##### Table of Contents









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,
    2003                                             
|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. o

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

Based on the closing price of Archstone-Smith
Trusts Common Shares on June 30, 2003, 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 $598,369,680.

At February 13, 2004, there were
approximately 25,233,992 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

|                                                  |  |                                                                                                        |  |                                     |    |  |    | 
|------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ----------------------------------- | -- |  | -- | 
|Item                                              |  | Description                                                                                            |  | Page                               
|                                                  |  |                                                                                                        |  |                                    
|PART I                                           
|                                                  |  |                                                                                                        |  | Glossary                            |    |  | 3  | 
|1.                                                |  | Business                                                                                               |  |                                     | 7  | 
|                                                  |  |                                                                                                        |  | The Company                         |    |  | 8  | 
|                                                  |  |                                                                                                        |  | Officers of the Operating
    Trust |    |  | 10 | 
|                                                  |  |                                                                                                        |  | Employees                           |    |  | 12 | 
|                                                  |  |                                                                                                        |  | Insurance                           |    |  | 13 | 
|                                                  |  |                                                                                                        |  | Risk Factors                        |    |  | 13 | 
|2.                                                |  | Properties                                                                                             |  |                                     | 17 | 
|                                                  |  |                                                                                                        |  | Geographic Distribution             |    |  | 17 | 
|                                                  |  |                                                                                                        |  | Real Estate Portfolio               |    |  | 18 | 
|3.                                                |  | Legal Proceedings                                                                                      |  |                                     | 20 | 
|4.                                                |  | Submission of Matters to a
    Vote of Security Holders                                                |  |                                     | 21 | 
|PART II                                          
|5.                                                |  | Market for the
    Registrants Common Equity and Related Stockholder
    Matters                      |  |                                     | 21 | 
|6.                                                |  | Selected Financial Data                                                                                |  |                                     | 23 | 
|7.                                                |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |                                     | 26 | 
|                                                  |  |                                                                                                        |  | Results of Operations               |    |  | 26 | 
|                                                  |  |                                                                                                        |  | Liquidity and Capital
    Resources |    |  | 32 | 
|                                                  |  |                                                                                                        |  | Litigation and
    Contingencies    |    |  | 36 | 
|                                                  |  |                                                                                                        |  | Critical Accounting
    Policies    |    |  | 37 | 
|                                                  |  |                                                                                                        |  | Off Balance Sheet
    Arrangements  |    |  | 40 | 
|                                                  |  |                                                                                                        |  | Contractual Commitments             |    |  | 41 | 
|                                                  |  |                                                                                                        |  | Related Party
    Transactions      |    |  | 41 | 
|                                                  |  |                                                                                                        |  | New Accounting
    Pronouncements   |    |  | 42 | 
|7A.                                               |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |                                     | 43 | 
|8.                                                |  | Financial Statements and
    Supplementary Data                                                        |  |                                     | 45 | 
|9.                                                |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |                                     | 45 | 
|9A.                                               |  | Controls and Procedures                                                                                |  |                                     | 45 | 
|PART III                                         
|10.                                               |  | Trustees and Executive
    Officers of the Registrant                                                  |  |                                     | 45 | 
|11.                                               |  | Executive Compensation                                                                                 |  |                                     | 46 | 
|12.                                               |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |                                     | 46 | 
|13.                                               |  | Certain Relationships and
    Related Transactions                                                     |  |                                     | 47 | 
|14.                                               |  | Principal Accountants Fees
    and Services                                                            |  |                                     | 47 | 
|PART IV                                          
|15.                                               |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  |                                     | 49 | 
|EX-4.4 Rights Agreement dated as of 12/1/03      
|EX-10.12 Amended and Restated Credit Agreement   
|EX-12.1 Computation of Ratio of Earnings         
|EX-12.2 Computation of Ratio of Earnings         
|EX-21 Subsidiaries of Archstone-Smith            
|EX-23.1 Consent of KPMG LLP                      
|EX-31.1 Certification of CEO pursuant to Sec. 302
|EX-31.2 Certification of CFO pursuant to Sec. 302
|EX-32.1 Certification of CEO pursuant to Sec. 906
|EX-32.2 Certification of CFO pursuant to Sec. 906



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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 cash, or at the option of
    Archstone-Smith, 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 11.5% of the Operating Trust at
    December 31, 2003.                      
|A-2 Common Units                         |  | Class A-2 common units of beneficial
    interest. Archstone-Smith is the sole holder of A-2 Common
    Units, which represent approximately an 88.5% interest of the
    Operating Trust at December 31, 2003.                                                                                                                                            
|Ameriton                                 |  | AMERITON Properties Incorporated, which is a
    taxable REIT subsidiary that engages in the opportunistic
    acquisition, development and eventual disposition of real estate
    with a shorter-term investment horizon.                                                                                                                                
|Ameriton Holdings                        |  | Ameriton Holdings LLC, owned 100% of the voting
    stock of Ameriton. During September 2003, the Operating Trust
    purchased the voting membership interest in Ameriton Holdings.                                                                                                                                                                       
|Annual Report                            |  | This Annual Report on Form 10-K filed with
    the Securities and Exchange Commission for the fiscal year ended
    December 31, 2003.                                                                                                                                                                                                                     
|Archstone                                |  | Archstone Communities Trust, the predecessor
    registrant to Archstone-Smith.                                                                                                                                                                                                                                                                            
|Archstone-Smith                          |  | Archstone-Smith Trust, sole holder of the A-2
    Common Units and sole trustee.                                                                                                                                                                                                                                                                           
|Board                                    |  | Collectively, refers to Archstone-Smiths
    Board of Trustees or to Archstone-Smith, our sole trustee,
    unless the context otherwise requires.                                                                                                                                                                                                        
|Class B Common Units                     |  | Common Units of beneficial interest 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 into 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.                                                                                                                                                                                         
|Consolidated Engineering Services or CES |  | Consolidated Engineering Services, Inc. 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 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 and RSUs 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 were convertible into a corresponding series of
    Preferred Shares. 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.                                                                                                                                                                                                                                                                                                                                                                    
|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. We rely on NOI for purposes of making
    decisions about resource allocations and assessing segment
    performance. We also believe NOI is a valuable means of
    comparing period-to-period property performance. See a
    reconciliation of NOI to Earnings from Operations in this Annual
    Report under caption Apartment Community Operations.
|NYSE                                  |  | New York Stock Exchange.                                                                                                                                                                                                                                                                                                                                                                                                              
|Operating Trust                       |  | Archstone-Smith Operating Trust.                                                                                                                                                                                                                                                                                                                                                                                                      

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|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abbreviation, Acronym or Defined Term |  | Definition/Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|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, H, I,
    J, K, and L Preferred Units.                                                                                                                                                                                                                                                                                                                                                                                                                        
|REIT                                  |  | Real estate investment trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Restricted Share Unit or RSU          |  | 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 two periods are being compared.
    Excludes communities which were not eligible for inclusion due
    to (i) recent acquisition or development, (ii) major
    redevelopment, or (iii) a significant number of non-
    operational units (fires, floods, etc.). Also excludes the
    Ameriton properties due to their short-term holding periods.
|Series A Preferred Units              |  | Operating Trust Series A Cumulative
    Preferred Units of Beneficial Interest, par value $0.01 per
    unit, which were redeemed in full in November 2003.                                                                                                                                                                                                                                                                                                                                        
|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, which were converted into Common Units
    in full in May 2003.                                                                                                                                                                                                                                                                                                
|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, which were converted into Common Units
    in full in July 2002.                                                                                                                                                                                                                                                                                               
|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.                                                                                                                                                                                                                                                                                                                                                                

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|                                      |  |                                                                                                                                                                                                                                                                                                                
|------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abbreviation, Acronym or Defined Term |  | Definition/Description                                                                                                                                                                                                                                                                                         
|                                      |  |                                                                                                                                                                                                                                                                                                                
|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.                                                                                                                                                                                                                                                                   
|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 we do not own, yet have 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.
|UPREIT                                |  | Umbrella Partnership Real Estate Investment Trust.                                                                                                                                                                                                                                                             

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PART I

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
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.






|        |         
|------- | --------
|Item 1. | Business

Archstone-Smith Operating Trust is a recognized
leader in apartment investment and operations. The company owns
and operates an irreplaceable portfolio of high-rise and garden
apartment communities concentrated in many of the most desirable
neighborhoods in the greater Washington, D.C. metropolitan area,
Southern California, the San Francisco Bay area, Chicago,
Boston, Seattle, the greater New York City metropolitan area and
Southeast Florida. The company continually upgrades the quality
of its portfolio through the selective sale of assets, using
proceeds to fund investments with higher anticipated growth
prospects. Through its two customer-facing brands, Archstone and
Charles E. Smith, we define the standard for apartment
operations. As of December 31, 2003, we owned or had an
ownership position in 249 communities, representing
88,183 units, including units under construction.

As of December 31, 2003, our operating
portfolio was concentrated in protected locations in the
following core markets, based on net operating income, excluding
amounts associated with communities that are owned by Ameriton
was as follows:

|                                           |        |  |      |       |  
|------------------------------------------ | ------ |  | ---- | ----- | -
|Greater Washington, D.C. metropolitan area |        |  | 40.0 | %    
|Southern California                        |        |  | 15.2 |      
|San Francisco Bay Area, California         |        |  | 9.8  |      
|Chicago, Illinois                          |        |  | 7.6  |      
|Boston, Massachusetts                      |        |  | 5.0  |      
|Southeast Florida                          |        |  | 4.2  |      
|Seattle, Washington                        |        |  | 3.3  |      
|Greater New York City metropolitan area    |        |  | 2.5  |      
|Other                                      |        |  | 12.4 |      
|                                           |        |  |      |      
|                                           | Total: |  |      | 100.0 | %
|                                           |        |  |      |      

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The Company

We are a REIT engaged primarily in the operation,
development, redevelopment, acquisition, management and
long-term ownership of apartment communities throughout the
United States. Archstone-Smith 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 owned 88.5% of our Common Units at
December 31, 2003. Archstone-Smith Common Shares trade on
the New York Stock Exchange (NYSE:ASN).

We focus on creating value for our unitholders by:



| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maximizing the performance of our apartment
    communities by (i) generating long-term sustainable growth
    in operating cash flow, (ii) strengthening our operating
    platform, (iii) leveraging the equity of our brands,
    (iv) investing in technology that improves our core
    business, (v) and solidifying our reputation for
    operational leadership;
|
| |  | Acquiring, developing and operating apartments in
    markets characterized by: (i) protected locations with
    limited land on which to build new housing; (ii) expensive
    single-family home prices; and (iii) a strong, diversified
    economic base and job growth potential; and                                                                               
|
| |  | The selective sale of assets, which allows us to
    continually upgrade our portfolio by using proceeds to fund
    investments with higher anticipated growth prospects.                                                                                                                                                                                               

Customer-focused Operations

We believe that our long-term cash flow growth is
enhanced by the Archstone and Charles E. Smith brands, our
efficient operating platform, robust and scalable technology,
and the continued investment in our associates:

Powerful brands.An
essential component of our strategy is to consistently offer a
higher level of service at all our apartment communities.
Through Archstones Seal of ServiceTM and
Charles E. Smiths Smith Advantage, we offer our
residents convenience and flexibility all backed by written
guarantees. These programs help to create customer loyalty and
trust, and increase the likelihood of renewals and referrals.

Strengthening our
operations.We believe that we can
create a distinct competitive advantage by identifying and
implementing the best practices for our most critical processes
and standardizing them at each of our communities. To do this,
we assembled a core process project (CPP) team to focus on
three important customer touch-points: (i) customer
inquiries and leasing, (ii) the move-in experience, and
(iii) renewal, transfer or move-out. To capture best
practices, the CPP team conducts extensive field research with
front-line associates to translate proven tactics into scalable
tools that ensure consistency in our day-to-day customer
interactions. We believe that by enhancing our customers
experiences with us, we will ultimately increase customer
acquisition, retention and referrals.

Investing in technology.We invest in technology to improve our
core operations and make it easier for our customers to do
business with us. In 2003, we completed the implementation of a
revenue and pricing management system and launched a new
web-based property management system that we believe will
redefine the way customers lease an apartment and how we manage
our apartment communities.

We pioneered the use of Lease Rent
OptionsTM (LRO), the first pricing and revenue
management software system in the apartment industry. LRO
enables us to more precisely forecast and analyze market demand
and unit availability by taking into account multiple variables
that are difficult to compile manually to optimize pricing for
our apartments, thereby enhancing total revenues for the
company. In addition, LRO allows us to offer flexible lease
terms to new and renewing customers, creating a level of
flexibility that has never been available in the apartment
industry.

We are also upgrading our existing property
management system to 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 allows us to fully
integrate LRO, our

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pricing and revenue management software, into our
operating platform and automate virtually all of our daily
on-site leasing and reporting tasks. This allows us to execute
leases more smoothly and quickly  and improve our
customers experience.


In addition, RM provides a seamless online
interface with our customers via resident-only web sites,
allowing customers 24/7 access to us to complete new and renewed
leases, pay rent online, submit service requests and more. The
systems automated work order solution allows us to
directly enhance our customer service offering by improving our
ability to manage and execute service requests, one of our most
important customer functions. Equally important, the system
gives us the ability to accurately track resident histories to
better understand and serve our customers. We expect to complete
the rollout of RM across our entire portfolio in 2005.

Investing in our associates.A critical component to ensuring the
integrity of our brand offering is attracting, training and
retaining the best professionals in our industry  and
giving them the support and tools to provide an exceptional
customer experience.

Each of our on-site associates receives extensive
training in their first year through our Customer-centered Sales
Excellence (CCSE) training program. CCSEs seven
training modules cover the various aspects of our sales process
and are offered to associates in manageable half-day classes.

In 2003, we introduced The Practice of Leadership
training program to on-site, corporate and regional managers to
give them the tools to become better leaders. This three-day
program focuses on six leadership practices consistent with our
company culture and values that we believe drive our success.
This program is complemented by a 360-Degree Feedback Program,
through which direct reports, supervisors and peers evaluate
corporate managers to identify strengths and opportunities for
improvement.

Investment Strategy

Protected markets.We invest our capital in protected markets in locations where
there is a very limited amount of land on which new housing can
be developed, which minimizes competition. In addition to supply
constraints, our core markets  the greater
Washington, D.C. metropolitan area, Southern California, the San
Francisco Bay area, Chicago, Boston, Seattle, the greater New
York City metropolitan area and Southeast Florida 
are characterized by (i) relatively stable demand,
(ii) a diverse economic base and (iii) expensive
single-family home prices, which we believe maximize our ability
to maintain occupancy and produce sustainable long-term cash
flow growth.

Capital recycling program.We utilize a sophisticated capital
allocation strategy, using the selective sale of assets to
redeploy disposition proceeds into investments with higher
anticipated long-term growth prospects. We believe that
concentrating our portfolio in protected markets improves our
growth rate, value creation and long-term business fundamentals.

In 2003, we sold $1.4 billion of apartment
communities (excluding Ameriton) representing 15,599 units,
generating GAAP gains of $310.9 million and an average
unleveraged internal rate of return of 13.0%. Additionally, we
acquired $508.9 million of operating communities,
representing 2,893 units, essentially all of which were funded
by disposition proceeds. We believe the quality of our portfolio
is continually upgraded by redeploying disposition proceeds into
new investments.

Development and redevelopment.We believe we create significant value
through the development of new apartment communities and the
redevelopment of existing operating communities. At
December 31, 2003, we had 2,607 units, representing a Total
Expected Investment of $636.9 million, of development
communities under construction in markets that include Southern
California, downtown Boston and the greater Washington, D.C.
metropolitan area. Of the total amount, $301.6 million is
already funded. In 2003, we completed $171.5 million of new
development communities, representing 861 units.

We also dramatically reposition assets by
upgrading interiors, exteriors, leasing offices, parking
facilities, landscaping, and amenities that we believe can
produce attractive returns on invested capital. In addition, we

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invest in revenue-enhancing and expense-reducing
capital expenditures such as building garages/carports,
additional storage facilities, and adding utility sub-metering
systems.


Conservative Balance Sheet
Management

One of our primary financial objectives is to
structure our balance sheet to enhance our financial flexibility
in order to have access to capital when others in the industry
do not. We have a significant equity base, with a total equity
market capitalization of $6.4 billion as of
December 31, 2003. 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.

During 2003, we financed our investment activity
primarily through internally generated cash flow from operations
and asset dispositions. Our dispositions for the year ended
December 31, 2003, totaled $1.4 billion. We used a
portion of the proceeds to repay $400 million of debt,
which reduced our ratio of
debt-to-undepreciated-book-capitalization from 47% at
December 31, 2002 to 42% at the end of 2003. We also
reduced our secured debt levels by $250 million and
increased our unencumbered asset base to $5.8 billion as of
December 31, 2003. As of February 13, 2004, we had
approximately $1.2 billion of liquidity, including cash on
hand, liquid assets, restricted cash in escrows and capacity on
unsecured credit facilities.

Our long-term debt is structured to create a
relatively level principal maturity schedule, without
significant repayment obligations in any year. We have only
$113.5 million of long-term debt maturing in 2004,
representing 1.1% of our total market capitalization. The
following summarizes our long-term debt maturity profile for
2004 through 2008, and thereafter, as of December 31, 2003
(dollar amounts in thousands):

|           |       |       |           |                   |  |  |      |      |  
|---------- | ----- | ----- | --------- | ----------------- |  |  | ---- | ---- | -
|           |       |       |           | % of Total Market
|Year       |       | Total |           | Capitalization(1)
|           |       |       |           |                  
|2004       |       | $     | 113,522   |                   |  |  | 1.1  | %   
|2005       |       |       | 319,944   |                   |  |  | 3.1  | %   
|2006       |       |       | 355,642   |                   |  |  | 3.5  | %   
|2007       |       |       | 515,312   |                   |  |  | 5.0  | %   
|2008       |       |       | 461,393   |                   |  |  | 4.5  | %   
|Thereafter |       |       | 2,033,777 |                   |  |  | 19.7 | %   
|           |       |       |           |                   |  |  |      |     
|           | Total |       | $         | 3,799,590         |  |  |      | 36.9 | %
|           |       |       |           |                   |  |  |      |     



---



|    |                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Total market capitalization as of
    December 31, 2003, represents the market capitalization
    based on the closing share price on the last trading day of the
    period for publicly traded securities and liquidation value for
    private securities as well as the book value of total debt.

Consistent dividend
growth.We paid distributions of $1.71
per Common Unit in 2003 and announced our anticipated 2004
distribution level of $1.72 per unit, a 169% increase since
1991, the year we began to focus exclusively on multifamily
communities. With the 2004 increase, we have raised our annual
distribution for 12 consecutive years. We have paid
114 consecutive quarterly distributions.

Management

We have several senior executives who possess the
leadership, operational, investment and financial skills and
experience to oversee the overall operation of our company.
Several of our senior officers could serve as the 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 88.5% of our total
outstanding Common Units. Archstone-Smith is the Operating
Trusts sole Trustee. References throughout

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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 of Financial Condition and Results of
Operations 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         |  | Chairman and Chief Executive Officer                   
|J. Lindsay Freeman      |  | Chief Operating Officer                                
|Charles E. Mueller, Jr. |  | Chief Financial Officer                                
|Al Neely                |  | Chief Development Officer                              
|James D. Rosenberg      |  | President  High Rise Division                         
|Dana K. Hamilton        |  | Executive Vice President  National
    Operations     
|Caroline Brower         |  | General Counsel and Secretary                          
|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 
47 Trustee, 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 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 and
Second Vice Chairman of the Board Governors of NAREIT; a member
of the Executive Committee of the Board of Directors of the
National Multi Housing Council; Director of Christian
International Scholarship Foundation; Director of Alliance for
Choice in Education.

J. Lindsay Freeman 
58 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 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. 
40 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.

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Al Neely 
58 Chief Development
Officer of the Operating Trust since April 2003, with
responsibility for the oversight and direction of all Operating
Trust residential development projects; Executive Vice President
of the Operating Trust and Charles E. Smith Residential Realty,
Inc. from April 1989 to April 2003 with responsibility for
oversight and direction of High-Rise residential development
projects; Executive Vice President and Managing General Partner
of the New Height Group from August 1981 to April 1989 with
responsibility for the development and management of
2.5 million square feet of mixed-use property; General
Manager of a 1,100-acre mixed-use business park from October
1973 to April 1989 where he managed the development of
3.5 million square feet of corporate user buildings.

James D. Rosenberg 
46 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  35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; 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  55General Counsel and Secretary of the
Operating Trust since September, 1999, with responsibility for
legal and corporate governance; 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 LLP),
where she practiced transaction and real estate law.

Daniel E.
Amedro  47Chief Information Officer and Senior
Vice President of the Operating Trust since January 1999, 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.

Mark A.
Schumacher  45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 departments of 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
2,730 individuals, of whom approximately 2,160 are focused
on the site-level operation of our garden communities and
high-rise properties. Of the site-level associates,
approximately 85 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.

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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.

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.

Available Information and Code of
Ethics

Our web site is http://www.archstonesmith.com.We make available free of charge, on or through our web
site, our annual, quarterly and current reports, as well as any
amendments to these reports, as soon as reasonably practicable
after electronically filing these reports with the Securities
and Exchange Commission. The reference to our web site does not
incorporate by reference the information contained in the web
site and such information should not be considered a part of
this report. We have adopted a code of ethics and business
conduct applicable to our Board and officers and employees,
including our principal executive officer, principal financial
officer and principal accounting officer or controller. A copy
of our code of ethics and business conduct is included as an
exhibit to this report and is available through our web site. In
addition, copies of the code of ethics and business conduct can
be obtained, free of charge, upon written request to Investor
Relations, 9200 East Panorama Circle, Suite 400, Englewood,
Colorado 80112. Any amendments to or waivers of our code of
ethics and business conduct that apply to the principal
executive officer, principal financial officer and principal
accounting officer or controller and that relate to any matter
enumerated in Item 406(b) of Regulation S-K, will be
disclosed on our web site.




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, unless they are all sold as a single transaction,
without the consent of Messrs. Smith and Kogod, which could
result in our inability to sell these properties at an opportune
time without incurring additional costs.

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

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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.



| |                                                           
| | ----------------------------------------------------------
| | 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 $3.9 billion in total debt
outstanding as of December 31, 2003, of which
$1.9 billion was secured by real estate assets and
$599.8 million was subject to variable interest rates,
including $103.8 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 could be subject to acts of
    terrorism.

Periodically, we receive alerts from government
agencies that apartment communities could be the target of both
domestic and foreign terrorism. Although we currently have
insurance coverage for losses incurred in connection with
terrorist-related activities, losses could exceed our coverage
limits and have a material adverse affect on our operating
results.



| |                                                                  
| | -----------------------------------------------------------------
| | 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,

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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 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.



| |                                                             
| | ------------------------------------------------------------
| | 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. 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.



| |                                                  
| | -------------------------------------------------
| | 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, such as the enactment of
regulations relating to internal air quality, 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.

15



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| |                                                                                    
| | -----------------------------------------------------------------------------------
| | 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 it 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 intend to qualify as a partnership, but
    we cannot guarantee 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,
dividends 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 will incur
substantial tax liabilities, Archstone-Smith would fail to
qualify as a REIT for tax purposes and our ability to raise
additional capital would be impaired.



| |                                                                   
| | ------------------------------------------------------------------
| | 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. 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, 2003, approximately 40.0% of
our apartment communities are located in the Greater Washington,
D.C. Metropolitan Area, based on NOI. Approximately 15.2% of our
apartment communities are located in Southern California at
December 31, 2003, 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 9.8% of our apartment communities
are located in the San Francisco Bay Area of California at
December 31, 2003, 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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| |                                                      
| | -----------------------------------------------------
| | 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, 2003, the geographic
distribution for our eight core markets based on NOI, excluding
properties owned by Ameriton, was as follows:

|                                           |       |  |      |      |  
|------------------------------------------ | ----- |  | ---- | ---- | -
|Greater Washington, D.C. Metropolitan Area |       |  | 40.0 | %   
|Southern California                        |       |  | 15.2 |     
|San Francisco Bay Area, California         |       |  | 9.8  |     
|Chicago, Illinois                          |       |  | 7.6  |     
|Boston, Massachusetts                      |       |  | 5.0  |     
|Southeast Florida                          |       |  | 4.2  |     
|Seattle, Washington                        |       |  | 3.3  |     
|Greater New York City Metropolitan Area    |       |  | 2.5  |     
|                                           |       |  |      |     
|                                           | Total |  |      | 87.6 | %
|                                           |       |  |      |     

17



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##### Table of Contents



The following table summarizes the geographic
distribution at December 31, 2003 based on NOI:

|                 |                                            |                        |                   |      |      |       |   |      |      |       |   |      |      |       |  
|---------------- | ------------------------------------------ | ---------------------- | ----------------- | ---- | ---- | ----- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                 |                                            |                       
|                 |                                            | Total Portfolio(1)(2) 
|                 |                                            |                       
|                 |                                            | 2003                   |                   | 2002 |      | 2001 
|                 |                                            |                        |                   |      |      |      
|Core Markets     |                                            |                        |                   |      |      |       |   |      |      |       |   |     
|                 | Greater Washington, D.C. Metropolitan Area |                        |                   | 40.0 | %    |       |   | 35.1 | %    |       |   | 33.2 | %   
|                 | Southern California                        |                        |                   | 15.2 |      |       |   | 13.2 |      |       |   | 11.8 |     
|                 | San Francisco Bay Area, California         |                        |                   | 9.8  |      |       |   | 9.0  |      |       |   | 9.8  |     
|                 | Chicago, Illinois                          |                        |                   | 7.6  |      |       |   | 8.5  |      |       |   | 9.0  |     
|                 | Boston, Massachusetts                      |                        |                   | 5.0  |      |       |   | 5.2  |      |       |   | 5.1  |     
|                 | Southeast Florida                          |                        |                   | 4.2  |      |       |   | 6.6  |      |       |   | 7.2  |     
|                 | Seattle, Washington                        |                        |                   | 3.3  |      |       |   | 3.4  |      |       |   | 4.0  |     
|                 | Greater New York City Metropolitan Area    |                        |                   | 2.5  |      |       |   | 2.2  |      |       |   |     |     
|                 |                                            |                        |                   |      |      |       |   |      |      |       |   |     
|                 |                                            | Total Core Markets     |                   |      | 87.6 | %     |   |      | 83.2 | %     |   |      | 80.1 | %    
|                 |                                            |                        |                   |      |      |       |   |      |      |       |   |     
|Non-Core Markets |                                            |                        |                   |      |      |       |   |      |      |       |   |     
|                 | Atlanta, Georgia                           |                        |                   | 2.5  | %    |       |   | 3.1  | %    |       |   | 3.3  | %   
|                 | Denver, Colorado                           |                        |                   | 2.2  |      |       |   | 2.4  |      |       |   | 2.7  |     
|                 | Houston, Texas                             |                        |                   | 1.4  |      |       |   | 1.0  |      |       |   | 1.4  |     
|                 | Phoenix, Arizona                           |                        |                   | 1.4  |      |       |   | 2.1  |      |       |   | 2.3  |     
|                 | Raleigh, North Carolina                    |                        |                   | 1.1  |      |       |   | 1.4  |      |       |   | 1.8  |     
|                 | Other                                      |                        |                   | 3.8  |      |       |   | 6.8  |      |       |   | 8.4  |     
|                 |                                            |                        |                   |      |      |       |   |      |      |       |   |     
|                 |                                            | Total Non-Core Markets |                   |      | 12.4 | %     |   |      | 16.8 | %     |   |      | 19.9 | %    
|                 |                                            |                        |                   |      |      |       |   |      |      |       |   |     
|                 |                                            |                        | 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, which closed
    October 31, 2001. See Item 7 under the caption
    Apartment Community Operationsfor a
    discussion on why we believe NOI is a meaningful measure and a
    reconciliation of NOI to Earnings for Operations.
|   
|(2) | Excludes all Ameriton properties.                                                                                                                                                                                                                                                                                                                                                                                                                               




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.
The following information summarizes our real estate portfolio
as of December 31, 2003 (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: |                         |             |  |           |  |            |  |            |  |  |   |         |  |  |  |     
|Garden Communities:              |                         |             |  |           |  |            |  |            |  |  |   |         |  |  |  |     
|                                 | Albuquerque, New Mexico |             |  | 2         |  |            |  | 664        |  |  | $ | 42,374  |  |  |  | 95.8 | %
|                                 | Atlanta, Georgia        |             |  | 9         |  |            |  | 2,659      |  |  |   | 215,689 |  |  |  | 97.0 | %
|                                 | Austin, Texas           |             |  | 2         |  |            |  | 714        |  |  |   | 34,187  |  |  |  | 93.8 | %
|                                 | Boston, Massachusetts   |             |  | 6         |  |            |  | 1,308      |  |  |   | 220,713 |  |  |  | 98.2 | %

18



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##### Table of Contents



|                      |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |      |      |      |  
|--------------------- | ------------------------------------------ | ---------------------------------- | ------------------------------------------------- | --------- | --- | ---------- |  | ---------- | ------ | ------ | - | --------- | --------- | --------- |  | ---- | ---- | ---- | -
|                      |                                            |                                    |                                                   |           |     | Operating  |  |           
|                      |                                            | Number of                          |                                                   | Number of |     | Trust      |  | Percentage
|                      |                                            | Communities                        |                                                   | Units     |     | Investment |  | Leased(1) 
|                      |                                            |                                    |                                                   |           |     |            |  |           
|                      | Chicago, Illinois                          |                                    |                                                   | 4         |     |            |  | 1,313      |        |        |   | 143,681   |           |           |  | 93.6 | %   
|                      | Dallas, Texas                              |                                    |                                                   | 5         |     |            |  | 1,282      |        |        |   | 67,162    |           |           |  | 96.3 | %   
|                      | Denver, Colorado                           |                                    |                                                   | 6         |     |            |  | 1,949      |        |        |   | 166,094   |           |           |  | 96.0 | %   
|                      | Greater Washington, D.C. Metropolitan Area |                                    |                                                   | 22        |     |            |  | 8,735      |        |        |   | 1,120,293 |           |           |  | 97.0 | %   
|                      | Houston, Texas                             |                                    |                                                   | 2         |     |            |  | 1,408      |        |        |   | 73,945    |           |           |  | 96.2 | %   
|                      | Inland Empire, California                  |                                    |                                                   | 4         |     |            |  | 1,594      |        |        |   | 96,901    |           |           |  | 96.3 | %   
|                      | Los Angeles County, California             |                                    |                                                   | 8         |     |            |  | 2,304      |        |        |   | 393,355   |           |           |  | 96.1 | %   
|                      | Orange County, California                  |                                    |                                                   | 7         |     |            |  | 1,647      |        |        |   | 179,768   |           |           |  | 98.0 | %   
|                      | Orlando, Florida                           |                                    |                                                   | 1         |     |            |  | 312        |        |        |   | 21,622    |           |           |  | 96.8 | %   
|                      | Phoenix, Arizona                           |                                    |                                                   | 3         |     |            |  | 1,212      |        |        |   | 74,454    |           |           |  | 95.7 | %   
|                      | Portland, Oregon                           |                                    |                                                   | 2         |     |            |  | 576        |        |        |   | 37,695    |           |           |  | 97.6 | %   
|                      | Raleigh, North Carolina                    |                                    |                                                   | 5         |     |            |  | 1,324      |        |        |   | 96,730    |           |           |  | 97.3 | %   
|                      | San Antonio, Texas                         |                                    |                                                   | 1         |     |            |  | 224        |        |        |   | 12,826    |           |           |  | 96.0 | %   
|                      | San Diego, California                      |                                    |                                                   | 7         |     |            |  | 2,559      |        |        |   | 290,329   |           |           |  | 98.0 | %   
|                      | San Francisco Bay Area, California         |                                    |                                                   | 14        |     |            |  | 5,454      |        |        |   | 708,897   |           |           |  | 95.4 | %   
|                      | Seattle, Washington                        |                                    |                                                   | 7         |     |            |  | 2,808      |        |        |   | 234,773   |           |           |  | 95.4 | %   
|                      | Southeast Florida                          |                                    |                                                   | 6         |     |            |  | 1,566      |        |        |   | 163,239   |           |           |  | 96.5 | %   
|                      | Stamford, Connecticut                      |                                    |                                                   | 1         |     |            |  | 160        |        |        |   | 36,390    |           |           |  | 97.5 | %   
|                      | West Coast Florida                         |                                    |                                                   | 3         |     |            |  | 746        |        |        |   | 44,021    |           |           |  | 98.3 | %   
|                      | Ventura County, California                 |                                    |                                                   | 2         |     |            |  | 770        |        |        |   | 69,803    |           |           |  | 97.5 | %   
|                      |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |     
|                      |                                            | Garden Community Subtotal/ Average |                                                   |           | 129 |            |  |            | 43,288 |        |   | $         | 4,544,941 |           |  |      | 96.5 | %   
|                      |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |     
|High-Rise Properties: |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |     
|                      | Boston, Massachusetts                      |                                    |                                                   | 3         |     |            |  | 693        |        |        | $ | 177,681   |           |           |  | 98.7 | %   
|                      | Chicago, Illinois                          |                                    |                                                   | 6         |     |            |  | 3,516      |        |        |   | 625,274   |           |           |  | 94.6 | %   
|                      | Greater New York City Metropolitan Area    |                                    |                                                   | 1         |     |            |  | 506        |        |        |   | 211,823   |           |           |  | 96.2 | %   
|                      | Greater Washington, D.C. Metropolitan Area |                                    |                                                   | 31        |     |            |  | 11,325     |        |        |   | 1,959,200 |           |           |  | 96.5 | %   
|                      | Southeast Florida                          |                                    |                                                   | 5         |     |            |  | 4,520      |        |        |   | 548,156   |           |           |  | 97.1 | %   
|                      |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |     
|                      |                                            | High-Rise Subtotal/ Average        |                                                   |           | 46  |            |  |            | 20,560 |        |   | $         | 3,522,134 |           |  |      | 96.4 | %   
|                      |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |     
|                      |                                            |                                    | Operating Apartment Communities Subtotal/ Average |           |     | 175        |  |            |        | 63,848 |   |           | $         | 8,067,075 |  |      |      | 96.4 | %
|                      |                                            |                                    |                                                   |           |     |            |  |            |        |        |   |           |           |           |  |     

|                                              |                                |                                    |  |           |   |            |  |            |       |  |   |         |         |  |  |      |     | 
|--------------------------------------------- | ------------------------------ | ---------------------------------- |  | --------- | - | ---------- |  | ---------- | ----- |  | - | ------- | ------- |  |  | ---- | --- | 
|                                              |                                |                                    |  |           |   | Archstone- |  |           
|                                              |                                | Number of                          |  | Number of |   | Smith      |  | Percentage
|                                              |                                | Communities                        |  | Units     |   | Investment |  | Leased(1) 
|                                              |                                |                                    |  |           |   |            |  |           
|APARTMENT COMMUNITIES UNDER
    CONSTRUCTION: |                                |                                    |  |           |   |            |  |            |       |  |   |         |         |  |  |     
|Garden Communities:                           |                                |                                    |  |           |   |            |  |            |       |  |   |         |         |  |  |     
|                                              | Boston, Massachusetts          |                                    |  | 1         |   |            |  | 134        |       |  | $ | 17,933  |         |  |  | N/A  |    
|                                              | Long Island, New York          |                                    |  | 1         |   |            |  | 396        |       |  |   | 32,828  |         |  |  | N/A  |    
|                                              | Los Angeles County, California |                                    |  | 4         |   |            |  | 1,129      |       |  |   | 200,666 |         |  |  | 66.1 | %  
|                                              | Ventura County, California     |                                    |  | 1         |   |            |  | 316        |       |  |   | 14,208  |         |  |  | N/A  |    
|                                              |                                |                                    |  |           |   |            |  |            |       |  |   |         |         |  |  |     
|                                              |                                | Garden Community Subtotal/ Average |  |           | 7 |            |  |            | 1,975 |  |   | $       | 265,635 |  |  |      | N/A | 
|                                              |                                |                                    |  |           |   |            |  |            |       |  |   |         |         |  |  |     

19



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##### Table of Contents



|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |     |     |     |  | 
|--------------------------------------------------- | ------------------------------------------ | ----------------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------------- | -- | ---------- | ----- | ---------- | ----- | ----- | ------ | ------ | ------- | ------- | --------- | --- | --- | --- |  | 
|                                                    |                                            |                                                                         |                                                                |                                                            |    | Archstone- |       |           
|                                                    |                                            | Number of                                                               |                                                                | Number of                                                  |    | Smith      |       | Percentage
|                                                    |                                            | Communities                                                             |                                                                | Units                                                      |    | Investment |       | Leased(1) 
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |           
|High Rise Properties:                               |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    | Boston, Massachusetts                      |                                                                         |                                                                | 1                                                          |    |            |       | 420        |       |       | $      | 26,768 |         |         |           | N/A |    
|                                                    | Greater Washington, D.C. Metropolitan Area |                                                                         |                                                                | 1                                                          |    |            |       | 212        |       |       |        | 9,231  |         |         |           | N/A |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            | High Rise Property Subtotal/ Average                                    |                                                                |                                                            | 2  |            |       |            | 632   |       |        | $      | 35,999  |         |           |     | N/A |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            |                                                                         | Apartment Communities Under Construction
    Subtotal/ Average |                                                            |    | 9          |       |            |       | 2,607 |        |        | $       | 301,634 |           |     |     | N/A | 
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|APARTMENT COMMUNITIES IN PLANNING AND
    OWNED(3): |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|Garden Communities:                                 |                                            |                                                                         | 6                                                              |                                                            |    |            | 2,633 |            |       | $     | 95,911 |        |         |         |           |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            | Total Apartment Communities In Planning and Owned
    Subtotal/ Average |                                                                |                                                            | 6  |            |       |            | 2,633 |       |        | $      | 95,911  |         |           |     |     |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            |                                                                         |                                                                | Total Apartment Communities Owned at
    December 31, 2003 |    |            | 190   |            |       |       | 69,088 |        |         | $       | 8,464,620 |     |     |     |  | 
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|OTHER REAL ESTATE ASSETS(2)                         |                                            |                                                                         |                                                                |                                                            |    |            |      |            |       |       | 17,352 |        |         |         |           |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|HOTEL ASSET                                         |                                            |                                                                         |                                                                |                                                            |    |            |      |            |       |       | 22,870 |        |         |         |           |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|AMERITON PORTFOLIO:                                 |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            | Operating Apartment Communities                                         |                                                                |                                                            | 10 |            |       |            | 2,526 |       |        |        | 283,319 |         |           |     |     |    
|                                                    |                                            | Apartment Communities Under Construction                                |                                                                |                                                            | 7  |            |       |            | 2,385 |       |        |        | 171,125 |         |           |     |     |    
|                                                    |                                            | Apartment Communities In Planning and Owned and
    Other               |                                                                |                                                            | 3  |            |       |            | 735   |       |        |        | 39,894  |         |           |     |     |    
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            |                                                                         |                                                                | Subtotal/Average                                           |    |            | 20    |            |       |       | 5,646  |        |         |         | 494,338   |     |     |     |  | 
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    
|                                                    |                                            |                                                                         |                                                                | Total Real Estate Owned at December 31, 2003               |    |            | 210   |            |       |       | 74,734 |        |         | $       | 8,999,180 |     |     |     |  | 
|                                                    |                                            |                                                                         |                                                                |                                                            |    |            |       |            |       |       |        |        |         |         |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the percentage leased as of
    December 31, 2003. 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, 2003. 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, 2003, we had one
    investment representing 112 units classified as In Planning and
    Under Control. Our actual investment in this community was
    $1.1 million, which is reflected in the Other
    assets caption of our Balance Sheet.                                                                                                            






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are subject to the following claims in
connection with moisture infiltration and resulting mold issues
at high-rise properties in Southeast Florida.

Henriques, et al. v. Archstone-Smith Operating
Trust, et al., filed on
August 27, 2002 (the Henriques Claim), in the
Circuit Court of the Eleventh Judicial Circuit in and for
Miami-Dade County, Florida, on behalf of a class of residents at
Harbour House. We have reached a court-approved settlement with
the plaintiffs in this matter. The case alleged that water
infiltration and resulting mold contamination at the property
had been caused by faulty air-conditioning and had resulted in
both personal injuries to the plaintiffs and damage to their
property. Based on the settlement, we have recorded a liability
for estimated legal fees associated with known and anticipated
costs for our counsel and plaintiffs counsel, as well as
estimated settlement costs. Not all plaintiffs have accepted the
court-approved settlement, which could result in further court
proceedings and potential legal fees and damages not
contemplated in our current accrual. See

20



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##### Table of Contents



Managements Discussion and Analysis of
Financial Conditions and Results of Operations in this Annual
Report for further discussion regarding this accrual.


Santos, et al. v. Archstone-Smith Operating
Trust et al., filed on
February 13, 2003, in the Circuit Court of the Eleventh
Judicial Circuit in and for Miami-Dade County, Florida, on
behalf of a class of residents at Harbour House. The plaintiffs
in this case make substantially the same allegations as those
made in the Henriquesclaim and seek both injunctive
relief and unspecified monetary and punitive damages. Although
we believe this case to be without merit, we are currently in
settlement discussions with the individuals who have retained
counsel. Based on the status of these discussions, we have
recorded a liability for estimated legal fees associated with
known and anticipated costs for our counsel and plaintiffs
counsel, as well as estimated settlement costs. See
Managements Discussion and Analysis of Financial
Conditions and Results of Operations in this Annual Report for
further discussion regarding this accrual.

Michel, et al, v. Archstone-Smith Operating
Trust, et al., was filed on
May 9, 2003, in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida, on behalf of the
class of residents at the property. The plaintiffs in this case
make substantially the same allegations as those made in the
Henriquesclaim and seek both injunctive relief and
unspecified monetary and punitive damages. We believe this suit
is without merit, and intend to vigorously contest the claims
asserted in this litigation. No assurances can be given that
this lawsuit, if adversely determined, will not have a material
adverse effect on the company.

Semidey, et al., v. Archstone-Smith Operating
Trust et al., was filed on
June 9, 2003, in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida, on behalf of the
class of residents at the property. The plaintiffs in this case
make substantially the same allegations as those made in the
Henriquesclaim and seek both injunctive relief and
unspecified monetary and punitive damages. We were never served
with this complaint, but we have reached a settlement with a
majority of the represented residents and are in discussions
with the remaining plaintiffs. As a result, this complaint has
been voluntarily dismissed without prejudice. Based on the
status of these discussions, we have recorded a liability for
estimated legal fees associated with known and anticipated costs
for our counsel and plaintiffs counsel, as well as
estimated settlement costs. No assurances can be given that the
claims of the remaining represented residents will not result in
additional lawsuits, or that if any such lawsuits were adversely
determined, it would not have a material adverse effect on the
company.

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.




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:

|                 |                 |       |   |      |      |      |   |      |      |  |   |      |      | 
|---------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                 |                 | 2003  |   | 2002 |      | 2001
|                 |                 |       |   |      |      |     
|Per Common Unit: |                 |       |   |      |      |      |   |      |      |  |   |     
|                 | Ordinary income |       | $ | 0.77 |      |      | $ | 1.33 |      |  | $ | 0.89 |     
|                 | Capital gains   |       |   | 0.94 |      |      |   | 0.37 |      |  |   | 0.75 |     
|                 |                 |       |   |      |      |      |   |      |      |  |   |     
|                 |                 | Total |   | $    | 1.71 |      |   | $    | 1.70 |  |   | $    | 1.64 | 
|                 |                 |       |   |      |      |      |   |      |      |  |   |     

21



---



##### Table of Contents



|                                            |                 |       |   |      |      |      |   |      |      |  |   |      |      | 
|------------------------------------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                            |                 | 2003  |   | 2002 |      | 2001
|                                            |                 |       |   |      |      |     
|Per Series A Convertible Preferred Unit(1): |                 |       |   |      |      |      |   |      |      |  |   |     
|                                            | Ordinary income |       | $ | 0.95 |      |      | $ | 1.79 |      |  | $ | 1.19 |     
|                                            | Capital gains   |       |   | 1.16 |      |      |   | 0.50 |      |  |   | 1.02 |     
|                                            |                 |       |   |      |      |      |   |      |      |  |   |     
|                                            |                 | Total |   | $    | 2.11 |      |   | $    | 2.29 |  |   | $    | 2.21 | 
|                                            |                 |       |   |      |      |      |   |      |      |  |   |     

|                                |                 |       |   |      |   |      |   |   |   |  |   |      |      | 
|------------------------------- | --------------- | ----- | - | ---- | - | ---- | - | - | - |  | - | ---- | ---- | 
|                                |                 | 2003  |   | 2002 |   | 2001
|                                |                 |       |   |      |   |     
|Per Series B Preferred Unit(2): |                 |       |   |      |   |      |   |   |   |  |   |     
|                                | Ordinary income |       | $ |     |   |      | $ |  |   |  | $ | 0.42 |     
|                                | Capital gains   |       |   |     |   |      |   |  |   |  |   | 0.37 |     
|                                |                 |       |   |      |   |      |   |   |   |  |   |     
|                                |                 | Total |   | $    |  |      |   | $ |  |  |   | $    | 0.79 | 
|                                |                 |       |   |      |   |      |   |   |   |  |   |     

|                                |                 |       |   |      |   |      |   |      |      |  |   |      |      | 
|------------------------------- | --------------- | ----- | - | ---- | - | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                |                 | 2003  |   | 2002 |   | 2001
|                                |                 |       |   |      |   |     
|Per Series C Preferred Unit(3): |                 |       |   |      |   |      |   |      |      |  |   |     
|                                | Ordinary income |       | $ |     |   |      | $ | 1.08 |      |  | $ | 1.16 |     
|                                | Capital gains   |       |   |     |   |      |   | 0.30 |      |  |   | 1.00 |     
|                                |                 |       |   |      |   |      |   |      |      |  |   |     
|                                |                 | Total |   | $    |  |      |   | $    | 1.38 |  |   | $    | 2.16 | 
|                                |                 |       |   |      |   |      |   |      |      |  |   |     

|                             |                 |       |   |      |      |      |   |      |      |  |   |      |      | 
|---------------------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                             |                 | 2003  |   | 2002 |      | 2001
|                             |                 |       |   |      |      |     
|Per Series D Preferred Unit: |                 |       |   |      |      |      |   |      |      |  |   |     
|                             | Ordinary income |       | $ | 0.99 |      |      | $ | 1.71 |      |  | $ | 1.18 |     
|                             | Capital gains   |       |   | 1.20 |      |      |   | 0.48 |      |  |   | 1.01 |     
|                             |                 |       |   |      |      |      |   |      |      |  |   |     
|                             |                 | Total |   | $    | 2.19 |      |   | $    | 2.19 |  |   | $    | 2.19 | 
|                             |                 |       |   |      |      |      |   |      |      |  |   |     

|                                         |                 |       |   |      |      |      |   |      |      |  |   |   |   | 
|---------------------------------------- | --------------- | ----- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | - | - | 
|                                         |                 | 2003  |   | 2002 |      | 2001
|                                         |                 |       |   |      |      |     
|Per Series H, K, L Preferred Unit(4)(5): |                 |       |   |      |      |      |   |      |      |  |   |  
|                                         | Ordinary income |       | $ | 1.52 |      |      | $ | 2.62 |      |  | $ |  |  
|                                         | Capital gains   |       |   | 1.86 |      |      |   | 0.74 |      |  |   |  |  
|                                         |                 |       |   |      |      |      |   |      |      |  |   |  
|                                         |                 | Total |   | $    | 3.38 |      |   | $    | 3.36 |  |   | $ |  | 
|                                         |                 |       |   |      |      |      |   |      |      |  |   |  

|                                   |                 |       |   |          |          |      |   |          |          |  |   |   |   | 
|---------------------------------- | --------------- | ----- | - | -------- | -------- | ---- | - | -------- | -------- |  | - | - | - | 
|                                   |                 | 2003  |   | 2002     |          | 2001
|                                   |                 |       |   |          |          |     
|Per Series I Preferred Unit(4)(6): |                 |       |   |          |          |      |   |          |          |  |   |  
|                                   | Ordinary income |       | $ | 3,447.00 |          |      | $ | 5,982.46 |          |  | $ |  |  
|                                   | Capital gains   |       |   | 4,213.00 |          |      |   | 1,677.54 |          |  |   |  |  
|                                   |                 |       |   |          |          |      |   |          |          |  |   |  
|                                   |                 | Total |   | $        | 7,660.00 |      |   | $        | 7,660.00 |  |   | $ |  | 
|                                   |                 |       |   |          |          |      |   |          |          |  |   |  

|                                   |                 |       |   |      |   |      |   |      |      |  |   |   |   | 
|---------------------------------- | --------------- | ----- | - | ---- | - | ---- | - | ---- | ---- |  | - | - | - | 
|                                   |                 | 2003  |   | 2002 |   | 2001
|                                   |                 |       |   |      |   |     
|Per Series J Preferred Unit(4)(7): |                 |       |   |      |   |      |   |      |      |  |   |  
|                                   | Ordinary income |       | $ |     |   |      | $ | 1.34 |      |  | $ |  |  
|                                   | Capital gains   |       |   |     |   |      |   | 0.37 |      |  |   |  |  
|                                   |                 |       |   |      |   |      |   |      |      |  |   |  
|                                   |                 | Total |   | $    |  |      |   | $    | 1.71 |  |   | $ |  | 
|                                   |                 |       |   |      |   |      |   |      |      |  |   |  



---



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(1) | The Series A Preferred Units were called for
    redemption during the fourth quarter of 2003.   
|   
|(2) | The Series B Preferred Units were redeemed
    in full plus accrued dividends during May 2001.   
|   
|(3) | The Series C Preferred Units were redeemed
    in full plus accrued dividends during August 2002.
|   
|(4) | The Series H, I, J, K and L Preferred Units
    were issued as a result of the Smith Merger.     

22



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | The Series H Preferred Units were converted
    into Common Units on May 15, 2003. The dividend paid on the
    Series H Preferred Units prior to conversion was $1.27, the
    taxability of which is proportionate to Series K and L
    Preferred Units above.
|   
|(6) | The Series I Preferred Units have a par
    value of $100,000 per share.                                                                                                                                                                                         
|   
|(7) | 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 13, 2004, we had
approximately 1015 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, 2003 has not been filed, and the taxability
information for 2003 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 distributions may be subject to change.

In July 2002, 684,931 Series J Preferred
Units were converted to Common Units. In August 2002, we
redeemed 1,965,315 Series C Preferred Units at liquidation
value plus accrued distributions. In addition, 3,000,000
Series E, F, and G Perpetual Preferred Units converted to
Operating Trust Perpetual Preferred Units and
870,523 DownREIT Operating Partnership Units converted to
A-1 Common Units in August 2002. In September 2002, 480,000 of
the Series E Preferred Units were redeemed at liquidation
value plus accrued distributions. The Series H Preferred
Units were converted into Common Units during May 2003. In
October 2003, we called the Series A Preferred Units for
redemption. Of the 2.9 million Series A Convertible
Preferred Units outstanding, 2.8 million were converted to
Common Units and the remaining were redeemed for cash and
retired. During 2003 and 2002 we issued 1,955,908 and 339,727
Common Units of the Operating Trust as partial consideration for
real estate respectively. All units were issued in transactions
exempt from registration under Section 4(2) of the
Securities Act of 1933 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, 1999 to 2003. We believe that net earnings
attributable to Common Units and NOI 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. We rely on NOI for
purposes of making decisions about resource allocations and
assessing segment performance. We also believe NOI is a valuable
means of comparing period-to-period property performance. See
Item 7 of this Annual Report under the caption
Apartment Community Operationsfor a
reconciliation of NOI to Earnings from Operations. This data is
qualified in its entirety by, and should be read in conjunction
with, Item 7. Managements Discussion and
Analysis of Financial

23



---



##### Table of Contents



Condition and Results of Operations and the
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,
|                                                                        |                                          |                         
|                                                                        |                                          | 2003                     |         | 2002     |  | 2001 |         | 2000     |  | 1999
|                                                                        |                                          |                          |         |          |  |      |         |          |  |     
|Operations Summary(1)(2):                                               |                                          |                          |         |          |  |      |         |          |  |      |         |         |  |   |         |         |  |   |         |        
|Total revenues(3)                                                       |                                          | $                        | 900,375 |          |  | $    | 861,757 |          |  | $    | 555,968 |         |  | $ | 585,495 |         |  | $ | 552,638 |        
|Property operating expenses (rental expenses and
    real estate taxes) |                                          |                          | 319,681 |          |  |      | 303,925 |          |  |      | 177,415 |         |  |   | 185,136 |         |  |   | 181,947 |        
|Net Operating Income                                                    |                                          |                          | 561,360 |          |  |      | 548,370 |          |  |      | 366,648 |         |  |   | 368,952 |         |  |   | 343,710 |        
|Depreciation on real estate investments                                 |                                          |                          | 187,677 |          |  |      | 167,029 |          |  |      | 102,477 |         |  |   | 115,658 |         |  |   | 109,676 |        
|Interest expense                                                        |                                          |                          | 186,832 |          |  |      | 190,005 |          |  |      | 88,081  |         |  |   | 107,231 |         |  |   | 94,471  |        
|General and administrative expense                                      |                                          |                          | 49,838  |          |  |      | 45,710  |          |  |      | 27,434  |         |  |   | 24,303  |         |  |   | 21,975  |        
|Earnings from operations                                                |                                          |                          | 108,262 |          |  |      | 127,619 |          |  |      | 130,070 |         |  |   | 139,295 |         |  |   | 140,920 |        
|Gains on dispositions of depreciated real estate,
    net(4)            |                                          |                          |        |          |  |      | 35,950  |          |  |      | 108,748 |         |  |   | 101,251 |         |  |   | 63,121  |        
|Income from unconsolidated entities                                     |                                          |                          | 5,745   |          |  |      | 53,602  |          |  |      | 10,998  |         |  |   | (449    | )       |  |   |        |        
|Net earnings from discontinued apartment
    communities(5)             |                                          |                          | 380,184 |          |  |      | 144,769 |          |  |      | 23,580  |         |  |   | 29,334  |         |  |   | 26,098  |        
|Preferred Unit distributions                                            |                                          |                          | 26,153  |          |  |      | 34,309  |          |  |      | 25,877  |         |  |   | 25,340  |         |  |   | 23,733  |        
|Net earnings attributable to Common Units:                              |                                          |                          |         |          |  |      |         |          |  |      |         |         |  |   |         |         |  |   |         |        
|                                                                        |  Basic                                  |                          |         | 468,038  |  |      |         | 322,416  |  |      |         | 239,697 |  |   |         | 236,045 |  |   |         | 204,526 | 
|                                                                        |  Diluted                                |                          |         | 480,910  |  |      |         | 322,416  |  |      |         | 250,917 |  |   |         | 244,625 |  |   |         | 204,526 | 
|Common Unit distributions                                               |                                          |                          | 365,009 |          |  |      | 344,590 |          |  |      | 221,196 |         |  |   | 201,257 |         |  |   | 208,018 |        
|Per Unit Data:                                                          |                                          |                          |         |          |  |      |         |          |  |      |         |         |  |   |         |         |  |   |         |        
|Net earnings attributable to Common Units:                              |                                          |                          |         |          |  |      |         |          |  |      |         |         |  |   |         |         |  |   |         |        
|                                                                        |  Basic                                  |                          | $       | 2.20     |  |      | $       | 1.59     |  |      | $       | 1.78    |  |   | $       | 1.79    |  |   | $       | 1.46    | 
|                                                                        |  Diluted                                |                          |         | 2.18     |  |      |         | 1.58     |  |      |         | 1.77    |  |   |         | 1.78    |  |   |         | 1.46    | 
|Common Unit cash distributions paid                                     |                                          |                          | 1.71    |          |  |      | 1.70    |          |  |      | 1.64    |         |  |   | 1.54    |         |  |   | 1.48    |        
|Cash distributions paid per unit:                                       |                                          |                          |         |          |  |      |         |          |  |      |         |         |  |   |         |         |  |   |         |        
|                                                                        | Series A Preferred Unit(6)               |                          |         | 2.11     |  |      |         | 2.29     |  |      |         | 2.21    |  |   |         | 2.07    |  |   |         | 1.99    | 
|                                                                        | Series B Preferred Unit(7)               |                          |         |         |  |      |         |         |  |      |         | 0.79    |  |   |         | 2.25    |  |   |         | 2.25    | 
|                                                                        | Series C Preferred Unit(8)               |                          |         |         |  |      |         | 1.38     |  |      |         | 2.16    |  |   |         | 2.16    |  |   |         | 2.16    | 
|                                                                        | Series D Preferred Unit                  |                          |         | 2.19     |  |      |         | 2.19     |  |      |         | 2.19    |  |   |         | 2.19    |  |   |         | 0.88    | 
|                                                                        | Series E Preferred Unit(9)               |                          |         | 2.09     |  |      |         | 0.70     |  |      |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series F Preferred Unit(9)               |                          |         | 2.03     |  |      |         | 0.68     |  |      |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series G Preferred Unit(9)               |                          |         | 2.16     |  |      |         | 0.72     |  |      |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series H, J, K and L Preferred Units(10) |                          |         | 3.38     |  |      |         | 3.36     |  |      |         |        |  |   |         |        |  |   |         |        | 
|                                                                        | Series I Preferred Share(10)(11)         |                          |         | 7,660.00 |  |      |         | 7,660.00 |  |      |         |        |  |   |         |        |  |   |         |        | 
|Weighted average Common Units outstanding:                              |                                          |                          |         |          |  |      |         |          |  |      |         |         |  |   |         |         |  |   |         |        
|                                                                        |  Basic                                  |                          |         | 212,288  |  |      |         | 202,781  |  |      |         | 134,589 |  |   |         | 131,874 |  |   |         | 139,801 | 
|                                                                        |  Diluted                                |                          |         | 220,758  |  |      |         | 203,804  |  |      |         | 142,090 |  |   |         | 137,730 |  |   |         | 139,829 | 



---



|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(1) | Includes Ameriton for all years presented.                                                   
|   
|(2) | Net earnings from discontinued operations have
    been reclassified for all years presented.

24



---



##### Table of Contents





|    |                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Annual revenues inclusive of discontinued
    operations for 2003, 2002, 2001, 2000 and 1999 were
    $1.03 billion, $1.01 billion, $737 million,
    $732 million and $675 million, respectively.                                
|   
|(4) | Gains on the disposition of real estate
    investments classified as held for sale after January 1,
    2002 are included in discontinued operations.                                                                            
|   
|(5) | Represents property-specific components of net
    earnings and gains/losses on the disposition of real estate
    classified as held for sale subsequent to January 1, 2002.                                                     
|   
|(6) | The Series A Preferred Units were called for
    redemption during the fourth quarter of 2003; of the
    2.9 million Preferred Units outstanding, 2.8 million
    were converted to Common Units and the remaining were redeemed.
|   
|(7) | All of the outstanding Series B Preferred
    Units were redeemed on May 7, 2001. During 2001, cash
    distributions of $0.79 per unit were paid for the period from
    January 1, 2001 to May 7, 2001.                         
|   
|(8) | All of the outstanding Series C Preferred
    Units were redeemed at liquidation value plus accrued dividends
    in August 2002.                                                                                                 
|   
|(9) | In August 2002, the DownREIT Perpetual Preferred
    Units were converted into Operating Trust Perpetual Preferred
    Units.                                                                                                     



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The Series H Preferred Units were converted
    into Common Units during May 2003 and the distribution paid
    during 2003 prior to conversion was 1.27. In July 2002,
    Series J Preferred Units were converted into Common Units.
    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.
|    
|(11) | Series I Preferred Units have a par value of
    $100,000 per unit.                                                                                                                                                                                                                                                                                                                                                                                         

|                                                             |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|------------------------------------------------------------ |  | ------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                                             |  |             
|                                                             |  | December 31,
|                                                             |  |             
|                                                             |  | 2003         |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                                                             |  |              |           |      |  |      |           |      |  |     
|Financial Position:                                          |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Real estate owned, at cost                                   |  | $            | 8,738,116 |      |  | $    | 7,406,437 |      |  | $    | 6,755,786 |  |  | $ | 4,113,206 |  |  | $ | 4,198,420 | 
|Real estate held for sale(1)                                 |  |              | 261,064   |      |  |      | 1,891,298 |      |  |      | 1,856,427 |  |  |   | 1,200,394 |  |  |   | 1,030,988 | 
|Investments in and advances to unconsolidated
    entities   |  |              | 86,367    |      |  |      | 116,594   |      |  |      | 240,719   |  |  |   | 64,993    |  |  |   | 39,868    | 
|Total assets                                                 |  |              | 8,921,695 |      |  |      | 9,096,026 |      |  |      | 8,700,722 |  |  |   | 5,117,459 |  |  |   | 5,360,477 | 
|Unsecured credit facilities                                  |  |              | 103,790   |      |  |      | 365,578   |      |  |      | 188,589   |  |  |   | 193,719   |  |  |   | 493,536   | 
|Long-Term Unsecured Debt                                     |  |              | 1,871,965 |      |  |      | 1,776,103 |      |  |      | 1,333,890 |  |  |   | 1,401,262 |  |  |   | 1,276,572 | 
|Total liabilities                                            |  |              | 4,184,592 |      |  |      | 4,714,687 |      |  |      | 4,305,117 |  |  |   | 2,767,774 |  |  |   | 2,735,729 | 
|Preferred units                                              |  |              | 210,120   |      |  |      | 355,221   |      |  |      | 374,114   |  |  |   | 286,856   |  |  |   | 297,635   | 
|Unitholders equity                                          |  |              | 4,017,669 |      |  |      | 3,799,141 |      |  |      | 3,631,518 |  |  |   | 2,251,606 |  |  |   | 2,567,506 | 
|Other Common Unitholders interest (at
    redemption value) |  |              | 707,924   |      |  |      | 579,598   |      |  |      | 669,502   |  |  |   |          |  |  |   |          | 
|Number of Common Units outstanding                           |  |              | 220,063   |      |  |      | 205,328   |      |  |      | 199,973   |  |  |   | 122,838   |  |  |   | 139,008   | 

25



---



##### Table of Contents



|                                      |                      |                          |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |          |  
|------------------------------------- | -------------------- | ------------------------ | - | -------- | - | ---- | - | -------- | - | ---- | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                      |                      |                         
|                                      |                      | Years Ended December 31,
|                                      |                      |                         
|                                      |                      | 2003                     |   | 2002     |   | 2001 |   | 2000     |   | 1999
|                                      |                      |                          |   |          |   |      |   |          |   |     
|Other Data:                           |                      |                          |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |         
|Net cash flows provided by (used in): |                      |                          |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |         
|                                      | Operating activities |                          | $ | 349,441  |   |      | $ | 445,645  |   |      | $ | 332,153  |   |  | $ | 322,077  |   |  | $ | 295,654  |  
|                                      | Investing activities |                          |   | 422,421  |   |      |   | (191,003 | ) |      |   | 387,694  |   |  |   | 71,789   |   |  |   | (274,236 | )
|                                      | Financing activities |                          |   | (779,478 | ) |      |   | (248,823 | ) |      |   | (721,897 | ) |  |   | (394,861 | ) |  |   | (21,465  | )



---



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Previous years have been restated to include all
    assets that were classified as sold or held for sale after
    January 1, 2002 and sold in subsequent years.






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



| |            
| | -----------
| | 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 owned approximately 88.5% of our Common Units at
December 31, 2003.



| |                 
| | ----------------
| | 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.




Results of Operations



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

In conjunction with our capital recycling
strategy, rental revenues and rental expense, including real
estate taxes will fluctuate based upon the timing and amount of
dispositions, acquisitions and development lease-ups. As a
result, in addition to the performance of our same store
portfolio, disposition gains, and the corresponding loss of
ongoing income from disposed assets, as well as the new income
generated from acquisitions and developments, all contribute to
the overall financial performance of Archstone-Smith.

Basic net earnings attributable to Common Units
increased approximately $145.6 million, or 45.2%, in 2003
as compared to 2002. This increase is largely attributable to:



| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An increase in gains during 2003 of
    $353.6 million as compared to $139.6 million during
    2002, associated with an increase in the dispositions of
    depreciated real estate assets;                                                                                                       
|
| |  | Lower interest expense associated with lower debt
    extinguishment costs and lower debt balances during 2003 and a
    reduction in interest rates on floating rate debt and refinanced
    debt;                                                                                                
|
| |  | A reduction in preferred share dividends during
    2003 due to the conversion of Series A and Series H
    Preferred Shares into Common Shares in 2003 and the conversion
    of Series J Preferred Shares into Common Shares and the
    redemption of Series A Preferred Shares during 2002; and
|
| |  | Increased rental revenue and corresponding
    increase in rental expense due to the acquisition of operating
    communities and the continued lease-up and stabilization of
    development communities.                                                                                         

26



---



##### Table of Contents



These increases were partially offset by:



| |   |                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A decline in rental revenue from our Same-Store
    portfolio of 1.4% for the twelve months ended December 31,
    2003 as compared to the same period in 2002 (the same store
    population excludes all Ameriton communities), primarily due to
    a decline in potential effective rent per unit and a decrease in
    average occupancy;
|
| |  | The loss of rental revenue and a corresponding
    decrease in rental expense due to $1.6 billion and
    $602.1 million in dispositions during the twelve months
    ended December 31, 2003 and 2002, respectively; and                                                                                                                     
|
| |  | An increase of $24.8 million in expense
    associated with moisture infiltration and resulting mold during
    2003 as compared to 2002.                                                                                                                                                                                                     

Basic net earnings attributable to Common Units
increased approximately $82.7 million, or 34.5%, in 2002 as
compared to 2001. This increase is largely attributable to:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An increase in overall rental revenue and a
    corresponding increase in rental expense due to the acquisition
    of properties in the Smith Merger;                                                      
|
| |  | A $35.4 million gain on the sale of CES, an
    unconsolidated entity acquired in the Smith Merger; and                                                                                                     
|
| |  | Increased gains from the disposition of real
    estate during 2002 of $139.6 million as compared to
    $108.7 million during 2001 as well as unconsolidated
    entities acquired in the Smith Merger; and
|
| |  | Increased rental revenue and a corresponding
    increase in rental expense due to the acquisition of operating
    communities and the continued lease-up and stabilization of
    development communities.

These increases were partially offset by:



| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The loss of rental revenue and a corresponding
    decrease in rental expense in 2002 due to the $1.3 billion
    of garden community dispositions in non-core markets during 2001
    (including Archstone-Smith joint venture transactions) and
    $602.1 million of dispositions in 2002;
|
| |  | Same-Store rental revenue decline of 0.4% due
    primarily to a decline in potential effective rent per unit;                                                                                                                                                                               
|
| |  | Same-Store rental expense increase of 4.4% in
    2002 as compared to 2001 primarily due to increase in real
    estate taxes, insurance, make ready and personnel expenses;                                                                                                                 
|
| |  | 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                                                                                   
|
| |  | A $32.1 million increase in debt
    extinguishments costs due to the prepayment of mortgages.                                                                                                                                                                                               

Our strongest core markets based on Same-Store
revenue growth during 2003 included Southern California and the
Greater Washington, D.C. Metropolitan Area. The San Francisco
Bay Area, Seattle and Chicago continued to present the greatest
challenges for revenue growth.



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

We utilize net operating income (NOI) as the
primary measure to evaluate the performance of our operating
communities. NOI is defined as rental revenues less rental
expense and real estate taxes for each of our operating
properties. We rely on NOI for purposes of making decisions
about resource allocations and assessing segment performance. We
also believe NOI is a valuable means of comparing
period-to-period

27



---



##### Table of Contents



property performance. The following is a
reconciliation of Same-Store NOI to Earnings from Operations (in
thousands):


|                                                                                                                              |                          |      |          |         |  |      |          |         |  |   |          |         | 
|----------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ---- | -------- | ------- |  | ---- | -------- | ------- |  | - | -------- | ------- | 
|                                                                                                                              |                          | 2003 |          | 2002    |  | 2001
|                                                                                                                              |                          |      |          |         |  |     
|Same-Store NOI                                                                                                                |                          | $    | 479,787  |         |  | $    | 486,268  |         |  | $ | 432,100  |        
|NOI for properties not in Same-Store including
    Ameriton properties, which are not included in discontinued
    operations |                          |      | 155,786  |         |  |      | 203,020  |         |  |   | 191,181  |        
|NOI classified as discontinued
    operations  communities sold                                                              |                          |      | (57,608  | )       |  |      | (123,619 | )       |  |   | (99,556  | )      
|NOI classified as discontinued
    operations  communities held for sale                                                     |                          |      | (16,605  | )       |  |      | (17,299  | )       |  |   | (21,180  | )      
|Smith NOI prior to merger included in Same-Store
    calculation                                                              |                          |      |         |         |  |      |         |         |  |   | (135,897 | )      
|                                                                                                                              |                          |      |          |         |  |      |          |         |  |   |          |        
|                                                                                                                              | Net Operating Income     |      |          | 561,360 |  |      |          | 548,370 |  |   |          | 366,648 | 
|Other income                                                                                                                  |                          |      | 19,334   |         |  |      | 9,462    |         |  |   | 11,905   |        
|Depreciation on real estate investments                                                                                       |                          |      | (187,677 | )       |  |      | (167,029 | )       |  |   | (102,477 | )      
|Interest expense                                                                                                              |                          |      | (186,832 | )       |  |      | (190,005 | )       |  |   | (88,081  | )      
|General and administrative expenses                                                                                           |                          |      | (49,838  | )       |  |      | (45,710  | )       |  |   | (27,434  | )      
|Other expense and provision for possible loss on
    investments                                                              |                          |      | (48,085  | )       |  |      | (27,469  | )       |  |   | (30,491  | )      
|                                                                                                                              |                          |      |          |         |  |      |          |         |  |   |          |        
|                                                                                                                              | Earnings from operations |      | $        | 108,262 |  |      | $        | 127,619 |  |   | $        | 130,070 | 
|                                                                                                                              |                          |      |          |         |  |      |          |         |  |   |          |        

At December 31, 2003, 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 2003, 2002 and 2001 (in thousands, except for units and
percentages):

|                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|Garden Communities(1)                                       |  | 2003 |         | 2002 |  | 2001
|                                                            |  |      |         |      |  |     
|Rental revenues                                             |  | $    | 526,143 |      |  | $    | 504,643 |   |  | $ | 485,017 |  
|Property operating expenses                                 |  |      | 175,574 |      |  |      | 166,652 |   |  |   | 157,029 |  
|                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|Net Operating Income                                        |  | $    | 350,569 |      |  | $    | 337,991 |   |  | $ | 327,988 |  
|                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|Average number of operating units                           |  |      | 50,725  |      |  |      | 58,189  |   |  |   | 57,979  |  
|                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|Operating margin (Net Operating Income/rental
    revenues) |  |      | 66.6    | %    |  |      | 67.0    | % |  |   | 67.6    | %
|                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|Average occupancy percentage                                |  |      | 95.0    | %    |  |      | 95.0    | % |  |   | 94.5    | %
|                                                            |  |      |         |      |  |      |         |   |  |   |         |  

|                                                            |  |      |         |      |  |      |         |   |  |   |        |  
|----------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|High-Rise Properties(1)(2)                                  |  | 2003 |         | 2002 |  | 2001
|                                                            |  |      |         |      |  |     
|Rental revenues                                             |  | $    | 351,634 |      |  | $    | 341,131 |   |  | $ | 54,917 |  
|Property operating expenses                                 |  |      | 143,456 |      |  |      | 133,623 |   |  |   | 19,841 |  
|                                                            |  |      |         |      |  |      |         |   |  |   |        |  
|Net Operating Income                                        |  | $    | 208,178 |      |  | $    | 207,508 |   |  | $ | 35,076 |  
|                                                            |  |      |         |      |  |      |         |   |  |   |        |  
|Average number of operating units                           |  |      | 20,917  |      |  |      | 21,659  |   |  |   | 21,149 |  
|                                                            |  |      |         |      |  |      |         |   |  |   |        |  
|Operating margin (Net Operating Income/rental
    revenues) |  |      | 59.2    | %    |  |      | 60.8    | % |  |   | 63.9   | %
|                                                            |  |      |         |      |  |      |         |   |  |   |        |  
|Average occupancy percentage                                |  |      | 93.2    | %    |  |      | 93.8    | % |  |   | 95.4   | %
|                                                            |  |      |         |      |  |      |         |   |  |   |        |  



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

28



---



##### Table of Contents



NOI for the entire apartment portfolio, including
properties reported in discontinued operations, decreased by
$13.2 million, or 2.4%, during 2003 as compared to 2002.
This decrease was principally attributable to:



| |   |                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A decline in rental revenue from our Same-Store
    portfolio of 1.4% for the twelve months ended December 31,
    2003 as compared to the same period in 2002 (the same store
    population excludes all Ameriton communities), primarily due to
    a decline in potential effective rent per unit and a decrease in
    average occupancy; and
|
| |  | The loss of rental revenue and the corresponding
    decrease in rental expense due to $1.6 billion and
    $602.1 million in dispositions during the twelve months
    ended December 31, 2003 and 2002, respectively.                                                                                                                           

This decrease was partially offset by increased
revenue from the acquisition of operating communities and the
continued lease-up and stabilization of development communities.

NOI for the entire apartment portfolio, including
properties reported in discontinued operations, increased by
$182.4 million, or 50.2%, during 2002 as compared to 2001.
These increases were principally attributable to:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | The inclusion of a full year of rental revenue
    and rental expense 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 rental revenue and the corresponding
    decrease in rental expense due to $1.3 billion of
    dispositions in 2001 and $602.1 million of dispositions in
    2002; and
|
| |  | Declining Same-Store revenue, combined with
    increases in property taxes and insurance.                                                                                         

The following table reflects revenue, expense and
NOI growth for Same-Store communities during each respective
comparison period (the Same-Store population excludes all
Ameriton communities):

|        |           |            |  |            |    |            |  |      |    |  |  |      |   
|------- | --------- | ---------- |  | ---------- | -- | ---------- |  | ---- | -- |  |  | ---- | --
|        |           | Same-Store |  | Same-Store |    | Same-Store
|        |           | Revenue    |  | Expense    |    | NOI       
|        |           | Growth/    |  | Growth/    |    | Growth/   
|        |           | (Decline)  |  | (Decline)  |    | (Decline) 
|        |           |            |  |            |    |           
|2003    |           |            |  |            |    |            |  |      |    |  |  |     
|        | Garden    |            |  | (2.4       | %) |            |  | (2.0 | %) |  |  | (2.6 | %)
|        | High-Rise |            |  | 0.3        | %  |            |  | (1.0 | %) |  |  | 1.0  | % 
|        | Total     |            |  | (1.4       | %) |            |  | (1.6 | %) |  |  | (1.3 | %)
|2002    |           |            |  |            |    |            |  |      |    |  |  |     
|        | Garden    |            |  | (1.3       | %) |            |  | 3.2  | %  |  |  | (3.3 | %)
|        | High-Rise |            |  | 1.5        | %  |            |  | 6.7  | %  |  |  | (1.1 | %)
|        | Total     |            |  | (0.4       | %) |            |  | 4.4  | %  |  |  | (2.7 | %)
|2001(1) |           |            |  |            |    |            |  |      |    |  |  |     
|        | Garden    |            |  | 5.1        | %  |            |  | 4.4  | %  |  |  | 5.4  | % 
|        | High-Rise |            |  | 7.0        | %  |            |  | 3.0  | %  |  |  | 9.4  | % 
|        | Total     |            |  | 5.7        | %  |            |  | 3.9  | %  |  |  | 6.5  | % 



---



|    |                                                                             
|--- | ----------------------------------------------------------------------------
|(1) | Includes a full year of results for assets
    acquired in the Smith Merger.

We anticipate Same-Store NOI growth to be flat to
negative two percent during 2004. We view job growth as one of
the most important drivers of demand in our business. If job
growth does not begin to

29



---



##### Table of Contents



improve throughout 2004, 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.




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

Other income increased by $9.9 million, or
104.3% in 2003 as compared to 2002. This increase is principally
attributable to the collection of contingent proceeds related to
indemnification of certain CES accounts receivable over
120 days and dividend income on stock investments.

Other income decreased by $2.4 million, or
20.5%, 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.



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

The $3.3 million, or 1.6% decrease in
depreciation expense, including properties reported in
discontinued operations, in 2003 as compared to 2002 is due
principally to increased disposition activity during 2003.

The $69.8 million, or 51.0% increase in
depreciation expense, including 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.



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

The $32.5 million, or 13.1%, decrease in
interest expense, including interest on properties reported in
discontinued operations in 2003 as compared to 2002, is the
result of lower debt balances, a reduction in interest rates on
floating rate debt and refinanced debt, and the repayment of
Long-Term Unsecured Debt with proceeds from our unsecured credit
facilities, which were at lower average interest rates during
the period.

The $96.8 million, or 64.1%, increase in
interest expense, including 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 due to an increase in
the number of properties under construction from the addition of
properties acquired in the Smith Merger.



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

The $4.1 million, or 9.0%, increase in
general and administrative expenses in 2003 as compared to 2002
relates primarily to additional severance costs and legal fees
incurred during 2003, as well as increased depreciation of
capitalized costs associated with our new RM program called
LROTM and our new on-site property management
software.

The $18.3 million, or 66.6%, 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 RM program called
LROTM, which began in December 2001, contributed to
the increase in 2002.



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

The $20.6 million, or 75.1% increase in
other expense in 2003 as compared to 2002 is primarily related
to an increase in moisture infiltration and resulting mold costs
and a $3.5 million increase in Ameriton income taxes. The
moisture infiltration costs pertain to estimated and incurred
legal fees and estimated settlement costs, additional
residential property repair and replacement costs and temporary
resident relocation expenses. These increases were partially
offset by lower merger integration costs associated with the
Smith Merger as well as lower pursuit cost write-offs during
2003.

30



---



##### Table of Contents



The $11.9 million, or 76.5% increase in
other expense in 2002 as compared to 2001 is primarily related
to an increase in moisture infiltration costs and a
$5.4 million increase in Ameriton income taxes. The
moisture infiltration costs pertain to estimated and incurred
legal fees and estimated settlement costs, additional
residential property repair and replacement costs and temporary
resident relocation expenses. These increases were partially
offset by lower merger integration costs associated with the
Smith Merger.



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

Income from unconsolidated entities decreased by
$47.9 million in 2003 as compared to 2002 primarily due to
the gain on sale of CES recognized in December 2002.

Income from unconsolidated entities increased by
$42.6 million in 2002 as compared to 2001 primarily as a
result of the following factors:



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 of three operating community
    joint ventures during 2001 and three joint ventures acquired in
    the Smith Merger.



| |                             
| | ----------------------------
| | Preferred Unit Distributions

Preferred Unit distributions decreased by
$8.2 million, or 23.8% during 2003 as compared to 2002.
This decrease was primarily attributable to the conversion of
Series A and Series H Preferred Units into Common
Units in 2003 and the conversion of Series J Preferred
Units into Common Units during 2002, as well as the redemption
of the Series C Preferred Units in 2002. The decrease in
Preferred Unit distributions due to conversions was off-set by
an increase in Common Unit distributions.

Preferred Unit distributions increased by
$8.4 million, or 32.6%, in 2002 as compared to 2001 due to
the issuance of Series H, I, J, K and L Preferred Units in
connection with the Smith Merger and the treatment of unit
issuance costs associated with the 2001 redemption of
Series B Preferred Units as additional 2001 distributions.
This increase was partially offset by the redemption of the
Series C Preferred Units in August 2002 and lower
distributions on Series A Preferred Units resulting from
periodic conversions into Common Units by shareholders.



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

For properties accounted for as discontinued
operations, the results of operations 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 were
classified as discontinued operations include rental revenue,
rental expense, real estate tax, 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
properties held for sale.

Consistent with our capital recycling program, we
had 10 operating apartment communities, representing
2,651 units (unaudited), classified as held for sale under
the provisions of SFAS 144, at December 31, 2003.
Accordingly, we have classified the operating earnings from
these 10 properties within discontinued operations for the years
ended December 31, 2003, 2002 and 2001. During the twelve
months ended December 31, 2003, we sold 48 operating
communities. The operating results of these 48 communities and
the related gain/loss on sale are also included in discontinued
operations for 2003, 2002 and 2001. Lastly, discontinued
operations for the years ended December 31, 2002 and 2001,
include the net operating results of 12 operating
communities and one retail property which were sold during 2002.
Four apartment communities that were sold during 2002 were held
for sale at December 31, 2001, and therefore gains and
related operating income for these

31



---



##### Table of Contents



dispositions are not classified as discontinued
operations in accordance with SFAS 144. The following is a
summary of net earnings from discontinued operations (in
thousands):


|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                          |  |                         
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2003                     |         | 2002 |  | 2001
|                                                          |  |                          |         |      |  |     
|Rental revenues                                           |  | $                        | 125,584 |      |  | $    | 233,479 |   |  | $ | 181,498 |  
|Rental expenses                                           |  |                          | (39,352 | )    |  |      | (69,554 | ) |  |   | (45,704 | )
|Real estate taxes                                         |  |                          | (12,019 | )    |  |      | (23,007 | ) |  |   | (15,058 | )
|Depreciation on real estate investments                   |  |                          | (15,679 | )    |  |      | (39,596 | ) |  |   | (34,390 | )
|Interest expense(1)                                       |  |                          | (28,236 | )    |  |      | (57,596 | ) |  |   | (62,766 | )
|Provision for possible loss on real estate
    investment |  |                          | (3,714  | )    |  |      | (2,611  | ) |  |   |        |  
|Gain on dispositions of real estate investments,
    net  |  |                          | 353,600 |      |  |      | 103,654 |   |  |   |        |  
|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  
|                                                          |  | $                        | 380,184 |      |  | $    | 144,769 |   |  | $ | 23,580  |  
|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  



---



|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The portion of interest expense included in
    discontinued operations that is allocated to properties based on
    the companys leverage ratio was $23.0 million,
    $38.7 million and $51.6 million for 2003, 2002 and
    2001, respectively.



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

We recognized $353.6 million,
$139.6 million and $108.7 million of net gains on the
disposition of depreciated real estate assets (including
properties reported in discontinued operations), during 2003,
2002 and 2001, 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, and opportunistic dispositions by Ameriton.




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, 2003, the available capacity
under our unsecured credit facilities, and anticipated proceeds
from the forward sale of marketable equity securities to be
settled during 2004, we believe our liquidity and financial
condition are sufficient to meet all of our reasonably
anticipated cash flow needs in 2004.



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

Our net cash flows provided by operating
activities decreased by $96.2 million, or 21.6%, during
2003 as compared to 2002. This decrease was principally due to
lower net earnings before gains on the disposition of
depreciated real estate and payment of expenses related to
remediation of moisture infiltration and resulting mold that
were accrued in previous years.

Our net cash flows provided by operating
activities increased by $113.5 million, or 34.2%, 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 revenue and lost revenue and
corresponding decrease in rental expense resulting from our 2002
and 2001 disposition activity. For a more complete discussion of
the factors affecting our operating performance, see our
accompanying Statement of Cash Flows in this Annual Report.

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

During 2003, cash flows provided by investing
activities increased by approximately $613.4 million or
321.2%. This increase was primary attributable to a
$984.1 million increase in proceeds from the disposition of
real estate assets and a reduction in cash used to purchase
marketable securities during 2003 as compared to 2002. This was
partially offset by an increase in the balance of our
tax-deferred escrow account and a $93.9 million decreased
cash flow from unconsolidated entities.

During 2002, cash flows from investing activities
decreased $578.7 million or 149.3% as compared to 2001. The
decrease was principally attributable to a $595.7 million
reduction in proceeds from dispositions, a $305.0 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 $129.5 million increase in cash flows
from our investment in and advances to our unconsolidated
investees and other investing activities.

During 2003, cash used in financing activities
increased by $530.7 million or 213.3%, as compared to 2002.
This is principally due to a $438.8 million net reduction
in our unsecured credit facility and a $283.5 million
reduction in the total proceeds received from long-term
unsecured debt offerings. This increase in cash used in
financing activities was partially offset by a
$361.7 million reduction in principal payments on mortgages
payable.

During 2002, cash used in financing activities
decreased $473.1 million, or 65.5%, as compared to 2001.
This decrease is primarily attributable to the issuance of
senior unsecured notes for net proceeds of $530.8 million
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 $589.8 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.

Significant non-cash investing and financing
activities for the years ended December 31, 2003, 2002 and
2001 are as follows:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Issued $14.2 million and $8.7 million
    of Class B Common Units as partial consideration for
    property acquired during 2003 and 2002, respectively;                                                                                                                                  
|
| |  | Issued $33.4 million of A-1 Common Units in
    exchange for real estate during 2003;                                                                                                                                                                                                     
|
| |  | Holders of Series H Preferred Units
    converted $71.5 million of their units into into Common
    Units during 2003;                                                                                                                                                                    
|
| |  | Redeemed $25.5 million and
    $41.7 million A-1 Common Units for Common Units during 2003
    and 2002, respectively;                                                                                                                                                                    
|
| |  | Holders of Series J Preferred Units
    converted $25 million of their units into Common Units
    during 2002;                                                                                                                                                                           
|
| |  | Recorded 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;                                                                                                    
|
| |  | Assumed mortgage debt of $55.4 million,
    $195.6 million and $167.3 million (excluding mortgage
    debt assumed in the Smith Merger) during 2003, 2002 and 2001,
    respectively, in connection with the acquisition of apartment
    communities;                                    
|
| |  | Holders of Series A Preferred Units
    converted $71.9 million, $5.7 million and
    $3.8 million of their units into Common Units during 2003,
    2002 and 2001, respectively; and                                                                                                     
|
| |  | 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
    during the year ended December 31, 2001.

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| |                                                                
| | ---------------------------------------------------------------
| | 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 have
$113.5 million in scheduled maturities during 2004, and we
have $319.9 million and $355.6 million of long-term
debt maturing during 2005 and 2006, respectively. See
Note 6 in our audited financial statements in this Annual
Report for additional information on scheduled debt maturities.

In October 2003, we completed the renewal of our
unsecured revolving credit facility provided by a group of
financial institutions led by JPMorgan Chase Bank. The
$600 million facility matures in October, 2006 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 0.60%. 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
facility contains an accordion feature that allows us to expand
the commitment up to $900 million at any time during the
life of the facility, subject to lenders providing additional
commitments. 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.

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 1.65% to 1.95% during 2003. There were $6.8 million
and $17.1 million of borrowings outstanding under this
agreement at December 31, 2003 and 2002, respectively.

We had $5.0 million outstanding on our
unsecured line of credit, $1.1 million outstanding under
letters of credit and an available balance of
$693.9 million on our unsecured credit facilities at
February 13, 2004.

Our unsecured credit facilities, Long-Term
Unsecured Debt and mortgages payable had effective weighted
average interest rates of 2.55%, 6.22% and 5.57%, respectively,
as of December 31, 2003. 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, 2003.



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

Based on anticipated distribution levels for 2004
and the number of units outstanding as of December 31,
2003, we anticipate that we will pay the following distributions
in 2004 (in thousands, except per unit amounts):

|                           |                                          |                                 |   |          |  |  |   |         |         | 
|-------------------------- | ---------------------------------------- | ------------------------------- | - | -------- |  |  | - | ------- | ------- | 
|                           |                                          | Per Unit                        |   | Total   
|                           |                                          |                                 |   |         
|Common unit distributions: |                                          |                                 |   |          |  |  |   |        
|                           | Common Units                             |                                 | $ | 1.72     |  |  | $ | 334,991 |        
|                           | A-1 Common Unit distributions(1)         |                                 |   | 1.72     |  |  |   | 43,518  |        
|                           | Series D Preferred Unit distributions    |                                 |   | 2.19     |  |  |   | 4,288   |        
|                           | 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 I Preferred Unit distributions(2) |                                 |   | 7,660.00 |  |  |   | 3,830   |        
|                           | Series K Preferred Unit distributions    |                                 |   | 3.40     |  |  |   | 2,267   |        
|                           | Series L Preferred Unit distributions    |                                 |   | 3.40     |  |  |   | 2,179   |        
|                           |                                          |                                 |   |          |  |  |   |        
|                           |                                          | Total distribution requirements |   |          |  |  |   | $       | 396,334 | 
|                           |                                          |                                 |   |          |  |  |   |        

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---



|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(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 May 2003, 2,640,325 Series H Preferred
Units were converted into Common Units. In October 2003, the
Series A Preferred Units were called for redemption. Of the
2.9 million Series A Preferred Units outstanding,
2.8 million were converted to Common Units and the
remaining were redeemed for cash and retired.

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 exchanged for A-1 Common Units in August 2002. In
September 2002, 480,000 of the Series E Preferred Units
were redeemed at liquidation value plus accrued distributions.
In 2003 and 2002, Archstone-Smith repurchased 614,100 and
668,900 Common Units. The repurchase of Common Units and the
redemption of Series C and E Preferred Units were funded
through borrowings under our unsecured credit facility, which
was repaid with proceeds from dispositions and the issuance of
long-term debt.



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

Following is a summary of planned investments as
of December 31, 2003, including amounts for Ameriton
(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
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           |       |       | 4,681 |                     |  | $         | 29,109  |         |  | $ | 16,082  |        
|Communities under construction            |       |       | 5,008 |                     |  |           |        |         |  |   | 482,280 |        
|Communities In Planning and Owned         |       |       | 3,693 |                     |  |           | 620,519 |         |  |   |        |        
|Communities In Planning and Under Control |       |       | 112   |                     |  |           | 9,084   |         |  |   |        |        
|Community acquisitions under contract     |       |       | 1,539 |                     |  |           | 325,652 |         |  |   |        |        
|                                          |       |       |       |                     |  |           |         |         |  |   |         |        
|                                          | Total |       |       | 15,033              |  |           | $       | 984,364 |  |   | $       | 498,362 | 
|                                          |       |       |       |                     |  |           |         |         |  |   |         |        

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
recurring expenditures to improve and maintain our established
operating communities.

We anticipate completion of most of the
communities that are currently under construction and the
planned operating community improvements during 2004 and 2005.
We expect to start construction on approximately
$300-$400 million, based on Total Expected Investment, of
communities that are currently In Planning, in 2004. 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

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unsecured credit facilities, prior to arranging
long-term financing. Consistent with our performance in 2003, we
anticipate that net cash flow from operating activities during
2004 will be sufficient to fund anticipated distribution
requirements and debt principal amortization payments. To fund
planned investment activities, we had $693.9 million in
available capacity on our unsecured credit facilities and
approximately $187.6 million of cash on hand at
February 13, 2004. In addition, we expect to complete the
disposition of $400-$600 million of operating communities
during 2004. During 2004, we will receive approximately
$128.5 million from the sale of certain marketable
securities in accordance with our forward sales agreement. See
Item 7A for a discussion of our hedging activities.


In March 2003, we filed a shelf registration
statement on Form S-3 to register an additional
$335 million in unsecured debt securities. In June 2003, we
issued $250 million in long-term unsecured senior notes due
in June 2008 for net proceeds of $247.2 million. These
notes bear interest at a coupon rate of 3.0% annually, with an
effective interest rate of 3.2%. The net proceeds were used to
repay outstanding balances on our unsecured credit facility.

In February 2002, we issued $200 million in
long-term unsecured ten-year senior notes with an effective
interest rate of 6.6%. 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 August 2002, we
issued $300 million in long-term unsecured senior five-year
notes 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%.

As of February 13, 2004, Archstone-Smith and
the Operating Trust collectively have $1.1 billion
available in shelf registered securities which can be issued
based on our ability to affect offerings on satisfactory terms
based on prevailing market conditions.




Litigation and Contingencies

During 2002, we accrued or incurred a liability
for $30.8 million relating to moisture infiltration and
resulting mold issues at Harbour House, a high-rise property in
Southeast Florida that became subject to litigation in the third
quarter of 2002. Of this amount, $11.3 million represents
amounts expensed for the estimated cost of repairing or
replacing residents property, temporary resident
relocation expenses 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.

During 2003, we recorded additional costs of
$30.7 million for moisture infiltration and resulting mold
at Harbour House. Of this amount, $25.7 million represents
amounts expensed for estimated and incurred legal fees
associated with known and anticipated costs for
Archstone-Smiths counsel and plaintiffs counsel, as
well as estimated settlement costs based upon the settlement
agreement, additional resident property repair and replacement
costs and temporary resident relocation expenses. The estimated
settlement accrual is inclusive of all pending legal claims at
this property other than for those individuals who have opted
out of the settlement and are pursuing or may pursue individual
claims. The remaining $5.0 million pertains to an increase
in our accrual estimate for capitalized costs associated with
remediation and capital improvements. As of December 31,
2003, total cash payments related to moisture infiltration and
mold remediation at this property were $45.1 million. We
anticipate incurring the remaining $16.4 million over the
next six to twelve months.

The Harbour House accrual represents
managements best estimate of the probable and reasonably
estimable costs and is based, in part, on estimates obtained
from third-party contractors and actual costs incurred to date.
It is possible that these estimates could increase or decrease
as better information becomes available. Not all plaintiffs have
accepted the court-approved settlement, which could result in
further court proceedings and potential legal fees and damages
not contemplated in our current accrual. It is not possible to
predict the likelihood of claims by individuals who have opted
out of the settlement, nor is it reasonably possible to estimate
the amount of any potential loss related to these claims.

We are also party to alleged moisture
infiltration and resulting mold lawsuits at other apartment
properties. We believe these suits are without merit,
nonetheless, in certain instances we have negotiated a

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settlement with certain of the plaintiffs in an
effort to expedite the resolution of their claims and avoid
potentially protracted litigation and associated attorneys
fees. During 2003 we expensed approximately $10.4 million
for estimated and incurred legal fees associated with known and
anticipated costs for Archstone-Smiths counsel and
plaintiffs counsel, as well as estimated settlement costs
based upon the status of discussions, additional resident
property repair and replacement costs and temporary resident
relocation expenses pertaining to these claims. These estimates
represent managements best estimate of the probable and
reasonably estimable costs and are based, in part, on estimates
obtained from third-party contractors and actual costs incurred
to date. It is possible that these estimates could increase or
decrease as better information becomes available. Not all
plaintiffs have accepted the negotiated settlement, and further
court proceedings and additional legal fees and damages may be
required to fully resolve these claims. We have not accrued for
renovation and equipment upgrades at these properties, as these
costs are part of our previously existing and ongoing plans and
not a result of the legal claims. Accordingly, we will
capitalize or expense costs associated with these issues as they
are incurred, in accordance with GAAP.


We are aggressively pursuing recovery of a
significant portion of these costs from our insurance carriers.
As of December 31, 2003, we have received approximately
$1.6 million of initial insurance recoveries pertaining to
moisture infiltration and resulting mold claims. We are still in
discussions with our insurance providers and therefore no
estimate for future insurance recoveries has been recorded. In
addition, we are continuing to pursue potential recoveries from
third parties who we believe bear responsibility for a
considerable portion of the costs we have incurred. We cannot
make assurances that we will obtain these recoveries or that our
ultimate liability associated with these claims will not be
material to our results of operations.

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.




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 that is
responsible for development and redevelopment of apartment
communities. Consistent with GAAP, all direct and certain
indirect costs, including interest and real estate taxes,
incurred during development and redevelopment activities are
capitalized. Interest is capitalized on real estate assets that
require a period of time to get them ready for their intended
use. The amount of interest capitalized is based upon the
average amount of accumulated development expenditures during
the reporting period. Included in capitalized costs are
managements estimates of the direct and incremental
personnel costs and indirect project costs associated with our
development and redevelopment activities. Indirect project costs
consist primarily of personnel costs associated with
construction administration and development accounting, legal
fees, and various office costs that clearly relate to projects
under development. 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 hypothetically, we were to reduce our
development and land acquisition activity by 25% with no
corresponding decrease in internal costs, our net earnings per
Common Unit could decrease by approximately 1.2% or $0.02 based
on 2003 amounts.

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| |                         
| | ------------------------
| | 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
approximately $5.4 billion of real estate assets (excluding
Ameriton) over the last eight years, which produced
$829.1 million in gains at an unleveraged internal rate of
return of approximately 12.8%. 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. We allocate the cost of newly acquired
properties between net tangible and identifiable intangible
assets. The primary intangible asset associated with an
apartment community acquisition is the value of the existing
lease agreements. When allocating cost to an acquired property,
we first allocate costs to the estimated intangible value of the
existing lease agreements and then to the estimated value of the
land, building and fixtures assuming the property is vacant. We
estimate the intangible value of the lease agreements by
determining the lost revenue associated with a hypothetical
lease-up. We depreciate the building and fixtures based on the
expected useful life of the asset and amortize the intangible
value of the lease agreements over the average remaining life of
the existing leases.

Determining whether expenditures meet the
criteria for capitalization, the assignment of depreciable lives
and determining the appropriate amounts to allocate between
tangible and intangible assets for property acquisitions
requires our management to exercise significant judgment and is
therefore considered a significant accounting
estimate.

Total capital expenditures were 1.4% and 2.2% of
weighted average gross real estate as of December 31, 2003
and 2002, 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 depreciable real estate was 3.2%, 3.1% and 3.7% or
$1.04, $1.16 and $1.00 per Unit for the years ended
December 31, 2003, 2002 and 2001, respectively. If the
actual weighted average useful life were determined to be one
year shorter or longer than managements

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current estimate, our annual depreciation expense
would increase or decrease approximately 3.1% or $0.03 per
Common Unit. See Note 1 in our audited financial statements in
this Annual Report for additional detail on depreciable lives.




| |              
| | -------------
| | Pursuit Costs

We incur costs relating to the potential
acquisition of real estate which we refer to as pursuit costs.
To the extent that these costs are identifiable with a specific
property and would be capitalized if the property were already
acquired, the costs are accumulated by project and capitalized
in the Other Asset section of the balance sheet. If these
conditions are not met, the costs are expensed as incurred.
Capitalized costs include but are not limited to earnest money,
option fees, environmental reports, traffic reports, surveys,
photos, blueprints, direct and incremental personnel costs and
legal costs. Upon acquisition, the costs are included in the
basis of the acquired property. When it becomes probable that a
prospective acquisition will not be acquired, the accumulated
costs for the property are charged to other expense on the
statement of earnings in the period such a determination is made.

Because of the inherent judgment involved in
evaluating whether a prospective property will ultimately be
acquired, we believe capitalizable pursuit costs are a
critical accounting estimate. If it were determined
that a quarter of our prospective acquisitions were deemed
improbable as of December 31, 2003, other expense for the year
ended December 31, 2003 would increase approximately 8.2%
or $0.02 per unit, excluding refundable earnest money.



| |                                                     
| | ----------------------------------------------------
| | 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.

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. Any accrual
represents managements best estimate of the probable and
reasonably estimable costs and is based, in part, on estimates
obtained from third-party contractors and actual costs incurred
to date. It is possible that these estimates could increase or
decrease as better information becomes available.

We accrue for litigation settlement costs when a
loss contingency is both probable and the amount of loss can be
reasonably estimated. Estimating the likelihood and amount of a
loss contingency requires significant judgment by management and
is therefore considered a critical accounting
estimate. We base these estimates on the best information
available as of the end of the period, which includes, but is
not limited to, estimates obtained from third-party contractors
as well as actual costs incurred to date. It is possible that
these estimates could increase or decrease as better information
becomes available. We generally recognize legal expenses as
incurred; however, if such fees are related to the accrual for a
known legal settlement, we accrue for the related incurred and
anticipated legal fees at the same time we accrue the cost of
settlement.

Our eventual costs to correct moisture
infiltration and remediate resulting mold could be significantly
different from current estimates. For example, if current
outstanding accruals were to increase or decrease by

39



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25% and the ratio between the expensed and
capitalized portion remained constant, our net earnings per
Common Unit would increase or decrease by approximately $0.02.





Off Balance Sheet Arrangements

Investments in entities that are not controlled
through majority economic interest are not consolidated and are
reported as investments in unconsolidated entities. Our
investments in unconsolidated entities consist of an $86.4
million investment in real estate joint ventures, which
generally consists of our percentage ownership in the GAAP
equity of the joint ventures.

CES 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 owners 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 share on a fully diluted basis.
Approximately $6.7 million in contingent proceeds related
to indemnification of accounts receivable over 120 days was
excluded from the gain. We have recognized $5.8 million of
these contingent proceeds during 2003, as this is the amount of
the indemnified accounts receivable collected.

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.

SMC is a service business that we acquired in the
Smith Merger during 2001. We sold SMC during February 2003 to
former members of SMCs senior management. Prior to the
sale, we reported SMC as an unconsolidated entity in our
financial statements. We received two notes receivable totaling
$5.8 million and bearing an interest rate of 7.0% as
consideration for the sale. The first note for $3.5 million
had principal payments that began in October 2003 with payment
in full by February 2008. The second note for $2.3 million
was fully repaid along with all accrued interest due during May
2003. For accounting purposes, we will not recognize the
divestiture until our responsibilities for certain performance
guarantees, which pertain to ongoing construction projects at
the time of sale, expire. Such performance guarantees currently
total $2.7 million, based on information provided by these
companies, and we expect them to expire during 2004. Principal
and interest payments received prior to the recognition of this
transaction as a divestiture will be recorded as a reduction to
our investment basis, which is included in other assets in the
accompanying condensed consolidated balance sheets.

Prior to their sale, we extended approximately
$54.7 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. As of
December 31, 2003, $2.7 million of these performance
bond guarantees were still outstanding, based upon information
provided by these companies. 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. We also will not extend any such performance
bond guarantees in the future due to the sale of both CES and
SMC. 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.

As part of the Smith Merger, we are required to
indemnify the former Smith Partnership unitholders for any
personal income tax expense resulting from the sale of high-rise
properties identified in the shareholders agreement
between Archstone-Smith, the Operating Trust, Robert H. Smith
and Robert P. Kogod.

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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):

|                                           |       |      |       |       |  |          |       |           |  |       |       |       |  |   |         |         |  |   |         |         | 
|------------------------------------------ | ----- | ---- | ----- | ----- |  | -------- | ----- | --------- |  | ----- | ----- | ----- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                           |       |      |       |       |  | 2006 and |       | 2008 thru |  |      
|                                           |       | 2004 |       | 2005  |  | 2007     |       | 2096      |  | Total
|                                           |       |      |       |       |  |          |       |           |  |      
|Scheduled long-term debt maturities        |       | $    | 113.5 |       |  | $        | 319.9 |           |  | $     | 871.0 |       |  | $ | 2,495.2 |         |  | $ | 3,799.6 |        
|Unsecured credit facilities(1)             |       |      | 6.8   |       |  |          |      |           |  |       | 97.0  |       |  |   |        |         |  |   | 103.8   |        
|Development and redevelopment expenditures |       |      | 498.4 |       |  |          |      |           |  |       |      |       |  |   |        |         |  |   | 498.4   |        
|Performance bond guarantees(2)             |       |      | 38.6  |       |  |          | 0.4   |           |  |       |      |       |  |   |        |         |  |   | 39.0    |        
|Lease commitments and other(3)             |       |      | 7.3   |       |  |          | 6.8   |           |  |       | 12.9  |       |  |   | 202.5   |         |  |   | 229.5   |        
|                                           |       |      |       |       |  |          |       |           |  |       |       |       |  |   |         |         |  |   |         |        
|                                           | Total |      | $     | 664.6 |  |          | $     | 327.1     |  |       | $     | 980.9 |  |   | $       | 2,697.7 |  |   | $       | 4,670.3 | 
|                                           |       |      |       |       |  |          |       |           |  |       |       |       |  |   |         |         |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In October 2003, we completed the renewal of our
    unsecured revolving line of credit. The new facility has a total
    capacity of $600 million and a three-year term, with a
    one-year extension option available at our discretion.                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | 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.
|   
|(3) | Lease commitments relate principally to ground
    lease payments as of December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                




Related Party Transactions

In 2003, we acquired our chief executive
officers voting interest in Ameriton for approximately
$72,000 and now own 100% of the voting and non-voting stock of
Ameriton. Our chief executive officers initial investment
in Ameriton Holdings, LLC was $50,000. Before this transaction,
we owned 100% of the non-voting stock in Ameriton, representing
a 95% economic interest and Ameriton Holdings owned 100% of the
voting stock of Ameriton, representing a 5% economic interest.
We also owned a non-voting membership interests in Ameriton
Holdings representing a 95% economic interest and our chief
executive officer owned 100% of the voting membership interest
in Ameriton Holdings representing a 5% economic interest.
Accordingly, the Operating Trust did not have a direct or
indirect voting interest in Ameriton. 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 $1.5 million and
$3.38 million to certain officers and employees of the
Operating Trust related to realized returns on investments sold
during 2003 and 2002, respectively, none of which were made to
members of Ameritons board. Four members of
Ameritons board (James H. Polk, III, John C.
Schweitzer, R. Scot Sellers and Charles E. Mueller,
Jr.) were Trustees of Archstone-Smith or executive officers of
the Operating Trust.

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. In connection with the sale, our chief executive
officers received proceeds of $5,325 and his initial basis
was $19,093. 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,

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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.


Prior to the sale in February 2003, 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. In connection with the sale, our chief executive
officers received proceeds of $8,626 and his initial basis
was $4,410. 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.

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, 2003,
the aggregate outstanding balances on these notes were
approximately $1.1 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.
No stock-based employee compensation expense was recognized
in-connection with the issuance of these fully vested and
exercisable options, as all options granted had an exercise
price equal to the market value of the underlying common stock
on the date of grant and are not considered replacement awards.
A total of 81,685 Common Shares were repurchased for a total of
$1.9 million.




New Accounting Pronouncements

In December 2003, the FASB issued FASB
Interpretation No. 46 Consolidation of Variable
Interest Entities (revised). This Interpretation
replaces FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, which was issued in
January 2003 and clarifies the application of Accounting
Research Bulletin No. 51 Consolidated Financial
Statements. FIN 46R requires us to consolidate our
existing variable interest entities in which we have the
majority variable interest. Due to the adoption of this
Interpretation, we have consolidated the results of Ameriton,
for all periods presented. We have evaluated all other joint
ventures and found there to be no material impact.

In April 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. We adopted this
Statement for contracts or hedging relationships entered into or
modified after June 30, 2003. Its purpose is to provide
more consistent application and clarification of SFAS 133.
The adoption of SFAS 149 did not have a material impact on
our financial position, net earnings or cash flows.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement is effective for financial instruments entered into or
modified after May 31, 2003, with the exception of the
application to non-controlling (minority) interests in
finite-life entities, which has been deferred indefinitely. The
Statement requires that certain financial instruments, formerly
presented as equity, be classified as liabilities. The adoption
of SFAS 150 did not have a material impact on our financial
position, net earnings or cash flows.

In December 2003, the FASB issued SFAS
No. 132, Employer Disclosure about Pension and
Other Post Retirement Benefits (revised). This
statement is effective for financial statements with fiscal
years ending after December 15, 2003. The statement revises
the necessary disclosures about pension plans. The adoption of
SFAS 132 (revised) did not have a material impact on our
financial position, net earnings or cash flows.

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|         |                                                               
|-------- | --------------------------------------------------------------
|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. These derivatives are designated as
either cash flow or fair value hedges. We are also exposed to
price risk associated with changes in the fair value of certain
equity securities. We have entered into forward sale agreements
to protect against a reduction in the fair value of these
securities. We have designated this forward sale as a fair value
hedge. 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.

We formally assess, both at inception of the
hedge and on an ongoing basis, whether each derivative is highly
effective in offsetting changes in fair values or cash flows of
the hedged item. We measure hedge effectiveness by comparing the
changes in the fair value or cash flows of the derivative
instrument with the changes in the fair value or cash flows of
the hedged item. We exclude the hedging instruments time
value component when assessing hedge effectiveness. If it is
determined that a derivative is not highly effective as a hedge
or if a derivative ceases to be a highly effective hedge, we
will discontinue hedge accounting prospectively.

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. During the
3rd quarter of 2003, we entered into a forward sale
agreement with a notional amount, which represents the fair
value of the underlying marketable securities, of approximately
$46.8 million. In the 4th quarter of 2003, we entered into
two additional forward sale agreements with a notional amount of
approximately $81.7 million. The forward sales agreements
fair value at December 31, 2003 and 2002 were $250,000 and
$0, respectively. The sale of certain marketable securities in
accordance with forward sale contracts is expected to result in
realized gains of approximately $22.0 million in 2004.

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The following table summarizes the notional
amount, carrying value and estimated fair value of our
derivative financial instruments, as of December 31, 2003
(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     |         |                |  | 2005      |           |           | $ |       |       
|                   | Interest rate swaps        |                         |              | 150,000    |         |                |  | 2006      |           |           |   | (9,819 | )     
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   |                            | Total cash flow hedges  |              | $          | 184,508 |                |  |           | 2005-2006 |           |   | $      | (9,819 | )    
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|Fair value hedges: |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   | Interest rate swaps        |                         | $            | 104,005    |         |                |  | 2006-2008 |           |           | $ | 8,822  |       
|                   | Total rate of return swaps |                         |              | 69,756     |         |                |  | 2004-2007 |           |           |   | 3,762  |       
|                   | Forward sales agreement    |                         |              | 128,500    |         |                |  | 2004      |           |           |   | 250    |       
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   |                            | Total fair value hedges |              | $          | 302,261 |                |  |           | 2004-2008 |           |   | $      | 12,834 |      
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   |                            |                         | Total hedges |            | $       | 486,769        |  |           |           | 2004-2008 |   |        | $      | 3,015 | 
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       



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

The table below provides information about our
liabilities that are sensitive to changes in interest rates as
of December 31, 2003. As the table incorporates only those
exposures that existed as of December 31, 2003, 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, 2003, 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)

|                                     |                             |                                  |                                  |       |        |      |   |      |         |      |   |            |         |         |   |           |         |      |   |   |         |      |   |   |         |      |   |         |           |   |   |         |           |   | 
|------------------------------------ | --------------------------- | -------------------------------- | -------------------------------- | ----- | ------ | ---- | - | ---- | ------- | ---- | - | ---------- | ------- | ------- | - | --------- | ------- | ---- | - | - | ------- | ---- | - | - | ------- | ---- | - | ------- | --------- | - | - | ------- | --------- | - | 
|                                     |                             |                                  |                                  |       |        |      |   |      |         |      |   |            |         |         |   | Estimated
|                                     |                             |                                  |                                  |       |        |      |   |      |         |      |   |            |         | Total   |   | Fair     
|                                     |                             | 2004                             |                                  | 2005  |        | 2006 |   | 2007 |         | 2008 |   | Thereafter |         | Balance |   | Value(1) 
|                                     |                             |                                  |                                  |       |        |      |   |      |         |      |   |            |         |         |   |          
|Interest rate sensitive liabilities: |                             |                                  |                                  |       |        |      |   |      |         |      |   |            |         |         |   |           |         |      |   |   |         |      |   |   |         |      |   |         |           |   |   |        
|                                     | Unsecured Credit Facilities |                                  | $                                | 6,790 |        |      | $ |     |         |      | $ | 97,000     |         |         | $ |          |         |      | $ |  |         |      | $ |  |         |      | $ | 103,790 |           |   | $ | 103,790 |          
|                                     |                             | Average nominal interest rate(2) |                                  |       | 1.95   | %    |   |      |        |      |   |            | 1.95    | %       |   |           |        |      |   |   |        |      |   |   |        |      |   |         |          |   |   |         |          |  
|                                     | Long-Term Unsecured Debt:   |                                  |                                  |       |        |      |   |      |         |      |   |            |         |         |   |           |         |      |   |   |         |      |   |   |         |      |   |         |           |   |   |         |          
|                                     |                             | Fixed rate                       |                                  | $     | 51,250 |      |   | $    | 251,250 |      |   | $          | 51,250  |         |   | $         | 386,250 |      |   | $ | 311,250 |      |   | $ | 719,917 |      |   | $       | 1,771,167 |   |   | $       | 1,942,491 |  
|                                     |                             |                                  | Average nominal interest rate(2) |       |        | 7.24 | % |      |         | 8.01 | % |            |         | 7.29    | % |           |         | 5.30 | % |   |         | 3.84 | % |   |         | 7.30 | % |         |           |  |   |         |           |  | 
|                                     |                             | Variable rate(3)                 |                                  | $     |       |      |   | $    |        |      |   | $          |        |         |   | $         |        |      |   | $ | 23,711  |      |   | $ | 77,087  |      |   | $       | 100,798   |   |   | $       | 100,798   |  
|                                     |                             |                                  | Average nominal interest rate(2) |       |        |      |   |      |         |      |   |            |         |         |   |           |         |      |   |   |         | 1.60 | % |   |         | 1.76 | % |         |           |  |   |         |           |  | 
|                                     | Mortgages payable:          |                                  |                                  |       |        |      |   |      |         |      |   |            |         |         |   |           |         |      |   |   |         |      |   |   |         |      |   |         |           |   |   |         |          
|                                     |                             | Fixed rate debt                  |                                  | $     | 48,142 |      |   | $    | 21,134  |      |   | $          | 301,268 |         |   | $         | 95,825  |      |   | $ | 123,788 |      |   | $ | 942,283 |      |   | $       | 1,532,440 |   |   | $       | 1,637,683 |  
|                                     |                             |                                  | Average nominal interest rate(2) |       |        | 7.26 | % |      |         | 7.25 | % |            |         | 6.13    | % |           |         | 6.71 | % |   |         | 6.93 | % |   |         | 7.29 | % |         |           |  |   |         |           |  | 
|                                     |                             | Variable rate debt               |                                  | $     | 14,130 |      |   | $    | 47,560  |      |   | $          | 3,124   |         |   | $         | 33,237  |      |   | $ | 2,644   |      |   | $ | 294,490 |      |   | $       | 395,185   |   |   | $       | 395,189   |  
|                                     |                             |                                  | Average nominal interest rate(2) |       |        | 2.32 | % |      |         | 3.08 | % |            |         | 1.04    | % |           |         | 2.76 | % |   |         | 1.05 | % |   |         | 1.27 | % |         |           |  |   |         |           |  | 

44



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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                    
|   
|(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, 2003. The
    weighted average effective interest rate on the unsecured credit
    facilities, Long- Term Unsecured Debt and mortgages payable was
    2.55%, 6.22% and 5.57%, respectively, as of December 31,
    2003.
|   
|(3) | Represents unsecured tax-exempt bonds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our Balance Sheets as of December 31, 2003
and 2002, 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, 2003 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.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

An evaluation was carried out under the
supervision and with the participation of 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 our disclosure
controls and procedures were, to the best of their knowledge,
effective as of December 31, 2003, to ensure that
information required to be disclosed in reports that are filed
or submitted under the Securities Exchange Act are recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Subsequent to December 31, 2003, 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 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. For information regarding our Code of
Ethics, see Item 1  Business 
Available Information and Code of Ethics. Information
regarding the trustees of Archstone-Smith will be contained in
Archstone-Smiths definitive proxy statement relating to
the 2004 Annual Meeting of Shareholders to be held on
May 20, 2004 (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

45



---



##### Table of Contents



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 2003.







|         |                       
|-------- | ----------------------
|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 13, 2004, regarding
beneficial ownership of A-1 Common Units by each 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
|Name of Beneficial Owner                                                        |  | Beneficially Owned |           | A-1 Common Units 
|                                                                                |  |                    |           |                  
|James A. Cardwell                                                               |  |                    |          |                   |  |  |     |  
|Ernest A. Gerardi                                                               |  |                    | 51,350    |                   |  |  | 0.2  | %
|Ned S. Holmes                                                                   |  |                    |          |                   |  |  |     |  
|Robert P. Kogod                                                                 |  |                    | 3,522,094 | (1)               |  |  | 14.0 | %
|James H. Polk, III                                                              |  |                    |          |                   |  |  |     |  
|John M. Richman                                                                 |  |                    |          |                   |  |  |     |  
|John C. Schweitzer                                                              |  |                    |          |                   |  |  |     |  
|R. Scot Sellers                                                                 |  |                    |          |                   |  |  |     |  
|Robert H. Smith                                                                 |  |                    | 3,607,801 | (1)               |  |  | 14.3 | %
|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 (14 persons) |  |                    | 3,851,477 | (2)               |  |  | 15.3 | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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

46



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 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 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.
|   
|(2) | The 3,329,768 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.                                                                                                                                                                                                                                                                                                                                                                                                






|         |                                                   
|-------- | --------------------------------------------------
|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
relationships 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. | Principal Accountants Fees and
    Services

RATIFICATION OF RELATIONSHIP WITH PUBLIC
ACCOUNTANTS

Subject to shareholder ratification, the Audit
Committee has selected KPMG LLP, certified public accountants,
to serve as the auditors of the Operating Trusts books and
records for the coming year. KPMG LLP has served as our auditors
since 1980. A representative of KPMG LLP is expected to be
present at the annual meeting, and will be given an opportunity
to make a statement if that representative desires to do so and
will be available to respond to appropriate questions.

Ratification of the appointment of KPMG LLP as
our auditors for the current fiscal year will require that the
votes cast in favor of ratification exceed the votes cast
against ratification. Abstention and brokers non-votes are not
counted for purposes of determining whether this proposal has
been approved.

The fees billed by KPMG LLP in 2003 and 2002 for
services provided to the Operating Trust were as follows:

|                      |  |      |           |      |  |   |           | 
|--------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                      |  | 2003 |           | 2002
|                      |  |      |           |     
|Audit Fees(1)         |  | $    | 815,450   |      |  | $ | 690,000   | 
|Audit-Related Fees(2) |  |      | 186,800   |      |  |   | 416,633   | 
|Tax Fees(3)           |  |      | 281,949   |      |  |   | 151,930   | 
|All Other Fees(4)     |  |      |          |      |  |   |          | 
|                      |  |      |           |      |  |   |           | 
|TOTAL                 |  | $    | 1,284,199 |      |  | $ | 1,258,563 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit Fees are the aggregate fees
    billed by KPMG LLP for professional services rendered for the
    audit of the Operating Trusts annual financial statements
    for the years ended December 31, 2003 and December 31,
    2002 and the reviews of the financial statements included in our
    quarterly reports on Form 10-Q during 2003 and 2002.
    Audit Fees also includes amounts billed for
    registration statements filed in 2003 and 2002 and related
    comfort letters and consent.

47



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Audit-related fees include fees
    billed for assurance and related services that are reasonably
    related to the performance of the audit and not included in the
    audit fees described above, including audits of
    joint ventures and unconsolidated and consolidated subsidiaries.
|   
|(3) | Tax Fees are fees billed by KPMG LLP
    in either 2003 or 2002 for tax services, including tax
    compliance, tax advice or tax planning.                                                                                                                                                     
|   
|(4) | All Other Fees are fees billed by
    KPMG LLP in 2003 or 2002 that are not included in the above
    classifications.                                                                                                                                                                          

Pre-Approval Process

All services provided by KPMG LLP in 2003 were,
and all services to be provided by KPMG LLP in 2004 will be,
permissible under applicable laws and regulations and have been,
and will continue to be, pre-approved by the Audit Committee. In
accordance with applicable law, the Operating Trust is required
to disclose the non-audit services approved by the Audit
Committee performed by KPMG LLP. Non-audit services are defined
as services other than those provided in connection with an
audit or a review of the financial statements of a company. The
Audit Committee approved the engagement of KPMG LLP for
non-audit services, consisting of certain specified tax-related
services during 2003 and 2004, provided that the fees for these
services did not exceed $400,000 in the aggregate or $100,000
for any one service.

48



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##### Table of Contents






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 50 of this report, which is incorporated herein by
    reference.



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



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | See Schedule III on page 89 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 92 of this
    report, which is incorporated herein by reference.



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



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | The following reports on Form 8-K were filed
    during the last quarter of the period covered by this report:

|           |         |                |  |                      |     |  |  |  |    | 
|---------- | ------- | -------------- |  | -------------------- | --- |  |  |  | -- | 
|Date Filed |         | Items Reported |  | Financial Statements
|           |         |                |  |                     
|           | 6/10/03 |                |  |                      | 5   |  |  |  | No | 
|           | 6/12/03 |                |  |                      | 5.7 |  |  |  | No | 



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



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Exhibits required by Item 601 of
    Registration S-K are listed in the Index to Exhibits on
    page 92 of this Annual Report, which is incorporated herein
    by reference.

49



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS AND
SCHEDULE

|                                |                                                                                                                                                                              |      |  |    | 
|------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                |                                                                                                                                                                              | Page
|                                |                                                                                                                                                                              |     
|Archstone-Smith Operating Trust |                                                                                                                                                                              |      |  |   
|                                | Independent Auditors Report                                                                                                                                                 |      |  | 51 | 
|                                | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                                                             |      |  | 52 | 
|                                | Consolidated Statements of Earnings for the years
    ended December 31, 2003, 2002 and 2001                                                                                 |      |  | 53 | 
|                                | Consolidated Statements of Unitholders
    Equity, Other Common Unitholders Interest and
    Comprehensive Income for the years ended December 31, 2003,
    2002 and 2001 |      |  | 54 | 
|                                | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                                                                               |      |  | 55 | 
|                                | Notes to Consolidated Financial Statements                                                                                                                                   |      |  | 56 | 
|                                | Independent Auditors Report on Financial
    Statement Schedule                                                                                                             |      |  | 88 | 
|                                | Schedule III  Real Estate and
    Accumulated Depreciation as of December 31, 2003                                                                                          |      |  | 89 | 
|                                | Signatures                                                                                                                                                                   |      |  | 91 | 
|                                | Index to Exhibits                                                                                                                                                            |      |  | 92 | 

50



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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 as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002,
and the results of their operations and their cash flows for
each of the years in the three-year period ended
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the consolidated
financial statements, effective July 1, 2003,
Archstone-Smith Operating Trust adopted FASB Interpretation
No. 46 Consolidation of Variable Interest
Entities (revised). As a result, the accompanying
consolidated financial statements, referred to above, have been
restated to reflect the consolidated financial position and
results of operations of Archstone-Smith Operating Trust and
certain previously unconsolidated entities in accordance with
accounting principles generally accepted in the United States of
America.



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

Denver, Colorado

February 9, 2004


51



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)


|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |           |           | 
|----------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------------------------- | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                                                                                              |                                                                                                            |                             
|                                                                                                                              |                                                                                                            | December 31,                
|                                                                                                                              |                                                                                                            |                             
|                                                                                                                              |                                                                                                            | 2003                         |           | 2002     
|                                                                                                                              |                                                                                                            |                              |           |          
|ASSETS                                                                                                                       
|Real estate                                                                                                                   |                                                                                                            | $                            | 8,738,116 |           |           | $ | 7,406,437 |          
|Real estate  held for sale                                                                                                   |                                                                                                            |                              | 261,064   |           |           |   | 1,891,298 |          
|Less accumulated depreciation                                                                                                 |                                                                                                            |                              | 648,982   |           |           |   | 578,855   |          
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                            |                              | 8,350,198 |           |           |   | 8,718,880 |          
|Investments in and advances to unconsolidated
    entities                                                                    |                                                                                                            |                              | 86,367    |           |           |   | 116,594   |          
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                            | Net investments              |           |           | 8,436,565 |   |           |           | 8,835,474 | 
|Cash and cash equivalents                                                                                                     |                                                                                                            |                              | 5,230     |           |           |   | 12,846    |          
|Restricted cash in tax-deferred exchange escrow                                                                               |                                                                                                            |                              | 180,920   |           |           |   |          |          
|Other assets                                                                                                                  |                                                                                                            |                              | 298,980   |           |           |   | 247,706   |          
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                            | Total assets                 |           | $         | 8,921,695 |   |           | $         | 9,096,026 | 
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|LIABILITIES AND EQUITY                                                                                                       
|Liabilities:                                                                                                                  |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              | Unsecured credit facilities                                                                                |                              | $         | 103,790   |           |   | $         | 365,578   |          
|                                                                                                                              | Long-Term Unsecured Debt                                                                                   |                              |           | 1,871,965 |           |   |           | 1,776,103 |          
|                                                                                                                              | Mortgages payable                                                                                          |                              |           | 1,891,991 |           |   |           | 1,838,386 |          
|                                                                                                                              | Mortgages payable  held for sale                                                                          |                              |           | 35,634    |           |   |           | 341,611   |          
|                                                                                                                              | Distributions payable                                                                                      |                              |           | 1,593     |           |   |           | 91,616    |          
|                                                                                                                              | Accounts payable                                                                                           |                              |           | 27,086    |           |   |           | 29,157    |          
|                                                                                                                              | Accrued expenses and other liabilities                                                                     |                              |           | 252,533   |           |   |           | 272,236   |          
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                            | Total liabilities            |           |           | 4,184,592 |   |           |           | 4,714,687 | 
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|Minority interest                                                                                                             |                                                                                                            |                              | 11,510    |           |           |   | 2,600     |          
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|Other common unitholders interest, at
    redemption value (A-1 Common Units: 25,301,069 in 2003 and
    24,621,853 in 2002) |                                                                                                            |                              | 707,924   |           |           |   | 579,598   |          
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|Unitholders equity:                                                                                                          |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              | Convertible Preferred Units                                                                                |                              |           | 50,000    |           |   |           | 194,671   |          
|                                                                                                                              | Perpetual Preferred Units                                                                                  |                              |           | 160,120   |           |   |           | 160,550   |          
|                                                                                                                              | Common unitholders equity (A-2 Common
    Units: 194,762,263 units in 2003 and 180,705,795 units in 2002) |                              |           | 3,793,314 |           |   |           | 3,456,259 |          
|                                                                                                                              | Accumulated other comprehensive earnings (loss)                                                            |                              |           | 14,235    |           |   |           | (12,339   | )        
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                            | Total unitholders equity    |           |           | 4,017,669 |   |           |           | 3,799,141 | 
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          
|                                                                                                                              |                                                                                                            | Total liabilities and equity |           | $         | 8,921,695 |   |           | $         | 9,096,026 | 
|                                                                                                                              |                                                                                                            |                              |           |           |           |   |           |          

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

52



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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,
|                                                      |                                                                 |                         
|                                                      |                                                                 | 2003                     |         | 2002    |         | 2001
|                                                      |                                                                 |                          |         |         |         |     
|Revenues:                                             |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Rental revenues                                                 |                          | $       | 881,041 |         |      | $       | 852,295 |         |   | $       | 544,063 |        
|                                                      | Other income                                                    |                          |         | 19,334  |         |      |         | 9,462   |         |   |         | 11,905  |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      |                                                                 | Total revenues           |         |         | 900,375 |      |         |         | 861,757 |   |         |         | 555,968 | 
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Expenses:                                             |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Rental expenses                                                 |                          |         | 235,351 |         |      |         | 226,633 |         |   |         | 130,982 |        
|                                                      | Real estate taxes                                               |                          |         | 84,330  |         |      |         | 77,292  |         |   |         | 46,433  |        
|                                                      | Depreciation on real estate investments                         |                          |         | 187,677 |         |      |         | 167,029 |         |   |         | 102,477 |        
|                                                      | Interest expense                                                |                          |         | 186,832 |         |      |         | 190,005 |         |   |         | 88,081  |        
|                                                      | General and administrative expenses                             |                          |         | 49,838  |         |      |         | 45,710  |         |   |         | 27,434  |        
|                                                      | Provisions for possible loss on investments                     |                          |         |        |         |      |         |        |         |   |         | 14,927  |        
|                                                      | Other expenses                                                  |                          |         | 48,085  |         |      |         | 27,469  |         |   |         | 15,564  |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      |                                                                 | Total expenses           |         |         | 792,113 |      |         |         | 734,138 |   |         |         | 425,898 | 
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Earnings from operations                              |                                                                 |                          | 108,262 |         |         |      | 127,619 |         |         |   | 130,070 |        
|                                                      | Less: minority interest                                         |                          |         |        |         |      |         | 5,215   |         |   |         | 7,822   |        
|                                                      | Plus: gains on dispositions of depreciated real
    estate, net |                          |         |        |         |      |         | 35,950  |         |   |         | 108,748 |        
|                                                      | Income from unconsolidated entities                             |                          |         | 5,745   |         |      |         | 53,602  |         |   |         | 10,998  |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Net earnings before discontinued operations           |                                                                 |                          | 114,007 |         |         |      | 211,956 |         |         |   | 241,994 |        
|                                                      | Plus: net earnings from discontinued apartment
    communities  |                          |         | 380,184 |         |      |         | 144,769 |         |   |         | 23,580  |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Net earnings                                          |                                                                 |                          | 494,191 |         |         |      | 356,725 |         |         |   | 265,574 |        
|                                                      | Less: Preferred Unit distributions                              |                          |         | 26,153  |         |      |         | 34,309  |         |   |         | 25,877  |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Net earnings attributable to Common
    Units  Basic |                                                                 | $                        | 468,038 |         |         | $    | 322,416 |         |         | $ | 239,697 |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Weighted average Common Units outstanding:            |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Basic                                                           |                          |         | 212,288 |         |      |         | 202,781 |         |   |         | 134,589 |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Diluted                                                         |                          |         | 220,758 |         |      |         | 203,804 |         |   |         | 142,090 |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Net earnings per Common Unit  Basic:                 |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Net earnings before discontinued operations                     |                          | $       | 0.41    |         |      | $       | 0.88    |         |   | $       | 1.60    |        
|                                                      | Discontinued operations, net                                    |                          |         | 1.79    |         |      |         | 0.71    |         |   |         | 0.18    |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Net earnings                                                    |                          | $       | 2.20    |         |      | $       | 1.59    |         |   | $       | 1.78    |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Net earnings per Common Unit  Diluted:               |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Net earnings before discontinued operations                     |                          | $       | 0.41    |         |      | $       | 0.87    |         |   | $       | 1.60    |        
|                                                      | Discontinued operations, net                                    |                          |         | 1.77    |         |      |         | 0.71    |         |   |         | 0.17    |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|                                                      | Net earnings                                                    |                          | $       | 2.18    |         |      | $       | 1.58    |         |   | $       | 1.77    |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        
|Distributions paid per Common Unit                    |                                                                 | $                        | 1.71    |         |         | $    | 1.70    |         |         | $ | 1.64    |        
|                                                      |                                                                 |                          |         |         |         |      |         |         |         |   |         |        

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

53



---



##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED STATEMENTS OF UNITHOLDERS
EQUITY, OTHER COMMON

UNITHOLDERS INTEREST AND COMPREHENSIVE
INCOME


Years Ended December 31, 2003, 2002 and
2001


(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, 2000. |                                                   | $                                             | 82,651  |             |   | $            | 204,205 |               |   | $            | 1,961,933 |              |         | $     | 2,817   |   |        | $ | 2,251,606 |           |         | $ |        |         |        | $ | 2,251,606 |          
|                               | Comprehensive income:                             |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |        
|                               |                                                   | Net earnings                                  |         |             |  |              |         |               |  |              |           |              | 257,992 |       |         |   |       |   |           |           | 257,992 |   |         |         | 7,582  |   |           |           | 265,574 |  
|                               |                                                   | 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 |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           | 257,240   |        
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                               | Preferred Unit distributions                      |                                               |         |            |   |              |         |              |   |              |           | (25,877      | )       |       |         |  |        |   |           | (25,877   | )       |   |         |        |        |   |           | (25,877   | )      
|                               | 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      | ) |              |         |              |   |              |           | 46,492       |         |       |         |  |        |   |           | 42,692    |         |   |         |        |        |   |           | 42,692    |        
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|Balances at December 31, 2001. |                                                   |                                               | 225,351 |             |   |              | 148,763 |               |   |              | 3,263,035 |              |         |       | (5,517  | ) |        |   | 3,631,632 |           |         |   | 669,388 |         |        |   | 4,301,020 |          
|                               | Comprehensive income:                             |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |        
|                               |                                                   | Net earnings                                  |         |             |  |              |         |               |  |              |           |              | 314,815 |       |         |   |       |   |           |           | 314,815 |   |         |         | 41,910 |   |           |           | 356,725 |  
|                               |                                                   | 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 |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           | 349,903   |        
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                               | Preferred Unit distribution                       |                                               |         |            |   |              |         |              |   |              |           | (34,309      | )       |       |         |  |        |   |           | (34,309   | )       |   |         |        |        |   |           | (34,309   | )      
|                               | UPREIT Preferred Unit distribution                |                                               |         |            |   |              |         |              |   |              |           | 1,839        |         |       |         |  |        |   |           | 1,839     |         |   |         | (1,839  | )      |   |           |          |        
|                               | 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       | ) |              |           | 47,068       |         |       |         |  |        |   |           | 35,068    |         |   |         | 21,143  |        |   |           | 56,211    |        
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|Balances at December 31, 2002. |                                                   |                                               | 194,671 |             |   |              | 160,550 |               |   |              | 3,456,259 |              |         |       | (12,339 | ) |        |   | 3,799,141 |           |         |   | 579,598 |         |        |   | 4,378,739 |          
|                               | Comprehensive income:                             |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |           |        
|                               |                                                   | Net earnings                                  |         |             |  |              |         |               |  |              |           |              | 433,657 |       |         |   |       |   |           |           | 433,657 |   |         |         | 60,534 |   |           |           | 494,191 |  
|                               |                                                   | Change in fair value of cash flow hedges      |         |             |  |              |         |               |  |              |           |              |        |       |         |   | 3,439  |   |           |           | 3,439   |   |         |         |       |   |           |           | 3,439   |  
|                               |                                                   | Change in fair value of marketable securities |         |             |  |              |         |               |  |              |           |              |        |       |         |   | 23,135 |   |           |           | 23,135  |   |         |         |       |   |           |           | 23,135  |  
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                               | Comprehensive income attributable to Common Units |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           | 520,765   |        
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|                               | Preferred Unit distribution                       |                                               |         |            |   |              |         |              |   |              |           | (26,153      | )       |       |         |  |        |   |           | (26,153   | )       |   |         |        |        |   |           | (26,153   | )      
|                               | UPREIT Preferred Unit Distribution                |                                               |         |            |   |              |         |              |   |              |           | 5,156        |         |       |         |  |        |   |           | 5,156     |         |   |         | (5,156  | )      |   |           |          |        
|                               | Common Unit distributions                         |                                               |         |            |   |              |         |              |   |              |           | (245,460     | )       |       |         |  |        |   |           | (245,460  | )       |   |         | (31,575 | )      |   |           | (277,035  | )      
|                               | A-1 Common Units converted into A-2 Common Units  |                                               |         |            |   |              |         |              |   |              |           | 25,534       |         |       |         |  |        |   |           | 25,534    |         |   |         | (25,534 | )      |   |           |          |        
|                               | Conversion of Preferred Units into Common Units   |                                               |         | (143,416    | ) |              |         |              |   |              |           | 143,416      |         |       |         |  |        |   |           |          |         |   |         |        |        |   |           |          |        
|                               | Common Unit repurchases                           |                                               |         |            |   |              |         |              |   |              |           | (13,163      | )       |       |         |  |        |   |           | (13,163   | )       |   |         |        |        |   |           | (13,163   | )      
|                               | Preferred Unit repurchases                        |                                               |         | (1,255      | ) |              |         | (430          | ) |              |           | (196         | )       |       |         |  |        |   |           | (1,881    | )       |   |         |        |        |   |           | (1,881    | )      
|                               | Exercise of Options                               |                                               |         |            |   |              |         |              |   |              |           | 43,420       |         |       |         |  |        |   |           | 43,420    |         |   |         |        |        |   |           | 43,420    |        
|                               | Proceeds from Dividend Reinvestment Plan (DRIP)   |                                               |         |            |   |              |         |              |   |              |           | 48,126       |         |       |         |  |        |   |           | 48,126    |         |   |         |        |        |   |           | 48,126    |        
|                               | Issuance of A-1 Common Units                      |                                               |         |            |   |              |         |              |   |              |           |             |         |       |         |  |        |   |           | -        |         |   |         | 47,575  |        |   |           | 47,575    |        
|                               | Adjustment to redemption value                    |                                               |         |            |   |              |         |              |   |              |           | (112,337     | )       |       |         |  |        |   |           | (112,337  | )       |   |         | 112,337 |        |   |           |          |        
|                               | Other, net                                        |                                               |         |            |   |              |         |               |   |              |           | 35,055       |         |       |         |  |        |   |           | 35,055    |         |   |         | (30,485 | )      |   |           | 4,570     |        
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          
|Balances at December 31, 2003. |                                                   | $                                             | 50,000  |             |   | $            | 160,120 |               |   | $            | 3,793,314 |              |         | $     | 14,235  |   |        | $ | 4,017,669 |           |         | $ | 707,294 |         |        | $ | 4,724,963 |          
|                               |                                                   |                                               |         |             |   |              |         |               |   |              |           |              |         |       |         |   |        |   |           |           |         |   |         |         |        |   |           |          

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

54



---



##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |           |          |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------ | --------- | -------- | ---- | ------ | -------- | -------- | - | ------ | --------- | -------- | -
|                                                 |                                                                                              |                                                             
|                                                 |                                                                                              | Years Ended December 31,                                    
|                                                 |                                                                                              |                                                             
|                                                 |                                                                                              | 2003                                                         |        | 2002      |          | 2001
|                                                 |                                                                                              |                                                              |        |           |          |     
|Operating activities:                            |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|                                                 | Net earnings                                                                                 |                                                              | $      | 494,191   |          |      | $      | 356,725  |          |   | $      | 265,574   |         
|                                                 | Adjustments to reconcile net earnings to net cash
    flow provided by operating activities: |                                                              |        |           |          |      |        |          |          |   |        |           |         
|                                                 |                                                                                              | Depreciation and amortization                                |        |           | 210,427  |      |        |          | 212,178  |   |        |           | 140,435  |  
|                                                 |                                                                                              | Gains on dispositions of depreciated real estate,
    net    |        |           | (353,600 | )    |        |          | (139,604 | ) |        |           | (108,748 | )
|                                                 |                                                                                              | Provisions for possible loss on investments                  |        |           | 3,714    |      |        |          | 2,611    |   |        |           | 14,927   |  
|                                                 |                                                                                              | Minority interest                                            |        |           |         |      |        |          | 4,871    |   |        |           | 3,224    |  
|                                                 | Change in other assets                                                                       |                                                              |        | 19,441    |          |      |        | (25,597  | )        |   |        | (2,554    | )       
|                                                 | Change in accounts payable, accrued expenses and
    other liabilities                       |                                                              |        | (18,583   | )        |      |        | 40,462   |          |   |        | 24,546    |         
|                                                 | Other, net                                                                                   |                                                              |        | (6,149    | )        |      |        | (6,001   | )        |   |        | (5,251    | )       
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|                                                 |                                                                                              | Net cash flow provided by operating activities               |        |           | 349,441  |      |        |          | 445,645  |   |        |           | 332,153  |  
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|Investing activities:                            |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|                                                 | Real estate investments                                                                      |                                                              |        | (932,777  | )        |      |        | (910,544 | )        |   |        | (605,498  | )       
|                                                 | Change in investments in and advances to
    unconsolidated entities, net                    |                                                              |        | 30,227    |          |      |        | 124,125  |          |   |        | (5,354    | )       
|                                                 | Proceeds from dispositions, net of closing costs                                             |                                                              |        | 1,563,556 |          |      |        | 579,451  |          |   |        | 1,175,199 |         
|                                                 | Change in tax-deferred exchange escrow                                                       |                                                              |        | (180,920  | )        |      |        | 120,421  |          |   |        | (116,440  | )       
|                                                 | Other, net                                                                                   |                                                              |        | (57,665   | )        |      |        | (104,456 | )        |   |        | (60,213   | )       
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|                                                 |                                                                                              | Net cash flow provided by (used in) investing
    activities |        |           | 422,421  |      |        |          | (191,003 | ) |        |           | 387,694  |  
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|Financing activities:                            |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|                                                 | Proceeds from Long-Term Unsecured Debt                                                       |                                                              |        | 247,225   |          |      |        | 530,774  |          |   |        |          |         
|                                                 | Payments on Long-Term Unsecured Debt                                                         |                                                              |        | (171,250  | )        |      |        | (97,500  | )        |   |        | (69,700   | )       
|                                                 | Principal prepayment of mortgages payable,
    including prepayment penalties                |                                                              |        | (343,368  | )        |      |        | (705,103 | )        |   |        | (115,293  | )       
|                                                 | Regularly scheduled principal payments on
    mortgages payable                              |                                                              |        | (11,934   | )        |      |        | (11,761  | )        |   |        | (5,243    | )       
|                                                 | Proceeds from mortgage notes payable                                                         |                                                              |        | 76,017    |          |      |        | 247,797  |          |   |        | 67,594    |         
|                                                 | Proceeds from (payments on) unsecured credit
    facilities, net                             |                                                              |        | (261,788  | )        |      |        | 176,989  |          |   |        | (224,130  | )       
|                                                 | Proceeds from Common Units issued under DRIP and
    employee stock options                  |                                                              |        | 91,546    |          |      |        | 69,772   |          |   |        | 24,818    |         
|                                                 | Repurchase of Common Units and Preferred Units                                               |                                                              |        | (15,044   | )        |      |        | (64,776  | )        |   |        | (50,772   | )       
|                                                 | Redemption of Perpetual Preferred Units                                                      |                                                              |        |          |          |      |        | (12,000  | )        |   |        | (104,670  | )       
|                                                 | Cash distributions paid on Common Units                                                      |                                                              |        | (365,009  | )        |      |        | (344,590 | )        |   |        | (221,196  | )       
|                                                 | Cash distributions paid on Preferred Units                                                   |                                                              |        | (28,371   | )        |      |        | (34,351  | )        |   |        | (17,788   | )       
|                                                 | Cash distributions paid to minority interests                                                |                                                              |        |          |          |      |        | (5,165   | )        |   |        | (8,406    | )       
|                                                 | Other, net                                                                                   |                                                              |        | 2,498     |          |      |        | 1,091    |          |   |        | 2,889     |         
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|                                                 |                                                                                              | Net cash flow used in financing activities                   |        |           | (779,478 | )    |        |          | (248,823 | ) |        |           | (721,897 | )
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|Net change in cash and cash equivalents          |                                                                                              |                                                              | (7,616 | )         |          |      | 5,819  |          |          |   | (2,050 | )        
|Cash and cash equivalents at beginning of period |                                                                                              |                                                              | 12,846 |           |          |      | 7,027  |          |          |   | 9,077  |          
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          
|Cash and cash equivalents at end of period       |                                                                                              | $                                                            | 5,230  |           |          | $    | 12,846 |          |          | $ | 7,027  |          
|                                                 |                                                                                              |                                                              |        |           |          |      |        |          |          |   |        |          

See Note 15 for supplemental information on
non-cash investing and financing activities.

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

55



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001


(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 is our
sole trustee and owns approximately 88.5% of our outstanding
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. Archstone-Smith is an equity REIT organized
under the laws of the State of Maryland. We focus on creating
value for our shareholders by acquiring, developing and
operating apartments in markets characterized by:
(i) protected locations with limited land on which to build
new housing; (ii) expensive single-family home prices; and
(iii) a strong, diversified economic base and job growth
potential.



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

The accounts of the Operating Trust and its
controlled subsidiaries are consolidated in the accompanying
financial statements. All significant inter-company accounts and
transactions have been eliminated. We use the equity method to
account for investments where we do not own a majority of the
economic 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.

We adopted FASB Interpretation No. 46
Consolidation of Variable Interest Entities
(revised) on July 1, 2003. As a result, the accompanying
consolidated financial statements have been restated to reflect
the consolidated financial position and results of operations of
Archstone-Smith Trust and certain previously unconsolidated
entities in accordance with accounting principles generally
accepted in the United States of America. We previously
accounted for Ameriton using the equity method.



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America 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. Actual results could
differ from managements estimates.



| |                        
| | -----------------------
| | 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 rental
revenue, rental expense, real estate tax, 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.

56



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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 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.

We allocate the cost of newly acquired properties
between net tangible and identifiable intangible assets. The
primary intangible asset associated with an apartment community
acquisition is the value of the existing lease agreements. When
allocating cost to an acquired property, we first allocate costs
to the estimated intangible value of the existing lease
agreements and then to the estimated value of the land, building
and fixtures assuming the property is vacant. We estimate the
intangible value of the lease agreements by determining the lost
revenue associated with a hypothetical lease-up. We depreciate
the building and fixtures based on the expected useful life of
the asset and amortize the intangible value of the lease
agreements over the average remaining life of the existing
leases.

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 are 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 have an investment organization that is
responsible for development and redevelopment of apartment
communities. Consistent with GAAP, all direct and certain
indirect costs, including interest and real estate taxes,
incurred during development and redevelopment activities are
capitalized. Interest is capitalized on real estate assets that
require a period of time to get them ready for their intended
use. The amount of interest capitalized is based upon the
average amount of accumulated development expenditures during
the reporting period. Included in capitalized costs are
managements estimates of the direct and incremental
personnel costs and indirect project costs associated with our
development and redevelopment activities. Indirect project costs

57



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consist primarily of personnel costs associated
with construction administration and development accounting,
legal fees, and various office costs that clearly relate to
projects under development.

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   | 
|Intangible value of lease agreements     |  |  | 6-12  months | 



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

During 2003, 2002 and 2001, the total interest
paid in cash on all outstanding debt was $244.8 million,
$269.8 million and $163.7 million, respectively.

We capitalize interest during the construction
period as part of the cost of apartment communities under
development. Interest capitalized during 2003, 2002 and 2001
aggregated $26.9 million, $32.4 million and
$31.6 million, respectively.



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

Costs incurred in connection with the issuance of
equity securities are deducted from unitholders equity.
Costs incurred in connection with the issuance or renewal of
debt are subject to the provisions of EITF 96-19.
Accordingly, if the terms of the renewed or modified debt
instrument are deemed to be substantially different (i.e., a
10 percent or more difference in the present value of the
remaining cash flows), all unamortized loan costs associated
with the extinguished debt are charged against earnings during
the current period; otherwise, costs are capitalized as other
assets and 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. We utilize the straight-line method
to amortize debt issuance costs as it approximates the effective
interest method required under SFAS No. 91.
Amortization of loan costs included in interest expense for
2003, 2002 and 2001 was $4.5 million, $5.0 million and
$3.9 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. Costs of addressing moisture
infiltration and resulting mold remediation issues are only
capitalized, subject to recoverability, when it is determined by
management that such 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/ Forward Sales
    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 2003, we adopted SFAS No. 149
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. Under SFAS 149, 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

58



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accumulated other comprehensive income (loss). If
effective, fair value 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. We use the full accrual method of profit
recognition in accordance with SFAS No. 66 to record
gains on sales of real estate. Accordingly, we evaluate the
related GAAP requirements in determining the profit to be
recognized at the date of each sale transaction (i.e., 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.



| |           
| | ----------
| | Legal Fees

We generally recognize legal expenses as
incurred; however, if such fees are related to the accrual for
an estimated legal settlement, we accrue for the related
incurred and anticipated legal fees at the same time we accrue
the cost of settlement.



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

As of December 31, 2003, the company has one
stock-based employee compensation plan. Effective
January 1, 2003, the company adopted the fair value
recognition provision of FASB Statement No. 123,
Accounting for Stock-Based Compensation,prospectively to all employee awards granted, modified or
settled after January 1, 2003, which results in expensing
of options. There were no significant employee awards granted
during the twelve months ended December 31, 2003. For
employee awards granted prior to January 1, 2003, 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 prior to January 1, 2003, no stock-based employee
compensation expense is reflected in the accompanying condensed
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 (dollar amounts in thousands, except per share amounts):

|                                                                                                                    |  |                          |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                    |  |                         
|                                                                                                                    |  | Years Ended December 31,
|                                                                                                                    |  |                         
|                                                                                                                    |  | 2003                     |         | 2002 |  | 2001
|                                                                                                                    |  |                          |         |      |  |     
|Net earnings attributable to Common Units 
    Basic                                                               |  | $                        | 468,038 |      |  | $    | 322,416 |   |  | $ | 239,697 |  
|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 |  |                          | (1,982  | )    |  |      | (2,094  | ) |  |   | (1,669  | )
|                                                                                                                    |  |                          |         |      |  |      |         |   |  |   |         |  
|Pro forma net earnings attributable to Common
    Units  Basic                                                     |  | $                        | 466,056 |      |  | $    | 320,322 |   |  | $ | 238,028 |  
|                                                                                                                    |  |                          |         |      |  |      |         |   |  |   |         |  

59



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                              |                       |                          |   |      |  |      |   |      |  |  |   |      | 
|----------------------------- | --------------------- | ------------------------ | - | ---- |  | ---- | - | ---- |  |  | - | ---- | 
|                              |                       |                         
|                              |                       | Years Ended December 31,
|                              |                       |                         
|                              |                       | 2003                     |   | 2002 |  | 2001
|                              |                       |                          |   |      |  |     
|Net earnings per Common Unit: |                       |                          |   |      |  |      |   |      |  |  |   |     
|                              | Basic  as reported   |                          | $ | 2.20 |  |      | $ | 1.59 |  |  | $ | 1.78 | 
|                              |                       |                          |   |      |  |      |   |      |  |  |   |     
|                              | Basic  pro forma     |                          | $ | 2.20 |  |      | $ | 1.58 |  |  | $ | 1.77 | 
|                              |                       |                          |   |      |  |      |   |      |  |  |   |     
|                              | Diluted  as reported |                          | $ | 2.18 |  |      | $ | 1.58 |  |  | $ | 1.77 | 
|                              |                       |                          |   |      |  |      |   |      |  |  |   |     
|                              | Diluted  pro forma   |                          | $ | 2.17 |  |      | $ | 1.57 |  |  | $ | 1.75 | 
|                              |                       |                          |   |      |  |      |   |      |  |  |   |     

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

|                                         |  |      |            |      |  |      |            |   |  |  |            |  
|---------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                         |  | 2003 |            | 2002 |  | 2001
|                                         |  |      |            |      |  |     
|Weighted average risk-free interest rate |  |      | 3.48       | %    |  |      | 3.54       | % |  |  | 4.06       | %
|Weighted average dividend yield          |  |      | 6.92       | %    |  |      | 6.74       | % |  |  | 6.79       | %
|Weighted average volatility              |  |      | 15.33      | %    |  |      | 19.58      | % |  |  | 15.67      | %
|Weighted average expected option life    |  |      | 5.0  years |      |  |      | 5.0  years |   |  |  | 5.0  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 and have made all
required distributions of our taxable income. 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 (Loss). Other comprehensive income
(loss) reflects unrealized holding gains and losses on the
available-for-sale investments and changes in the fair value of
effective cash flow hedges as described above (see 
Interest Rate Contracts).

60



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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,
|                                                                                              |                                                              |                         
|                                                                                              |                                                              | 2003                     |         | 2002   |  | 2001
|                                                                                              |                                                              |                          |         |        |  |     
|Reconciliation of numerator between basic and
    diluted net earnings per Common Share(1):  
|Net earnings attributable to Common
    Units  Basic                                         |                                                              | $                        | 468,038 |        |  | $    | 322,416 |       |  | $ | 239,697 |      
|                                                                                              | Dividends on Convertible Preferred Units                     |                          |         | 12,872 |  |      |         |      |  |   |         | 9,696 | 
|                                                                                              | Minority interest                                            |                          |         |       |  |      |         |      |  |   |         | 1,524 | 
|                                                                                              |                                                              |                          |         |        |  |      |         |       |  |   |         |      
|Net earnings attributable to Common Units 
    Diluted                                       |                                                              | $                        | 480,910 |        |  | $    | 322,416 |       |  | $ | 250,917 |      
|                                                                                              |                                                              |                          |         |        |  |      |         |       |  |   |         |      
|Reconciliation of denominator between basic
    and diluted net earnings per Common Share(1):
|Weighted average number of Common Units
    outstanding  Basic                               |                                                              |                          | 212,288 |        |  |      | 202,781 |       |  |   | 134,589 |      
|                                                                                              | Assumed conversion of Preferred Units into Common
    Shares |                          |         | 7,972  |  |      |         |      |  |   |         | 5,844 | 
|                                                                                              | Minority interest                                            |                          |         |       |  |      |         |      |  |   |         | 943   | 
|                                                                                              | Incremental options and warrants                             |                          |         | 498    |  |      |         | 1,023 |  |   |         | 714   | 
|                                                                                              |                                                              |                          |         |        |  |      |         |       |  |   |         |      
|Weighted average number of Common Units
    outstanding  Diluted                             |                                                              |                          | 220,758 |        |  |      | 203,804 |       |  |   | 142,090 |      
|                                                                                              |                                                              |                          |         |        |  |      |         |       |  |   |         |      



---



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Excludes the impact of 13.1 million
    convertible equity securities during 2002 as they were
    anti-dilutive.



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

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



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

In December 2003, the FASB issued FASB
Interpretation No. 46 Consolidation of Variable
Interest Entities (revised). This Interpretation
replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities,
which was issued in January 2003 and clarifies the application
of Accounting Research Bulletin No. 51
Consolidated Financial Statements.
FIN 46R requires us to consolidate our existing variable
interest entities in which we have the majority variable
interest. Due to the adoption of this Interpretation, we have
consolidated the results of Ameriton, for all periods presented.

In April 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. We adopted this
Statement for contracts or hedging relationships entered into or
modified after June 30, 2003. Its purpose is to provide
more consistent application and clarification of SFAS 133.
The adoption of SFAS 149 did not have a material impact on our
financial position, net earnings or cash flows.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement is effective for financial instruments entered into or
modified after May 31, 2003, with the exception of the
application to non-controlling (minority) interests in
finite-life entities, which has been deferred indefinitely. The
Statement requires that certain financial instruments, formerly
presented as equity, be classified as liabilities. The adoption
of SFAS 150 did not have a material impact on our financial
position, net earnings or cash flows.

61



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In December 2003, the FASB issued SFAS
No. 132, Employer Disclosure about Pension and Other
Post retirement Benefits (revised). This statement is
effective for financial statements with fiscal years ending
after December 15, 2003. The statement revises the
necessary disclosures about pension plans. The adoption of SFAS
132 (revised) did not have a material impact on our
financial position, net earnings or cash flows.

(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, 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. Because the transaction was completed during late
2001, all information necessary to complete the purchase price
allocation was not available. During 2002, we finalized the
estimates associated with certain information that was not
available at the time the transaction was consummated. We
adjusted the original purchase price allocation by approximately
$31.8 million in 2002 to reflect the net amount of the
finalized unrecorded liabilities.

62



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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, 2001. 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)     
|                                                                             |         |             
|Total revenues                                                               |         | $            | 1,036,614 |     
|                                                                             |         |              |           |     
|Net earnings attributable to Common Units before
    discontinued operations |         | $            | 303,235   |     
|                                                                             |         |              |           |     
|Net earnings attributable to Common Units(2)                                 |         | $            | 345,612   |     
|                                                                             |         |              |           |     
|Net earnings per Common Unit:                                                |         |              |           |     
|                                                                             | Basic   |              | $         | 1.77 | 
|                                                                             |         |              |           |     
|                                                                             | Diluted |              | $         | 1.74 | 
|                                                                             |         |              |           |     



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Net earnings from discontinued operations have
    been reclassified.                                        
|   
|(2) | Includes $5.3 million in merger related
    costs and $14.9 million in provision for loss on
    investments.



| |                                              
| | ---------------------------------------------
| | 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 business or $0.16 per share on a
fully diluted basis. Excluded from the gain was approximately
$6.7 million in contingent proceeds related to
indemnification of certain accounts receivable over
120 days. During 2003, $5.8 million of these accounts
receivable were collected and recognized in other income.

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

63



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



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

Smith Management Construction, Inc. (SMC) is
a service business that we acquired in the Smith Merger during
2001. We sold SMC during February 2003 to members of SMCs
senior management. Prior to the sale, we reported SMC as an
unconsolidated entity in our financial statements. We received
two notes receivable totaling $5.8 million and bearing an
interest rate of 7.0% as consideration for the sale. The first
note for $3.5 million has principal payments that began in
October 2003 with payment in full by February 2008. The second
note for $2.3 million was fully repaid along with all
accrued interest due during May 2003. For accounting purposes,
we will not recognize the divestiture until our responsibilities
for certain performance guarantees, which pertain to ongoing
construction projects at the time of sale, expire. Principal and
interest payments received prior to the recognition of this
transaction as a divestiture will be recorded as a reduction to
our investment basis, which is included in other assets in the
accompanying consolidated balance sheets.

(3)     Real
Estate



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

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

|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |        |        | 
|---------------------------------------------------------- | --------------------------------------------------------------- | ----------------- | - | --------- | --------- | ---------- |  | ------ | ------ |  | - | --------- | --------- |  |  | ------ | ------ | 
|                                                           |                                                                 |                  
|                                                           |                                                                 | December 31,     
|                                                           |                                                                 |                  
|                                                           |                                                                 |                   |   |          
|                                                           |                                                                 | 2003              |   | 2002     
|                                                           |                                                                 |                   |   |          
|                                                           |                                                                 | Investment        |   | Units     |           | Investment |  | Units 
|                                                           |                                                                 |                   |   |           |           |            |  |       
|Archstone-Smith Operating Trust apartment
    communities: |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       
|                                                           | Operating communities                                           |                   | $ | 8,067,075 |           |            |  | 63,848 |        |  | $ | 8,380,779 |           |  |  | 75,693 |       
|                                                           | Communities under construction                                  |                   |   | 301,634   |           |            |  | 2,607  |        |  |   | 328,390   |           |  |  | 2,295  |       
|                                                           | Development communities In Planning:                            |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |        |       
|                                                           |                                                                 | Owned             |   |           | 95,911    |            |  |        | 2,633  |  |   |           | 89,501    |  |  |        | 2,870  | 
|                                                           |                                                                 | Under control(2)  |   |           |          |            |  |        | 112    |  |   |           |          |  |  |        | 428    | 
|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       
|                                                           | Total development communities In Planning                       |                   |   | 95,911    |           |            |  | 2,745  |        |  |   | 89,501    |           |  |  | 3,298  |       
|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       
|                                                           | Total Archstone-Smith Operating Trust apartment
    communities |                   |   | 8,464,620 |           |            |  | 69,200 |        |  |   | 8,798,670 |           |  |  | 81,286 |       
|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       
|                                                           | Ameriton apartment communities                                  |                   |   | 494,338   |           |            |  | 5,646  |        |  |   | 458,914   |           |  |  | 6,241  |       
|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       
|                                                           | Land                                                            |                   |   | 9,648     |           |            |  |        |        |  |   | 9,697     |           |  |  |        |       
|                                                           | Other                                                           |                   |   | 30,574    |           |            |  |        |        |  |   | 30,454    |           |  |  |        |       
|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       
|                                                           |                                                                 | Total real estate |   | $         | 8,999,180 |            |  |        | 74,846 |  |   | $         | 9,297,735 |  |  |        | 87,527 | 
|                                                           |                                                                 |                   |   |           |           |            |  |        |        |  |   |           |           |  |  |       



---



|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unit information is based on managements
    estimates and has not been audited or reviewed by our
    independent auditors.                                                                                                                              
|   
|(2) | Our investment as of December 31, 2003 and
    December 31, 2002 for development communities Under Control
    was $1.1 million and $2.7 million, respectively, and
    are reflected in the Other assets caption of our
    Consolidated Balance Sheets.

64



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                     
| | --------------------
| | 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 incremental capital
expenditures, which are classified as either
redevelopment or recurring.

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,        
|                       |                                                           |                                 
|                       |                                                           | 2003                             |           | 2002      
|                       |                                                           |                                  |           |           
|Balance at January 1   |                                                           | $                                | 9,297,735 |            |          | $ | 8,612,213 |         
|                      
|                       | Apartment properties acquired in the Smith
    Merger(1)  |                                  |           |           |          |   |           | 31,877   |        
|                       | Acquisition-related expenditures                          |                                  |           | 573,768    |          |   |           | 539,652  |        
|                       | Redevelopment expenditures                                |                                  |           | 69,649     |          |   |           | 152,428  |        
|                       | Recurring capital expenditures                            |                                  |           | 48,960     |          |   |           | 40,683   |        
|                       | Development expenditures, excluding land
    acquisitions |                                  |           | 91,430     |          |   |           | 247,044  |        
|                       | Acquisition and improvement of land for
    development   |                                  |           | 125,581    |          |   |           | 107,727  |        
|                       | Dispositions                                              |                                  |           | (1,209,956 | )        |   |           | (439,847 | )      
|                       | Provision for possible loss on investments                |                                  |           | (3,714     | )        |   |           | (2,611   | )      
|                       |                                                           |                                  |           |            |          |   |           |         
|                       |                                                           | Net apartment community activity |           |            | (304,282 | ) |           |          | 676,953 | 
|Other:                 |                                                           |                                  |           |            |          |   |           |         
|                       | Disposition of retail asset acquired in Smith
    Merger  |                                  |           |           |          |   |           | (5,990   | )      
|                       | Change in other real estate assets                        |                                  |           | 5,727      |          |   |           | 14,559   |        
|                       |                                                           |                                  |           |            |          |   |           |         
|                       |                                                           | Net other activity               |           |            | 5,727    |   |           |          | 8,569   | 
|Balance at December 31 |                                                           | $                                | 8,999,180 |            |          | $ | 9,297,735 |         
|                       |                                                           |                                  |           |            |          |   |           |         



---



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

At December 31, 2003, we had unfunded
contractual commitments of $498.4 million related to
communities under construction and under redevelopment.

65



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4)     Discontinued
Operations

Consistent with our capital recycling program, we
had 10 operating apartment communities, representing
2,651 units (unaudited), classified as held for sale under
the provisions of SFAS 144, at December 31, 2003.
Accordingly, we have classified the operating earnings from
these 10 properties within discontinued operations for the
years ended December 31, 2003, 2002 and 2001. During the
twelve months ended December 31, 2003, we sold
48 operating communities. The operating results of these
48 communities and the related gain/loss on sale are also
included in discontinued operations for 2003, 2002 and 2001.
Lastly, discontinued operations for the years ended
December 31, 2002 and 2001, include the net operating
results of 12 operating communities and one retail property
which were sold during 2002. Four apartment communities that
were sold during 2002 were held for sale at December 31,
2001, and therefore gains and related operating income for these
dispositions are not classified as discontinued operations in
accordance with SFAS 144. The following is a summary of net
earnings from discontinued operations (in thousands):

|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                          |  |                         
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2003                     |         | 2002 |  | 2001
|                                                          |  |                          |         |      |  |     
|Rental revenues                                           |  | $                        | 125,584 |      |  | $    | 233,479 |   |  | $ | 181,498 |  
|Rental expenses                                           |  |                          | (39,352 | )    |  |      | (69,554 | ) |  |   | (45,704 | )
|Real estate taxes                                         |  |                          | (12,019 | )    |  |      | (23,007 | ) |  |   | (15,058 | )
|Depreciation on real estate investments                   |  |                          | (15,679 | )    |  |      | (39,596 | ) |  |   | (34,390 | )
|Interest expense(1)                                       |  |                          | (28,236 | )    |  |      | (57,596 | ) |  |   | (62,766 | )
|Provision for possible loss on real estate
    investment |  |                          | (3,714  | )    |  |      | (2,611  | ) |  |   |        |  
|Gain on dispositions of real estate investments,
    net  |  |                          | 353,600 |      |  |      | 103,654 |   |  |   |        |  
|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  
|                                                          |  | $                        | 380,184 |      |  | $    | 144,769 |   |  | $ | 23,580  |  
|                                                          |  |                          |         |      |  |      |         |   |  |   |         |  



---



|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The portion of interest expense included in
    discontinued operations that is allocated to properties based on
    the companys leverage ratio was $23.0 million,
    $38.7 million and $51.6 million for 2003, 2002 and
    2001, respectively.

(5)     Investments
in and Advances to Unconsolidated Entities



| |                   
| | ------------------
| | Service Businesses

SMC and CES were service businesses that we
acquired in the Smith Merger during 2001. We sold CES in 2002 to
a third party and we sold SMC in 2003 to former members of
SMCs senior management. Prior to the sales, we reported
both CES and SMC as unconsolidated entities in our financial
statements.



| |                              
| | -----------------------------
| | Archstone Management Services

During May 2003, we sold Archstone Management
Services, our third-party management business. The transaction
includes management contracts for 32 communities comprising
10,665 units. The $6.5 million sales price will be
paid in three installments based on the retention of the
contracts acquired. Since the ultimate sales proceeds are
contingent upon the retention of management contracts existing
at the time of the sale, the gain is being deferred. We will
recognize the gain from this sale when the required retention
period expires in the second quarter of 2004.



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

At December 31, 2003, we had investments in
11 Operating Trust real estate joint ventures. Our
ownership percentage of economic interests range from 20% to
48%. The voting interest for major decisions is

66



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

split 50/50 between ourselves and the venture
partners. At December 31, 2003, Ameriton had seven real
estate joint ventures in which the venture partners are the
development/managing members. Voting on major investment
decisions are split 50/50 and our venture partners handle all
day-to-day operational decisions. Economic interest in the
ventures varies depending upon the ultimate return of the
venture. Because we do not control the voting interest of these
joint ventures, we account for these entities using the equity
method. In aggregate, these ventures own 16,817 apartment
units. At December 31, 2003, the investment balance
consists of $42.9 million in Archstone-Smith Operating
Trust joint ventures and $43.5 million in Ameriton joint
ventures. At December 31, 2002, the investment balance
consists of $54.9 million in Archstone-Smith Operating
Trust joint ventures and $61.7 million in Ameriton joint
ventures.



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

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

|                                |                                               |                                      |   |           |           |  |   |           |           | 
|------------------------------- | --------------------------------------------- | ------------------------------------ | - | --------- | --------- |  | - | --------- | --------- | 
|                                |                                               | 2003                                 |   | 2002     
|                                |                                               |                                      |   |          
|Assets:                         |                                               |                                      |   |           |           |  |   |          
|                                | Real estate                                   |                                      | $ | 1,283,904 |           |  | $ | 1,263,302 |          
|                                | Other assets                                  |                                      |   | 29,577    |           |  |   | 28,880    |          
|                                |                                               |                                      |   |           |           |  |   |          
|                                |                                               | Total assets                         |   | $         | 1,313,481 |  |   | $         | 1,292,182 | 
|                                |                                               |                                      |   |           |           |  |   |          
|Liabilities and owners equity: |                                               |                                      |   |           |           |  |   |          
|                                | Inter-company debt payable to Archstone-Smith |                                      | $ | 2,779     |           |  | $ | 5,105     |          
|                                | Mortgages payable                             |                                      |   | 913,142   |           |  |   | 842,959   |          
|                                | Other liabilities                             |                                      |   | 20,804    |           |  |   | 25,270    |          
|                                |                                               |                                      |   |           |           |  |   |          
|                                |                                               | Total liabilities                    |   |           | 936,725   |  |   |           | 873,334   | 
|                                |                                               |                                      |   |           |           |  |   |          
|                                | Owners equity                                |                                      |   | 376,756   |           |  |   | 418,848   |          
|                                |                                               |                                      |   |           |           |  |   |          
|                                |                                               | Total liabilities and owners equity |   | $         | 1,313,481 |  |   | $         | 1,292,182 | 
|                                |                                               |                                      |   |           |           |  |   |          

Selected summary results of operations for our
significant unconsolidated investees presented on a stand-alone
basis follows:

|                                |              |      |   |         |   |      |   |         |   |  |   |         |  
|------------------------------- | ------------ | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                |              | 2003 |   | 2002    |   | 2001
|                                |              |      |   |         |   |     
|Operating Trust Joint Ventures: |              |      |   |         |   |      |   |         |   |  |   |        
|                                | Revenues     |      | $ | 145,567 |   |      | $ | 145,061 |   |  | $ | 97,338  |  
|                                | Net earnings |      |   | 7,726   |   |      |   | 16,118  |   |  |   | 10,130  |  
|Ameriton Joint Ventures:        |              |      |   |         |   |      |   |         |   |  |   |        
|                                | Revenues     |      | $ | 11,549  |   |      | $ | 9,977   |   |  | $ | 33,776  |  
|                                | Net earnings |      |   | (4,569  | ) |      |   | (1,716  | ) |  |   | (157    | )
|Service Businesses:             |              |      |   |         |   |      |   |         |   |  |   |        
|                                | Revenues     |      | $ |        |   |      | $ | 432,193 |   |  | $ | 79,246  |  
|                                | Net earnings |      |   |        |   |      |   | 5,227   |   |  |   | 2,885   |  
|                                |              |      |   |         |   |      |   |         |   |  |   |        
|Total:                          |              |      |   |         |   |      |   |         |   |  |   |        
|                                | Revenues     |      | $ | 157,116 |   |      | $ | 587,231 |   |  | $ | 210,360 |  
|                                |              |      |   |         |   |      |   |         |   |  |   |        
|                                | Net earnings |      | $ | 3,157   |   |      | $ | 19,629  |   |  | $ | 12,858  |  
|                                |              |      |   |         |   |      |   |         |   |  |   |        

67



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 certain
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.

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 us. 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.



|    |           
|--- | ----------
|(6) | Borrowings



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

In October 2003, we completed the renewal of our
unsecured revolving credit facility provided by a group of
financial institutions led by JPMorgan Chase Bank. The
$600 million facility matures in October, 2006 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 0.60%. 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
facility contains an accordion feature that allows us to expand
the commitment up to $900 million at any time during the
life of the facility, subject to lenders providing additional
commitments. 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 under our line of credit (in
thousands, except for percentages):

|                                                  |  |              |         |      |  |   |         |  
|------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                  |  |             
|                                                  |  | Years Ended 
|                                                  |  | December 31,
|                                                  |  |             
|                                                  |  | 2003         |         | 2002
|                                                  |  |              |         |     
|Total unsecured revolving credit facility         |  | $            | 600,000 |      |  | $ | 700,000 |  
|Borrowings outstanding at December 31             |  |              | 97,000  |      |  |   | 348,500 |  
|Outstanding letters of credit under this facility |  |              | 1,050   |      |  |   | 11,890  |  
|Weighted average daily borrowings                 |  |              | 231,354 |      |  |   | 248,398 |  
|Maximum borrowings outstanding during the period  |  |              | 511,500 |      |  |   | 465,000 |  
|Weighted average daily nominal interest rate      |  |              | 1.95    | %    |  |   | 2.26    | %
|Weighted average daily effective interest rate    |  |              | 2.55    | %    |  |   | 3.08    | %

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 1.65% to 1.95% during 2003. There were $6.8 million
and $17.1 million of borrowings outstanding under this
agreement at December 31, 2003 and 2002, respectively.

68



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

During June 2003, we issued $250 million of
long-term unsecured senior notes due in June 2008 for net
proceeds of $247.2 million. These notes bear interest at a
coupon rate of 3.0% annually, with an effective interest rate of
3.2%. The net proceeds were used to repay outstanding balances
on our unsecured credit facilities.

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, 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, 2003, we
had $550 million available in debt shelf registered
securities which can be issued subject to our ability to affect
offerings on satisfactory terms based on prevailing market
conditions.

A summary of our Long-Term Unsecured Debt
outstanding at December 31, 2003 and 2002 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) |   | 2003         |      | 2002         |   | (Years)       
|                                 |               |                |      |                  |   |              |      |              |   |               
|Long-term unsecured senior notes |               |                | 6.35 | %                |   |              | 6.46 | %            |   | $              | 1,771,167 |           |  | $ | 1,669,396 |           |  |  | 5.40  |     
|Unsecured tax-exempt bonds       |               |                | 1.72 | %                |   |              | 1.93 | %            |   |                | 100,798   |           |  |   | 106,707   |           |  |  | 20.56 |     
|                                 |               |                |      |                  |   |              |      |              |   |                |           |           |  |   |           |           |  |  |       |     
|                                 | Total/average |                |      | 6.10             | % |              |      | 6.22         | % |                | $         | 1,871,965 |  |   | $         | 1,776,103 |  |  |       | 6.22 | 
|                                 |               |                |      |                  |   |              |      |              |   |                |           |           |  |   |           |           |  |  |       |     



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(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 $1.8 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 with
$23.7 million maturing in 2008 and $77.1 million
maturing in 2029. 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

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

69



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

summary of mortgages payable outstanding for the
years ending December 31, 2003 and December 31, 2002
follows (dollar amounts in thousands):

|                                   |                             |                  |      |                      |   |      |         |           |  |   |           |           | 
|---------------------------------- | --------------------------- | ---------------- | ---- | -------------------- | - | ---- | ------- | --------- |  | - | --------- | --------- | 
|                                   |                             |                  |      |                     
|                                   |                             |                  |      | Principal Balance(2)
|                                   |                             |                  |      | at December 31,     
|                                   |                             | Effective        |      |                     
|                                   |                             | Interest Rate(1) |      | 2003                 |   | 2002
|                                   |                             |                  |      |                      |   |     
|Fannie Mae secured debt(3)         |                             |                  | 6.56 | %                    |   | $    | 538,106 |           |  | $ | 540,364   |          
|Freddie Mac secured line of credit |                             |                  | 2.74 | %                    |   |      | 21,705  |           |  |   | 71,110    |          
|Conventional fixed rate            |                             |                  | 6.33 | %                    |   |      | 973,171 |           |  |   | 1,137,548 |          
|Tax-exempt fixed rate              |                             |                  | n/a  |                      |   |      |        |           |  |   | 7,035     |          
|Tax-exempt floating rate           |                             |                  | 1.83 | %                    |   |      | 317,351 |           |  |   | 337,352   |          
|Construction Loans                 |                             |                  | 4.19 | %                    |   |      | 56,129  |           |  |   | 63,738    |          
|Other                              |                             |                  | 3.85 | %                    |   |      | 21,163  |           |  |   | 22,850    |          
|                                   |                             |                  |      |                      |   |      |         |           |  |   |           |          
|                                   | Total/average mortgage debt |                  |      | 5.57                 | % |      | $       | 1,927,625 |  |   | $         | 2,179,997 | 
|                                   |                             |                  |      |                      |   |      |         |           |  |   |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2003.                                                                                                                          
|   
|(2) | Includes net fair market value adjustment
    recorded in connection with the Smith Merger of
    $58.5 million and $69.7 million at December 31,
    2003 and 2002, 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.

The change in mortgages payable during 2003 and
2002 consisted of the following (in thousands):

|                       |                                                           |      |           |          |   |   |           |          |  
|---------------------- | --------------------------------------------------------- | ---- | --------- | -------- | - | - | --------- | -------- | -
|                       |                                                           | 2003 |           | 2002    
|                       |                                                           |      |           |         
|Balance at January 1   |                                                           | $    | 2,179,997 |          |   | $ | 2,454,508 |         
|                       | Issuance of new mortgages(1)                              |      |           | 76,017   |   |   |           | 247,797  |  
|                       | Mortgage assumptions related to property
    acquisitions |      |           | 55,362   |   |   |           | 205,542  |  
|                       | Regularly scheduled principal amortization                |      |           | (11,934  | ) |   |           | (11,760  | )
|                       | Prepayments, final maturities and other                   |      |           | (371,817 | ) |   |           | (716,090 | )
|                       |                                                           |      |           |          |   |   |           |         
|Balance at December 31 |                                                           | $    | 1,927,625 |          |   | $ | 2,179,997 |         
|                       |                                                           |      |           |          |   |   |           |         

70



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



---



|    |                                                               
|--- | --------------------------------------------------------------
|(1) | Represents proceeds from mortgages originated by
    Ameriton.



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

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

|              |       |                          |         |                   |  |              |         |            |  |       |         |         |  |   |           |           |  |   |           |           | 
|------------- | ----- | ------------------------ | ------- | ----------------- |  | ------------ | ------- | ---------- |  | ----- | ------- | ------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|              |       |                          |         |                   |  |             
|              |       | Long Term Unsecured Debt |         | Mortgages Payable |  |             
|              |       |                          |         |                   |  |             
|              |       | Regularly                |         |                   |  | Regularly    |         |            |  |      
|              |       | Scheduled                |         | Final             |  | Scheduled    |         | Final      |  |      
|              |       | Principal                |         | Maturities        |  | Principal    |         | Maturities |  |      
|              |       | Amortization             |         | and Other         |  | Amortization |         | and Other  |  | Total
|              |       |                          |         |                   |  |              |         |            |  |      
|2004          |       | $                        | 31,250  |                   |  | $            | 20,000  |            |  | $     | 13,093  |         |  | $ | 49,179    |           |  | $ | 113,522   |          
|2005          |       |                          | 31,250  |                   |  |              | 220,000 |            |  |       | 14,119  |         |  |   | 54,575    |           |  |   | 319,944   |          
|2006          |       |                          | 31,250  |                   |  |              | 20,000  |            |  |       | 13,273  |         |  |   | 291,119   |           |  |   | 355,642   |          
|2007          |       |                          | 31,250  |                   |  |              | 355,000 |            |  |       | 14,575  |         |  |   | 114,487   |           |  |   | 515,312   |          
|2008          |       |                          | 31,250  |                   |  |              | 303,711 |            |  |       | 16,142  |         |  |   | 110,290   |           |  |   | 461,393   |          
|Thereafter(1) |       |                          | 399,917 |                   |  |              | 397,087 |            |  |       | 185,945 |         |  |   | 1,050,828 |           |  |   | 2,033,777 |          
|              |       |                          |         |                   |  |              |         |            |  |       |         |         |  |   |           |           |  |   |           |          
|              | Total |                          | $       | 556,167           |  |              | $       | 1,315,798  |  |       | $       | 257,147 |  |   | $         | 1,670,478 |  |   | $         | 3,799,590 | 
|              |       |                          |         |                   |  |              |         |            |  |       |         |         |  |   |           |           |  |   |           |          



---



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | The average annual principal payments due from
    2009 to 2023 are $123.7 million per year.



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

The book value of total assets pledged as
collateral for mortgage loans and other obligations at
December 31, 2003 and 2002 is $3.8 billion and
$3.8 billion, respectively. 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, 2003. See Note 11 for a
summary of derivative financial instruments used in connection
with our debt instruments.



|    |                             
|--- | ----------------------------
|(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 2003, we announced an anticipated increase in the
annual distribution from $1.71 to $1.72 per Common Unit.

71



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the cash
distributions paid per unit on Common Units and Preferred Units
during 2003, 2002 and 2001:

|                                |  |      |          |      |  |      |          |  |  |   |      | 
|------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- |  |  | - | ---- | 
|                                |  | 2003 |          | 2002 |  | 2001
|                                |  |      |          |      |  |     
|Common Units and A-1 Units      |  | $    | 1.71     |      |  | $    | 1.70     |  |  | $ | 1.64 | 
|Series A Preferred Units(1)     |  |      | 2.11     |      |  |      | 2.29     |  |  |   | 2.21 | 
|Series B Preferred Units(2)     |  |      |         |      |  |      |         |  |  |   | 0.79 | 
|Series C Preferred Units(3)     |  |      |         |      |  |      | 1.38     |  |  |   | 2.16 | 
|Series D Preferred Units        |  |      | 2.19     |      |  |      | 2.19     |  |  |   | 2.19 | 
|Series E Preferred Units(4)     |  |      | 2.09     |      |  |      | 0.70     |  |  |   |     | 
|Series F Preferred Units(4)     |  |      | 2.03     |      |  |      | 0.68     |  |  |   |     | 
|Series G Preferred Units(4)     |  |      | 2.16     |      |  |      | 0.72     |  |  |   |     | 
|Series H Preferred Units(5),(6) |  |      | 1.27     |      |  |      | 3.36     |  |  |   |     | 
|Series I Preferred Units(5),(7) |  |      | 7,660.00 |      |  |      | 7,660.00 |  |  |   |     | 
|Series J Preferred Units(5)     |  |      |         |      |  |      | 1.71     |  |  |   |     | 
|Series K Preferred Units(5)     |  |      | 3.38     |      |  |      | 3.36     |  |  |   |     | 
|Series L Preferred Units(5)     |  |      | 3.38     |      |  |      | 3.36     |  |  |   |     | 



---



|    |                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Series A Preferred Units were called for
    redemption during the fourth quarter of 2003; of the
    2.9 million Preferred Units outstanding, 2.8 million
    were converted to Common Units and the remaining were redeemed.
|   
|(2) | All of the outstanding Series B Preferred
    Units were redeemed on May 7, 2001.                                                                                                                                                 
|   
|(3) | The Series C Preferred Units were redeemed
    at liquidation value, plus accrued and unpaid distributions, on
    August 20, 2002.                                                                                               
|   
|(4) | In August 2002, all DownREIT Perpetual Preferred
    Unites were converted into Operating Trust Perpetual Preferred
    Units.                                                                                                    
|   
|(5) | Series H, I, J, K and L did not exist before
    the Smith Merger.                                                                                                                                                                
|   
|(6) | The Series H Preferred Units were converted
    into Common Units on May 15, 2003.                                                                                                                                                
|   
|(7) | The Series I Preferred Units have a par
    value of $100,000.                                                                                                                                                                    
|   
|(8) | The Series J Preferred Units were converted
    into Common Units on July 13, 2002.                                                                                                                                               



|    |                    
|--- | -------------------
|(8) | Unitholders Equity



| |                 
| | ----------------
| | 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 11.5% at December 31, 2003.

During 2003, we issued 1,955,908 Common Units in
exchange for real estate. In 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.

72



---



##### 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

The Series A Preferred Units were called for
redemption during the fourth quarter of 2003. Of the
2.9 million Series A Preferred Units outstanding,
2.8 million were converted to Common Units and the
remaining were redeemed. During May 2003, the Series H
Preferred Shares were converted into Common Units. 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, the Series J Preferred
Units were converted to Common Units.



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

In 2003, we repurchased 614,100 Common Units for
an average price of $21.38 per unit. In 2002, we repurchased
668,900 Common Units for an average price of $22.97 per unit.



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

A summary of our Convertible Preferred Units
outstanding at December 31, 2003 and 2002, including their
significant rights, preferences, and privileges follows:

|                                                                                                                        |  |            |          |            |  |             |       |          |  |              |       |      |  |   |      |  |  |   |        |  |  |   |         | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---------- | -------- | ---------- |  | ----------- | ----- | -------- |  | ------------ | ----- | ---- |  | - | ---- |  |  | - | ------ |  |  | - | ------- | 
|                                                                                                                        |  |            |          |            |  |             |       | Annual   |  |             
|                                                                                                                        |  |            |          |            |  |             |       | Dividend |  | December 31,
|                                                                                                                        |  | Redemption |          | Conversion |  | Liquidation |       | Rate Per |  |             
|Description                                                                                                             |  | Date       |          | Ratio      |  | Value       |       | Unit     |  | 2003         |       | 2002
|                                                                                                                        |  |            |          |            |  |             |       |          |  |              |       |     
|                                                                                                                        |  |            |          |            |  |             |       |          |  |             
|                                                                                                                        |  |            |          |            |  |             |       |          |  | (Amounts in 
|                                                                                                                        |  |            |          |            |  |             |       |          |  | thousands)  
|Series A Preferred Units; 2,926,835 Units
    issued and outstanding at December 31, 2002(1)                            |  |            |         |            |  |             |      |          |  |              |      |      |  | $ |     |  |  | $ |       |  |  | $ | 73,171  | 
|Series H Preferred Units; 2,640,325 Units
    issued and outstanding at December 31, 2002(2)                            |  |            |         |            |  |             |      |          |  |              |      |      |  |   |     |  |  |   |       |  |  |   | 71,500  | 
|Series K Preferred Units; 666,667 Units
    issued and outstanding at December 31, 2003 and
    December 31, 2002(3)(4) |  |            | 10/01/04 |            |  |             | 1.975 |          |  |              | 37.50 |      |  |   | 3.38 |  |  |   | 25,000 |  |  |   | 25,000  | 
|Series L Preferred Units; 641,026 Units
    issued and outstanding at December 31, 2003 and
    December 31, 2002(3)(4) |  |            | 11/05/05 |            |  |             | 1.975 |          |  |              | 39.00 |      |  |   | 3.38 |  |  |   | 25,000 |  |  |   | 25,000  | 
|                                                                                                                        |  |            |          |            |  |             |       |          |  |              |       |      |  |   |      |  |  |   |        |  |  |   |         | 
|                                                                                                                        |  |            |          |            |  |             |       |          |  |              |       |      |  |   |      |  |  | $ | 50,000 |  |  | $ | 194,671 | 
|                                                                                                                        |  |            |          |            |  |             |       |          |  |              |       |      |  |   |      |  |  |   |        |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Series A Preferred Units were called for
    redemption during the fourth quarter of 2003; of the
    2.9 million Preferred Units outstanding, 2.8 million
    were converted to Common Units and the remaining were redeemed.
|   
|(2) | The Series H Preferred Units were converted
    into Common Units on May 15, 2003.                                                                                                                                                

73



---



##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | 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.                
|   
|(4) | Series K and L Preferred Units 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. Additionally, Series K and L unitholders
    have the right to convert into Common Units at their discretion.

A summary of our Perpetual Preferred Units
outstanding at December 31, 2003 and 2002, including their
significant rights, preferences, and privileges follows:

|                                                                                                                                      |  |            |          |             |  |               |         |              |  |      |       |  |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | -------- | ----------- |  | ------------- | ------- | ------------ |  | ---- | ----- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                                                                      |  |            |          |             |  |               |         |             
|                                                                                                                                      |  |            |          |             |  | Annual        |         | December 31,
|                                                                                                                                      |  | Redemption |          | Liquidation |  | Dividend Rate |         |             
|Description                                                                                                                           |  | Date(1)    |          | Value       |  | Per Unit      |         | 2003         |  | 2002
|                                                                                                                                      |  |            |          |             |  |               |         |              |  |     
|                                                                                                                                      |  |            |          |             |  |               |         |             
|                                                                                                                                      |  |            |          |             |  |               |         | (Amounts in 
|                                                                                                                                      |  |            |          |             |  |               |         | Thousands)  
|Series D Preferred Units; 1,957,606 and
    1,974,806 units issued and outstanding at December 31,
    2003 and 2002, respectively(1) |  |            | 08/06/04 |             |  |               | 25.00   |              |  | $    | 2.19  |  |  | $ | 48,940  |  |  | $ | 49,370  | 
|Series E Preferred Units;
    1,120,000 units issued and outstanding at December 31,
    2003 and 2002, respectively(2)               |  |            | 08/13/04 |             |  |               | 25.00   |              |  |      | 2.09  |  |  |   | 27,123  |  |  |   | 27,123  | 
|Series F Preferred Units; 800,000 units
    issued and outstanding at December 31, 2003 and 2002,
    respectively(2)                 |  |            | 09/27/04 |             |  |               | 25.00   |              |  |      | 2.03  |  |  |   | 19,464  |  |  |   | 19,464  | 
|Series G Preferred Units; 600,000 units
    issued and outstanding at December 31, 2003 and 2002,
    respectively(2)                 |  |            | 03/03/05 |             |  |               | 25.00   |              |  |      | 2.16  |  |  |   | 14,593  |  |  |   | 14,593  | 
|Series I Preferred Units; 500 units
    issued and outstanding at December 31, 2003 and 2002,
    respectively(1)                     |  |            | 02/01/28 |             |  |               | 100,000 |              |  |      | 7,660 |  |  |   | 50,000  |  |  |   | 50,000  | 
|                                                                                                                                      |  |            |          |             |  |               |         |              |  |      |       |  |  |   |         |  |  |   |         | 
|                                                                                                                                      |  |            |          |             |  |               |         |              |  |      |       |  |  | $ | 160,120 |  |  | $ | 160,550 | 
|                                                                                                                                      |  |            |          |             |  |               |         |              |  |      |       |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 share, plus
    accrued and unpaid dividends, if any, on or after the redemption
    dates indicated.
|   
|(2) | 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 cumulative preferential cash distributions, when and as
declared and authorized by the Board, out of funds legally
available for the payment of distributions. All Preferred Unit
distributions are cumulative from date of original issue and all
series of Preferred Units rank equally as to distributions and
liquidation proceeds. All dividends due and payable on Preferred
Units have been accrued and paid as of the end of each fiscal
year.

If six quarterly dividends payable (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 distributions in arrears have
been paid, the right to elect the two additional trustees shall
cease and the terms of such trustees shall terminate.

74



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                  
| | -------------------------------------------------
| | 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. In October 2003, we announced that shares issued under
the Dividend Reinvestment and Share Purchase Plan would be
acquired through open market purchases or in negotiated
transactions with third parties pursuant to the automatic
reinvestment of dividends or pursuant to optional cash payments
under the plan. As a result, Common Shares acquired by investors
under the plan are not currently entitled to a discount.



|    |              
|--- | -------------
|(9) | Benefit Plans

Our 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, granted
only in 1997 and 1998.

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. The plan has a 10-year term. As of
December 31, 2003, Archstone-Smith had
8,840,740 shares available for future grants. No annual
option awards were made in 2003, as option awards for 2003 were
approved and granted in January 2004. Beginning in 2004, the
Board voted to eliminate regular option awards to officers with
the title of Senior Vice President or above.



| |                                      
| | -------------------------------------
| | 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 Shares for issuance to their outside
trustees under the equity plan for 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
options granted to outside trustees before 1999 have been
exercised or cancelled. The options issued to outside trustees
between 1999 and 2001 have a DEU feature, a 10-year term and
vest over a four-year period. Beginning in 2002 options are no
longer issued to outside trustees.

During 1997, as part of the employee share
purchase plan, certain officers and other employees purchased
Common Shares of Archstone-Smith. The company financed 95% of
the total purchase price by issuing notes representing
approximately $17.1 million. Loans made to employees in
connection with the employee share purchase plan are recourse
loans and the associated receivable is recorded as a reduction
of shareholders/unitholders equity. As of
December 31, 2003, the aggregate outstanding balances on
these notes were approximately $1.1 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. The fully vested stock options issued in
connection with the repurchase

75



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of outstanding common shares were accounted for
under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Additionally,
no stock-based employee compensation expense is reflected in the
Consolidated Statement of Earnings, as all options granted had
an exercise price equal to the market value of the underlying
common stock on the date of grant and would not be considered a
replacement award.

A summary of all options outstanding at
December 31, 2003 follows:

|                                                                    |       |           |           |                 |  |         |              |                  |  |                  |       |       |  |  |           |  |  |  |            |  | 
|------------------------------------------------------------------- | ----- | --------- | --------- | --------------- |  | ------- | ------------ | ---------------- |  | ---------------- | ----- | ----- |  |  | --------- |  |  |  | ---------- |  | 
|                                                                    |       |           |           |                 |  |         |              |                 
|                                                                    |       |           |           | Exercise Prices |  |         |              | Weighted-Average
|                                                                    |       | Number of |           |                 |  |         |              | Remaining       
|                                                                    |       | Options   |           | Range           |  | Average |              | Expiration Date  |  | Contractual Life
|                                                                    |       |           |           |                 |  |         |              |                  |  |                 
|Matching options under the 1997 employee share
    purchase program |       |           | 485,202   |                 |  | $       | 21.19-$22.44 |                  |  | $                | 22.19 |       |  |  | 2007-2008 |  |  |  | 3.71 years | 
|Options with DEUs                                                   |       |           | 969,212   |                 |  |         | 19.00- 22.94 |                  |  |                  | 20.51 |       |  |  | 2007-2009 |  |  |  | 5.05 years | 
|Options without DEUs                                                |       |           | 3,853,064 |                 |  |         | 21.91- 28.86 |                  |  |                  | 24.77 |       |  |  | 2007-2013 |  |  |  | 8.04 years | 
|Outside Trustees                                                    |       |           | 71,250    |                 |  |         | 22.56- 23.95 |                  |  |                  | 23.06 |       |  |  | 2009-2011 |  |  |  | 6.43 years | 
|Exchanged options                                                   |       |           | 1,009,014 |                 |  |         | 15.07- 23.18 |                  |  |                  | 19.99 |       |  |  | 2007-2011 |  |  |  | 6.22 years | 
|                                                                    |       |           |           |                 |  |         |              |                  |  |                  |       |       |  |  |           |  |  |  |            | 
|                                                                    | Total |           |           | 6,387,742       |  |         | $            | 15.07-$28.86     |  |                  | $     | 23.15 |  |  |           |  |  |  |            |  | 
|                                                                    |       |           |           |                 |  |         |              |                  |  |                  |       |       |  |  |           |  |  |  |            | 

A summary of the status of Archstone-Smith
Trusts option plans as of December 31, 2003, 2002 and
2001, and changes during the years ended on those dates is
presented below:

|                                      |                                  |           |           |                |   |             |       |       |  |  |           |  | 
|------------------------------------- | -------------------------------- | --------- | --------- | -------------- | - | ----------- | ----- | ----- |  |  | --------- |  | 
|                                      |                                  |           |           | Weighted       |   | Number of  
|                                      |                                  | Number of |           | Average        |   | Options    
|                                      |                                  | Options   |           | Exercise Price |   | Exercisable
|                                      |                                  |           |           |                |   |            
|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 | 
|                                      |                                  |           |           |                |   |             |       |       |  |  |           | 
|                                      | Granted                          |           |           | 15,823         |   |             |       | 22.42 |  |  |           |  | 
|                                      | Exercised                        |           |           | (2,101,605     | ) |             |       | 19.58 |  |  |           |  | 
|                                      | Forfeited                        |           |           | (762,838       | ) |             |       | 24.38 |  |  |           |  | 
|                                      |                                  |           |           |                |   |             |       |       |  |  |           | 
|Balance/ Average at December 31, 2003 |                                  |           | 6,387,742 |                |   | $           | 23.15 |       |  |  | 4,546,725 | 
|                                      |                                  |           |           |                |   |             |       |       |  |  |           | 



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

Restricted Share Unit awards are granted at the
market value of the underlying Common Shares on the date of
grant. To compute the total compensation expense to be
recognized, the fair value of each share on the grant date is
multiplied by the number of shares granted. We then recognize
this stock-based employee compensation expense over the vesting
period, which ranges from two to five years. The total expense

76



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recognized in connection with these awards,
including the DEUs for the years ending December 31, 2003,
December 31, 2002 and December 31, 2001 was
$5.6 million, $4.6 million, and $4.2 million,
respectively.

There were no RSU grants awarded under the
Long-Term Incentive Plan in 2003. Instead, 2003 RSUs were
approved and granted in January 2004. During 2002 and 2001
Archstone-Smith awarded 341,048 and 168,066 RSUs with a DEU
feature, respectively, to certain employees under the long-term
incentive plan, of which 88,366 have been forfeited. Twelve
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 provides the holder with one Common Share
upon settlement. 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, 2003, there were a total
of 246,964 DEUs outstanding awarded to 85 holders of
options and RSUs. The outstanding DEUs were valued at
$6.9 million on December 31, 2003 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
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 of $12,000
during 2003. 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.

77



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                              
| | ---------------------------------------------
| | 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
accrue in the form of phantom shares equal to the number of
Common Shares that could have been purchased on the date the fee
was credited. Dividends are calculated on the phantom shares and
additional phantom shares are credited. Distribution of phantom
shares may be deferred to a later date. Upon settlement, phantom
shares convert into Common Shares on a 1-to-1 basis.
Alternatively, the Trustee can elect to have his or her fees
deferred and invested in one or more of the investment funds
that are otherwise available under the deferred compensation
plan. Upon settlement such investments are paid out in cash.



|     |                                                 
|---- | ------------------------------------------------
|(10) | Financial Instruments and Hedging
    Activities



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

At December 31, 2003 and 2002, 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
actual amounts that we could realize upon disposition. The
following table summarizes these financial instruments (in
thousands):

|                         |                             |                              |   |                              |  |          |   |            |  |  |   |           |   |  |   |           |  
|------------------------ | --------------------------- | ---------------------------- | - | ---------------------------- |  | -------- | - | ---------- |  |  | - | --------- | - |  | - | --------- | -
|                         |                             |                              |   |                             
|                         |                             | Balance at December 31, 2003 |   | Balance at December 31, 2002
|                         |                             |                              |   |                             
|                         |                             | Carrying                     |   | Estimated                    |  | Carrying |   | Estimated 
|                         |                             | Amounts                      |   | Fair Value                   |  | Amounts  |   | Fair Value
|                         |                             |                              |   |                              |  |          |   |           
|Borrowings:              |                             |                              |   |                              |  |          |   |            |  |  |   |           |   |  |   |          
|                         | Unsecured credit facilities |                              | $ | 103,790                      |  |          | $ | 103,790    |  |  | $ | 365,578   |   |  | $ | 365,578   |  
|                         | Long-Term Unsecured Debt    |                              |   | 1,871,695                    |  |          |   | 2,043,289  |  |  |   | 1,776,103 |   |  |   | 1,969,102 |  
|                         | Mortgages payable           |                              |   | 1,927,625                    |  |          |   | 2,032,872  |  |  |   | 2,179,997 |   |  |   | 2,059,081 |  
|Interest rate contracts: |                             |                              |   |                              |  |          |   |            |  |  |   |           |   |  |   |          
|                         | Interest rate swaps         |                              | $ | 2,765                        |  |          | $ | 2,765      |  |  | $ | (1,235    | ) |  | $ | (1,235    | )
|                         | Interest rate caps          |                              |   |                             |  |          |   |           |  |  |   | 3         |   |  |   | 3         |  
|Forward Contracts:       |                             |                              |   |                              |  |          |   |            |  |  |   |           |   |  |   |          
|                         | Forward sales agreements    |                              | $ | 250                          |  |          | $ | 250        |  |  | $ |          |   |  | $ |          |  

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 shareholders equity. As of
December 31, 2003 and 2002, our investments in publicly
traded equity securities included in other assets were
$144.7 million and $85.2 million, respectively.
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.

78



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | 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. These derivatives are designated as
either cash flow or fair value hedges. We are also exposed to
price risk associated with changes in the fair value of certain
equity securities. We have entered into forward sale agreements
to protect against a reduction in the fair value of these
securities. We have designated this forward sale as a fair value
hedge. 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.

We formally assess, both at inception of the
hedge and on an ongoing basis, whether each derivative is highly
effective in offsetting changes in fair values or cash flows of
the hedged item. We measure hedge effectiveness by comparing the
changes in the fair value or cash flows of the derivative
instrument with the changes in the fair value or cash flows of
the hedged item. We exclude the hedging instruments time
value component when assessing hedge effectiveness. If it is
determined that a derivative is not highly effective as a hedge
or if a derivative ceases to be a highly effective hedge, we
will discontinue hedge accounting prospectively.

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. During the 3rd quarter
of 2003, we entered into a forward sale agreement with a
notional amount, which represents the fair value of the
underlying marketable securities, of approximately
$46.8 million. In the 4th quarter of 2003, we entered into
two additional forward sale agreements with a notional amount of
approximately $81.7 million. The forward sales agreements
fair value at December 31, 2003 and 2002 were $250,000 and
$0, respectively. The sale of certain marketable securities in
accordance with forward sale contracts is expected to result in
realized gains of approximately $22.0 million in 2004.



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

We adopted SFAS No. 133/138,
Accounting for Derivative Instruments and Hedging
Activitieson January 1, 2001. This 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.

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. During the years
ended December 31, 2003, 2002 and 2001 we recorded a net
charge of $(100,665), $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.

79



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In April 2003, we adopted SFAS No. 149,
Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.We adopted this
Statement for contracts or hedging relationships entered into or
modified after June 30, 2003. Its purpose is to provide
more consistent application and clarification of SFAS 133.

The following table summarizes the notional
amount, carrying value and estimated fair value of our
derivative financial instruments, as of December 31, 2003
(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     |         |                |  | 2005      |           |           | $ |       |       
|                   | Interest rate swaps        |                         |              | 150,000    |         |                |  | 2006      |           |           |   | (9,819 | )     
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   |                            | Total cash flow hedges  |              | $          | 184,508 |                |  |           | 2005-2006 |           |   | $      | (9,819 | )    
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|Fair value hedges: |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   | Interest rate swaps        |                         | $            | 104,005    |         |                |  | 2006-2008 |           |           | $ | 8,822  |       
|                   | Total rate of return swaps |                         |              | 69,756     |         |                |  | 2004-2007 |           |           |   | 3,762  |       
|                   | Forward sales agreement    |                         |              | 128,500    |         |                |  | 2004      |           |           |   | 250    |       
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   |                            | Total fair value hedges |              | $          | 302,261 |                |  |           | 2004-2008 |           |   | $      | 12,834 |      
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       
|                   |                            |                         | Total hedges |            | $       | 486,769        |  |           |           | 2004-2008 |   |        | $      | 3,015 | 
|                   |                            |                         |              |            |         |                |  |           |           |           |   |       

80



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                  
|---- | ---------------------------------
|(11) | Selected Quarterly Financial Data

Selected quarterly financial data (in thousands,
except per unit amounts) for 2003 and 2002 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.

|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |         |       | 
|----- | ------------------------------------------------------------ | --------------------------------------- | - | ---------- | ----- | ------- | - | -------- | ----- | -------- | - | ------- | ----- |  | - | ------- | ---- |  | - | ------- | ----- | 
|      |                                                              |                                         |   |           
|      |                                                              | (Unaudited)                             |   |           
|      |                                                              | Three Months Ended                      |   |           
|      |                                                              |                                         |   | Year Ended
|      |                                                              | 3-31(1)                                 |   | 6-30(1)    |       | 9-30(1) |   | 12-31(1) |       | 12-31(1)
|      |                                                              |                                         |   |            |       |         |   |          |       |         
|2003: |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Total revenues                                               |                                         | $ | 221,250    |       |         | $ | 221,924  |       |          | $ | 226,398 |       |  | $ | 230,803 |      |  | $ | 900,375 |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Earnings from operations                                     |                                         |   | 39,322     |       |         |   | 16,050   |       |          |   | 24,730  |       |  |   | 28,160  |      |  |   | 108,262 |      
|      | Gains on dispositions of depreciated real estate,
    net(2) |                                         |   |           |       |         |   |         |       |          |   |        |       |  |   |        |      |  |   |        |      
|      | Income from unconsolidated entities                          |                                         |   | 455        |       |         |   | (1,161   | )     |          |   | 1,714   |       |  |   | 4,737   |      |  |   | 5,745   |      
|      | Less minority interest:                                      |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |         |      
|      |                                                              | Perpetual Preferred Units               |   |            |      |         |   |          |      |          |   |         |      |  |   |         |     |  |   |         |      | 
|      |                                                              | Convertible operating partnership units |   |            |      |         |   |          |      |          |   |         |      |  |   |         |     |  |   |         |      | 
|      | Plus net earnings from discontinued operations               |                                         |   | 58,010     |       |         |   | 59,595   |       |          |   | 151,273 |       |  |   | 111,306 |      |  |   | 380,184 |      
|      | Less Preferred Unit distributions                            |                                         |   | 8,358      |       |         |   | 7,251    |       |          |   | 6,128   |       |  |   | 4,416   |      |  |   | 26,153  |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Net earnings attributable to Common
    Units  Basic        |                                         | $ | 89,429     |       |         | $ | 67,233   |       |          | $ | 171,589 |       |  | $ | 139,787 |      |  | $ | 468,038 |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Net earnings per Common Unit:(3)                             |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |         |      
|      |                                                              | Basic                                   |   | $          | 0.43  |         |   | $        | 0.32  |          |   | $       | 0.80  |  |   | $       | 0.64 |  |   | $       | 2.20  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      |                                                              | Diluted                                 |   | $          | 0.43  |         |   | $        | 0.32  |          |   | $       | 0.79  |  |   | $       | 0.63 |  |   | $       | 2.18  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|2002: |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Total revenues                                               |                                         | $ | 211,844    |       |         | $ | 215,065  |       |          | $ | 216,325 |       |  | $ | 218,523 |      |  | $ | 861,757 |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Earnings from operations                                     |                                         |   | 48,353     |       |         |   | 42,045   |       |          |   | 28,983  |       |  |   | 8,238   |      |  |   | 127,619 |      
|      | Gains on dispositions of depreciated real estate,
    net(2) |                                         |   | 2,231      |       |         |   | 22,212   |       |          |   | 3,500   |       |  |   | 8,007   |      |  |   | 35,950  |      
|      | Income from unconsolidated entities                          |                                         |   | 3,603      |       |         |   | 8,078    |       |          |   | 3,748   |       |  |   | 38,173  |      |  |   | 53,602  |      
|      | Less minority interest:                                      |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |         |      
|      |                                                              | Perpetual preferred units               |   |            | 1,567 |         |   |          | 1,567 |          |   |         | 1,095 |  |   |         |     |  |   |         | 4,229 | 
|      |                                                              | Convertible operating partnership units |   |            | 370   |         |   |          | 370   |          |   |         | 246   |  |   |         |     |  |   |         | 986   | 
|      | Plus net earnings from discontinued operations               |                                         |   | 14,128     |       |         |   | 23,900   |       |          |   | 36,732  |       |  |   | 70,009  |      |  |   | 144,769 |      
|      | Less Preferred Unit distributions                            |                                         |   | 8,759      |       |         |   | 8,681    |       |          |   | 7,702   |       |  |   | 9,167   |      |  |   | 34,309  |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Net earnings attributable to Common
    Units  Basic        |                                         | $ | 57,619     |       |         | $ | 85,617   |       |          | $ | 63,920  |       |  | $ | 115,260 |      |  | $ | 322,416 |      
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      | Net earnings per Common Unit:(3)                             |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |         |      
|      |                                                              | Basic                                   |   | $          | 0.29  |         |   | $        | 0.43  |          |   | $       | 0.31  |  |   | $       | 0.56 |  |   | $       | 1.59  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        
|      |                                                              | Diluted                                 |   | $          | 0.29  |         |   | $        | 0.42  |          |   | $       | 0.31  |  |   | $       | 0.56 |  |   | $       | 1.58  | 
|      |                                                              |                                         |   |            |       |         |   |          |       |          |   |         |       |  |   |         |      |  |   |        

81



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



---



|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|(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.             
|   
|(3) | Due to rounding, the sum of the quarterly per
    unit amounts do not equal the year-to-date totals.



|     |             
|---- | ------------
|(12) | 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. Additionally, we believe that same store
sales disclosure of the portfolio of communities fully operating
in both periods is a meaningful way to assess our operating
results. We rely primarily on NOI for purposes of making
decisions about allocating resources and assessing segment
performance. We also believe NOI is a valuable means of
comparing period-to-period property 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,
|                                                   |                 |                         
|                                                   |                 | 2003                     |                                         | 2002 |         | 2001   
|                                                   |                 |                          |                                         |      |         |        
|Reportable apartment communities segment revenues: |                 |                          |                                         |      |         |         |       |   |         |         |       |  
|                                                   | Same-Store:     |                          |                                         |      |         |         |       |   |         |         |       |   |        
|                                                   |                 | Garden communities       |                                         | $    | 430,002 |         |       | $ | 364,021 |         |       | $ | 316,933 |        
|                                                   |                 | High-rise properties     |                                         |      | 339,084 |         |       |   | 309,616 |         |       |   | 51,938  |        
|                                                   | Non Same-Store: |                          |                                         |      |         |         |       |   |         |         |       |   |        
|                                                   |                 | Garden communities       |                                         |      | 96,141  |         |       |   | 140,622 |         |       |   | 168,085 |        
|                                                   |                 | High-rise properties     |                                         |      | 12,550  |         |       |   | 31,515  |         |       |   | 2,979   |        
|                                                   |                 |                          |                                         |      |         |         |       |   |         |         |       |  
|Other non-reportable operating segment revenues    |                 |                          | 3,264                                   |      |         |         | 6,521 |   |         |         | 4,128 |  
|                                                   |                 |                          |                                         |      |         |         |       |   |         |         |       |  
|                                                   |                 |                          | Total segment and consolidated revenues |      | $       | 881,041 |       |   | $       | 852,295 |       |   | $       | 544,063 | 
|                                                   |                 |                          |                                         |      |         |         |       |   |         |         |       |  

|                                              |                 |                          |                   |      |         |         |       |   |         |         |       |   |         |         | 
|--------------------------------------------- | --------------- | ------------------------ | ----------------- | ---- | ------- | ------- | ----- | - | ------- | ------- | ----- | - | ------- | ------- | 
|                                              |                 |                         
|                                              |                 | Years Ended December 31,
|                                              |                 |                         
|                                              |                 | 2003                     |                   | 2002 |         | 2001   
|                                              |                 |                          |                   |      |         |        
|Reportable apartment communities segment NOI: |                 |                          |                   |      |         |         |       |   |         |         |       |  
|                                              | Same-Store:     |                          |                   |      |         |         |       |   |         |         |       |   |        
|                                              |                 | Garden communities       |                   | $    | 291,573 |         |       | $ | 246,743 |         |       | $ | 216,157 |        
|                                              |                 | High-rise properties     |                   |      | 201,657 |         |       |   | 190,729 |         |       |   | 33,056  |        
|                                              | Non Same-Store: |                          |                   |      |         |         |       |   |         |         |       |   |        
|                                              |                 | Garden communities       |                   |      | 58,996  |         |       |   | 91,248  |         |       |   | 111,831 |        
|                                              |                 | High-rise properties     |                   |      | 6,521   |         |       |   | 16,779  |         |       |   | 2,020   |        
|                                              |                 |                          |                   |      |         |         |       |   |         |         |       |  
|Other non-reportable operating segment NOI    |                 |                          | 2,613             |      |         |         | 2,871 |   |         |         | 3,584 |  
|                                              |                 |                          |                   |      |         |         |       |   |         |         |       |  
|                                              |                 |                          | Total segment NOI |      |         | 561,360 |       |   |         | 548,370 |       |   |         | 366,648 | 
|                                              |                 |                          |                   |      |         |         |       |   |         |         |       |  

82



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                   |                                            |                                       |  |          |         |      |  |          |         |  |  |          |         | 
|------------------ | ------------------------------------------ | ------------------------------------- |  | -------- | ------- | ---- |  | -------- | ------- |  |  | -------- | ------- | 
|                   |                                            |                                      
|                   |                                            | Years Ended December 31,             
|                   |                                            |                                      
|                   |                                            | 2003                                  |  | 2002     |         | 2001
|                   |                                            |                                       |  |          |         |     
|Reconciling items: |                                            |                                       |  |          |         |      |  |          |         |  |  |         
|                   | Other income                               |                                       |  | 19,334   |         |      |  | 9,462    |         |  |  | 11,905   |        
|                   | Depreciation on real estate investments    |                                       |  | (187,677 | )       |      |  | (167,029 | )       |  |  | (102,477 | )      
|                   | Interest expense                           |                                       |  | (186,832 | )       |      |  | (190,005 | )       |  |  | (88,081  | )      
|                   | General and administrative expenses        |                                       |  | (49,838  | )       |      |  | (45,710  | )       |  |  | (27,434  | )      
|                   | Provision for possible loss on investments |                                       |  |         |         |      |  |         |         |  |  | (14,927  | )      
|                   | Other expenses                             |                                       |  | (48,085  | )       |      |  | (27,469  | )       |  |  | (15,564  | )      
|                   |                                            |                                       |  |          |         |      |  |          |         |  |  |         
|                   |                                            | Consolidated earnings from operations |  | $        | 108,262 |      |  | $        | 127,619 |  |  | $        | 130,070 | 
|                   |                                            |                                       |  |          |         |      |  |          |         |  |  |         

|                                                 |                 |                                                           |                           |      |           |           |        |   |           |           |  |  |  |  | 
|------------------------------------------------ | --------------- | --------------------------------------------------------- | ------------------------- | ---- | --------- | --------- | ------ | - | --------- | --------- |  |  |  |  | 
|                                                 |                 |                                                           |                           |     
|                                                 |                 | Years Ended December 31,                                  |                           |     
|                                                 |                 |                                                           |                           |     
|                                                 |                 | 2003                                                      |                           | 2002 |           |          
|                                                 |                 |                                                           |                           |      |           |          
|Reportable operating communities segment assets: |                 |                                                           |                           |      |           |           |        |   |           |           |  | 
|                                                 | Same-Store:     |                                                           |                           |      |           |           |        |   |           |           |  |  | 
|                                                 |                 | Garden communities                                        |                           | $    | 3,586,989 |           |        | $ | 3,508,051 |           |  |  |  | 
|                                                 |                 | High-rise properties                                      |                           |      | 2,466,129 |           |        |   | 2,432,925 |           |  |  |  | 
|                                                 | Non same-Store: |                                                           |                           |      |           |           |        |   |           |           |  |  | 
|                                                 |                 | Garden communities                                        |                           |      | 1,195,470 |           |        |   | 1,669,614 |           |  |  |  | 
|                                                 |                 | High-rise properties                                      |                           |      | 1,072,039 |           |        |   | 1,067,975 |           |  |  |  | 
|Other non-reportable operating segment assets    |                 |                                                           | 29,571                    |      |           |           | 40,315 |   |           |           |  | 
|                                                 |                 |                                                           |                           |      |           |           |        |   |           |           |  | 
|                                                 |                 |                                                           | Total segment assets      |      |           | 8,350,198 |        |   |           | 8,718,880 |  |  |  |  | 
|                                                 |                 |                                                           |                           |      |           |           |        |   |           |           |  | 
|Reconciling items:                               |                 |                                                           |                           |      |           |           |        |   |           |           |  | 
|                                                 |                 | Investment in and advances to unconsolidated
    entities |                           |      | 86,367    |           |        |   | 116,594   |           |  |  |  | 
|                                                 |                 | Cash and cash equivalents                                 |                           |      | 5,230     |           |        |   | 12,846    |           |  |  |  | 
|                                                 |                 | Restricted cash in tax-deferred exchange escrow           |                           |      | 180,920   |           |        |   |          |           |  |  |  | 
|                                                 |                 | Other assets                                              |                           |      | 298,980   |           |        |   | 247,706   |           |  |  |  | 
|                                                 |                 |                                                           |                           |      |           |           |        |   |           |           |  | 
|                                                 |                 |                                                           | Consolidated total assets |      | $         | 8,921,695 |        |   | $         | 9,096,026 |  |  |  |  | 
|                                                 |                 |                                                           |                           |      |           |           |        |   |           |           |  | 

Total capital expenditures for garden communities
were $42.5 million and $58.0 million for the years
ended December 31, 2003 and 2002, respectively. Total
capital expenditures for high-rise properties were
$86.3 million and $136.3 million for the years ended
December 31, 2003 and 2002, respectively.



|     |             
|---- | ------------
|(13) | 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.

83



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                        |                                              |                                
|                                        |                                              | 2003                            |         | 2002     |   | 2001
|                                        |                                              |                                 |         |          |   |     
|                                        |                                              | (estimated)                     |         |          |   |     
|GAAP net earnings                       |                                              | $                               | 494,191 |          |   | $    | 356,725 |         |   | $ | 265,574 |        
|Book to tax differences:                |                                              |                                 |         |          |   |      |         |         |   |   |         |        
|                                        | Gain on sale of CES(1)                       |                                 |         |         |   |      |         | (43,623 | ) |   |         |        |  
|                                        | Depreciation and amortization(2)             |                                 |         | (1,513   | ) |      |         | (22,348 | ) |   |         | (5,722  | )
|                                        | Gain or loss from capital transactions(3)    |                                 |         | (124,390 | ) |      |         | (25,685 | ) |   |         | 23,109  |  
|                                        | Deferred compensation and gain contingencies |                                 |         | 859      |   |      |         | 17,323  |   |   |         |        |  
|                                        | Merger expenses                              |                                 |         |         |   |      |         |        |   |   |         | (21,673 | )
|                                        | Other, net                                   |                                 |         | 11,704   |   |      |         | 3,400   |   |   |         | 3,991   |  
|                                        |                                              |                                 |         |          |   |      |         |         |   |   |         |        
|Taxable income, including capital gains |                                              | $                               | 380,851 |          |   | $    | 285,792 |         |   | $ | 265,279 |        
|                                        |                                              |                                 |         |          |   |      |         |         |   |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

Distributions have been made as follows:

|                                       |                     |                                 |         |         |  |      |         |         |  |   |         |         | 
|-------------------------------------- | ------------------- | ------------------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                       |                     |                                
|                                       |                     | For the Year Ended December 31,
|                                       |                     |                                
|                                       |                     | 2003                            |         | 2002    |  | 2001
|                                       |                     |                                 |         |         |  |     
|Distributions to Archstone-Smith Trust |                     | $                               | 340,819 |         |  | $    | 334,316 |         |  | $ | 240,073 |        
|Distributions to unitholders           |                     |                                 | 47,489  |         |  |      | 45,165  |         |  |   | 10,460  |        
|                                       |                     |                                 |         |         |  |      |         |         |  |   |         |        
|                                       | Total Distributions |                                 | $       | 388,308 |  |      | $       | 379,481 |  |   | $       | 250,533 | 
|                                       |                     |                                 |         |         |  |      |         |         |  |   |         |        

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,
|                 |  |                                
|                 |  | 2003                            |       | 2002 |  | 2001
|                 |  |                                 |       |      |  |     
|Ordinary income  |  |                                 | 45.0  | %    |  |      | 78.0  | % |  |  | 54.0  | %
|Capital gains(1) |  |                                 | 55.0  | %    |  |      | 22.0  | % |  |  | 46.0  | %
|                 |  |                                 |       |      |  |      |       |   |  |  |       |  
|                 |  |                                 | 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.

As a taxable REIT subsidiary, Ameriton is subject
to state and federal income taxes. Income tax expense, which has
been included in other expense was $15.9 million,
$12.4 million and $7.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively. The primary
difference between income taxes attributable to income from
continuing operations and the amount computed by applying the
U.S. federal income tax rate of 35% to pretax income was
state income taxes. Deferred income taxes reflect the estimated
net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts for income tax purposes.
Ameritons deferred tax assets and liabilities

84



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

primarily relate to the deductibility of
depreciation expense and deferred compensation accruals for
income tax purposes.



|     |                              
|---- | -----------------------------
|(14) | Commitments and Contingencies



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

At December 31, 2003 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.

The future minimum lease payments payable under
non-cancelable leases are as follows at December 31, 2003
(in thousands):

|                       |       |   |         |         | 
|---------------------- | ----- | - | ------- | ------- | 
|2004                   |       | $ | 3,178   |        
|2005                   |       |   | 3,179   |        
|2006                   |       |   | 3,180   |        
|2007                   |       |   | 3,181   |        
|2008                   |       |   | 3,183   |        
|Thereafter (2009-2096) |       |   | 193,241 |        
|                       |       |   |         |        
|                       | Total |   | $       | 209,142 | 
|                       |       |   |         |        

See Note 3 for real estate related
commitments.



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

We have extended approximately $54.7 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. As of December 31, 2003,
$2.7 million of these performance bond guarantees were
still outstanding, based upon information provided by these
companies. 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. See
Note 5 for a summary of our investments in and advances to
unconsolidated entities.

85



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As part of the Smith Merger, we are required to
indemnify the former Smith Partnership unitholders for any
personal income tax expense resulting from the sale of high-rise
properties identified in the shareholders agreement
between Archstone-Smith, the Operating Trust, Robert H. Smith
and Robert P. Kogod.



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

During 2002, we accrued or incurred a liability
for $30.8 million relating to moisture infiltration and
resulting mold issues at Harbour House, a high-rise property in
Southeast Florida that became subject to litigation in the third
quarter of 2002. Of this amount, $11.3 million represents
amounts expensed for the estimated cost of repairing or
replacing residents property, temporary resident
relocation expenses 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.

During 2003, we recorded additional costs of
$30.7 million for moisture infiltration and resulting mold
at Harbour House. Of this amount, $25.7 million represents
amounts expensed for estimated and incurred legal fees
associated with known and anticipated costs for
Archstone-Smiths counsel and plaintiffs counsel, as
well as estimated settlement costs based upon the settlement
agreement, additional resident property repair and replacement
costs and temporary resident relocation expenses. The estimated
settlement accrual is inclusive of all pending legal claims at
this property other than for those individuals who have opted
out of the settlement and are pursuing or may pursue individual
claims. The remaining $5.0 million pertains to an increase
in our accrual estimate for capitalized costs associated with
remediation and capital improvements. As of December 31,
2003, total cash payments related to moisture infiltration and
mold remediation at this property were $45.1 million. We
anticipate incurring the remaining $16.4 million over the
next six to twelve months.

The Harbour House accrual represents
managements best estimate of the probable and reasonably
estimable costs and is based, in part, on estimates obtained
from third-party contractors and actual costs incurred to date.
It is possible that these estimates could increase or decrease
as better information becomes available. Not all plaintiffs have
accepted the court-approved settlement, which could result in
further court proceedings and potential legal fees and damages
not contemplated in our current accrual. It is not possible to
predict the likelihood of claims by individuals who have opted
out of the settlement, nor is it reasonably possible to estimate
the amount of any potential loss related to these claims.

We are also party to alleged moisture
infiltration and resulting mold lawsuits at other apartment
properties. We believe these suits are without merit,
nonetheless, in certain instances we have negotiated a
settlement with certain of the plaintiffs in an effort to
expedite the resolution of their claims and avoid potentially
protracted litigation and associated attorneys fees.
During 2003 we expensed approximately $10.4 million for
estimated and incurred legal fees associated with known and
anticipated costs for Archstone-Smiths counsel and
plaintiffs counsel, as well as estimated settlement costs
based upon the status of discussions, additional resident
property repair and replacement costs and temporary resident
relocation expenses pertaining to these claims. These estimates
represent managements best estimate of the probable and
reasonably estimable costs and are based, in part, on estimates
obtained from third-party contractors and actual costs incurred
to date. It is possible that these estimates could increase or
decrease as better information becomes available. Not all
plaintiffs have accepted the negotiated settlement, and further
court proceedings and additional legal fees and damages may be
required to fully resolve these claims. We have not accrued for
renovation and equipment upgrades at these properties, as these
costs are part of our previously existing and ongoing plans and
not a result of the legal claims. Accordingly, we will
capitalize or expense costs associated with these issues as they
are incurred, in accordance with GAAP.

We are aggressively pursuing recovery of a
significant portion of these costs from our insurance carriers.
As of December 31, 2003, we have received approximately
$1.6 million of initial insurance recoveries pertaining to
moisture infiltration and resulting mold claims. We are still in
discussions with our insurance providers and therefore no
estimate for future insurance recoveries has been recorded. In
addition, we are

86



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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

continuing to pursue potential recoveries from
third parties who we believe bear responsibility for a
considerable portion of the costs we have incurred. We cannot
make assurances that we will obtain these recoveries or that our
ultimate liability associated with these claims will not be
material to our results of operations.

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.



|     |                                   
|---- | ----------------------------------
|(15) | Supplemental Cash Flow Information

Significant non-cash investing and financing
activities for the years ended December 31, 2003, 2002 and
2001 are as follows:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Issued $14.2 million and $8.7 million
    of Class B Common Units as partial consideration for
    property acquired during 2003 and 2002, respectively;                                                                                                                                  
|
| |  | Issued $33.4 million of A-1 Common Units in
    exchange for real estate during 2003;                                                                                                                                                                                                     
|
| |  | Converted $71.5 million Series H
    Preferred Units into Common Units during 2003;                                                                                                                                                                                                       
|
| |  | Redeemed $25.5 million and
    $41.7 million A-1 Common Units for Common Units during 2003
    and 2002, respectively;                                                                                                                                                                    
|
| |  | Converted $25 million Series J
    Preferred Shares into Common Units during 2002;                                                                                                                                                                                                        
|
| |  | Recorded 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;                                                                                                    
|
| |  | Assumed mortgage debt of $55.4 million,
    $195.6 million and $167.3 million (excluding mortgage
    debt assumed in the Smith Merger) during 2003, 2002 and 2001,
    respectively, in connection with the acquisition of apartment
    communities;                                    
|
| |  | Holders of Series A Preferred Units
    converted $71.9 million, $5.7 million and
    $3.8 million of their units into Common Units during 2003,
    2002 and 2001, respectively;                                                                                                         
|
| |  | 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
    during the year ended December 31, 2001.

87



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Trustee and Unitholders

Archstone-Smith Operating Trust:


Under date of February 9, 2004, we reported
on the consolidated balance sheets of Archstone-Smith Operating
Trust and subsidiaries as of December 31, 2003 and 2002,
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, 2003.
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.

As discussed in Note 1 to the consolidated
financial statements, effective July 1, 2003,
Archstone-Smith Operating Trust adopted FASB Interpretation
No. 46 Consolidation of Variable Interest
Entities (revised). As a result, the accompanying
consolidated financial statements, referred to above, have been
restated to reflect the consolidated financial position and
results of operations of Archstone-Smith Operating Trust and
certain previously unconsolidated entities in accordance with
accounting principles generally accepted in the United States of
America.



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

Denver, Colorado

February 9, 2004




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##### Table of Contents



ARCHSTONE-SMITH OPERATING TRUST


SCHEDULE III


REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003


(Dollar amounts in thousands)


|                                                                  |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |         | 
|----------------------------------------------------------------- | ------------------------------------------ | ----- | ------ | ------- |  | --------------------- | --------- | ------------ |  | ------------- | --------- | ------- |  |  | --------- | --------- |  |  | --------- | ------- | 
|                                                                  |                                            |       |        |         |  |                       |           |             
|                                                                  |                                            |       |        |         |  | Initial Cost to       |           |             
|                                                                  |                                            |       |        |         |  | Archstone-Smith Trust |           | Costs       
|                                                                  |                                            |       |        |         |  |                       |           | Capitalized 
|                                                                  |                                            |       |        | Encum-  |  |                       |           | Buildings &  |  | Subsequent to
|                                                                  |                                            | Units |        | brances |  | Land                  |           | Improvements |  | Acquisition  
|                                                                  |                                            |       |        |         |  |                       |           |              |  |              
|Apartment Communities:                                            |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Garden Communities:                                               |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|                                                                  | Albuquerque, New Mexico                    |       |        | 664     |  |                       |           |             |  |               |           | 6,317   |  |  |           | 7,624     |  |  |           | 28,433  | 
|                                                                  | Atlanta, Georgia                           |       |        | 3,327   |  |                       |           | 43,549       |  |               |           | 41,973  |  |  |           | 165,508   |  |  |           | 82,170  | 
|                                                                  | Austin, Texas                              |       |        | 1,446   |  |                       |           | 10,979       |  |               |           | 6,828   |  |  |           | 26,791    |  |  |           | 55,324  | 
|                                                                  | Boston, Massachusetts                      |       |        | 1,606   |  |                       |           | 62,246       |  |               |           | 75,201  |  |  |           | 50,514    |  |  |           | 136,786 | 
|                                                                  | Chicago, Illinois                          |       |        | 1,313   |  |                       |           | 42,748       |  |               |           | 85,603  |  |  |           | 50,544    |  |  |           | 7,534   | 
|                                                                  | Dallas, Texas                              |       |        | 1,282   |  |                       |           |             |  |               |           | 7,231   |  |  |           | 34,861    |  |  |           | 25,070  | 
|                                                                  | Denver, Colorado                           |       |        | 1,949   |  |                       |           | 8,500        |  |               |           | 17,477  |  |  |           | 46,104    |  |  |           | 102,513 | 
|                                                                  | Houston, Texas                             |       |        | 2,024   |  |                       |           | 38,819       |  |               |           | 20,298  |  |  |           | 34,045    |  |  |           | 64,495  | 
|                                                                  | Inland Empire, California                  |       |        | 1,594   |  |                       |           | 16,811       |  |               |           | 12,663  |  |  |           | 71,769    |  |  |           | 12,469  | 
|                                                                  | Greater NYC Metropolitan Area              |       |        | 160     |  |                       |           |             |  |               |           | 5,775   |  |  |           | 1,225     |  |  |           | 29,390  | 
|                                                                  | Los Angeles, California                    |       |        | 2,982   |  |                       |           | 102,876      |  |               |           | 172,665 |  |  |           | 131,612   |  |  |           | 246,274 | 
|                                                                  | Orange County, California                  |       |        | 1,647   |  |                       |           | 77,427       |  |               |           | 25,612  |  |  |           | 46,136    |  |  |           | 108,020 | 
|                                                                  | Orlando, Florida                           |       |        | 312     |  |                       |           |             |  |               |           | 3,110   |  |  |           | 17,620    |  |  |           | 892     | 
|                                                                  | Phoenix, Arizona                           |       |        | 1,709   |  |                       |           | 26,830       |  |               |           | 20,231  |  |  |           | 3,215     |  |  |           | 94,644  | 
|                                                                  | Portland, Oregon                           |       |        | 576     |  |                       |           |             |  |               |           | 3,520   |  |  |           |          |  |  |           | 34,175  | 
|                                                                  | Raleigh, North Carolina                    |       |        | 1,324   |  |                       |           | 13,712       |  |               |           | 13,499  |  |  |           | 76,490    |  |  |           | 6,741   | 
|                                                                  | San Antonio, Texas                         |       |        | 224     |  |                       |           |             |  |               |           | 1,644   |  |  |           |          |  |  |           | 11,182  | 
|                                                                  | San Diego, California                      |       |        | 3,406   |  |                       |           | 61,628       |  |               |           | 55,215  |  |  |           | 136,874   |  |  |           | 157,008 | 
|                                                                  | San Francisco, California                  |       |        | 5,819   |  |                       |           | 81,969       |  |               |           | 186,172 |  |  |           | 326,826   |  |  |           | 257,361 | 
|                                                                  | Seattle, Washington                        |       |        | 2,808   |  |                       |           | 28,354       |  |               |           | 33,195  |  |  |           | 99,046    |  |  |           | 102,532 | 
|                                                                  | Southeast, Florida                         |       |        | 1,566   |  |                       |           | 10,938       |  |               |           | 39,169  |  |  |           | 118,942   |  |  |           | 5,128   | 
|                                                                  | Ventura County, California                 |       |        | 1,251   |  |                       |           |             |  |               |           | 11,623  |  |  |           | 52,832    |  |  |           | 58,625  | 
|                                                                  | Greater Washington, D.C. Metropolitan Area |       |        | 9,739   |  |                       |           | 229,211      |  |               |           | 256,353 |  |  |           | 583,057   |  |  |           | 380,915 | 
|                                                                  | West Coast, Florida                        |       |        | 746     |  |                       |           |             |  |               |           | 5,430   |  |  |           | 30,765    |  |  |           | 7,826   | 
|                                                                  |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Garden Communities Total                                          |                                            |       | 49,474 |         |  |                       | 856,597   |              |  |               | 1,106,804 |         |  |  | 2,112,400 |           |  |  | 2,015,507 |        
|                                                                  |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|High-Rise Properties:                                             |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|                                                                  | Boston, Massachusetts                      |       |        | 1,113   |  |                       |           | 62,408       |  |               |           | 41,345  |  |  |           | 121,883   |  |  |           | 41,221  | 
|                                                                  | Chicago, Illinois                          |       |        | 3,516   |  |                       |           | 131,996      |  |               |           | 138,162 |  |  |           | 406,868   |  |  |           | 80,247  | 
|                                                                  | Southeast Florida                          |       |        | 4,824   |  |                       |           | 80,783       |  |               |           | 178,362 |  |  |           | 231,776   |  |  |           | 157,064 | 
|                                                                  | Greater NYC Metropolitan Area              |       |        | 902     |  |                       |           | 124,198      |  |               |           | 72,340  |  |  |           | 154,735   |  |  |           | 17,577  | 
|                                                                  | Greater Washington, D.C. Metropolitan Area |       |        | 11,537  |  |                       |           | 671,643      |  |               |           | 532,997 |  |  |           | 1,133,630 |  |  |           | 301,804 | 
|                                                                  |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|High-Rise Properties Total                                        |                                            |       | 21,892 |         |  |                       | 1,071,028 |              |  |               | 963,206   |         |  |  | 2,048,892 |           |  |  | 597,913   |        
|                                                                  |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Total Apartment Communities- Operating and
    Under Construction |                                            |       | 71,366 |         |  |                       | 1,927,625 |              |  |               | 2,070,010 |         |  |  | 4,161,292 |           |  |  | 2,613,420 |        
|                                                                  |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Other:                                                            |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Development communities In Planning and Owned                     |                                            |       | 3,368  |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Hotel, retail and other assets                                    |                                            |       |        |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        
|Total real estate assets                                          |                                            |       | 74,734 |         |  |                       |           |              |  |               |           |         |  |  |           |           |  |  |           |        

[Additional columns below]

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

|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |           | 
|----------------------------------------------------------------- | ------------------------------------------ | --------------------- | --------- | ------------ |  | ------ | --------- | ------------ |  | ------------ | --------- | --------- |  |  | -------- | ------- | - |  |  | --------- |  |  |  | --------- | 
|                                                                  |                                            |                       |           |              |  |        |           |              |  |             
|                                                                  |                                            | Gross Amount at Which |           |              |  |        |           |              |  |             
|                                                                  |                                            | Carried at Year End   |           |              |  |        |           |              |  |             
|                                                                  |                                            |                       |           |              |  |        |           |              |  |             
|                                                                  |                                            |                       |           | Buildings &  |  |        |           | Accumulated  |  | Construction |           | Year     
|                                                                  |                                            | Land                  |           | Improvements |  | Totals |           | Depreciation |  | Year         |           | Acquired 
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |          
|Apartment Communities:                                            |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|Garden Communities:                                               |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|                                                                  | Albuquerque, New Mexico                    |                       |           | 8,183        |  |        |           | 34,191       |  |              |           | 42,374    |  |  |          | (10,635 | ) |  |  | 1981-1996 |  |  |  | 1991-1996 | 
|                                                                  | Atlanta, Georgia                           |                       |           | 50,966       |  |        |           | 238,685      |  |              |           | 289,651   |  |  |          | (40,447 | ) |  |  | 1978-2003 |  |  |  | 1998-2001 | 
|                                                                  | Austin, Texas                              |                       |           | 15,124       |  |        |           | 73,819       |  |              |           | 88,943    |  |  |          | (11,311 | ) |  |  | 1979-1996 |  |  |  | 1993      | 
|                                                                  | Boston, Massachusetts                      |                       |           | 47,245       |  |        |           | 215,256      |  |              |           | 262,501   |  |  |          | (21,264 | ) |  |  | 1975-2002 |  |  |  | 1999-2003 | 
|                                                                  | Chicago, Illinois                          |                       |           | 26,691       |  |        |           | 116,990      |  |              |           | 143,681   |  |  |          | (17,421 | ) |  |  | 1968-1988 |  |  |  | 1999-2001 | 
|                                                                  | Dallas, Texas                              |                       |           | 10,194       |  |        |           | 56,968       |  |              |           | 67,162    |  |  |          | (14,795 | ) |  |  | 1983-1998 |  |  |  | 1993-1998 | 
|                                                                  | Denver, Colorado                           |                       |           | 19,605       |  |        |           | 146,489      |  |              |           | 166,094   |  |  |          | (20,034 | ) |  |  | 1981-2002 |  |  |  | 1992-2001 | 
|                                                                  | Houston, Texas                             |                       |           | 15,057       |  |        |           | 103,781      |  |              |           | 118,838   |  |  |          | (16,287 | ) |  |  | 1972-1996 |  |  |  | 1994-1996 | 
|                                                                  | Inland Empire, California                  |                       |           | 14,417       |  |        |           | 82,484       |  |              |           | 96,901    |  |  |          | (17,117 | ) |  |  | 1985-1990 |  |  |  | 1995-1997 | 
|                                                                  | Greater NYC Metropolitan Area              |                       |           | 6,312        |  |        |           | 30,078       |  |              |           | 36,390    |  |  |          | (1,111  | ) |  |  | 2001-2002 |  |  |  | 2000      | 
|                                                                  | Los Angeles, California                    |                       |           | 99,081       |  |        |           | 451,470      |  |              |           | 550,551   |  |  |          | (13,336 | ) |  |  | 1985-2002 |  |  |  | 1998-2003 | 
|                                                                  | Orange County, California                  |                       |           | 26,276       |  |        |           | 153,492      |  |              |           | 179,768   |  |  |          | (22,709 | ) |  |  | 1986-2002 |  |  |  | 1996-1999 | 
|                                                                  | Orlando, Florida                           |                       |           | 3,703        |  |        |           | 17,919       |  |              |           | 21,622    |  |  |          | (3,847  | ) |  |  | 1988      |  |  |  | 1998      | 
|                                                                  | Phoenix, Arizona                           |                       |           | 21,700       |  |        |           | 96,390       |  |              |           | 118,090   |  |  |          | (11,218 | ) |  |  | 1980-2001 |  |  |  | 1993-1997 | 
|                                                                  | Portland, Oregon                           |                       |           | 9,528        |  |        |           | 28,167       |  |              |           | 37,695    |  |  |          | (6,706  | ) |  |  | 1985-1998 |  |  |  | 1995-1996 | 
|                                                                  | Raleigh, North Carolina                    |                       |           | 14,641       |  |        |           | 82,089       |  |              |           | 96,730    |  |  |          | (18,935 | ) |  |  | 1985-1999 |  |  |  | 1998      | 
|                                                                  | San Antonio, Texas                         |                       |           | 3,718        |  |        |           | 9,108        |  |              |           | 12,826    |  |  |          | (2,773  | ) |  |  | 1979-1996 |  |  |  | 1992-1993 | 
|                                                                  | San Diego, California                      |                       |           | 55,389       |  |        |           | 293,708      |  |              |           | 349,097   |  |  |          | (32,413 | ) |  |  | 1985-2001 |  |  |  | 1996-1998 | 
|                                                                  | San Francisco, California                  |                       |           | 139,064      |  |        |           | 631,295      |  |              |           | 770,359   |  |  |          | (85,040 | ) |  |  | 1965-2002 |  |  |  | 1995-2003 | 
|                                                                  | Seattle, Washington                        |                       |           | 41,947       |  |        |           | 192,826      |  |              |           | 234,773   |  |  |          | (36,712 | ) |  |  | 1986-2003 |  |  |  | 1995-1999 | 
|                                                                  | Southeast, Florida                         |                       |           | 43,669       |  |        |           | 119,570      |  |              |           | 163,239   |  |  |          | (9,704  | ) |  |  | 1986-2001 |  |  |  | 1998-2003 | 
|                                                                  | Ventura County, California                 |                       |           | 10,207       |  |        |           | 112,873      |  |              |           | 123,080   |  |  |          | (10,901 | ) |  |  | 1985-2002 |  |  |  | 1997-1999 | 
|                                                                  | Greater Washington, D.C. Metropolitan Area |                       |           | 282,944      |  |        |           | 937,381      |  |              |           | 1,220,325 |  |  |          | (57,257 | ) |  |  | 1941-2002 |  |  |  | 1998-2003 | 
|                                                                  | West Coast, Florida                        |                       |           | 5,661        |  |        |           | 38,360       |  |              |           | 44,021    |  |  |          | (8,207  | ) |  |  | 1982-1988 |  |  |  | 1998      | 
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|Garden Communities Total                                          |                                            |                       | 971,322   |              |  |        | 4,263,389 |              |  |              | 5,234,711 |           |  |  | (490,180 | )       |   |  |  |           |  |  |  |          
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|High-Rise Properties:                                             |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|                                                                  | Boston, Massachusetts                      |                       |           | 41,709       |  |        |           | 162,740      |  |              |           | 204,449   |  |  |          | (8,365  | ) |  |  | 1986-1998 |  |  |  | 2001      | 
|                                                                  | Chicago, Illinois                          |                       |           | 89,557       |  |        |           | 535,720      |  |              |           | 625,277   |  |  |          | (30,311 | ) |  |  | 1969-2003 |  |  |  | 2001      | 
|                                                                  | Southeast Florida                          |                       |           | 184,020      |  |        |           | 383,182      |  |              |           | 567,202   |  |  |          | (20,604 | ) |  |  | 1964-2000 |  |  |  | 2001      | 
|                                                                  | Greater NYC Metropolitan Area              |                       |           | 69,110       |  |        |           | 175,542      |  |              |           | 244,652   |  |  |          | (6,351  | ) |  |  |           |  |  |  | 2002      | 
|                                                                  | Greater Washington, D.C. Metropolitan Area |                       |           | 582,621      |  |        |           | 1,385,810    |  |              |           | 1,968,431 |  |  |          | (87,196 | ) |  |  | 1923-2002 |  |  |  | 2001      | 
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|High-Rise Properties Total                                        |                                            |                       | 967,017   |              |  |        | 2,642,994 |              |  |              | 3,610,011 |           |  |  | (152,827 | )       |   |  |  |           |  |  |  |          
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|Total Apartment Communities- Operating and
    Under Construction |                                            |                       | 1,938,339 |              |  |        | 6,906,383 |              |  |              | 8,844,722 |           |  |  | (643,007 | )       |   |  |  |           |  |  |  |          
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|Other:                                                            |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|Development communities In Planning and Owned                     |                                            |                       |           |              |  |        |           |              |  |              | 114,236   |           |  |  |          |         |   |  |  |           |  |  |  |          
|Hotel, retail and other assets                                    |                                            |                       |           |              |  |        |           |              |  |              | 40,222    |           |  |  | (5,975   | )       |   |  |  |           |  |  |  |          
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          
|Total real estate assets                                          |                                            |                       |           |              |  |        |           |              |  |              | 8,999,180 |           |  |  | (648,982 | )       |   |  |  |           |  |  |  |          
|                                                                  |                                            |                       |           |              |  |        |           |              |  |              |           |           |  |  |          |         |   |  |  |           |  |  |  |          

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SCHEDULE III

The following is a reconciliation of the carrying
amount and related accumulated depreciation of our investment in
real estate, at cost (in thousands):

|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |            |  
|-------------------------------- | ------------------------------------------------------------ | ----------------------- | --------- | ---------- | - | ---- | --------- | -------- | - | - | --------- | ---------- | -
|                                 |                                                              |                        
|                                 |                                                              | Year Ended December 31,
|                                 |                                                              |                        
|Carrying Amounts                 |                                                              | 2003                    |           | 2002       |   | 2001
|                                 |                                                              |                         |           |            |   |     
|Balance at January 1             |                                                              | $                       | 9,297,735 |            |   | $    | 8,612,213 |          |   | $ | 5,313,600 |           
|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|Apartment communities:           |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|                                 | Apartment properties acquired in the Smith Merger            |                         |           |           |   |      |           | 31,877   |   |   |           | 3,733,936  |  
|                                 | Acquisition-related expenditures                             |                         |           | 573,768    |   |      |           | 539,652  |   |   |           | 370,398    |  
|                                 | Redevelopment expenditures                                   |                         |           | 69,649     |   |      |           | 152,428  |   |   |           | 39,176     |  
|                                 | Recurring capital expenditures                               |                         |           | 48,960     |   |      |           | 40,683   |   |   |           | 20,269     |  
|                                 | Development expenditures, excluding land
    acquisitions    |                         |           | 91,430     |   |      |           | 247,044  |   |   |           | 108,436    |  
|                                 | Acquisition and improvement of land for
    development      |                         |           | 125,581    |   |      |           | 107,727  |   |   |           | 89,506     |  
|                                 | Dispositions                                                 |                         |           | (1,209,956 | ) |      |           | (439,847 | ) |   |           | (1,066,451 | )
|                                 | Provision for possible loss on investments                   |                         |           | (3,714     | ) |      |           | (2,611   | ) |   |           | (2,710     | )
|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|Net apartment community activity |                                                              | $                       | (304,282  | )          |   | $    | 676,953   |          |   | $ | 3,292,560 |           
|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|Other:                           |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|                                 | Disposition of retail asset acquired in the Smith
    Merger |                         |           |           |   |      |           | (5,990   | ) |   |           | 5,976      |  
|                                 | Change in other real estate assets                           |                         |           | 5,727      |   |      |           | 14,559   |   |   |           | 77         |  
|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|Net other activity               |                                                              |                         | 5,727     |            |   |      | 8,569     |          |   |   | 6,053     |           
|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |           
|Balance at December 31.          |                                                              | $                       | 8,999,180 |            |   | $    | 9,297,735 |          |   | $ | 8,612,213 |           
|                                 |                                                              |                         |           |            |   |      |           |          |   |   |           |           

|                                                         |  |              |          |      |  |      |         |   |  |   |          |  
|-------------------------------------------------------- |  | ------------ | -------- | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                                         |  |             
|                                                         |  | December 31,
|                                                         |  |             
|Accumulated Depreciation                                 |  | 2003         |          | 2002 |  | 2001
|                                                         |  |              |          |      |  |     
|Balance at January 1                                     |  | $            | 578,855  |      |  | $    | 412,894 |   |  | $ | 378,451  |  
|Depreciation for the year(1)                             |  |              | 200,356  |      |  |      | 206,625 |   |  |   | 136,867  |  
|Accumulated depreciation on real estate
    dispositions |  |              | (130,229 | )    |  |      | (40,563 | ) |  |   | (102,424 | )
|Other                                                    |  |              |         |      |  |      | (101    | ) |  |   |         |  
|                                                         |  |              |          |      |  |      |         |   |  |   |          |  
|Balance at December 31                                   |  | $            | 648,982  |      |  | $    | 578,855 |   |  | $ | 412,894  |  
|                                                         |  |              |          |      |  |      |         |   |  |   |          |  



---



|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Depreciation is net of $3.0 million for our
    intangible asset related to the value of leases in place for
    real estate assets acquired in 2003.

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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          
| | Chairman of the Board and
| | 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)                              |  | March 5, 2004
|                                                  
|/s/ CHARLES E. MUELLER, JR.Charles E. Mueller, Jr. |  | Executive Vice President and Chief Financial
    Officer (principal financial officer) |  | March 5, 2004
|                                                  
|/s/ MARK A. SCHUMACHERMark A. Schumacher           |  | Senior Vice President and Controller (principal
    accounting officer)                |  | March 5, 2004
|                                                  
|ARCHSTONE-SMITH TRUST                              |  |                                                                                        |  |              
|By:                                                |  | /s/ R. SCOT SELLERSChief Executive Officer                                             |  | Trustee       |  | March 5, 2004

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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 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)                                                                                                                                                                                                                                                                                                
|       | 3  | .2          |  | Amended and Restated Bylaws of Archstone-Smith
    Trust (incorporated by reference to Exhibit 4.2 to the
    Archstone-Smith Trusts Current Report on Form 8-K
    filed with the SEC on November 1, 2001)                                                                                                                                                                                                                                                                                                                  
|       | 4  | .1          |  | 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  | .2          |  | 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  | .3          |  | 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  | .4          |  | Rights Agreement, dated as of December 1,
    2003, by and between Archstone-Smith Trust and Mellon Investor
    Services, LLC, including the form of rights certificate                                                                                                                                                                                                                                                                                                                                                      
|       | 4  | .5          |  | Form of Archstone-Smith Trust common share
    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 Trust share certificate
    for Series D Preferred Shares (incorporated by reference to
    Exhibit 3.6 to Archstone-Smith Trusts Registration
    Statement on Form S-4 (File No. 333-63734))                                                                                                                                                                                                                                                                                                       
|       | 4  | .10         |  | Form of Archstone-Smith Trust share certificate
    for Series I Preferred Shares (incorporated by reference to
    Exhibit 3.8 to Archstone-Smith Trusts Registration
    Statement on Form S-4 (File No. 333-63734))                                                                                                                                                                                                                                                                                                       
|       | 4  | .12         |  | Form of Archstone-Smith Trust share certificate
    for Series K Preferred Shares (incorporated by reference to
    Exhibit 3.10 to Archstone-Smith Trusts Registration
    Statement on Form S-4 (File No. 333-63734))                                                                                                                                                                                                                                                                                                      
|       | 4  | .13         |  | Form of Archstone-Smith Trust share certificate
    for Series L Preferred Shares (incorporated by reference to
    Exhibit 3.11 to Archstone-Smith Trusts Registration
    Statement on Form S-4 (File No. 333-63734))                                                                                                                                                                                                                                                                                                      
|       | 10 | .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)                                                                                                                                                                                                                                                                                      
|       | 10 | .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)                                                                                                                                                                                                                                                                                                        
|       | 10 | .3          |  | 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))                                                                                                                                                                                                                                                                                                                      

92



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##### Table of Contents



INDEX TO EXHIBITS 
(Continued)


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .4          |  | 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 | .5          |  | Archstone-Smith Deferred Compensation Plan
    (incorporated by reference to Exhibit 10.5 to
    Archstone-Smiths Annual Report on Form 10-K for the
    year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .6          |  | Form of Indemnification Agreement entered into
    between Archstone-Smith Trust and each of its officers and
    Trustees (incorporated by reference to Exhibit 10.6 to
    Archstone-Smiths Annual Report on Form 10-K for the
    year ended December 31, 2003)                                                                                                                                                                                                                                                                             
|       | 10 | .7          |  | Form of Change in Control Agreement between
    Archstone-Smith Trust and certain of its officers (incorporated
    by reference to Exhibit 10.7 to Archstone-Smiths
    Annual Report on Form 10-K for the year ended
    December 31, 2002)                                                                                                                                                                                                                                                                                                  
|       | 10 | .8          |  | 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 | .9          |  | 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 | .10         |  | 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 | .11         |  | 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 | .12         |  | Amended and Restated Credit Agreement, dated as
    of October 30, 2003, by and among Archstone-Smith Operating
    Trust, as borrower, and Archstone-Smith Trust as parent, and
    J.P. Morgan Chase Bank, as administrative agent, and Bank of
    America, N.A., and Wells Fargo Bank, N.A., as syndication
    agents, and Bank One, N.A. and Commerzbank A.G., New York
    Branch, as documentation agents                                                                                                                               
|       | 10 | .13         |  | 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 | .14         |  | 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 | .15         |  | 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 | .16         |  | 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)                                                                                                                                                                                                                                                                                                                            

93



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##### Table of Contents



INDEX TO EXHIBITS 
(Continued)


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|------ | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .17         |  | 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 | .18         |  | 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)                                                                                                               
|       | 10 | .19         |  | 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 | .20         |  | 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 | .21         |  | 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 | .22         |  | 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 | .23         |  | 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 | .24         |  | 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 | .25         |  | 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 | .26         |  | 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 | .27         |  | 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 | .28         |  | 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 | .29         |  | Multi-family 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 | .30         |  | Multi-family 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 | .31         |  | 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)                                                                                                                                                        

94



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##### Table of Contents



INDEX TO EXHIBITS 
(Continued)


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .32         |  | 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 | .33         |  | Multi-family 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)                                                                                            
|       | 10 | .34         |  | 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 | .35         |  | 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 | .36         |  | 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 | .37         |  | 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 | .38         |  | 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 Share Dividends                                                                                                                                                                                                                                                                                        
|       | 21 |             |  | Subsidiaries of Archstone-Smith                                                                                                                                                                                                                                                                                                                                                     
|       | 23 | .1          |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                 
|       | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                              
|       | 31 | .2          |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                              
|       | 32 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                              
|       | 32 | .2          |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                              
|       | 99 | .1          |  | Corporate Governance Guidelines (incorporated by
    reference to Exhibit 99.1 of Archstone-Smiths
    Quarterly Report on Form 10-Q for the Quarter Ended
    September 30, 2003)                                                                                                                                                                                                 
|       | 99 | .3          |  | Audit Committee Charter (incorporated by
    reference to Exhibit 99.3 of Archstone-Smiths
    Quarterly Report on Form 10-Q for the Quarter Ended
    September 30, 2003)                                                                                                                                                                                                         
|       | 99 | .4          |  | Management Development and Executive Compensation
    Committee Charter (incorporated by reference to
    Exhibit 99.4 of Archstone-Smiths Quarterly Report on
    Form 10-Q for the Quarter Ended September 30, 2003)                                                                                                                                                             
|       | 99 | .5          |  | Nominating and Corporate Governance Committee
    Charter (incorporated by reference to Exhibit 99.5 of
    Archstone-Smiths Quarterly Report on Form 10-Q for
    the Quarter Ended September 30, 2003)                                                                                                                                                                           

95