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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 March 31, 2003



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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification 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



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N/A

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



Number of shares outstanding of each of the registrants

classes of common stock, as of April 30, 2003:



Common Stock, par value $.01 per share: 51,877,080 shares



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 ̈



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##### Table of Contents



Index



|                              |  |                                                                                                                                                         |  | Page    
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|Part I: Financial Information |  |                                                                                                                                                        
|                             
|Item 1.                       |  | Financial Statements                                                                                                                                    |  |         
|                             
|                              |  | Consolidated balance sheets of CarrAmerica Realty Corporation and subsidiaries as of March 31, 2003 (unaudited) and December 31, 2002                   |  | 4       
|                             
|                              |  | Consolidated statements of operations of CarrAmerica Realty Corporation and subsidiaries for the three months ended March 31, 2003 and 2002 (unaudited) |  | 5       
|                             
|                              |  | Consolidated statements of cash flows of CarrAmerica Realty Corporation and subsidiaries for the three months ended March 31, 2003 and 2002 (unaudited) |  | 6       
|                             
|                              |  | Notes to consolidated financial statements (unaudited)                                                                                                  |  | 7 to 15 
|                             
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                   |  | 16 to 30
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                              |  | 31      
|                             
|Item 4.                       |  | Controls and Procedures                                                                                                                                 |  | 31      
|                             
|Part II: Other Information    |  |                                                                                                                                                        
|                             
|Item 1.                       |  | Legal Proceedings                                                                                                                                       |  | 32-33   
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                        |  | 33      



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##### Table of Contents

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 three months ended March 31, 2003 are not necessarily indicative of the operating results to be expected for the full year.





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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets As Of March 31, 2003
and December 31, 2002



|                                                                                                                                                                                                                                                  |  | March 31, 2003 |           |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | -
|(In thousands, except share and per share amounts)                                                                                                                                                                                                |  | (unaudited)    |           |   |                   |  
|Assets                                                                                                                                                                                                                                            |  |                |           |   |                   |  
|Rental property:                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|Land                                                                                                                                                                                                                                              |  | $              | 669,034   |   |                   | $
|Buildings                                                                                                                                                                                                                                         |  |                | 1,976,611 |   |                   |  
|Tenant improvements                                                                                                                                                                                                                               |  |                | 371,176   |   |                   |  
|Furniture, fixtures and equipment                                                                                                                                                                                                                 |  |                | 4,264     |   |                   |  
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|                                                                                                                                                                                                                                                  |  |                | 3,021,085 |   |                   |  
|Less: Accumulated depreciation                                                                                                                                                                                                                    |  |                | (596,762  | ) |                   |  
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|Total rental property                                                                                                                                                                                                                             |  |                | 2,424,323 |   |                   |  
|                                                                                                                                                                                                                                                 
|Land held for development or sale                                                                                                                                                                                                                 |  |                | 45,298    |   |                   |  
|Construction in progress                                                                                                                                                                                                                          |  |                | 6,574     |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                                                         |  |                | 5,274     |   |                   |  
|Restricted deposits                                                                                                                                                                                                                               |  |                | 1,960     |   |                   |  
|Accounts and notes receivable, net                                                                                                                                                                                                                |  |                | 16,444    |   |                   |  
|Investments in unconsolidated entities                                                                                                                                                                                                            |  |                | 128,211   |   |                   |  
|Accrued straight-line rents                                                                                                                                                                                                                       |  |                | 77,037    |   |                   |  
|Tenant leasing costs, net                                                                                                                                                                                                                         |  |                | 43,421    |   |                   |  
|Prepaid expenses and other assets, net                                                                                                                                                                                                            |  |                | 50,093    |   |                   |  
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|                                                                                                                                                                                                                                                  |  | $              | 2,798,635 |   |                   | $
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|Liabilities, Minority Interest, and Stockholders
Equity                                                                                                                                                                                          |  |                |           |   |                   |  
|                                                                                                                                                                                                                                                 
|Liabilities:                                                                                                                                                                                                                                      |  |                |           |   |                   |  
|Mortgages and notes payable, net                                                                                                                                                                                                                  |  | $              | 1,672,713 |   |                   | $
|Accounts payable and accrued expenses                                                                                                                                                                                                             |  |                | 85,361    |   |                   |  
|Rent received in advance and security deposits                                                                                                                                                                                                    |  |                | 37,189    |   |                   |  
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|Total liabilities                                                                                                                                                                                                                                 |  |                | 1,795,263 |   |                   |  
|                                                                                                                                                                                                                                                 
|Minority interest                                                                                                                                                                                                                                 |  |                | 76,144    |   |                   |  
|                                                                                                                                                                                                                                                 
|Stockholders equity:                                                                                                                                                                                                                             |  |                |           |   |                   |  
|Preferred stock, $.01 par value, authorized 35,000,000 shares:Series B, C, and D
Cumulative Redeemable Preferred Stock, at redemption value, issued and outstanding, 1,602,650 shares at March 31, 2003 and 3,622,589 shares at December 31, 2002 |  |                | 200,634   |   |                   |  
|Common Stock, $.01 par value, authorized 180,000,000 shares: issued and outstanding
51,850,900 shares at March 31, 2003 and 51,835,647 shares at December 31, 2002.                                                                               |  |                | 519       |   |                   |  
|Additional paid-in capital                                                                                                                                                                                                                        |  |                | 946,804   |   |                   |  
|Cumulative dividends in excess of net income                                                                                                                                                                                                      |  |                | (220,729  | ) |                   |  
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|Total stockholders equity                                                                                                                                                                                                                        |  |                | 927,228   |   |                   |  
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  
|Commitments and contingencies                                                                                                                                                                                                                     |  |                |           |   |                   |  
|                                                                                                                                                                                                                                                  |  | $              | 2,798,635 |   |                   | $
|                                                                                                                                                                                                                                                  |  |                |           |   |                   |  







See accompanying notes to consolidated financial statements.





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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES



Consolidated Statements of Operations

For the Three Months Ended March 31, 2003 and 2002



|                                                                                                                               |  | Three Months Ended March 31, |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | -------
|                                                                                                                               |  | 2003                         |        
|(Unaudited and in thousands, except per share amounts)                                                                         |  |                              |        
|Operating revenues:                                                                                                            |  |                              |        
|Rental revenue:                                                                                                                |  |                              |        
|Base rent                                                                                                                      |  | $                            | 105,763
|Recoveries from tenants                                                                                                        |  |                              | 16,052 
|Parking and other tenant charges                                                                                               |  |                              | 5,988  
|                                                                                                                               |  |                              |        
|Total rental revenue                                                                                                           |  |                              | 127,803
|Real estate service revenue                                                                                                    |  |                              | 5,555  
|                                                                                                                               |  |                              |        
|Total operating revenues                                                                                                       |  |                              | 133,358
|                                                                                                                               |  |                              |        
|Operating expenses:                                                                                                            |  |                              |        
|Property expenses:                                                                                                             |  |                              |        
|Operating expenses                                                                                                             |  |                              | 32,374 
|Real estate taxes                                                                                                              |  |                              | 12,000 
|Interest expense                                                                                                               |  |                              | 25,537 
|General and administrative                                                                                                     |  |                              | 10,286 
|Depreciation and amortization                                                                                                  |  |                              | 32,010 
|                                                                                                                               |  |                              |        
|Total operating expenses                                                                                                       |  |                              | 112,207
|                                                                                                                               |  |                              |        
|Real estate operating income                                                                                                   |  |                              | 21,151 
|                                                                                                                               |  |                              |        
|Other income (expense):                                                                                                        |  |                              |        
|Interest income                                                                                                                |  |                              | 98     
|Obligations under lease guarantees                                                                                             |  |                              |       
|Equity in earnings of unconsolidated entities                                                                                  |  |                              | 1,327  
|                                                                                                                               |  |                              |        
|Total other income (expense)                                                                                                   |  |                              | 1,425  
|                                                                                                                               |  |                              |        
|Income from continuing operations before income taxes, minority interest, and loss on
sale of assets and other provisions, net |  |                              | 22,576 
|Income taxes                                                                                                                   |  |                              | (252   
|Minority interest                                                                                                              |  |                              | (3,076 
|Loss on sale of assets and other provisions, net                                                                               |  |                              | (277   
|                                                                                                                               |  |                              |        
|Income from continuing operations                                                                                              |  |                              | 18,971 
|                                                                                                                               |  |                              |        
|Discontinued operationsNet operations of sold property                                                                        |  |                              |       
|                                                                                                                               |  |                              |        
|Net income                                                                                                                     |  | $                            | 18,971 
|                                                                                                                               |  |                              |        
|Basic net income per common share:                                                                                             |  |                              |        
|Continuing operations                                                                                                          |  | $                            | 0.26   
|Discontinued operations                                                                                                        |  |                              |       
|                                                                                                                               |  |                              |        
|Net income                                                                                                                     |  | $                            | 0.26   
|                                                                                                                               |  |                              |        
|Diluted net income per common share:                                                                                           |  |                              |        
|Continuing operations                                                                                                          |  | $                            | 0.26   
|Discontinued operations                                                                                                        |  |                              |       
|                                                                                                                               |  |                              |        
|Net income                                                                                                                     |  | $                            | 0.26   
|                                                                                                                               |  |                              |        



See
accompanying notes to consolidated financial statements.





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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2003 and 2002





|                                                                                                                                       |  | 2003 |         |   | 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|(Unaudited and in thousands)                                                                                                           |  |      |        
|Cash flows from operating activities:                                                                                                  |  |      |         |   |      |  
|Net income                                                                                                                             |  | $    | 18,971  |   |      | $
|Adjustments to reconcile net income to net cash provided by operating
activities:                                                      |  |      |         |   |      |  
|Depreciation and amortization                                                                                                          |  |      | 32,010  |   |      |  
|Minority interest                                                                                                                      |  |      | 3,076   |   |      |  
|Equity in earnings of unconsolidated entities                                                                                          |  |      | (1,327  | ) |      |  
|Loss on sale of assets and other provisions, net                                                                                       |  |      | 277     |   |      |  
|Obligations under lease guarantees                                                                                                     |  |      |        |   |      |  
|Provision for uncollectible accounts                                                                                                   |  |      | 1,871   |   |      |  
|Stock-based compensation                                                                                                               |  |      | 1,171   |   |      |  
|Other                                                                                                                                  |  |      | (188    | ) |      |  
|Changes in assets and liabilities:                                                                                                     |  |      |         |   |      |  
|Decrease in accounts receivable                                                                                                        |  |      | 2,650   |   |      |  
|Increase in accrued straight-line rents                                                                                                |  |      | (2,153  | ) |      |  
|Additions to tenant leasing costs                                                                                                      |  |      | (2,704  | ) |      |  
|Increase in prepaid expenses and other assets                                                                                          |  |      | (1,174  | ) |      |  
|Decrease in accounts payable and accrued expenses                                                                                      |  |      | (14,734 | ) |      |  
|Increase (decrease) in rent received in advance and security deposits                                                                  |  |      | 1,599   |   |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Total adjustments                                                                                                                      |  |      | 20,374  |   |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Net cash provided by operating activities                                                                                              |  |      | 39,345  |   |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Cash flows from investing activities:                                                                                                  |  |      |         |   |      |  
|Acquisition and development of rental property                                                                                         |  |      | (7,972  | ) |      |  
|Additions to land held for development or sale                                                                                         |  |      | (520    | ) |      |  
|Additions to construction in progress                                                                                                  |  |      | (3,777  | ) |      |  
|Issuance of notes receivable                                                                                                           |  |      | (654    | ) |      |  
|Distributions from unconsolidated entities                                                                                             |  |      | 835     |   |      |  
|Investments in unconsolidated entities                                                                                                 |  |      | (544    | ) |      |  
|Acquisition of minority interest                                                                                                       |  |      | (220    | ) |      |  
|Decrease (increase) in restricted deposits                                                                                             |  |      | 2,545   |   |      |  
|Proceeds from sales of properties                                                                                                      |  |      | 162     |   |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Net cash used by investing activities                                                                                                  |  |      | (10,145 | ) |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Cash flows from financing activities:                                                                                                  |  |      |         |   |      |  
|Repurchase of common shares                                                                                                            |  |      | (7,858  | ) |      |  
|Repurchase of preferred shares                                                                                                         |  |      | (53,953 | ) |      |  
|Exercises of stock options                                                                                                             |  |      | 1,381   |   |      |  
|Proceeds from issuance of unsecured notes, net                                                                                         |  |      |        |   |      |  
|Net borrowings (repayments) on unsecured credit facility                                                                               |  |      | 96,000  |   |      |  
|Deferred financing costs                                                                                                               |  |      |        |   |      |  
|Repayments of mortgages payable                                                                                                        |  |      | (28,045 | ) |      |  
|Dividends and distributions to minority interests                                                                                      |  |      | (34,474 | ) |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Net cash used by financing activities                                                                                                  |  |      | (26,949 | ) |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Increase in cash and cash equivalents                                                                                                  |  |      | 2,251   |   |      |  
|Cash and cash equivalents, beginning of the period                                                                                     |  |      | 3,023   |   |      |  
|                                                                                                                                       |  |      |         |   |      |  
|Cash and cash equivalents, end of the period                                                                                           |  | $    | 5,274   |   |      | $
|                                                                                                                                       |  |      |         |   |      |  
|Supplemental disclosure of cash flow information:                                                                                      |  |      |         |   |      |  
|Cash paid for interest (net of capitalized interest of $424 and $872 for the three
months ended March 31, 2003 and 2002, respectively) |  | $    | 37,926  |   |      | $
|                                                                                                                                       |  |      |         |   |      |  
|Cash paid (refunds) for income taxes                                                                                                   |  | $    | (59     | ) |      | $
|                                                                                                                                       |  |      |         |   |      |  



See
accompanying notes to consolidated financial statements.

|
|





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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
as a corporation under the laws of Maryland. We focus on the acquisition, development, ownership and operation of office properties, located in selected markets across the United States.



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



The financial statements have been prepared using the accounting policies described in our 2002 annual report on Form 10-K except that,
effective January 1, 2003, we began using the fair value method to account for employee stock compensation awards. The effect of the change on the financial statements was immaterial.



Our accounts and those of our controlled subsidiaries and affiliates are consolidated in the financial
statements. 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 indicated 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 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 accounting principles generally accepted in the United States of America. Significant estimates are required in a number of areas, including the evaluation of
impairment of long-lived assets and equity and cost method investments, assessing our probable liability under lease guarantees for HQ Global Workplaces, Inc. and the evaluation of the collectibility of accounts and notes receivable. Actual results
could differ from these estimates.



| | (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.



| | (d) |  | New Accounting Pronouncements
| | --- |  | -----------------------------



In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation requires recognition of liabilities at their fair value for newly issued guarantees. The Interpretation requires certain
disclosures, which we have included in note 4. The adoption of Interpretation No. 45 on January 1, 2003 did not have a material effect on our financial statements.



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

(Unaudited)



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and requires disclosure in both annual and
interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. 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 and, accordingly, the method is being applied for all employee stock compensation awards granted, modified or settled on or
after January 1, 2003.



In January 2003, the
FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation addresses the consolidation of variable interest entities (VIEs) in which the equity investors lack one or more of the
essential characteristics of a controlling financial interest or where the equity investment at risk is not sufficient for the entity to finance its activities without subordinated financial support from other parties. The Interpretation applies to
VIEs created after January 31, 2003 and to VIEs in which we acquire an interest after that date. Effective July 1, 2003, it also applies to VIEs in which we acquired an interest before February 1, 2003. We may apply the Interpretation prospectively,
with a cumulative effect adjustment as of July 1, 2003, or by restating previously issued financial statements with a cumulative effect adjustment as of the beginning of the first year restated. We are in the process of evaluating the effects of
applying Interpretation No. 46 in 2003. Based on our preliminary analysis, we believe that we may be required to consolidate certain of our unconsolidated real estate ventures that we have accounted for using the equity method; however, we do not
expect that this will involve any cumulative effect adjustment. We also do not believe that this will have a material adverse effect on our financial condition.



| | (e) |  | Earnings Per Share
| | --- |  | ------------------



The following table sets forth information relating to the computations of our basic and diluted earnings per share from continuing
operations.



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

(Unaudited)





|                                                     |  | Three Months EndedMarch 31, 2003         |        | Three Months EndedMarch 31, 2002
|---------------------------------------------------- |  | ---------------------------------------- | ------ | --------------------------------
|                                                     |  | Income (Numerator)                       |        | Shares (Denominator)            
|                                                     |  | (In thousands, except per share amounts)
|Basic EPS                                            |  | $                                        | 13,628 |                                 
|                                                     |  |                                          |        |                                 
|Effect of Dilutive Securities                        |  |                                          |        |                                 
|Adjustment to dividends on unvested restricted stock |  |                                          | 37     |                                 
|Stock options                                        |  |                                          |       |                                 
|Convertible preferred stock                          |  |                                          |       |                                 
|                                                     |  |                                          |        |                                 
|Diluted EPS                                          |  | $                                        | 13,665 |                                 
|                                                     |  |                                          |        |                                 



Income
from continuing operations has been reduced by preferred stock dividends and dividends for unvested restricted stock of approximately $5,343,000 and $8,548,000 for the three months ended March 31, 2003 and 2002, respectively.



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



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



We manage our capital structure to reflect a 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 mainly 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 may use derivative financial instruments, including interest rate caps and swaps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We either will hedge our
variable rate debt to give it a fixed interest rate or hedge fixed rate debt to give it a variable interest rate.



Under interest rate cap agreements, we make initial premium payments to the counterparties in exchange for the right to receive payments
from them if interest rates exceed specified levels during the agreement period. Under interest rate swap agreements, we and the counterparties agree to exchange the difference between fixed rate and variable rate interest amounts calculated by
reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less.
Parties to interest rate cap and swap agreements are subject to market risk for changes in interest rates and credit risk in the event of nonperformance by the counterparty. We do not require any collateral under these agreements but deal only with
highly rated institutional counterparties and do not expect that any counterparties will fail to meet their obligation.



Derivative financial instruments are recognized as either assets or liabilities on the balance sheet at their fair value. Subject to
certain qualifying conditions, we may designate a derivative as either a hedge of the cash flows from a variable rate debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a fixed rate debt instrument (fair
value hedge). For those derivatives designated as a cash flow hedge, we report the fair value gains and losses in accumulated other comprehensive income in stockholders equity to the extent the hedge is effective. We recognize these fair value
gains or losses in earnings during the period(s) in which the hedged item affects earnings. For a derivative qualifying as a fair value hedge, we report fair value gains and losses in earnings along with fair value gains or losses on



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CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

(Unaudited)



the hedge item attributable to the risk being hedged. Most of our derivative financial instruments qualify as a fair value hedge. Derivatives
that do not qualify for hedge accounting are marked to market through earnings. Amounts receivable or payable under interest rate cap and swap agreements are accounted for as adjustments to interest expense on the related debt.



On May 8, 2002, we entered into an interest rate swap
agreements with JP Morgan Chase and Bank of America, N.A. hedging $150.0 million of senior unsecured notes due July 2004. We receive interest at a fixed rate of 7.2% and pay interest at a variable rate of six-month LIBOR in arrears plus 2.72%. The
interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. The fair value of the interest rate swaps is recognized on our balance sheet and the carrying value of the senior
unsecured notes is increased or decreased by an offsetting amount. As of March 31, 2003, the fair value of the interest rate swaps was approximately $4.9 million. We recognized a reduction in interest expense for the three months ended March 31,
2003 of approximately $1.2 million related to the swaps. As of March 31, 2003, taking into account the effect of the interest rate swaps, the effective interest rate on the notes was reduced to 3.9%.



On November 20, 2002, in conjunction with the issuance of
$175.0 million of senior unsecured notes, we entered into interest rate swap agreements with JP Morgan Chase, Bank of America, N.A. and Goldman Sachs & Co. We receive interest at a fixed rate of 5.25% and pay interest at a variable rate of
six-month LIBOR in arrears plus 1.405%. The interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. The fair value of the interest rate swaps is recognized on our balance sheet
and the carrying value of the senior unsecured notes is increased or decreased by an offsetting amount. As of March 31, 2003, the fair value of the interest rate swaps was approximately $2.9 million. We recognized a reduction in interest expense for
the three months ended March 31, 2003 of approximately $1.5 million related to the swaps. As of March 31, 2003, taking into account the effect of the interest rate swaps, the effective interest rate on the notes was reduced to 2.6%.



As part of the assumption of $63.5 million of debt associated
with the purchase of two operating properties in August 2002, we purchased interest rate caps with a notional amount of $97.0 million and LIBOR capped at 6.75%. As of March 31, 2003, the fair market value of these interest rate caps was not
material.



| | (g) |  | 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 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 1997 and 2002.



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Notes to Consolidated Financial Statements

(Unaudited)





|                                                                               |  | Three Months Ended March 31, |       
|------------------------------------------------------------------------------ |  | ---------------------------- | ------
|                                                                               |  | 2003                         |       
|(In thousands, except per share data)                                          |  |                              |       
|Net income as reported                                                         |  | $                            | 18,971
|Stock-based compensation cost from stock option plans included in net
income   |  |                              | 19    
|Stock-based compensation cost from restricted unit plan included in net
income |  |                              | 1,152 
|Fair value of stock-based compensation                                         |  |                              | (1,760
|                                                                               |  |                              |       
|Pro forma net income                                                           |  | $                            | 18,382
|                                                                               |  |                              |       
|Earnings per share as reported:                                                |  |                              |       
|Basic                                                                          |  | $                            | 0.26  
|Diluted                                                                        |  |                              | 0.26  
|Earnings per share, pro forma:                                                 |  |                              |       
|Basic                                                                          |  | $                            | 0.25  
|Diluted                                                                        |  |                              | 0.25  



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



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



|(2) |  | HQ Global Workplaces, Inc.
|--- |  | --------------------------



In 1997, we began making investments in HQ Global Workplaces, Inc. (HQ Global), a provider of executive office suites. On June
1, 2000, we, along with HQ Global, VANTAS Incorporated (VANTAS) and FrontLine Capital Group (FrontLine), consummated several transactions including (i) the merger of VANTAS with and into HQ Global, (ii) the acquisition by FrontLine of shares of HQ
Global common stock from us and other stockholders of HQ Global, and (iii) the acquisition by VANTAS of our debt and equity interests in OmniOffices (UK) Limited and OmniOffices LUX 1929 Holding Company S.A. We received $377.3 million in cash in
connection with these transactions. In addition, $140.5 million of debt which we had guaranteed was repaid with a portion of the cash proceeds. Following the transaction, we owned approximately 16% of the equity of HQ Global on a diluted basis and
our investment had a carrying value of $42.2 million. In 2001, based on a number of considerations, we recorded an impairment charge that reduced the carrying value of our remaining investment in HQ Global to zero.



On March 13, 2002, HQ Global filed for bankruptcy protection
under Chapter 11 of the federal bankruptcy laws. During 1997 and 1998, to assist HQ Global as it grew its business, we provided guarantees of HQ Globals performance under four office leases. To our knowledge, all monthly rent payments were
made by HQ Global under two of these leases through January 2002, and rental payments under the other two leases were made through February 2002.



In the course of its bankruptcy proceedings, HQ Global has filed motions to reject two of these four leases. One lease was for
approximately 22,000 square feet of space at two adjacent buildings in San Jose, California. Our liability under this guarantee was limited to approximately $2.0 million. We reached an agreement with the landlord of this lease under which we paid
$1.75 million in full satisfaction of the guarantee in January 2003. We recognized this expense in 2002.



The second lease that was rejected by HQ Global is a sublease for space in downtown Manhattan. This lease is for approximately 26,000
square feet of space and runs through March 2008, with total aggregate remaining lease payments as of February 1, 2002 of approximately $5.4 million. In June 2002, we received a demand for payment of the full amount of the guarantee. However, we
believe that we have defenses to payment under this guarantee available to us and joined with HQ Global in filing suit on July 24, 2002 in HQ Globals bankruptcy proceedings asking the bankruptcy court to declare that the lease was terminated
by the landlord of the sublease not later than February 28, 2002. On July 26, 2002, the landlord under the sublease filed suit in federal court in New York seeking payment from us under this guarantee. In light of our defenses and these proceedings,
we have not



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Notes to Consolidated Financial Statements

(Unaudited)



accrued any expense relating to this guarantee; however, there can be no assurance as
to the outcome of the pending litigation or that we will not incur expense or be required to make cash payments relating to this guarantee up to the full amount of the guarantee. As of March 31, 2003, we had not made any payments under this
guarantee.



HQ Global has not filed a motion
seeking to reject the remaining two leases that we have guaranteed, although it could do so in the future. Even if the leases are not rejected, we may ultimately be liable to the lessors for payments due under the leases. In one case, the lease is
for approximately 25,000 square feet of space in midtown Manhattan, and our liability is currently capped at approximately $0.5 million, which liability reduces over the life of the lease until its expiration in September 2007. As of March 31, 2003,
we have not accrued any expense related to or made any payments under this guarantee.



The remaining lease is for space in San Mateo, California. This lease is for approximately 19,000 square feet of space and runs through January 2013, with total aggregate remaining lease payments as of
March 1, 2002 of approximately $10.4 million. We initially recognized an expense of $0.4 million under this guarantee in the first quarter of 2002 based on a tentative agreement with HQ Global under which HQ Global would not reject this lease
obligation and we would fund HQ Globals operating losses at this location for a limited period of time. Due to deteriorating conditions in the local commercial real estate market, HQ Global subsequently determined that the tentative agreement
was not in its best interest. HQ Global indicated to us that it intended to reject this lease unless its rent was reduced to current market rates. As an interim measure, we entered into an agreement with HQ Global as of June 30, 2002 to fund
operating losses at this location up to an aggregate amount of $130,000 in exchange for HQ Global forbearing from rejecting this lease until September 15, 2002, or, if it obtained from the bankruptcy court an extension of time within which to reject
leases, November 1, 2002. Because the bankruptcy court has since twice extended the time period within which HQ Global may reject this lease to May 9, 2003, we have twice extended the existing forbearance agreement in exchange for funding operating
losses up to an additional aggregate amount of $245,000. As a result of our efforts to mitigate our exposure under this guarantee, we entered into agreements with HQ Global in January 2003 under which HQ Global assigned its interest as a tenant in
this lease to us and we in turn subleased the space back to HQ Global at current market rates. These agreements remain subject to approval by the bankruptcy court. In addition, these agreements will not be enforceable if HQ Global fails to
successfully reorganize and emerge from the bankruptcy proceedings. There can be no assurance that the necessary approvals will be granted, that material changes to the agreements will not be required to gain approvals, or that HQ Global will
successfully reorganize and emerge from the bankruptcy proceedings. We increased our provision for loss under this guarantee to $6.9 million in the second quarter of 2002 and this amount plus accrued interest continues to represent the amount we
have determined to be our likely exposure under this guarantee as of March 31, 2003. However, there can be no assurance that we will not be required to further increase our provision or make cash payments related to this guarantee in future periods
up to, in the aggregate, the full amount of the guarantee. As of March 31, 2003, we had not made any payments under this guarantee.



|(3) |  | Gain on Sale of Assets and Other Provisions, Net and Discontinued Operations
|--- |  | ----------------------------------------------------------------------------



We occasionally dispose of assets that are inconsistent with
our long-term strategic or return objectives. During the three months ended March 31, 2003 and 2002, we did not dispose of any operating properties. For the three months ended March 31, 2002, we recognized an impairment loss of $0.9 million on a
land holding.



In August 2002, we sold Commons at
Las Colinas in which we had no continuing involvement after the sale. The results of operations of the property are classified as discontinued operations.



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Notes to Consolidated Financial Statements

(Unaudited)





|(4) |  | Guarantees
|--- |  | ----------



Our obligations under guarantee agreements at March 31, 2003 are summarized as follows:



|Type of Guarantee |  | Project Relationship |  | Term   |  | Maximum Exposure |            | Carrying Value
|----------------- |  | -------------------- |  | ------ |  | ---------------- | ---------- | --------------
|Loan1             |  | 575 7th Street       |  | Apr-05 |  | $                | 40,000,000 |               
|Loan2             |  | Atlantic Building    |  | Dec-03 |  |                  | 21,000,000 |               
|Loan3             |  | Shakespeare Theater  |  | Dec-04 |  |                  | 16,500,000 |               
|Lease4            |  | HQ Global            |  | Jan-13 |  |                  | 16,400,000 |               
|Indemnification5  |  | HQ Global            |  |        |  |                  |           |               

---

| | 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 guaranty 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 their 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. In the event of a default, we can exercise our rights under the security agreement to take title to the
property and sell the property to mitigate our exposure under the guarantee.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. |  | Represents a payment guarantee on a third party project for which we are the developer. We have entered into an agreement with the lender that permits us to acquire
the lenders first position mortgage securing the loan if the third party defaults on the loan and we then make payment in full to the lender under the guarantee.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. |  | See note 2 for further discussion.
| | -- |  | ----------------------------------

| | 5. |  | See Part II, Item 1 for further discussion.
| | -- |  | -------------------------------------------



|(5) |  | 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 segment operating income. We define segment operating income as total rental revenue less property expenses, which
include property operating expenses (other than depreciation and amortization) and real estate taxes. The real estate property operations segment includes the operation and management of rental properties including those classified as discontinued
operations. The accounting policies of the segments are the same as those described in note 1.



Operating results of our reportable segment and our other operations for the three months ended March 31, 2003 and 2002 are summarized as follows:



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Notes to Consolidated Financial Statements

(Unaudited)





|                                                 |  | For the three months ended March 31, 2003 |      
|------------------------------------------------ |  | ----------------------------------------- | -----
|                                                 |  | Real Estate Property Operations           |      
|(In millions)                                    |  |                                           |      
|Revenue                                          |  | $                                         | 127.8
|Segment expense                                  |  |                                           | 44.4 
|                                                 |  |                                           |      
|Segment operating income (loss)                  |  |                                           | 83.4 
|                                                 |  |                                           |      
|Interest expense                                 |  |                                           |      
|Depreciation expense                             |  |                                           |      
|                                                 |  |                                           |      
|Operating income                                 |  |                                           |      
|Other income                                     |  |                                           |      
|Loss on sale of assets and other provisions, net |  |                                           |      
|Minority interest and taxes                      |  |                                           |      
|                                                 |  |                                           |      
|Net income                                       |  |                                           |      
|                                                 |  |                                           |      



|                                                 |  | For the three months ended March 31, 2002 |      
|------------------------------------------------ |  | ----------------------------------------- | -----
|                                                 |  | Real Estate Property Operations           |      
|(In millions)                                    |  |                                           |      
|Revenue                                          |  | $                                         | 127.2
|Segment expense                                  |  |                                           | 42.6 
|                                                 |  |                                           |      
|Segment operating income (loss)                  |  |                                           | 84.6 
|                                                 |  |                                           |      
|Interest expense                                 |  |                                           |      
|Depreciation expense                             |  |                                           |      
|                                                 |  |                                           |      
|Operating income                                 |  |                                           |      
|Other expense                                    |  |                                           |      
|Loss on sale of assets and other provisions, net |  |                                           |      
|Minority interest and taxes                      |  |                                           |      
|Discontinued operationssold property            |  |                                           |      
|                                                 |  |                                           |      
|Net income                                       |  |                                           |      
|                                                 |  |                                           |      



|(6) |  | Supplemental Cash Flow Information
|--- |  | ----------------------------------



In the first quarter of 2002, 80,000 shares of our Series A Cumulative Convertible Redeemable Preferred Stock were converted to shares of
common stock, retiring all remaining shares of Series A Cumulative Convertible Redeemable Preferred Stock.



Our employees converted approximately $1.4 million and $0.7 million in restricted units to 58,683 shares and 31,797 shares of common stock
during the three months ended March 31, 2003 and 2002, respectively.



|(7) |  | Preferred and Common Stock
|--- |  | --------------------------



On March 18, 2003, we redeemed 2,000,000 shares of our Series B Cumulative Redeemable Preferred Stock at a redemption price of $25.00 per
share plus $0.107125 per share in accrued and unpaid dividends for the period from March 1, 2003 through and including the redemption date, without interest. This resulted in a cash expenditure of approximately $50.2 million in March 2003, which we
funded by drawing on our $500 million



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Notes to Consolidated Financial Statements

(Unaudited)



unsecured credit facility. Including this redemption, for the three months ended March 31, 2003, we repurchased or redeemed 2,158,035 shares
of our preferred stock for approximately $54.0 million, excluding accrued and unpaid dividends.



During the first quarter of 2003, we repurchased 322,600 shares of our common stock for approximately $7.9 million.



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Managements Discussion and Analysis





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



The discussion that follows is based primarily on our
consolidated financial statements as of March 31, 2003 and December 31, 2002 and for the three months ended March 31, 2003 and 2002 and should be read along with the consolidated financial statements and related notes. 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.



General



During the three months ended March 31, 2003 we completed the following significant transactions:



| |  |  | We repurchased or redeemed an aggregate of 2,158,035 shares of our preferred stock for approximately $54.0 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | We repurchased 322,600 shares of our common stock for approximately $7.9 million.
| | - |  | ---------------------------------------------------------------------------------



During the three months ended March 31, 2002 we completed the following significant transactions:



| |  |  | We issued $400.0 million of 7.125% senior unsecured notes in January 2002.
| | - |  | --------------------------------------------------------------------------



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. Our critical accounting policies and estimates relate to evaluating the impairment of long-lived assets and equity and cost
method investments, assessing our probable liability under lease guarantees for HQ Global Workplaces, Inc. (HQ Global) and the evaluation of the collectibility of accounts and notes receivable.



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 and lease commissions, 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 is
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.



If events or circumstances indicate that the fair value of an investment accounted for using the equity or
cost method (such as essention) 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.



As a result of the bankruptcy of HQ Global, we were required
to make estimates regarding our probable liability under guarantees of HQ Globals performance under four office leases. After carefully evaluating the facts and circumstances of each property and developments in the bankruptcy proceedings, we
accrued a loss of $8.7 million in 2002, our best estimate of the probable liability related to these guarantees. Our estimated loss was based on such factors as the expected period of vacancy for the space before it could be relet, expected rental
rates and other factors. Circumstances may change in the future which could cause us to reevaluate our liability under these guarantees and adjust our estimate as appropriate.



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



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##### Table of Contents

Managements Discussion and Analysis



and the status of related negotiations, etc. Our estimate of the required allowance, which is reviewed 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. Metro areas). For example, due to economic
conditions and analysis of our accounts receivable, we increased our provision for uncollectible accounts (and related straight-line rent adjustments) by approximately $1.9 million for the three months ended March 31, 2003.



Results Of Operations



Property Operations Revenue



Property operations revenue is summarized as follows:



|                                 |  | For the three months ended March 31, |       | Variance |  
|-------------------------------- |  | ------------------------------------ | ----- | -------- | -
|                                 |  | 2003                                 |       | 2002     |  
|(in millions)                    |  |                                      |      
|Minimum base rent                |  | $                                    | 105.7 |          | $
|Recoveries from tenants          |  |                                      | 16.1  |          |  
|Parking and other tenant charges |  |                                      | 6.0   |          |  



Property
operations 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. Occupancy rates in our buildings began to decline
in most of our markets in late 2001 and have continued to decline into 2003. This decline has negatively affected our operating revenue. Occupancy in stabilized buildings (buildings in operation more than one year) by market as of March 31, 2003 and
2002 are as follows:



|                           |  | March 31, 2003       |  | March 31, 2002 |  | Variance             | 
|-------------------------- |  | -------------------- |  | -------------- |  | -------------------- | 
|Market                     |  | Rentable Sq. Footage |  | Percent Leased |  | Rentable Sq. Footage | 
|Washington, DC             |  | 3,522,832            |  | 97.4           |  | 2,933,604            | 
|Chicago                    |  | 1,234,797            |  | 78.0           |  | 1,229,863            | 
|Atlanta                    |  | 1,865,229            |  | 81.9           |  | 1,774,221            | 
|Dallas                     |  | 1,007,522            |  | 86.8           |  | 1,611,957            | 
|Austin                     |  | 432,083              |  | 88.0           |  | 627,313              | 
|Denver                     |  | 908,023              |  | 91.4           |  | 815,078              | 
|Phoenix                    |  | 532,506              |  | 100.0          |  | 532,506              | 
|Portland                   |  | 275,193              |  | 80.7           |  | 275,193              | 
|Seattle                    |  | 1,500,896            |  | 89.4           |  | 1,501,679            | 
|Salt Lake City             |  | 630,029              |  | 83.9           |  | 702,117              | 
|San Francisco              |  | 5,509,762            |  | 92.9           |  | 5,416,697            | 
|Orange County, Los Angeles |  | 1,812,764            |  | 86.6           |  | 1,813,732            | 
|San Diego                  |  | 1,254,095            |  | 95.8           |  | 1,069,709            | 
|                           |  |                      |  |                |  |                      | 
|Total                      |  | 20,485,731           |  | 90.4           |  | 20,303,669           | 
|                           |  |                      |  |                |  |                      | 



As a
result of the ongoing weak economic climate, the real estate markets have been materially affected. The contraction of office workforces has reduced demand for office space and overall vacancy rates for office properties have increased in all of our
markets. In reviewing various outlooks for the economy, we believe that the vacancy rates will not improve in any material fashion until at least 2004. During 2002 and into 2003, our markets weakened significantly and our operations were adversely
impacted. The occupancy in our portfolio of stabilized operating properties decreased to 90.4% at March 31, 2003 compared to 92.3% at December 31, 2002 and 93.9% at March 31, 2002. Market rental rates have declined in most markets from peak levels
and we believe there will be additional declines in some markets this year. Rental rates on space that was re-leased in the first quarter of 2003 decreased an average of 15.8% in comparison to rates that were in effect under expiring leases.



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Managements Discussion and Analysis





Minimum Base Rent



Minimum base rent increased $0.6 million
(0.6%) in the first quarter of 2003 compared to 2002. The increase in minimum base rent in 2003 was due primarily to higher base rents from buildings we acquired in 2002 compared to buildings we sold in the second and third quarters of 2002,
partially offset by higher vacancies. We expect minimum base rent to be under downward pressure during the remainder of the year as a result of re-leasing space at lower rates than those rates that were in effect under expiring leases.



Our lease rollover by square footage and rent at March 31,
2003 is as follows:



|                    |  | Leased Sq. Footage1 |  | Rent ($000)
|------------------- |  | ------------------- |  | -----------
|2003                |  | 1,884,186           |  | 35,920     
|2004                |  | 2,450,870           |  | 51,650     
|20052               |  | 2,910,279           |  | 74,081     
|2006                |  | 2,451,713           |  | 59,034     
|2007                |  | 2,689,211           |  | 58,353     
|2008                |  | 1,890,058           |  | 40,572     
|2009                |  | 1,631,423           |  | 32,481     
|2010                |  | 646,757             |  | 17,733     
|2011                |  | 396,797             |  | 7,622      
|2012                |  | 1,026,879           |  | 24,861     
|2013 and thereafter |  | 546,860             |  | 14,190     
|                    |  |                     |  |            
|                    |  | 18,525,033          |  | 416,497    
|                    |  |                     |  |            

---

| | 1 |  | Does not include vacant space at 3/31/032.0 million sq. ft.
| | - |  | ------------------------------------------------------------

| | 2 |  | The International Monetary Fund (IMF) leases approximately 472,000 square feet of office space from us in Washington, D.C. under a lease that, by its terms, expires
in January 2004. However, under this lease, IMF has an option to extend the term for up to five additional years. IMF must provide us with at least two years prior notice of the date to which it is extending the term, which notice must be given no
later than May 31, 2003. IMF, with our assistance as development manager, is currently constructing a new building in Washington, D.C. into which they intend to move their operations. Based on the construction schedule for IMFs new building,
we currently expect IMF to extend the term of their lease through the third quarter of 2005. Therefore, IMFs lease is included in the 2005 rollover; however at this time, there can be no assurance such rollover will not occur before or after
2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recoveries from Tenants



Recoveries from tenants decreased $0.1 million (0.6%) in the
first quarter of 2003 from 2002. This decrease was due primarily to higher vacancies and new base years for new leases partially offset by the impact on recoveries of higher property operating expenses.



Parking and Other Tenant Charges



Parking and other tenant charges increased $3.2 million
(114.2%) in the first quarter of 2003 from 2002. This increase was due primarily to higher lease termination fees. Lease termination fees are paid by a tenant in exchange for our agreement to terminate the lease. Other tenant charges included $3.2
million and $0.5 million of lease termination fees in the first quarter of 2003 and 2002, respectively. Lease termination fees earned during the first quarter of 2003 related primarily to the vacancy of one tenant in Seattle. This vacancy is
expected to negatively impact minimum base rent for the remainder of the year.



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Managements Discussion and Analysis





Property Expenses



Property expenses are summarized as
follows:



|                            |  | For the three months ended March 31, |      | Variance
|--------------------------- |  | ------------------------------------ | ---- | --------
|                            |  | 2003                                 |      | 2002    
|(in millions)               |  |                                     
|Property operating expenses |  | $                                    | 32.4 |         
|Real estate taxes           |  |                                      | 12.0 |         



Property
operating expenses increased $1.6 million (5.2%) in the first quarter of 2003 from 2002 as a result of higher insurance expense ($1.7 million). The increase in insurance expense was due primarily to increases in our property and casualty insurance
premiums and the cost of terrorism coverage upon renewal in June 2002.



Property Operating Margin



Property operating margin, defined as property operations revenue less property expenses, is summarized as follows:



|                                  |  | For the three months ended March 31, |      |   | Variance
|--------------------------------- |  | ------------------------------------ | ---- | - | --------
|                                  |  | 2003                                 |      |   | 2002    
|(in millions)                     |  |                                     
|Property operating margin         |  | $                                    | 83.4 |   |         
|Property operating margin percent |  |                                      | 65.3 | % |         



Property
operating margin increased $1.9 million (2.3%) in the first quarter of 2003 from 2002 due primarily to higher termination fees. Property operating margin as a percentage of property operations revenue was 65.3% for the first quarter of 2003 compared
to 65.7% in 2002.



Real Estate Service Revenue



Real estate service revenue, which includes
our third party property management services and our development services, decreased $0.5 million (8.2%) in the first quarter of 2003 from 2002. The decrease was due primarily to lower development fees earned from third parties and joint ventures.



Interest Expense



Interest expense increased $1.1 million (4.5%) during the
first quarter of 2003 compared to the first quarter of 2002. This increase was due primarily to higher debt levels to finance our repurchases of common and preferred stock in the latter half of 2002 and 2003. The effect of this increase was
partially offset by a decrease in short-term interest rates on our variable rate line of credit, our interest rate swap agreements and repayment of higher rate mortgages.



General and Administrative Expense



General and administrative expense decreased $0.7 million (6.4%) in the first quarter of 2003 from 2002. This
decrease was due primarily to overall cost containment efforts and lower consulting fees.



Depreciation and Amortization



Depreciation and amortization decreased $0.7 million (2.1%) in the first quarter of 2003 compared to the first quarter of 2002. This decrease was due primarily to the write-off of tenant improvement balances for terminating and
defaulting tenants in the first quarter of 2002 and property dispositions, partially offset by property acquisitions.



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Managements Discussion and Analysis





Gain on Sale of Assets
and Other Provisions, Net and Discontinued Operations



We dispose of assets from time to time that are inconsistent with our long-term strategic or return objectives. During the three months ended March 31, 2003 and 2002, we did not dispose of any operating properties. For the three
months ended March 31, 2002, we recognized an impairment loss of $0.9 million on a land holding.



In August 2002, we sold Commons at Las Colinas in which we had no continuing involvement after the sale. The results of operations of the property are classified as discontinued operations.



Other Income and Expense



Other income (expense) was $1.4 million and $(0.2) million in
the first quarter of 2003 and 2002, respectively. Equity in earnings from unconsolidated entities decreased $0.7 million in 2003 from 2002 due to increased vacancies in the properties and the sale of one joint venture in the latter half of 2002. In
the first quarter of 2002, we accrued $2.4 million of losses related to lease guarantees associated with HQ Global.



Net Income and Earnings per Share



Net income increased $1.5 million (8.4%) for the reasons discussed above. Earnings per share from continuing operations increased $0.12
(85.7%) per share. The increase is due primarily to higher earnings ($0.05), a decrease in weighted average common shares outstanding ($0.01) and a reduction in preferred dividends paid ($0.06) as a result of our repurchase and redemption of common
and preferred shares.



Consolidated Cash Flows



Consolidated cash flow information
is summarized as follows:



|                                      |  | For the three months ended March 31, |       |   | Variance |  
|------------------------------------- |  | ------------------------------------ | ----- | - | -------- | -
|                                      |  | 2003                                 |       |   | 2002     |  
|(in millions)                         |  |                                      |      
|Cash provided by operating activities |  | $                                    | 39.3  |   |          | $
|Cash used by investing activities     |  |                                      | (10.1 | ) |          |  
|Cash used by financing activities     |  |                                      | (26.9 | ) |          |  



Operations generated $39.3 million of net cash for the first three months of 2003 compared to $36.4 million in 2002. The change in cash flow from operating activities was primarily the result of factors discussed above in the
analysis of operating results. The level of net cash provided by operating activities is also affected by the timing of receipt of revenues and payment of expenses.



Our investing activities used net cash of $10.1 million in 2003 and $13.8 million in 2002. The change in cash
flows from investing activities in 2003 was due primarily to reduced acquisitions of minority interests ($3.2 million), a release of restricted deposits ($2.7 million) and a reduced level of investment in joint ventures ($1.2 million), partially
offset by increased construction ($2.0 million), issuance of notes receivable ($0.7 million) and an increase in capital additions ($0.4 million).



Our financing activities used net cash of $26.9 million in 2003 and $16.3 million in 2002. The change in net cash used by financing
activities in 2003 was due primarily to higher repurchases and redemptions of common and preferred stock ($61.8 million), increased mortgage repayments ($23.0 million) and reduced proceeds from stock option exercises ($14.3 million), partially
offset by increased net unsecured borrowings ($84.5 million) and reduced dividend payments ($3.4 million).



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Managements Discussion and Analysis





LIQUIDITY AND CAPITAL
RESOURCES



General



As of March 31, 2003, we had approximately $5.3 million in
available cash and cash equivalents. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annual basis. In addition, we and our affiliates regularly require capital to invest in our existing portfolio
of operating assets for capital projects. These capital projects include such things as large-scale renovations, routine capital improvements, deferred maintenance on properties we have recently acquired and leasing-related matters, including 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.



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. Although our top 25 tenants
accounted for approximately 35.6% of our annualized minimum base rents, we believe that the diversity of our tenant base (no tenant accounted for more than 5% of annualized minimum base rents as of March 31, 2003) helps insulate us from the negative
impact of tenant defaults and bankruptcies. However, general economic downturns, or economic downturns in one or more of our markets, could materially adversely impact the ability of our tenants to make lease payments and our ability to re-lease
space on favorable terms as leases expire. In either of these cases, our cash flow and therefore our ability to meet our capital needs would be adversely affected.



As a result of the ongoing weak economic climate, the real estate markets have been materially affected. The
contraction of office workforces has reduced demand for office space and overall vacancy rates for office properties have increased in all of our markets. In reviewing various outlooks for the economy, we believe that the vacancy rates will not
improve in any material fashion until at least 2004. During 2002 and into 2003, our markets weakened significantly and our operations were adversely impacted. The occupancy in our portfolio of stabilized operating properties decreased to 90.4% at
March 31, 2003 compared to 92.3% at December 31, 2002 and 93.9% at March 31, 2002. Market rental rates have declined in most markets from peak levels and we believe there will be additional declines in some markets this year. Rental rates on space
that was re-leased in the first quarter of 2003 decreased an average of 15.8% in comparison to rates that were in effect under expiring leases.



In the future, if, as a result of general economic downturns, a credit rating downgrade, our properties do not perform as expected, 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 make required principal and interest payments or make necessary routine capital improvements with respect
to our existing portfolio of operating assets. While we believe that we would continue to have sufficient funds to pay our operating expenses and debt service and our regular quarterly dividends, our ability to expand our development activity or to
fund acquisitions of properties could be adversely affected. 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 generally expect to refinance that debt when it matures, although in some cases 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.



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 source of capital is most advantageous to us at any particular point in time, but the capital markets may not consistently be available on terms that
are attractive.



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Managements Discussion and Analysis





Capital Structure



We manage our capital structure to reflect
a 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 possible asset dispositions. Our management believes, but there can be no assurance, that we will 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.



Debt Financing



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 either will 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 March 31, 2003, 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 negative 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, 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 March 31, 2003 is summarized as follows:



|                                                    |  | (In thousands) |          
|--------------------------------------------------- |  | -------------- | ---------
|Fixed rate mortgages                                |  | $              | 391,310  
|Unsecured credit facility                           |  |                | 184,000  
|Senior unsecured notes                              |  |                | 1,100,000
|                                                    |  |                |          
|                                                    |  |                | 1,675,310
|Unamortized discount and fair value adjustment, net |  |                | (2,597   
|                                                    |  |                |          
|                                                    |  | $              | 1,672,713
|                                                    |  |                |          



Our
fixed rate mortgage debt bore an effective weighted average interest rate of 8.04% at March 31, 2003 and had a weighted average maturity of 6.0 years. $184.0 million (11.0%) of our total debt at March 31, 2003 bore a LIBOR-based variable interest
rate and $325.0 million (19.4%) 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 March 31, 2003 was 2.01%.



Our primary external source of liquidity is our credit
facility. We have a three-year, $500 million unsecured credit facility expiring in June 2004 with J.P. Morgan Chase, as agent for a group of banks. We can extend the life of the facility an additional year at our option. The facility carries an
interest rate of 70 basis points over 30-day LIBOR, or 2.01% as of March 31, 2003. As of March 31, 2002, $184.0 million was drawn on the credit facility, $1.2 million in letters of credit were outstanding and we had $314.8 million available for
borrowing.



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



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



| |  |  | A minimum ratio of annual EBITDA to fixed charges;
| | - |  | --------------------------------------------------



| |  |  | A maximum ratio of aggregate unsecured debt to unencumbered assets;
| | - |  | -------------------------------------------------------------------



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



| |  |  | Restrictions on our ability to make dividend distributions in excess of 90% of funds from operations.
| | - |  | -----------------------------------------------------------------------------------------------------



Availability under the unsecured credit facility is also
limited to a specified percentage of the fair value of our unmortgaged properties. We are currently in compliance with all the financial covenants of our credit facility. However we expect that in future quarters, we may fail to meet our maximum
ratio of aggregate unsecured debt to unencumbered assets covenant. We are currently in discussions with our lenders to amend our credit facility to change this covenant. Based on our preliminary discussions with our lenders, we expect them to amend
the covenant and increase our maximum ratio so as to allow our continuing compliance. However, there can be no assurance we will obtain the amendment. Failure to amend the credit facility agreement or failure to comply with any of the other
covenants under our unsecured credit facility or other debt instruments could result in a default under one or more of our debt instruments. This could cause our lenders to accelerate the timing of payments and would therefore have a material
adverse effect on our business, operations, financial condition or liquidity.



We have senior unsecured notes outstanding at March 31, 2003 as follows:



|                         |  | Note Principal |           | Unamortized Discount |   |         | Fair Value Adjustment |  | Total
|------------------------ |  | -------------- | --------- | -------------------- | - | ------- | --------------------- |  | -----
|(In thousands)           |  |               
|7.20% notes due in 2004  |  | $              | 150,000   |                      | $ | (281    | )                     |  | $    
|6.625% notes due in 2005 |  |                | 100,000   |                      |   | (1,222  | )                     |  |      
|7.375% notes due in 2007 |  |                | 125,000   |                      |   | (616    | )                     |  |      
|5.261% notes due in 2007 |  |                | 50,000    |                      |   | (140    | )                     |  |      
|5.25% notes due in 2007  |  |                | 175,000   |                      |   | (1,263  | )                     |  |      
|6.875% notes due in 2008 |  |                | 100,000   |                      |   | (2,036  | )                     |  |      
|7.125% notes due in 2012 |  |                | 400,000   |                      |   | (4,837  | )                     |  |      
|                         |  |                |           |                      |   |         |                       |  |      
|                         |  | $              | 1,100,000 |                      | $ | (10,395 | )                     |  | $    
|                         |  |                |           |                      |   |         |                       |  |      



Of our
senior unsecured notes, $625.0 million was issued in 2002. In January 2002, we issued $400.0 million of senior unsecured notes. The notes bear interest at 7.125% per annum payable semi-annually beginning on July 15, 2002. The notes mature on January
15, 2012. In November 2002, we issued $50.0 million of 5.261% and $175.0 million of 5.25% senior unsecured notes. Interest on these notes is payable semi-annually beginning May 30, 2003. The notes mature on November 30, 2007. 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 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.
| | - |  | ---------------------------------------------------------------



Derivative Financial Instruments



On May 8, 2002, we entered into an interest rate swap agreements with JP Morgan Chase and Bank of America,
N.A. hedging $150.0 million of senior unsecured notes due July 2004. We receive interest at a fixed rate of 7.2% and pay interest at a variable rate of six-month LIBOR in arrears plus 2.72%. The interest rate swaps mature at the same time the notes
are due. The swaps qualify as fair value hedges for accounting purposes. The fair value of the interest rate swaps is recognized on our balance sheet and the carrying value of the senior unsecured notes is increased or decreased by an offsetting
amount. As of March 31, 2003, the fair value of the interest rate swaps was approximately $4.9 million. We recognized a reduction in interest expense for the three months ended March 31, 2003 of approximately $1.2 million related to the swaps. As of
March 31, 2003, taking into account the effect of the interest rate swaps, the effective interest rate on the notes was reduced to 3.9%.



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On November 20, 2002, in conjunction with the issuance of $175.0 million of senior
unsecured notes, we entered into interest rate swap agreements with JP Morgan Chase, Bank of America, N.A. and Goldman Sachs & Co. We receive interest at a fixed rate of 5.25% and pay interest at a variable rate of six-month LIBOR in arrears
plus 1.405%. The interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. The fair value of the interest rate swaps is recognized on our balance sheet and the carrying value of
the senior unsecured notes is increased or decreased by an offsetting amount. As of March 31, 2003, the fair value of the interest rate swaps was approximately $2.9 million. We recognized a reduction in interest expense for the three months ended
March 31, 2003 of approximately $1.5 million related to the swaps. As of March 31, 2003, taking into account the effect of the interest rate swaps, the effective interest rate on the notes was reduced to 2.6%.



As part of the assumption of $63.5 million of debt associated
with the purchase of two operating properties in August 2002, we purchased interest rate caps with a notional amount of $97.0 million and LIBOR capped at 6.75%. As of March 31, 2003, the fair market value of these interest rate caps was not
material.



Stock Repurchases and Dividends



On March 18, 2003, we redeemed 2,000,000 shares of our Series
B Cumulative Redeemable Preferred Stock at a redemption price of $25.00 per share plus $0.107125 per share in accrued and unpaid dividends for the period from March 1, 2003 through and including the redemption date, without interest. This resulted
in a cash expenditure of approximately $50.2 million in March 2003, which we funded by drawing on our $500 million unsecured credit facility. Including this redemption, for the three months ended March 31, 2003, we repurchased or redeemed 2,158,035
shares of our preferred stock for approximately $54.0 million, excluding accrued and unpaid dividends.



Our Board of Directors has authorized us to spend up to $400.0 million to repurchase our common stock, preferred stock and debt
securities, excluding the 9.2 million shares repurchased from Security Capital in November 2001 and our preferred stock redemption of 4.0 million and 2.0 million shares in September 2002 and March 2003, respectively, which were separately approved.
Since the start of this program in mid-2000 through March 31, 2003, we have acquired approximately 10.4 million of our common shares for an aggregate purchase price of approximately $296.9 million, including 322,600 shares for approximately $7.9
million in the first quarter of 2003. We continue to monitor market conditions and other alternative investments in order to evaluate whether repurchase of our securities is appropriate.



We 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 stockholders. In addition, under our line of credit, we generally are restricted from paying dividends that would exceed 90% of our funds from operations during any four-quarter period.



Capital Commitments



We will require capital for development projects currently
underway and in the future. As of March 31, 2003, we had a residential project under development. We undertook this wholly-owned project in conjunction with an office development project in a joint venture. Our total investment in the residential
project is expected to be $19.9 million. As of March 31, 2003, we had invested $6.6 million in this project with the remainder expected to be incurred during this year. As of March 31, 2003, we had 477,000 rentable square feet of office space under
construction in a joint venture project in which we own a minority interest. This project is expected to cost $159.0 million, of which our total investment is expected to be approximately $47.7 million. Through March 31, 2003, approximately $96.1
million or 60.4% of total project costs had been expended on this project. We have financed our investment in both our wholly-owned and our joint venture projects under construction at March 31, 2003 primarily from borrowings under our credit
facility. We expect that our credit facility and project-specific financing of selected assets will provide the additional funds required to complete existing development projects and to finance the costs of additional projects we may undertake. As
a result of market conditions, we believe we will be limiting our development activities in the near future and expect to concentrate our growth efforts on the acquisition of properties.



Unconsolidated Investments and Related Parties



We have minority investments in two non-real estate operating companies, AgilQuest and essention, which we
account for using the cost method. These are startup entities in which we invested $2.8 million and $1.7 million,



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respectively. In the fourth quarter of 2002, we recognized an impairment of $500,000 on our investment in essention because we believed the
value of our investment was partially impaired. In the future, additional impairment charges related to our investments may be required.



We have investments in real estate joint ventures in which we hold 15%-50% interests. These investments are accounted for using the equity
or cost method, as appropriate, and therefore the assets and liabilities of the joint ventures are not included in our consolidated financial statements. Most of these 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 March 31, 2003, we guaranteed $40.0 million of debt
related to a joint venture and have provided completion guarantees related to three joint venture projects for which total costs are anticipated to be $290.1 million, of which $197.0 million has 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;
| | - |  | ----------------



| |  |  | 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 the 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 $1.6 million and $2.1 million in the first quarter of 2003 and 2002, respectively.
Accounts receivable from joint ventures and other affiliates were $1.7 million at March 31, 2003.



Other material related party transactions include general contracting and other services from Clark Enterprises, Inc., an entity in which
one of our directors is the majority stockholder. We, including our unconsolidated affiliates, paid $15.9 million and $4.1 million in the first quarter of 2003 and 2002, respectively to Clark Enterprises, Inc. for these services. Substantially all
of the payments related to our unconsolidated affiliates. We also have a consulting agreement with Oliver Carr, one of our directors, under which Mr. Carr provides services to us. We paid Mr. Carr $52,250 in the first quarter of 2003 and $105,000
for the full year 2002. The agreement expires in June 2003.



Guarantee Obligations



Our obligations under guarantee agreements at March 31, 2003 are summarized as follows:



|Type of Guarantee |  | Project Relationship |  | Term   |  | Maximum Exposure |            | Carrying Value
|----------------- |  | -------------------- |  | ------ |  | ---------------- | ---------- | --------------
|Loan1             |  | 575 7th Street       |  | Apr-05 |  | $                | 40,000,000 |               
|Loan2             |  | Atlantic Building    |  | Dec-03 |  |                  | 21,000,000 |               
|Loan3             |  | Shakespeare Theater  |  | Dec-04 |  |                  | 16,500,000 |               
|Lease4            |  | HQ Global            |  | Jan-13 |  |                  | 16,400,000 |               
|Indemnification5  |  | HQ Global            |  |        |  |                  |           |               

---

|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 guaranty 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 their 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. In the event of a default, we can exercise our rights under the security agreement to take title to the
property and sell the property to mitigate our exposure under the guarantee.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|3. |  | Represents a payment guarantee on a third party project for which we are the developer. We have entered into an agreement with the lender that permits us to acquire
the lenders first position mortgage securing the loan if the third party defaults on the loan and we then make payment in full to the lender under the guarantee.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | See HQ Global Workplaces, Inc. below for further discussion.
|-- |  | --------------------------------------------------------------

|5. |  | See Part II, Item 1 for further discussion.
|-- |  | -------------------------------------------



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



Insurance



Although we believe our properties are adequately covered by
insurance, we cannot predict at this time if we will be able to obtain full coverage at a reasonable cost in the future. The costs associated with our June 30, 2002 property and casualty insurance renewals were higher than anticipated. Although we
have an excellent claims history and safety record, all lines of coverage were affected by higher premiums, in part because insurance companies have experienced a loss of income on their investments, underwriting results have been poor and also as a
result of the events of September 11, 2001.



Our
insurance renewal on June 30, 2002 increased premiums from the prior year approximately 155%. The property insurance deductible increased from $5,000 to $10,000 per claim. Since reinsurance treaties renew twice each year (January and July), our
property and casualty insurance renewal date has been changed from June 30 to May 15 to enable underwriters to concentrate on the insurance proposals well ahead of treaty renewal.



In December 2002, three major corporate insurance policies were renewed for another annual term. The policies
were the Directors and Officers Liability, Employment Practices Liability and the Professional (Errors and Omissions) Liability. As had been expected, the insurance markets were not favorable to the buyer due mainly to insurance industry conditions.
The increases in premiums were 44% for Directors and Officers Liability, 76% for Employment Practices Liability and 45% for Professional (Errors and Omissions) Liability. The deductible for the Directors and Officers Liability policy changed from
$250,000 for each claim to $500,000 for securities claims and $250,000 for all other claims. The deductible for the Employment Practices Liability increased from $50,000 per claim to $250,000 per claim.



As a result of the Terrorism Risk Insurance Act of 2002
(TRIA), we have elected to purchase the TRIA coverage upon our 2003 insurance renewal rather than stand alone coverage. In June 2002, we purchased stand alone terrorism coverage with limits of $200 million per occurrence and in the
aggregate, with a deductible of $1.0 million per claim, at a cost of approximately $2.2 million per year. Our TRIA insurance increases our coverage to $500 million for foreign certified terrorist acts but also includes $25 million of coverage for
domestic terrorism. Coverage, either under TRIA or a stand alone policy, includes only physical damage and does not include losses due to biological, chemical or radioactive contamination. The lack of coverage for such contamination could have a
material adverse effect on our financial results if a building we own becomes uninhabitable as a result of a biological, chemical, radioactive or other contamination.



Due to the rising cost of California earthquake insurance, we reviewed our probable maximum loss
(PML) related to earthquake coverage for various factors. As a result of this review, we determined that it was possible to lower our PML coverage from $200 million to $150 million. We believe this will be sufficient coverage.



In anticipation of our scheduled renewal on May
15, 2003, we provided updated data to our insurance broker to enable our broker to market our insurance with various insurers. We received insurance coverage and cost proposals in April 2003. Based on these proposals and our decision to change our
earthquake and terrorism coverage, we expect our insurance costs to remain relatively flat for the upcoming renewal as compared to the 2002 renewal of insurance.



HQ Global Workplaces, Inc.



In 1997, we began making investments in HQ Global Workplaces, Inc. (HQ Global), a provider of executive office suites. On June
1, 2000, we, along with HQ Global, VANTAS Incorporated (VANTAS) and FrontLine Capital Group (FrontLine), consummated several transactions including (i) the merger of VANTAS with and into HQ Global, (ii) the acquisition by FrontLine of shares of HQ
Global common stock from us and other stockholders of HQ Global, and (iii) the acquisition by VANTAS of our debt and equity interests in OmniOffices (UK) Limited and OmniOffices LUX 1929 Holding Company S.A. We received $377.3 million in cash in
connection with these transactions. In



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Managements Discussion and Analysis



addition, $140.5 million of debt which we had guaranteed was repaid with a portion of the cash proceeds. Following the transaction, we owned
approximately 16% of the equity of HQ Global on a diluted basis and our investment had a carrying value of $42.2 million. In 2001, based on a number of considerations, we recorded an impairment charge that reduced the carrying value of our remaining
investment in HQ Global to zero.



On March 13,
2002, HQ Global filed for bankruptcy protection under Chapter 11 of the federal bankruptcy laws. During 1997 and 1998, to assist HQ Global as it grew its business, we provided guarantees of HQ Globals performance under four office leases. To
our knowledge, all monthly rental payments were made by HQ Global under two of these leases through January 2002, and rental payments under the other two leases were made through February 2002. In connection with the June 2000 merger transaction,
FrontLine agreed to indemnify us against any losses incurred with respect to guarantees of the four office leases. However, on June 12, 2002, FrontLine also filed for bankruptcy protection under Chapter 11 of the federal bankruptcy laws, and
therefore it is unlikely that we will recover any resulting losses from FrontLine under this indemnity.



In the course of its bankruptcy proceedings, HQ Global has filed motions to reject two of these four leases. One lease was for
approximately 22,000 square feet of space at two adjacent buildings in San Jose, California. Our liability under this guarantee was limited to approximately $2.0 million. We reached an agreement with the landlord of this lease pursuant to which we
paid $1.75 million in full satisfaction of the guarantee in January 2003. We recognized this expense in 2002.



The second lease that was rejected by HQ Global is a sublease for space in downtown Manhattan. This lease is for approximately 26,000
square feet of space and runs through March 2008, with total aggregate remaining lease payments as of February 1, 2002 of approximately $5.4 million. In June 2002, we received a demand for payment of the full amount of the guarantee. However, we
believe that we have defenses to payment under this guarantee available to us and joined with HQ Global in filing suit on July 24, 2002 in HQ Globals bankruptcy proceedings asking the bankruptcy court to declare that the lease was terminated
by the landlord of the sublease not later than February 28, 2002. On July 26, 2002, the landlord under the sublease filed suit in federal court in New York seeking payment from us under this guarantee. In light of our defenses and these proceedings,
we have not accrued any expense relating to this guarantee; however, there can be no assurance as to the outcome of the pending litigation or that we will not incur expense or be required to make cash payments relating to this guarantee up to the
full amount of the guarantee. As of March 31, 2003, we had not made any payments under this guarantee.



HQ Global has not filed a motion seeking to reject the remaining two leases that we have guaranteed, although it could do so in the
future. Even if the leases are not rejected, we may ultimately be liable to the lessors for payments due under the leases. In one case, the lease is for approximately 25,000 square feet of space in midtown Manhattan, and our liability is currently
capped at approximately $0.5 million, which liability reduces over the life of the lease until its expiration in September 2007. As of March 31, 2003, we have not accrued any expense related to or made any payments under this guarantee.



The remaining lease is for space in San Mateo,
California. This lease is for approximately 19,000 square feet of space and runs through January 2013, with total aggregate remaining lease payments as of March 1, 2002 of approximately $10.4 million. We initially recognized an expense of $0.4
million under this guarantee in the first quarter of 2002 based on a tentative agreement with HQ Global under which HQ Global would not reject this lease obligation and we would fund HQ Globals operating losses at this location for a limited
period of time. Due to deteriorating conditions in the local commercial real estate market, HQ Global subsequently determined that the tentative agreement was not in its best interest. HQ Global indicated to us that it intended to reject this lease
unless its rent was reduced to current market rates. As an interim measure, we entered into an agreement with HQ Global as of June 30, 2002 to fund operating losses at this location up to an aggregate amount of $130,000 in exchange for HQ Global
forbearing from rejecting this lease until September 15, 2002, or if it obtained from the bankruptcy court an extension of time within which to reject leases, November 1, 2002. Because the bankruptcy court has since twice extended the time period
within which HQ Global may reject this lease to May 9, 2003, we have twice extended the existing forbearance agreement in exchange for funding operating losses up to an additional aggregate amount of $245,000. As a result of our efforts to mitigate
our exposure under this guarantee, we entered into agreements with HQ Global in January 2003 under which HQ Global assigned its interest as a tenant in this lease to us and we in turn subleased the space back to HQ Global at current market rates.
These agreements remain subject to approval by the bankruptcy court. In addition, these agreements will not be enforceable if HQ Global fails to successfully reorganize and emerge from the bankruptcy proceedings. There can be no assurance that the
necessary approvals will be granted, that material changes to the agreements will not be required to gain approvals, or that HQ Global will successfully



27



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##### Table of Contents

Managements Discussion and Analysis



reorganize and emerge from the bankruptcy proceedings. We increased our provision for loss under this guarantee to $6.9 million in the second
quarter of 2002 and this amount plus accrued interest continues to represent the amount we have determined to be our likely exposure under this guarantee as of March 31, 2003. However, there can be no assurance that we will not be required to
further increase our provision or make cash payments related to this guarantee in future periods up to, in the aggregate, the full amount of the guarantee. As of March 31, 2003, we had not made any payments under this guarantee.



New Accounting Pronouncements



In November 2002, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation requires recognition of liabilities at their fair
value for newly issued guarantees. The adoption of Interpretation No. 45 January 1, 2003 did not have a material effect on our financial statements.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and requires disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on reported results. 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 and, accordingly, the method is being applied for all employee stock compensation awards granted, modified or settled on or after January 1, 2003.



In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This Interpretation addresses the consolidation of variable interest entities (VIEs) in which the equity investors lack one or more of the essential characteristics of a
controlling financial interest or where the equity investment at risk is not sufficient for the entity to finance its activities without subordinated financial support from other parties. The Interpretation applies to VIEs created after January 31,
2003 and to VIEs in which we acquire an interest after that date. Effective July 1, 2003, it also applies to VIEs in which we acquired an interest before February 1, 2003. We may apply the Interpretation prospectively, with a cumulative effect
adjustment as of July 1, 2003, or by restating previously issued financial statements with a cumulative effect adjustment as of the beginning of the first year restated. We are in the process of evaluating the effects of applying Interpretation No.
46 in 2003. Based on our preliminary analysis, we believe that we may be required to consolidate certain of our unconsolidated real estate ventures that we have accounted for using the equity method; however, we do not expect that this will involve
any cumulative effect adjustment. We also do not believe that this will have a material adverse effect on our financial condition.



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. 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 analyses of operating performance more difficult to compare. We also believe that FFO provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund
other cash needs. Our FFO may not be



28



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##### Table of Contents

Managements Discussion and Analysis



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 ended March 31, |       
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | ------
|                                                                                        |  | 2003                                 |       
|(In thousands)                                                                          |  |                                      |       
|Net income                                                                              |  | $                                    | 18,971
|Adjustments                                                                             |  |                                      |       
|Minority interest                                                                       |  |                                      | 3,076 
|FFO allocable to Unitholders                                                            |  |                                      | (4,505
|Depreciation and amortization                                                           |  |                                      | 33,343
|Minority interests (non-Unitholders share of depreciation, amortization
andnet income) |  |                                      | (280  
|Loss on sale of assets and other provisions, net                                        |  |                                      | 277   
|                                                                                        |  |                                      |       
|FFO                                                                                     |  |                                      | 50,882
|Less preferred and restricted stock dividends                                           |  |                                      | (5,306
|                                                                                        |  |                                      |       
|FFO attributable to common shares                                                       |  |                                      | 45,576
|FFO allocable to the minority Unitholders                                               |  |                                      | 4,505 
|                                                                                        |  |                                      |       
|Adjusted FFO1                                                                           |  | $                                    | 50,081
|                                                                                        |  |                                      |       

---

|1 |  | Adjusted funds from operations is computed to reflect all operating partnership units as if they were converted to common shares for any period in which they are not
antidilutive.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



FORWARD-LOOKING STATEMENTS



Certain statements contained herein
constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Reform Act). Such forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause our, and our affiliates, or the industrys actual results, performance, dividends, achievements or transactions to be materially different from any future results, performance, dividends, achievements or transactions
expressed or implied by such forward-looking statements. Such factors include, among others, the following:



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



| |  |  | Demand for office properties,
| | - |  | -----------------------------



| |  |  | The ability of the general economy to recover timely from the current economic conditions,
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | The availability and creditworthiness of tenants,
| | - |  | -------------------------------------------------



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



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



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



| |  |  | Competition with other companies, and
| | - |  | -------------------------------------



| |  |  | Risks of real estate acquisition and development (including the failure of pending acquisitions to close and pending developments to be completed on time and within
budget);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Possible charges or payments resulting from our guarantees of certain leases of HQ Global Workplaces, Inc;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------



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



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





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Managements Discussion and Analysis



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 Securities and Exchange Commission, and in particular, the section titled The CompanyRisk Factors in our Annual Report on Form
10-K.



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##### Table of Contents



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, distributions and other cash requirements. We may also use derivative financial instruments at times to limit market risk. Interest rate protection agreements 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 May 8, 2002, we entered into interest rate
swap agreements with JP Morgan Chase and Bank of America, N.A. hedging $150.0 million of senior unsecured notes due July 2004. We receive interest at a fixed rate of 7.2% and pay interest at a variable rate of six-month LIBOR in arrears plus 2.72%.
The interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. The fair value of the interest rate swaps is recognized on our balance sheet and the carrying value of the senior
unsecured notes is increased or decreased by an offsetting amount. As of March 31, 2003, the fair value of the interest rate swaps was approximately $4.9 million. We recognized a reduction in interest expense for the three months ended March 31,
2003 of approximately $1.2 million related to the swaps. As of March 31, 2003, taking into account the effect of the interest rate swaps, the effective interest rate on the notes was reduced to 3.9%.



On November 20, 2002, in conjunction with the issuance of
$175.0 million of senior unsecured notes, we entered into interest rate swap agreements with JP Morgan Chase, Bank of America, N.A. and Goldman Sachs & Co. We receive interest at a fixed rate of 5.25% and pay interest at a variable rate of
six-month LIBOR in arrears plus 1.405%. The interest rate swaps mature at the same time the notes are due. The swaps qualify as fair value hedges for accounting purposes. The fair value of the interest rate swaps is recognized on our balance sheet
and the carrying value of the senior unsecured notes is increased or decreased by an offsetting amount. As of March 31, 2003, the fair value of the interest rate swaps was approximately $2.9 million. We recognized a reduction in interest expense for
the three months ended March 31, 2003 of approximately $1.5 million related to the swaps. As of March 31, 2003, taking into account the effect of the interest rate swaps, the effective interest rate on the notes was reduced to 2.6%.



As part of the assumption of $63.5 million of debt associated
with the purchase of two operating properties in August 2002, we purchased interest rate caps with a notional amount of $97.0 million and LIBOR capped at 6.75%. As of March 31, 2003, the fair market value of these interest rate caps was not
material.



Our unsecured line of credit carries
an interest rate of 30-day LIBOR plus 0.7%. 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 $90,000 for the first quarter of 2003.



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, 2002 are summarized in the Liquidity and Capital Resources section of the
Managements Discussion and Analysis of Financial Condition and Results of Operations.



Item 4. Controls and Procedures



Within the 90-day period prior to the filing of this quarterly report, an 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 of the design and operation of our disclosure controls and procedures as defined in Rule 13a-14 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. There have been no significant changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.



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##### Table of Contents



Part II



OTHER INFORMATION



|Item |  | 1. Legal Proceedings
|---- |  | --------------------



We are currently involved in two separate lawsuits with two stockholders of HQ Global. The first lawsuit involves the September 1998
conversion of an approximately $111.0 million loan that we made to HQ Global into stock of HQ Global. We, along with HQ Global, initiated this lawsuit in the United States District Court for the District of Columbia in February 1999, asking the
court to declare that the terms of the debt conversion were fair, after two minority stockholders threatened to challenge the terms of the conversion. These stockholders had claimed that both the conversion price used and the methods by which the
conversion price was agreed upon between HQ Global and us were not fair to HQ Global or these stockholders. Thereafter, these two stockholders filed their own counterclaims against HQ Global, the board of directors of HQ Global and us. The
stockholders asked the court to declare the conversion void or in the alternative for compensatory and punitive damages. Subsequently, we moved for summary judgement on the stockholders claims based on alleged breaches of fiduciary duties
(fiduciary claims) and the stockholders moved for summary judgement on their claim that the stock was void because of a statutory defect (statutory claim).



On September 12, 2001, the trial court granted these stockholders motion for summary judgment on the
statutory claim, declaring that the shares issued in connection with the conversion were null and void. The trial court also denied our motion for summary judgement. We believed that the trial court incorrectly interpreted Delaware law in this case
and appealed the decision on October 2, 2001.



On
March 7, 2003, the United States Court of Appeals for the District of Columbia issued an opinion reversing the trial court and granting summary judgment to us. On April 3, 2003, the minority shareholders filed a Petition for Panel Rehearing. In
their Petition, the minority shareholders argued that the court erred in granting summary judgment on the fiduciary claims and requested that the court affirm the denial of our motion for summary judgment on the fiduciary claims or remand for the
trial court to further consider those claims. On April 23, 2003, we filed a Response to the Petition for Panel Rehearing. We recognize that there is a possibility that the minority shareholders will be successful in their Petition for Panel
Rehearing on their fiduciary claims. In that event, there are a number of possible outcomes, including a reduction in our equity interest in HQ Global (which we have already written down the value to zero) or a cash payment by us to these
stockholders. We currently believe that the value of any loss we may incur in this matter should not exceed $10.0 million, including losses under the directors indemnification discussed below, although we cannot assure you that this will be
the case.



The second lawsuit involves claims
filed by these two stockholders in April 2000 arising out of the June 2000 merger transaction involving HQ Global and VANTAS Incorporated. In this lawsuit, these two stockholders have brought claims against HQ Global, the board of directors of HQ
Global, FrontLine Capital Group and us in Delaware Chancery Court. The two stockholders allege that, in connection with the merger transaction, we breached our fiduciary duties to the two stockholders and breached a contract with the stockholders.
The claim relates principally to the allocation of consideration paid to us with respect to our interest in an affiliate of HQ Global that conducts international executive suites operations. The stockholders asked the court to rescind the
transaction, or in the alternative for compensatory and rescissory damages. The court determined that it would not rescind the merger transaction, but held open the possibility that compensatory damages could be awarded or that another equitable
remedy might be available. We believe that these claims are without merit and that we will ultimately prevail in this action, although we cannot assure you that the court will not find in favor of these stockholders. We continue to believe, however,
that, even if the court finds in favor of these stockholders, any such adverse result will not have a material adverse effect on our financial condition or results of operations.



In connection with the HQ Global/VANTAS merger transaction, we agreed to indemnify all of the individuals who
served as directors of HQ Global at the time of the transaction, including Thomas Carr, Oliver Carr and Philip Hawkins, who currently serve as directors and/or executive officers of us, with respect to any losses incurred by them arising out of the
above litigation matters, if they first tried and were unsuccessful in getting the losses reimbursed by HQ Global or from insurance proceeds. It was expected at the time that these former directors would be indemnified against any of these losses by
HQ Global, as required by HQ Globals certificate of incorporation and bylaws. HQ Global has not satisfied its indemnity obligation to these directors, and in light of HQ Globals bankruptcy filing in March 2002, is not likely to do so in
the future. As a result, we have paid the costs incurred by these directors in connection with the above litigation matters. As of March 31, 2003, we had paid approximately $600,000 of costs pursuant to this indemnification arrangement, all of which
represents amounts paid to legal counsel for these directors.



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##### Table of Contents



We are
currently involved in two lawsuits arising out of a sublease entered into by HQ Global in March 1998 and our guarantee to the landlord of the performance of HQ Globals obligations under the sublease. On March 13, 2002 HQ Global filed for
bankruptcy protection under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the District of Delaware. In its bankruptcy proceedings, HQ Global rejected the sublease effective April 30, 2002. In June 2002, we
received a demand for payment by the landlord of the full amount of the guarantee (approximately $5.4 million of rent payments remain under the sublease).



We believe, however, that we have defenses to making payment under the guarantee and therefore joined with HQ Global in filing suit on
July 24, 2002 in HQ Globals bankruptcy proceedings asking the bankruptcy court to declare that the sublease was terminated not later than February 28, 2002. In February 2002, HQ Global, with the knowledge of the landlord, vacated the space it
was subleasing and surrendered possession of the space to the landlord. The landlord then began utilizing the space for its own benefit, as a storage and staging area related to construction the landlord was performing on other space it occupied. We
believe that the landlords use of the space effectively terminated the sublease as a matter of law and that therefore we have no obligation to make payments under the guarantee.



On July 26, 2002, the landlord under the sublease filed suit in the United States District Court for the
Southern District of New York seeking payment from us under the guarantee. The District Court in New York ruled that the bankruptcy court should determine which of the two courts should decide this dispute. The bankruptcy court has not yet decided
that issue.



In light of our defenses and these
proceedings, we have not accrued any expense relating to this guarantee; however, there can be no assurance as to the outcome of the pending litigation or that we will not incur expense or be required to make cash payments relating to this guarantee
up to the full amount of the guarantee. As of March 31, 2003 we had not made any payments under this guarantee. However, even if the landlord were successful in its claims, we do not believe that this result would have a material adverse effect on
our financial condition.



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 and Reports on Form 8-K
|---- |  | -----------------------------------



| | (a) |  | Exhibits
| | --- |  | --------



| | 10.1 |  | Change in Control Employment Agreement by and between CarrAmerica Realty Corporation and Linda Madrid, dated January 29, 2003 filed herewith.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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



None



33



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##### Table of Contents



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, Controller (on behalf of the registrant and as the registrants chief accounting
officer)



Date:  May 7, 2003



34



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##### Table of Contents



CERTIFICATION



I, Thomas A. Carr, certify
that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of CarrAmerica Realty Corporation;
| | -- |  | -------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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



Date:  May 7, 2003



|                                      
|--------------------------------------
|/s/    THOMAS A.
CARR                 
|Thomas A. Carr Chief Executive Officer



---

##### Table of Contents



CERTIFICATION



I, Stephen E. Riffee,
certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of CarrAmerica Realty Corporation;
| | -- |  | -------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | c) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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



Date: May 7, 2003



|                                         
|-----------------------------------------
|/s/    STEPHEN E.
RIFFEE                 
|Stephen E. Riffee Chief Financial Officer