |         |     |   |   |         |     |   |   |           |     |   |         |           |  |   |         |           |  | 
|                                     | Long-Term Unsecured Debt:    |                                                                |                                  |           |         |      |   |         |        |      |   |            |         |         |   |          |         |      |   |   |         |      |   |   |           |      |   |         |           |   |   |         |          
|                                     |                              | Fixed rate                                                     |                                  | $         | 171,250 |      |   | $       | 51,250 |      |   | $          | 251,250 |         |   | $        | 51,250  |      |   | $ | 386,250 |      |   | $ | 781,477   |      |   | $       | 1,692,727 |   |   | $       | 1,885,726 |  
|                                     |                              |                                                                | Average nominal interest rate(2) |           |         | 7.33 | % |         |        | 7.34 | % |            |         | 8.19    | % |          |         | 7.37 | % |   |         | 5.29 | % |   |           | 7.46 | % |         |           |  |   |         |           |  | 
|                                     |                              | Variable rate(3)                                               |                                  | $         |        |      |   | $       |       |      |   | $          |        |         |   | $        |        |      |   | $ |        |      |   | $ | 83,376    |      |   | $       | 83,376    |   |   | $       | 83,376    |  
|                                     |                              |                                                                | Average nominal interest rate(2) |           |         | 2.25 | % |         |        | 2.25 | % |            |         | 2.25    | % |          |         | 2.25 | % |   |         | 2.25 | % |   |           | 2.25 | % |         |           |  |   |         |           |  | 
|                                     | Mortgages payable:           |                                                                |                                  |           |         |      |   |         |        |      |   |            |         |         |   |          |         |      |   |   |         |      |   |   |           |      |   |         |           |   |   |         |          
|                                     |                              | Fixed rate debt                                                |                                  | $         | 50,353  |      |   | $       | 49,248 |      |   | $          | 22,321  |         |   | $        | 289,497 |      |   | $ | 112,676 |      |   | $ | 1,100,903 |      |   | $       | 1,624,998 |   |   | $       | 1,502,782 |  
|                                     |                              |                                                                | Average nominal interest rate(2) |           |         | 8.08 | % |         |        | 7.28 | % |            |         | 7.29    | % |          |         | 6.24 | % |   |         | 6.71 | % |   |           | 7.26 | % |         |           |  |   |         |           |  | 
|                                     |                              | Variable rate debt                                             |                                  | $         | 2,279   |      |   | $       | 2,479  |      |   | $          | 2,686   |         |   | $        | 2,910   |      |   | $ | 22,034  |      |   | $ | 303,441   |      |   | $       | 335,829   |   |   | $       | 335,829   |  
|                                     |                              |                                                                | Average nominal interest rate(2) |           |         | 1.38 | % |         |        | 1.38 | % |            |         | 1.38    | % |          |         | 1.38 | % |   |         | 1.34 | % |   |           | 1.62 | % |         |           |  |   |         |           |  | 



---



|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The estimated fair value for each of the
    liabilities listed was calculated by discounting the actual
    principal payment stream at prevailing interest rates (obtained
    from third party financial institutions) currently available on
    debt instruments with similar terms and features.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Reflects the weighted average nominal interest
    rate on the liabilities outstanding during each period, giving
    effect to principal payments and final maturities during each
    period, if any. The nominal rates for variable rate mortgages
    payable have been held constant during each period presented
    based on the actual variable rates as of December 31, 2002.
    The weighted average effective interest rate on the unsecured
    credit facilities, Long- Term Unsecured Debt and mortgages
    payable was 3.04%, 6.83% and 5.75%, respectively, as of
    December 31, 2002.
|   
|(3) | Represents unsecured tax-exempt bonds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    




Item 8.     Financial
Statements and Supplementary Data

Our Balance Sheets as of December 31, 2002
and 2001, and our Statements of Earnings, Unitholders
Equity, Other Common Unitholders Interest and
Comprehensive Income, and Cash Flows for each of the years in
the three-year period ended December 31, 2002 and
Schedule III  Real Estate and Accumulated
Depreciation, together with the reports of KPMG LLP,
independent auditors, are included under Item 15 of this
Annual Report and are incorporated herein by reference. Selected
quarterly financial data is presented in Note 12 of our
audited financial statements in this Annual Report.




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.






Part III





Item 10.     Trustees
and Executive Officers of the Registrant

Archstone-Smith is our sole trustee and is
responsible for the oversight and management of the Operating
Trust. All of the property ownership and business operations of
Archstone-Smith are conducted through the Operating Trust. For
information regarding Archstone-Smiths business, see
Item 1   Business. For
information regarding Archstone-Smiths senior officers,
who also serve as the senior officers of the Operating Trust,
see Item 1. Business   Officers of the
Operating Trust. Information regarding the trustees of
Archstone-Smith will be contained in Archstone-Smiths
definitive proxy statement relating to the 2003 Annual Meeting
of Shareholders to be held on May 20, 2003 (the
Archstone-Smith Proxy Statement), which is
incorporated herein by reference. Please see the Archstone-Smith
Proxy Statement for further information.

Section 16(a) of the Securities Exchange Act
of 1934 requires the Operating Trust to report whether or not,
based on its review of reports to the SEC filed by beneficial
owners of more that 10% of any class of equity securities
registered under Section 12 of the Securities Act of 1933,
any such required reports were not filed or were filed untimely.
There were no such failures to report or late reports during
2002.




Item 11.     Executive
Compensation

Our sole trustee is responsible for the oversight
and management of the Operating Trust and performs the
day-to-day management of the Operating Trust through its
officers. No compensation is paid to Archstone-Smith for acting
as trustee. Each officer of our sole trustee holds the same
officer position with the Operating Trust and is compensated for
his or her service to Archstone-Smith and the Operating Trust,
considered as a single enterprise. Information concerning the
compensation of the executive officers of Archstone-Smith will
be contained in the Archstone-Smith Proxy Statement, which is
incorporated herein by reference. Please see the Archstone-Smith
Proxy Statement for further information.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Archstone-Smith owns all of the outstanding
voting securities of the Operating Trust. The following table
sets forth information as of February 14, 2003, regarding
beneficial ownership of A-1 Common Units by each

44



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##### Table of Contents



person known by us to be beneficial owners of
more than 5% of the A-1 Common Units, by each of
Archstone-Smiths trustees, by each of
Archstone-Smiths five most highly compensated executive
officers and by all of Archstone-Smiths trustees and
executive officers as a group. Each person named in the table
has sole voting and investment power with respect to all A-1
Common Units shown as beneficially owned by such person, except
as otherwise set forth in the notes to the table. The address of
each person listed below is c/o Archstone-Smith Trust,
9200 E. Panorama Circle, Suite 400, Englewood,
Colorado 80112.


|                                                                                |  |               |           |                   |  |  |      |  
|------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------- |  |  | ---- | -
|                                                                                |  | Number of A-1 |           |                  
|                                                                                |  | Common Units  |           | Percentage of all
|                                                                                |  | Beneficially  |           | A-1 Common       
|Name of Beneficial Owner                                                        |  | Owned         |           | Units            
|                                                                                |  |               |           |                  
|James A. Cardwell                                                               |  |               |          |                   |  |  |     |  
|Ernest A. Gerardi                                                               |  |               |          |                   |  |  |     |  
|Ned S. Holmes                                                                   |  |               |          |                   |  |  |     |  
|Robert P. Kogod                                                                 |  |               | 3,522,094 | (1)               |  |  | 14.7 | %
|James H. Polk, III                                                              |  |               |          |                   |  |  |     |  
|John M. Richman                                                                 |  |               |          |                   |  |  |     |  
|John C. Schweitzer                                                              |  |               |          |                   |  |  |     |  
|R. Scot Sellers                                                                 |  |               |          |                   |  |  |     |  
|Robert H. Smith                                                                 |  |               | 3,607,801 | (1)               |  |  | 15.1 | %
|Richard A. Banks                                                                |  |               |          |                   |  |  |     |  
|J. Lindsay Freeman                                                              |  |               |          |                   |  |  |     |  
|Dana K. Hamilton                                                                |  |               |          |                   |  |  |     |  
|Charles E. Mueller, Jr.                                                         |  |               |          |                   |  |  |     |  
|James D. Rosenberg                                                              |  |               |          |                   |  |  |     |  
|All Archstone-Smith trustees and executive
    officers as a group (17 persons) |  |               | 7,129,895 |                   |  |  | 29.8 | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Smith has shared voting power with
    respect to 3,418,655 of such A-1 Common Units and shared
    dispositive power with respect to 3,418,655 of such A-1 Common
    Units, of the 3,418,655 A-1 Common Units for which
    Mr. Smith shares voting power and dispositive power, 88,887
    are owned by Mr. Smiths spouse and 3,329,768 are
    owned by Charles E. Smith Management, Inc., of which
    Mr. Smith is a director and the vice president, secretary
    and treasurer. Mr. Kogod has shared voting power with
    respect to 3,398,510 of such A-1 Common Units and shared
    dispositive power with respect to 3,398,510 of such A-1 Common
    Units, of the 3,398,510 A-1 Common Units for which
    Mr. Kogod shares voting power and dispositive power, 68,742
    are owned by Mr. Kogods spouse and 3,329,768 are
    owned by Charles E. Smith Management, Inc., of which
    Mr. Kogod is a director and the president. The A-1 Common
    Units that are owned by Charles E. Smith Management, Inc. are
    reported twice, once as beneficially owned by Mr. Smith and
    again as beneficially owned by Mr. Kogod, but are only
    counted once in the calculation of beneficial ownership of
    Archstone-Smiths trustees and executive officers as a
    group.

The Operating Trust does not maintain any
compensation plans under which its equity securities may be
issued. However, officers and employees of the Operating Trust
and of our sole trustee may receive compensation under
compensation plans maintained by Archstone-Smith. Information
concerning the equity compensation plans of Archstone-Smith will
be contained in the Archstone-Smith Proxy Statement, which is
incorporated herein by reference. Please see the Archstone-Smith
Proxy Statement for further details.




Item 13.     Certain
Relationships and Related Transactions

All of the property ownership and business
operations of Archstone-Smith are conducted through the
Operating Trust. In the normal course of business, because of
our structure as an UPREIT, Archstone-Smith conducts all of its
operations through the Operating Partnership and, as a result,
engages in a significant number of transactions with and on
behalf of the Operating Trust. Information concerning certain
relation-

45



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##### Table of Contents



ships and related transactions between
Archstone-Smith and its trustees, executive officers, holders of
more than 10% of its Common Shares and related persons, will be
contained in the Archstone-Smith Proxy Statement, which is
incorporated herein by reference. Please see the Archstone-Smith
Proxy Statement for further information.





Item 14.     Controls
and Procedures

Within the 90-day period prior to the filing of
this report, an evaluation was carried out under the supervision
and with the participation of the Operating Trusts
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934). Based on their evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded that the Operating Trusts disclosure controls
and procedures are, to the best of their knowledge, effective to
ensure that information required to be disclosed by the
Operating Trust in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms. Subsequent to the date of their
evaluation, there were no significant changes in the Operating
Trusts disclosure controls or in other factors that could
significantly affect these controls, including any corrective
actions with regard to significant deficiencies and material
weaknesses.




Part IV




Item 15.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

The following documents are filed as part of this
report:



| |                                       
| | --------------------------------------
| | (a) Financial Statements and Schedule:



| |    |                     
| | -- | --------------------
| | 1. | Financial Statements



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | See Index to Financial Statements and Schedule on
    page 47 of this report, which is incorporated herein by
    reference.



| |    |                              
| | -- | -----------------------------
| | 2. | Financial Statement Schedule:



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | See Schedule III on page 86 of this
    report, which is incorporated herein by reference.                                                                       
|
| | All other schedules have been omitted since the
    required information is presented in the financial statements
    and the related notes or is not applicable.



| |    |         
| | -- | --------
| | 3. | Exhibits



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | See Index to Exhibits on page 91 of this
    report, which is incorporated herein by reference.



| |     |                     
| | --- | --------------------
| | (b) | Reports on Form 8-K:



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 15, 2002, the Operating Trust
    filed a Form 8-K disclosing the issuance of
    $35 million in unsecured long-term debt from our shelf
    registration.



| |     |          
| | --- | ---------
| | (c) | Exhibits:



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Exhibits required by Item 601 of
    Registration S-K are listed in the Index to Exhibits on
    page 91 of this Annual Report, which is incorporated herein
    by reference.

46



---



##### Table of Contents






INDEX TO FINANCIAL STATEMENTS AND
SCHEDULE

|                                |                                                                                                                                                                              |      |  |    | 
|------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                |                                                                                                                                                                              | Page
|                                |                                                                                                                                                                              |     
|Archstone-Smith Operating Trust |                                                                                                                                                                              |      |  |   
|                                | Independent Auditors Report                                                                                                                                                 |      |  | 48 | 
|                                | Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                                                                             |      |  | 49 | 
|                                | Consolidated Statements of Earnings for the years
    ended December 31, 2002, 2001 and 2000                                                                                 |      |  | 50 | 
|                                | Consolidated Statements of Unitholders
    Equity, Other Common Unitholders Interest and
    Comprehensive Income for the years ended December 31, 2002,
    2001 and 2000 |      |  | 51 | 
|                                | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                                                                               |      |  | 52 | 
|                                | Notes to Consolidated Financial Statements                                                                                                                                   |      |  | 53 | 
|                                | Independent Auditors Report on Financial
    Statement Schedule                                                                                                             |      |  | 85 | 
|                                | Schedule III  Real Estate and
    Accumulated Depreciation as of December 31, 2002                                                                                          |      |  | 86 | 
|                                | Signatures                                                                                                                                                                   |      |  | 88 | 
|                                | Certifications                                                                                                                                                               |      |  | 89 | 
|                                | Index to Exhibits                                                                                                                                                            |      |  | 91 | 

47



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Trustee and Unitholders

Archstone-Smith Operating Trust:


We have audited the accompanying consolidated
balance sheets of Archstone-Smith Operating Trust and
subsidiaries (formerly known as Archstone Communities Trust), as
of December 31, 2002 and 2001, and the related consolidated
statements of earnings, unitholders equity, other common
unitholders interest and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements
are the responsibility of Archstone-Smith Operating Trusts
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Archstone-Smith Operating
Trust and subsidiaries as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for
each of the years in the three-year period ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the consolidated
financial statements, Archstone-Smith Operating Trust adopted
Statement of Financial Accounting Standards 144,
Accounting for Impairment or Disposal of Long-Lived
Assets, as of January 1, 2002. As a result, the
accompanying consolidated financial statements for 2001 and
2000, referred to above, have been restated to conform to the
presentation adopted in 2002 in accordance with accounting
principles generally accepted in the United States of America.



| |         
| | --------
| | KPMG LLP

Denver, Colorado

January 24, 2003,


except as to
Note 18,


which is as of
February 12, 2003


48



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST






CONSOLIDATED BALANCE SHEETS


(In thousands, except unit data)


|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |           |           | 
|----------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ---------------------------- | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                                                                                              |                                                                                                                |                             
|                                                                                                                              |                                                                                                                | December 31,                
|                                                                                                                              |                                                                                                                |                             
|                                                                                                                              |                                                                                                                | 2002                         |           | 2001     
|                                                                                                                              |                                                                                                                |                              |           |          
|ASSETS                                                                                                                       
|Real estate                                                                                                                   |                                                                                                                | $                            | 8,838,821 |           |           | $ | 8,276,004 |          
|Less accumulated depreciation                                                                                                 |                                                                                                                |                              | 571,247   |           |           |   | 406,784   |          
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                                |                              | 8,267,574 |           |           |   | 7,869,220 |          
|Investments in and advances to unconsolidated
    entities                                                                    |                                                                                                                |                              | 346,946   |           |           |   | 437,365   |          
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                                | Net investments              |           |           | 8,614,520 |   |           |           | 8,306,585 | 
|Cash and cash equivalents                                                                                                     |                                                                                                                |                              | 12,846    |           |           |   | 7,027     |          
|Restricted cash in tax-deferred exchange escrow                                                                               |                                                                                                                |                              |          |           |           |   | 120,421   |          
|Other assets                                                                                                                  |                                                                                                                |                              | 227,702   |           |           |   | 115,882   |          
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                                | Total assets                 |           | $         | 8,855,068 |   |           | $         | 8,549,915 | 
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|LIABILITIES AND EQUITY                                                                                                       
|Liabilities:                                                                                                                  |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              | Unsecured credit facilities                                                                                    |                              | $         | 365,578   |           |   | $         | 188,589   |          
|                                                                                                                              | Long-Term Unsecured Debt                                                                                       |                              |           | 1,776,103 |           |   |           | 1,333,890 |          
|                                                                                                                              | Mortgages payable                                                                                              |                              |           | 1,960,827 |           |   |           | 2,330,533 |          
|                                                                                                                              | Distributions payable                                                                                          |                              |           | 91,616    |           |   |           | 89,326    |          
|                                                                                                                              | Accounts payable                                                                                               |                              |           | 22,594    |           |   |           | 18,643    |          
|                                                                                                                              | Accrued expenses and other liabilities                                                                         |                              |           | 257,091   |           |   |           | 193,387   |          
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                                | Total liabilities            |           |           | 4,473,809 |   |           |           | 4,154,368 | 
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|Minority interest                                                                                                             |                                                                                                                |                              | 2,600     |           |           |   | 94,527    |          
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|Other common unitholders interest, at
    redemption value (A-1 Common Units: 24,621,853 in 2002 and
    25,456,336 in 2001) |                                                                                                                |                              | 579,598   |           |           |   | 669,502   |          
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|Unitholders equity:                                                                                                          |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              | Convertible Preferred Units                                                                                    |                              |           | 194,671   |           |   |           | 225,351   |          
|                                                                                                                              | Perpetual Preferred Units                                                                                      |                              |           | 160,550   |           |   |           | 148,763   |          
|                                                                                                                              | Common unitholders equity (A-2 Common
    Units: 180,705,795 units in 2002 and 174,516,970 units
    in 2001) |                              |           | 3,456,179 |           |   |           | 3,262,921 |          
|                                                                                                                              | Accumulated other comprehensive loss                                                                           |                              |           | (12,339   | )         |   |           | (5,517    | )        
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                                | Total unitholders equity    |           |           | 3,799,061 |   |           |           | 3,631,518 | 
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                                | Total liabilities and equity |           | $         | 8,855,068 |   |           | $         | 8,549,915 | 
|                                                                                                                              |                                                                                                                |                              |           |           |           |   |           |          

The accompanying notes are an integral part of
these consolidated financial statements.

49



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST






CONSOLIDATED STATEMENTS OF EARNINGS


(In thousands, except per unit
amounts)


|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |         |         | 
|----------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------ | ------- | ------- | --------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                        |                                                                         |                         
|                                                                        |                                                                         | Years Ended December 31,
|                                                                        |                                                                         |                         
|                                                                        |                                                                         | 2002                     |         | 2001    |           | 2000
|                                                                        |                                                                         |                          |         |         |           |     
|Revenues:                                                               |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Rental revenues                                                         |                          | $       | 997,749 |           |      | $       | 652,402 |         |   | $       | 647,008 |        
|                                                                        | Income from unconsolidated entities                                     |                          |         | 73,075  |           |      |         | 14,375  |         |   |         | 2,752   |        
|                                                                        | Other income                                                            |                          |         | 11,467  |           |      |         | 12,768  |         |   |         | 31,938  |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        |                                                                         | Total revenues           |         |         | 1,082,291 |      |         |         | 679,545 |   |         |         | 681,698 | 
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Expenses:                                                               |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Rental expenses                                                         |                          |         | 267,922 |           |      |         | 156,570 |         |   |         | 154,937 |        
|                                                                        | Real estate taxes                                                       |                          |         | 92,826  |           |      |         | 55,833  |         |   |         | 56,024  |        
|                                                                        | Depreciation on real estate investments                                 |                          |         | 192,447 |           |      |         | 123,308 |         |   |         | 135,465 |        
|                                                                        | Interest expense                                                        |                          |         | 194,955 |           |      |         | 130,027 |         |   |         | 134,999 |        
|                                                                        | General and administrative expenses                                     |                          |         | 43,340  |           |      |         | 26,503  |         |   |         | 23,157  |        
|                                                                        | Provisions for possible loss on investments                             |                          |         |        |           |      |         | 14,927  |         |   |         | 5,200   |        
|                                                                        | Other expenses                                                          |                          |         | 14,511  |           |      |         | 8,384   |         |   |         | 3,936   |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        |                                                                         | Total expenses           |         |         | 806,001   |      |         |         | 515,552 |   |         |         | 513,718 | 
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Earnings from operations                                                |                                                                         |                          | 276,290 |         |           |      | 163,993 |         |         |   | 167,980 |        
|                                                                        | Less: minority interest                                                 |                          |         | 5,165   |           |      |         | 7,793   |         |   |         | 7,241   |        
|                                                                        | Plus: gains on dispositions of depreciated real
    estate, net         |                          |         | 35,950  |           |      |         | 100,273 |         |   |         | 93,071  |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Net earnings before discontinued operations and
    extraordinary items |                                                                         |                          | 307,075 |         |           |      | 256,473 |         |         |   | 253,810 |        
|                                                                        | Plus: net earnings from discontinued apartment
    communities          |                          |         | 84,050  |           |      |         | 11,404  |         |   |         | 8,486   |        
|                                                                        | Less: extraordinary items  loss on
    early extinguishment of debt    |                          |         | 34,400  |           |      |         | 2,303   |         |   |         | 911     |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Net earnings                                                            |                                                                         |                          | 356,725 |         |           |      | 265,574 |         |         |   | 261,385 |        
|                                                                        | Less: Preferred Unit distributions                                      |                          |         | 34,024  |           |      |         | 22,277  |         |   |         | 25,340  |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Net earnings attributable to Common
    Units  Basic                   |                                                                         | $                        | 322,701 |         |           | $    | 243,297 |         |         | $ | 236,045 |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Weighted average Common Units outstanding:                              |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Basic                                                                   |                          |         | 202,781 |           |      |         | 134,589 |         |   |         | 131,874 |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Diluted                                                                 |                          |         | 203,804 |           |      |         | 142,090 |         |   |         | 137,730 |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Net earnings per Common Unit  Basic:                                   |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Net earnings before discontinued operations and
    extraordinary items |                          | $       | 1.35    |           |      | $       | 1.74    |         |   | $       | 1.73    |        
|                                                                        | Discontinued operations                                                 |                          |         | .41     |           |      |         | .09     |         |   |         | .07     |        
|                                                                        | Extraordinary items                                                     |                          |         | (.17    | )         |      |         | (.02    | )       |   |         | (.01    | )      
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Net earnings                                                            |                          | $       | 1.59    |           |      | $       | 1.81    |         |   | $       | 1.79    |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Net earnings per Common Unit  Diluted:                                 |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Net earnings before discontinued operations and
    extraordinary items |                          | $       | 1.34    |           |      | $       | 1.73    |         |   | $       | 1.72    |        
|                                                                        | Discontinued operations                                                 |                          |         | .41     |           |      |         | .08     |         |   |         | .06     |        
|                                                                        | Extraordinary items                                                     |                          |         | (.17    | )         |      |         | (.02    | )       |   |         |        |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|                                                                        | Net earnings                                                            |                          | $       | 1.58    |           |      | $       | 1.79    |         |   | $       | 1.78    |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        
|Distributions paid per Common Unit                                      |                                                                         | $                        | 1.70    |         |           | $    | 1.64    |         |         | $ | 1.54    |        
|                                                                        |                                                                         |                          |         |         |           |      |         |         |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

50



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST






CONSOLIDATED STATEMENTS OF UNITHOLDERS
EQUITY, OTHER COMMON


UNITHOLDERS INTEREST AND COMPREHENSIVE
INCOME


Years Ended December 31, 2002, 2001 and
2000


(In thousands)


|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |          |  
|----------------------------- | ---------------------------------------------------- | --------------------------------------------- | ------- | ----------- | - | ------------ | ------- | ------------- | - | ------------ | --------- | ------------ | ------- | ----- | ------- | - | ------ | - | --------- | --------- | ------- | - | ------- | ------- | ------ | - | --------- | --------- | -------- | -
|                              |                                                      | Convertible                                   |         | Perpetual   |   |              |         |               |   |              |           |              |         |      
|                              |                                                      | Preferred                                     |         | Preferred   |   |              |         | Accumulated   |   |              |           |              |         |      
|                              |                                                      | Units at                                      |         | Units at    |   |              |         | Other         |   |              |           | Other        |         |      
|                              |                                                      | Aggregate                                     |         | Aggregate   |   | Common       |         | Comprehensive |   | Total        |           | Common       |         |      
|                              |                                                      | Liquidation                                   |         | Liquidation |   | Unitholders |         | Income        |   | Unitholders |           | Unitholders |         |      
|                              |                                                      | Preference                                    |         | Preference  |   | Equity       |         | (Loss)        |   | Equity       |           | Interest     |         | Total
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |      
|Balances at December 31, 1999 |                                                      | $                                             | 92,635  |             |   | $            | 205,000 |               |   | $            | 2,269,477 |              |         | $     | 394     |   |        | $ | 2,567,506 |           |         | $ |        |         |        | $ | 2,567,506 |          
|                              | Comprehensive income:                                |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |         
|                              |                                                      | Net earnings                                  |         |             |  |              |         |               |  |              |           |              | 261,385 |       |         |   |       |   |           |           | 261,385 |   |         |         |       |   |           |           | 261,385  |  
|                              |                                                      | Preferred Unit distributions                  |         |             |  |              |         |               |  |              |           |              | (25,340 | )     |         |   |       |   |           |           | (25,340 | ) |         |         |       |   |           |           | (25,340  | )
|                              |                                                      | Change in fair value of marketable securities |         |             |  |              |         |               |  |              |           |              |        |       |         |   | 2,423  |   |           |           | 2,423   |   |         |         |       |   |           |           | 2,423    |  
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                              | Comprehensive income attributable to Common Units    |                                               |         |            |   |              |         |              |   |              |           |             |         |       |         |  |        |   |           |          |         |   |         |        |        |   |           | 238,468   |         
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                              | Common Unit distributions                            |                                               |         |            |   |              |         |              |   |              |           | (198,069     | )       |       |         |  |        |   |           | (198,069  | )       |   |         |        |        |   |           | (198,069  | )       
|                              | Repurchase of units, net of expenses                 |                                               |         |            |   |              |         | (795          | ) |              |           | (383,747     | )       |       |         |  |        |   |           | (384,542  | )       |   |         |        |        |   |           | (384,542  | )       
|                              | Other, net                                           |                                               |         | (9,984      | ) |              |         |              |   |              |           | 38,227       |         |       |         |  |        |   |           | 28,243    |         |   |         |        |        |   |           | 28,243    |         
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|Balances at December 31, 2000 |                                                      |                                               | 82,651  |             |   |              | 204,205 |               |   |              | 1,961,933 |              |         |       | 2,817   |   |        |   | 2,251,606 |           |         |   |        |         |        |   | 2,251,606 |          
|                              | Comprehensive income:                                |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |         
|                              |                                                      | Net earnings                                  |         |             |  |              |         |               |  |              |           |              | 257,878 |       |         |   |       |   |           |           | 257,878 |   |         |         | 7,696  |   |           |           | 265,574  |  
|                              |                                                      | Preferred Unit distributions                  |         |             |  |              |         |               |  |              |           |              | (22,277 | )     |         |   |       |   |           |           | (22,277 | ) |         |         |       |   |           |           | (22,277  | )
|                              |                                                      | Cumulative effect of adoption of SFAS 133     |         |             |  |              |         |               |  |              |           |              |        |       |         |   | 3,831  |   |           |           | 3,831   |   |         |         |       |   |           |           | 3,831    |  
|                              |                                                      | Change in fair value of cash flow hedges      |         |             |  |              |         |               |  |              |           |              |        |       |         |   | (9,290 | ) |           |           | (9,290  | ) |         |         |       |   |           |           | (9,290   | )
|                              |                                                      | Reclassification adjustment on realized gains |         |             |  |              |         |               |  |              |           |              |        |       |         |   | (2,167 | ) |           |           | (2,167  | ) |         |         |       |   |           |           | (2,167   | )
|                              |                                                      | Change in fair value of marketable securities |         |             |  |              |         |               |  |              |           |              |        |       |         |   | (708   | ) |           |           | (708    | ) |         |         |       |   |           |           | (708     | )
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                              | Comprehensive income attributable to Common Units    |                                               |         |            |   |              |         |              |   |              |           |             |         |       |         |  |        |   |           |          |         |   |         |        |        |   |           | 234,963   |         
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                              | Common Unit distributions                            |                                               |         |            |   |              |         |              |   |              |           | (245,035     | )       |       |         |  |        |   |           | (245,035  | )       |   |         | (10,903 | )      |   |           | (255,938  | )       
|                              | Units issued in connection with Smith Merger         |                                               |         | 146,500     |   |              |         | 50,000        |   |              |           | 1,361,641    |         |       |         |  |        |   |           | 1,558,141 |         |   |         | 628,598 |        |   |           | 2,186,739 |         
|                              | Repurchase of units, net of expenses                 |                                               |         |            |   |              |         | (772          | ) |              |           | (50,000      | )       |       |         |  |        |   |           | (50,772   | )       |   |         |        |        |   |           | (50,772   | )       
|                              | Redemption of Series B Preferred Units               |                                               |         |            |   |              |         | (104,670      | ) |              |           |             |         |       |         |  |        |   |           | (104,670  | )       |   |         |        |        |   |           | (104,670  | )       
|                              | A-1 Common Units converted into A-2 Common
    Units |                                               |         |            |   |              |         |              |   |              |           | 1,373        |         |       |         |  |        |   |           | 1,373     |         |   |         | (1,373  | )      |   |           |          |         
|                              | Adjustment to redemption value                       |                                               |         |            |   |              |         |              |   |              |           | (45,484      | )       |       |         |  |        |   |           | (45,484   | )       |   |         | 45,484  |        |   |           |          |         
|                              | Other, net                                           |                                               |         | (3,800      | ) |              |         |              |   |              |           | 42,892       |         |       |         |  |        |   |           | 39,092    |         |   |         |        |        |   |           | 39,092    |         
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|Balances at December 31, 2001 |                                                      |                                               | 225,351 |             |   |              | 148,763 |               |   |              | 3,262,921 |              |         |       | (5,517  | ) |        |   | 3,631,518 |           |         |   | 669,502 |         |        |   | 4,301,020 |          
|                              | Comprehensive income:                                |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |         
|                              |                                                      | Net earnings                                  |         |             |  |              |         |               |  |              |           |              | 315,063 |       |         |   |       |   |           |           | 315,063 |   |         |         | 41,662 |   |           |           | 356,7255 |  
|                              |                                                      | Preferred Unit distribution                   |         |             |  |              |         |               |  |              |           |              | (34,024 | )     |         |   |       |   |           |           | (34,024 | ) |         |         |       |   |           |           | (34,024  | )
|                              |                                                      | UPREIT Preferred Unit distribution            |         |             |  |              |         |               |  |              |           |              | 1,839   |       |         |   |       |   |           |           | 1,839   |   |         |         | (1,839 | ) |           |           |         |  
|                              |                                                      | Change in fair value of cash flow hedges      |         |             |  |              |         |               |  |              |           |              |        |       |         |   | (7,554 | ) |           |           | (7,554  | ) |         |         |       |   |           |           | (7,554   | )
|                              |                                                      | Change in fair value of marketable securities |         |             |  |              |         |               |  |              |           |              |        |       |         |   | 732    |   |           |           | 732     |   |         |         |       |   |           |           | 732      |  
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                              | Comprehensive income attributable to Common Units    |                                               |         |            |   |              |         |              |   |              |           |             |         |       |         |  |        |   |           |          |         |   |         |        |        |   |           | 315,879   |         
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                              | Common Unit distributions                            |                                               |         |            |   |              |         |              |   |              |           | (306,189     | )       |       |         |  |        |   |           | (306,189  | )       |   |         | (41,782 | )      |   |           | (347,971  | )       
|                              | A-1 Common Units converted into A-2 Common
    Units |                                               |         |            |   |              |         |              |   |              |           | 41,723       |         |       |         |  |        |   |           | 41,723    |         |   |         | (41,723 | )      |   |           |          |         
|                              | Conversion of Preferred Units into Common Units      |                                               |         | (30,680     | ) |              |         |              |   |              |           | 30,680       |         |       |         |  |        |   |           |          |         |   |         |        |        |   |           |          |         
|                              | Conversion of DownREIT Perpetual Preferred Units     |                                               |         |            |   |              |         | 73,180        |   |              |           |             |         |       |         |  |        |   |           | 73,180    |         |   |         |        |        |   |           | 73,180    |         
|                              | Common Unit repurchases                              |                                               |         |            |   |              |         |              |   |              |           | (15,362      | )       |       |         |  |        |   |           | (15,362   | )       |   |         |        |        |   |           | (15,362   | )       
|                              | Preferred Unit repurchases                           |                                               |         |            |   |              |         | (49,393       | ) |              |           | (11          | )       |       |         |  |        |   |           | (49,404   | )       |   |         |        |        |   |           | (49,404   | )       
|                              | Proceeds from Dividend Reinvestment Plan (DRIP)      |                                               |         |            |   |              |         |              |   |              |           | 45,471       |         |       |         |  |        |   |           | 45,471    |         |   |         |        |        |   |           | 45,471    |         
|                              | Adjustment to redemption value                       |                                               |         |            |   |              |         |              |   |              |           | 67,499       |         |       |         |  |        |   |           | 67,499    |         |   |         | (67,499 | )      |   |           |          |         
|                              | Other, net                                           |                                               |         |            |   |              |         | (12,000       | ) |              |           | 46,569       |         |       |         |  |        |   |           | 34,570    |         |   |         | 21,277  |        |   |           | 55,846    |         
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|Balances at December 31, 2002 |                                                      | $                                             | 194,671 |             |   | $            | 160,550 |               |   | $            | 3,456,179 |              |         | $     | (12,339 | ) |        | $ | 3,799,061 |           |         | $ | 579,598 |         |        | $ | 4,378,659 |          
|                              |                                                      |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          

The accompanying notes are an integral part of
these consolidated financial statements.

51



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |          |          |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------ | -------- | -------- | ---- | ------ | --------- | -------- | - | ------ | -------- | -------- | -
|                                                 |                                                                                              |                                                                   
|                                                 |                                                                                              | Years Ended December 31,                                          
|                                                 |                                                                                              |                                                                   
|                                                 |                                                                                              | 2002                                                               |        | 2001     |          | 2000
|                                                 |                                                                                              |                                                                    |        |          |          |     
|Operating activities:                            |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|                                                 | Net earnings                                                                                 |                                                                    | $      | 356,725  |          |      | $      | 265,574   |          |   | $      | 261,385  |         
|                                                 | Adjustments to reconcile net earnings to net cash
    flow provided by operating activities: |                                                                    |        |          |          |      |        |           |          |   |        |          |         
|                                                 |                                                                                              | Depreciation and amortization                                      |        |          | 205,994  |      |        |           | 135,682  |   |        |          | 145,571  |  
|                                                 |                                                                                              | Extraordinary items  loss on early
    extinguishments of debt    |        |          | 34,400   |      |        |           | 2,303    |   |        |          | 911      |  
|                                                 |                                                                                              | Gains on dispositions of depreciated real estate,
    net          |        |          | (108,884 | )    |        |           | (100,273 | ) |        |          | (93,071  | )
|                                                 |                                                                                              | Gain on exchange of Homestead mortgage notes, net
    of writedown |        |          |         |      |        |           |         |   |        |          | (6,560   | )
|                                                 |                                                                                              | Provisions for possible loss on investments                        |        |          | 2,611    |      |        |           | 14,927   |   |        |          | 5,200    |  
|                                                 |                                                                                              | Minority interest                                                  |        |          | 5,165    |      |        |           | 7,793    |   |        |          | 7,241    |  
|                                                 | Change in other assets                                                                       |                                                                    |        | (13,923  | )        |      |        | (4,589    | )        |   |        | (2,224   | )       
|                                                 | Change in accounts payable, accrued expenses and
    other liabilities                       |                                                                    |        | 41,247   |          |      |        | (2,217    | )        |   |        | 6,277    |         
|                                                 | Other, net                                                                                   |                                                                    |        | (15,913  | )        |      |        | (9,895    | )        |   |        | (2,410   | )       
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|                                                 |                                                                                              | Net cash flow provided by operating activities                     |        |          | 507,422  |      |        |           | 309,305  |   |        |          | 322,320  |  
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|Investing activities:                            |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|                                                 | Real estate investments                                                                      |                                                                    |        | (639,170 | )        |      |        | (530,706  | )        |   |        | (671,148 | )       
|                                                 | Change in investments in and advances to
    unconsolidated entities, net                    |                                                                    |        | 91,241   |          |      |        | 21,111    |          |   |        | (68,995  | )       
|                                                 | Proceeds from dispositions, net of closing costs                                             |                                                                    |        | 409,516  |          |      |        | 1,076,722 |          |   |        | 770,679  |         
|                                                 | Change in tax-deferred exchange escrow                                                       |                                                                    |        | 120,421  |          |      |        | (116,440  | )        |   |        | 65,455   |         
|                                                 | Other, net                                                                                   |                                                                    |        | (104,964 | )        |      |        | (16,357   | )        |   |        | 9,572    |         
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|                                                 |                                                                                              | Net cash flow provided by (used in) investing
    activities       |        |          | (122,956 | )    |        |           | 434,330  |   |        |          | 105,563  |  
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|Financing activities:                            |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|                                                 | Proceeds from mortgages payable                                                              |                                                                    |        |         |          |      |        |          |          |   |        | 156,527  |         
|                                                 | Proceeds from Long-Term Unsecured Debt                                                       |                                                                    |        | 530,774  |          |      |        |          |          |   |        | 189,628  |         
|                                                 | Payments on Long-Term Unsecured Debt                                                         |                                                                    |        | (97,500  | )        |      |        | (69,700   | )        |   |        | (75,000  | )       
|                                                 | Principal prepayment of mortgages payable,
    including prepayment penalties                |                                                                    |        | (587,480 | )        |      |        | (85,513   | )        |   |        | (41,658  | )       
|                                                 | Regularly scheduled principal payments on
    mortgages payable                              |                                                                    |        | (11,181  | )        |      |        | (4,820    | )        |   |        | (4,833   | )       
|                                                 | Proceeds from (payments on) unsecured credit
    facilities, net                             |                                                                    |        | 176,989  |          |      |        | (224,130  | )        |   |        | (299,817 | )       
|                                                 | Proceeds from Common Units issued under DRIP and
    employee stock options                  |                                                                    |        | 69,772   |          |      |        | 24,818    |          |   |        | 18,646   |         
|                                                 | Repurchase of Common Units and Preferred Units                                               |                                                                    |        | (64,766  | )        |      |        | (50,772   | )        |   |        | (179,461 | )       
|                                                 | Redemption of Perpetual Preferred Units                                                      |                                                                    |        | (12,000  | )        |      |        | (104,670  | )        |   |        |         |         
|                                                 | Proceeds from issuance of Preferred Units and
    Perpetual Preferred Units                  |                                                                    |        |         |          |      |        |          |          |   |        | 31,215   |         
|                                                 | Cash distributions paid on Common Units                                                      |                                                                    |        | (344,590 | )        |      |        | (221,196  | )        |   |        | (201,257 | )       
|                                                 | Cash distributions paid on Preferred Units                                                   |                                                                    |        | (34,351  | )        |      |        | (17,788   | )        |   |        | (25,340  | )       
|                                                 | Cash distributions paid to minority interests                                                |                                                                    |        | (5,165   | )        |      |        | (8,406    | )        |   |        | (7,241   | )       
|                                                 | Other, net                                                                                   |                                                                    |        | 851      |          |      |        | 16,492    |          |   |        | 9,713    |         
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|                                                 |                                                                                              | Net cash flow used in financing activities                         |        |          | (378,647 | )    |        |           | (745,685 | ) |        |          | (428,878 | )
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|Net change in cash and cash equivalents          |                                                                                              |                                                                    | 5,819  |          |          |      | (2,050 | )         |          |   | (995   | )       
|Cash and cash equivalents at beginning of period |                                                                                              |                                                                    | 7,027  |          |          |      | 9,077  |           |          |   | 10,072 |         
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         
|Cash and cash equivalents at end of period       |                                                                                              | $                                                                  | 12,846 |          |          | $    | 7,027  |           |          | $ | 9,077  |         
|                                                 |                                                                                              |                                                                    |        |          |          |      |        |           |          |   |        |         

See Note 17 for supplemental information on
non-cash investing and financing activities.

The accompanying notes are an integral part of
these consolidated financial statements.

52



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2002, 2001 and
2000


(The glossary included in this Annual Report
is hereby incorporated by reference)




|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Description of Business and Summary of
    Significant Accounting Policies



| |         
| | --------
| | Business

Archstone-Smith is structured as an UPREIT under
which all property ownership and business operations are
conducted through the Operating Trust. Archstone-Smith Trust is
our sole trustee and owns approximately 88.0% of our Common
Units. As used herein, we, our and the
company refers to the Operating Trust and
Archstone-Smith, collectively, except where the context
otherwise requires. We are focused on the operation,
development, redevelopment, acquisition, management and
long-term ownership of apartment communities in protected
markets throughout the United States characterized by:
(i) limited new supply; (ii) expensive single-family
home prices; and (iii) strong economic fundamentals.



| |                      
| | ---------------------
| | Basis of Presentation

For periods prior to the reorganization into an
UPREIT and the Smith Merger, Archstones consolidated
financial statements and related footnotes have been recast as
if we were an UPREIT for all periods presented in the
accompanying consolidated financial statements.



| |                            
| | ---------------------------
| | Principles of Consolidation

The accounts of the Operating Trust and its
controlled subsidiaries are consolidated in the accompanying
financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation. We use the
equity method to account for investments that we do not control
through majority voting interest, but have the ability to
exercise significant influence over the operating and financial
policies of the investee. For an investee accounted for under
the equity method, our share of net earnings or losses of the
investee is reflected in income as earned and distributions are
credited against the investment as received.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect amounts reported in the financial
statements and the related notes. Actual results could differ
from those estimates. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the
period they are determined to be necessary.



| |                        
| | -----------------------
| | Discontinued Operations

In October 2001, the FASB issued SFAS 144,
Accounting for Impairment or Disposal of Long-Lived
Assets which became effective on January 1, 2002.
For properties accounted for under SFAS 144, the results of
operations for properties sold during the period or classified
as held for sale at the end of the current period are required
to be classified as discontinued operations in the current and
prior periods. The property-specific components of net earnings
that are classified as discontinued operations include net
operating income, depreciation expense, and interest expense
(actual interest expense for encumbered properties and a
pro-rata allocation of interest expense for any unencumbered
portion up to our weighted average leverage ratio). The net gain
or loss on the eventual disposal of the held for sale properties
is also required to be classified as discontinued operations.
Properties sold by our unconsolidated entities are not included
in discontinued operations and related gains or losses are
reported as a component of income from unconsolidated entities.

53



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of cash on
hand, demand deposits with financial institutions and
short-term, highly liquid investments. We consider all highly
liquid instruments with maturities when purchased of three
months or less to be cash equivalents.



| |                                                    
| | ---------------------------------------------------
| | Restricted Cash in Tax-Deferred Exchange
    Escrow

Disposition proceeds are set aside and designated
to fund future tax-deferred exchanges of qualifying real estate
investments. If these proceeds are not redeployed to qualifying
real estate investments within 180 days, these funds are
redesignated as cash and cash equivalents.



| |                                                
| | -----------------------------------------------
| | Marketable Securities and Other
    Investments

All publicly traded equity securities are
classified as available for sale and carried at fair
value, with unrealized gains and losses reported as a separate
component of shareholders equity. Private investments, for
which we do not have the ability to exercise significant
influence, are accounted for at cost. Declines in the value of
public and private investments that management determines are
other than temporary are recorded as a provision for possible
loss on investments.



| |                             
| | ----------------------------
| | Real Estate and Depreciation

Real estate, other than properties held for sale,
is carried at cost. Long-lived assets designated as being held
for sale are reported at the lower of their carrying amount or
estimated fair value less cost to sell, and thereafter are no
longer depreciated.

In accordance with SFAS No. 144,
long-lived assets, such as property, plant, and equipment, and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of
the balance sheet.

We capitalize direct and certain related indirect
costs associated with the successful acquisition, development or
improvement of real estate. Capitalized costs associated with
unsuccessful acquisition or development pursuits are expensed at
the time the pursuit is abandoned.

Depreciation is computed over the expected useful
lives of depreciable property on a straight-line basis
as follows:

|                                         |  |  |             | 
|---------------------------------------- |  |  | ----------- | 
|Buildings and related land improvements  |  |  | 20-40 years | 
|Furniture, fixtures, equipment and other |  |  | 5-10 years  | 



| |         
| | --------
| | Interest

During 2002, 2001 and 2000, the total interest
paid in cash on all outstanding debt was $261.9 million,
$156.4 million and $157.7 million, respectively.

54



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We capitalize interest during the construction
period as part of the cost of apartment communities under
development. Interest capitalized during 2002, 2001 and 2000
aggregated $21.7 million, $20.3 million and
$24.3 million, respectively.



| |                        
| | -----------------------
| | Cost of Raising Capital

Costs incurred in connection with the issuance of
equity securities are deducted from common unitholders
equity. Costs incurred in connection with the issuance or
renewal of debt are capitalized as other assets and are
amortized into interest expense over the term of the related
loan or the renewal period. The balance of any unamortized loan
costs associated with old debt is expensed upon replacement with
new debt. Amortization of loan costs included in interest
expense for 2002, 2001 and 2000 was $4.4 million,
$3.1 million and $5.0 million, respectively.



| |                                                     
| | ----------------------------------------------------
| | Moisture Infiltration and Mold Remediation
    Costs

We estimate and accrue costs related to the
correction of moisture infiltration and related mold remediation
when we anticipate incurring such remediation costs because of
the assertion of a legal claim or threatened litigation. When we
incur remediation costs at our own discretion, the cost is
recognized as incurred. Moisture infiltration and resulting mold
remediation costs are only capitalized, subject to
recoverability, when it is determined by management that such
remediation costs also extend the life, increase the capacity,
or improve the safety or efficiency of the property relative to
when the community was originally constructed or acquired, if
later. All other related costs are expensed.



| |                        
| | -----------------------
| | Interest Rate Contracts

We utilize derivative financial instruments to
manage our interest rate risk and designate these financial
instruments as hedges of specific liabilities or anticipated
transactions. During 2001, we adopted SFAS No. 133/138
Accounting for Derivative Instruments and Hedging
Activities. Under SFAS 133/138, the resulting
assets and liabilities associated with derivative financial
instruments are carried on our financial statements at estimated
fair value at the end of each reporting period. The changes in
the fair value of a fair value hedge and the fair value of the
items hedged are recorded in earnings for each reporting period.
The change in the fair value of effective cash flow hedges are
carried on our financial statements as a component of
accumulated other comprehensive income (loss). If effective,
these hedges have no impact on our current earnings.



| |                             
| | ----------------------------
| | Revenue and Gain Recognition

We generally lease our apartment units under
operating leases with terms of one year or less. Rental revenue
is recognized evenly over the lease term. Rent concessions are
recognized as an offset to revenues collected over the term of
the underlying lease. Gains on sales of real estate are recorded
when the real estate is sold, provided the profit is
determinable and the earnings process is complete.



| |                
| | ---------------
| | Rental Expenses

Rental expenses shown on the accompanying
Statements of Earnings include costs associated with on-site and
property management personnel, utilities (net of utility
reimbursements from residents), repairs and maintenance,
property insurance, marketing, landscaping and other on-site and
related administrative costs.



| |                         
| | ------------------------
| | Stock-Based Compensation

As of December 31, 2002, the company has one
stock-based employee compensation plan, which is described more
fully in Note 10. Effective January 1, 2003, the
company adopted the fair value recognition

55



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

provision of FASB Statement No. 123,
Accounting for Stock-Based Compensation,
prospectively to all employee awards granted, modified or
settled after January 1, 2003. For the period covered by
the accompanying consolidated financial statements, the company
accounted for this plan under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related
Interpretations. With respect to options granted under the plan,
no stock-based employee compensation expense is reflected in the
accompanying Consolidated Statements of Earnings, as all options
granted under those plans had an exercise price equal to the
market value of the underlying Archstone-Smith common stock on
the date of grant. The following table illustrates the effect on
net earnings and earnings per share if the fair value based
method had been applied to all outstanding and unvested awards
in each period.

|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |      | 
|------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                    |                       |                         
|                                                                                                                    |                       | Years Ended December 31,
|                                                                                                                    |                       |                         
|                                                                                                                    |                       | 2002                     |         | 2001 |  | 2000
|                                                                                                                    |                       |                          |         |      |  |     
|Net earnings attributable to Common
    Units  Basic                                                               |                       | $                        | 322,701 |      |  | $    | 243,297 |      |  | $ | 236,045 |     
|Add: Stock-based employee compensation expense
    included in reported net earnings                                |                       |                          |        |      |  |      |        |      |  |   |        |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                       |                          | (2,094  | )    |  |      | (1,669  | )    |  |   | (1,023  | )   
|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |     
|Pro forma net earnings attributable to Common
    Units  Basic                                                     |                       | $                        | 320,607 |      |  | $    | 241,628 |      |  | $ | 235,022 |     
|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |     
|Net earnings per Common Unit:                                                                                       |                       |                          |         |      |  |      |         |      |  |   |         |     
|                                                                                                                    | Basic  as reported   |                          | $       | 1.59 |  |      | $       | 1.81 |  |   | $       | 1.79 | 
|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |     
|                                                                                                                    | Basic  pro forma     |                          | $       | 1.58 |  |      | $       | 1.79 |  |   | $       | 1.78 | 
|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |     
|                                                                                                                    | Diluted  as reported |                          | $       | 1.58 |  |      | $       | 1.79 |  |   | $       | 1.78 | 
|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |     
|                                                                                                                    | Diluted  pro forma   |                          | $       | 1.57 |  |      | $       | 1.78 |  |   | $       | 1.77 | 
|                                                                                                                    |                       |                          |         |      |  |      |         |      |  |   |         |     

The pro forma amounts above were calculated using
the Black-Scholes model, using the following assumptions:

|                                         |  |      |            |      |  |      |            |   |  |  |            |  
|---------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                         |  | 2002 |            | 2001 |  | 2000
|                                         |  |      |            |      |  |     
|Weighted average risk-free interest rate |  |      | 3.54       | %    |  |      | 4.06       | % |  |  | 5.43       | %
|Weighted average dividend yield          |  |      | 6.74       | %    |  |      | 6.79       | % |  |  | 6.77       | %
|Weighted average volatility              |  |      | 19.58      | %    |  |      | 15.67      | % |  |  | 23.65      | %
|Weighted average expected option life    |  |      | 5.0  years |      |  |      | 5.0  years |   |  |  | 6.3  years |  



| |                     
| | --------------------
| | Federal Income Taxes

We have made an election to be taxed as a
partnership under the Internal Revenue Code of 1986, as amended,
and we believe we qualify as a partnership. See Note 14 for
more information on income taxes.



| |                     
| | --------------------
| | Comprehensive Income

Comprehensive income, which is defined as net
earnings and all other non-owner changes in equity, is displayed
in the accompanying Consolidated Statements of Unitholders
Equity, Other Common Unitholders Interest and
Comprehensive Income. Other comprehensive income (loss) reflects
unrealized holding gains and losses on the available-for-sale
investments and, beginning in 2001, changes in the fair value of
effective cash flow hedges as described above (see 
Interest Rate Contracts).

56



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |              
| | -------------
| | Per Unit Data

Following is a reconciliation of basic net
earnings attributable to Common Units to diluted net earnings
attributable to Common Units for the periods indicated
(in thousands):

|                                                                                             |                                                             |                          |         |       |  |      |         |       |  |   |         |       | 
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ----- |  | ---- | ------- | ----- |  | - | ------- | ----- | 
|                                                                                             |                                                             |                         
|                                                                                             |                                                             | Years Ended December 31,
|                                                                                             |                                                             |                         
|                                                                                             |                                                             | 2002                     |         | 2001  |  | 2000
|                                                                                             |                                                             |                          |         |       |  |     
|Reconciliation of numerator between basic and
    diluted net earnings per Common Unit(1):  
|Net earnings attributable to Common
    Units  Basic                                        |                                                             | $                        | 322,701 |       |  | $    | 243,297 |       |  | $ | 236,045 |      
|                                                                                             | Distributions on Convertible Preferred Units                |                          |         |      |  |      |         | 9,696 |  |   |         | 7,254 | 
|                                                                                             | Minority interest                                           |                          |         |      |  |      |         | 1,524 |  |   |         | 1,326 | 
|                                                                                             |                                                             |                          |         |       |  |      |         |       |  |   |         |      
|Net earnings attributable to Common
    Units  Diluted                                      |                                                             | $                        | 322,701 |       |  | $    | 254,517 |       |  | $ | 244,625 |      
|                                                                                             |                                                             |                          |         |       |  |      |         |       |  |   |         |      
|Reconciliation of denominator between basic
    and diluted net earnings per Common Unit(1):
|Weighted average number of Common Units
    outstanding  Basic                              |                                                             |                          | 202,781 |       |  |      | 134,589 |       |  |   | 131,874 |      
|                                                                                             | Assumed conversion of Preferred Units into Common
    Units |                          |         |      |  |      |         | 5,844 |  |   |         | 4,721 | 
|                                                                                             | Minority interest                                           |                          |         |      |  |      |         | 943   |  |   |         | 876   | 
|                                                                                             | Incremental options and warrants                            |                          |         | 1,023 |  |      |         | 714   |  |   |         | 259   | 
|                                                                                             |                                                             |                          |         |       |  |      |         |       |  |   |         |      
|Weighted average number of Common Units
    outstanding  Diluted                            |                                                             |                          | 203,804 |       |  |      | 142,090 |       |  |   | 137,730 |      
|                                                                                             |                                                             |                          |         |       |  |      |         |       |  |   |         |      



---



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Excludes the impact of potentially dilutive
    equity securities during periods in which they are anti-dilutive.



| |                  
| | -----------------
| | Reclassifications

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



| |                              
| | -----------------------------
| | New Accounting Pronouncements

In April 2002, the FASB issued SFAS 145
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. We are required to adopt SFAS 145 on
January 1, 2003. SFAS 145 significantly limits the
treatment of losses associated with early extinguishment of debt
as an extraordinary item. SFAS 145 also impacts certain
sale-leaseback transactions. Upon adoption, early
extinguishments will not continue to qualify for extraordinary
item treatment and we do not anticipate that the adoption of
SFAS 145 will have a material impact on our financial
position, net earnings or cash flows.

In July 2002, the FASB issued SFAS 146
Accounting for Costs Associated with Exit or Disposal
Activities. We are required to adopt SFAS 146 on
January 1, 2003. SFAS 146 requires that certain
expenses associated with restructuring charges be accrued as
liabilities in the period in which the liability is incurred. We
do not anticipate the adoption of SFAS 146 will have a
material impact on our financial position, net earnings or cash
flows.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation
No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after

57



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2002. The company has not yet
determined the impact of the Interpretation. The disclosure
requirements are effective immediately.

In December 2002, the FASB issued SFAS 148
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement
No. 123. We are required to adopt SFAS 148
for financial statements for fiscal years ending after
December 15, 2002. We have modified the disclosure of our
transition to the fair value based method of accounting for
stock-based compensation in this annual report to reflect the
additional requirements of this statement. The adoption of
SFAS 148 did not have a material impact on our financial
position, net earnings or cash flows.

In January 2003, the FASB issued Interpretation
No. 46 Consolidation of Variable Interest
Entities. We are required to adopt the Interpretation
for financial statements for the fiscal year or interim period
beginning after June 15, 2003. This Interpretation
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial
Statements, and requires that we consolidate the
results of variable interest entities in which we have a
majority variable interest. Although we have not yet determined
the total impact of adopting the Interpretation, it is
reasonably possible that we will be deemed the primary
beneficiary of Ameriton, which would result in consolidation of
this currently unconsolidated entity.

(2)     Smith
Merger

On October 31, 2001, we completed our merger
with Smith Partnership, which primarily developed, owned, and
managed high-rise properties and garden communities in
Washington, D.C., Chicago, Boston and Southeast Florida.
The purpose of the Smith Merger was to expand our portfolio in
key protected markets. Following is a sequential outline of
events that occurred prior to the merger closing:



| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | In October 2001, Archstone was reorganized into
    an UPREIT structure. To facilitate this reorganization,
    Archstone formed a wholly-owned subsidiary named
    Archstone-Smith. Archstone-Smith then formed a wholly-owned
    subsidiary. Archstone merged with the wholly-owned subsidiary,
    became a wholly-owned subsidiary of Archstone-Smith and changed
    its name to Archstone-Smith Operating Trust. The Operating Trust
    is the successor entity to Archstone and Archstone-Smith is the
    successor registrant to Archstone;
|
| | (ii)  | Smith Partnership then merged with and into the
    Operating Trust, with the Operating Trust remaining as the
    successor entity; and                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (iii) | Finally, Smith Residential merged with and into
    Archstone-Smith, who remains the majority owner of the Operating
    Trust.                                                                                                                                                                                                                                                                                                                                                                                                                        

The merger of Smith Partnership and the Operating
Trust and the merger of Smith Residential with Archstone-Smith
are collectively referred to in aggregate as the Smith Merger.

Holders of Smith Residential common stock
received 1.975 Archstone-Smith Common Shares for each share of
Smith Residential common stock owned and holders of Smith
Residential preferred shares received one Archstone-Smith
preferred share for each Smith Residential preferred share
owned. Holders of Smith Partnership common units received 1.975
A-1 Common Units for each Smith Partnership unit owned and
holders of Smith Partnership preferred units received one
Operating Trust preferred unit for each unit owned.
Additionally, the Operating Trust assumed the outstanding debt
and other liabilities and acquired the assets of Smith
Partnership. Archstone-Smith issued 52.1 million Common
Shares and 4.6 million preferred shares to holders of Smith
Residential common and preferred stock and succeeded to Smith
Residentials interest in Smith Partnership. The Operating
Trust issued 52.1 million A-2 Common Units and
4.6 million preferred units for Smith Residentials
interest in Smith Partnership and 25.5 million A-1 Common
Units for the Smith Partnership unitholders interest in
Smith Partnership. Additionally, all outstanding Smith
Residential employee stock options and restricted share grants
vested immediately prior to the Smith Merger. As a result,

58



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the holders of such options and restricted share
grants were given the choice of replacement options in
Archstone-Smith or a cash payment equal to the intrinsic value
of the award based on a cash payment of $49.48 per option.

The Smith Merger was structured as a tax-free
merger and was accounted for using the purchase method of
accounting. During 2002, all remaining purchase accounting
adjustments were finalized. Adjustments to the initial purchase
price allocation were not material. The following summary of the
assets acquired and liabilities assumed were recorded at the
estimated fair value as determined by management, based on
information available and on assumptions of future performance
(dollar amounts in thousands):

|                                                          |                           |   |           |           | 
|--------------------------------------------------------- | ------------------------- | - | --------- | --------- | 
|Real estate                                               |                           | $ | 3,771,789 |          
|Investment in and advances to unconsolidated
    entities |                           |   | 164,831   |          
|Other assets                                              |                           |   | 32,017    |          
|                                                          |                           |   |           |          
|                                                          | Total assets acquired     |   | $         | 3,968,637 | 
|                                                          |                           |   |           |          
|Unsecured credit facilities                               |                           | $ | 219,000   |          
|Mortgages payable                                         |                           |   | 1,402,962 |          
|Other accrued expenses and accounts payables              |                           |   | 148,885   |          
|                                                          |                           |   |           |          
|                                                          | Total liabilities assumed |   | $         | 1,770,847 | 
|                                                          |                           |   |           |          

Since the Smith Merger closed on October 31,
2001, the accompanying Consolidated Statements of Earnings
include Smith Residentials results of operations for the
last two months of 2001. The following summarized pro forma
unaudited information assumes that the Smith Merger had occurred
on January 1, 2000. The pro forma results of operations
include estimates and assumptions which management believes are
reasonable. These results are not necessarily indicative of what
the results of operations would have been had the business
combination been in effect on the dates indicated, or which may
result in the future (dollar amounts in thousands):

|                                                                                                     |         |                         |           |         |  |   |           |      | 
|---------------------------------------------------------------------------------------------------- | ------- | ----------------------- | --------- | ------- |  | - | --------- | ---- | 
|                                                                                                     |         |                        
|                                                                                                     |         | Pro Forma              
|                                                                                                     |         | Year Ended December 31,
|                                                                                                     |         |                        
|                                                                                                     |         | 2001(1)                 |           | 2000(1)
|                                                                                                     |         |                         |           |        
|Total revenues                                                                                       |         | $                       | 1,048,586 |         |  | $ | 1,074,966 |     
|                                                                                                     |         |                         |           |         |  |   |           |     
|Net earnings attributable to Common Units before
    discontinued operations and extraordinary items |         | $                       | 324,970   |         |  | $ | 356,424   |     
|                                                                                                     |         |                         |           |         |  |   |           |     
|Net earnings attributable to Common Units(2)                                                         |         | $                       | 345,612   |         |  | $ | 377,334   |     
|                                                                                                     |         |                         |           |         |  |   |           |     
|Net earnings per Common Unit:                                                                        |         |                         |           |         |  |   |           |     
|                                                                                                     | Basic   |                         | $         | 1.77    |  |   | $         | 1.88 | 
|                                                                                                     |         |                         |           |         |  |   |           |     
|                                                                                                     | Diluted |                         | $         | 1.74    |  |   | $         | 1.84 | 
|                                                                                                     |         |                         |           |         |  |   |           |     



---



|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net earnings from discontinued operations have
    been reclassified for all years presented.                                                                                                                  
|   
|(2) | 2001 includes $5.3 million in merger related
    costs and $14.9 million in provision for loss on
    investments. Both 2000 and 2001 include extraordinary items
    related to early extinguishments of debt.



| |                                              
| | ---------------------------------------------
| | Sale of Consolidated Engineering
    Services

Consolidated Engineering Services is a service
business that we acquired in the Smith Merger in 2001, and prior
to its sale had been reported as an unconsolidated entity in our
financial statements. CES provides engineering services for
commercial and residential real estate across the country. On
December 19, 2002, CES was sold to a third party for
$178 million in cash. We recorded a $35.4 million net
gain on the sale of the

59



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

business or $0.16 per share on a fully
diluted basis. The gain will be adjusted during the first
quarter of 2003 based on final net asset value calculations as
of the transaction date. Any adjustment is not expected to be
material. Excluded from the gain is approximately
$6.7 million in contingent proceeds related to
indemnification of certain accounts receivable over
120 days.

As a condition of sale, we agreed to indemnify
the buyer for certain representations and warranties contained
in the sale contract. The indemnifications terminate on
June 30, 2004, and while we do not believe it is probable
that the indemnities will reach the maximum amount, the related
liability is limited to a maximum exposure of $44.5 million
with exceptions including third-party claims, insurance,
arbitration and environmental issues, each of which is without
deduction or limitation. There are no recourse provisions
available to us to recover potential future payments from third
parties.

(3)     Real
Estate



| |                           
| | --------------------------
| | Investments in Real Estate

Investments in real estate, at cost, were as
follows (dollar amounts in thousands):

|                       |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |        |       | 
|---------------------- | ----------------------------------------- | ----------------- | - | --------- | --------- | ---------- |  | ------ | ----- |  | - | --------- | --------- |  |  | ------ | ----- | 
|                       |                                           |                  
|                       |                                           | December 31,     
|                       |                                           |                  
|                       |                                           |                   |   |          
|                       |                                           | 2002              |   | 2001     
|                       |                                           |                   |   |          
|                       |                                           | Investment        |   | Units     |           | Investment |  | Units 
|                       |                                           |                   |   |           |           |            |  |       
|Apartment Communities: |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |       
|                       | Operating communities                     |                   | $ | 8,380,779 |           |            |  | 75,693 |       |  | $ | 7,809,444 |           |  |  | 77,170 |      
|                       | Communities under construction(1)         |                   |   | 328,390   |           |            |  | 2,295  |       |  |   | 358,367   |           |  |  | 2,812  |      
|                       | Development communities In Planning(1):   |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |        |      
|                       |                                           | Owned             |   |           | 89,501    |            |  |        | 2,870 |  |   |           | 76,611    |  |  |        | 1,402 | 
|                       |                                           | Under control(2)  |   |           |          |            |  |        | 428   |  |   |           |          |  |  |        | 991   | 
|                       |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |       
|                       | Total development communities In Planning |                   |   | 89,501    |           |            |  | 3,298  |       |  |   | 76,611    |           |  |  | 2,393  |      
|                       |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |       
|                       | Total apartment communities               |                   |   | 8,798,670 |           |            |  | 81,286 |       |  |   | 8,244,422 |           |  |  | 82,375 |      
|                       |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |       
|                       | Office, retail, hotel and other           |                   |   | 40,151    |           |            |  |        |       |  |   | 31,582    |           |  |  |        |      
|                       |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |       
|                       |                                           | Total real estate |   | $         | 8,838,821 |            |  |        |       |  |   | $         | 8,276,004 |  |  |        |       | 
|                       |                                           |                   |   |           |           |            |  |        |       |  |   |           |           |  |  |       



---



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unit information is based on managements
    estimates and has not been audited or reviewed by our
    independent auditors.                                                                                                                                                                      
|   
|(2) | The Operating Trusts investment as of
    December 31, 2002 and December 31, 2001 for
    development communities Under Control was $2.7 million and
    $4.9 million, respectively, and are reflected on the
    Other assets caption of the Operating Trusts
    Consolidated Balance Sheets.



| |                     
| | --------------------
| | Capital Expenditures

In conjunction with the underwriting of each
acquisition of an operating community, we prepare acquisition
budgets that encompass the incremental capital needed to achieve
our investment objectives. These expenditures, combined with the
initial purchase price and related closing costs, are
capitalized and classified as acquisition-related
capital expenditures, as incurred.

As part of our operating strategy, we
periodically evaluate each communitys physical condition
relative to established business objectives and the
communitys competitive position in its market. In
conducting these evaluations, we consider our return on
investment in relation to our long-term cost of capital as well
as our research and analysis of competitive market factors.
Based on these factors, we make decisions on needed capital
expenditures, which are classified as either
redevelopment or recurring.

60



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The redevelopment category includes:
(i) redevelopment initiatives, which are intended to
reposition the community in the marketplace and include items
such as significant upgrades to the interiors, exteriors,
landscaping and amenities; (ii) revenue-enhancing
expenditures, which include investments that are expected to
produce incremental community revenues, such as building
garages, carports and storage facilities or gating a community;
and (iii) expense-reducing expenditures, which include
items such as water submetering systems and xeriscaping that
reduce future operating costs.

Recurring capital expenditures consist of
significant expenditures for items having a useful life in
excess of one year, which are incurred to maintain a
communitys long-term physical condition at a level
commensurate with our stringent operating standards. Examples of
recurring capital expenditures include roof replacements,
certain make-ready expenditures, parking lot resurfacing and
exterior painting.

The change in investments in real estate, at
cost, consisted of the following (in thousands):

|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |          |         |  
|---------------------- | --------------------------------------------------------- | -------------------------------- | --------- | -------- | ------- | ---- | --------- | ---------- | --------- | - | --------- | -------- | ------- | -
|                       |                                                           |                                 
|                       |                                                           | Years Ended December 31,        
|                       |                                                           |                                 
|                       |                                                           | 2002                             |           | 2001     |         | 2000
|                       |                                                           |                                  |           |          |         |     
|Balance at January 1   |                                                           | $                                | 8,276,004 |          |         | $    | 5,058,910 |            |           | $ | 5,086,486 |         
|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |         
|                       | Apartment properties acquired in the Smith
    Merger(1)  |                                  |           | 31,877   |         |      |           | 3,733,936  |           |   |           |         |        
|                       | Acquisition-related expenditures                          |                                  |           | 413,502  |         |      |           | 339,055    |           |   |           | 372,539  |        
|                       | Redevelopment expenditures                                |                                  |           | 152,389  |         |      |           | 39,136     |           |   |           | 37,547   |        
|                       | Recurring capital expenditures                            |                                  |           | 40,235   |         |      |           | 20,184     |           |   |           | 13,937   |        
|                       | Development expenditures, excluding land
    acquisitions |                                  |           | 195,809  |         |      |           | 185,988    |           |   |           | 228,819  |        
|                       | Acquisition and improvement of land for
    development   |                                  |           | 53,165   |         |      |           | 48,120     |           |   |           | 68,308   |        
|                       | Dispositions                                              |                                  |           | (330,118 | )       |      |           | (1,152,668 | )         |   |           | (743,287 | )      
|                       | Provision for possible loss on investments                |                                  |           | (2,611   | )       |      |           | (2,710     | )         |   |           | (5,200   | )      
|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |         
|                       |                                                           | Net apartment community activity |           |          | 554,248 |      |           |            | 3,211,041 |   |           |          | (27,337 | )
|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |         
|Other:                 |                                                           |                                  |           |          |         |      |           |            |           |   |           |         
|                       | Disposition of retail asset acquired in Smith
    Merger  |                                  |           | (5,990   | )       |      |           | 5,976      |           |   |           |         |        
|                       | Change in other real estate assets                        |                                  |           | 14,559   |         |      |           | 77         |           |   |           | (239     | )      
|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |         
|                       |                                                           | Net other activity               |           |          | 8,569   |      |           |            | 6,053     |   |           |          | (239    | )
|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |         
|Balance at December 31 |                                                           | $                                | 8,838,821 |          |         | $    | 8,276,004 |            |           | $ | 5,058,910 |         
|                       |                                                           |                                  |           |          |         |      |           |            |           |   |           |         



---



|    |                                                 
|--- | ------------------------------------------------
|(1) | Reflects purchase accounting adjustment in 2002.

At December 31, 2002, we had unfunded
contractual commitments of $193.4 million related to
communities under construction and under redevelopment.

(4)     Discontinued
Operations

At December 31, 2002, we had 12 operating
communities classified as held for sale under the provisions of
SFAS 144. Accordingly, the net earnings for these
properties are classified as earnings from discontinued
operations. We also sold eight operating communities and one
retail property during 2002, that were accounted for under
SFAS 144. Accordingly, the gains on sale and net earnings
for these properties are also

61



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

included in discontinued operations. The
following is a summary of net earnings from discontinued
operations (in thousands):

|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                          |  |                         
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2002                     |         | 2001 |  | 2000
|                                                          |  |                          |         |      |  |     
|Rental revenues                                           |  | $                        | 55,913  |      |  | $    | 49,392  |   |  | $ | 41,536  |  
|Rental expenses                                           |  |                          | (18,273 | )    |  |      | (13,990 | ) |  |   | (11,863 | )
|Real estate taxes                                         |  |                          | (3,685  | )    |  |      | (3,300  | ) |  |   | (2,784  | )
|Depreciation on real estate investments                   |  |                          | (7,524  | )    |  |      | (8,818  | ) |  |   | (8,229  | )
|Interest expense(1)                                       |  |                          | (12,704 | )    |  |      | (11,880 | ) |  |   | (10,174 | )
|Provision for possible loss on real estate
    investment |  |                          | (2,611  | )    |  |      |        |   |  |   |        |  
|Gain on dispositions of real estate investments,
    net  |  |                          | 72,934  |      |  |      |        |   |  |   |        |  
|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  
|                                                          |  | $                        | 84,050  |      |  | $    | 11,404  |   |  | $ | 8,486   |  
|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  



---



|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The portion of interest expense included in
    discontinued operations that is allocated to properties based on
    the companys leverage ratio was $7.0 million,
    $9.4 million and $9.2 million for 2002, 2001 and 2000,
    respectively.

Assets classified as held for sale, pursuant to
SFAS 144 at December 31, 2002, had aggregate carrying
value of $159.0 million with $7.0 million of secured
debt. At December 31, 2002, we recorded an impairment of
$2.6 million for one operating community classified as held
for sale. Estimated net sales proceeds were less than the net
book value; therefore, a provision for possible loss was
recorded. Additionally, we sold six operating communities during
2002 that were either held for sale at December 31, 2001 or
sold to unconsolidated entities and therefore, not classified as
discontinued operations.

(5)     Investments
in and Advances to Unconsolidated Entities



| |                        
| | -----------------------
| | Unconsolidated Entities

At December 31, 2001, we had investments in
three operating companies and ten real estate joint ventures
that we account for under the equity method. Two of the
operating companies  SMC and CES  and
three of the real estate joint ventures were acquired in the
Smith Merger on October 31, 2001. Accordingly, our
Consolidated Statements of Earnings include our proportionate
share of equity in earnings of these entities for the two-month
period ended December 31, 2001, and for all of 2002 with
the exception of CES, which was sold in December 2002. See
Note 2 for additional discussion related to our sale of
CES. Furthermore, we sold our interest in SMC during February
2003; see Note 18.

As a matter of policy, we do not guarantee
third-party debt incurred by our unconsolidated investees.
Investee third-party debt consists principally of mortgage notes
payable. Generally, mortgages on real estate assets owned by our
unconsolidated investees are secured by the underlying
properties. Occasionally, the investees are required to
guarantee the mortgages. However, such guarantees are fully
non-recourse to the Operating Trust or to Archstone-Smith. All
off-balance sheet contingent liabilities, with the exception of
outstanding performance bonds, and all third-party debt incurred
by our unconsolidated investees are fully non-recourse to us. As
such, the extent of our exposure to financial losses is limited
solely to our investment in each of the unconsolidated investees
plus the unfunded amount of the Ameriton $10 million
committed credit

62



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

facility described below. A summary of our
investments in and advances to unconsolidated entities follows
(in thousands):

|                           |  |      |         |      |  |   |         | 
|-------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                           |  | 2002 |         | 2001
|                           |  |      |         |     
|Ameriton                   |  | $    | 292,043 |      |  | $ | 244,654 | 
|CES(1)                     |  |      |        |      |  |   | 133,878 | 
|SMC(2)                     |  |      |        |      |  |   | 1,894   | 
|Real estate joint ventures |  |      | 54,903  |      |  |   | 56,939  | 
|                           |  |      |         |      |  |   |         | 
|                           |  | $    | 346,946 |      |  | $ | 437,365 | 
|                           |  |      |         |      |  |   |         | 



---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | CES was sold in December 2002, see Note 2
    for further discussion.                                                                                        
|   
|(2) | Cash distributions from SMC have exceeded
    investments in and advances to the company, therefore the
    investment balance at December 31, 2002, is zero.



| |                                    
| | -----------------------------------
| | Ameriton and Service
    Businesses

We own 100% of the non-voting stock in Ameriton,
representing a 95% economic interest. In June 2001, Ameriton
Holdings acquired the voting stock of Ameriton from third
parties, representing the remaining 5% economic interest, for
approximately $5.8 million. We also own 95% of the
membership interests in Ameriton Holdings. Our chief executive
officer owns 5% of the membership interests in Ameriton Holdings
and is the manager of Ameriton Holdings. Our chief executive
officer did not receive any loans or other consideration from
the Operating Trust, our subsidiaries or our affiliates in
connection with the purchase of his interests in Ameriton.

During 2002, Ameriton paid approximately
$3.38 million to certain other executive officers and
employees of the Operating Trust related to realized returns on
investments sold during 2002. Four members of Ameritons
board (James H. Polk, III, John C. Schweitzer, R. Scot
Sellers and Charles E. Mueller, Jr.) are Trustees or executive
officers of Archstone-Smith.

We have extended a $10 million committed
unsecured credit facility with Ameriton to facilitate working
capital advances, with $4.8 million outstanding and
$5.2 million available at December 31, 2002. We also
have an uncommitted unsecured credit facility with Ameriton,
with $106.3 million of available capacity at
December 31, 2002. Advances to Ameriton under this
uncommitted facility are made solely at our discretion.

Prior to the sale in December 2002, our interest
in CES was structured similarly to that of our interest in
Ameriton, as described above, whereby an entity managed by our
chief executive officer held 100% of the voting stock. Our chief
executive officer did not receive any loans or other
consideration from the Operating Trust, our subsidiaries or our
affiliates in connection with the purchase of his interests in
CES. All CES board members (Ernest A Gerardi, Jr., Robert H.
Smith, Dana K. Hamilton and Messrs. Sellers and Mueller)
were Trustees of Archstone-Smith or executive officers of the
Operating Trust. Furthermore, Mr. Gerardi was an officer of
CES. In connection with the sale of CES, Mr. Gerardi
received a disposition incentive bonus of $2.75 million.

Our interest in SMC was structured similarly to
that of our interest in Ameriton, as described above, whereby an
entity managed by our chief executive officer held 100% of the
voting stock. Our chief executive officer did not receive any
loans or other consideration from the Operating Trust, our
subsidiaries or our affiliates in connection with the purchase
of his interests in SMC. All SMC board members (Robert P. Kogod,
Ms. Hamilton and Messrs. Smith, Sellers and Mueller)
were Trustees of Archstone-Smith or executive officers of the
Operating Trust. During February 2003, we sold our interest in
SMC. See Note 18 for additional information on the sale of
SMC.

63



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | Real Estate Joint Ventures

At December 31, 2002, we had investments in
10 real estate joint ventures with economic interests ranging
from 20% to 48%. In aggregate, these ventures own 15,084
apartment units. These joint ventures were formed with
institutional investors who seek investment opportunities with
us to leverage our expertise in acquiring, developing and
operating apartment communities and properties.

Following is a summary of the three most
significant joint ventures formed during 2001. This information
is presented as of the formation date. The joint ventures were
formed through the contribution of apartment communities located
in 16 non-core markets throughout the United States (dollar
amounts in millions):

|                                                                                                          |  |      |       |   |  |   |       |    
|--------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - |  | - | ----- | ---
|                                                                                                          |  |      |       |  
|                                                                                                          |  |     
|                                                                                                          |  | 2001
|                                                                                                          |  |     
|Month of venture formation                                                                                |  |      | March |   |  |   | May   | (1)
|Number of apartment communities in the ventures                                                           |  |      | 12    |   |  |   | 15    |    
|Archstone ownership percentage                                                                            |  |      | 25    | % |  |   | 25    | %  
|Investor partner ownership percentage                                                                     |  |      | 75    | % |  |   | 75    | %  
|Aggregate fair value of apartment communities                                                             |  | $    | 310.0 |   |  | $ | 339.5 |    
|Aggregate net book value of apartment communities                                                         |  |      | 268.5 |   |  |   | 301.4 |    
|Aggregate net book value of debt and other
    liabilities assumed by the venture                         |  |      | 18.5  |   |  |   | 16.8  |    
|Aggregate amount of mortgages obtained by the
    venture                                                 |  |      | 202.0 |   |  |   | 225.3 |    
|Cash contributions by investor partner                                                                    |  |      | 71.3  |   |  |   | 82.0  |    
|Cash distributions to Archstone upon contribution
    of operating communities                            |  |      | 267.4 |   |  |   | 297.5 |    
|Aggregate net book value of communities
    contributed, less debt and liabilities assumed by the venture |  |      | 250.0 |   |  |   | 284.6 |    
|Gain recognized                                                                                           |  |      | 17.4  |   |  |   | 12.9  |    
|Gain deferred(2)                                                                                          |  | $    | 23.8  |   |  | $ | 27.3  |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects the formation of two joint ventures. One
    of the joint ventures formed in May includes two operating
    communities sold to the joint venture by Ameriton or its
    affiliates. The fair value and net book value related to these
    communities were $40.9 million and $33.9 million,
    respectively. In accordance with GAAP, no gain was recognized on
    these two transactions.
|   
|(2) | As of December 31, 2002, the remaining
    deferred gains were $46.2 million for the joint ventures
    formed in March and May 2001.                                                                                                                                                                                                                                                                  

For financial reporting purposes, we accounted
for the transactions as a partial disposition of communities. As
a result of our continuing economic interest in the joint
ventures formed in 2001, we deferred the recognition of gains as
outlined above and reduced the carrying value of our investment
on the date of formation to zero. Gains on these transactions
have been recorded using the cost recovery method of accounting.
The cost recovery method results in application of cash proceeds
from the partial disposition to the carrying value of the entire
asset as if a 100% interest were sold. Under the cost recovery
method, gain is recognized only to the extent that such proceeds
exceed the entire carrying value. Generally, the deferred gains
noted above will be recognized in future periods in the event of
a sale of the related assets to a third party. A portion of the
deferred gain may also be recognized as income from
unconsolidated real estate entities to the extent that our net
investment recorded using the equity method of accounting is
reduced to an amount less than zero. This could result from cash
distributions exceeding our share of joint venture income in a
reporting period. The ventures formed in 2001 have a ten-year
life with flexible liquidation terms to ensure an orderly
disposition of the communities based on prevailing market
conditions. Cash distributions to the joint venture partners are
paid quarterly. The venture partners have no ongoing capital
commitments and no

64



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

obligation to repay cash distributions. We
receive management fees for managing the ventures and
communities.

In June and July of 2000, we formed two joint
ventures with another institutional investor. The ventures were
formed through our contribution of a total of 11 apartment
communities with an estimated aggregate fair value of
approximately $237.0 million. The investor contributed a
total of $66.7 million of cash for an 80% ownership
interest in each of the ventures. The ventures also obtained an
aggregate of $153.7 million in mortgage loans from Freddie
Mac secured by the 11 communities. We maintained a 20% ownership
interest in each of the ventures valued at approximately
$16.7 million and received cash distributions totaling
$220.4 million. For financial reporting purposes, we
accounted for the transactions as a partial disposition of the
communities, which resulted in recognition of an aggregate net
gain of $13.3 million. At formation, we only recognized 80%
of the total gain, due to the 20% continuing ownership interest
in the joint ventures. The ventures have a five-year life with
flexible liquidation terms to ensure an orderly disposition of
the communities, based on prevailing market conditions. We
receive management fees for managing the communities and the
ventures.



| |                              
| | -----------------------------
| | Summary Financial Information

Combined summary balance sheet data for our
investments in unconsolidated entities follows (in thousands):

|                                |                                               |                   |                                      |           |           |           |   |           |           |           | 
|------------------------------- | --------------------------------------------- | ----------------- | ------------------------------------ | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                |                                               | 2002              |                                      | 2001     
|                                |                                               |                   |                                      |          
|Assets:                         |                                               |                   |                                      |           |           |           |   |          
|                                | Real estate                                   |                   | $                                    | 1,582,145 |           |           | $ | 1,403,902 |          
|                                | Other assets                                  |                   |                                      | 69,575    |           |           |   | 282,255   |          
|                                |                                               |                   |                                      |           |           |           |   |          
|                                |                                               | Total assets      |                                      | $         | 1,651,720 |           |   | $         | 1,686,157 |          
|                                |                                               |                   |                                      |           |           |           |   |          
|Liabilities and owners equity: |                                               |                   |                                      |           |           |           |   |          
|                                | Inter-company debt payable to Archstone-Smith |                   | $                                    | 149,627   |           |           | $ | 211,839   |          
|                                | Mortgages payable                             |                   |                                      | 923,205   |           |           |   | 800,193   |          
|                                | Other liabilities                             |                   |                                      | 69,354    |           |           |   | 126,250   |          
|                                |                                               |                   |                                      |           |           |           |   |          
|                                |                                               | Total liabilities |                                      |           | 1,142,186 |           |   |           | 1,138,282 |          
|                                |                                               |                   |                                      |           |           |           |   |          
|                                | Owners equity                                |                   |                                      | 509,534   |           |           |   | 547,875   |          
|                                |                                               |                   |                                      |           |           |           |   |          
|                                |                                               |                   | Total liabilities and owners equity |           | $         | 1,651,720 |   |           | $         | 1,686,157 | 
|                                |                                               |                   |                                      |           |           |           |   |          

Selected summary results of operations for our
significant unconsolidated investees presented on a stand-alone
basis follows (only periods with reportable activity are
presented):

|               |  |          |        |                    |  |                |        |        |  |      |        |      |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        |   |  |   |         |  |  |   |         |  |  |   |        | 
|-------------- |  | -------- | ------ | ------------------ |  | -------------- | ------ | ------ |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | - |  | - | ------- |  |  | - | ------- |  |  | - | ------ | 
|               |  |          |        |                    |  |                |        |        |  |      |        |      |  |      |         |      |  |     
|               |  |          |        |                    |  | Real Estate    |        |       
|               |  | Ameriton |        | Service Businesses |  | Joint Ventures |        | Totals
|               |  |          |        |                    |  |                |        |       
|               |  | 2002     |        | 2001               |  | 2000           |        | 2002   |  | 2001 |        | 2002 |  | 2001 |         | 2000 |  | 2002 |        | 2001 |  | 2000
|               |  |          |        |                    |  |                |        |        |  |      |        |      |  |      |         |      |  |      |        |      |  |     
|Total revenues |  | $        | 53,470 |                    |  | $              | 44,364 |        |  | $    | 22,218 |      |  | $    | 432,193 |      |  | $    | 79,246 |      |  | $    | 145,054 |  |  | $ | 97,338 |  |  | $ | 16,134 |   |  | $ | 630,717 |  |  | $ | 220,948 |  |  | $ | 38,352 | 
|               |  |          |        |                    |  |                |        |        |  |      |        |      |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        |   |  |   |         |  |  |   |         |  |  |   |        | 
|Net earnings   |  | $        | 19,689 |                    |  | $              | 11,518 |        |  | $    | 4,533  |      |  | $    | 5,227   |      |  | $    | 2,885  |      |  | $    | 16,388  |  |  | $ | 10,130 |  |  | $ | (243   | ) |  | $ | 41,303  |  |  | $ | 24,533  |  |  | $ | 4,290  | 
|               |  |          |        |                    |  |                |        |        |  |      |        |      |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        |   |  |   |         |  |  |   |         |  |  |   |        | 

Our income from unconsolidated entities differs
from the stand-alone net earnings from the investees presented
above due to various accounting adjustments made in accordance
with GAAP. Examples of these differences include: (i) only
recording our proportionate share of net earnings in the
unconsolidated investees; (ii) the impact of eliminating
inter-company transactions; (iii) adjustments to
depreciation and amortization expense resulting from applying
purchase accounting in connection with the Smith Merger;
(iv) timing differences in income recognition due to
deferral of gains on contribution of properties to joint
ventures; and (v) a gain on the sale of CES, as previously
discussed.

65



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) Borrowings



| |                            
| | ---------------------------
| | Unsecured Credit Facilities

We have a $700 million unsecured revolving
credit facility provided by a group of financial institutions
led by JPMorgan Chase Bank. The $700 million facility
matures in December 2003 and has a one-year extension feature,
exercisable at our option. The facility bears interest at the
greater of prime or the federal funds rate plus 0.50%, or at our
option, LIBOR plus 0.65%. The spread over LIBOR can vary from
LIBOR plus 0.50% to LIBOR plus 1.25% based upon the rating of
our Long-Term Unsecured Debt. Under a competitive bid option
contained in the credit agreement, we may be able to borrow up
to $350 million at a lower interest rate spread over LIBOR,
depending on market conditions. Under the agreement, we pay a
facility fee of 0.15% of the commitment, which can vary from
0.125% to 0.200% based upon the ratings of our Long-Term
Unsecured Debt.

The following table summarizes our revolving
credit facility borrowings on our $700 million line of
credit (in thousands, except for percentages):

|                                                  |  |              |         |      |  |   |         |  
|------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                  |  |             
|                                                  |  | Years Ended 
|                                                  |  | December 31,
|                                                  |  |             
|                                                  |  | 2002         |         | 2001
|                                                  |  |              |         |     
|Total unsecured revolving credit facility         |  | $            | 700,000 |      |  | $ | 700,000 |  
|Borrowings outstanding at December 31             |  |              | 348,500 |      |  |   | 173,000 |  
|Outstanding letters of credit under this facility |  |              | 11,890  |      |  |   | 35,791  |  
|Weighted average daily borrowings                 |  |              | 248,398 |      |  |   | 52,575  |  
|Maximum borrowings outstanding during the period  |  |              | 465,000 |      |  |   | 250,000 |  
|Weighted average daily nominal interest rate      |  |              | 2.26    | %    |  |   | 5.31    | %
|Weighted average daily effective interest rate(1) |  |              | 3.08    | %    |  |   | 9.76    | %



---



|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The higher effective interest rate during 2001
    was due to the amortization of fixed credit facility fees over
    the relatively low average outstanding balance during the year.

We also have a short-term unsecured borrowing
agreement with JPMorgan Chase Bank, which provides for maximum
borrowings of $100 million. The agreement bears interest at
an overnight rate agreed to at the time of borrowing and ranged
from 1.90% to 2.45% during 2002. At December 31, 2002 and
2001, there were $17.1 million and $15.6 million of
borrowings outstanding under this agreement, respectively.



| |                         
| | ------------------------
| | Long-Term Unsecured Debt

In February 2002, we issued $200 million in
long-term unsecured ten-year senior notes with an effective
interest rate of 6.6% from its shelf registration statement. In
May 2002, we filed a shelf registration statement on
Form S-3 to register an additional $422.8 million (for
a total of $800 million) in unsecured debt securities.
These registration statements were declared effective in June
2002. In August 2002, we issued $300 million in long-term
unsecured senior five-year notes with an effective interest rate
of 5.2% from its shelf registration statement. In November 2002,
we issued $35 million in long-term unsecured five-year
senior notes with an effective interest rate of 4.9% from its
shelf registration statement. As of December 31, 2002, we
had $465 million available in debt shelf registered
securities which can be issued subject to our ability to effect
offerings on satisfactory terms based on prevailing market
conditions.

66



---



##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of our Long-Term Unsecured Debt
outstanding at December 31, 2002 and 2001 follows (dollar
amounts in thousands):

|                                 |               |                |      |                  |   |              |      |              |   |                |           |           |  |   |           |           |  |  |       |      | 
|-------------------------------- | ------------- | -------------- | ---- | ---------------- | - | ------------ | ---- | ------------ | - | -------------- | --------- | --------- |  | - | --------- | --------- |  |  | ----- | ---- | 
|                                 |               |                |      |                  |   | Balance at   |      | Balance at   |   | Average       
|                                 |               |                |      | Effective        |   | December 31, |      | December 31, |   | Remaining Life
|Type of Debt                     |               | Coupon Rate(1) |      | Interest Rate(2) |   | 2002         |      | 2001         |   | (Years)       
|                                 |               |                |      |                  |   |              |      |              |   |               
|Long-term unsecured senior notes |               |                | 6.93 | %                |   |              | 7.06 | %            |   | $              | 1,692,727 |           |  | $ | 1,255,537 |           |  |  | 5.93  |     
|Unsecured tax-exempt bonds       |               |                | 2.03 | %                |   |              | 2.26 | %            |   |                | 83,376    |           |  |   | 78,353    |           |  |  | 26.42 |     
|                                 |               |                |      |                  |   |              |      |              |   |                |           |           |  |   |           |           |  |  |       |     
|                                 | Total/average |                |      | 6.70             | % |              |      | 6.83         | % |                | $         | 1,776,103 |  |   | $         | 1,333,890 |  |  |       | 6.89 | 
|                                 |               |                |      |                  |   |              |      |              |   |                |           |           |  |   |           |           |  |  |       |     



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents a fixed rate for the long-term
    unsecured notes and a variable rate for the unsecured tax-exempt
    bonds.      
|   
|(2) | Includes the effect of fair value hedges, loan
    cost amortization and other ongoing fees and expenses, where
    applicable.

The $1.7 billion of long-term unsecured
senior notes generally have semi-annual interest payments and
either amortizing annual principal payments or balloon payments
due at maturity. The unsecured tax-exempt bonds require
semi-annual payments and are due upon maturity in 2029
(see  Scheduled Debt Maturities). The notes
are redeemable at our option, in whole or in part, and the
unsecured tax-exempt bonds are redeemable at our option upon
sale of the related property. The redemption price is generally
equal to the sum of the principal amount of the notes being
redeemed plus accrued interest through the redemption date plus
a standard make-whole premium, if any.



| |                  
| | -----------------
| | Mortgages Payable

In connection with the Smith Merger, we acquired
approximately $1.4 billion of mortgages payable, at fair
value, with interest rates ranging from 6.10% to 8.51% and
maturities from July 2004 to October 2027. We repaid or
refinanced an aggregate $553.1 million in mortgages payable
during 2002 in order to release the mortgages, free up
$993.7 million of previously encumbered assets and increase
our unencumbered asset pool. Due to the costs associated with
early retirement of this debt, we recorded an extraordinary item
of $34.4 million, net of $4.2 million minority
interest, in 2002. Our mortgages payable generally feature
either monthly interest and principal payments or monthly
interest-only payments with balloon payments due at maturity
(see  Scheduled Debt Maturities). A summary of
mortgages payable outstanding at December 31, 2002 follows
(dollar amounts in thousands):

|                                      |                             |                    |      |                         |   |      |           |           |  |   |           |           | 
|------------------------------------- | --------------------------- | ------------------ | ---- | ----------------------- | - | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                      |                             |                    |      |                        
|                                      |                             |                    |      | Principal Balance(2) at
|                                      |                             |                    |      | December 31,           
|                                      |                             | Effective Interest |      |                        
|                                      |                             | Rate(1)            |      | 2002                    |   | 2001
|                                      |                             |                    |      |                         |   |     
|Fannie Mae secured debt(3)            |                             |                    | 6.48 | %                       |   | $    | 540,364   |           |  | $ | 661,764   |          
|Freddie Mac secured line of credit(4) |                             |                    | 2.51 | %                       |   |      | 10,725    |           |  |   | 163,768   |          
|Conventional fixed rate               |                             |                    | 6.47 | %                       |   |      | 1,054,750 |           |  |   | 1,266,569 |          
|Tax-exempt fixed rate                 |                             |                    | 7.26 | %                       |   |      | 7,035     |           |  |   | 7,216     |          
|Tax-exempt floating rate              |                             |                    | 2.31 | %                       |   |      | 325,103   |           |  |   | 207,716   |          
|Other                                 |                             |                    | 3.80 | %                       |   |      | 22,850    |           |  |   | 23,500    |          
|                                      |                             |                    |      |                         |   |      |           |           |  |   |           |          
|                                      | Total/average mortgage debt |                    |      | 5.75                    | % |      | $         | 1,960,827 |  |   | $         | 2,330,533 | 
|                                      |                             |                    |      |                         |   |      |           |           |  |   |           |          



---



|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the effect of fair value hedges, credit
    enhancement fees, the amortization of fair market value purchase
    adjustment, and other related costs, where applicable, as of
    December 31, 2002.

67



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes net fair market value adjustment
    recorded in connection with the Smith Merger of
    $69.7 million and $83.5 million at December 31,
    2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Represents a long-term secured debt agreement
    with Fannie Mae. The Fannie Mae secured debt matures on dates
    ranging from January 2006 to July 2009, although we have the
    option to extend the term of any portion of the debt for up to
    an additional 30-year period at any time, subject to Fannie
    Maes approval.                                                                                                                                                                                    
|   
|(4) | The Freddie Mac facility was assumed in
    connection with the Smith Merger and provides for maximum
    borrowings of up to $300 million if we have sufficient
    collateral in place. Borrowings under the Freddie Mac facility
    bear interest at a floating rate over LIBOR based on debt
    service coverage ratios. The facility expires on May 31,
    2010. In January 2002, one of our real estate properties was
    released from the collateral pool, leaving one asset
    collateralizing this facility.

The change in mortgages payable during 2002 and
2001 consisted of the following (in thousands):

|                       |                                                           |      |           |          |   |   |           |           |  
|---------------------- | --------------------------------------------------------- | ---- | --------- | -------- | - | - | --------- | --------- | -
|                       |                                                           | 2002 |           | 2001    
|                       |                                                           |      |           |         
|Balance at January 1   |                                                           | $    | 2,330,533 |          |   | $ | 875,804   |          
|                       | Mortgages assumed in Smith Merger                         |      |           | 9,905    |   |   |           | 1,393,057 |  
|                       | Mortgage assumptions related to property
    acquisitions |      |           | 195,637  |   |   |           | 167,289   |  
|                       | Regularly scheduled principal amortization                |      |           | (11,181  | ) |   |           | (4,820    | )
|                       | Prepayments, final maturities and other                   |      |           | (564,067 | ) |   |           | (100,797  | )
|                       |                                                           |      |           |          |   |   |           |          
|Balance at December 31 |                                                           | $    | 1,960,827 |          |   | $ | 2,330,533 |          
|                       |                                                           |      |           |          |   |   |           |          



| |                          
| | -------------------------
| | Scheduled Debt Maturities

Approximate principal payments due during each of
the next five calendar years and thereafter, are as follows (in
thousands):

|              |       |           |         |                   |  |            |         |         |  |   |           |           |  |   |           |           | 
|------------- | ----- | --------- | ------- | ----------------- |  | ---------- | ------- | ------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|              |       |           |         |                   |  |           
|              |       |           |         | Mortgages Payable |  |           
|              |       |           |         |                   |  |           
|              |       |           |         | Regularly         |  |            |         |        
|              |       | Long-Term |         | Scheduled         |  | Final      |         |        
|              |       | Unsecured |         | Principal         |  | Maturities |         |        
|              |       | Debt      |         | Amortization      |  | and Other  |         | Total  
|              |       |           |         |                   |  |            |         |        
|2003          |       | $         | 171,250 |                   |  | $          | 11,719  |         |  | $ | 40,913    |           |  | $ | 223,882   |          
|2004          |       |           | 51,250  |                   |  |            | 13,850  |         |  |   | 37,877    |           |  |   | 102,977   |          
|2005          |       |           | 251,250 |                   |  |            | 14,946  |         |  |   | 10,061    |           |  |   | 276,257   |          
|2006          |       |           | 51,250  |                   |  |            | 15,043  |         |  |   | 277,364   |           |  |   | 343,657   |          
|2007          |       |           | 386,250 |                   |  |            | 15,559  |         |  |   | 119,151   |           |  |   | 520,960   |          
|Thereafter(1) |       |           | 864,853 |                   |  |            | 229,338 |         |  |   | 1,175,006 |           |  |   | 2,269,197 |          
|              |       |           |         |                   |  |            |         |         |  |   |           |           |  |   |           |          
|              | Total |           | $       | 1,776,103         |  |            | $       | 300,455 |  |   | $         | 1,660,372 |  |   | $         | 3,736,930 | 
|              |       |           |         |                   |  |            |         |         |  |   |           |           |  |   |           |          



---



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | The average annual principal payments due from
    2008 to 2022 are $140.2 million per year.

The $700 million unsecured credit facility
matures in December 2003 and has a one-year extension option.



| |      
| | -----
| | Other

Our debt instruments generally contain covenants
common to the type of facility or borrowing, including financial
covenants establishing minimum debt service coverage ratios and
maximum leverage ratios. We were in compliance with all
financial covenants pertaining to our debt instruments at
December 31, 2002. See Note 11 for a summary of
derivative financial instruments used in connection with our
debt instruments.

68



---



##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(7)     Distributions
to Unitholders

The payment of distributions is subject to the
discretion of the Archstone-Smith Board and is dependent upon
our strategy, financial condition and operating results. In
December 2002, we announced an anticipated increase in the
annual distribution from $1.70 to $1.71 per Common Unit.
The following table summarizes the cash distributions paid per
unit on Common Units and Preferred Units during 2002, 2001 and
2000:

|                                |  |      |          |      |  |      |      |  |  |   |      | 
|------------------------------- |  | ---- | -------- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                |  | 2002 |          | 2001 |  | 2000
|                                |  |      |          |      |  |     
|Common Units and A-1 Units      |  | $    | 1.70     |      |  | $    | 1.64 |  |  | $ | 1.54 | 
|Series A Preferred Units        |  |      | 2.29     |      |  |      | 2.21 |  |  |   | 2.07 | 
|Series B Preferred Units(1)     |  |      |         |      |  |      | 0.79 |  |  |   | 2.25 | 
|Series C Preferred Units(2)     |  |      | 1.38     |      |  |      | 2.16 |  |  |   | 2.16 | 
|Series D Preferred Units        |  |      | 2.19     |      |  |      | 2.19 |  |  |   | 2.19 | 
|Series E Preferred Units(3)     |  |      | 0.70     |      |  |      |     |  |  |   |     | 
|Series F Preferred Units(3)     |  |      | 0.68     |      |  |      |     |  |  |   |     | 
|Series G Preferred Units(3)     |  |      | 0.72     |      |  |      |     |  |  |   |     | 
|Series H Preferred Units(4)     |  |      | 3.36     |      |  |      |     |  |  |   |     | 
|Series I Preferred Units(4),(5) |  |      | 7,660.00 |      |  |      |     |  |  |   |     | 
|Series J Preferred Units(4),(6) |  |      | 1.71     |      |  |      |     |  |  |   |     | 
|Series K Preferred Units(4)     |  |      | 3.36     |      |  |      |     |  |  |   |     | 
|Series L Preferred Units(4)     |  |      | 3.36     |      |  |      |     |  |  |   |     | 



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All of the outstanding Series B Preferred
    Units were redeemed on May 7, 2001. The cash distributions
    paid for the period from January 1, 2001 to May 7,
    2001 was $0.79 per unit.
|   
|(2) | The Series C Preferred Units were redeemed
    at liquidation value, plus accrued and unpaid distributions, on
    August 20, 2002.                                                         
|   
|(3) | In August 2002, all DownREIT Perpetual Preferred
    Units were converted into Operating Trust Perpetual Preferred
    Units.                                                               
|   
|(4) | Series H, I, J, K and L did not exist
    before the Smith Merger.                                                                                                                          
|   
|(5) | The Series I Preferred Units have a par
    value of $100,000.                                                                                                                              
|   
|(6) | The Series J Preferred Units were converted
    into Common Units on July 13, 2002.                                                                                                         

(8)     Unitholders
Equity and Other Common Unitholders Interest



| |                 
| | ----------------
| | A-1 Common Units

In connection with the Smith Merger, the
Operating Trust issued approximately 25.5 million A-1
Common Units to former Smith Partnership unitholders. These
units are redeemable at the option of the A-1 Common
Unitholders. The Operating Trust must redeem the A-1 Common
Units with cash or Archstone-Smith has the option to redeem the
A-1 Common Units with Common Shares. The A-1 Common
Unitholders aggregate interest in the Operating Trust was
approximately 12.0% at December 31, 2002.

In April 2002, we issued 339,727 Class B
Common Units as partial consideration for a real estate
acquisition. In April 2002, Archstone-Smith issued 149,319
unregistered Common Shares in exchange for 149,319 Class B
Common Units previously issued. In August 2002, we converted
870,523 of DownREIT operating units into A-1 Common Units in
connection with the merger with our DownREIT Operating
Partnerships.

69



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | Units of Beneficial Interest

Our Declaration of Trust authorizes us to issue
450,000,000 units with a par value of $0.01 per unit.
Our Declaration of Trust allows us to issue Common Units,
Preferred Units and such other units of beneficial interest as
the Board may create and authorize from time to time. The Board
may classify or reclassify any unissued units from time to time
by setting or changing the preferences, conversion rights,
voting powers, restrictions, limitations as to distributions,
qualifications of terms or conditions of redemption.



| |                                              
| | ---------------------------------------------
| | Preferred Unit Redemption and
    Conversions

In August 2002, we redeemed Series C
Preferred Units at liquidation value, plus accrued and unpaid
distributions for a total of $49.7 million. In July 2002,
we converted Series J Preferred Units to Common Units. In
May 2001, we redeemed and retired all outstanding shares of
Series B Preferred Units at the liquidation preference of
$25 per unit, plus accrued and unpaid distributions, for a
total of $104.7 million.



| |                       
| | ----------------------
| | Common Unit Repurchase

In the fourth quarter of 2002, we repurchased
668,900 Common Units for an average price of $22.97 per
unit. In February 2001, Archstone facilitated the liquidation of
Security Capitals ownership of Common Units. Of the
31.8 million Common Units held by Security Capital prior to
the transaction, we purchased 2.3 million units from
Security Capital at $22.08 per unit and 29.5 million
units were sold to the public in an underwritten secondary
offering.



| |                
| | ---------------
| | Preferred Units

A summary of our Convertible Preferred Units
outstanding at December 31, 2002 and 2001, including their
significant rights, preferences, and privileges follows:

|                                                                                                                                            |  |            |          |            |  |             |        |              |  |                        |       |      |  |   |      |  |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | -------- | ---------- |  | ----------- | ------ | ------------ |  | ---------------------- | ----- | ---- |  | - | ---- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                                                                            |  |            |          |            |  |             |        | Annual       |  |                       
|                                                                                                                                            |  |            |          |            |  |             |        | Distribution |  | December 31,          
|                                                                                                                                            |  | Redemption |          | Conversion |  | Liquidation |        | Rate Per     |  |                       
|Description                                                                                                                                 |  | Date       |          | Ratio      |  | value       |        | Share        |  | 2002                   |       | 2001
|                                                                                                                                            |  |            |          |            |  |             |        |              |  |                        |       |     
|                                                                                                                                            |  |            |          |            |  |             |        |              |  |                       
|                                                                                                                                            |  |            |          |            |  |             |        |              |  | (Amounts in thousands)
|Series A Preferred Units; 2,926,835 and
    3,154,035 units issued and outstanding at December 31,
    2002 and 2001, respectively(1)(2)(3) |  |            | 11/30/03 |            |  |             | 1.3469 |              |  | $                      | 25.00 |      |  | $ | 2.29 |  |  | $ | 73,171  |  |  | $ | 78,851  | 
|Series H Preferred Units;
    2,640,325 units issued and outstanding at December 31,
    2002 and December 31, 2001(1)(3)                   |  |            | 05/15/03 |            |  |             | 1.975  |              |  |                        | 27.08 |      |  |   | 3.36 |  |  |   | 71,500  |  |  |   | 71,500  | 
|Series J Preferred Units; 684,931 units
    issued and outstanding at December 31, 2001(4)                                                  |  |            |         |            |  |             |       |              |  |                        |      |      |  |   |     |  |  |   |        |  |  |   | 25,000  | 
|Series K Preferred Units; 666,667 units
    issued and outstanding at December 31, 2002 and
    December 31, 2001(1)(3)                     |  |            | 10/01/04 |            |  |             | 1.975  |              |  |                        | 37.50 |      |  |   | 3.36 |  |  |   | 25,000  |  |  |   | 25,000  | 
|Series L Preferred Units; 641,026 units
    issued and outstanding at December 31, 2002 and
    December 31, 2001(1)(3)                     |  |            | 11/05/05 |            |  |             | 1.975  |              |  |                        | 39.00 |      |  |   | 3.36 |  |  |   | 25,000  |  |  |   | 25,000  | 
|                                                                                                                                            |  |            |          |            |  |             |        |              |  |                        |       |      |  |   |      |  |  |   |         |  |  |   |         | 
|                                                                                                                                            |  |            |          |            |  |             |        |              |  |                        |       |      |  |   |      |  |  | $ | 194,671 |  |  | $ | 225,351 | 
|                                                                                                                                            |  |            |          |            |  |             |        |              |  |                        |       |      |  |   |      |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The distribution is calculated as the higher of
    the annual distribution rate per unit, or the distribution on
    Common Units as if converted. The distribution reflected here is
    the actual distribution that would be paid based on the current
    Common Unit distribution.

70



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During 2002, 2001 and 2000 approximately 227,000,
    152,000 and 399,000 of Series A Preferred Units were
    converted into approximately 306,000, 205,000 and 538,000 Common
    Units, respectively.
|   
|(3) | Series A, H, K and L may be redeemed for
    cash at our option, in whole or in part, at the redemption price
    equal to the liquidation value plus accrued distributions.                            
|   
|(4) | The Series J Preferred Units were converted
    into Common Units on July 13, 2002.                                                                                                                     

A summary of our Perpetual Preferred Units
outstanding at December 31, 2002 and 2001, including their
significant rights, preferences, and privileges follows:

|                                                                                                                                      |  |            |          |             |  |              |         |                        |  |      |       |  |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | -------- | ----------- |  | ------------ | ------- | ---------------------- |  | ---- | ----- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                                                                      |  |            |          |             |  | Annual       |         |                       
|                                                                                                                                      |  |            |          |             |  | Distribution |         | December 31,          
|                                                                                                                                      |  | Redemption |          | Liquidation |  | Rate Per     |         |                       
|Description                                                                                                                           |  | Date(1)    |          | Value       |  | Share        |         | 2002                   |  | 2001
|                                                                                                                                      |  |            |          |             |  |              |         |                        |  |     
|                                                                                                                                      |  |            |          |             |  |              |         |                       
|                                                                                                                                      |  |            |          |             |  |              |         | (Amounts in thousands)
|Series C Preferred Units;
    1,966,715 units issued and outstanding at December 31,
    2001(2)                                      |  |            |         |             |  | $            |        |                        |  | $    |      |  |  | $ |        |  |  | $ | 49,168  | 
|Series D Preferred Units; 1,974,806 and
    1,983,816 units issued and outstanding at December 31,
    2002 and 2001, respectively(1) |  |            | 08/06/04 |             |  |              | 25.00   |                        |  |      | 2.19  |  |  |   | 49,370  |  |  |   | 49,595  | 
|Series E Preferred Units;
    1,120,000 units issued and outstanding at December 31,
    2002(1)(3)                                   |  |            | 08/13/04 |             |  |              | 25.00   |                        |  |      | 2.09  |  |  |   | 27,123  |  |  |   |        | 
|Series F Preferred Units; 800,000 units
    issued and outstanding at December 31, 2002(1)(3)                                         |  |            | 09/27/04 |             |  |              | 25.00   |                        |  |      | 2.03  |  |  |   | 19,464  |  |  |   |        | 
|Series G Preferred Units; 600,000 units
    issued and outstanding at December 31, 2002(1)(3)                                         |  |            | 03/03/05 |             |  |              | 25.00   |                        |  |      | 2.16  |  |  |   | 14,593  |  |  |   |        | 
|Series I Preferred Units; 500 units
    issued and outstanding at December 31, 2002 and 2001,
    respectively(1)                     |  |            | 02/01/28 |             |  |              | 100,000 |                        |  |      | 7,660 |  |  |   | 50,000  |  |  |   | 50,000  | 
|                                                                                                                                      |  |            |          |             |  |              |         |                        |  |      |       |  |  |   |         |  |  |   |         | 
|                                                                                                                                      |  |            |          |             |  |              |         |                        |  |      |       |  |  | $ | 160,550 |  |  | $ | 148,763 | 
|                                                                                                                                      |  |            |          |             |  |              |         |                        |  |      |       |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Series D and I Preferred Units may be
    redeemed for cash at our option, in whole or in part, at a
    redemption price equal to the liquidation price per unit, plus
    accrued and unpaid distributions, if any, on or after the
    redemption dates indicated.
|   
|(2) | Series C Preferred Units were redeemed at
    liquidation value, plus accrued and unpaid distributions, on
    August 20, 2002.                                                                                                                                      
|   
|(3) | In August 2002, 3,000,000 DownREIT Perpetual
    Preferred Units were converted into Operating Trust Perpetual
    Preferred Units.                                                                                                                                  

The holders of our Preferred Units do not have
preemptive rights over the holders of Common Units, but have
limited voting rights under certain circumstances. The Preferred
Units have no stated maturity, are not subject to any sinking
fund requirements and we are not obligated to redeem or retire
the units. Holders of the Preferred Units are entitled to
receive, when and as declared and authorized by the Board, out
of funds legally available for the payment of distributions,
cumulative preferential cash distributions. All Preferred Unit
distributions are cumulative from date of original issue and all
series of Preferred Unit rank as a parity as to

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ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

distributions and liquidation proceeds. All
distributions due and payable on Preferred Units have been
accrued and paid as of the end of each fiscal year.

If six quarterly distribution payments (whether
or not consecutive) on any series or class of Preferred Units
that are of equal rank with respect to distributions and any
distribution of assets, shall not be paid in full, the number of
Archstone-Smith Trustees shall be increased by two and the
holders of all such Preferred Units voting as a class regardless
of series or class, shall be entitled to elect the two
additional trustees. Whenever all arrears in distributions have
been paid, the right to elect the two additional trustees shall
cease and the terms of such trustees shall terminate.



| |                                                  
| | -------------------------------------------------
| | Dividend Reinvestment and Share Purchase
    Plan

Archstone-Smiths dividend reinvestment and
share purchase plan was designed and implemented to increase
ownership in the company by private investors. Under the plan,
holders of Archstone-Smith Common Shares and Operating Trust A-1
Common Units have the ability to automatically reinvest their
cash dividends and distributions to purchase additional Common
Shares at a two percent discount from market prices, based on
the average of the high and low sales price of a Common Share on
the day of the purchase. Additionally, existing and prospective
investors have the ability to directly purchase additional
Common Shares. The amount purchased by an individual is limited
to a maximum of $5,000 per month, with any investments
above the limitation requiring our approval. We have not granted
approvals for any purchases above the $5,000 threshold since
inception of the plan. In April 2002, Archstone-Smith filed a
registration statement with the Securities and Exchange
Commission registering the offering of 3,556,267 Common Shares
pursuant to the terms of the plan. As of December 31, 2002
we had 1,933,334 Common Shares left to issue under this plan.

(9)     Minority
Interest

Minority interest consists of the following at
December 31, 2002 and 2001 (in thousands):

|                                      |       |      |       |       |  |   |        |        | 
|------------------------------------- | ----- | ---- | ----- | ----- |  | - | ------ | ------ | 
|                                      |       | 2002 |       | 2001 
|                                      |       |      |       |      
|DownREIT Perpetual Preferred Units(1) |       | $    |      |       |  | $ | 73,180 |       
|DownREIT OP Units(2)                  |       |      |      |       |  |   | 18,747 |       
|Other minority interests              |       |      | 2,600 |       |  |   | 2,600  |       
|                                      |       |      |       |       |  |   |        |       
|                                      | Total |      | $     | 2,600 |  |   | $      | 94,527 | 
|                                      |       |      |       |       |  |   |        |       



---



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | In August 2002, 3,000,000 DownREIT Perpetual
    Preferred Units were converted into Operating Trust Perpetual
    Preferred Units.
|   
|(2) | In August 2002, we converted all of the
    outstanding DownREIT operating units into A-1 Common Units.                            

(10)     Benefit
Plans

Archstone-Smith maintains several different share
based incentive plans. As Archstone-Smith issues shares and
options pursuant to these plans, the Operating Trust must issue
Common Units on a one-for-one basis. The information contained
in the footnote pertains to the share based benefit plans of
Archstone-Smith. While shares and options issued under these
plans are issued by Archstone-Smith, related compensation costs,
if any, are borne by the Operating Trust.

The long-term incentive plan was approved in
1997, and was modified in connection with the Smith Merger.
There have been four types of awards under the plan:
(i) options with a DEU feature (only awarded prior to
2000); (ii) options without the DEU feature (generally
awarded after 1999); (iii) restricted Common Share unit
awards with a DEU feature; and (iv) employee unit purchase
program with matching options without the DEU feature.

72



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

No more than 20,000,000 share or option
awards in the aggregate may be granted under the plan and no
individual may be awarded more than 1,000,000 share or
option awards in any one-year period. As of December 31,
2002, Archstone-Smith had 6,325,331 share awards available
for future grants. The plan has a ten-year term.



| |                                      
| | -------------------------------------
| | Share Options and Trustee
    Options

The exercise price of each employee option
granted is equal to the fair market value at the close of
business on the day immediately preceding the date of grant. The
options awarded through mid-2001 generally vest at a rate of
25% per year; options granted after mid-2001 generally vest
at the rate of 33 1/3% a year.

Additionally, Archstone-Smith has authorized
400,000 Common Units for issuance to their outside trustees. The
exercise price of outside trustee options is equal to the
average of the high and low prices on the date of grant. All of
the options granted to outside trustees prior to 1999 have a
five-year term and are exercisable in whole or in part at any
time. The options issued to outside trustees subsequent to 1998
have a DEU feature, a 10-year term and vest over a four-year
period.

During 1997, as part of the employee share
purchase plan, certain officers and other employees purchased
Common Shares of Archstone-Smith. Archstone-Smith financed 95%
of the total purchase price by issuing notes representing
approximately $17.1 million. As of December 31, 2002,
the aggregate outstanding balances on these notes were
approximately $2.0 million. In an effort to eliminate all
employee loans, Archstone-Smith made an offer to the remaining
participants of this plan to repurchase their Common Shares as
of December 27, 2002, using the closing price of
Archstone-Smith Common Shares on that date. The proceeds of the
repurchase were used to pay off the outstanding loan balance,
with any excess going to the participant. In addition, the
participant received one fully vested and exercisable option for
each share that was repurchased, with a term not to exceed the
remaining term on the promissory note for the outstanding loan.
A total of 81,685 Common Shares were repurchased for a total of
$1.9 million.

A summary of all options outstanding at
December 31, 2002 follows:

|                                                                   |       |           |           |                 |  |         |              |                  |  |                  |       |       |  |  |           |  |  |  |            |  | 
|------------------------------------------------------------------ | ----- | --------- | --------- | --------------- |  | ------- | ------------ | ---------------- |  | ---------------- | ----- | ----- |  |  | --------- |  |  |  | ---------- |  | 
|                                                                   |       |           |           |                 |  |         |              |                 
|                                                                   |       |           |           | Exercise Prices |  |         |              | Weighted-Average
|                                                                   |       | Number of |           |                 |  |         |              | Remaining       
|                                                                   |       | Options   |           | Range           |  | Average |              | Expiration Date  |  | Contractual Life
|                                                                   |       |           |           |                 |  |         |              |                  |  |                 
|Matching options under the 1997 employee unit
    purchase program |       |           | 792,244   |                 |  | $       | 21.19-$23.34 |                  |  | $                | 22.20 |       |  |  | 2007-2008 |  |  |  | 4.74 years | 
|Options with DEUs                                                  |       |           | 1,261,122 |                 |  | $       | 19.00-$23.34 |                  |  |                  | 20.54 |       |  |  | 2007-2009 |  |  |  | 6.04 years | 
|Options without DEUs                                               |       |           | 4,733,182 |                 |  | $       | 22.56-$28.86 |                  |  |                  | 24.76 |       |  |  | 2003-2012 |  |  |  | 9.01 years | 
|Outside Trustees                                                   |       |           | 76,250    |                 |  | $       | 22.13-$23.95 |                  |  |                  | 23.01 |       |  |  | 2003-2011 |  |  |  | 6.97 years | 
|Exchanged options                                                  |       |           | 2,373,564 |                 |  | $       | 12.16-$23.18 |                  |  |                  | 18.86 |       |  |  | 2004-2011 |  |  |  | 6.91 years | 
|                                                                   |       |           |           |                 |  |         |              |                  |  |                  |       |       |  |  |           |  |  |  |            | 
|                                                                   | Total |           |           | 9,236,362       |  |         | $            | 12.16-$28.86     |  |                  | $     | 22.44 |  |  |           |  |  |  |            |  | 
|                                                                   |       |           |           |                 |  |         |              |                  |  |                  |       |       |  |  |           |  |  |  |            | 

73



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of Archstone-Smith
Trusts option plans as of December 31, 2002, 2001 and
2000, and changes during the years ended on those dates is
presented below:

|                                      |                                  |           |           |                  |   |             |       |       |  |  |           |  | 
|------------------------------------- | -------------------------------- | --------- | --------- | ---------------- | - | ----------- | ----- | ----- |  |  | --------- |  | 
|                                      |                                  |           |           |                  |   | Number of  
|                                      |                                  | Number of |           | Weighted Average |   | Options    
|                                      |                                  | Options   |           | Exercise Price   |   | Exercisable
|                                      |                                  |           |           |                  |   |            
|Balance/ Average at December 31, 1999 |                                  |           | 4,196,414 |                  |   | $           | 21.36 |       |  |  | 873,325   | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 
|                                      | Granted                          |           |           | 1,259,776        |   |             |       | 24.51 |  |  |           |  | 
|                                      | Exercised                        |           |           | (371,333         | ) |             |       | 21.49 |  |  |           |  | 
|                                      | Forfeited                        |           |           | (931,644         | ) |             |       | 21.40 |  |  |           |  | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 
|Balance/ Average at December 31, 2000 |                                  |           | 4,153,213 |                  |   | $           | 22.29 |       |  |  | 1,182,120 | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 
|                                      | Granted                          |           |           | 1,236,560        |   |             |       | 26.30 |  |  |           |  | 
|                                      | Smith Merger replacement options |           |           | 3,338,220        |   |             |       | 18.41 |  |  |           |  | 
|                                      | Exercised                        |           |           | (404,254         | ) |             |       | 26.02 |  |  |           |  | 
|                                      | Forfeited                        |           |           | (216,111         | ) |             |       | 22.42 |  |  |           |  | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 
|Balance/ Average at December 31, 2001 |                                  |           | 8,107,628 |                  |   | $           | 21.33 |       |  |  | 5,131,390 | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 
|                                      | Granted                          |           |           | 2,680,143        |   |             |       | 24.15 |  |  |           |  | 
|                                      | Exercised                        |           |           | (1,210,890       | ) |             |       | 26.28 |  |  |           |  | 
|                                      | Forfeited                        |           |           | (340,519         | ) |             |       | 23.94 |  |  |           |  | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 
|Balance/ Average at December 31, 2002 |                                  |           | 9,236,362 |                  |   | $           | 22.44 |       |  |  | 5,314,210 | 
|                                      |                                  |           |           |                  |   |             |       |       |  |  |           | 



| |                             
| | ----------------------------
| | Restricted Share Unit Awards

During 2002, 2001 and 2000 Archstone-Smith
awarded 331,048, 168,066 and 131,942 RSUs with a DEU feature to
certain employees under the long-term incentive plan,
respectively, of which 32,141 have been forfeited. Ten thousand
RSUs with a DEU feature were awarded to trustees under the
equity plan for outside trustees, none of which has been
forfeited. Each RSU is subject to certain vesting provisions,
and upon settlement provides the holder with one Common Share.
The RSUs and related DEU feature vest at 20%-50% per year
over a two to five-year period. We recognize the value of the
awards and the related DEUs as compensation expense over the
vesting period.



| |                          
| | -------------------------
| | Dividend Equivalent Units

Under the modified long-term incentive plan,
participants who are awarded RSUs may be credited with DEUs
equal to the amount of dividends paid on Common Shares with
respect to such awards. The DEUs are awarded annually each year
and vest under substantially the same terms as the underlying
share options or RSUs.

DEUs credited in relation to options are
calculated by taking the average number of options held at each
record date and multiplying by the difference between the
average annual dividend yield on Common Shares and the average
dividend yield for the Standard & Poors 500 Stock
Index. DEUs credited in relation to RSUs are calculated by
taking the average number of RSUs held at each record date and
multiplying by the average annual dividend yield on Common
Shares. DEUs credited in relation to existing DEUs are
calculated by taking the number of DEUs at December 31 and
multiplying by the average annual dividend yield on Common
Shares.

As of December 31, 2002, there were a total
of 241,434 DEUs outstanding awarded to 90 holders of
options and RSUs. The outstanding DEUs were valued at
$5.7 million on December 31, 2002 based upon market
price of the Common Shares on that date. We recognize the value
of the DEUs awarded as compensation expense over the vesting
period. The matching options granted in connection with the 1997

74



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

employee purchase program and all of the employee
options granted after 1999 (including the converted Smith
Residential options) do not have a DEU feature.



| |                                                            
| | -----------------------------------------------------------
| | 401(k) Plan and Nonqualified Deferred
    Compensation Plan

In December 1997, the Archstone-Smith Board
established a 401(k) plan and a nonqualified savings plan, which
both became effective on January 1, 1998. The 401(k) plan
provides for matching employer contributions of fifty cents
for every dollar contributed by the employee, up to 6% of the
employees annual contribution. Contributions by employees
to the 401(k) plan are subject to federal limitations. The
matching employer contributions are made in Common Shares, which
vest between years of service at 20% per year. The Smith
Residential nonqualified deferred compensation plan and the
outside trustees deferred fee plan were merged into our existing
nonqualified savings plan to form a new on-going nonqualified
deferred compensation plan on January 1, 2002. Generally,
the deferred compensation plan permits only deferrals of
compensation by eligible employees and non-employee trustees. No
employer contributions are currently being made to that plan.
Amounts deferred under the deferred compensation plan are
invested among a variety of investments as directed by the
participants, and are generally deferred until termination of
employment or service as a trustee.



| |                                              
| | ---------------------------------------------
| | Deferral of Fees by Non-Employee
    Trustees

Pursuant to the terms of the nonqualified
deferred compensation plan, each non-employee member of our
Board has the opportunity to defer receipt of all or a portion
of the service fees they otherwise would have been paid in cash.
If a participant elects to have their fees deferred, the fees
are accrued based on the amount that would be payable if he had
used the cash to purchase Common Units on the date the fee was
credited and reinvested any distributions received during the
deferral period into additional phantom Common Units.
Distributions can be deferred up to the date the Trustee ceases
to serve on the Board and are payable in Common Units.
Alternatively, the Trustee can elect to have his or her deferred
fees invested in one or more of the investment funds that are
otherwise available under the deferred compensation plan, which
amounts are payable only in cash.

(11)     Financial
Instruments and Hedging Activities



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

At December 31, 2002 and 2001, the fair
values of cash and cash equivalents, restricted cash held in a
tax-deferred exchange escrow accounts, receivables and accounts
payable approximated their carrying values because of the
short-term nature of these instruments. The estimated fair
values of other financial instruments subject to fair value
disclosures were determined based on available market
information and valuation methodologies believed to be
appropriate for these purposes. Considerable judgment and a high
degree of subjectivity are involved in developing these
estimates and, therefore, are not necessarily indicative of the

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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

actual amounts that we could realize upon
disposition. The following table summarizes these financial
instruments (in thousands):

|                         |                             |                              |   |                              |   |          |   |            |   |  |   |           |   |  |   |           |  
|------------------------ | --------------------------- | ---------------------------- | - | ---------------------------- | - | -------- | - | ---------- | - |  | - | --------- | - |  | - | --------- | -
|                         |                             |                              |   |                             
|                         |                             | Balance at December 31, 2002 |   | Balance at December 31, 2001
|                         |                             |                              |   |                             
|                         |                             | Carrying                     |   | Estimated                    |   | Carrying |   | Estimated 
|                         |                             | Amounts                      |   | Fair Value                   |   | Amounts  |   | Fair Value
|                         |                             |                              |   |                              |   |          |   |           
|Borrowings:              |                             |                              |   |                              |   |          |   |            |   |  |   |           |   |  |   |          
|                         | Unsecured credit facilities |                              | $ | 365,578                      |   |          | $ | 365,578    |   |  | $ | 188,589   |   |  | $ | 188,589   |  
|                         | Long-Term Unsecured Debt    |                              |   | 1,776,103                    |   |          |   | 1,969,102  |   |  |   | 1,333,890 |   |  |   | 1,344,917 |  
|                         | Mortgages payable           |                              |   | 1,960,827                    |   |          |   | 1,838,611  |   |  |   | 2,330,533 |   |  |   | 2,330,149 |  
|Interest rate contracts: |                             |                              |   |                              |   |          |   |            |   |  |   |           |   |  |   |          
|                         | Interest rate swaps         |                              | $ | (1,235                       | ) |          | $ | (1,235     | ) |  | $ | (770      | ) |  | $ | (770      | )
|                         | Interest rate caps          |                              |   | 3                            |   |          |   | 3          |   |  |   | 20        |   |  |   | 20        |  

All publicly traded equity securities are
classified as available for sale securities and
carried at fair value, with unrealized gains and losses reported
as a separate component of unitholders equity. Private
investments, for which we do not have the ability to exercise
significant influence, are accounted for at cost. Declines in
the value of public and private investments that management
determines are other than temporary, are recorded as a provision
for possible loss on investments. Our evaluation of the carrying
value of these investments is primarily based upon a regular
review of market valuations (if available), each companys
operating performance and assumptions underlying cash flow
forecasts. In addition, management considers events and
circumstances that may signal the impairment of an investment.
During 2001, we concluded that our investments in private
service and technology companies were impaired due to the
investees financial position. Since the decline was other
than temporary, we recorded a $12.2 million provision for
possible loss on investments during the year ended
December 31, 2001.



| |                   
| | ------------------
| | Hedging Activities

We are exposed to the impact of interest rate
changes and will occasionally utilize interest rate swaps and
interest rate caps as hedges with the objective of lowering our
overall borrowing costs. We do not use these derivatives for
trading or other speculative purposes. Further, as a matter of
policy, we only enter into contracts with major financial
institutions based upon their credit ratings and other factors.
When viewed in conjunction with the underlying and offsetting
exposure that the derivatives are designed to hedge, we have
not, nor do we expect to sustain a material loss from the use of
these hedging instruments.

To determine the fair values of derivative and
other financial instruments, we use a variety of methods and
assumptions that are based on market value conditions and risks
existing at each balance sheet date. These methods and
assumptions include standard market conventions and techniques
such as discounted cash flow analysis, option pricing models,
replacement cost and termination cost. All methods of assessing
fair value result in a general approximation of value, and
therefore, are not necessarily indicative of the actual amounts
that we could realize upon disposition.



| |                                       
| | --------------------------------------
| | Derivatives and Hedging
    Activities

We adopted SFAS No. 133/138,
Accounting for Derivative Instruments and Hedging
Activities on January 1, 2001. This new
accounting standard requires companies to carry all derivative
instruments on the balance sheet at 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, if so, on the reason for holding it.
We use only qualifying hedges that are designated specifically
to reduce borrowing costs. This is typically accomplished using
interest rate swaps, interest rate caps or by locking in rates
on anticipated debt issuances.

76



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Upon adoption of SFAS No. 133/138, on
January 1, 2001 we recorded a net transition loss of
$205,000 in other expense and a net transition unrealized gain
of $3.8 million in other comprehensive income, related to
the cumulative effect of an accounting change. In addition, for
the years ended December 31, 2002 and 2001 we recorded a
$20,000 and $490,000 charge, respectively, to other expense
related to the change in time value of our interest rate caps.
During the years ended December 31, 2002 and 2001 we
recorded a net charge of $311,868 and $19,000, respectively, to
interest expense relating to an interest rate swap designated as
a cash flow hedge that was more than 100% effective at
offsetting interest rates on the underlying hedged debt. As a
matter of policy, we pursue hedging strategies that we expect
will result in the lowest overall borrowing costs and least
degree of earnings volatility possible under the new accounting
standards.

The following table summarizes the notional
amount, carrying value and estimated fair value of our
derivative financial instruments, as of December 31, 2002
(dollar amounts in thousands). The notional amount represents
the aggregate amount of a particular security that is currently
hedged at one time, but does not represent exposure to credit,
interest rate or market risks.

|                   |                            |                         |              |            |         |                |  |           |           |           |   |         |         |        |  
|------------------ | -------------------------- | ----------------------- | ------------ | ---------- | ------- | -------------- |  | --------- | --------- | --------- | - | ------- | ------- | ------ | -
|                   |                            |                         |              |            |         | Carrying and  
|                   |                            | Notional                |              | Maturity   |         | Estimated Fair
|                   |                            | Amount                  |              | Date Range |         | Value         
|                   |                            |                         |              |            |         |               
|Cash flow hedges:  |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   | Interest rate caps         |                         | $            | 34,508     |         |                |  | 2006      |           |           | $ | 3       |        
|                   | Interest rate swaps        |                         |              | 150,000    |         |                |  | 2005      |           |           |   | (13,361 | )      
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   |                            | Total cash flow hedges  |              | $          | 184,508 |                |  |           | 2005-2006 |           |   | $       | (13,358 | )     
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|Fair value hedges: |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   | Interest rate swaps        |                         | $            | 104,005    |         |                |  | 2006-2008 |           |           | $ | 11,050  |        
|                   | Total rate of return swaps |                         |              | 69,756     |         |                |  | 2004-2007 |           |           |   | 1,076   |        
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   |                            | Total fair value hedges |              | $          | 173,761 |                |  |           | 2004-2008 |           |   | $       | 12,126  |       
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        
|                   |                            |                         | Total hedges |            | $       | 358,269        |  |           |           | 2004-2008 |   |         | $       | (1,232 | )
|                   |                            |                         |              |            |         |                |  |           |           |           |   |        

77



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                                  
|---- | -------------------------------------------------
|(12) | Selected Quarterly Financial Data
    (Unaudited)

Selected quarterly financial data (in thousands,
except per unit amounts) for 2002 and 2001 is summarized below.
The sum of the quarterly earnings per Common Unit amounts may
not equal the annual earnings per Common Unit amounts due
primarily to changes in the number of Common Units outstanding
from quarter to quarter.

|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |           |       | 
|----- | ------------------------------------------------------------ | --------------------------------------- | - | ---------- | ----- | ------- | - | -------- | ----- | -------- | - | ------- | ----- |  | - | ------- | ----- |  | - | --------- | ----- | 
|      |                                                              |                                         |   |           
|      |                                                              | Three Months Ended                      |   |           
|      |                                                              |                                         |   | Year Ended
|      |                                                              | 3-31(1)                                 |   | 6-30(1)    |       | 9-30(1) |   | 12-31(1) |       | 12-31(1)
|      |                                                              |                                         |   |            |       |         |   |          |       |         
|2002: |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Total revenues                                               |                                         | $ | 250,589    |       |         | $ | 260,160  |       |          | $ | 271,489 |       |  | $ | 300,053 |       |  | $ | 1,082,291 |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Earnings from operations                                     |                                         |   | 62,593     |       |         |   | 64,268   |       |          |   | 62,857  |       |  |   | 86,572  |       |  |   | 276,290   |      
|      | Gains on dispositions of depreciated real estate,
    net(2) |                                         |   | 1,281      |       |         |   | 23,263   |       |          |   | 3,399   |       |  |   | 8,007   |       |  |   | 35,950    |      
|      | Less minority interest:                                      |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |           |      
|      |                                                              | Perpetual preferred units               |   |            | 1,567 |         |   |          | 1,567 |          |   |         | 1,045 |  |   |         |      |  |   |           | 4,179 | 
|      |                                                              | Convertible operating partnership units |   |            | 370   |         |   |          | 370   |          |   |         | 246   |  |   |         |      |  |   |           | 986   | 
|      | Plus net earnings from discontinued operations               |                                         |   | 4,438      |       |         |   | 19,482   |       |          |   | 6,487   |       |  |   | 53,643  |       |  |   | 84,050    |      
|      | Less extraordinary item                                      |                                         |   |           |       |         |   | 10,373   |       |          |   | 745     |       |  |   | 23,282  |       |  |   | 34,400    |      
|      | Less Preferred Unit distributions                            |                                         |   | 8,759      |       |         |   | 8,681    |       |          |   | 7,702   |       |  |   | 8,882   |       |  |   | 34,024    |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Net earnings attributable to Common
    Units  Basic        |                                         | $ | 57,616     |       |         | $ | 86,022   |       |          | $ | 63,005  |       |  | $ | 116,058 |       |  | $ | 322,701   |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Net earnings per Common Unit:                                |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |           |      
|      |                                                              | Basic                                   |   | $          | 0.29  |         |   | $        | 0.43  |          |   | $       | 0.31  |  |   | $       | 0.56  |  |   | $         | 1.59  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      |                                                              | Diluted                                 |   | $          | 0.29  |         |   | $        | 0.42  |          |   | $       | 0.31  |  |   | $       | 0.56  |  |   | $         | 1.58  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|2001: |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Total revenues                                               |                                         | $ | 163,572    |       |         | $ | 149,295  |       |          | $ | 151,422 |       |  | $ | 215,256 |       |  | $ | 679,545   |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Earnings from operations                                     |                                         |   | 34,897     |       |         |   | 40,121   |       |          |   | 36,668  |       |  |   | 52,307  |       |  |   | 163,993   |      
|      | Gains on dispositions of depreciated real estate,
    net(2) |                                         |   | 35,051     |       |         |   | 35,470   |       |          |   | 9,767   |       |  |   | 19,985  |       |  |   | 100,273   |      
|      | Less minority interest:                                      |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |           |      
|      |                                                              | Perpetual preferred units               |   |            | 1,567 |         |   |          | 1,567 |          |   |         | 1,568 |  |   |         | 1,567 |  |   |           | 6,269 | 
|      |                                                              | Convertible operating partnership units |   |            | 389   |         |   |          | 389   |          |   |         | 389   |  |   |         | 357   |  |   |           | 1,524 | 
|      | Plus net earnings from discontinued operations               |                                         |   | 2,703      |       |         |   | 2,701    |       |          |   | 2,890   |       |  |   | 3,110   |       |  |   | 11,404    |      
|      | Less extraordinary item                                      |                                         |   |           |       |         |   |         |       |          |   |        |       |  |   | 2,303   |       |  |   | 2,303     |      
|      | Less Preferred Unit distributions                            |                                         |   | 6,307      |       |         |   | 4,904    |       |          |   | 3,913   |       |  |   | 7,153   |       |  |   | 22,277    |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Net earnings attributable to Common
    Units  Basic        |                                         | $ | 64,388     |       |         | $ | 71,432   |       |          | $ | 43,455  |       |  | $ | 64,022  |       |  | $ | 243,297   |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      | Net earnings per Common Unit:                                |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |           |      
|      |                                                              | Basic                                   |   | $          | 0.53  |         |   | $        | 0.59  |          |   | $       | 0.36  |  |   | $       | 0.37  |  |   | $         | 1.81  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          
|      |                                                              | Diluted                                 |   | $          | 0.52  |         |   | $        | 0.58  |          |   | $       | 0.36  |  |   | $       | 0.37  |  |   | $         | 1.79  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |       |  |   |          



---



|    |                                                                                                
|--- | -----------------------------------------------------------------------------------------------
|(1) | Net earnings from discontinued operations have
    been reclassified for all periods presented.
|   
|(2) | Excludes gains on properties included in net
    earnings from discontinued operations.        

78



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(13)     Segment
Data

We define our garden communities and high-rise
properties each as individual operating segments. We have
determined that each of our garden communities and each of our
high-rise properties have similar economic characteristics and
also meet the other criteria, which permit the garden
communities and high-rise properties to be aggregated into
two reportable segments. We rely primarily on NOI for
purposes of making decisions about allocating resources and
assessing segment performance.

Following are reconciliations of each reportable
segments (i) revenues to consolidated revenues;
(ii) Net Operating Income to consolidated earnings from
operations; and (iii) assets to consolidated assets, for
the periods indicated (in thousands):

|                                                   |                      |                                         |        |         |           |      |        |         |         |  |        |         |         | 
|-------------------------------------------------- | -------------------- | --------------------------------------- | ------ | ------- | --------- | ---- | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                                                   |                      |                                        
|                                                   |                      | Years Ended December 31,               
|                                                   |                      |                                        
|                                                   |                      | 2002                                    |        | 2001    |           | 2000
|                                                   |                      |                                         |        |         |           |     
|Reportable apartment communities segment revenues: |                      |                                         |        |         |           |      |        |         |         |  |        |        
|                                                   | Garden communities   |                                         | $      | 628,637 |           |      | $      | 591,816 |         |  | $      | 642,902 |        
|                                                   | High-rise properties |                                         |        | 366,804 |           |      |        | 56,480  |         |  |        |        |        
|Other non-reportable operating segment revenues    |                      |                                         | 86,850 |         |           |      | 31,249 |         |         |  | 38,796 |        
|                                                   |                      |                                         |        |         |           |      |        |         |         |  |        |        
|                                                   |                      | Total segment and consolidated revenues |        | $       | 1,082,291 |      |        | $       | 679,545 |  |        | $       | 681,698 | 
|                                                   |                      |                                         |        |         |           |      |        |         |         |  |        |        

|                                              |                                            |                                       |       |          |         |      |       |          |         |  |       |          |         | 
|--------------------------------------------- | ------------------------------------------ | ------------------------------------- | ----- | -------- | ------- | ---- | ----- | -------- | ------- |  | ----- | -------- | ------- | 
|                                              |                                            |                                      
|                                              |                                            | Years Ended December 31,             
|                                              |                                            |                                      
|                                              |                                            | 2002                                  |       | 2001     |         | 2000
|                                              |                                            |                                       |       |          |         |     
|Reportable apartment communities segment NOI: |                                            |                                       |       |          |         |      |       |          |         |  |       |         
|                                              | Garden communities                         |                                       | $     | 416,093  |         |      | $     | 400,030  |         |  | $     | 431,953  |        
|                                              | High-rise properties                       |                                       |       | 217,904  |         |      |       | 36,372   |         |  |       |         |        
|Other non-reportable operating segment NOI    |                                            |                                       | 3,004 |          |         |      | 3,597 |          |         |  | 4,094 |         
|                                              |                                            |                                       |       |          |         |      |       |          |         |  |       |         
|                                              |                                            | Total segment NOI                     |       |          | 637,001 |      |       |          | 439,999 |  |       |          | 436,047 | 
|                                              |                                            |                                       |       |          |         |      |       |          |         |  |       |         
|Reconciling items:                            |                                            |                                       |       |          |         |      |       |          |         |  |       |         
|                                              | Income from unconsolidated entities        |                                       |       | 73,075   |         |      |       | 14,375   |         |  |       | 2,752    |        
|                                              | Other income                               |                                       |       | 11,467   |         |      |       | 12,768   |         |  |       | 31,938   |        
|                                              | Depreciation on real estate investments    |                                       |       | (192,447 | )       |      |       | (123,308 | )       |  |       | (135,465 | )      
|                                              | Interest expense                           |                                       |       | (194,955 | )       |      |       | (130,027 | )       |  |       | (134,999 | )      
|                                              | General and administrative expenses        |                                       |       | (43,340  | )       |      |       | (26,503  | )       |  |       | (23,157  | )      
|                                              | Provision for possible loss on investments |                                       |       |         |         |      |       | (14,927  | )       |  |       | (5,200   | )      
|                                              | Other expenses                             |                                       |       | (14,511  | )       |      |       | (8,384   | )       |  |       | (3,936   | )      
|                                              |                                            |                                       |       |          |         |      |       |          |         |  |       |         
|                                              |                                            | Consolidated earnings from operations |       | $        | 276,290 |      |       | $        | 163,993 |  |       | $        | 167,980 | 
|                                              |                                            |                                       |       |          |         |      |       |          |         |  |       |         

79



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                 |                                                           |                           |        |           |           |  |        |           |           | 
|------------------------------------------------ | --------------------------------------------------------- | ------------------------- | ------ | --------- | --------- |  | ------ | --------- | --------- | 
|                                                 |                                                           |                          
|                                                 |                                                           | Year Ended December 31,  
|                                                 |                                                           |                          
|                                                 |                                                           | 2002                      |        | 2001     
|                                                 |                                                           |                           |        |          
|Reportable operating communities segment assets: |                                                           |                           |        |           |           |  |        |          
|                                                 | Garden communities                                        |                           | $      | 4,731,919 |           |  | $      | 4,649,561 |          
|                                                 | High-rise properties                                      |                           |        | 3,500,900 |           |  |        | 3,188,074 |          
|Other non-reportable operating segment assets    |                                                           |                           | 34,755 |           |           |  | 31,585 |          
|                                                 |                                                           |                           |        |           |           |  |        |          
|                                                 |                                                           | Total segment assets      |        |           | 8,267,574 |  |        |           | 7,869,220 | 
|                                                 |                                                           |                           |        |           |           |  |        |          
|Reconciling items:                               |                                                           |                           |        |           |           |  |        |          
|                                                 | Investment in and advances to unconsolidated
    entities |                           |        | 346,946   |           |  |        | 437,365   |          
|                                                 | Cash and cash equivalents                                 |                           |        | 12,846    |           |  |        | 7,027     |          
|                                                 | Restricted cash in tax-deferred exchange escrow           |                           |        |          |           |  |        | 120,421   |          
|                                                 | Other assets                                              |                           |        | 227,702   |           |  |        | 115,882   |          
|                                                 |                                                           |                           |        |           |           |  |        |          
|                                                 |                                                           | Consolidated total assets |        | $         | 8,855,068 |  |        | $         | 8,549,915 | 
|                                                 |                                                           |                           |        |           |           |  |        |          

Total capital expenditures for garden communities
were $56.3 million and $36.3 million for the years
ended December 31, 2002 and 2001, respectively. Total
capital expenditures for high-rise properties were
$136.3 million and $23.0 million for the years ended
December 31, 2002 and 2001, respectively.



|     |             
|---- | ------------
|(14) | Income Taxes

These consolidated financial statements have been
presented as if the company were a partnership for all periods
presented. For income tax purposes, the company was subject to
regulations under the Internal Revenue Code pertaining to REITs
through October 31, 2001 and to partnerships subsequent to
that date. In either case, as a REIT or a partnership, our
income is not generally subject to federal income taxes and no
provision for income taxes is included in the accompanying
Consolidated Statements of Earnings.

As a partnership, we make distributions to our
partners and allocate our taxable income to our partners. The
major portion of distributions and income are paid/allocated to
Archstone-Smith Trust with the remainder paid/allocated to third
party unitholders.

The following table reconciles net earnings to
taxable income subject to dividend distribution requirement for
the years ended December 31 (in thousands):

|                                        |                                              |                                 |         |         |   |      |         |         |   |   |         |         |  
|--------------------------------------- | -------------------------------------------- | ------------------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                        |                                              |                                
|                                        |                                              | For the Year Ended December 31,
|                                        |                                              |                                
|                                        |                                              | 2002                            |         | 2001    |   | 2000
|                                        |                                              |                                 |         |         |   |     
|                                        |                                              | (estimated)                     |         |         |   |     
|GAAP net earnings                       |                                              | $                               | 356,725 |         |   | $    | 265,574 |         |   | $ | 261,385 |        
|Book to tax differences:                |                                              |                                 |         |         |   |      |         |         |   |   |         |        
|                                        | Gain on sale of CES(1)                       |                                 |         | (43,623 | ) |      |         |        |   |   |         |        |  
|                                        | Depreciation and amortization(2)             |                                 |         | (47,475 | ) |      |         | (5,722  | ) |   |         | (7,311  | )
|                                        | Gain or loss from capital transactions(3)    |                                 |         | (13,599 | ) |      |         | 23,109  |   |   |         | (29,077 | )
|                                        | Deferred compensation and gain contingencies |                                 |         | 17,323  |   |      |         |        |   |   |         |        |  
|                                        | Merger expenses                              |                                 |         |        |   |      |         | (21,673 | ) |   |         |        |  
|                                        | Other, net                                   |                                 |         | 38,291  |   |      |         | 3,991   |   |   |         | 1,772   |  
|                                        |                                              |                                 |         |         |   |      |         |         |   |   |         |        
|Taxable income, including capital gains |                                              | $                               | 307,642 |         |   | $    | 265,279 |         |   | $ | 226,769 |        
|                                        |                                              |                                 |         |         |   |      |         |         |   |   |         |        

80



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In December 2002, CES was sold to a third party.
    See Note 2 for details.                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | In January 1999, we began using accelerated
    depreciable lives for tax purposes. This change resulted in
    higher depreciation expense on newly acquired assets for tax
    purposes relative to GAAP. This was partially offset by the
    Smith Merger in 2001 as GAAP depreciation expense for the Smith
    assets was based on fair value and tax depreciation was based on
    a lower historical tax basis.
|   
|(3) | The negative tax adjustment during 2000 was due
    to certain gains, which were included in GAAP earnings but were
    deferred through 1031 exchanges for tax purposes and therefore
    excluded from taxable net earnings. This was offset during 2001
    as certain taxable gains were deferred according to GAAP (see
    Note 5).                                                                              

Distributions have been made as follows:

|                                       |                     |                                 |         |         |  |      |         |         |  |   |         |         | 
|-------------------------------------- | ------------------- | ------------------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                       |                     |                                
|                                       |                     | For the Year Ended December 31,
|                                       |                     |                                
|                                       |                     | 2002                            |         | 2001    |  | 2000
|                                       |                     |                                 |         |         |  |     
|Distributions to Archstone-Smith Trust |                     | $                               | 334,322 |         |  | $    | 240,073 |         |  | $ | 226,597 |        
|Distributions to unitholders           |                     |                                 | 43,598  |         |  |      | 10,460  |         |  |   |        |        
|                                       |                     |                                 |         |         |  |      |         |         |  |   |         |        
|                                       | Total distributions |                                 | $       | 377,920 |  |      | $       | 250,533 |  |   | $       | 226,597 | 
|                                       |                     |                                 |         |         |  |      |         |         |  |   |         |        

All distributions made to Archstone-Smith were
subsequently paid to its shareholders.

The following table summarizes the taxability of
our dividends for the past three years:

|                 |  |                                 |       |      |  |      |       |   |  |  |       |  
|---------------- |  | ------------------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                 |  |                                
|                 |  | For the Year Ended December 31,
|                 |  |                                
|                 |  | 2002                            |       | 2001 |  | 2000
|                 |  |                                 |       |      |  |     
|Ordinary income  |  |                                 | 78.0  | %    |  |      | 54.0  | % |  |  | 68.0  | %
|Capital gains(1) |  |                                 | 22.0  | %    |  |      | 46.0  | % |  |  | 32.0  | %
|                 |  |                                 |       |      |  |      |       |   |  |  |       |  
|                 |  |                                 | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                 |  |                                 |       |      |  |      |       |   |  |  |       |  



---



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | Includes 6.2%, 22.0% and 13.0% of unrecaptured
    section 1250 gains in 2002, 2001, and 2000, respectively

(15)     Homestead
Mortgage Notes

In July 2000, we completed a transaction to
repurchase approximately 17.5 million of our Common Units
held by Security Capital in exchange for Homestead mortgage
notes with a face amount of $221.3 million and cash of
$178.7 million. The Homestead mortgage notes and related
balances had a net book value of $195.7 million on the date
of the transaction. We recognized a gain of $9.3 million
related to this transaction in the third quarter of 2000.

In March 2000, we determined that the conversion
feature associated with our investment in Homestead mortgage
notes had no continuing economic value. Therefore, a write-off
of the net unamortized balance of the conversion feature,
aggregating $2.8 million, was recorded. The remaining
balances associated with the convertible mortgage notes were not
affected.

(16)     Commitments
and Contingencies



| |            
| | -----------
| | Commitments

At December 31, 2002 we had seven
non-cancelable ground leases for certain apartment communities
and buildings that expire between 2050 and 2095. Each ground
lease generally provides for a fixed annual rental payment plus
additional rental payments based on the properties operating
results. Additionally, we lease certain office space under
non-cancellable operating leases with fixed annual rental
payments.

81



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The future minimum lease payments payable under
non-cancelable leases are as follows at
December 31, 2002 (in thousands):

|                       |       |   |         |         | 
|---------------------- | ----- | - | ------- | ------- | 
|2003                   |       | $ | 7,879   |        
|2004                   |       |   | 7,392   |        
|2005                   |       |   | 6,368   |        
|2006                   |       |   | 4,876   |        
|2007                   |       |   | 4,877   |        
|Thereafter (2008-2095) |       |   | 194,865 |        
|                       |       |   |         |        
|                       | Total |   | $       | 226,257 | 
|                       |       |   |         |        

See Note 3 for real estate related
commitments.



| |                                    
| | -----------------------------------
| | Guarantees and
    Indemnifications

We have extended approximately $80.7 million
in performance bond guarantees relating to contracts entered
into by CES and SMC, which are customary to the type of business
in which these entities engage. The Operating Trust, our
subsidiaries and investees have not been required to perform on
these guarantees, nor do we anticipate being required to perform
on such guarantees. Since we believe that our risk of loss under
these contingencies is remote, no accrual for potential loss has
been made in the accompanying financial statements. There are
recourse provisions available to us to recover any potential
future payments from the new owners of CES and SMC.

In connection with the sale of CES, we have
indemnified the buyer for certain representations and warranties
contained in the sale contract. The indemnifications terminate
on June 30, 2004, and while we do not believe it is
probable that the indemnities will reach the maximum amount, the
related liability is limited to a maximum exposure of
$44.5 million with exceptions including third party claims,
insurance, arbitration and environmental issues, each of which
is without deduction or limitation. There are no recourse
provisions available to us to recover any potential future
payments from third parties.

Except as noted above, we do not guarantee
third-party debt incurred by our unconsolidated investees.
Occasionally, the investees are required to guarantee their
mortgages. However, such guarantees are fully non-recourse to
the Operating Trust or to Archstone-Smith. All off-balance sheet
contingent liabilities and all third-party debt incurred by our
unconsolidated investees are fully non-recourse to us. As such,
the extent of our exposure to financial losses is limited solely
to our investment in each of the unconsolidated investees plus
the unfunded amount of the $10 million Ameriton credit
facility. See Note 5 for a summary of our investments in
and advances to unconsolidated entities.



| |                             
| | ----------------------------
| | Litigation and Contingencies

For the year ended December 31, 2002, we
have incurred and/or accrued a liability for approximately
$30.8 million relating to moisture infiltration and
resulting mold issues at one of our high-rise properties in
Southeast Florida. Of this amount, approximately
$11.3 million represents amounts expensed during the second
half of 2002 for the estimated cost of repairing or replacing
residents property and incurred legal fees. The remaining
$19.5 million represents costs capitalized in accordance
with GAAP pertaining to remediation and capital improvements to
the building.

We are in the process of addressing this issue,
and there are still considerable uncertainties that affect our
ability to estimate the ultimate cost of remediation efforts.
These uncertainties include the exact nature and extent of the
issues, the extent of required remediation efforts and varying
costs of alternative strategies for addressing the issues. The
accrual represents managements best estimate of the
probable and reasonably

82



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimable costs and is based, in part, on
estimates obtained from third-party environmental contractors
and actual costs incurred to date. It is possible that these
estimates could increase or decrease as better information
becomes available.

The company is also subject to litigation in
connection with these issues. We intend to vigorously contest
the claims asserted in the litigation. Due to the preliminary
nature of the litigation, it is not possible to predict or
determine the outcome of the legal actions nor is it reasonably
possible to estimate the amount of loss associated with an
adverse outcome.

We believe these costs are covered by our
insurance policies and are pursuing recovery from our carriers.
In addition, we believe there is a basis for other potential
recoveries from third parties. As of December 31, 2002, no
estimated recovery has been recorded because we have no basis
for making such an estimate at this time. While mold issues have
resulted in significant claims at only one of our properties to
date, we can make no assurance that liabilities resulting from
moisture infiltration and the presence of or exposure to mold
will not have a future material impact on our financial results.

We are a party to various other claims and
routine litigation arising in the ordinary course of business.
We do not believe that the results of any such claims or
litigation, individually or in the aggregate, will have a
material adverse effect on our business, financial position or
results of operations.

We are subject to environmental regulations
related to the ownership, operation, development and acquisition
of real estate. As part of our due diligence investigation
procedures, we conduct Phase I environmental assessments on
each property prior to acquisition. We are not aware of any
other environmental condition of any of our communities, which
is likely to have a material effect on our financial condition
or results of operations.

(17)     Supplemental
Cash Flow Information

Significant non-cash investing and financing
activities for the years ended December 31, 2002, 2001 and
2000 are as follows:



| |        |                                                                                                                                                                                                                                                                                       
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)    | We redeemed $41.7 million A-1 Common Units
    for Common Units during the year ended December 31, 2002;                                                                                                                                                                              
|
| | (ii)   | Converted $25 million Series J
    Preferred Units into Common Units during the year ended
    December, 31, 2002;                                                                                                                                                                    
|
| | (iii)  | An accrual related to moisture infiltration and
    resulting mold remediation for $11.3 million at one of our
    high-rise properties in Southeast Florida during 2002;                                                                                                             
|
| | (iv)   | In April 2002, we issued 339,727 Class B
    Common Units as partial consideration for a real estate
    acquisition;                                                                                                                                                                 
|
| | (v)    | See Note 2 regarding the Smith Merger;                                                                                                                                                                                                                                                
|
| | (vi)   | We repurchased approximately 17.5 million
    Common Units held by Security Capital in exchange for Homestead
    mortgage notes with a face amount of $221.3 million and
    cash of $178.7 million during the year ended
    December 31, 2000. See Note 15 for more information;   
|
| | (vii)  | In connection with the acquisition of apartment
    communities, we assumed mortgage debt of $195.6 million,
    $167.3 million and $71.0 million (excluding mortgage
    debt assumed in the Smith Merger) during the years ended
    December 31, 2002, 2001 and 2000, respectively;
|
| | (viii) | Holders of Series A Preferred Units
    converted $5.7 million, $3.8 million and
    $10.0 million of their units into Common Units during the
    years ended December 31, 2002, 2001 and 2000, respectively;                                                                        

83



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Concluded)



| |      |                                                                                                                                                                                                                                                                                                                                            
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ix) | We entered into joint venture transactions formed
    through our contribution of apartment communities and land in
    exchange for cash and an ownership interest in each of the
    ventures with an aggregate carrying value of $5.0 million
    and $19.7 million during the years ended December 31,
    2001 and 2000, respectively;
|
| | (x)  | We refinanced approximately $54.8 million in
    tax-exempt bonds during the year ended December 31, 2000.                                                                                                                                                                                                                                 

(18)     Subsequent
Events



| |                                                
| | -----------------------------------------------
| | Sale of Smith Management Construction,
    Inc.

Smith Management Construction, Inc. is a service
business that we acquired in the Smith Merger in 2001, and prior
to its sale had been reported as an unconsolidated entity in our
financial statements. SMC provides construction management and
building maintenance services. On February 12, 2003, we
sold SMC to members of SMCs senior management. The sale
will be recorded in the first quarter of 2003 and is not
expected to have a material effect on the financial results of
the company.

84



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Trustee and Unitholders

Archstone-Smith Operating Trust:


Under date of January 24, 2003, except as to
Note 18 which is as of February 12, 2003, we reported
on the consolidated balance sheets of Archstone-Smith Operating
Trust and subsidiaries (formerly known as Archstone Communities
Trust) as of December 31, 2002 and 2001, and the related
consolidated statements of earnings, unitholders equity,
other common unitholders interest and comprehensive
income, and cash flows for each of the years in the three-year
period ended December 31, 2002. In connection with our
audits of the aforementioned financial statements, we also
audited the related financial statement schedule. This financial
statement schedule is the responsibility of Archstone-Smith
Operating Trusts management. Our responsibility is to
express an opinion on this financial statement schedule based on
our audits.

In our opinion, such financial statement schedule
as listed in the accompanying index, when considered in relation
to the basic financial statements taken as a whole, presents
fairly, in all respects, the information set forth therein.



| |         
| | --------
| | KPMG LLP

Denver, Colorado

January 24, 2003


85



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST





SCHEDULE III


REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2002


(Dollar amounts in thousands)


|                                                                   |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |          |  
|------------------------------------------------------------------ | ------------------------------------------ | ----- | ------ | ------- |  | -------------------------- | --------- | ------------ |  | ------------- | --------- | ------- |  | - | --------- | --------- |  | - | --------- | -------- | -
|                                                                   |                                            |       |        |         |  |                            |           |             
|                                                                   |                                            |       |        |         |  | Initial Cost to Archstone- |           |             
|                                                                   |                                            |       |        |         |  | Smith Operating Trust      |           | Costs       
|                                                                   |                                            |       |        |         |  |                            |           | Capitalized 
|                                                                   |                                            |       |        | Encum-  |  |                            |           | Buildings &  |  | Subsequent to
|                                                                   |                                            | Units |        | brances |  | Land                       |           | Improvements |  | Acquisition  
|                                                                   |                                            |       |        |         |  |                            |           |              |  |              
|Apartment Communities:                                             |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|East Division (garden communities):                                |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|                                                                   | Atlanta, Georgia                           |       |        | 3,403   |  |                            | $         | 71,171       |  |               | $         | 34,534  |  |   | $         | 195,690   |  |   | $         | 27,098   |  
|                                                                   | Austin, Texas                              |       |        | 714     |  |                            |           |             |  |               |           | 3,508   |  |   |           | 7,431     |  |   |           | 22,723   |  
|                                                                   | Boston, Massachusetts                      |       |        | 1,967   |  |                            |           | 40,705       |  |               |           | 194,576 |  |   |           | 56,976    |  |   |           | 34,251   |  
|                                                                   | Charlotte, North Carolina                  |       |        | 668     |  |                            |           |             |  |               |           | 5,945   |  |   |           | 16,489    |  |   |           | 24,218   |  
|                                                                   | Chicago, Illinois                          |       |        | 3,912   |  |                            |           | 87,764       |  |               |           | 159,036 |  |   |           | 143,651   |  |   |           | 14,160   |  
|                                                                   | Dallas, Texas                              |       |        | 1,616   |  |                            |           | 14,840       |  |               |           | 11,899  |  |   |           | 61,314    |  |   |           | 25,717   |  
|                                                                   | Denver, Colorado                           |       |        | 2,620   |  |                            |           | 26,116       |  |               |           | 20,693  |  |   |           | 50,777    |  |   |           | 127,905  |  
|                                                                   | Houston, Texas                             |       |        | 1,408   |  |                            |           | 27,360       |  |               |           | 16,391  |  |   |           | 22,993    |  |   |           | 34,001   |  
|                                                                   | Nashville, Tennessee                       |       |        | 445     |  |                            |           | 4,703        |  |               |           | 3,657   |  |   |           | 20,719    |  |   |           | (706     | )
|                                                                   | Greater NYC Metropolitan Area              |       |        | 160     |  |                            |           |             |  |               |           | 5,775   |  |   |           | 1,225     |  |   |           | 28,486   |  
|                                                                   | Orlando, Florida                           |       |        | 312     |  |                            |           |             |  |               |           | 3,110   |  |   |           | 17,620    |  |   |           | 721      |  
|                                                                   | Raleigh, North Carolina                    |       |        | 1,840   |  |                            |           | 13,712       |  |               |           | 13,836  |  |   |           | 78,399    |  |   |           | 38,212   |  
|                                                                   | San Antonio, Texas                         |       |        | 530     |  |                            |           | 8,705        |  |               |           | 2,789   |  |   |           |          |  |   |           | 28,714   |  
|                                                                   | Southeast, Florida                         |       |        | 1,786   |  |                            |           |             |  |               |           | 16,307  |  |   |           | 72,683    |  |   |           | 43,320   |  
|                                                                   | Greater Washington, D.C. Metropolitan Area |       |        | 10,120  |  |                            |           | 226,823      |  |               |           | 328,786 |  |   |           | 668,497   |  |   |           | 164,436  |  
|                                                                   | West Coast, Florida                        |       |        | 746     |  |                            |           |             |  |               |           | 5,430   |  |   |           | 30,765    |  |   |           | 7,013    |  
|                                                                   |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|East Division Total                                                |                                            |       | 32,247 |         |  | $                          | 521,899   |              |  | $             | 826,272   |         |  | $ | 1,445,229 |           |  | $ | 620,269   |         
|West Division (garden communities):                                |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|                                                                   | Albuquerque, New Mexico                    |       |        | 1,491   |  |                            | $         |             |  |               | $         | 11,238  |  |   | $         | 30,527    |  |   | $         | 34,925   |  
|                                                                   | Inland Empire, California:                 |       |        | 1,884   |  |                            |           | 17,284       |  |               |           | 178,161 |  |   |           | 243,921   |  |   |           | (308,947 | )
|                                                                   | Las Vegas, Nevada                          |       |        | 896     |  |                            |           |             |  |               |           | 15,020  |  |   |           | 85,133    |  |   |           | (52,694  | )
|                                                                   | Los Angeles, California                    |       |        | 2,002   |  |                            |           | 53,540       |  |               |           | 5,904   |  |   |           | 33,561    |  |   |           | 218,401  |  
|                                                                   | Orange County, California                  |       |        | 1,647   |  |                            |           | 48,190       |  |               |           | 127,547 |  |   |           | 51,703    |  |   |           | (550     | )
|                                                                   | Phoenix, Arizona                           |       |        | 2,268   |  |                            |           |             |  |               |           | 25,612  |  |   |           | 46,136    |  |   |           | 64,525   |  
|                                                                   | Portland, Oregon                           |       |        | 826     |  |                            |           |             |  |               |           | 15,974  |  |   |           | 19,943    |  |   |           | 17,282   |  
|                                                                   | Salt Lake City, Utah                       |       |        | 776     |  |                            |           | 7,035        |  |               |           | 5,780   |  |   |           |          |  |   |           | 48,521   |  
|                                                                   | San Diego, California                      |       |        | 2,791   |  |                            |           | 64,040       |  |               |           | 55,215  |  |   |           | 136,874   |  |   |           | 124,342  |  
|                                                                   | San Francisco, California                  |       |        | 5,142   |  |                            |           | 113,157      |  |               |           | 7,864   |  |   |           | 14,171    |  |   |           | 624,511  |  
|                                                                   | Seattle, Washington                        |       |        | 3,230   |  |                            |           | 28,354       |  |               |           | 37,339  |  |   |           | 99,114    |  |   |           | 128,257  |  
|                                                                   | Ventura County, California                 |       |        | 1,247   |  |                            |           |             |  |               |           | 13,526  |  |   |           | 53,473    |  |   |           | 59,765   |  
|                                                                   |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|West Division Total                                                |                                            |       | 24,200 |         |  | $                          | 331,600   |              |  | $             | 499,180   |         |  | $ | 814,556   |           |  | $ | 958,338   |         
|Charles E. Smith Division (high rise
    properties):              |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|                                                                   | Boston, Massachusetts                      |       |        | 693     |  |                            | $         | 64,054       |  |               | $         | 41,345  |  |   | $         | 121,883   |  |   | $         | 13,417   |  
|                                                                   | Chicago, Illinois                          |       |        | 3,839   |  |                            |           | 133,799      |  |               |           | 149,558 |  |   |           | 444,357   |  |   |           | 68,756   |  
|                                                                   | Southeast Florida                          |       |        | 5,054   |  |                            |           | 80,645       |  |               |           | 207,359 |  |   |           | 248,503   |  |   |           | 90,427   |  
|                                                                   | Greater NYC Metropolitan Area              |       |        | 630     |  |                            |           | 137,986      |  |               |           | 72,340  |  |   |           | 154,735   |  |   |           | 2,773    |  
|                                                                   | Greater Washington, D.C. Metropolitan Area |       |        | 11,325  |  |                            |           | 690,844      |  |               |           | 561,856 |  |   |           | 1,231,411 |  |   |           | 136,605  |  
|                                                                   |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|Charles E. Smith Division Total                                    |                                            |       | 21,541 |         |  | $                          | 1,107,328 |              |  | $             | 1,032,458 |         |  | $ | 2,200,889 |           |  | $ | 311,978   |         
|                                                                   |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|Total Apartment Communities 
    Operating and Under Construction |                                            |       | 77,988 |         |  | $                          | 1,960,827 |              |  | $             | 2,357,910 |         |  | $ | 4,460,674 |           |  | $ | 1,890,585 |         
|                                                                   |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|Other:                                                             |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|Development communities In Planning and Owned                      |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|Hotel, retail and other assets                                     |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         
|Total real estate assets                                           |                                            |       |        |         |  |                            |           |              |  |               |           |         |  |   |           |           |  |   |           |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |           | 
|------------------------------------------------------------------ | ------------------------------------------ | ---------------------------- | --------- | ------------ |  | ------ | --------- | ------------ | - | ------------ | --------- | --------- |  | - | ------- | ------ |  |  |  | --------- |  |  |  | --------- | 
|                                                                   |                                            |                              |           |              |  |        |           |              |   |             
|                                                                   |                                            | Gross Amount at Which        |           |              |  |        |           |              |   |             
|                                                                   |                                            | Carried at December 31, 2002 |           |              |  |        |           |              |   |             
|                                                                   |                                            |                              |           |              |  |        |           |              |   |             
|                                                                   |                                            |                              |           | Buildings &  |  |        |           | Accumulated  |   | Construction |           | Year     
|                                                                   |                                            | Land                         |           | Improvements |  | Totals |           | Depreciation |   | Year         |           | Acquired 
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |          
|Apartment Communities:                                             |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|East Division (garden communities):                                |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|                                                                   | Atlanta, Georgia                           |                              | $         | 34,534       |  |        | $         | 222,788      |   |              | $         | 257,322   |  |   | $       | 38,612 |  |  |  | 1978-1999 |  |  |  | 1998-2001 | 
|                                                                   | Austin, Texas                              |                              |           | 3,508        |  |        |           | 30,154       |   |              |           | 33,662    |  |   |         | 6,850  |  |  |  | 1979-1996 |  |  |  | 1993      | 
|                                                                   | Boston, Massachusetts                      |                              |           | 194,576      |  |        |           | 91,227       |   |              |           | 285,803   |  |   |         | 19,182 |  |  |  | 1975-2002 |  |  |  | 1999-2002 | 
|                                                                   | Charlotte, North Carolina                  |                              |           | 5,945        |  |        |           | 40,707       |   |              |           | 46,652    |  |   |         | 4,247  |  |  |  | 1997-2001 |  |  |  | 1998      | 
|                                                                   | Chicago, Illinois                          |                              |           | 159,036      |  |        |           | 157,811      |   |              |           | 316,847   |  |   |         | 19,079 |  |  |  | 1968-1988 |  |  |  | 1999-2001 | 
|                                                                   | Dallas, Texas                              |                              |           | 11,899       |  |        |           | 87,031       |   |              |           | 98,930    |  |   |         | 16,373 |  |  |  | 1983-1998 |  |  |  | 1993-1998 | 
|                                                                   | Denver, Colorado                           |                              |           | 20,693       |  |        |           | 178,682      |   |              |           | 199,375   |  |   |         | 20,908 |  |  |  | 1981-2002 |  |  |  | 1992-2001 | 
|                                                                   | Houston, Texas                             |                              |           | 16,391       |  |        |           | 56,994       |   |              |           | 73,385    |  |   |         | 13,713 |  |  |  | 1972-1996 |  |  |  | 1994-1996 | 
|                                                                   | Nashville, Tennessee                       |                              |           | 3,657        |  |        |           | 20,013       |   |              |           | 23,670    |  |   |         | 3,335  |  |  |  | 1986      |  |  |  | 1998      | 
|                                                                   | Greater NYC Metropolitan Area              |                              |           | 5,775        |  |        |           | 29,711       |   |              |           | 35,486    |  |   |         | 238    |  |  |  | 2001-2002 |  |  |  | 2000      | 
|                                                                   | Orlando, Florida                           |                              |           | 3,110        |  |        |           | 18,341       |   |              |           | 21,451    |  |   |         | 3,097  |  |  |  | 1988      |  |  |  | 1998      | 
|                                                                   | Raleigh, North Carolina                    |                              |           | 13,836       |  |        |           | 116,611      |   |              |           | 130,447   |  |   |         | 19,938 |  |  |  | 1985-1999 |  |  |  | 1998      | 
|                                                                   | San Antonio, Texas                         |                              |           | 2,789        |  |        |           | 28,714       |   |              |           | 31,503    |  |   |         | 6,750  |  |  |  | 1979-1996 |  |  |  | 1992-1993 | 
|                                                                   | Southeast, Florida                         |                              |           | 16,307       |  |        |           | 116,003      |   |              |           | 132,310   |  |   |         | 15,003 |  |  |  | 1986-2001 |  |  |  | 1998-1999 | 
|                                                                   | Greater Washington, D.C. Metropolitan Area |                              |           | 328,786      |  |        |           | 832,933      |   |              |           | 1,161,719 |  |   |         | 44,889 |  |  |  | 1941-2002 |  |  |  | 1998-2002 | 
|                                                                   | West Coast, Florida                        |                              |           | 5,430        |  |        |           | 37,778       |   |              |           | 43,208    |  |   |         | 6,572  |  |  |  | 1982-1988 |  |  |  | 1998      | 
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|East Division Total                                                |                                            | $                            | 826,272   |              |  | $      | 2,065,498 |              |   | $            | 2,891,770 |           |  | $ | 238,786 |        |  |  |  |           |  |  |  |          
|West Division (garden communities):                                |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|                                                                   | Albuquerque, New Mexico                    |                              | $         | 11,238       |  |        | $         | 65,452       |   |              | $         | 76,690    |  |   | $       | 16,086 |  |  |  | 1981-1996 |  |  |  | 1991-1996 | 
|                                                                   | Inland Empire, California:                 |                              |           | 178,161      |  |        |           | (65,026      | ) |              |           | 113,135   |  |   |         | 17,373 |  |  |  | 1985-1990 |  |  |  | 1995-1997 | 
|                                                                   | Las Vegas, Nevada                          |                              |           | 15,020       |  |        |           | 32,439       |   |              |           | 47,459    |  |   |         | 8,068  |  |  |  | 1986      |  |  |  | 1995      | 
|                                                                   | Los Angeles, California                    |                              |           | 5,904        |  |        |           | 251,962      |   |              |           | 257,866   |  |   |         | 9,944  |  |  |  | 1985-2002 |  |  |  | 1998-2002 | 
|                                                                   | Orange County, California                  |                              |           | 127,547      |  |        |           | 51,153       |   |              |           | 178,700   |  |   |         | 18,107 |  |  |  | 1986-2002 |  |  |  | 1996-1999 | 
|                                                                   | Phoenix, Arizona                           |                              |           | 25,612       |  |        |           | 110,661      |   |              |           | 136,273   |  |   |         | 21,596 |  |  |  | 1980-2001 |  |  |  | 1993-1997 | 
|                                                                   | Portland, Oregon                           |                              |           | 15,974       |  |        |           | 37,225       |   |              |           | 53,199    |  |   |         | 7,993  |  |  |  | 1985-1998 |  |  |  | 1995-1996 | 
|                                                                   | Salt Lake City, Utah                       |                              |           | 5,780        |  |        |           | 48,521       |   |              |           | 54,301    |  |   |         | 5,608  |  |  |  | 1985-2000 |  |  |  | 1997      | 
|                                                                   | San Diego, California                      |                              |           | 55,215       |  |        |           | 261,216      |   |              |           | 316,431   |  |   |         | 29,057 |  |  |  | 1985-2001 |  |  |  | 1996-1998 | 
|                                                                   | San Francisco, California                  |                              |           | 7,864        |  |        |           | 638,682      |   |              |           | 646,546   |  |   |         | 67,440 |  |  |  | 1965-2002 |  |  |  | 1995-2000 | 
|                                                                   | Seattle, Washington                        |                              |           | 37,339       |  |        |           | 227,371      |   |              |           | 264,710   |  |   |         | 34,155 |  |  |  | 1986-2002 |  |  |  | 1995-1999 | 
|                                                                   | Ventura County, California                 |                              |           | 13,526       |  |        |           | 113,238      |   |              |           | 126,764   |  |   |         | 9,587  |  |  |  | 1985-2002 |  |  |  | 1997-1999 | 
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|West Division Total                                                |                                            | $                            | 499,180   |              |  | $      | 1,772,894 |              |   | $            | 2,272,074 |           |  | $ | 245,014 |        |  |  |  |           |  |  |  |          
|Charles E. Smith Division (high rise
    properties):              |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|                                                                   | Boston, Massachusetts                      |                              | $         | 41,345       |  |        | $         | 135,300      |   |              | $         | 176,645   |  |   | $       | 4,347  |  |  |  | 1986-1998 |  |  |  | 2001      | 
|                                                                   | Chicago, Illinois                          |                              |           | 149,558      |  |        |           | 513,113      |   |              |           | 662,671   |  |   |         | 17,055 |  |  |  | 1969-2002 |  |  |  | 2001      | 
|                                                                   | Southeast Florida                          |                              |           | 207,359      |  |        |           | 338,930      |   |              |           | 546,289   |  |   |         | 10,631 |  |  |  | 1964-2000 |  |  |  | 2001      | 
|                                                                   | Greater NYC Metropolitan Area              |                              |           | 72,340       |  |        |           | 157,508      |   |              |           | 229,848   |  |   |         | 2,991  |  |  |  |           |  |  |  | 2002      | 
|                                                                   | Greater Washington, D.C. Metropolitan Area |                              |           | 561,856      |  |        |           | 1,368,016    |   |              |           | 1,929,872 |  |   |         | 47,027 |  |  |  | 1923-2002 |  |  |  | 2001      | 
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|Charles E. Smith Division Total                                    |                                            | $                            | 1,032,458 |              |  | $      | 2,512,867 |              |   | $            | 3,545,325 |           |  | $ | 82,051  |        |  |  |  |           |  |  |  |          
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|Total Apartment Communities 
    Operating and Under Construction |                                            | $                            | 2,357,910 |              |  | $      | 6,351,259 |              |   | $            | 8,709,169 |           |  | $ | 565,851 |        |  |  |  |           |  |  |  |          
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|Other:                                                             |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|Development communities In Planning and Owned                      |                                            |                              |           |              |  |        |           |              |   |              | 89,501    |           |  |   |        |        |  |  |  |           |  |  |  |          
|Hotel, retail and other assets                                     |                                            |                              |           |              |  |        |           |              |   |              | 40,151    |           |  |   | 5,396   |        |  |  |  |           |  |  |  |          
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          
|Total real estate assets                                           |                                            |                              |           |              |  |        |           |              |   | $            | 8,838,821 |           |  | $ | 571,247 |        |  |  |  |           |  |  |  |          
|                                                                   |                                            |                              |           |              |  |        |           |              |   |              |           |           |  |   |         |        |  |  |  |           |  |  |  |          

86



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SCHEDULE III

The following is a reconciliation of the carrying
amount and related accumulated depreciation of Archstone-Smith
Operating Trusts investment in real estate, at cost
(in thousands):

|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |          |  
|-------------------------------- | ------------------------------------------------------------ | ----------------------- | --------- | -------- | - | ---- | --------- | ---------- | - | - | --------- | -------- | -
|                                 |                                                              |                        
|                                 |                                                              | Year Ended December 31,
|                                 |                                                              |                        
|                                 |                                                              | 2002                    |           | 2001     |   | 2000
|                                 |                                                              |                         |           |          |   |     
|Carrying Amounts                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|Balance at January 1             |                                                              | $                       | 8,276,004 |          |   | $    | 5,058,910 |            |   | $ | 5,086,486 |         
|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|Apartment communities:           |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|                                 | Apartment properties acquired in the Smith Merger            |                         |           | 31,877   |   |      |           | 3,733,936  |   |   |           |         |  
|                                 | Acquisition-related expenditures                             |                         |           | 413,502  |   |      |           | 339,055    |   |   |           | 372,539  |  
|                                 | Redevelopment expenditures                                   |                         |           | 152,389  |   |      |           | 39,136     |   |   |           | 37,547   |  
|                                 | Recurring capital expenditures                               |                         |           | 40,235   |   |      |           | 20,184     |   |   |           | 13,937   |  
|                                 | Development expenditures, excluding land
    acquisitions    |                         |           | 195,809  |   |      |           | 185,988    |   |   |           | 228,819  |  
|                                 | Acquisition and improvement of land for
    development      |                         |           | 53,165   |   |      |           | 48,120     |   |   |           | 68,308   |  
|                                 | Dispositions                                                 |                         |           | (330,118 | ) |      |           | (1,152,668 | ) |   |           | (743,287 | )
|                                 | Provision for possible loss on investments                   |                         |           | (2,611   | ) |      |           | (2,710     | ) |   |           | (5,200   | )
|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|Net apartment community activity |                                                              | $                       | 554,248   |          |   | $    | 3,211,041 |            |   | $ | (27,337   | )       
|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|Other:                           |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|                                 | Disposition of retail asset acquired in the Smith
    Merger |                         |           | (5,990   | ) |      |           | 5,976      |   |   |           |         |  
|                                 | Change in other real estate assets                           |                         |           | 14,559   |   |      |           | 77         |   |   |           | (239     | )
|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|Net other activity               |                                                              |                         | 8,569     |          |   |      | 6,053     |            |   |   | (239      | )       
|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         
|Balance at December 31           |                                                              | $                       | 8,838,821 |          |   | $    | 8,276,004 |            |   | $ | 5,058,910 |         
|                                 |                                                              |                         |           |          |   |      |           |            |   |   |           |         

|                                                         |  |              |         |      |  |      |          |   |  |   |         |  
|-------------------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                         |  |             
|                                                         |  | December 31,
|                                                         |  |             
|                                                         |  | 2002         |         | 2001 |  | 2000
|                                                         |  |              |         |      |  |     
|Accumulated Depreciation                                 |  |              |         |      |  |      |          |   |  |   |         |  
|Balance at January 1                                     |  | $            | 406,784 |      |  | $    | 375,672  |   |  | $ | 300,658 |  
|Depreciation for the year                                |  |              | 199,971 |      |  |      | 132,126  |   |  |   | 143,694 |  
|Accumulated depreciation on real estate
    dispositions |  |              | (35,407 | )    |  |      | (101,014 | ) |  |   | (68,624 | )
|Other                                                    |  |              | (101    | )    |  |      |         |   |  |   | (56     | )
|                                                         |  |              |         |      |  |      |          |   |  |   |         |  
|Balance at December 31                                   |  | $            | 571,247 |      |  | $    | 406,784  |   |  | $ | 375,672 |  
|                                                         |  |              |         |      |  |      |          |   |  |   |         |  

87



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ARCHSTONE-SMITH OPERATING TRUST






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.



| |                                
| | -------------------------------
| | ARCHSTONE-SMITH OPERATING TRUST



| |     |                    
| | --- | -------------------
| | By: | /s/ R. SCOT SELLERS

| |                        
| | -----------------------
| |                        
| | R. Scot Sellers        
| | Chief Executive Officer

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 date indicated:

|                                                   |  |                                                                                        |  |                   |  | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                                   |  |                                                                                        |  |                  
|Signature                                          |  | Title                                                                                  |  | Date             
|                                                   |  |                                                                                        |  |                  
|/s/ R. SCOT SELLERSR. Scot Sellers                 |  | Chief Executive Officer (principal executive
    officer)                              |  | February 28, 2003
|                                                  
|/s/ CHARLES E. MUELLER, JR.Charles E. Mueller, Jr. |  | Executive Vice President and Chief Financial
    Officer (principal financial officer) |  | February 28, 2003
|                                                  
|/s/ MARK A. SCHUMACHERMark A. Schumacher           |  | Senior Vice President and Controller (principal
    accounting officer)                |  | February 28, 2003
|                                                  
|ARCHSTONE-SMITH TRUST                              |  | Trustee                                                                                |  | February 28, 2003
|                                                  
|By:                                                |  | /s/ R. SCOT SELLERSChief Executive Officer                                             |  |                   |  | 

88



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##### Table of Contents






CERTIFICATIONS

I, R. Scot Sellers, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Archstone-Smith Operating Trust (the
    registrant).                                                                                                                                                                                                                             
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the years covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the years presented in this annual report;                        
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the years in
    which this annual report is being prepared;
|
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                     
|
| | c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                               



| |    |                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of trustees (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |     |                    
| | --- | -------------------
| | By: | /s/ R. SCOT SELLERS

| |                        
| | -----------------------
| |                        
| | R. Scot Sellers        
| | Chief Executive Officer

Date: February 28, 2003

89



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##### Table of Contents






CERTIFICATIONS

I, Charles E. Mueller, Jr., certify that:



| |    |                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Archstone-Smith Operating Trust (the
    registrant).                                                                                                                                                                                                                             
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the years covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the years presented in this annual report;                        
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the years in
    which this annual report is being prepared;
|
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                     
|
| | c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                               



| |    |                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation,
    to the registrants auditors and the audit committee of
    registrants board of trustees (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |     |                            
| | --- | ---------------------------
| | By: | /s/ CHARLES E. MUELLER, JR.

| |                              
| | -----------------------------
| |                              
| | Charles E. Mueller, Jr.      
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: February 28, 2003

90



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##### Table of Contents



INDEX TO EXHIBITS

Certain of the following documents are filed
herewith. Certain other of the following documents have been
previously filed with the Securities and Exchange Commission
and, pursuant to Rule 12b-32, are incorporated herein by
reference:

|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 3  | .1          |  | Amended and Restated Declaration of Trust of
    Archstone-Smith Operating Trust (incorporated by reference to
    Exhibit 4.3 to the Archstone-Smith Trusts Current
    Report on Form 8-K filed with the SEC on November 1,
    2001)                                                                                                                                                                                                                                                                                      
|       | 3  | .2          |  | Amended and Restated Bylaws of Archstone-Smith
    Operating Trust (incorporated by reference to Exhibit 4.4
    to the Archstone-Smith Trusts Current Report on
    Form 8-K filed with the SEC on November 1, 2001)                                                                                                                                                                                                                                                                                                        
|       | 4  | .1          |  | Amended and Restated Declaration of Trust of
    Archstone-Smith Trust (incorporated by reference to
    Exhibit 4.1 to the Archstone-Smith Trusts Current
    Report of Form 8-K filed with the SEC on November 1,
    2001)                                                                                                                                                                                                                                                                                                
|       | 4  | .2          |  | Amended and Restated Bylaws of Archstone-Smith
    Trust (incorporated by reference to Exhibit 4.1 to the
    Archstone-Smith Trusts Current Report on Form 8-K
    filed with the SEC on November 1, 2001)                                                                                                                                                                                                                                                                                                                  
|       | 4  | .3          |  | Indenture, dated as of February 1, 1994,
    between Archstone-Smith Operating Trust (formerly Archstone
    Communities Trust) and Morgan Guaranty Trust Company of
    New York, as Trustee relating to Archstone-Smith Operating
    Trusts (formerly Archstone Communities Trust) unsecured
    senior debt securities (incorporated by reference to
    Exhibit 4.2 to Archstone-Smith Operating Trusts
    (formerly Archstone Communities Trust) Annual Report on
    Form 10-K for the year ended December 31, 1993)
|       | 4  | .4          |  | First Supplemental Indenture, dated
    February 2, 1994, among Archstone-Smith Operating Trust
    (formerly Archstone Communities Trust), Morgan Guaranty Trust
    Company of New York and State Street Bank and Trust
    Company, as successor Trustee (incorporated by reference to
    Exhibit 4.3 to Archstone-Smith Operating Trusts
    (formerly Archstone Communities Trust) Current Report on
    Form 8-K dated July 19, 1994)                                                                                 
|       | 4  | .5          |  | Indenture, dated as of August 14, 1997,
    between Security Capital Atlantic Incorporated and State Street
    Bank and Trust Company, as Trustee (incorporated by reference to
    Exhibit 4.8 to Security Capital Atlantic
    Incorporateds Registration Statement on Form S-11
    (File No. 333-30747))                                                                                                                                                                                                                
|       | 4  | .6          |  | Rights Agreement, dated as of August 31,
    2001, by and between Archstone-Smith Trust and Mellon Investor
    Services, LLC, including the form of rights certificate
    (incorporated by reference to Exhibit 3.13 to
    Archstone-Smith Trusts Registration Statement on
    Form S-4 (File No. 333-63734))                                                                                                                                                                                                            
|       | 4  | .7          |  | Form of Archstone-Smith Trust common share of
    beneficial interest ownership certificate (incorporated by
    reference to Exhibit 3.3 to Archstone-Smith Trusts
    Registration Statement on Form S-4 (File
    No. 333-63734))                                                                                                                                                                                                                                                                                         
|       | 4  | .8          |  | Form of Archstone-Smith Operating Trust
    Class A-1 common unit certificate (incorporated by
    reference to Exhibit 3.11 to Archstone-Smith Operating
    Trusts Registration Statement on Form S-4 (File
    No. 333-64540))                                                                                                                                                                                                                                                                                            
|       | 10 | .1          |  | 1987 Share Option Plan for Outside Trustees,
    as amended (incorporated by reference to Exhibit 2.1(c) to
    Archstone Communities Trusts Current Report on
    Form 8-K filed with the SEC on June 19, 2001)                                                                                                                                                                                                                                                                                                             
|       | 10 | .2          |  | Amendment to 1996 Share Option Plan for Outside
    Trustees (incorporated by reference to Exhibit 4.6 to
    Archstone Communities Trusts Registration Statement on
    Form S-8 (File No. 333-60815))                                                                                                                                                                                                                                                                                                                      
|       | 10 | .3          |  | Archstone-Smith Trust 2001 Long-Term Incentive
    Plan (incorporated by reference to Exhibit 10.14 to
    Archstone-Smith Trusts Registration Statement on
    Form S-4 (File No. 333-63734))                                                                                                                                                                                                                                                                                                                               
|       | 10 | .4          |  | Archstone-Smith Deferred Compensation Plan
    (incorporated by reference to Exhibit 10.6 to
    Archstone-Smith Trusts Annual Report on Form 10-K for
    the year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                 

91



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##### Table of Contents



INDEX TO EXHIBITS 
(Continued)


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .5          |  | Form of Indemnification Agreement entered into
    between Archstone-Smith Trust and each of its officers and
    Trustees (incorporated by reference to Exhibit 10.7 to
    Archstone-Smith Trusts Annual Report on Form 10-K for
    the year ended December 31, 2001)                                                                                                                                                                                                                                                                       
|       | 10 | .6          |  | Form of Change in Control Agreement between
    Archstone-Smith Trust and certain of it officers                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 10 | .7          |  | Credit Agreement, dated December 20, 2000,
    among Archstone-Smith Operating Trust (formerly Archstone
    Communities Trust) and The Chase Manhattan Bank, as
    administrative agent, and Wells Fargo Bank, N.A., as syndication
    agent, and Bank of America, N.A., as documentation agent
    (incorporated by reference to Exhibit 99.4 to Archstone
    Communities Trusts Current Report on Form 8-K dated
    February 16, 2001)                                                                                                  
|       | 10 | .8          |  | Agreement and First Amendment, dated as of
    September 21, 2001, to Credit Agreement, dated as of
    December 20, 2000, by and among Archstone-Smith Operating
    Trust (formerly Archstone Communities Trust) and the financial
    institutions named therein (incorporated by reference to
    Exhibit 10.2 to Archstone-Smith Trusts Current Report
    on Form 8-K filed with the SEC on November 1, 2001)                                                                                                                            
|       | 10 | .9          |  | Agreement and Second Amendment, dated as of
    November 1, 2001, to Credit Agreement, dated as of
    December 20, 2000, by and among Archstone-Smith Operating
    Trust (formerly Archstone Communities Trust) and the financial
    institutions named therein (incorporated by reference to
    Exhibit 10.3 to Archstone-Smith Trusts Current Report
    on Form 8-K filed with the SEC on November 1, 2001)                                                                                                                             
|       | 10 | .10         |  | Parent Agreement, dated as of November 1,
    2001, by and among Archstone-Smith Operating Trust and Chase
    Manhattan Bank, in its capacity as Agent for the lenders under
    the Credit Agreement, dated as of December 20, 2000, as
    amended, by and among Archstone-Smith Operating Trust (formerly
    Archstone Communities Trust) and the financial institutions
    named therein (incorporated by reference to Exhibit 10.4 to
    Archstone-Smith Trusts Current Report on Form 8-K
    filed with the SEC on November 1, 2001)
|       | 10 | .11         |  | Master Credit Facility Agreement, dated as of
    December 1, 1998, by and among Archstone-Smith Operating
    Trust and ASN Multifamily Limited Partnership and Berkshire
    Mortgage Finance Limited Partnership (incorporated by reference
    to Exhibit 10.10 to Archstone Communities Trusts
    Annual Report on Form 10-K for the year ended
    December 31, 1998)                                                                                                                                                                   
|       | 10 | .12         |  | Archstone Dividend Reinvestment and Share
    Purchase Plan (incorporated by reference to the prospectus
    contained in Archstone-Smith Trusts Registration Statement
    on Form S-3 (No. 333-44639-01))                                                                                                                                                                                                                                                                                                                                    
|       | 10 | .13         |  | Shareholders Agreement, dated as of
    October 31, 2001, by and among Archstone-Smith Trust,
    Archstone-Smith Operating Trust, Robert H. Smith and Robert P.
    Kogod (incorporated by reference to Exhibit 10.1 to
    Archstone-Smith Trusts Current Report on Form 8-K
    filed with the SEC on November 1, 2001)                                                                                                                                                                                                                    
|       | 10 | .14         |  | Noncompetition Agreement by and among Charles E.
    Smith Residential Realty, Inc., Charles E. Smith Residential
    Realty L.P. and Robert P. Kogod and Robert H. Smith
    (incorporated by reference to Exhibit 10.1 of Charles E.
    Smith Residential Realty, Inc.s Annual Report on
    Form 10-K for the year ended December 31, 1994)                                                                                                                                                                                                
|       | 10 | .15         |  | Registration Rights and Lock-up Agreement
    (incorporated by reference to Exhibit 10.2 of Charles E.
    Smith Residential Realty, Inc.s Annual Report on
    Form 10-K for the year ended December 31, 1994)                                                                                                                                                                                                                                                                                                                                
|       | 10 | .16         |  | License Agreement between Charles E. Smith
    Management, Inc. and Charles E. Smith Residential Realty, Inc.
    (incorporated by reference to Exhibit 10.35 of Charles E.
    Smith Residential Realty, Inc.s Annual Report on
    Form 10-K for the year ended December 31, 1994)                                                                                                                                                                                                                                                           
|       | 10 | .17         |  | License Agreement between Charles E. Smith
    Management, Inc. and Charles E. Smith Residential Realty L.P.
    (incorporated by reference to Exhibit 10.36 of Charles E.
    Smith Residential Realty, Inc.s Annual Report on
    Form 10-K for the year ended December 31, 1994)                                                                                                                                                                                                                                                            

92



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##### Table of Contents



INDEX TO EXHIBITS 
(Continued)


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------ | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .18         |  | Deed of Trust and Security Agreement between
    Smith Property Holdings Three L.P. (Smith Three) and
    The Northwestern Mutual Life Insurance Company
    (Northwestern) (incorporated by reference to
    Exhibit 10.2 of Charles E. Smith Residential Realty,
    Inc.s Quarterly Report on Form 10-Q for the Quarter
    Ended June 30, 1994)                                           
|       | 10 | .19         |  | Guarantee of Recourse Obligations by Smith Three
    and Charles E. Smith Residential Realty L.P. (incorporated by
    reference to Exhibit 10.3 of Charles E. Smith Residential
    Realty, Inc.s Quarterly Report on Form 10-Q for the
    Quarter Ended June 30, 1994)                                                                                                                         
|       | 10 | .20         |  | Absolute Assignment of Leases and Rents between
    Smith Three and Northwestern (incorporated by reference to
    Exhibit 10.4 of Charles E. Smith Residential Realty,
    Inc.s Quarterly Report on Form 10-Q for the Quarter
    Ended June 30, 1994)                                                                                                                                          
|       | 10 | .21         |  | Promissory Note of Smith Three to Northwestern
    (incorporated by reference to Exhibit 10.5 of Charles E.
    Smith Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                                                                                            
|       | 10 | .22         |  | Purchase Money Deed of Trust and Security
    Agreement between Smith Property Holdings Three (D.C.) L.P.
    (Smith Three D.C.) and Northwestern (incorporated by
    reference to Exhibit 10.6 of Charles E. Smith Residential
    Realty, Inc.s Quarterly Report on Form 10-Q for the
    Quarter Ended June 30, 1994)                                                                       
|       | 10 | .23         |  | Guarantee of Recourse Obligations by Smith Three
    D.C. and Charles E. Smith Residential Realty L.P. (incorporated
    by reference to Exhibit 10.7 of Charles E. Smith
    Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                                    
|       | 10 | .24         |  | Absolute Assignment of Leases and Rents between
    Smith Three D.C. and Northwestern (incorporated by reference to
    Exhibit 10.8 of Charles E. Smith Residential Realty,
    Inc.s Quarterly Report on Form 10-Q for the Quarter
    Ended June 30, 1994)                                                                                                                                     
|       | 10 | .25         |  | Purchase Money Promissory Note of Smith Three
    D.C. to Northwestern (incorporated by reference to
    Exhibit 10.9 of Charles E. Smith Residential Realty,
    Inc.s Quarterly Report on Form 10-Q for the Quarter
    Ended June 30, 1994)                                                                                                                                                    
|       | 10 | .26         |  | Supplemental Loan Agreement by and among Smith
    Property Holdings Two L.P. (Smith Two), Smith
    Property Holdings Two (D.C.) L.P. (Smith Two D.C.)
    and Green Park Financial Limited Partnership (Green
    Park) (incorporated by reference to Exhibit 10.47 of
    Charles E. Smith Residential Realty, Inc.s Annual Report
    on Form 10-K for the year ended December 31, 1998)
|       | 10 | .27         |  | Supplemental Loan Agreement by and among Smith
    Property Holdings One L.P. (Smith One D.C.), Smith
    Property Holdings One (D.C.) L.P. (Smith One D.C.)
    and GMAC (incorporated by reference to Exhibit 10.13 of
    Charles E. Smith Residential Realty, Inc.s Quarterly
    Report on Form 10-Q for the Quarter Ended June 30,
    1994)                                            
|       | 10 | .28         |  | Multifamily Note of Smith One to GMAC
    (incorporated by reference to Exhibit 10.14 of Charles E.
    Smith Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                                                                                                    
|       | 10 | .29         |  | Multifamily Note of Smith One D.C. to GMAC
    (incorporated by reference to Exhibit 10.15 of Charles E.
    Smith Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                                                                                               
|       | 10 | .30         |  | Absolute Assignment of Leases and Rents by Smith
    One D.C. to GMAC (incorporated by reference to
    Exhibit 10.16 of Charles E. Smith Residential Realty,
    Inc.s Quarterly Report on Form 10-Q for the Quarter
    Ended June 30, 1994)                                                                                                                                                    
|       | 10 | .31         |  | Property Management Agreement by and between
    Smith One and Charles E. Smith Residential Realty L.P.
    (incorporated by reference to Exhibit 10.17 of Charles E.
    Smith Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                                  
|       | 10 | .32         |  | Multifamily Deed of Trust, Assignment of Rents
    and Security Agreement between Smith One D.C. and GMAC
    (incorporated by reference to Exhibit 10.18 of Charles E.
    Smith Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                                

93



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##### Table of Contents



INDEX TO EXHIBITS 
(Continued)


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .33         |  | Commercial Leasing and Property Management
    Agreement between Smith Three and the Operating Partnership
    (incorporated by reference to Exhibit 10.19 of Charles E.
    Smith Residential Realty, Inc.s Quarterly Report on
    Form 10-Q for the Quarter Ended June 30, 1994)                                                                                                
|       | 10 | .34         |  | Credit Agreement By and Among Smith Property
    Holdings Lincoln Towers LLC and Smith Property Holdings McClurg
    Court LLC, as Borrower and Columbia National Real Estate
    Finance, Inc., as Lender. (incorporated by reference to
    Exhibit 99.1 of Charles E. Smith Residential Realty,
    Inc.s Quarterly Report on Form 10-Q for the Quarter
    Ended June 30, 2000)
|       | 10 | .35         |  | Articles Supplementary for Series E
    cumulative Redeemable Preferred Units of Beneficial Interest of
    Archstone-Smith Operating Trust (incorporated by reference to
    Exhibit 10.1 of Archstone-Smiths Quarterly Report on
    Form 10-Q for the Quarter Ended September 30, 2002)                                                                                         
|       | 10 | .36         |  | Articles Supplementary for Series F
    cumulative Redeemable Preferred Units of Beneficial Interest of
    Archstone-Smith Operating Trust (incorporated by reference to
    Exhibit 10.2 of Archstone-Smiths Quarterly Report on
    Form 10-Q for the Quarter Ended September 30, 2002)                                                                                         
|       | 10 | .37         |  | Articles Supplementary for Series G
    cumulative Redeemable Preferred Units of Beneficial Interest of
    Archstone-Smith Operating Trust (incorporated by reference to
    Exhibit 10.3 of Archstone-Smiths Quarterly Report on
    Form 10-Q for the Quarter Ended September 30, 2002)                                                                                         
|       | 12 | .1          |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                   
|       | 12 | .2          |  | Computation of Ratio of Earnings to Combined
    Fixed Charges and Preferred Unit Distributions                                                                                                                                                                                                                                                                                     
|       | 21 |             |  | Subsidiaries of Archstone-Smith Operating Trust                                                                                                                                                                                                                                                                                                                                     
|       | 23 | .1          |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                 
|       | 99 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                              
|       | 99 | .2          |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                              

94