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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



FOR QUARTER ENDED September 30, 2005



COMMISSION FILE NO. 1-11706



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CARRAMERICA REALTY CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Maryland                                                       |  | 52-1796339                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



1850 K Street, N.W.,
Washington, D.C. 20006

(Address or principal executive office) (Zip code)



Registrants telephone number, including area code (202) 729-1700



N/A

(Former name, former address and former fiscal year, if changed since last report)



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Number of shares outstanding of each of the registrants

classes of common stock, as of October 25, 2005:



Common Stock, par value $.01 per share: 58,473,875
shares



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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 twelve (12) months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety
(90) days.    YES  x    NO ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    YES  x    NO ̈



Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).    YES ̈NO  x



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Index



|                              |  |                                                                                                                                                                      |  |      
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|                              |  |                                                                                                                                                                      |  | Page 
|Part I:
Financial Information
|                              |  |                                                                                                                                                                     
|Item 1.                       |  | Financial Statements                                                                                                                                                 |  |      
|                              |  |                                                                                                                                                                     
|                              |  | Consolidated balance sheets of CarrAmerica Realty Corporation and subsidiaries as of September 30, 2005 (unaudited) and December 31, 2004                            |  | 4    
|                              |  |                                                                                                                                                                     
|                              |  | Consolidated statements of operations of CarrAmerica Realty Corporation and subsidiaries for the three and nine months ended September 30, 2005 and 2004 (unaudited) |  | 5    
|                              |  |                                                                                                                                                                     
|                              |  | Consolidated statements of cash flows of CarrAmerica Realty Corporation and subsidiaries for the nine months ended September 30, 2005 and 2004 (unaudited)           |  | 6    
|                              |  |                                                                                                                                                                     
|                              |  | Notes to consolidated financial statements (unaudited)                                                                                                               |  | 7-19 
|                              |  |                                                                                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                |  | 20-40
|                              |  |                                                                                                                                                                     
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                           |  | 41   
|                              |  |                                                                                                                                                                     
|Item 4.                       |  | Controls and Procedures                                                                                                                                              |  | 42   
|                             
|Part II:
Other Information   
|                              |  |                                                                                                                                                                     
|Item 1.                       |  | Legal Proceedings                                                                                                                                                    |  | 43   
|                              |  |                                                                                                                                                                     
|Item 6.                       |  | Exhibits                                                                                                                                                             |  | 43   



2



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Part I



Item 1. Financial Information



The
information furnished in our accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows reflects all adjustments which are, in our opinion, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.



The financial
statements should be read in conjunction with the notes to the financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations. The results of operations for the nine months ended
September 30, 2005 are not necessarily indicative of the operating results to be expected for the full year.



3



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004



|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|(In thousands, except share and per share amounts)                                                                                                                     |  | September 30,2005 |           |   | December 31,2004 |  
|                                                                                                                                                                       |  | (unaudited)       |           |   |                  |  
|Assets                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Rental property:                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Land                                                                                                                                                                   |  | $                 | 750,414   |   |                  | $ | 779,482   |  
|Buildings                                                                                                                                                              |  |                   | 2,002,284 |   |                  |   | 2,064,678 |  
|Tenant improvements                                                                                                                                                    |  |                   | 455,441   |   |                  |   | 448,515   |  
|Furniture, fixtures and equipment                                                                                                                                      |  |                   | 48,387    |   |                  |   | 45,879    |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                       |  |                   | 3,256,526 |   |                  |   | 3,338,554 |  
|Less: Accumulated depreciation                                                                                                                                         |  |                   | (759,879  | ) |                  |   | (750,530  | )
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Total rental property                                                                                                                                                  |  |                   | 2,496,647 |   |                  |   | 2,588,024 |  
|                                                                                                                                                                       |  |                  
|Land held for development or sale                                                                                                                                      |  |                   | 41,782    |   |                  |   | 41,676    |  
|Assets held for sale                                                                                                                                                   |  |                   | 35,785    |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                              |  |                   | 6,590     |   |                  |   | 4,735     |  
|Restricted deposits                                                                                                                                                    |  |                   | 103,267   |   |                  |   | 1,364     |  
|Accounts and notes receivable, net                                                                                                                                     |  |                   | 54,927    |   |                  |   | 52,438    |  
|Investments in unconsolidated entities                                                                                                                                 |  |                   | 153,919   |   |                  |   | 138,127   |  
|Accrued straight-line rents                                                                                                                                            |  |                   | 83,869    |   |                  |   | 84,396    |  
|Tenant leasing costs, net                                                                                                                                              |  |                   | 57,886    |   |                  |   | 53,908    |  
|Intangible assets, net                                                                                                                                                 |  |                   | 104,223   |   |                  |   | 98,354    |  
|Prepaid expenses and other assets                                                                                                                                      |  |                   | 22,385    |   |                  |   | 18,170    |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                       |  | $                 | 3,161,280 |   |                  | $ | 3,081,192 |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Liabilities, Minority Interest, and Stockholders' Equity                                                                                                               |  |                   |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Mortgages and notes payable, net                                                                                                                                       |  | $                 | 1,900,621 |   |                  | $ | 1,941,130 |  
|Accounts payable and accrued expenses                                                                                                                                  |  |                   | 90,325    |   |                  |   | 107,409   |  
|Rent received in advance and security deposits                                                                                                                         |  |                   | 37,187    |   |                  |   | 40,304    |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                      |  |                   | 2,028,133 |   |                  |   | 2,088,843 |  
|                                                                                                                                                                       |  |                  
|Minority interest                                                                                                                                                      |  |                   | 59,902    |   |                  |   | 65,378    |  
|                                                                                                                                                                       |  |                  
|Stockholders' equity:                                                                                                                                                  |  |                   |           |   |                  |   |           |  
|Preferred stock, $.01 par value, authorized 35,000,000 shares:                                                                                                         |  |                   |           |   |                  |   |           |  
|Series E Cumulative Redeemable Preferred Stock, at redemption value, issued and outstanding, 8,050,000 shares at September 30, 2005 and
December 31, 2004              |  |                   | 201,250   |   |                  |   | 201,250   |  
|Common Stock, $.01 par value, authorized 180,000,000 shares: issued and outstanding 58,461,703 shares at September 30, 2005 and
54,890,361 shares at December 31, 2004 |  |                   | 584       |   |                  |   | 548       |  
|Additional paid-in capital                                                                                                                                             |  |                   | 1,147,021 |   |                  |   | 1,025,388 |  
|Cumulative dividends in excess of net income                                                                                                                           |  |                   | (275,869  | ) |                  |   | (300,500  | )
|Accumulated other comprehensive income - Unrealized gains on available-for-sale securities                                                                             |  |                   | 259       |   |                  |   | 285       |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Total stockholders' equity                                                                                                                                             |  |                   | 1,073,245 |   |                  |   | 926,971   |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Commitments and contingencies                                                                                                                                          |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                       |  | $                 | 3,161,280 |   |                  | $ | 3,081,192 |  
|                                                                                                                                                                       |  |                   |           |   |                  |   |           |  



See
accompanying notes to consolidated financial statements.



4



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2005 and 2004



|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                 |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|(In thousands, except per share amounts)                                                                                                         |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|                                                                                                                                                 |  | (unaudited)                     |         |   | (unaudited)                    |  
|Operating revenues:                                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Rental revenue:                                                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Base rent                                                                                                                                        |  | $                               | 92,962  |   |                                | $ | 94,663  |      |  | $ | 285,812 |   |  | $ | 278,546 |  
|Recoveries from tenants                                                                                                                          |  |                                 | 14,062  |   |                                |   | 14,529  |      |  |   | 42,528  |   |  |   | 41,187  |  
|Parking and other tenant charges                                                                                                                 |  |                                 | 4,712   |   |                                |   | 4,146   |      |  |   | 12,463  |   |  |   | 14,625  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total rental revenue                                                                                                                             |  |                                 | 111,736 |   |                                |   | 113,338 |      |  |   | 340,803 |   |  |   | 334,358 |  
|Real estate service revenue                                                                                                                      |  |                                 | 5,128   |   |                                |   | 6,234   |      |  |   | 15,923  |   |  |   | 17,001  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating revenues                                                                                                                         |  |                                 | 116,864 |   |                                |   | 119,572 |      |  |   | 356,726 |   |  |   | 351,359 |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses:                                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Property expenses:                                                                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses                                                                                                                               |  |                                 | 30,655  |   |                                |   | 29,830  |      |  |   | 90,515  |   |  |   | 87,120  |  
|Real estate taxes                                                                                                                                |  |                                 | 10,292  |   |                                |   | 9,804   |      |  |   | 31,193  |   |  |   | 30,051  |  
|General and administrative                                                                                                                       |  |                                 | 10,121  |   |                                |   | 10,304  |      |  |   | 31,049  |   |  |   | 31,334  |  
|Depreciation and amortization                                                                                                                    |  |                                 | 34,751  |   |                                |   | 32,024  |      |  |   | 102,310 |   |  |   | 91,215  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                                                                         |  |                                 | 85,819  |   |                                |   | 81,962  |      |  |   | 255,067 |   |  |   | 239,720 |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Real estate operating income                                                                                                                     |  |                                 | 31,045  |   |                                |   | 37,610  |      |  |   | 101,659 |   |  |   | 111,639 |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Other (expense) income:                                                                                                                          |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                                                                                                                 |  |                                 | (29,100 | ) |                                |   | (28,362 | )    |  |   | (86,746 | ) |  |   | (82,538 | )
|Equity in earnings of unconsolidated entities                                                                                                    |  |                                 | 709     |   |                                |   | 3,644   |      |  |   | 2,751   |   |  |   | 7,391   |  
|Interest and other income                                                                                                                        |  |                                 | 2,009   |   |                                |   | 505     |      |  |   | 5,021   |   |  |   | 1,729   |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net other expense                                                                                                                                |  |                                 | (26,382 | ) |                                |   | (24,213 | )    |  |   | (78,974 | ) |  |   | (73,418 | )
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes, minority interest, impairment losses on real estate and gain (loss) on sale of
properties |  |                                 | 4,663   |   |                                |   | 13,397  |      |  |   | 22,685  |   |  |   | 38,221  |  
|Income taxes                                                                                                                                     |  |                                 | (428    | ) |                                |   | 19      |      |  |   | (730    | ) |  |   | (135    | )
|Minority interest                                                                                                                                |  |                                 | (3,396  | ) |                                |   | (2,192  | )    |  |   | (7,164  | ) |  |   | (6,357  | )
|Impairment losses on real estate                                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   | (4,000  | ) |  |   |         |  
|Gain (loss) on sale of properties                                                                                                                |  |                                 | 29      |   |                                |   |        |      |  |   | 88,786  |   |  |   | (58     | )
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                                                                                |  |                                 | 868     |   |                                |   | 11,224  |      |  |   | 99,577  |   |  |   | 31,671  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations                                                                                                                          |  |                                 | 12,759  |   |                                |   | 26,332  |      |  |   | 20,960  |   |  |   | 35,122  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                                                                                       |  |                                 | 13,627  |   |                                |   | 37,556  |      |  |   | 120,537 |   |  |   | 66,793  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Less: Dividends on preferred and unvested restricted stock                                                                                       |  |                                 | (4,020  | ) |                                |   | (3,931  | )    |  |   | (12,062 | ) |  |   | (11,794 | )
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income available to common shareholders                                                                                                      |  | $                               | 9,607   |   |                                | $ | 33,625  |      |  | $ | 108,475 |   |  | $ | 54,999  |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic net income (loss) per common share:                                                                                                        |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Continuing operations                                                                                                                            |  | $                               | (0.05   | ) |                                | $ | 0.13    |      |  | $ | 1.57    |   |  | $ | 0.37    |  
|Discontinued operations                                                                                                                          |  |                                 | 0.22    |   |                                |   | 0.49    |      |  |   | 0.38    |   |  |   | 0.65    |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                                                                                       |  | $                               | 0.17    |   |                                | $ | 0.62    |      |  | $ | 1.95    |   |  | $ | 1.02    |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Diluted net income (loss) per common share:                                                                                                      |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Continuing operations                                                                                                                            |  | $                               | (0.05   | ) |                                | $ | 0.13    |      |  | $ | 1.54    |   |  | $ | 0.36    |  
|Discontinued operations                                                                                                                          |  |                                 | 0.22    |   |                                |   | 0.48    |      |  |   | 0.34    |   |  |   | 0.65    |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                                                                                       |  | $                               | 0.17    |   |                                | $ | 0.61    |      |  | $ | 1.88    |   |  | $ | 1.01    |  
|                                                                                                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



5



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2005 and 2004



|                                                                                                          |  |             |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ---- | - | -------- | -
|(In thousands)                                                                                            |  | 2005        |          |   | 2004 |  
|                                                                                                          |  | (unaudited) |         
|Cash flows from operating activities:                                                                     |  |             |          |   |      |   |          |  
|Net income                                                                                                |  | $           | 120,537  |   |      | $ | 66,793   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                         |  |             |          |   |      |   |          |  
|Depreciation and amortization                                                                             |  |             | 105,160  |   |      |   | 99,882   |  
|Minority interest                                                                                         |  |             | 7,164    |   |      |   | 6,357    |  
|Equity in earnings of unconsolidated entities                                                             |  |             | (2,751   | ) |      |   | (7,391   | )
|Operating distributions from unconsolidated entities                                                      |  |             | 6,525    |   |      |   | 3,498    |  
|(Gain) loss on sale of properties                                                                         |  |             | (88,786  | ) |      |   | 58       |  
|Gain on sale of properties - discontinued operations                                                      |  |             | (14,938  | ) |      |   | (19,870  | )
|Gain on sale of residential property                                                                      |  |             | (375     | ) |      |   | (326     | )
|Impairment losses on real estate                                                                          |  |             | 4,859    |   |      |   |         |  
|(Recovery of) provision for uncollectible accounts                                                        |  |             | (886     | ) |      |   | 444      |  
|Stock-based compensation                                                                                  |  |             | 4,171    |   |      |   | 2,538    |  
|Lease intangible amortization                                                                             |  |             | 7,128    |   |      |   | (704     | )
|Amortization of deferred financing costs                                                                  |  |             | 3,429    |   |      |   | 3,713    |  
|Other                                                                                                     |  |             | 1,729    |   |      |   | (647     | )
|Changes in assets and liabilities:                                                                        |  |             |          |   |      |   |          |  
|Decrease in accounts receivable                                                                           |  |             | 4,002    |   |      |   | 4,847    |  
|Increase in accrued straight-line rents                                                                   |  |             | (6,501   | ) |      |   | (4,753   | )
|Additions to tenant leasing costs                                                                         |  |             | (12,918  | ) |      |   | (10,052  | )
|Increase in intangible assets, prepaid expenses and other assets                                          |  |             | (10,782  | ) |      |   | (4,534   | )
|Decrease in accounts payable and accrued expenses                                                         |  |             | (24,193  | ) |      |   | (19,785  | )
|Decrease in rent received in advance and security deposits                                                |  |             | (4,784   | ) |      |   | (1,679   | )
|                                                                                                          |  |             |          |   |      |   |          |  
|Total adjustments                                                                                         |  |             | (22,747  | ) |      |   | 51,596   |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Net cash provided by operating activities                                                                 |  |             | 97,790   |   |      |   | 118,389  |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Cash flows from investing activities:                                                                     |  |             |          |   |      |   |          |  
|Rental property additions                                                                                 |  |             | (7,369   | ) |      |   | (6,280   | )
|Additions to tenant improvements                                                                          |  |             | (32,146  | ) |      |   | (36,707  | )
|Additions to land held for development or sale and construction in progress                               |  |             | (381     | ) |      |   | (3,217   | )
|Rental property acquisitions and deposits                                                                 |  |             | (226,633 | ) |      |   | (320,379 | )
|Issuance of notes receivable                                                                              |  |             | (10,545  | ) |      |   | (13,164  | )
|Payments on notes receivable                                                                              |  |             | 6,062    |   |      |   |         |  
|Distributions from unconsolidated entities                                                                |  |             | 3,025    |   |      |   | 1,891    |  
|Investments in unconsolidated entities                                                                    |  |             | (14,545  | ) |      |   | (13,936  | )
|Acquisition of minority interest                                                                          |  |             | (4,795   | ) |      |   | (4,406   | )
|Increase in restricted deposits                                                                           |  |             | (101,895 | ) |      |   | (1,407   | )
|Proceeds from sale of residential property                                                                |  |             | 1,663    |   |      |   | 2,727    |  
|Proceeds from sales of rental properties                                                                  |  |             | 319,376  |   |      |   | 201,702  |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Net cash used in investing activities                                                                     |  |             | (68,183  | ) |      |   | (193,176 | )
|                                                                                                          |  |             |          |   |      |   |          |  
|Cash flows from financing activities:                                                                     |  |             |          |   |      |   |          |  
|Issuance of common stock, net of issuance costs                                                           |  |             | 99,471   |   |      |   |         |  
|Exercises of stock options                                                                                |  |             | 18,486   |   |      |   | 34,881   |  
|Repayment of unsecured notes                                                                              |  |             | (100,000 | ) |      |   | (150,000 | )
|Termination of interest rate swap agreement                                                               |  |             | (1,996   | ) |      |   |         |  
|Proceeds from issuance of unsecured notes, net of issuance costs                                          |  |             |         |   |      |   | 419,967  |  
|Net borrowings (repayments) on unsecured credit facility                                                  |  |             | 65,000   |   |      |   | (100,500 | )
|Repayments of mortgages and notes payable                                                                 |  |             | (4,385   | ) |      |   | (30,043  | )
|Dividends and distributions to minority interests                                                         |  |             | (104,328 | ) |      |   | (100,621 | )
|                                                                                                          |  |             |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                                                       |  |             | (27,752  | ) |      |   | 73,684   |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Increase (decrease) in cash and cash equivalents                                                          |  |             | 1,855    |   |      |   | (1,103   | )
|Cash and cash equivalents, beginning of the period                                                        |  |             | 4,735    |   |      |   | 4,299    |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Cash and cash equivalents, end of the period                                                              |  | $           | 6,590    |   |      | $ | 3,196    |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                                         |  |             |          |   |      |   |          |  
|Cash paid for interest (net of capitalized interest of $457 for the nine months ended September 30, 2004) |  | $           | 97,426   |   |      | $ | 90,399   |  
|                                                                                                          |  |             |          |   |      |   |          |  
|Income tax payments                                                                                       |  | $           | 516      |   |      | $ | 870      |  
|                                                                                                          |  |             |          |   |      |   |          |  



See accompanying notes to consolidated
financial statements.



6



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



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



| | (a) | Business
| | --- | --------



We are a fully integrated, self-administered and self-managed publicly traded real estate investment trust (REIT) organized under Maryland
law. We focus on the acquisition, development, ownership and operation of office properties, located primarily in selected markets across the United States. Based on property operating income, our most significant markets include Northern
California, the Washington, D.C. metropolitan area, Southern California and Seattle.



In December 2003, our Board of Directors approved a plan to restructure the manner in which we hold our assets by converting to what is commonly referred to as an umbrella partnership REIT, or UPREIT, structure. On
June 30, 2004, we contributed substantially all of our assets to CarrAmerica Realty Operating Partnership, L.P. (the Operating Partnership) in exchange for units of common and preferred partnership interest in the Operating
Partnership. The Operating Partnership assumed substantially all of our liabilities. Since the UPREIT restructuring, substantially all of our business is conducted through the Operating Partnership and our primary asset is our interest in the
Operating Partnership. As of September 30, 2005, we owned, directly or through a wholly-owned subsidiary, all of the outstanding units of partnership interest of the Operating Partnership.



| | (b) | Basis of Presentation
| | --- | ---------------------



The financial statements have been prepared using the accounting policies described in our 2004 annual report on Form 10-K (except as updated in Note
1(g)).



Our accounts and those of our controlled subsidiaries
and affiliates are consolidated in the financial statements. For entities which are not variable interest entities, we consolidate those entities in which we own a direct or indirect majority voting interest and where the minority holders do not
have rights to participate in significant decisions that are made in the ordinary course of business. If applicable, we would consolidate any variable interest entity of which we are the primary beneficiary. We use the equity or cost methods, as
appropriate in the circumstances, to account for our investments in and our share of the earnings or losses of unconsolidated entities. These entities are not controlled by us. If events or changes in circumstances indicate that the fair value of an
investment accounted for using the equity method or cost method has declined below its carrying value and we consider the decline to be other than temporary, the investment is written down to fair value and an impairment loss is
recognized.



Management has made a number of estimates,
judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements, and the disclosure of contingent assets and liabilities. Estimates are required in order for us to prepare our
financial statements in conformity with U.S. generally accepted accounting principles. Significant estimates, judgments and assumptions are required in a number of areas, including evaluating the impairment of long-lived assets and investments,
allocating the purchase cost of acquired properties and evaluating the collectibility of accounts receivable. We base these estimates, judgments and assumptions on historical experience and various other factors that management believes to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.



| | (c) | Interim Financial Statements
| | --- | ----------------------------



The financial statements reflect all adjustments, which are, in our opinion, necessary to reflect a fair presentation of the results for the interim
periods, and all adjustments are of a normal, recurring nature.



7



---

CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



| | (d) | Earnings Per Share
| | --- | ------------------



The following tables set forth information relating to the computations of our basic and diluted earnings per share (EPS) from continuing
operations:



|                                         |  |                                       |        |   |                                       |        |                 |   |       |                      |  |                     |       |                 |        |  |   |     
|---------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | ------ | --------------- | - | ----- | -------------------- |  | ------------------- | ----- | --------------- | ------ |  | - | ----
|                                         |  | Three Months Ended September 30, 2005 |        |   | Three Months Ended September 30, 2004
|(In thousands, except per share amounts) |  | Earnings (Numerator)                  |        |   | Shares (Denominator)                  |        | Per ShareAmount |   |       | Earnings (Numerator) |  | Shares(Denominator) |       | Per ShareAmount
|Basic EPS                                |  | $                                     | (3,152 | ) |                                       | 56,930 |                 | $ | (0.05 | )                    |  | $                   | 7,293 |                 | 54,069 |  | $ | 0.13
|                                         |  |                                       |        |   |                                       |        |                 |   |       |                      |  |                     |       |                 |        |  |   |     
|Stock options                            |  |                                       |       |   |                                       | 604    |                 |   |       |                      |  |                     |      |                 | 600    |  |   |     
|                                         |  |                                       |        |   |                                       |        |                 |   |       |                      |  |                     |       |                 |        |  |   |     
|Diluted EPS                              |  | $                                     | (3,152 | ) |                                       | 57,534 |                 | $ | (0.05 | )                    |  | $                   | 7,293 |                 | 54,669 |  | $ | 0.13
|                                         |  |                                       |        |   |                                       |        |                 |   |       |                      |  |                     |       |                 |        |  |   |     



|                                         |  |                                      |        |                                      |        |                  |   |                      |  |                      |        |                  |        |  |   |     
|---------------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ | ------ | ---------------- | - | -------------------- |  | -------------------- | ------ | ---------------- | ------ |  | - | ----
|                                         |  | Nine Months Ended September 30, 2005 |        | Nine Months Ended September 30, 2004
|(In thousands, except per share amounts) |  | Earnings (Numerator)                 |        | Shares (Denominator)                 |        | Per Share Amount |   | Earnings (Numerator) |  | Shares (Denominator) |        | Per Share Amount
|Basic EPS                                |  | $                                    | 87,515 |                                      | 55,495 |                  | $ | 1.57                 |  | $                    | 19,877 |                  | 53,768 |  | $ | 0.37
|                                         |  |                                      |        |                                      |        |                  |   |                      |  |                      |        |                  |        |  |   |     
|Stock options                            |  |                                      |       |                                      | 556    |                  |   |                      |  |                      |       |                  | 564    |  |   |     
|Partnership units                        |  |                                      | 6,544  |                                      | 5,197  |                  |   |                      |  |                      |       |                  |       |  |   |     
|                                         |  |                                      |        |                                      |        |                  |   |                      |  |                      |        |                  |        |  |   |     
|Diluted EPS                              |  | $                                    | 94,059 |                                      | 61,248 |                  | $ | 1.54                 |  | $                    | 19,877 |                  | 54,332 |  | $ | 0.36
|                                         |  |                                      |        |                                      |        |                  |   |                      |  |                      |        |                  |        |  |   |     



Income from continuing
operations is reconciled to earnings (loss) available to common stockholders as follows:



|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|(In thousands)                                                              |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Income from continuing operations                                           |  | $                               | 868    |   |                                | $ | 11,224 |      |  | $ | 99,577  |   |  | $ | 31,671  |  
|Dividends on preferred stock                                                |  |                                 | (3,773 | ) |                                |   | (3,773 | )    |  |   | (11,320 | ) |  |   | (11,320 | )
|Dividends on unvested restricted stock                                      |  |                                 | (247   | ) |                                |   | (158   | )    |  |   | (742    | ) |  |   | (474    | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|(Loss) earnings from continuing operations available to common shareholders |  | $                               | (3,152 | ) |                                | $ | 7,293  |      |  | $ | 87,515  |   |  | $ | 19,877  |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



The effects of units
in CarrAmerica Realty, L.P. and Carr Realty Holdings, L.P. that are redeemable for shares of our common stock are not included in the computation of diluted earnings per share for any period in which their effect is antidilutive.



| | (e) | Derivative Financial Instruments and Hedging
| | --- | --------------------------------------------



On November 20, 2002, in conjunction with the issuance of $175.0 million of our 5.25% senior unsecured notes, we entered into interest rate swap
agreements with JPMorgan Chase Bank, Bank of America, N.A. and Goldman, Sachs & Co. Under the terms of these agreements, we received interest at a fixed rate of 5.25% and paid interest at a variable rate of six-month LIBOR in arrears plus
1.405%. The interest rate swaps matured at the same time the notes were due. The swaps qualified as fair value hedges for accounting purposes. We recognized an increase in interest expense for the nine months ended September 30, 2005 of
approximately $14,000 related to the swaps. We recognized a reduction in



8



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



interest expense for the three and nine months ended September 30, 2004 of approximately $0.6 million and $2.4 million, respectively, related to the
swaps. On April 18, 2005, we terminated these swap agreements by paying approximately $2.0 million. This payment is being amortized to interest expense over the remaining term of the senior unsecured notes which mature November 2007. The
effective rate of interest on the notes giving effect to the swap termination is 5.69%.



On March 18, 2004, in conjunction with the issuance of $225.0 million of our 3.625% senior unsecured notes, we entered into $100.0 million of interest rate swap agreements with JPMorgan Chase Bank and Bank of
America, N.A. Under the terms of these agreements, we receive interest at a fixed rate of 3.625% and pay interest at a variable rate of six-month LIBOR in arrears plus 0.2675%. The interest rate swaps mature at the same time the notes are due. The
swaps qualify as fair value hedges for accounting purposes. As of September 30, 2005, the fair value of the interest rate swaps was a payable of approximately $(4.3) million. We recognized an increase in interest expense for the three and nine
months ended September 30, 2005 of approximately $0.3 million and $0.6 million, respectively and a reduction in interest expense of approximately $0.4 million and $0.6 million for the three and nine months ended September 30, 2004,
respectively, related to the swaps. As of September 30, 2005, taking into account the effect of the interest rate swaps, the effective interest rate on $100.0 million of the notes was 4.36%.



On August 10, 2004, we entered into interest rate lock agreements with
a notional amount of $150.0 million with JPMorgan Chase Bank, Goldman, Sachs & Co. and Morgan Stanley in anticipation of our 5.125% $200.0 million senior unsecured note offering. We settled the interest rate locks on August 20, 2004
and paid $0.6 million to the counterparties. The interest rate locks qualified as cash flow hedges and are being amortized to interest expense over the life of our senior unsecured notes due in 2011. During the three and nine months ended
September 30, 2005, the impact of the interest rate locks on interest expense was not material.



In January 2005, we purchased an interest rate cap with a notional amount of $200.0 million and LIBOR capped at 7.5% which expires in February 2006.



| | (f) | Stock/Unit Compensation Plans
| | --- | -----------------------------



Through 2002, we applied the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees,  and related interpretations to account for our stock/unit compensation plans. Under this method, we recorded compensation expense for awards of stock, options or units to employees only if the market price of the
unit or stock on the grant date exceeded the amount the employee was required to pay to acquire the unit or stock. Effective January 1, 2003, we adopted the fair value based method of accounting for stock-based compensation costs. We elected to
use the prospective method of transition to the fair value method provided in SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and accordingly, the method is being applied for all employee stock
compensation awards granted, modified or settled on or after January 1, 2003.



The following table summarizes pro forma effects on net income and earnings per share if the fair value method had been used to account for all stock-based compensation awards made between 1995 and 2002.



9



---

CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



|                                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|(In thousands, except per share data)                                           |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Net income as reported                                                          |  | $                               | 13,627 |   |                                | $ | 37,556 |      |  | $ | 120,537 |   |  | $ | 66,793 |  
|Stock-based compensation cost from stock option plans included in net income    |  |                                 | 38     |   |                                |   | 38     |      |  |   | 114     |   |  |   | 114    |  
|Stock-based compensation cost from restricted stock plan included in net income |  |                                 | 1,379  |   |                                |   | 738    |      |  |   | 4,057   |   |  |   | 2,424  |  
|Fair value of stock-based compensation                                          |  |                                 | (1,581 | ) |                                |   | (1,059 | )    |  |   | (4,664  | ) |  |   | (3,380 | )
|                                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Pro forma net income                                                            |  | $                               | 13,463 |   |                                | $ | 37,273 |      |  | $ | 120,044 |   |  | $ | 65,951 |  
|                                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Earnings per share as reported:                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic                                                                           |  | $                               | 0.17   |   |                                | $ | 0.62   |      |  | $ | 1.95    |   |  | $ | 1.02   |  
|Diluted                                                                         |  |                                 | 0.17   |   |                                |   | 0.61   |      |  |   | 1.88    |   |  |   | 1.01   |  
|Earnings per share, pro forma:                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic                                                                           |  | $                               | 0.17   |   |                                | $ | 0.62   |      |  | $ | 1.95    |   |  | $ | 1.01   |  
|Diluted                                                                         |  |                                 | 0.16   |   |                                |   | 0.61   |      |  |   | 1.87    |   |  |   | 1.00   |  



| | (g) | Revenue Recognition
| | --- | -------------------



In a letter dated February 7, 2005 sent by the Chief Accountant of the Securities and Exchange Commission (Commission) to the American
Institute of Certified Public Accountants, the Chief Accountant addressed a number of issues related to lease accounting by tenants. In that letter, the Chief Accountant indicated that leasehold improvements made by a tenant that are funded by
landlord incentives or allowances under an operating lease should in certain circumstances be recorded as leasehold improvement assets by the tenant. This letter caused REITs and their accounting firms to reevaluate their treatment of tenant
improvements and lease incentives. Based upon the implications of the Chief Accountants letter, we have concluded that if a tenant improvement is deemed to be owned by the tenant for accounting purposes then we must record the amounts funded
to construct the tenant improvements as a lease incentive instead of as a tenant improvement, and as a result, the amount funded would be amortized as a reduction of rental revenue rather than as an increase to depreciation expense. This change in
presentation will have no effect on our net income.



This
consideration of the issues raised in the Chief Accountants letter also resulted in examination of when revenue recognition under an operating lease should begin. Historically, we began to recognize revenue under a lease when possession or
control of the space leased was turned over to our tenant. In instances where our tenant contracted directly with third parties for their tenant improvement work, we determined that the tenant took possession of the space and we would begin
recognizing revenue when we turned over the space to the tenant to begin construction. However, after discussions with our registered independent public accounting firm, we have concluded that if we are the owner of the tenant improvements, for
accounting purposes, revenue recognition cannot commence until the leasehold improvements are substantially completed. In contrast, if we determine that the tenant allowances we are funding are lease incentives, then we will commence revenue
recognition when possession or control of the space is turned over to the tenant for construction to begin.



This change did not have a material impact on or require a material adjustment to our audited financial statements for fiscal years ended on or before
December 31, 2004 and for the nine months ended September 30, 2005.



10



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



| | (h) | Reclassifications
| | --- | -----------------



Certain reclassifications of prior period amounts have been made to conform to the current periods presentation.



| | (i) | Other Comprehensive Income
| | --- | --------------------------



We hold stock warrants which we obtained from a former tenant in settlement of its lease obligations. The unrealized gain or loss on these securities is
an item of other comprehensive income.



Comprehensive income
is summarized as follows:



|                                                                    |  |                                 |        |                                |   |        |  |   |         |   |  |   |       
|------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | - | ------- | - |  | - | ------
|                                                                    |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|(In thousands)                                                      |  | 2005                            |        | 2004                           |   | 2005   |  |   | 2004   
|Net income                                                          |  | $                               | 13,627 |                                | $ | 37,556 |  | $ | 120,537 |   |  | $ | 66,793
|Item of comprehensive income - Unrealized gain (loss) on securities |  |                                 | 32     |                                |   | 2      |  |   | (26     | ) |  |   | 227   
|                                                                    |  |                                 |        |                                |   |        |  |   |         |   |  |   |       
|Comprehensive income                                                |  | $                               | 13,659 |                                | $ | 37,558 |  | $ | 120,511 |   |  | $ | 67,020
|                                                                    |  |                                 |        |                                |   |        |  |   |         |   |  |   |       



|(2) | Gain on Sale of Properties, Discontinued Operations and Impairment Losses
|--- | -------------------------------------------------------------------------



The tables below summarize property sales for the nine months ended September 30, 2005 and 2004:



|                                 |  |          |  |               |  |                        |  |                     
|-------------------------------- |  | -------- |  | ------------- |  | ---------------------- |  | --------------------
|2005                            
|Property Name                    |  | SaleDate |  | SquareFootage |  | Net CashProceeds($000) |  | GainRecognized($000)
|Alton Deere                      |  | Mar-05   |  | 182,561       |  | 31,469                 |  | 9,002               
|CarrAmerica Corporate Center (1) |  | Mar-05   |  | 1,004,679     |  | 153,986                |  | 77,433              
|Westlake Spectrum*               |  | Apr-05   |  | 108,084       |  | 20,641                 |  | 3,773               
|Hacienda*                        |  | Sep-05   |  | 207,518       |  | 37,287                 |  | 11,099              
|Phoenix*                         |  | Sep-05   |  | 440,403       |  | 63,676                 |  | 47                  
|                                
|2004                            
|Property Name                    |  | SaleDate |  | SquareFootage |  | Net CashProceeds($000) |  | GainRecognized($000)
|Tower of the Hills*              |  | Mar-04   |  | 166,149       |  | 10,512                 |  | 66                  
|Atlanta Portfolio*(2)            |  | Sep-04   |  | 1,696,757     |  | 191,190                |  | 19,804              

---

|* | Included in discontinued operations
|- | -----------------------------------

|(1) | We retained a 20% interest in this property through a joint venture.
|--- | --------------------------------------------------------------------

|(2) | 15 operating office buildings located in Atlanta, Georgia. The properties were Glenridge, Holcomb Place, Midori, Parkwood, Summit, Spalding Ridge, 2400 Lake Park Dr., 680
Engineering Dr., Embassy Row, Waterford and Forum
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the three months ended September 30, 2005, we disposed of our Hacienda property and three buildings in our Phoenix, Arizona portfolio. Prior to the sale of the Phoenix buildings, we recognized an impairment loss of $0.6 million
on the three buildings sold. We recognized gains of approximately $11.1 million on these transactions which are classified, along with their results of operations, as discontinued operations as we have no



11



---

CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



continuing involvement with the properties after the sale. These sales have been treated as like-kind exchanges for income tax purposes. As a result, the
proceeds from these sales, approximately $101.0 million are being held in escrow and are classified as restricted cash as of September 30, 2005. All of these proceeds were released from escrow subsequent to the end of the third quarter and were
used to pay down amounts outstanding under our line of credit. As of September 30, 2005, we have two properties under contract for sale and which meet our criteria to be classified as held for sale, the remaining building in Phoenix and Sunrise
Corporate Center in Reston, Virginia. We will continue to manage Sunrise Corporate Center after the sale and therefore, its results of operations are included in continuing operations.



For the nine months ended September 30, 2005, we disposed of our Alton Deere, Westlake Spectrum, Hacienda properties
and three buildings of our Phoenix, Arizona portfolio, recognizing gains of $23.9 million, $14.9 million of which is classified as discontinued operations as we have no continuing involvement with Westlake Spectrum, Hacienda and the Phoenix
buildings after the sale. Prior to the sale of the Phoenix buildings, we recognized an impairment loss of $0.6 million on the three buildings sold. The sale of the Phoenix buildings and Hacienda are being treated for as like-kind exchanges for
income tax purposes. As a result, the proceeds from these sales, approximately $101.0 million are being held in escrow and are classified as restricted cash as of September 30, 2005. All of these proceeds were released from escrow subsequent to
the end of the third quarter and were used to pay down amounts outstanding under our line of credit. On March 31, 2005, we had a partial sale of CarrAmerica Corporate Center to a joint venture in return for a 19% interest in the venture and
cash of approximately $154.0 million. We recognized a gain of $77.4 million on the transaction. We funded $2.7 million of additional capital to this venture increasing our percentage ownership to 20% in the third quarter of 2005. We continue to
manage Alton Deere and CarrAmerica Corporate Center under management agreements and the gains on these sales and the operating results of these properties are not classified as discontinued operations due to our continuing involvement. In addition
to these sales, there were two sales in joint ventures. In June 2005, a joint venture in which we hold a 35% interest sold an office property. We recognized a gain from this sale of $0.8 million which is classified as continuing operations and
received cash proceeds of $5.8 million. In January 2005, a joint venture in which we are a 30% partner sold two floors of a building. We recognized a gain of $1.7 million on this transaction and received cash proceeds of $6.5 million.



During the three months ended September 30, 2004, we disposed of 15
office buildings in Atlanta, Georgia, exiting that market. The gain on this sale ($19.8 million) and the operating results of these properties are classified as discontinued operations as we had no continuing involvement with the properties after
the sale.



During the nine months ended September 30,
2004, we disposed of 15 office buildings in Atlanta, Georgia, exiting that market and our Tower of the Hills property. The gains on these sales ($19.9 million) and the operating results of these properties are classified as discontinued operations
as we had no continuing involvement with the properties after the sale. We had previously recognized an impairment loss of $3.0 million on Tower of the Hills in the fourth quarter of 2003.



As stated above, the operating results of our Tower of the Hills property
along with our Atlanta portfolio, which we sold in September 2004, First Street Technology and Valley Business Park I, which we sold in December 2004, Westlake Spectrum, which we sold in April 2005, our Hacienda property, which we sold in September
2005 and our Phoenix portfolio, three buildings of which were sold in September 2005, are classified as discontinued operations. As of September 30, 2005, the remaining building of our Phoenix, Arizona portfolio is under contract for sale and
meets our criteria to be classified as held for sale. After the sale, we will have no continuing involvement with this property and therefore, its results of operations are classified as discontinued operations. We recognized an impairment loss of
$0.2 million on the Phoenix property under contract during the second quarter of 2005. Operating results of the properties classified as discontinued operations are summarized as follows:



12



---

CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



|                                                        |  |                                          |        |                                        |      |   |        |  |   |        |   |  |   |       
|------------------------------------------------------- |  | ---------------------------------------- | ------ | -------------------------------------- | ---- | - | ------ |  | - | ------ | - |  | - | ------
|                                                        |  | For the three months ended September 30, |        | For the nine months endedSeptember 30,
|(In thousands)                                          |  | 2005                                     |        |                                        | 2004 |   | 2005   |  |   | 2004  
|Revenue                                                 |  | $                                        | 3,665  |                                        |      | $ | 11,810 |  | $ | 11,790 |   |  | $ | 35,847
|Property expenses                                       |  |                                          | 682    |                                        |      |   | 3,941  |  |   | 2,059  |   |  |   | 11,934
|Depreciation and amortization                           |  |                                          | 740    |                                        |      |   | 1,341  |  |   | 2,850  |   |  |   | 8,661 
|                                                        |  |                                          |        |                                        |      |   |        |  |   |        |   |  |   |       
|Net operations of properties sold or held for sale      |  |                                          | 2,243  |                                        |      |   | 6,528  |  |   | 6,881  |   |  |   | 15,252
|Impairment loss                                         |  |                                          | (649   | )                                      |      |   |       |  |   | (859   | ) |  |   |      
|Gain on sale of properties                              |  |                                          | 11,165 |                                        |      |   | 19,804 |  |   | 14,938 |   |  |   | 19,870
|                                                        |  |                                          |        |                                        |      |   |        |  |   |        |   |  |   |       
|Discontinued operations                                 |  | $                                        | 12,759 |                                        |      | $ | 26,332 |  | $ | 20,960 |   |  | $ | 35,122
|                                                        |  |                                          |        |                                        |      |   |        |  |   |        |   |  |   |       
|Number of buildings included in discontinued operations |  |                                          | 6      |                                        |      |   | 26     |  |   | 8      |   |  |   | 28    
|                                                        |  |                                          |        |                                        |      |   |        |  |   |        |   |  |   |       



During the remainder
of 2005, we are currently marketing or anticipate marketing several properties for sale. As a result we have reduced our estimated holding periods for these properties. Of these properties, two, Quorum Place and 5000 Quorum in Dallas, Texas, had
book values in excess of the undiscounted cash flows we expect to receive from the operation and sale of the properties. As a result, we recognized impairment losses of $1.8 million and $2.2 million, respectively, on these two properties in the
first quarter of 2005 to write down these properties to their estimated fair value. None of the properties which we are marketing currently meet our criteria to be classified as held for sale or as discontinued operations.



|(3) | Assets Held for Sale
|--- | --------------------



As discussed in note 2, as of September 30, 2005, the remaining building in our Phoenix portfolio and Sunrise Corporate Center in Reston, Virginia
met our criteria to be classified as held for sale. The sale of the Phoenix property closed in the fourth quarter of 2005 and the sale of Sunrise Corporate Center is expected to close in early 2006.



The book value of assets classified as held for sale as of
September 30, 2005 are as follows:



|                         |  |                   |        |  
|------------------------ |  | ----------------- | ------ | -
|(In thousands)           |  | September 30,2005 |       
|Land                     |  | $                 | 14,471 |  
|Buildings                |  |                   | 26,664 |  
|Accumulated depreciation |  |                   | (6,951 | )
|Other assets             |  |                   | 1,601  |  
|                         |  |                   |        |  
|                         |  | $                 | 35,785 |  
|                         |  |                   |        |  



|(4) | Acquisitions
|--- | ------------



In the first nine months of 2005, we acquired six operating properties from third parties. The acquired properties totaled approximately 815,000 rentable
square feet and our investment was approximately $226.8 million. The table below details the 2005 acquisitions:



|                             |  |                   |  |               |  |                   |  |                       |  |                   |       
|---------------------------- |  | ----------------- |  | ------------- |  | ----------------- |  | --------------------- |  | ----------------- | ------
|Property Name                |  | Market            |  | MonthAcquired |  | NumberofBuildings |  | RentableSquareFootage |  | PurchaseCost(000)
|North Creek Corporate Center |  | Seattle, WA       |  | Jun-05        |  | 3                 |  | 95,267                |  | $                 | 16,455
|Fairchild Dr.                |  | San Francisco, CA |  | Aug-05        |  | 2                 |  | 131,561               |  |                   | 53,461
|2711 N. First St.            |  | San Francisco, CA |  | Aug-05        |  | 1                 |  | 74,621                |  |                   | 6,185 
|Park Place                   |  | Washington, D.C   |  | Aug-05        |  | 1                 |  | 166,446               |  |                   | 59,685
|West Willows                 |  | Seattle, WA       |  | Aug-05        |  | 3                 |  | 155,830               |  |                   | 35,527
|Chancellor Park              |  | San Diego, CA     |  | Sep-05        |  | 2                 |  | 190,946               |  |                   | 55,512



13



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



During the first nine months of 2004, we acquired five operating properties from third parties. The
acquired properties totaled approximately 1.2 million rentable square feet and our investment was approximately $320.4 million. The table below details the 2004 acquisitions:



|                            |  |                   |  |               |  |                   |  |                       |  |                    |        
|--------------------------- |  | ----------------- |  | ------------- |  | ----------------- |  | --------------------- |  | ------------------ | -------
|Property Name               |  | Market            |  | MonthAcquired |  | NumberofBuildings |  | RentableSquareFootage |  | PurchaseCost (000)
|Commonwealth Tower          |  | Washington, DC    |  | Jun-04        |  | 1                 |  | 339,599               |  | $                  | 130,593
|Commerical National Bank    |  | Washington, DC    |  | Aug-04        |  | 1                 |  | 205,869               |  |                    | 85,044 
|Corporate Technology Centre |  | San Francisco, CA |  | Jul-04        |  | 2                 |  | 176,280               |  |                    | 25,604 
|Corporate Technology Centre |  | San Francisco, CA |  | Sep-04        |  | 5                 |  | 331,950               |  |                    | 43,594 
|Corporate Plaza II          |  | San Diego, CA     |  | Sep-04        |  | 2                 |  | 116,166               |  |                    | 35,544 



The aggregate purchase
cost of the properties acquired in the nine months ended September 30, 2005 and 2004 was preliminarily allocated as follows:



|                                 |  |      |         |   |      |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(In thousands)                   |  | 2005 |         |   | 2004 |  
|Land                             |  | $    | 50,653  |   |      | $ | 103,357 |  
|In-place lease intangibles       |  |      | 21,086  |   |      |   | 21,676  |  
|Building and tenant improvements |  |      | 157,326 |   |      |   | 201,634 |  
|Deferred revenue and other       |  |      | (2,240  | ) |      |   | (6,288  | )
|                                 |  |      |         |   |      |   |         |  
|                                 |  | $    | 226,825 |   |      | $ | 320,379 |  
|                                 |  |      |         |   |      |   |         |  



During April 2005, we
entered into a new joint venture arrangement with institutional investors advised by JPMorgan Asset Management. The joint venture, in which we are a 20% partner, acquired a three building, 984,000 rentable square foot property in Addison, Texas for
approximately $153.5 million. The acquisition was partially financed with $99.3 million of debt. Our equity investment, net of debt used to finance the acquisition, was $10.4 million in cash.



In September 2004, we invested $13.1 million in a joint venture with
JPMorgan Fleming Asset Management which acquired two buildings containing 361,000 rentable square feet in Dallas, Texas for $66.3 million. In October 2004, the venture bought an additional building for approximately $5.6 million. We own a 20%
interest in the joint venture.



|(5) | Mortgages and Notes Payable
|--- | ---------------------------



Our mortgages and notes payable are summarized as follows:



|                                                                     |  |                    |           |   |                   |   |           |  
|-------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | -
|(In thousands)                                                       |  | September 30, 2005 |           |   | December 31, 2004 |  
|Fixed rate mortgages                                                 |  | $                  | 259,349   |   |                   | $ | 262,930   |  
|Notes payable                                                        |  |                    | 18,615    |   |                   |   | 19,228    |  
|Unsecured credit facility                                            |  |                    | 360,000   |   |                   |   | 295,000   |  
|Senior unsecured notes                                               |  |                    | 1,275,000 |   |                   |   | 1,375,000 |  
|                                                                     |  |                    |           |   |                   |   |           |  
|                                                                     |  |                    | 1,912,964 |   |                   |   | 1,952,158 |  
|Unamortized discount, fair value adjustment and swap settlement, net |  |                    | (12,343   | ) |                   |   | (11,028   | )
|                                                                     |  |                    |           |   |                   |   |           |  
|                                                                     |  | $                  | 1,900,621 |   |                   | $ | 1,941,130 |  
|                                                                     |  |                    |           |   |                   |   |           |  



We repaid $3.6 million
of fixed rate mortgage debt in the first nine months of 2005.



14



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



On June 30, 2004, we entered into a new $500.0 million, three year unsecured revolving credit
facility with JPMorgan Chase Bank, as administrative agent for a syndicate of banks. The facility replaced and was used to repay all amounts outstanding under our previous senior unsecured credit facility. We may increase the facility to $700.0
million by our request at any time within 24 months of the closing, provided the funding commitments are increased accordingly. The facility can be extended one year at our option. The facility carries an interest rate of 65 basis points over 30-day
LIBOR, or 4.51% as of September 30, 2005. As of September 30, 2005, $360.0 million was drawn on the credit facility, $32.4 million in letters of credit were outstanding, and we had $107.6 million available for borrowing. Subsequent to the
end of the third quarter, the amounts in restricted escrows from two property sales were released and we used the monies to pay down our line of credit. As of October 13, 2005, $252.0 million was drawn on the credit facility, $32.4 million in
letters of credit were outstanding, and we had $215.6 million available for borrowing.



Our unsecured credit facility contains financial and other covenants with which we must comply. Some of these covenants include:



| |  |  | A minimum ratio of annual EBITDA (earnings before interest, taxes, depreciation and amortization) to interest expense of at least 2 to 1;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A minimum ratio of annual EBITDA to fixed charges of at least 1.5 to 1;
| | - |  | -----------------------------------------------------------------------



| |  |  | A maximum ratio of aggregate unsecured debt to tangible fair market value of our unencumbered assets of 60%;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | A maximum ratio of total secured debt to tangible fair market value of our assets of 30%;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | A maximum ratio of total debt to tangible fair market value of our assets of 60%; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Restrictions on our ability to make dividend distributions in excess of 90% of funds from operations or the minimum amount necessary to enable us to maintain our status as a REIT.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2005, we are in
compliance with all debt covenants related to our unsecured credit facility. For the remainder of 2005, we expect our minimum ratio of annual EBITDA to interest expense to be in compliance but relatively close to the minimum of 2 to 1 as a result of
space that will be out of service related to a large new lease in Washington, D.C. and the delayed commencement of revenue recognition on leases that have been executed as a result of our change in how we recognize revenue. If circumstances change
from our current expectations, there can be no assurance we will remain in compliance with this or our other covenants. During the first quarter of 2005, we amended our credit facility, increasing the maximum ratio of total debt to tangible fair
market value of our assets to 60%. In addition, the capitalization rate used to compute the fair market value of our assets for purposes of calculating this ratio was decreased from 9.0% to 8.5% for properties located in the Washington, D.C.
metropolitan area. Our ability to draw on our unsecured credit facility or to incur other unsecured debt in the future could be restricted by the covenants.



We have senior unsecured notes outstanding at September 30, 2005 as follows:



|                         |  |                |           |                      |   |        |                                        |  |   |        |   |  |   |          
|------------------------ |  | -------------- | --------- | -------------------- | - | ------ | -------------------------------------- |  | - | ------ | - |  | - | ---------
|(In thousands)           |  | Note Principal |           | Unamortized Discount |   |        | Swap Settlement/ Fair Value Adjustment |  |   | Total 
|                         |  |                |          
|                         |  |                |          
|                         |  |                |          
|7.375% notes due in 2007 |  | $              | 125,000   |                      | $ | (253   | )                                      |  | $ |       |   |  | $ | 124,747  
|5.261% notes due in 2007 |  |                | 50,000    |                      |   | (65    | )                                      |  |   |       |   |  |   | 49,935   
|5.25% notes due in 2007  |  |                | 175,000   |                      |   | (585   | )                                      |  |   | (1,663 | ) |  |   | 172,752  
|3.625% notes due in 2009 |  |                | 225,000   |                      |   | (536   | )                                      |  |   | (4,250 | ) |  |   | 220,214  
|6.875% notes due in 2008 |  |                | 100,000   |                      |   | (998   | )                                      |  |   |       |   |  |   | 99,002   
|5.125% notes due in 2011 |  |                | 200,000   |                      |   | (532   | )                                      |  |   |       |   |  |   | 199,468  
|7.125% notes due in 2012 |  |                | 400,000   |                      |   | (3,461 | )                                      |  |   |       |   |  |   | 396,539  
|                         |  |                |           |                      |   |        |                                        |  |   |        |   |  |   |          
|                         |  | $              | 1,275,000 |                      | $ | (6,430 | )                                      |  | $ | (5,913 | ) |  | $ | 1,262,657
|                         |  |                |           |                      |   |        |                                        |  |   |        |   |  |   |          



All of the notes are
unconditionally guaranteed by CarrAmerica Realty, L.P., one of our subsidiaries.



15



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



Our senior unsecured notes also contain covenants with which we must comply. These covenants include:



| |  |  | Limits on our total indebtedness on a consolidated basis;
| | - |  | ---------------------------------------------------------



| |  |  | Limits on our secured indebtedness on a consolidated basis;
| | - |  | -----------------------------------------------------------



| |  |  | Limits on our required debt service payments; and
| | - |  | -------------------------------------------------



| |  |  | Compliance with the financial covenants of our credit facility.
| | - |  | ---------------------------------------------------------------



We were in compliance with our senior unsecured notes covenants as of September 30, 2005.



$100.0 million of senior unsecured notes matured on March 1, 2005 and
were repaid on that date using borrowings from our unsecured credit facility.



|(6) | Common Stock
|--- | ------------



On August 5, 2005, we issued 2,649,000 shares of common stock. The net proceeds of the offering was approximately $99.5 million and was used to repay
a portion of the borrowings under our $500.0 million revolving credit facility and in turn fund current and potential acquisitions and other working capital and general corporate purposes, including the funding of dividends on our common and
preferred stock and making distributions to third party unitholders in certain of our subsidiaries.



|(7) | Guarantees
|--- | ----------



Our obligations under guarantee agreements at September 30, 2005 are summarized as follows:



|                  |  |                      |  |        |  |                  |            |                |   |        
|----------------- |  | -------------------- |  | ------ |  | ---------------- | ---------- | -------------- | - | -------
|Type of Guarantee |  | Project Relationship |  | Term   |  | Maximum Exposure |            | Carrying Value
|                  |  |                      | 
|Loan1             |  | 575 7th Street       |  | Jan-06 |  | $                | 30,000,000 |                | $ |       
|Loan2             |  | Atlantic Building    |  | Mar-07 |  |                  | 25,000,000 |                |   | 160,000
|Completion3       |  | Atlantic Building    |  | Mar-07 |  |                  | 46,801,485 |                |   | 250,000
|Completion4       |  | Shakespeare Theatre  |  | Dec-06 |  |                  | 31,300,866 |                |   | 725,000
|Loan5             |  | 10UCP                |  | Nov-06 |  |                  | 1,015,000  |                |   |       
|Loan6             |  | Square 320           |  | Mar-06 |  |                  | 19,570,000 |                |   | 165,000

---

|1. | Loan guarantee relates to a joint venture in which we have a 30% interest and for which we are the developer. It is a payment guarantee to the lender on behalf of the joint venture.
If the joint venture defaults on the loan, we may be required to perform under the guarantee. We have a reimbursement guarantee from the other joint venture partner to repay us its proportionate share (70%) of any monies we pay under the
guarantee.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Loan guarantee relates to a third party project for which we are the developer. It is a payment guarantee to the lender. If the third party defaults on the loan, we may be required
to perform under the guarantee. We have a security interest in the third partys interest in the underlying property. The third party owns 100% of the property owning entity. We have a security interest in the property owning entity. In the
event of default, we can exercise our rights under the loan documents to foreclose on the membership interests of the property owning entity and sell such membership interest to mitigate our exposure under the guarantees.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Completion guarantee relates to a third party project for which we are the developer. It is a completion guaranty to the lender. If the third party defaults on its obligation to
construct the building, we may be required to perform. As long as there is no Event of Default under the loan agreement, the lender will continue to make funds available from the construction loan to complete the project.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Completion guarantee relates to a third party project for which we are the developer. It is a completion guaranty to the lender and/or owners. If the third party defaults on its
obligation to construct the building, we may be required to perform. As long as there is no Event of Default under the loan agreement, the lender will continue to make funds available from the construction loan to complete the project.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Lease-up guarantee to a lender. Funds related to this guarantee are being held in escrow by a joint venture in which we own a minority interest.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Loan guarantee relates to a third party project for which we are the developer. It is a payment guarantee to the lender. If the third party defaults on the loan, we may be required
to perform under the guarantee. We have a security interest in the third partys interest in the underlying property. The third party owns 100% of the property owning entity. We have a security interest in the property owning entity. In the
event of default, we can exercise our rights under the loan documents to foreclose on the membership interests of the property owning entity and sell such membership interest to mitigate our exposure under the guarantees.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



|(8) | Segment Information
|--- | -------------------



Our only reportable operating segment is real estate property operations. Other business activities and operating segments that are not reportable are
included in other operations. The performance measure we use to assess results for real estate property operations is property operating income. We define property operating income as total property operating revenue less property expenses, which
includes property operating expenses (other than depreciation and amortization) and real estate taxes. We believe that the presentation of property operating income is helpful to investors as a measure of operating performance of our office
properties because it excludes items that do not relate to or are not indicative of the operating performance of the properties (including interest and depreciation and amortization) and which can make periodic comparisons of operating performance
more difficult. The real estate property operations segment includes the operation and management of consolidated rental properties including those classified as discontinued operations.



Operating results of our reportable segment and our other operations for the three and nine months ended September 30,
2005 and 2004 are summarized as follows:



|                                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   |       |  
|---------------------------------------- |  | --------------------------------------------- | ----- | ------------------------------- | - | ---- | ------------------------------------------ |  | - | ----- | - |  | - | ----- | -
|                                         |  | For the three months ended September 30, 2005 |      
|(In millions)                            |  | Real Estate Property Operations               |       | Other Operationsand Unallocated |   |      | Reclassification - Discontinued Operations |  |   | Total |  
|                                         |  |                                               |      
|                                         |  |                                               |      
|Revenue                                  |  | $                                             | 115.4 |                                 | $ | 5.1  |                                            |  | $ | (3.7  | ) |  | $ | 116.8 |  
|Segment expense                          |  |                                               | 41.6  |                                 |   | 10.1 |                                            |  |   | (0.6  | ) |  |   | 51.1  |  
|                                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   |       |  
|Property/Segment operating income (loss) |  |                                               | 73.8  |                                 |   | (5.0 | )                                          |  |   | (3.1  | ) |  |   | 65.7  |  
|                                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   |       |  
|Depreciation expense                     |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   | 34.7  |  
|                                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   |       |  
|Operating income                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   | 31.0  |  
|Interest expense                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   | (29.1 | )
|Other income                             |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   | 2.7   |  
|Minority interest and taxes              |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   | (3.8  | )
|Discontinued operations                  |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   | 12.8  |  
|                                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   |       |  
|Net income                               |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  | $ | 13.6  |  
|                                         |  |                                               |       |                                 |   |      |                                            |  |   |       |   |  |   |       |  



|                                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   |       |  
|---------------------------------------- |  | --------------------------------------------- | ----- | -------------------------------- | - | ---- | ------------------------------------------ |  | - | ----- | - |  | - | ----- | -
|                                         |  | For the three months ended September 30, 2004 |      
|(In millions)                            |  | Real Estate Property Operations               |       | Other Operations and Unallocated |   |      | Reclassification - Discontinued Operations |  |   | Total |  
|                                         |  |                                               |      
|                                         |  |                                               |      
|Revenue                                  |  | $                                             | 125.1 |                                  | $ | 6.2  |                                            |  | $ | (11.8 | ) |  | $ | 119.5 |  
|Segment expense                          |  |                                               | 43.5  |                                  |   | 10.3 |                                            |  |   | (3.9  | ) |  |   | 49.9  |  
|                                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   |       |  
|Property/Segment operating income (loss) |  |                                               | 81.6  |                                  |   | (4.1 | )                                          |  |   | (7.9  | ) |  |   | 69.6  |  
|                                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   |       |  
|Depreciation expense                     |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   | 32.0  |  
|                                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   |       |  
|Operating income                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   | 37.6  |  
|Interest expense                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   | (28.3 | )
|Other income                             |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   | 4.1   |  
|Minority interest and taxes              |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   | (2.1  | )
|Discontinued operations                  |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   | 26.3  |  
|                                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   |       |  
|Net income                               |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  | $ | 37.6  |  
|                                         |  |                                               |       |                                  |   |      |                                            |  |   |       |   |  |   |       |  



17



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|------------------------------------------------ |  | -------------------------------------------- | ----- | -------------------------------- | - | ----- | ------------------------------------------ |  | - | ----- | - |  | - | ----- | -
|                                                 |  | For the nine months ended September 30, 2005 |      
|(In millions)                                    |  | Real Estate Property Operations              |       | Other Operations and Unallocated |   |       | Reclassification - Discontinued Operations |  |   | Total |  
|                                                 |  |                                              |      
|                                                 |  |                                              |      
|Revenue                                          |  | $                                            | 352.6 |                                  | $ | 15.9  |                                            |  | $ | (11.8 | ) |  | $ | 356.7 |  
|Segment expense                                  |  |                                              | 123.7 |                                  |   | 31.0  |                                            |  |   | (2.0  | ) |  |   | 152.7 |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Property/Segment operating income (loss)         |  |                                              | 228.9 |                                  |   | (15.1 | )                                          |  |   | (9.8  | ) |  |   | 204.0 |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Depreciation expense                             |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 102.3 |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Operating income                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 101.7 |  
|Interest expense                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | (86.7 | )
|Other income                                     |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 7.7   |  
|Minority interest and taxes                      |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | (7.9  | )
|Gain on sale of properties and impairment losses |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 84.8  |  
|Discontinued operations                          |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 20.9  |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Net income                                       |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  | $ | 120.5 |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|                                                 |  | For the nine months ended September 30, 2004 |      
|(In millions)                                    |  | Real Estate Property Operations              |       | Other Operations and Unallocated |   |       | Reclassification - Discontinued Operations |  |   | Total |  
|                                                 |  |                                              |      
|                                                 |  |                                              |      
|Revenue                                          |  | $                                            | 370.2 |                                  | $ | 17.0  |                                            |  | $ | (35.8 | ) |  | $ | 351.4 |  
|Segment expense                                  |  |                                              | 129.1 |                                  |   | 31.3  |                                            |  |   | (11.9 | ) |  |   | 148.5 |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Property/Segment operating income (loss)         |  |                                              | 241.1 |                                  |   | (14.3 | )                                          |  |   | (23.9 | ) |  |   | 202.9 |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Depreciation expense                             |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 91.2  |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Operating income                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 111.7 |  
|Interest expense                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | (82.5 | )
|Other income                                     |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 9.1   |  
|Loss on sale of properties                       |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | (0.1  | )
|Minority interest and taxes                      |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | (6.5  | )
|Discontinued operations                          |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   | 35.1  |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  
|Net income                                       |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  | $ | 66.8  |  
|                                                 |  |                                              |       |                                  |   |       |                                            |  |   |       |   |  |   |       |  



|(9) | New Accounting Pronouncements
|--- | -----------------------------



In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections.
It replaces Accounting Principle Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting
for and reporting of a change in accounting principles. It requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based Compensation. It replaces SFAS No. 123,
Accounting for Stock Issued to Employees. SFAS No. 123(R) requires the compensation cost relating to share-based payment transactions be recognized in financial statements. It is required to be applied by us beginning
January 1, 2006. We intend to adopt SFAS No. 123(R) using the modified prospective application method which requires, among other things, that we recognize compensation cost for all awards outstanding at January 1, 2006, for which the
requisite service has not yet been rendered. Because we have used a fair value based method of accounting for stock-based compensation costs for all employee stock compensation awards granted, modified or



18



---

CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



settled since January 1, 2003, and do not expect to have significant unvested awards from periods prior to January 1, 2003 outstanding at
January 1, 2006, adoption of SFAS No. 123 (R) is not expected to have a material effect on our financial statements.



In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29. The amendments
made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured on the fair value of assets exchanged. The statement eliminates the exception for nonmonetary exchanges of similar productive assets and
replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.



Emerging Issues Task Force (EITF) Issue 04-5, Determining
Whether a General Partner or the General Partners, as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights was ratified by the FASB in June 2005. At issue is what rights held by the limited
partner(s) preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with U.S. generally accepted accounting principles. The assessment of limited partners rights and
their impact on the presumption of control of the limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (a) there is a change to the terms or in the
exercisability of the rights of the limited partners, (b) the sole general partner increases or decreases its ownership of limited partnership interests, or (c) there is an increase or decrease in the number of outstanding limited
partnership interests. This Issue is effective no later than for fiscal years beginning after December 15, 2005 and as of June 29, 2005 for new or modified arrangements. We do not expect that we will be required to consolidate any of our
current unconsolidated investments nor will this EITF have a material effect on our financial statements.



|(10) | Supplemental Cash Flow Information
|---- | ----------------------------------



We converted an investment in an unconsolidated entity to a $1.0 million note receivable during the nine months ended September 30, 2005.



We acquired $3.1 million of minority interest units which were redeemed
for shares of our common stock during the nine months ended September 30, 2004.



|(11) | Subsequent Event
|---- | ----------------



On October 4, 2005, a joint venture, which owns a 428,000 square foot building in Austin, Texas and in which we own 20% interest, disposed of its
sole operating property. We realized a gain of approximately $7.7 million, net of $4.0 million of tax, from the sale. We received cash proceeds from the sale of $16.6 million.



On October 7, 2005, we sold our remaining building in our Phoenix, Arizona portfolio for $11.7 million. We recognized a
$0.2 million impairment loss on this building in the second quarter of 2005 to write down this property to its estimated fair value.



19



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Managements Discussion and Analysis



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Introduction



The discussion that follows is based primarily on our consolidated financial statements as of September 30, 2005 and December 31, 2004 and for
the three and nine months ended September 30, 2005 and 2004 and should be read together with our consolidated financial statements and related notes appearing elsewhere in this report. The ability to compare one period to another may be
significantly affected by acquisitions completed, development properties placed in service and dispositions made during those periods.



After several years of adverse conditions in the commercial office real estate markets, vacancy rates peaked in the majority of our markets in 2003 and
then began to improve. At the end of the third quarter of 2005, vacancy rates in all of our markets were declining due to continuing positive net absorption. As a result of improved office job growth, we believe leasing activity is up significantly,
and we believe that market rental rates have stabilized in all of our markets and have improved in many of our markets including Washington, D.C. and Southern California. We anticipate rental economics will improve in most of our markets for the
discernable future.



Due to the improving market conditions
described above, occupancy in our portfolio of operating properties was 87.6% at September 30, 2005 compared to 87.8% at December 31, 2004 and 87.0% at September 30, 2004. If demand continues to improve in the balance of 2005, we
expect that our overall portfolio average occupancy may improve further. Our occupancy improved slightly in 2005 over 2004 due in part to acquisitions of properties with higher occupancies and dispositions of certain low occupancy properties. Our
same store (properties we owned in both years) occupancy was 87.3% at September 30, 2005 compared to 87.9% at September 30, 2004. In connection with terminating tenants in the three months ended September 30, 2005, we earned $1.5
million of termination fees compared to $1.3 million for the three months ended September 30, 2004. For the nine months ended September 30, 2005 and 2004, we earned termination fees of $3.3 million and $6.6 million, respectively. These
fees are non-recurring in nature and while we expect we will earn modest termination fees in the remainder of 2005, we expect that termination fees earned for 2005 will be substantially lower than in 2004.



Not withstanding the improving markets for office space and declining vacancy
rates in most of our markets, rental rates on space that was re-leased in 2005 decreased an average of 17.0% in comparison to rates that were in effect under expiring leases. While we believe market rental rates have stabilized and are improving in
many of our markets, rental rates on in-place leases in certain markets remain significantly above current market rental rates. We estimate that market rental rates on leased space expiring in the remainder of 2005 will be, on average, approximately
10%-12% lower than straight-lined rents on expiring leases. We have 0.5 million square feet of space on which leases are currently scheduled to expire in the remainder of 2005.



We are currently marketing or anticipate marketing several properties for sale. There can be no assurance any of these sales
will be consummated. We plan to use any proceeds resulting from the sale of any property for the acquisition of other properties or general corporate purposes, including the funding of dividends on our common and preferred stock and making
distributions to third party unitholders in certain of our subsidiaries.



We have decided, based on current returns and other market factors, that we will seek to sell our wholly-owned properties in Chicago and Denver. We expect to begin marketing these properties early in 2006. We intend
to reinvest the proceeds from the sale of Chicago and Denver in our other markets where we believe we will recognize a greater return on our invested capital. We have not yet begun to market these properties and, as a result, have not yet determined
their fair market value or expected sales prices. There can be no assurance that these dispositions will be consummated on favorable terms, if at all. A summary of the net book value of the assets and the operating results of our Chicago and Denver
properties as of and for the nine months ended September 30, 2005 is as follows:



20



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Managements Discussion and Analysis



|                           |  |                       |         |            |     |  
|-------------------------- |  | --------------------- | ------- | ---------- | --- | -
|                           |  | Amount (In thousands) |         | % of Total |    
|                           | 
|Assets (net book value)    |  | $                     | 246,573 |            | 7.8 | %
|Rental revenue             |  |                       | 26,155  |            | 7.7 | %
|Property operating income1 |  |                       | 16,199  |            | 7.4 | %

---

|1 | Property operating income is property operations revenueless property operating expenses.
|- | -----------------------------------------------------------------------------------------



During 2003 and continuing in 2004, we experienced increases in tenant improvement, lease incentive and leasing costs as
compared to historical levels as a result of competitive market conditions. We expect that tenant improvements and lease incentives will continue at high levels in 2005 due to increasing construction costs and continuing competitive market
conditions. Additionally, we expect to incur unusually high levels of tenant improvements, lease incentives and lease commissions due to the commencement of a 394,000 square foot lease in Washington, D.C. In connection with this lease, we expect to
incur approximately $5-6 million of lease incentives and lease commissions in 2005 ($1.0 million for the nine months ended September 2005) with an additional $23-27 million being incurred in 2006. The space was vacated on June 30,
2005 and was out of service during most of the third quarter as the space was being prepared for the new tenant. As of September 30, 2005, the tenant has occupied the majority of the space. We expect that the tenant will occupy the remaining
space early in the fourth quarter of 2005. In addition to high levels of lease incentives and commissions, we did not and will not recognize any revenue from this new lease for any of the space that is not in service.



In December 2003, our Board of Directors approved a plan to restructure the
manner in which we hold our assets by converting to what is commonly referred to as an umbrella partnership REIT, or UPREIT, structure. To effect the UPREIT restructuring, we formed CarrAmerica Realty Operating Partnership, L.P., or the Operating
Partnership, to which we contributed substantially all of our assets on June 30, 2004 in exchange for 100% of the units of common and preferred partnership interest in the Operating Partnership and the assumption by the Operating Partnership of
substantially all of our liabilities, including the assumption of the obligations under our unsecured credit facility and our senior unsecured notes. At September 30, 2005, we owned, directly or through a wholly-owned subsidiary, all of the
outstanding units of partnership interest of the Operating Partnership.



Since the UPREIT restructuring, substantially all of our business is conducted through the Operating Partnership and our primary asset is our interest in the Operating Partnership. We undertook the UPREIT restructuring to enable us to
better compete with other office REITs, many of which are structured as UPREITs, for the acquisition of properties from tax-motivated sellers. As a result of the UPREIT restructuring, the Operating Partnership can issue units of limited partnership
interest in the Operating Partnership to tax-motivated sellers who contribute properties to the Operating Partnership, thereby enabling those sellers to realize certain tax benefits that would be unavailable if we purchased properties directly for
cash.



General



During the nine months ended September 30, 2005 we completed the
following significant transactions:



| |  |  | We issued 2,649,000 shares of common stock with net proceeds of approximately $99.5 million.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | We retired $100.0 million of senior unsecured notes upon maturity with proceeds from our unsecured line of credit.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | We acquired six operating properties (12 buildings) with 815,000 rentable square feet for approximately $226.8 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | We had a partial sale of one operating property (seven buildings) with 1.0 million rentable square feet to a joint venture in exchange for a 20% interest and cash proceeds of
approximately $154.0 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We disposed of four operating properties (13 buildings) generating net proceeds of approximately $153.1 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | We entered into a new joint venture arrangement with institutional investors advised by JPMorgan Asset Management. The joint venture, in which we are a 20% partner, acquired a three
building 984,000 rentable square foot property in Addison, Texas for approximately $153.5 million. Our equity investment, net of debt used to finance the acquisition, was $10.4 million in cash.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A joint venture in which we are a 30% partner sold two floors of a building. We received cash of $6.5 million from the partial sale and recognized a gain of $1.7 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A joint venture in which we are a 35% partner sold a building. We received cash of $5.8 million and recognized a gain of $0.8 million on the sale.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



21



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Managements Discussion and Analysis



During the nine months ended September 30, 2004 we completed the following significant
transactions:



| |  |  | We issued $225.0 million principal amount of 3.625% senior unsecured notes in March 2004 with net proceeds of approximately $222.7 million which were used to pay down amounts
outstanding under our unsecured line of credit. The notes mature April 1, 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We entered into a $100.0 million interest rate swap in connection with the issuance of the 3.625% senior unsecured notes which qualifies for fair value hedge accounting.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued $200.0 million principal amount of 5.125% senior unsecured notes in August 2004 with net proceeds of approximately $197.2 million which were used to pay down amounts
outstanding under our unsecured line of credit. The notes mature on September 1, 2011.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We retired $150.0 million of senior unsecured notes with proceeds from our unsecured line of credit.
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | We disposed of 12 operating properties (17 buildings) generating net proceeds of approximately $201.7 million.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | We purchased 5 operating properties (11 buildings) with 1.2 million rentable square feet for $320.4 million.
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | We acquired a 20% interest in a joint venture for $13.1 million which purchased a $66.3 million operating property.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | We entered into a three year $500.0 million unsecured revolving credit agreement with JPMorgan Chase Bank as administrative agent for a syndicate of banks.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We completed our corporate restructuring.
| | - |  | -----------------------------------------



In a letter dated February 7, 2005 sent by the Chief Accountant of the Commission to the American Institute of Certified Public Accountants, the
Chief Accountant addressed a number of issues related to lease accounting by tenants. In that letter, the Chief Accountant indicated that leasehold improvements made by a tenant that are funded by landlord incentives or allowances under an operating
lease should in certain circumstances be recorded as leasehold improvement assets by the tenant. This letter caused REITs and their accounting firms to reevaluate their treatment of tenant improvements and lease incentives. Based upon the
implications of the Chief Accountants letter, we have concluded that if a tenant improvement is deemed to be owned by the tenant for accounting purposes then we must record the amounts funded to construct the tenant improvements as a lease
incentive instead of as a tenant improvement, and as a result, the amount funded would be amortized as a reduction of rental revenue rather than as an increase to depreciation expense. This change in presentation will have no effect on our net
income.



This consideration of the issues raised in the Chief
Accountants letter also resulted in examination of when revenue recognition under an operating lease should begin. Historically, we began to recognize revenue under a lease when possession or control of the space leased was turned over to our
tenant. In instances where our tenant contracted directly with third parties for their tenant improvement work, we determined that the tenant took possession of the space and we would begin recognizing revenue when we turned over the space to the
tenant to begin construction. However, after discussions with our registered independent public accounting firm, we have concluded that if we are the owner of the tenant improvements, for accounting purposes, revenue recognition cannot commence
until the leasehold improvements are substantially completed. In contrast, if we determine that the tenant allowances we are funding are lease incentives, then we will commence revenue recognition when possession or control of the space is turned
over to the tenant for construction to begin.



This change did
not have a material impact on or require a material adjustment to our audited financial statements for fiscal years ended on or before December 31, 2004 and for the nine months ended September 30, 2005.



Critical Accounting Policies and Estimates



Critical accounting policies and estimates are those that are both important
to the presentation of our financial condition and results of operations and require managements most difficult, complex or subjective judgments and that have the most significant impact on our financial condition and results of operations.
Our critical accounting policies and estimates relate to revenue recognition, estimating the depreciable lives of assets, evaluating the impairment of long-lived assets and investments, allocating the purchase cost of acquired properties and
evaluating the collectibility of accounts receivable.



22



---

Managements Discussion and Analysis



We commence revenue recognition on our leases based on a number of factors. In most cases, revenue
recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. In determining what constitutes the leased asset, we evaluate whether we or
the lessee is the owner, for accounting purposes, of the tenant improvements. If we are the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes
possession of the finished space, typically when the improvements are substantially complete. If we conclude we are not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved
space and any tenant improvement allowances funded under the lease are treated as lease incentives which reduces revenue recognized over the term of the lease. In these circumstances, we begin revenue recognition when the lessee takes possession of
the unimproved space for the lessee to construct their own improvements. The determination of who is the owner, for accounting purposes, of the tenant improvements determines the nature of the leased asset and when revenue recognition under a lease
begins. We consider a number of different factors to evaluate whether we or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:



| |  |  | whether the lease stipulates how and on what a tenant improvement allowance may be spent;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | whether the tenant or landlord retain legal title to the improvements;
| | - |  | ----------------------------------------------------------------------



| |  |  | the uniqueness of the improvements;
| | - |  | -----------------------------------



| |  |  | the expected economic life of the tenant improvements relative to the length of the lease; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | who constructs or directs the construction of the improvements.
| | - |  | ---------------------------------------------------------------



The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment. In making that determination we consider all of the
above factors. No one factor, however necessarily determines our conclusion.



If a lease provides for rent based on the resolution of contingencies, such as meeting a level of sales by the tenant, we defer rent associated with rental contingencies until the resolution of the contingency.



Depreciation of rental properties is computed on a
straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets by class are as follows:



|                                  |  |                                                                
|--------------------------------- |  | ---------------------------------------------------------------
|Base building                     |  | 5 to 50 years                                                  
|Building components               |  | 7 to 20 years                                                  
|Tenant improvements               |  | Lesser of the terms of the leases or useful lives of the assets
|Furniture, fixtures and equipment |  | 5 to 15 years                                                  



We make subjective
assessments as to the useful lives of our assets. These assessments have a direct impact on our net income. Should we lengthen the expected useful life of an asset, it would be depreciated over a longer period, resulting in less depreciation expense
and higher annual net income. Should we shorten the expected useful life of an asset, it would be depreciated over a shorter period, resulting in more depreciation expense and lower annual net income.



We assess the carrying value of our long-lived assets on a regular basis. If
events or changes in circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, we perform a recoverability analysis based on estimated undiscounted cash flows to be
generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property and related assets, such as tenant improvements, lease commissions and in-place lease intangibles,
are written down to estimated fair value and an impairment loss is recognized. If we decide to sell rental properties or land holdings, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the
carrying value is not recoverable from estimated net sales proceeds, the property and related assets are written down to estimated fair value less costs to sell and an impairment loss is recognized. Our estimates of cash flows and fair values of the
properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with
purchasers or prospective purchasers. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of additional impairment losses which, under applicable accounting
guidance, could be substantial. We are currently marketing or anticipate marketing several properties for sale. As a result, we have reduced our estimated holding periods for these properties. Of these properties, two, Quorum Place and 5000 Quorum
in Dallas, Texas, had book values in excess of the undiscounted cash flows we expect to receive from the operation and sale of the properties. We recognized impairment losses of $1.8 million and $2.2 million, respectively, on these two properties in
the first quarter of 2005.



23



---

Managements Discussion and Analysis



We allocate the purchase cost of acquired properties to the related physical assets and in-place
leases based on their fair values. The fair values of acquired office buildings are determined on an if-vacant basis considering a variety of factors, including the physical condition and quality of the buildings, estimated rental and
absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions. The if-vacant fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on
property tax assessments and other relevant information obtained in connection with the acquisition of the property.



The fair value of in-place leases includes the effect of leases with above or below market rents, where applicable, customer relationship value and the
cost of acquiring existing tenants at the date of acquisition. Above market and below market in-place lease values are determined on a lease-by-lease basis based on the present value (using an interest rate which reflects the risks associated with
the leases acquired) of the difference between (a) the contractual amounts to be paid under the lease and (b) our estimate of the fair market lease rate for the corresponding space over the remaining non-cancellable terms of the related
leases. The capitalized below market lease values are amortized as an increase to rental revenue over the initial term and any below market renewal periods of the related leases. Capitalized above market lease values are amortized as a decrease to
rental revenue over the initial term of the related leases. Customer relationship values are determined based on our evaluation of the specific characteristics of each tenants lease and our overall relationship with the tenant. Characteristics
we consider include the nature and extent of our existing business relationships with the tenant, prospects for developing new business with the tenant, the tenants credit quality and expectations of lease renewals. The value of customer
relationship intangibles is amortized to expense over the lesser of the initial lease term and any expected renewal periods or the remaining useful life of the building. We determine the fair value of the cost of acquiring existing tenants by
estimating the lease commissions avoided by having in-place tenants and the avoided lost operating income for the estimated period required to lease the space occupied by existing tenants at the acquisition date. The cost of acquiring existing
tenants is amortized to expense over the initial term of the respective leases. Should a tenant terminate its lease early, the unamortized portion of the in-place lease value is charged to expense. Changes in the assumptions used in the allocation
of the purchase cost among the acquired assets would affect the timing of recognition of the related revenue and expenses.



Our allowance for doubtful accounts receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular
emphasis on past-due accounts and considers information such as the nature and age of the receivable, the payment history of the tenant or other debtor, the amount of security we hold, the financial condition of the tenant and our assessment of its
ability to meet its lease obligations, the basis for any disputes and the status of related negotiations. Our estimate of the required allowance, which is reviewed by management on a quarterly basis, is subject to revision as these factors change
and is sensitive to the effects of economic and market conditions on our tenants, particularly in our largest markets (i.e., the San Francisco Bay and Washington, D.C. metropolitan areas).



Results Of Operations



Property Operating Revenue



Property operating revenue is composed of minimum base rent from our office
buildings, revenue from the recovery of operating expenses from our tenants and other revenue such as parking and termination fees.Property operating revenue is summarized as follows:



|                                 |  |                                          |      |          |   |               |                                         |   |          |   |      |   |               |  |   |       |  |   |      |  
|-------------------------------- |  | ---------------------------------------- | ---- | -------- | - | ------------- | --------------------------------------- | - | -------- | - | ---- | - | ------------- |  | - | ----- |  | - | ---- | -
|                                 |  | For the three months ended September 30, |      | Variance |   |               | For the nine months ended September 30, |   | Variance |  
|                                 |  |                                          |      |          |   |              
|(In millions)                    |  | 2005                                     |      | 2004     |   | 2005 vs. 2004 |                                         |   | 2005     |   | 2004 |   | 2005 vs. 2004 | 
|Minimum base rent                |  | $                                        | 93.0 |          | $ | 94.7          |                                         | $ | (1.7     | ) |      | $ | 285.8         |  | $ | 278.5 |  | $ | 7.3  |  
|Recoveries from tenants          |  |                                          | 14.1 |          |   | 14.5          |                                         |   | (0.4     | ) |      |   | 42.5          |  |   | 41.2  |  |   | 1.3  |  
|Parking and other tenant charges |  |                                          | 4.7  |          |   | 4.1           |                                         |   | 0.6      |   |      |   | 12.5          |  |   | 14.6  |  |   | (2.1 | )



24



---

Managements Discussion and Analysis



Occupancy in our consolidated buildings by market as of September 30, 2005 and 2004 was as
follows:



|               |  |                      |  |                    |  |                      |  |                |  |                      |   |  |                |  
|-------------- |  | -------------------- |  | ------------------ |  | -------------------- |  | -------------- |  | -------------------- | - |  | -------------- | -
|               |  | September 30, 2005   |  | September 30, 2004 |  | Variance             | 
|Market         |  | Rentable Sq. Footage |  | Percent Leased     |  | Rentable Sq. Footage |  | Percent Leased |  | Rentable Sq. Footage |   |  | Percent Leased |  
|               |  |                      |  |                    | 
|Washington, DC |  | 4,419,583            |  | 94.5               |  | 4,258,212            |  | 97.1           |  | 161,371              |   |  | (2.6           | )
|Chicago        |  | 1,222,573            |  | 63.5               |  | 1,225,117            |  | 62.2           |  | (2,544               | ) |  | 1.3            |  
|Dallas         |  | 998,120              |  | 84.5               |  | 1,005,668            |  | 84.3           |  | (7,548               | ) |  | 0.2            |  
|Austin         |  | 264,822              |  | 90.2               |  | 265,901              |  | 70.1           |  | (1,079               | ) |  | 20.1           |  
|Denver         |  | 899,185              |  | 97.6               |  | 904,717              |  | 92.3           |  | (5,532               | ) |  | 5.3            |  
|Phoenix        |  | 92,103               |  | 100.0              |  | 532,506              |  | 100.0          |  | (440,403             | ) |  |               |  
|Portland       |  | 275,193              |  | 84.5               |  | 275,193              |  | 81.8           |  |                     |   |  | 2.7            |  
|Seattle        |  | 1,743,747            |  | 78.9               |  | 1,496,957            |  | 79.5           |  | 246,790              |   |  | (0.6           | )
|Salt Lake City |  | 627,255              |  | 97.1               |  | 628,399              |  | 87.5           |  | (1,144               | ) |  | 9.6            |  
|San Francisco  |  | 5,307,928            |  | 86.5               |  | 6,176,169            |  | 85.9           |  | (868,241             | ) |  | 0.6            |  
|Los Angeles    |  | 548,821              |  | 82.7               |  | 659,604              |  | 78.6           |  | (110,783             | ) |  | 4.1            |  
|Orange County  |  | 781,785              |  | 98.9               |  | 970,608              |  | 95.4           |  | (188,823             | ) |  | 3.5            |  
|San Diego      |  | 1,505,425            |  | 88.2               |  | 1,307,574            |  | 86.5           |  | 197,851              |   |  | 1.7            |  
|               |  |                      |  |                    |  |                      |  |                |  |                      |   |  |                |  
|Total          |  | 18,686,540           |  | 87.6               |  | 19,706,625           |  | 87.0           |  | (1,020,085           | ) |  | 0.6            |  
|               |  |                      |  |                    |  |                      |  |                |  |                      |   |  |                |  



Minimum Base Rent



Minimum base rent decreased $1.7 million (1.8%) in the third quarter
of 2005 compared to 2004. The decrease in minimum base rent in 2005 was due primarily to space in Washington, D.C. that was out of service for the majority of the third quarter while it was being prepared for occupancy ($2.3 million), sold
properties ($6.0 million) and lower rental rates partially offset by rents from buildings acquired in 2005 and 2004 ($7.3 million).



Minimum base rent increased $7.3 million (2.6%) in the first nine months of 2005 compared to 2004. The increase in minimum base rent in 2005 was due
primarily to rents from buildings acquired in 2005 and 2004 ($25.4 million) partially offset by sales of properties ($12.7 million), space in Washington, D.C. that was out of service for the majority of the third quarter while it was being prepared
for occupancy ($2.3 million) and lower rental rates. We expect minimum base rent to be under downward pressure during the remainder of the year as a result of re-leasing space at significantly lower rates than those rates that were in effect under
expiring leases.



Our lease rollover by square footage and rent
at September 30, 2005 is as follows:



|                    |  |                     |  |            
|------------------- |  | ------------------- |  | -----------
|                    |  | Leased Sq. Footage1 |  | Rent ($000)
|                    | 
|2005                |  | 467,177             |  | 11,800     
|2006                |  | 2,541,608           |  | 67,198     
|2007                |  | 1,914,124           |  | 47,400     
|2008                |  | 2,178,993           |  | 43,503     
|2009                |  | 2,878,706           |  | 59,337     
|2010                |  | 1,736,473           |  | 35,729     
|2011                |  | 1,212,117           |  | 30,975     
|2012                |  | 1,025,790           |  | 26,409     
|2013                |  | 542,969             |  | 15,552     
|2014                |  | 501,973             |  | 10,215     
|2015 and thereafter |  | 1,366,200           |  | 34,066     
|                    |  |                     |  |            
|                    |  | 16,366,130          |  | 382,184    
|                    |  |                     |  |            

---

|1 | Does not include vacant space at 9/30/05 - 2.3 million sq. ft.
|- | --------------------------------------------------------------



Recoveries from Tenants



Recoveries from tenants decreased $0.4 million (2.8%) in the third
quarter of 2005 from 2004. The decrease in recoveries from tenants is primarily the result of the sales of properties and the space in Washington, D.C. that was out of service for the majority of the third quarter while it was being prepared for
occupancy partially offset by recoveries from tenants in buildings acquired in 2005 and 2004 ($1.5 million).



25



---

Managements Discussion and Analysis



Recoveries from tenants increased $1.3 million (3.2%) in the first nine months of 2005 from
2004. The increase in recoveries from tenants is primarily the result of recoveries from tenants in buildings acquired in 2005 and 2004 ($4.7 million) partially offset by sales of properties and the above-mentioned out of service space in
Washington, D.C.



Parking and Other Tenant Charges



Parking and other tenant charges increased $0.6 million (14.6%) in the
third quarter of 2005 from 2004 due primarily to higher parking and lease termination fees. Lease termination fees were $1.5 million in the third quarter of 2005 and $1.3 million in the third quarter of 2004. Parking and other tenant charges
decreased $2.1 million (14.4%) in the first nine months of 2005 from 2004 due primarily to a reduction in lease termination fees partially offset by increased parking fees principally from acquired properties. Lease termination fees were $3.3
million in 2005 and $6.6 million in 2004. Lease termination fees are paid by a tenant in exchange for our agreement to terminate the lease or pursuant to a termination provision in its lease document. Vacancies created as a result of these
terminations negatively impact future rents until the space is relet.



Property Expenses



Property expenses are
summarized as follows:



|                            |  |                                          |      |          |   |                                         |  |          |     |      |   |               |  |   |      |  |   |    
|--------------------------- |  | ---------------------------------------- | ---- | -------- | - | --------------------------------------- |  | -------- | --- | ---- | - | ------------- |  | - | ---- |  | - | ---
|                            |  | For the three months ended September 30, |      | Variance |   | For the nine months ended September 30, |  | Variance
|(In millions)               |  | 2005                                     |      | 2004     |   | 2005 vs. 2004                           |  | 2005     |     | 2004 |   | 2005 vs. 2004
|Property operating expenses |  | $                                        | 30.7 |          | $ | 29.8                                    |  | $        | 0.9 |      | $ | 90.5          |  | $ | 87.1 |  | $ | 3.4
|Real estate taxes           |  |                                          | 10.3 |          |   | 9.8                                     |  |          | 0.5 |      |   | 31.2          |  |   | 30.1 |  |   | 1.1



Property operating
expenses increased $0.9 million (3.0%) in the third quarter of 2005 from 2004 due primarily to expenses related to buildings acquired in 2005 and 2004 ($1.5 million) and increased operating services expenses ($2.5 million) partially offset by
sales of properties ($2.1 million) and lower bad debt expense ($1.1 million).



Property operating expenses increased $3.4 million (3.9%) in the first nine months of 2005 from 2004 due primarily to expenses related to buildings acquired in 2005 and 2004 ($4.9 million) and increased operating
services expenses ($5.7 million) partially offset by sales of properties ($4.1 million), lower insurance expense ($1.1 million) and lower bad debt ($1.4 million).



Real estate taxes increased $0.5 million (5.1%) in the third quarter of 2005 from 2004. The increase was due primarily
to the impact of property acquisitions ($0.8 million) partially offset by sales of properties ($0.8 million).



Real estate taxes increased $1.1 million (3.7%) in the first nine of 2005 from 2004. The increase was due primarily to the impact of property
acquisitions ($2.8 million) partially offset by sales of properties ($1.6 million).



Property Operating Income



Property operating
income is the performance measure used to assess the results of our real estate property operations segment. We believe that the presentation of property operating income is helpful to investors as a measure of the operating performance of our
office properties because it excludes items that do not relate to or are not indicative of operating performance of the properties (including interest and depreciation and amortization) and which can make periodic comparisons of operating
performance more difficult. Property operating income, defined as property operating revenue less property expenses, is summarized as follows:



26



---

Managements Discussion and Analysis



|                                  |  |                                          |      |   |          |   |      |                                         |  |   |          |   |  |      |       |   |      |   |       |   |  |   |      |  
|--------------------------------- |  | ---------------------------------------- | ---- | - | -------- | - | ---- | --------------------------------------- |  | - | -------- | - |  | ---- | ----- | - | ---- | - | ----- | - |  | - | ---- | -
|                                  |  | For the three months ended September 30, |      |   | Variance |   |      | For the nine months ended September 30, |  |   | Variance |  
|                                  |  |                                          |      |   | 2005 vs. |   |      |                                         |  |   | 2005 vs. |  
|(In millions)                     |  | 2005                                     |      |   | 2004     |   |      | 2004                                    |  |   | 2005     |   |  | 2004 |       |   | 2004 |  
|Property operating income         |  | $                                        | 70.8 |   |          | $ | 73.7 |                                         |  | $ | (2.9     | ) |  | $    | 219.1 |   |      | $ | 217.2 |   |  | $ | 1.9  |  
|Property operating income percent |  |                                          | 63.4 | % |          |   | 65.0 | %                                       |  |   | -1.6     | % |  |      | 64.3  | % |      |   | 65.0  | % |  |   | -0.7 | %



Property operating
income decreased $2.9 million (3.9%) in the third quarter of 2005 from 2004 due primarily to the impact of declining rental rates on new leases, sales of properties and the space in Washington, D.C. that was out of service for the majority of
the third quarter while it was being prepared for occupancy partially offset by the impact of properties acquired in 2005 and 2004. Property operating income as a percentage of property operations revenue was lower at 63.4% compared to 65.0% for the
third quarter of 2005 and 2004, respectively.



Property
operating income increased $1.9 million (0.9%) in the first nine of 2005 from 2004 due primarily to the impact of properties acquired in 2005 and 2004 partially offset by the impact of declining rental rates on new leases, sales of properties and
the space in Washington, D.C. that was out of service for the majority of the third quarter while it was being prepared for occupancy. Property operating income as a percentage of property operations revenue was slightly lower at 64.3% for the first
nine months of 2005 compared to 65.0% in 2004.



Real Estate Service Revenue



Real estate service revenue, which includes our third
party property management services and our development services, decreased $1.1 million in the third quarter of 2005 from 2004 and for the first nine months of 2005 compared to 2004 due to lower development and leasing fees.



General and Administrative Expense



General and administrative expense decreased $0.2 million in the third
quarter of 2005 as compared to 2004. The decrease was due primarily to lower payroll primarily as a result of the sale of our Atlanta portfolio in the third quarter of 2004.



General and administrative expense decreased $0.3 million in the first nine months of 2005 as compared to 2004. The decrease
was due to lower payroll primarily as a result of the sale of our Atlanta portfolio in the third quarter of 2004 offset by the settlement of litigation ($1.2 million) in the first quarter of 2005.



Depreciation and Amortization



Depreciation and amortization increased $2.7 million (8.5%) in the
third quarter of 2005 compared to the third quarter of 2004 and $11.1 million (12.2%) in the first nine months of 2005 compared to the first nine months of 2004. This increase was due primarily to the effects of the depreciation and
amortization related to buildings acquired in 2005 and 2004, including the amortization of certain related intangible assets.



Interest Expense



Interest expense increased $0.7 million (2.6%) during the third quarter of 2005 compared to 2004. This increase was due primarily to higher interest
rates ($1.7 million) partially offset by lower average levels of debt ($1.0 million) due to repayment of debt with proceeds from our stock offering in August 2005.



Interest expense increased $4.2 million (5.1%) during the first nine months of 2005 compared to 2004. This increase was
due primarily to higher average levels of debt outstanding ($3.2 million) as a result of our 2005 and 2004 property acquisitions partially offset by debt repayments with proceeds from our stock offering in August 2005, higher interest rates ($0.6
million) and lower capitalized interest ($0.4 million).



Other Income



Other income was $2.7 million in the third quarter of
2005 compared to $4.1 million in the third quarter of 2004 due primarily to lower equity in earnings of our unconsolidated joint ventures ($2.9 million) partially offset by increased interest income from our notes receivable ($1.5 million). In the
third quarter of 2004, Carr Office Park, LLC, a joint venture in which we have a 35% interest, recognized a $5.9 million termination settlement on a cancelled building development project with a third party. We recognized $2.1 million through equity
in earnings associated with this termination.



27



---

Managements Discussion and Analysis



Other income was $7.8 million in the first nine months of 2005 compared to $9.1 million in the first
nine months of 2004 due primarily to lower equity in earnings of our unconsolidated joint ventures ($4.6 million) partially offset by increased interest income from our notes receivable ($3.3 million). In the third quarter of 2004, Carr Office Park,
LLC, a joint venture in which we have a 35% interest, recognized a $5.9 million termination settlement on a cancelled building development project with a third party. We recognized $2.1 million in equity in earnings associated with this termination.



Gain on Sale of Properties and Discontinued Operations



The tables below summarize property sales for the nine
months ended September 30, 2005 and 2004:



|                                |  |           |  |                |  |                          |  |                       
|------------------------------- |  | --------- |  | -------------- |  | ------------------------ |  | ----------------------
|2005                           
|Property Name                   |  | Sale Date |  | Square Footage |  | NetCash Proceeds ($000)  |  | Gain Recognized ($000)
|                                |  |           | 
|Alton Deere                     |  | Mar-05    |  | 182,561        |  | 31,469                   |  | 9,002                 
|CarrAmerica Corporate Center(1) |  | Mar-05    |  | 1,004,679      |  | 153,986                  |  | 77,433                
|Westlake Spectrum*              |  | Apr-05    |  | 108,084        |  | 20,641                   |  | 3,773                 
|Hacienda*                       |  | Sep-05    |  | 207,518        |  | 37,287                   |  | 11,099                
|Phoenix*                        |  | Sep-05    |  | 440,403        |  | 63,676                   |  | 47                    
|                               
|2004                           
|Property Name                   |  | Sale Date |  | Square Footage |  | Net Cash Proceeds ($000) |  | Gain Recognized ($000)
|                                |  |           | 
|                                |  |           | 
|Tower of the Hills*             |  | Mar-04    |  | 166,149        |  | 10,512                   |  | 66                    
|Atlanta Portfolio*(2)           |  | Sep-04    |  | 1,696,757      |  | 191,190                  |  | 19,804                

---

|* | Included in discontinued operations
|- | -----------------------------------

|(1) | We retained a 20% interest in this property through joint venture.
|--- | ------------------------------------------------------------------

|(2) | 15 operating office buildings located in Atlanta, Georgia. The properties were Glenridge, Holcomb Place, Midori, Parkwood, Summit, Spalding Ridge, 2400 Lake Park Dr., 680
Engineering Dr., Embassy Row, Waterford and Forum
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the three months ended September 30, 2005, we disposed of our Hacienda property and three buildings in our Phoenix, Arizona portfolio. Prior to the sale of the Phoenix buildings, we recognized an impairment loss of $0.6 million
on the three buildings sold. We recognized gains of approximately $11.1 million on these transactions which are classified, along with their results of operations, as discontinued operations as we have no continuing involvement with the properties
after the sale. These sales have been treated as like-kind exchanges for income tax purposes. As a result, the proceeds from these sales, approximately $101.0 million are being held in escrow and are classified as restricted cash as of
September 30, 2005. All of these proceeds were released from escrow subsequent to the end of the third quarter and were used to pay down amounts outstanding under our line of credit. As of September 30, 2005, we have two properties under
contract for sale and which meet our criteria to be classified as held for sale, the remaining building in Phoenix and Sunrise Corporate Center in Reston, Virginia. We will continue to manage Sunrise Corporate Center after the sale and therefore,
its results of operations are included in continuing operations.



For the nine months ended September 30, 2005, we disposed of our Alton Deere, Westlake Spectrum, Hacienda properties and three buildings of our Phoenix, Arizona portfolio, recognizing gains of $23.9 million, $14.9 million of which is
classified as discontinued operations as we have no continuing involvement with Westlake Spectrum, Hacienda and the Phoenix buildings after the sale. Prior to the sale of the Phoenix buildings, we recognized an impairment loss of $0.6 million on the
three buildings sold. The sale of the Phoenix buildings and Hacienda are being treated for as like-kind exchanges for income tax purposes. As a result, the proceeds from these to sales, approximately $101.0 million are being held in escrow and are
classified as restricted cash as of September 30, 2005. All of these proceeds were released from escrow subsequent to the end of the third quarter and were used to pay down amounts outstanding under our line of credit.



28



---

Managements Discussion and Analysis



On March 31, 2005, we had a partial sale of CarrAmerica Corporate Center to a joint venture in return for a 19% interest in the venture and cash of
approximately $154.0 million. We recognized a gain of $77.4 million on the transaction. We funded $2.7 million of additional capital to this venture increasing our percentage ownership to 20% in the third quarter of 2005. We continue to manage Alton
Deere and CarrAmerica Corporate Center under management agreements and the gains on these sales and the operating results of these properties are not classified as discontinued operations due to our continuing involvement. In addition to these
sales, there were two sales in joint ventures. In June 2005, a joint venture in which we hold a 35% interest sold an office property. We received cash proceeds of $5.8 million and recognized a gain from this sale of $0.8 million which is classified
as continuing operations. In January 2005, a joint venture in which we are a 30% partner sold two floors of a building. We recognized a gain of $1.7 million on this transaction and received cash proceeds of $6.5 million.



During the three months ended September 30, 2004, we disposed of 15
office buildings in Atlanta, Georgia, exiting that market. The gain on this sale ($19.8 million) and the operating results of these properties are classified as discontinued operations as we had no continuing involvement with the properties after
the sale.



During the nine months ended September 30,
2004, we disposed of 15 office buildings in Atlanta, Georgia, exiting that market and our Tower of the Hills property. The gains on these sales ($19.9 million) and the operating results of these properties are classified as discontinued operations
as we had no continuing involvement with the properties after the sale. We had previously recognized an impairment loss of $3.0 million on Tower of the Hills in the fourth quarter of 2003.



As stated above, the operating results of our Tower of the Hills property
along with our Atlanta portfolio, which we sold in September 2004, First Street Technology and Valley Business Park I, which we sold in December 2004, Westlake Spectrum, which we sold in April 2005, our Hacienda property, which we sold in September
2005 and our Phoenix portfolio, three buildings of which were sold in September 2005, are classified as discontinued operations. As of September 30, 2005, the remaining building of our Phoenix, Arizona portfolio is under contract for sale and
meets our criteria to be classified as held for sale. After the sale, we will have no continuing involvement with this property and therefore, its results of operations are classified as discontinued operations. We recognized an impairment loss of
$0.2 million on the Phoenix property under contract during the second quarter of 2005. Operating results of the properties classified as discontinued operations are summarized as follows:



|                                                        |  |                                         |        |                                        |      |   |        |  |   |        |   |  |   |       
|------------------------------------------------------- |  | --------------------------------------- | ------ | -------------------------------------- | ---- | - | ------ |  | - | ------ | - |  | - | ------
|                                                        |  | For the three months endedSeptember 30, |        | For the nine months endedSeptember 30,
|(In thousands)                                          |  | 2005                                    |        |                                        | 2004 |   | 2005   |  |   | 2004  
|Revenue                                                 |  | $                                       | 3,665  |                                        |      | $ | 11,810 |  | $ | 11,790 |   |  | $ | 35,847
|Property expenses                                       |  |                                         | 682    |                                        |      |   | 3,941  |  |   | 2,059  |   |  |   | 11,934
|Depreciation and amortization                           |  |                                         | 740    |                                        |      |   | 1,341  |  |   | 2,850  |   |  |   | 8,661 
|                                                        |  |                                         |        |                                        |      |   |        |  |   |        |   |  |   |       
|Net operations of properties sold or held for sale      |  |                                         | 2,243  |                                        |      |   | 6,528  |  |   | 6,881  |   |  |   | 15,252
|Impairment loss                                         |  |                                         | (649   | )                                      |      |   |       |  |   | (859   | ) |  |   |      
|Gain on sale of properties                              |  |                                         | 11,165 |                                        |      |   | 19,804 |  |   | 14,938 |   |  |   | 19,870
|                                                        |  |                                         |        |                                        |      |   |        |  |   |        |   |  |   |       
|Discontinued operations                                 |  | $                                       | 12,759 |                                        |      | $ | 26,332 |  | $ | 20,960 |   |  | $ | 35,122
|                                                        |  |                                         |        |                                        |      |   |        |  |   |        |   |  |   |       
|Number of buildings included in discontinued operations |  |                                         | 6      |                                        |      |   | 26     |  |   | 8      |   |  |   | 28    
|                                                        |  |                                         |        |                                        |      |   |        |  |   |        |   |  |   |       



During the remainder
of 2005, we are currently marketing or anticipate marketing several properties for sale. As a result we have reduced our estimated holding periods for these properties. Of these properties, two, Quorum Place and 5000 Quorum in Dallas, Texas, had
book values in excess of the undiscounted cash flows we expect to receive from the operation and sale of the properties. As a result, we recognized impairment losses of $1.8 million and $2.2 million, respectively, on these two properties in the
first quarter of 2005 to write down these properties to their estimated fair value. None of the properties which we are marketing currently meet our criteria to be classified as held for sale or as discontinued operations.



29



---

Managements Discussion and Analysis



Consolidated Cash Flows



Consolidated cash flow information is summarized as follows:



|                                                |  |                                         |       |   |          |   |        |               |  |   |        |  
|----------------------------------------------- |  | --------------------------------------- | ----- | - | -------- | - | ------ | ------------- |  | - | ------ | -
|                                                |  | For the nine months ended September 30, |       |   | Variance |  
|(In millions)                                   |  | 2005                                    |       |   | 2004     |   |        | 2005 vs. 2004 | 
|Cash provided by operating activities           |  | $                                       | 97.8  |   |          | $ | 118.4  |               |  | $ | (20.6  | )
|Cash provided by (used in) investing activities |  |                                         | (68.2 | ) |          |   | (193.2 | )             |  |   | 125.0  |  
|Cash (used in) provided by financing activities |  |                                         | (27.8 | ) |          |   | 73.7   |               |  |   | (101.5 | )



Operations generated
$97.8 million of net cash for the first nine months of 2005 compared to $118.4 million in 2004. The change in cash flow from operating activities was primarily the result of fluctuations in working capital primarily in accounts payable and prepaid
and intangible assets and the factors discussed above in the analysis of operating results.



Our investing activities used net cash of $68.2 million in 2005 and $193.2 million in 2004. The change in cash used in investing activities in 2005 was due primarily to increased proceeds from sales of rental
properties ($117.7 million), reduced property acquisitions ($93.7 million), reduced rental property additions including tenant improvements and construction in progress ($6.3 million), increased distributions from unconsolidated entities ($1.1
million) and increased payments on notes receivable ($6.1 million) partially offset by increases in restricted cash ($100.5 million) due to tax deferred exchanges.



Our financing activities used net cash of $27.8 million in 2005 and provided net cash of $73.7 million in 2004. The change
in net cash from financing activities in 2005 was due primarily to a decrease in net borrowings of approximately $178.8 million, lower stock option exercises ($16.4 million) and higher dividends ($3.7 million) partially offset by common stock
issuance proceeds ($99.5 million).



LIQUIDITY AND CAPITAL
RESOURCES



General



Our primary sources of capital are our real estate operations and our
unsecured credit facility. As of September 30, 2005, we had approximately $6.6 million in cash and cash equivalents, $103.3 million of restricted cash and $107.6 million available for borrowing under our unsecured credit facility. We derive
substantially all of our revenue from tenants under leases at our properties. Our operating cash flow therefore depends materially on the rents that we are able to charge to our tenants, and the ability of these tenants to make their rental
payments.



Our primary uses of cash are to fund dividends to
stockholders and distributions to unitholders in certain of our subsidiaries, to fund capital investment in our existing portfolio of operating assets, and to fund new acquisitions and our development activities. As a REIT, we are required to
distribute at least 90% of our taxable income to our stockholders on an annual basis. We also regularly require capital to invest in our existing portfolio of operating assets in connection with large-scale renovations, routine capital improvements,
deferred maintenance on properties we have recently acquired, and our leasing activities, including funding tenant improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures can vary significantly depending on
negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases.



During the remainder of 2005, we expect that we will have significant capital requirements, including the following items. There can be no assurance that
our capital requirements will not be materially higher or lower than these expectations.



| |  |  | Funding dividends on our common and preferred stock and making distributions to third party unit holders in certain of our subsidiaries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately $30-40 million to invest in our existing portfolio of operating assets, including approximately $27-33 million of tenant-related capital requirements; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately $2-4 million to fund mezzanine loans we have committed to make in connection with two projects for which we are providing development management services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We expect to meet our capital requirements using
cash generated by our real estate operations, by borrowings on our unsecured credit facility, and from proceeds from the sale of properties. We could also raise additional debt or equity capital in the public market or fund acquisitions of
properties through property-specific mortgage debt.



30



---

Managements Discussion and Analysis



We believe that we will generate sufficient cash flow from operations and the possible disposition of assets and have
access to the capital resources necessary to expand and develop our business, to fund our operating and administrative expenses, to continue to meet our debt service obligations, to pay dividends in accordance with REIT requirements, to acquire
additional properties and land, and to pay for construction in progress. If we continue to maintain our dividend at its current rate in 2006, cash flows from operations less capital requirements will significantly exceed dividends and distributions.
We would expect to fund the shortfall through additional borrowings, the collection of existing notes receivable and/or potential dispositions in excess of property acquisitions. If we cannot raise the expected funds from the sale of properties
and/or if we are unable to obtain capital from other sources, we may not be able to pay the dividend required under the terms of our preferred stock or to maintain our status as a REIT, make required principal and interest payments, make strategic
acquisitions or make necessary routine capital improvements with respect to our existing portfolio of operating assets. Also if, as a result of general economic downturns, our credit rating is downgraded, rental rates on new leases continue to be
significantly lower than expiring leases or our properties do not otherwise perform as expected, we may not generate sufficient cash flow from operations or otherwise have access to capital on favorable terms, or at all. Any of these events could
have a material adverse effect on our liquidity, financial condition, results of operations and the trading prices of our securities. In addition, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage
payments, the holder of the mortgage could foreclose on the property, resulting in loss of income and asset value. An unsecured lender could also attempt to foreclose on some of our assets in order to receive payment. In most cases, very little of
the principal amount that we borrow is repaid prior to the maturity of the loan. We may refinance that debt when it matures, or we may pay off the loan. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of
other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing (such as possible reluctance of lenders to make commercial
real estate loans) may result in higher interest rates and increased interest expense.



Capital Structure



We manage our capital
structure to reflect a flexible long-term investment approach, generally seeking to match the stable return nature of our assets with a mix of equity and various debt instruments. We expect that our capital structure will allow us to obtain
additional capital from diverse sources that could include additional equity offerings of common stock and/or preferred stock, public and private debt financings and asset dispositions. Our ability to raise funds through sales of debt and equity
securities is dependent on, among other things, general economic conditions, general market conditions for REITs, rental rates, occupancy levels, market perceptions about us, our debt rating and the current trading price of our stock. We will
continue to analyze which sources of capital are most advantageous to us at any particular point in time, but the capital markets may not consistently be available on terms that are attractive or at all.



In December 2003, our Board of Directors approved a plan to restructure the
manner in which we hold our assets by converting to what is commonly referred to as an umbrella partnership REIT, or UPREIT, structure. To effect the UPREIT restructuring, we formed our Operating Partnership, to which we contributed substantially
all of our assets on June 30, 2004 in exchange for 100% of the units of common and preferred partnership interest in the Operating Partnership and the assumption by the Operating Partnership of substantially all of our liabilities, including
the assumption of the obligations under our unsecured credit facility and our senior unsecured notes. At September 30, 2005, we owned, directly or through a wholly-owned subsidiary, all of the outstanding units of partnership interest of the
Operating Partnership.



Since the UPREIT restructuring,
substantially all of our business is conducted through the Operating Partnership and our primary asset is our interest in the Operating Partnership. We undertook the UPREIT restructuring to enable us to better compete with other office REITs, many
of which are structured as UPREITs, for the acquisition of properties from tax-motivated sellers. As a result of the UPREIT restructuring, the Operating Partnership can issue units of limited partnership interest in the Operating Partnership to
tax-motivated sellers who contribute properties to the Operating Partnership, thereby enabling those sellers to realize certain tax benefits that would be unavailable if we purchased properties directly for cash.



The Operating Partnership is capitalized through the issuance of units. We
serve as the sole general partner of the Operating Partnership and currently own the general partnership interest and substantially all of the common limited partnership interest. Our wholly owned subsidiary, CarrAmerica OP, LLC, a Delaware limited
liability company, owns a nominal common limited partnership interest in the Operating Partnership. Together, we and CarrAmerica OP, LLC own a number of common units in the Operating Partnership equal to the number of shares of our common stock
outstanding. In connection with the UPREIT conversion, the Operating Partnership issued to us 8,050,000 Series E Cumulative Redeemable Preferred Partnership Units with terms that are substantially the same as the economic terms of our Series E
preferred stock.



31



---

Managements Discussion and Analysis



The Operating Partnership is managed by us as the sole general partner of the Operating Partnership.
Even if we in the future admit additional limited partners, as the sole general partner of the Operating Partnership, we will generally have the exclusive power under the partnership agreement to manage and conduct the business of the Operating
Partnership, subject to certain limited approval and voting rights of the limited partners, in most cases including us.



Real Estate Operations



After several years of adverse conditions in the commercial office real estate markets, vacancy rates peaked in the majority of our markets in 2003 and
then began to improve. At the end of the third quarter of 2005, vacancy rates in all of our markets were declining due to continuing positive net absorption. As a result of improved office job growth, we believe leasing activity is up significantly,
and we believe that market rental rates have stabilized in all of our markets and have improved in many of our markets including Washington, D.C. and Southern California. We anticipate rental economics will improve in most of our markets for the
discernable future.



Due to the improving market conditions
described above, occupancy in our portfolio of operating properties was 87.6% at September 30, 2005 compared to 87.8% at December 31, 2004 and 87.0% at September 30, 2004. If demand continues to improve in the balance of 2005, we
expect that our overall portfolio average occupancy may improve further. Our occupancy improved slightly in 2005 over 2004 due in part to acquisitions of properties with higher occupancies and dispositions of certain low occupancy properties. Our
same store (properties we owned in both years) occupancy was 87.3% at September 30, 2005 compared to 87.9% at September 30, 2004. In connection with terminating tenants in the three months ended September 30, 2005, we earned $1.5
million of termination fees compared to $1.3 million for the three months ended September 30, 2004. For the nine months ended September 30, 2005 and 2004, we earned termination fees of $3.3 million and $6.6 million, respectively. These
fees are non-recurring in nature and while we expect we will earn modest termination fees in the remainder of 2005, we expect that termination fees earned for 2005 will be substantially lower than in 2004.



Not withstanding the improving markets for office space and declining vacancy
rates in most of our markets, rental rates on space that was re-leased in 2005 decreased an average of 17.0% in comparison to rates that were in effect under expiring leases. While we believe market rental rates have stabilized and are improving in
many of our markets, rental rates on in-place leases in certain markets remain significantly above current market rental rates. We estimate that market rental rates on leased space expiring in the remainder of 2005 will be, on average, approximately
10%-12% lower than straight-lined rents on expiring leases. We have 0.5 million square feet of space on which leases are currently scheduled to expire in the remainder of 2005.



During the remainder of 2005, we are currently or anticipate marketing several properties for sale. There can be no
assurance any of these sales will be consummated. We plan to use any proceeds resulting from the sale of any property for the acquisition of other properties or general corporate purposes.



We have decided, based on current returns and other market factors, that we
will seek to sell our wholly-owned properties in Chicago and Denver. We expect to begin marketing these properties early in 2006. We intend to reinvest the proceeds from the sale of Chicago and Denver in our other markets where we believe we will
recognize a greater return on our invested capital. We have not yet begun to market these properties and, as a result, have not yet determined their fair market value or expected sales prices. There can be no assurance that these dispositions will
be consummated on favorable terms, if at all. A summary of the net book value of the assets and the operating results of our Chicago and Denver properties as of and for the nine months ended September 30, 2005 is as follows:



|                           |  |                      |         |           |     |  
|-------------------------- |  | -------------------- | ------- | --------- | --- | -
|                           |  | Amount(In thousands) |         | % ofTotal |    
|Assets (net book value)    |  | $                    | 246,573 |           | 7.8 | %
|Rental revenue             |  |                      | 26,155  |           | 7.7 | %
|Property operating income1 |  |                      | 16,199  |           | 7.4 | %

---

|1 | Property operating income is property operations revenueless property operating expenses.
|- | -----------------------------------------------------------------------------------------



During 2003 and continuing in 2004, we experienced increases in tenant improvement, lease incentive and leasing costs as
compared to historical levels as a result of competitive market conditions. We expect that tenant improvements and lease incentives will continue at high levels in 2005 due to increasing construction costs and continuing competitive market
conditions. Additionally, we expect to incur unusually high levels of tenant improvements, lease incentives and



32



---

Managements Discussion and Analysis



lease commissions due to the commencement of a 394,000 square foot lease in Washington, D.C. In connection with this lease, we expect to incur approximately
$5-6 million of lease incentives and lease commissions in 2005 ($1.0 for the nine months ended September 2005) with an additional $23-27 million being incurred in 2006. The space was vacated on June 30, 2005 and was out of service
during most of the third quarter as the space was being prepared for the new tenant. Base rental income associated with this lease was approximately $1.5 million per month. As of September 30, 2005, the tenant has occupied the majority of the
space. We expect that the tenant will occupy the remaining space early in the fourth quarter of 2005. In addition to high levels of lease incentives and commissions, we did not and will not recognize any revenue from the new lease for any of the
space that is not in service. The lease also includes eight months of abated rent and requires significant capital investment in tenant improvements, lease incentives and lease commissions. As a result, we expect the abatement of rent to have a
significant negative impact on our operating cash flows during the last quarter of 2005 and at least the first two quarters of 2006.



Debt Financing



We generally use unsecured, corporate-level debt, including senior unsecured notes and our unsecured credit facility, to meet our borrowing needs. As a
component of this financing strategy, we continue to unencumber our assets where possible by repaying existing mortgage debt with unsecured debt.



We generally use fixed rate debt instruments in order to match the returns from our real estate assets. We also utilize variable rate debt for short-term
financing purposes or to protect against the risk, at certain times, that fixed rates may overstate our long-term costs of borrowing if assumed inflation or growth in the economy implicit in higher fixed interest rates do not materialize. At times,
our mix of variable and fixed rate debt may not suit our needs. At those times, we use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing
our debt mix. We will either hedge our variable rate debt to give it a fixed interest rate or hedge fixed rate debt to give it a variable interest rate.



We have three investment grade ratings. As of September 30, 2005, Fitch Rating Services and Standard & Poors have each assigned their BBB
rating to our prospective senior unsecured debt offerings and their BBB- rating to our prospective cumulative preferred stock offerings. Moodys Investor Service has assigned its Baa2 rating with a stable outlook to our prospective senior
unsecured debt offerings and its Baa3 rating to our prospective cumulative preferred stock offerings. A downgrade in rating by any one of these rating agencies could result from, among other things, a change in our financial position or a downturn
in general economic conditions. Any such downgrade could adversely affect our ability to obtain future financing or could increase the interest rates on our existing variable rate debt. However, as of September 30, 2005, we have no debt
instruments under which the principal maturity would be accelerated upon a downward change in our debt rating.



Our total debt at September 30, 2005 and December 31, 2005 is summarized as follows:



|                                                                     |  |                    |           |   |                   |   |           |  
|-------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | -
|(In thousands)                                                       |  | September 30, 2005 |           |   | December 31, 2004 |  
|Fixed rate mortgages                                                 |  | $                  | 259,349   |   |                   | $ | 262,930   |  
|Notes payable                                                        |  |                    | 18,615    |   |                   |   | 19,228    |  
|Unsecured credit facility                                            |  |                    | 360,000   |   |                   |   | 295,000   |  
|Senior unsecured notes                                               |  |                    | 1,275,000 |   |                   |   | 1,375,000 |  
|                                                                     |  |                    |           |   |                   |   |           |  
|                                                                     |  |                    | 1,912,964 |   |                   |   | 1,952,158 |  
|                                                                     |  |                   
|Unamortized discount, fair value adjustment and swap settlement, net |  |                    | (12,343   | ) |                   |   | (11,028   | )
|                                                                     |  |                    |           |   |                   |   |           |  
|                                                                     |  | $                  | 1,900,621 |   |                   | $ | 1,941,130 |  
|                                                                     |  |                    |           |   |                   |   |           |  



Our fixed rate
mortgage debt bore an effective weighted average interest rate of 7.98% at September 30, 2005 and had a weighted average maturity of 3.5 years. $360.0 million (18.8%) of our total debt at September 30, 2005 bore a LIBOR-based variable
interest rate and $100.0 million (5.2%) of our debt was subject to variable interest rates through interest rate swap agreements. The interest rate on borrowings on our unsecured credit facility at September 30, 2005 was 4.51%.



We repaid $3.6 million of fixed rate mortgage debt in the first nine
months of 2005.



Our primary external source of liquidity is
our credit facility. On June 30, 2004, we entered into a new $500.0



33



---

Managements Discussion and Analysis



million, three year unsecured revolving credit facility with JPMorgan Chase Bank, as administrative agent for a syndicate of banks. The facility replaced and
was used to repay all amounts outstanding under our previous senior unsecured credit facility. We may increase the facility to $700.0 million by our request at any time within 24 months of the closing, provided the funding commitments are increased
accordingly. The facility can be extended one year at our option. The facility carries an interest rate of 65 basis points over 30-day LIBOR, or 4.51% as of September 30, 2005. As of September 30, 2005, $360.0 million was drawn on the
credit facility, $32.4 million in letters of credit were outstanding, and we had $107.6 million available for borrowing. Subsequent to the end of the third quarter, the amounts in restricted escrows from two property sales were released and we used
the monies to pay down our line of credit. As of October 13, 2005, $252.0 million was drawn on the credit facility, $32.4 million in letters of credit were outstanding, and we had $215.6 million available for borrowing.



Our unsecured credit facility contains financial and other covenants with
which we must comply. Some of these covenants include:



| |  |  | A minimum ratio of annual EBITDA (earnings before interest, taxes, depreciation and amortization) to interest expense of at least 2 to 1;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A minimum ratio of annual EBITDA to fixed charges of at least 1.5 to 1;
| | - |  | -----------------------------------------------------------------------



| |  |  | A maximum ratio of aggregate unsecured debt to tangible fair market value of our unencumbered assets of 60%;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | A maximum ratio of total secured debt to tangible fair market value of our assets of 30%;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | A maximum ratio of total debt to tangible fair market value of our assets of 60%; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Restrictions on our ability to make dividend distributions in excess of 90% of funds from operations or the minimum amount necessary to enable us to maintain our status as a REIT.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2005, we are in
compliance with all debt covenants related to our unsecured credit facility. For the remainder of 2005, we expect our minimum ratio of annual EBITDA to interest expense to be in compliance but relatively close to the minimum of 2 to 1 as a result of
space that was out of service related to a large new lease in Washington, D.C. and the delayed commencement of revenue recognition on leases that have been executed as a result of our change in how we recognize revenue. If circumstances change from
our current expectations, there can be no assurance we will remain in compliance with this or our other covenants. During the first quarter of 2005, we amended our credit facility, increasing the maximum ratio of total debt to tangible fair market
value of our assets to 60%. In addition, the capitalization rate used to compute the fair market value of our assets for purposes of calculating this ratio was decreased from 9.0% to 8.5% for properties located in the Washington, D.C. metropolitan
area. Our ability to draw on our unsecured credit facility or to incur other unsecured debt in the future could be restricted by the covenants.



We have senior unsecured notes outstanding at September 30, 2005 as follows:



|                         |  |               |           |                     |   |        |                                     |  |   |        |   |  |   |          
|------------------------ |  | ------------- | --------- | ------------------- | - | ------ | ----------------------------------- |  | - | ------ | - |  | - | ---------
|(In thousands)           |  | NotePrincipal |           | UnamortizedDiscount |   |        | SwapSettlement/Fair ValueAdjustment |  |   | Total 
|7.375% notes due in 2007 |  | $             | 125,000   |                     | $ | (253   | )                                   |  | $ |       |   |  | $ | 124,747  
|5.261% notes due in 2007 |  |               | 50,000    |                     |   | (65    | )                                   |  |   |       |   |  |   | 49,935   
|5.25% notes due in 2007  |  |               | 175,000   |                     |   | (585   | )                                   |  |   | (1,663 | ) |  |   | 172,752  
|3.625% notes due in 2009 |  |               | 225,000   |                     |   | (536   | )                                   |  |   | (4,250 | ) |  |   | 220,214  
|6.875% notes due in 2008 |  |               | 100,000   |                     |   | (998   | )                                   |  |   |       |   |  |   | 99,002   
|5.125% notes due in 2011 |  |               | 200,000   |                     |   | (532   | )                                   |  |   |       |   |  |   | 199,468  
|7.125% notes due in 2012 |  |               | 400,000   |                     |   | (3,461 | )                                   |  |   |       |   |  |   | 396,539  
|                         |  |               |           |                     |   |        |                                     |  |   |        |   |  |   |          
|                         |  | $             | 1,275,000 |                     | $ | (6,430 | )                                   |  | $ | (5,913 | ) |  | $ | 1,262,657
|                         |  |               |           |                     |   |        |                                     |  |   |        |   |  |   |          



All of the notes are
unconditionally guaranteed by CarrAmerica Realty, L.P., one of our subsidiaries.



Our senior unsecured notes also contain covenants with which we must comply. These covenants include:



| |  |  | Limits on our total indebtedness on a consolidated basis;
| | - |  | ---------------------------------------------------------



| |  |  | Limits on our secured indebtedness on a consolidated basis;
| | - |  | -----------------------------------------------------------



| |  |  | Limits on our required debt service payments; and
| | - |  | -------------------------------------------------



| |  |  | Compliance with the financial covenants of our credit facility.
| | - |  | ---------------------------------------------------------------



34



---

Managements Discussion and Analysis



We were in compliance with our senior unsecured notes covenants as of September 30, 2005.



$100.0 million of senior unsecured notes matured on
March 1, 2005 and were repaid on that date using borrowings from our unsecured credit facility.



Derivative Financial Instruments



On November 20, 2002, in conjunction with the issuance of $175.0 million of our 5.25% senior unsecured notes, we entered into interest rate swap agreements with JPMorgan Chase Bank, Bank of America, N.A. and
Goldman, Sachs & Co. Under the terms of these agreements, we received interest at a fixed rate of 5.25% and paid interest at a variable rate of six-month LIBOR in arrears plus 1.405%. The interest rate swaps matured at the same time the
notes were due. The swaps qualified as fair value hedges for accounting purposes. We recognized an increase in interest expense for the nine months ended September 30, 2005 of approximately $14,000 related to the swaps. We recognized a
reduction in interest expense for the three and nine months ended September 30, 2004 of approximately $0.6 million and $2.4 million, respectively, related to the swaps. On April 18, 2005, we terminated these swap agreements by paying
approximately $2.0 million. This payment is being amortized to interest expense over the remaining term of the senior unsecured notes which mature November 2007. The effective rate of interest on the notes giving effect to the swap termination is
5.69%.



On March 18, 2004, in conjunction with the
issuance of $225.0 million of our 3.625% senior unsecured notes, we entered into $100.0 million of interest rate swap agreements with JPMorgan Chase Bank and Bank of America, N.A. Under the terms of these agreements, we receive interest at a fixed
rate of 3.625% and pay interest at a variable rate of six-month LIBOR in arrears plus 0.2675%. The interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. As of
September 30, 2005, the fair value of the interest rate swaps was a payable of approximately $(4.3) million. We recognized an increase in interest expense for the three and nine months ended September 30, 2005 of approximately $0.3 million
and $0.6 million, respectively and a reduction in interest expense of approximately $0.4 million and $0.6 million for the three and nine months ended September 30, 2004, respectively, related to the swaps. As of September 30, 2005, taking
into account the effect of the interest rate swaps, the effective interest rate on $100.0 million of the notes was 4.36%.



On August 10, 2004, we entered into interest rate lock agreements with a notional amount of $150.0 million with JPMorgan Chase Bank, Goldman,
Sachs & Co. and Morgan Stanley in anticipation of our 5.125% $200.0 million senior unsecured note offering. We settled the interest rate locks on August 20, 2004 and paid $0.6 million to the counterparties. The interest rate locks
qualified as cash flow hedges and are being amortized to interest expense over the life of our senior unsecured notes due in 2011. During the three and nine months ended September 30, 2005, the impact of the interest rate locks on interest
expense was not material.



In January 2005, we purchased an
interest rate cap with a notional amount of $200.0 million and LIBOR capped at 7.5% which expires in February 2006.



Stock Issuance and Dividends



On August 5, 2005, we issued 2,649,000 shares of common stock. The net proceeds of the offering was approximately $99.5 million and was used to repay
a portion of the borrowings under our $500.0 million revolving credit facility and in turn fund current and potential acquisitions and other working capital and general corporate purposes including the funding of dividends on our common and
preferred stock and making distributions to third party unitholders in certain of our subsidiaries.



We currently intend to pay dividends quarterly. The maintenance of these dividends is subject to various factors, including the discretion of the Board of
Directors, the ability to pay dividends under Maryland law, the availability of cash to make the necessary dividend payments and the effect of REIT distribution requirements, which require at least 90% of our taxable income to be distributed to our
stockholders. The table below details our dividend and distribution payments for the three and nine months ended September 30, 2005 and 2004, respectively.



35



---

Managements Discussion and Analysis



|                          |  |                            |        |                           |   |        |  |      |         |  |   |        
|------------------------- |  | -------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                          |  | For the three months ended |        | For the nine months ended
|                          |  | September 30,              |        | September 30,            
|(In thousands)            |  | 2005                       |        | 2004                      |   | 2005   |  | 2004
|Preferred stock dividends |  | $                          | 3,773  |                           | $ | 3,773  |  | $    | 11,320  |  | $ | 11,319 
|Unit distributions        |  |                            | 2,777  |                           |   | 2,736  |  |      | 8,418   |  |   | 8,317  
|Common stock dividends    |  |                            | 29,233 |                           |   | 27,192 |  |      | 84,590  |  |   | 80,985 
|                          |  |                            |        |                           |   |        |  |      |         |  |   |        
|                          |  | $                          | 35,783 |                           | $ | 33,701 |  | $    | 104,328 |  | $ | 100,621
|                          |  |                            |        |                           |   |        |  |      |         |  |   |        



Cash flows from
operations is an important factor in our ability to sustain our common stock dividend at its current rate. Cash flows from operations decreased from $118.4 million in 2004 to $97.8 million in 2005 due primarily to fluctuations in working capital and
our results of operations. We expect our cash flows from operations to be lower in 2005 than 2004 while tenant improvements and lease incentives are expected to remain at elevated levels as a result of factors mentioned in the introduction to our
Managements Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 20 of this report, including but not limited to, lower expected lease termination fees, continued declines in rental rates compared to the
rates on expiring leases and costs associated with a new lease in Washington, D.C. for approximately 394,000 rentable square feet. This lease required the space to be taken out of service during most of the third quarter of 2005 for remodeling for
the new tenant. Also, the lease includes eight months of abated rent and requires significant capital investment in lease incentives and lease commissions. We expect that these factors will negatively impact our cash flows from operations and our
ability to satisfy our current common stock dividend payment level using cash flows from operations for the remainder of 2005 and at least the first two quarters of 2006. We currently expect to maintain our common stock dividend rate of $0.50 per
share in the fourth quarter of 2005. As a result, we expect to borrow under our line of credit and/or sell assets in order to maintain this rate. There can be no assurance that circumstances may not change and as a result of poorer than expected
operating results or the inability to obtain financing on favorable terms, or at all, that we will not later reduce our common stock dividend below the current rate. We generally are restricted from paying dividends that would exceed 90% of our
funds from operations during any four-quarter period. We expect that we will have adequate liquidity through our line of credit and from planned property dispositions to fund our dividend at its current rate.



Capital Commitments



We expect to incur unusually high levels of lease incentives and lease commissions due to the commencement of a 394,000
square foot lease in Washington, D.C and several other large leases. In connection with these leases, we expect to incur approximately $15-20 million of lease incentives and lease commissions during the remainder of 2005 with an additional
$28-36 million being incurred in 2006. We currently have no development projects underway, however a joint venture in which we hold a 20% interest, has a project under construction. This project is expected to cost $25.1 million, of which our
total investment is expected to be $5.0 million. Through September 30, 2005, approximately $2.7 million or 10.8% of total project costs had been expended on this project We expect that our credit facility and project-specific financing will
provide the additional funds required to complete this project and to finance the costs of additional projects we may undertake.



Unconsolidated Investments and Joint Ventures



We have investments in real estate joint ventures in which we hold 15%-50% interests. These investments are accounted for using the equity method and
therefore the assets and liabilities of the joint ventures are not included in our consolidated financial statements. Most of our real estate joint ventures own and operate office buildings financed by non-recourse debt obligations that are secured
only by the real estate and other assets of the joint ventures. We have no obligation to repay this debt and the lenders have no recourse to our other assets. As of September 30, 2005, we guaranteed $30.0 million of debt related to a joint
venture and have provided a completion guarantee related to a joint venture project for which total costs are anticipated to be $172.0 million, of which $141.8 million had been expended to date. We have not funded any amounts under these guarantees
and do not expect any funding will be required in the future.



Our investments in these joint ventures are subject to risks not inherent in our majority owned properties, including:



| |  |  | Absence of exclusive control over the development, financing, leasing, management and other aspects of the project;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Possibility that our co-venturer or partner might:
| | - |  | --------------------------------------------------



| |  |  | become bankrupt;
| | - |  | ----------------



36



---

Managements Discussion and Analysis



| |  |  | have interests or goals that are inconsistent with ours;
| | - |  | --------------------------------------------------------



| |  |  | take action contrary to our instructions, requests or interests (including those related to our qualification as a REIT for tax purposes); or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | otherwise impede our objectives; and
| | - |  | ------------------------------------



| |  |  | Possibility that we, together with our partners, may be required to fund losses of an investee.
| | - |  | -----------------------------------------------------------------------------------------------



In addition to making investments in these ventures, we provide construction management, leasing and property management,
development and architectural and other services to them. We earned fees for these services of $2.0 million and $3.1 million for the three months ended September 30, 2005 and 2004, respectively, and $6.5 million and $6.9 million for the nine
months ended September 30, 2005 and 2004, respectively. Accounts receivable from joint ventures and other affiliates were $1.3 million at September 30, 2005 and $1.8 million at September 30, 2004.



We have a minority ownership interest in a non-real estate operating company,
AgilQuest, which we account for using the cost method and in which we invested $2.8 million. We evaluate this investment regularly considering factors such as the companys progress against its business plans, its operating results and the
estimated fair value of its equity securities. Based on this evaluations, we recognized an impairment loss of $1.1 million on our investment in AgilQuest in 2003. In the future, additional impairment charges related to our investment may be
required. During the second quarter of 2005, we converted our equity investment in essention to a note receivable.



Off Balance Sheet Arrangements



Variable Interest Entities



During 2003, we provided mezzanine loans and guaranties to third-parties for development management projects. The purpose of these variable interest
entities (VIEs) is to build and own office buildings in Washington, D.C. Based upon our analysis, we believe that we are not the primary beneficiary of either entity and, accordingly, we do not consolidate them. Our maximum exposure to
loss as September 30, 2005 is $75.5 million, the sum of our notes receivable ($30.9 million) and the maximum exposure under the guaranties ($44.6 million).



In December 2004, we provided mezzanine financing to a third-party joint venture. This VIE owns property in Texas. Based upon our analysis, we believe
that we are not the primary beneficiary of this entity and, accordingly, we do not consolidate it. Our maximum exposure to loss as of September 30, 2005 is $13.8 million, the balance of our subordinated note receivable.



Guarantee Obligations



Our obligations under guarantee agreements at September 30, 2005 are summarized as follows:



|                  |  |                      |  |        |  |                  |            |                |   |        
|----------------- |  | -------------------- |  | ------ |  | ---------------- | ---------- | -------------- | - | -------
|Type of Guarantee |  | Project Relationship |  | Term   |  | Maximum Exposure |            | Carrying Value
|Loan1             |  | 575 7th Street       |  | Jan-06 |  | $                | 30,000,000 |                | $ |       
|Loan2             |  | Atlantic Building    |  | Mar-07 |  |                  | 25,000,000 |                |   | 160,000
|Completion3       |  | Atlantic Building    |  | Mar-07 |  |                  | 46,801,485 |                |   | 250,000
|Completion4       |  | Shakespeare Theatre  |  | Dec-06 |  |                  | 31,300,866 |                |   | 725,000
|Loan5             |  | 10UCP                |  | Nov-06 |  |                  | 1,015,000  |                |   |       
|Loan6             |  | Square 320           |  | Mar-06 |  |                  | 19,570,000 |                |   | 165,000

---

|1. | Loan guarantee relates to a joint venture in which we have a 30% interest and for which we are the developer. It is a payment guarantee to the lender on behalf of the joint venture.
If the joint venture defaults on the loan, we may be required to perform under the guarantee. We have a reimbursement guarantee from the other joint venture partner to repay us its proportionate share (70%) of any monies we pay under the
guarantee.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Loan guarantee relates to a third party project for which we are the developer. It is a payment guarantee to the lender. If the third party defaults on the loan, we may be required
to perform under the guarantee. We have a security interest in the third partys interest in the underlying property. The third party owns 100% of the property owning entity. We have a security interest in the property owning entity. In the
event of default, we can exercise our rights under the loan documents to foreclose on the membership interests of the property owning entity and sell such membership interest to mitigate our exposure under the guarantees.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Completion guarantee relates to a third party project for which we are the developer. It is a completion guaranty to the lender. If the third party defaults on its obligation to
construct the building, we may be required to perform. As long as there is no Event of Default under the loan agreement, the lender will continue to make funds available from the construction loan to complete the project.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Completion guarantee relates to a third party project for which we are the developer. It is a completion guaranty to the lender and/or owners. If the third party defaults on its
obligation to construct the building, we may be required to perform. As long as there is no Event of Default under the loan agreement, the lender will continue to make funds available from the construction loan to complete the project.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



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Managements Discussion and Analysis



|5. | Lease-up guarantee to a lender. Funds related to this guarantee are being held in escrow by a joint venture in which we own a minority interest.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Loan guarantee relates to a third party project for which we are the developer. It is a payment guarantee to the lender. If the third party defaults on the loan, we may be required
to perform under the guarantee. We have a security interest in the third partys interest in the underlying property. The third party owns 100% of the property owning entity. We have a security interest in the property owning entity. In the
event of default, we can exercise our rights under the loan documents to foreclose on the membership interests of the property owning entity and sell such membership interest to mitigate our exposure under the guarantees.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In the normal course of business, we guarantee our performance of services
or indemnify third parties against our negligence.



New Accounting
Pronouncements



In May 2005, the Financial Accounting
Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections. It replaces Accounting Principle Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principles. It requires retrospective application to prior periods financial
statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005.



In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Compensation. It replaces SFAS No. 123, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires the compensation cost relating to
share-based payment transactions be recognized in financial statements. It is required to be applied by us beginning January 1, 2006. We intend to adopt SFAS No. 123(R) using the modified prospective application method which requires,
among other things, that we recognize compensation cost for all awards outstanding at January 1, 2006, for which the requisite service has not yet been rendered. Because we have used a fair value based method of accounting for stock-based
compensation costs for all employee stock compensation awards granted, modified or settled since January 1, 2003, and do not expect to have significant unvested awards from periods prior to January 1, 2003 outstanding at January 1,
2006, adoption of SFAS No. 123 (R) is not expected to have a material effect on our financial statements.



In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29. The amendments
made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured on the fair value of assets exchanged. The statement eliminates the exception for nonmonetary exchanges of similar productive assets and
replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.



Emerging Issues Task Force (EITF) Issue 04-5,  Determining
Whether a General Partner or the General Partners, as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights was ratified by the FASB in June 2005. At issue is what rights held by the limited
partner(s) preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with U.S. generally accepted accounting principles. The assessment of limited partners rights and
their impact on the presumption of control of the limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (a) there is a change to the terms or in the
exercisability of the rights of the limited partners, (b) the sole general partner increases or decreases its ownership of limited partnership interests, or (c) there is an increase or decrease in the number of outstanding limited
partnership interests. This Issue is effective no later than for fiscal years beginning after December 15, 2005 and as of June 29, 2005 for new and modified arrangements. We do not expect that we will be required to consolidate any of our
current unconsolidated investments nor will this EITF have a material effect on our financial statements.



Funds from Operations



Funds from Operations (FFO) is a widely used measure of operating performance for real estate companies. We provide FFO as a supplement to net income calculated in accordance with accounting principles generally accepted in the
United States of America (GAAP). Although FFO is a widely used measure of operating performance for equity REITs, FFO does not represent net income calculated in accordance with GAAP. As such, it should not be considered an alternative
to net income as an indication of our operating performance. In addition, FFO does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered
as an alternative to cash flow from operating activities, determined in accordance with GAAP as a measure



38



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Managements Discussion and Analysis



of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. FFO is defined by the
National Association of Real Estate Investment Trusts (NAREIT) as follows:



| |  |  | Net income - computed in accordance with GAAP;
| | - |  | ----------------------------------------------



| |  |  | Less gains (or plus losses) from sales of operating properties and items that are classified as extraordinary items under GAAP;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Plus depreciation and amortization of assets uniquely significant to the real estate industry;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



We believe that FFO is helpful to investors as a measure of our performance
because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as gains and losses on sales of real estate and real estate related depreciation and amortization, which can make
periodic comparison of operating performance more difficult. Our management believes, however, that FFO, by excluding such items, which can vary among owners of similar assets in similar condition based on historical cost accounting and useful life
estimates, can help compare the operating performance of a companys real estate between periods or as compared to different companies. Our FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in
accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than us.



The following table provides the calculation of our FFO and a reconciliation of FFO to net income for the periods presented:



|                                                                                         |  |                                         |         |   |                                         |   |         |      |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | --------------------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                                                         |  | For the three months endedSeptember 30, |         |   | For the nine months ended September 30, |  
|(In thousands)                                                                           |  | 2005                                    |         |   | 2004                                    |   |         | 2005 |  |   | 2004     |  
|Net income                                                                               |  | $                                       | 13,627  |   |                                         | $ | 37,556  |      |  | $ | 120,537  |   |  | $ | 66,793  |  
|                                                                                         |  |                                         |         |  
|Adjustments                                                                              |  |                                         |         |   |                                         |   |         |      |  |   |          |   |  |   |         |  
|Minority interest                                                                        |  |                                         | 3,396   |   |                                         |   | 2,192   |      |  |   | 7,164    |   |  |   | 6,357   |  
|FFO allocable to Unitholders                                                             |  |                                         | (3,100  | ) |                                         |   | (3,653  | )    |  |   | (10,253  | ) |  |   | (10,713 | )
|Depreciation and amortization                                                            |  |                                         | 38,545  |   |                                         |   | 35,316  |      |  |   | 112,442  |   |  |   | 106,070 |  
|Minority interests' (non-Unitholders share of depreciation, amortization and net income) |  |                                         | (256    | ) |                                         |   | (258    | )    |  |   | (804     | ) |  |   | (798    | )
|Gain on sale of properties                                                               |  |                                         | (11,196 | ) |                                         |   | (19,804 | )    |  |   | (103,726 | ) |  |   | (19,812 | )
|                                                                                         |  |                                         |         |   |                                         |   |         |      |  |   |          |   |  |   |         |  
|FFO as defined by NAREIT1                                                                |  | $                                       | 41,016  |   |                                         | $ | 51,349  |      |  | $ | 125,360  |   |  | $ | 147,897 |  
|                                                                                         |  |                                         |         |   |                                         |   |         |      |  |   |          |   |  |   |         |  

---

|1 | FFO as defined by NAREIT includes impairment losses on real estate.
|- | -------------------------------------------------------------------



FORWARD-LOOKING STATEMENTS



Statements contained in this Form 10-Q which are not historical facts may be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the Exchange Act). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Such statements
(none of which is intended as a guarantee of performance) are subject to certain risks and uncertainties, which could cause our actual future results, achievements or transactions to differ materially from those projected or anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. A number of important factors could cause actual results to differ materially from those indicated by
the forward-looking statements, including, but not limited to, the risks described in our annual report on Form 10-K for the year ended December 31, 2004. Such factors include, among others:



| |  |  | National and local economic, business and real estate conditions that will, among other things, affect:
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Demand for office space,
| | - |  | ------------------------



| |  |  | The extent, strength and duration of any economic recovery, including the effect on demand for office space and the creation of new office development,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Availability and creditworthiness of tenants,
| | - |  | ---------------------------------------------



| |  |  | The level of lease rents, and
| | - |  | -----------------------------



| |  |  | The availability of financing for both tenants and us;
| | - |  | ------------------------------------------------------



39



---

Managements Discussion and Analysis



| |  |  | Adverse changes in the real estate markets, including, among other things:
| | - |  | --------------------------------------------------------------------------



| |  |  | The extent of tenant bankruptcies, financial difficulties and defaults,
| | - |  | -----------------------------------------------------------------------



| |  |  | The extent of future demand for office space in our core markets and barriers to entry into markets which we may seek to enter in the future,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The extent of the decreases in rental rates,
| | - |  | --------------------------------------------



| |  |  | Our ability to identify and consummate attractive acquisitions on favorable terms,
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Our ability to successfully complete and lease development projects on time and within budget,
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Our ability to consummate any planned dispositions in a timely manner on acceptable terms, and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Changes in operating costs, including real estate taxes, utilities, insurance and security costs;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Actions, strategies and performance of affiliates that we may not control or companies in which we have made investments;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to obtain insurance at a reasonable cost;
| | - |  | -------------------------------------------------



| |  |  | Ability to maintain our status as a REIT for federal and state income tax purposes;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Ability to raise capital;
| | - |  | -------------------------



| |  |  | Effect of any terrorist activity or other heightened geopolitical risks;
| | - |  | ------------------------------------------------------------------------



| |  |  | Governmental actions and initiatives; and
| | - |  | -----------------------------------------



| |  |  | Environmental/safety requirements.
| | - |  | ----------------------------------



For further discussion of these and other factors that could impact our future results, performance, achievements or transactions, see the documents we file from time to
time with the Commission, and in particular, the section titled The Company  Risk Factors on page 12 of our annual report on Form 10-K for the year ended December 31, 2004.



40



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Managements Discussion and Analysis



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Our future earnings and cash flows and the fair values of our financial instruments are dependent upon prevailing market rates. Market risk associated
with financial instruments and derivative and commodity instruments is the risk of loss from adverse changes in market prices or rates. We manage our risk by matching projected cash inflows from operating activities, financing activities and
investing activities with projected cash outflows to fund debt payments, acquisitions, capital expenditures, dividends, distributions and other cash requirements. We may also use derivative financial instruments at times to limit market risk.
Derivative financial instruments may be used to convert variable rate debt to a fixed rate basis, to convert fixed rate debt to a variable rate basis or to hedge anticipated financing transactions. We use derivative financial instruments only for
hedging purposes, and not for speculation or trading purposes.



On November 20, 2002, in conjunction with the issuance of $175.0 million of our 5.25% senior unsecured notes, we entered into interest rate swap agreements with JPMorgan Chase Bank, Bank of America, N.A. and Goldman, Sachs &
Co. Under the terms of these agreements, we received interest at a fixed rate of 5.25% and paid interest at a variable rate of six-month LIBOR in arrears plus 1.405%. The interest rate swaps matured at the same time the notes were due. The swaps
qualified as fair value hedges for accounting purposes. We recognized an increase in interest expense for the nine months ended September 30, 2005 of approximately $14,000 related to the swaps. We recognized a reduction in interest expense for
the three and nine months ended September 30, 2004 of approximately $0.6 million and $2.4 million, respectively, related to the swaps. On April 18, 2005, we terminated these swap agreements by paying approximately $2.0 million. This
payment is being amortized to interest expense over the remaining term of the senior unsecured notes which mature November 2007. The effective rate of interest on the notes giving effect to the swap termination is 5.69%.



On March 18, 2004, in conjunction with the issuance of $225.0 million of
our 3.625% senior unsecured notes, we entered into $100.0 million of interest rate swap agreements with JPMorgan Chase Bank and Bank of America, N.A. Under the terms of these agreements, we receive interest at a fixed rate of 3.625% and pay interest
at a variable rate of six-month LIBOR in arrears plus 0.2675%. The interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. As of September 30, 2005, the fair value of the
interest rate swaps was a payable of approximately $(4.3) million. We recognized an increase in interest expense for the three and nine months ended September 30, 2005 of approximately $0.3 million and $0.6 million, respectively and a reduction
in interest expense of approximately $0.4 million and $0.6 million for the three and nine months ended September 30, 2004, respectively, related to the swaps. As of September 30, 2005, taking into account the effect of the interest rate
swaps, the effective interest rate on $100.0 million of the notes was 4.36%.



On August 10, 2004, we entered into interest rate lock agreements with a notional amount of $150.0 million with JPMorgan Chase Bank, Goldman, Sachs & Co. and Morgan Stanley in anticipation of our 5.125%
$200.0 million senior unsecured note offering. We settled the interest rate locks on August 20, 2004 and paid $0.6 million to the counterparties. The interest rate locks qualified as cash flow hedges and are being amortized to interest expense
over the life of our senior unsecured notes due in 2011. During the three and nine months ended September 30, 2005, the impact of the interest rate locks on interest expense was not material.



In January 2005, we purchased an interest rate cap with a notional amount of
$200.0 million and LIBOR capped at 7.5% which expires in February 2006.



Our unsecured line of credit carries an interest rate of 30-day LIBOR plus 0.65%. This exposes us to the risk of higher interest costs if 30-day LIBOR should increase above its current low levels. A 10% increase in the current interest rate
would have increased interest expense on the line of credit approximately $1.0 million for the first nine months of 2005.



If the market rates of interest on our interest rate swap agreements increase by 10% (or approximately 49 basis points), our interest expense would have
increased by approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2005, respectively.



Any other significant changes in our market risk that have occurred since the filing of our Annual Report on Form 10-K for the year ended
December 31, 2004 are summarized in the Liquidity and Capital Resources section of the Managements Discussion and Analysis of Financial Condition and Results of Operations on page 30 of this report.



41



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Managements Discussion and Analysis



Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness as of September 30, 2005 of the design and operation
of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.



Changes in Internal Controls over Financial Reporting



There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.



42



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Part II



OTHER INFORMATION



Item 1. Legal Proceedings



We are party to a variety of other legal proceedings arising in the ordinary course of business. All of these matters, taken together, are not expected to have a material adverse impact on us.



Item 6. Exhibits



|     |  |                                                                                                                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Schedule of CarrAmerica Realty Corporation Board of Directors Annual Compensation (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K, dated July 28,
2005)                    
|     | 
|10.2 |  | Eighth Amendment to CarrAmerica Realty Corporation 1997 Stock Option and Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K, dated July 28,
2005)   
|     | 
|10.3 |  | Ninth Amendment to CarrAmerica Realty Corporation 1997 Stock Option and Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K, dated July 28,
2005)    
|     | 
|10.4 |  | Underwriting Agreement, dated as of August 2, 2005 by and between the Company and Goldman, Sachs & Co. (incorporated by reference to Exhibit 1.1 to the Companys Form 8-K, dated
August 4, 2005)
|     | 
|10.5 |  | Terms Agreement, dated as of August 2, 2005 by and between the Company and Goldman, Sachs & Co. (incorporated by reference to Exhibit 1.2 to the Companys Form 8-K, dated August 4,
2005)       
|     | 
|31.1 |  | Section 302 Certification from Mr. Thomas A. Carr, dated November 1, 2005                                                                                                                        
|     | 
|31.2 |  | Section 302 Certification from Mr. Stephen E. Riffee, dated November 1, 2005                                                                                                                     
|     | 
|32.1 |  | Section 906 Certification from Mr. Thomas A. Carr and Mr. Stephen E. Riffee, dated November 1, 2005                                                                                              



43



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SIGNATURES



Pursuant to the requirements 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.



CARRAMERICA REALTY CORPORATION



|                                                                              
|------------------------------------------------------------------------------
|/s/ Kurt A. Heister                                                           
|Kurt A. Heister, Senior Vice President, Controller and Treasurer              
|(on behalf of the registrant and as the registrants chief accounting officer)



Date: November 1, 2005



44