10-K 1 l12414ae10vk.txt TOWN & COUNTRY TRUST 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to __________________ Commission File No. 001-12056 --------- THE TOWN AND COUNTRY TRUST -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) MARYLAND 52-6613091 --------------------------------------- ------------------------------------- (State or Other Jurisdiction (IRS Employer Identification Number) of Incorporation or Organization) 300 East Lombard Street Baltimore, Maryland 21202 --------------------------------------- ------------------------------------- (Address of Principal Executive Office) (ZIP Code) (410) 539-7600 -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Shares of Beneficial Interest New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---- [Cover Continued on Following Page] [Cover Continued From Previous Page] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No --- --- Aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2004: $439,650,512. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practical date: 17,551,823 Common Shares of Beneficial Interest, $.01 Par Value, at February 17, 2005 -------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Document Document In Which Incorporated -------- --------------------- Portions of the Registrant's Notice of I and III Annual Meeting and Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005 None of the Report of the Compensation Committee of the Board of Trustees on Executive Compensation, the Audit Committee Report or the Performance Graph contained in the Registrant's Notice of Annual Meeting and Proxy Statement for the annual meeting of shareholders be held on May 4, 2005 shall be deemed incorporated by reference herein. 2 SAFE HARBOR STATEMENT The matters discussed herein include certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Town and Country Trust (the "Company") intends that such forward-looking statements be subject to the safe harbors created by such Acts. Words and phrases such as "looking ahead," "we are confident," "should be," "will be," "predicted," "believe," "expect," "anticipate," and similar expressions identify forward-looking statements. These forward-looking statements reflect the Company's current views regarding future events and financial performance but are subject to many known and unknown risks, uncertainties, and other factors relating to the Company's operations and business environment which may cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: - Interest rate fluctuations; - Competition for tenants and acquisitions from others, many of whom may have greater financial resources than the Company; - Changes in rental rates which may be charged by the Company in response to market rental rate changes or otherwise; - Changes in federal income tax laws and regulations; - Any changes in the Company's capacity to acquire additional apartment properties and any changes in the Company's financial condition or operating results due to the acquisition of additional apartment properties; - Unanticipated increases in rental expenses due to factors such as casualties to the Company's apartment properties or adverse weather conditions in the geographic locations of the Company's apartment properties; - Local economic and business conditions, including, without limitation, conditions that may affect public securities markets generally, the real estate investment trust industry, or the markets in which the Company's apartment properties are located. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that such statements will prove to be accurate. In view of the significant uncertainties associated with such forward-looking statements, the inclusion of this information should not be construed as a representation by the Company that the results or conditions described in such statements will be achieved. The Company undertakes no obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. 3 PART I ------ ITEM 1. BUSINESS GENERAL The Registrant, The Town and Country Trust (the "Trust" and, together with its consolidated subsidiaries and other controlled entities, the "Company"), is a self administered and self managed real estate investment trust ("REIT"), organized in Maryland in 1993. The Company operates in one industry segment, the ownership and operation of multifamily apartment communities. The Trust conducts substantially all of its operations through its operating partnership, The TC Operating Limited Partnership (the "Operating Partnership"), in which it holds an 88% general partnership interest at February 17, 2005. The remaining 12% limited partnership interest in the Operating Partnership is held by certain of the indirect predecessor owners of the Company's original 26 properties, including the successors of the late Alfred Lerner, the Trust's former Chairman, and Harvey Schulweis, the Trust's Chairman of the Board and Chief Executive Officer. At December 31, 2004, the Company owned 38 apartment communities (the "Properties") with 13,065 apartment units located in selected markets in the Mid-Atlantic region and Florida. The Company's headquarters is located at 300 East Lombard Street, Baltimore Maryland 21202 and its telephone number is (410) 539-7600. The Registrant makes available free of charge, through its website (www.tctrust.com), its reports on Form 10-K, 10-Q and 8-K as soon as practicable after they are electronically filed with the Securities and Exchange Commission. The Company's objective is to continue to be a significant owner of middle-income apartment communities in select markets in the Mid-Atlantic and Southeast regions of the United States. The Company seeks to own and operate apartment communities in markets that it believes will achieve acceptable population and employment growth and in other markets it considers to have high barriers to entry. At December 31, 2004, approximately 38.2% of the Company's apartments were located in the greater Baltimore metropolitan area and an additional 26% were located in the greater Washington, D.C. metropolitan area. The Company seeks to acquire additional apartment communities in its operating region, particularly in the greater Washington, D.C. and Baltimore metropolitan areas, and in Florida. In 2004, the Company sold two apartment communities with 580 units in Charlotte, North Carolina, for an aggregate consideration of $31.1 million, including disposition costs. The Company continues to seek new investment opportunities that meet its investment criteria. While the Company prefers investments within its operating region, it also will consider acquisitions beyond its existing markets if, among other things, they are large enough to support the overhead associated with establishing and maintaining dedicated regional and/or district offices. The Company prefers acquisitions in markets with long term stability, reasonably high barriers to entry and the potential for establishing a meaningful ownership position over time. 4 The Company continues to implement the ongoing program of reinvesting significant capital in its existing portfolio. During 2004, the Company began or continued renovations to seven of its communities containing 3,646 units. One other 336 unit community had renovations completed in 2003. The renovations include the installation of new kitchens and baths, washers and dryers, new entranceways and windows. At one of these properties, the renovation included the completion of a 7,200 square foot clubhouse, which has helped make it one of the premier communities in its market. Renovations at 1,122 units were completed during 2004 bringing the total completed to 1,872 units. The Company expects to expand the program to several additional communities and to have a slightly higher number of units completed during 2005. PROPERTY MANAGEMENT Each of the apartment communities is managed by the Operating Partnership. The management staff for each community includes on-site management and maintenance personnel as well as off-site support staff. On-site staff performs leasing and rent collection functions and coordinates maintenance and resident services. Property management staff are supervised by regional managers. COMPETITION All of the Company's apartments are located in developed areas and compete with numerous other apartment communities within their respective sub-markets. In many of the Company's apartment markets, the competition for residents is intense. Some competing communities are larger or newer than the Company's apartments and many offer features that the Company's communities do not have. The competitive position of each of the Company's apartment communities varies. Certain of the Company's competitors may have greater financial resources and other competitive advantages over the Company. FINANCING All of the Company's properties are encumbered by mortgage debt. Thirty-three properties are pledged as collateral for the Company's master credit facility with Fannie Mae and the remaining five properties are encumbered by individual mortgage loans from Freddie Mac. At December 31, 2004, outstanding borrowings under the Company's credit facility with Fannie Mae totaled $340 million. Of this amount, $300 million bears interest at a fixed rate of 6.91%. The remaining $40 million outstanding has a weighted-average variable rate of 2.43% at December 31, 2004 and can be converted to a fixed-rate term loan at the Company's option. The Company has a $50 million bank line of credit. Advances under the line bear interest at 120 basis points over LIBOR and are due on demand. Up to $10 million of the line may be used for working capital purposes and $40 million may be used to fund acquisitions. In October 2004, the Company renewed this line of credit through October 2005 and at the Company's option the line may be extended through October 2007. As of December 31, 2004, $2 million was outstanding under the line. 5 The Company has $74.75 million principal amount of 5.375% Convertible Senior Notes outstanding which mature on August 15, 2023. The notes are convertible into the Company's common shares under certain circumstances, provided that the share price exceeds $30.61 over a specified trading period. The initial conversion rate is 39.20185 shares per $1,000 principal amount of notes (equivalent to $25.51 per share) and is subject to adjustment under certain circumstances, including stock splits, stock dividends and increases in the dividend rate over the current quarterly rate of $.43 per share. The notes are redeemable at the Company's option for shares or cash at any time on or after August 21, 2010 and are subject to repurchase at the option of the holder in August, 2008, August, 2010, August, 2013, and August, 2018, or upon the occurrence of certain events. The notes are unsecured and unsubordinated obligations of the Company. The Company uses interest rate protection agreements to reduce the potential impact of increases in interest rates as required by its secured credit facility. The Company maintains two interest rate protection agreements for $139 million and $49.2 million, capping the Company's exposure to LIBOR at 9.35% and 7.5%, respectively, through March 2007. In addition, the Company executed two $20 million floating to fixed interest rate swaps to effectively fix the interest rate on $40 million of floating rate debt under the secured credit facility at a blended rate of approximately 4.67%. The Company simultaneously sold two $20 million interest rate caps, capping the Company's exposure to LIBOR at 9.35%. These interest rate protection agreements hedge interest payments consistent with the Company's risk management objective and strategy to reduce exposure to variability in cash flows attributable to increases in LIBOR. ENVIRONMENTAL MATTERS Under various Federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such enactments often impose liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may affect adversely the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real property for personal injury associated with ACMs. In connection with its ownership and operation of the Properties, the Trust, the Operating Partnership, or any of their respective direct or indirect subsidiaries, as the case may be, potentially may be liable for such costs. All of the Properties have been subjected to a Phase I or similar environmental assessment which generally does not involve invasive techniques such as soil or ground water sampling. These assessments have not revealed any environmental conditions that the Company believes will have a material adverse effect on its business, assets, financial condition or results of operations, nor is the Company aware of any material environmental liability. 6 EMPLOYEES As of December 31, 2004, the Company had 412 employees. ITEM 2. PROPERTIES. The Properties consist of 38 multifamily properties comprising 13,065 apartment units located in suburban Baltimore, Maryland; suburban Washington, D.C. and northern Virginia; southeastern Pennsylvania; Delaware; and Florida. The average occupancy rate for all Properties for fiscal 2004 and fiscal 2003 was 92.6% and 93.5%, respectively. Tenant leases are generally for one-year terms and often require security deposits. Approximately 96% of the apartments in the Properties are one-bedroom and two-bedroom apartments. The balance are three-bedroom apartments. The Properties typically consist of two- and three-story buildings in a landscaped setting, many with amenities such as swimming pools, tennis courts, playgrounds and community buildings. All apartments offer air conditioning. The majority of such buildings are of brick construction and all of the Properties are located in mature, fully-developed neighborhoods. The following table presents certain additional information concerning the Properties :

2004 ~~SECURITIES~~NUMBER ~~AND~~AVERAGE ~~EXCHANGE~~PROPERTY ~~COMMISSION~~ NAME PROPERTY LOCATION OF UNITS OCCUPANCY(1) ------------- ----------------- -------- ------------ BALTIMORE Bowleys Quarters Baltimore, Maryland 462 93.3% Excalibur at Avalon Pikesville, Maryland 147 92.3% Howard Crossing Ellicott City, Maryland 1,350 91.9% Hallfield Perry Hall, Maryland 75 98.0% Skylark Pointe Carney, Maryland 336 93.2% Hollows Glen Burnie, Maryland 336 94.2% Ridgeview Rossville, Maryland 257 90.4% Eagles Walk at White Marsh (2) Rossville, Maryland 692 79.3% Steeplechase Cockeysville, Maryland 540 91.6% The Courts of Avalon Pikesville, Maryland 258 93.6% Versailles Towson, Maryland 210 96.9% Woodhill Glen Burnie, Maryland 334 92.3% WASHINGTON, D.C. ~~20549~~Barton's Crossing Alexandria, Virginia 532 93.9% Carlyle Station Manassas, Virginia 408 94.4% Fox Run Germantown, Maryland 218 91.4% Lionsgate Herndon, Virginia 328 93.2% Tall Oaks Laurel, Maryland 352 92.6% The Glen Leesburg, Virginia 134 95.4% The Village at McNair Farms Herndon, Virginia 283 95.3% University Heights Ashburn, Virginia 466 92.6% Willow Lake Laurel, Maryland 456 94.4%

~~FORM~~2004 10NUMBER AVERAGE PROPERTY NAME PROPERTY LOCATION OF UNITS OCCUPANCY(1) -K------------ ----------------- -------- ------------ Watkins Station Gaithersburg, Maryland 210 90.4% PENNSYLVANIA Colonial Crest Emmaus Emmaus, Pennsylvania 329 92.8% Hanover Hanover, Pennsylvania 215 94.0% Hidden Village Allentown, Pennsylvania 264 91.3% Lancaster East Lancaster, Pennsylvania 272 89.4% Lancaster West Lancaster, Pennsylvania 413 88.1% Rolling Hills York, Pennsylvania 184 97.0% York York, Pennsylvania 396 89.0% NEWARK, DELAWARE Christina Mill Newark, Delaware 228 94.7% Stonegate Elkton, Maryland 260 91.8% FLORIDA Gardens East Apartments Palm Beach Gardens, Florida 448 94.7% Heron's Run Sarasota, Florida 274 96.3% Kirkman Orlando, Florida 370 95.3% McIntosh Sarasota, Florida 212 94.4% Perico Bradenton, Florida 256 95.8% Twelve Oaks Orlando, Florida 284 93.8% Windermere Lakes Orlando, Florida 276 93.9% Total 13,065 92.6% ------

---------- (1) Average occupancy is defined as total market rent at 100% less market rent on vacant units divided by total market rent for the period, expressed as a percentage. (2) Property is undergoing major renovation. ITEM 3. LEGAL PROCEEDINGS There were no legal proceedings pending at December 31, 2004 or as of the date of this report to which the Registrant, the Operating Partnership or any of the separate general partnerships and limited liability companies which own the Properties is a party or to which the Properties are subject that are likely to have a material adverse impact on the Registrant's operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 8 EXECUTIVE OFFICERS OF THE REGISTRANT The age (as of February 15, 2005), business experience during the past five years and offices presently held by Harvey Schulweis are set forth under the caption "Election of Trustees" in the Registrant's Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005, which information is incorporated herein by reference. Such information in respect of each of the Registrant's Executive Officers who are not Trustees is reported below. The Registrant's Bylaws provide that officers shall hold office until their successors are elected and qualified. Thomas Brodie: Age 42. Mr. Brodie has served as President and Chief Operating Officer of the Registrant since November 2004. Prior thereto, he served as Executive Vice President-Co-Chief Operating Officer of the Registrant from February 2003 to November 2004. He served as Senior Vice President and Chief Investment Officer of the Registrant from May 2001 to February 2003. Mr. Brodie also has served as Managing Director of Schulweis Realty, Inc., a private real estate investment and development firm, since 1991. Prior to 1991, Mr. Brodie was a Senior Vice President of Lazard Realty, Inc. Alan W. Lasker: Age 58. Mr. Lasker has served as Senior Vice President-Finance, Chief Financial Officer and Assistant Secretary of the Registrant since February 2003. Prior thereto, he served as Senior Vice President-Finance of the Registrant since February 2000 and Vice President-Finance of the Registrant since July 1997. Mr. Lasker also has served as Senior Vice President of Schulweis Realty, Inc., a private real estate investment and development firm, since 1991. Prior to 1991, Mr. Lasker was a Senior Vice President of Lazard Realty, Inc. Mr. Lasker is a Certified Public Accountant. W. Daniel Brown: Age 54. Mr. Brown has served as Senior Vice President - Human Resources of the Registrant since May of 2001. Prior to joining the Company he held the same position at Prime Retail, LP beginning in 1998. From 1994 through 1998, Mr. Brown was a Vice President in Human Resources at T. Rowe Price Associates. Prior to joining T. Rowe Price, Mr. Brown was a member of the Principal Professional Staff of the Johns Hopkins University Applied Physics Laboratory (APL) from 1984 through 1994. Mr. Brown holds professional certifications in both human resources and compensation. William J. Fishell: Age 50. Mr. Fishell has served as Vice President - Treasurer of the Registrant since February 2004. Previously, he served as Vice President - Controller of the Registrant since its initial public offering in 1993. He has been the Principal Accounting Officer of the Registrant since February 2003. Prior thereto, Mr. Fishell served as Assistant Vice President - Assistant Controller since 1979. 9 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS The Company's common shares of beneficial interest are listed on the New York Stock Exchange under the trading symbol "TCT."

SALES ~~(Mark~~PRICE ~~One)~~CASH ------------------------------- DIVIDENDS QUARTER ENDED HIGH LOW DECLARED -------------------------------------------------------------------------- March 31, 2003 $ 21.35 $ 19.51 $.43 June 30, 2003 $ 23.91 $ 20.18 $.43 September 30, 2003 $ 24.69 $ 22.40 $.43 December 31, 2003 $ 25.63 $ 22.25 $.43 March 31, 2004 $ 27.20 $ 24.99 $.43 June 30, 2004 $ 27.93 $ 22.50 $.43 September 30, 2004 $ 25.86 $ 24.00 $.43 December 31, 2004 $ 29.21 $ 25.25 $.43

On February 2, 2005, a cash dividend of $.43 per share was declared, payable March 10, 2005, to shareholders of record as of February 18, 2005. At December 31, 2004, the approximate number of record holders of the Trust's shares was 492. This does not include beneficial owners for whom Cede & Co. or others act as nominee. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information concerning the Amended and Restated 1993 Long Term Incentive Plan and the 1997 Long Term Incentive Plan, both of which have been approved by the shareholders of the Trust. The figures shown are for the year ended December 31, 2004.

Number ~~[X]~~of ~~Annual~~Securities ~~report~~To ~~pursuant~~be toWeighted-Average ~~Section~~Exercise 13Number orof ~~15(d)~~Securities ofIssued ~~the~~Upon ~~Securities~~Exercise ~~Exchange~~of ~~Act~~Price of ~~1934 (Fee~~Outstanding ~~Required)~~Remaining Available for Outstanding Options Options Future Issuance Under Equity Compensation Plans ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity Compensation Plans Approved by the Shareholders 227,666 $19.67 373,034 -----

10 ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data

(In ~~For~~thousands, ~~the~~except ~~fiscal~~per ~~year~~share data) / Year ended December 31, 2004 2003 2002 2001 2000 ----------- ----------- ----------- ----------- ----------- OPERATING DATA Rental income $ 126,975 $ 118,017 $ 110,232 $ 107,401 $ 100,238 Operating expenses 53,710 50,670 44,978 42,105 37,487 ----------- ----------- ----------- ----------- ----------- Net operating income 73,265 67,347 65,254 65,296 62,751 Depreciation and amortization 30,083 21,387 18,483 17,645 18,721 Interest expense 32,969 28,785 25,216 24,387 27,148 General and administrative expenses 5,866 4,744 4,595 4,355 3,557 Separation expense 1,533 -- -- 3,338 -- Gain on sales of operating properties -- -- -- -- 9,461 ----------- ----------- ----------- ----------- ----------- Income before discontinued operations and minority interest 2,814 12,431 16,960 15,571 22,786 Income allocated to minority interest from continuing operations (364) (1,681) (2,269) (2,110) (3,108) Minority interest distributions less than (in excess of) earnings -- 576 (576) -- -- ----------- ----------- ----------- ----------- ----------- Income from continuing operations 2,450 11,326 14,115 13,461 19,678 Discontinued operations: Income from discontinued operations 918 2,054 3,669 1,730 3,026 Gain on sales of properties -- 80,081 -- -- -- Impairment of assets held for disposition (1,672) (4,000) -- -- -- Loss (income) allocated to minority interest from discontinued operations 100 (10,693) (492) (235) (413) ----------- ----------- ----------- ----------- ----------- (Loss) income from discontinued operations (654) 67,442 3,177 1,495 2,613 ----------- ----------- ----------- ----------- ----------- Net income(1) $ 1,796 $ 78,768 $ 17,292 $ 14,956 $ 22,291 =========== =========== =========== =========== =========== Basic earnings per share: Income from continuing operations $ .15 $ .72 $ .88 $ .86 $ 1.26 (Loss) income from discontinued operations (.04) 4.27 .20 .09 .17 ----------- ----------- ----------- ----------- ----------- Net income $ .11 $ 4.99 $ 1.08 $ .95 $ 1.43 =========== =========== =========== =========== =========== Diluted earnings per share: Income from continuing operations $ .14 $ .70 $ .87 $ .84 $ 1.24 (Loss) income from discontinued operations (.04) 4.20 .20 .09 .16 ----------- ----------- ----------- ----------- ----------- Net income $ .10 $ 4.90 $ 1.07 $ .93 $ 1.40 =========== =========== =========== =========== ===========

(In ~~[ ]~~thousands) ~~Transition~~2004 ~~report~~2003 ~~pursuant~~2002 to2001 ~~Section~~2000 13----------- or----------- ~~15(d)~~----------- of----------- ~~the~~----------- ~~Securities~~BALANCE ~~Exchange~~SHEET ~~Act~~DATA ofAT ~~1934~~YEAR-END Real estate assets, at cost $ 815,318 $ 809,135 $ 665,998 $ 643,271 $ 626,079 Net real estate assets 543,334 535,752 412,854 407,902 407,768 Real estate and other assets held for disposition -- 32,561 73,336 74,119 75,419 Total assets 562,084 588,990 503,785 498,962 498,552 Mortgage notes payable 415,132 427,318 422,003 390,587 390,946 Notes payable 2,000 -- -- 16,000 5,000 5.375% Convertible Senior Notes 74,750 74,750 -- -- -- Mortgage notes payable and other liabilities held for disposition -- 23,734 71,346 70,175 70,191 Minority interest 6,592 7,556 -- 905 2,803 Shareholders' equity (Nodeficit) ~~Fee~~46,717 ~~Required~~39,362 (1,610) 9,492 20,052

(In ~~For~~thousands, ~~the~~except ~~transition~~per ~~period~~share data) / 31, Year ended December 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION Dividends declared per share $ 1.72 $ 1.72 $ 1.72 $ 1.72 $ 1.68 ========== ========== ========== ========== ========== Net cash provided by operating activities $ 37,546 $ 43,107 $ 42,875 $ 42,221 $ 38,875 Net cash used in investing activities (7,542) (30,585) (25,615) (21,335) (30,474) Net cash used in financing activities (31,326) (12,896) (16,311) (20,456) (9,419) Reconciliation of net income to funds from ~~__________________~~operations: Net income(1) $ 1,796 $ 78,768 $ 17,292 $ 14,956 $ 22,291 Income allocated to ~~__________________~~ minority interest 264 11,798 3,337 2,345 3,521 Gain on involuntary conversion (558) (621) -- -- -- Gain on sales of properties -- (80,081) -- -- (9,461) Real estate depreciation 28,859 23,175 21,153 20,359 21,809 ---------- ---------- ---------- ---------- ---------- Funds from operations (1),(2) $ 30,361 $ 33,039 $ 41,782 $ 37,660 $ 38,160 ========== ========== ========== ========== ==========

(1) Net income and funds from operations for the years ended December 31, 2004 and 2003 include a $1.7 million and $4 million impairment charge, respectively, on the Charlotte properties sold during 2004. Net income and funds from operations for the years ended December 31, 2004 and 2001 include a charge of $1,553,000 and $3,338,000, respectively, related to the departure of certain executives. (2) Funds from operations ("FFO") is computed as net income (loss) (computed in accordance with U.S. generally accepted accounting principles) ("U.S. GAAP") excluding gains and losses from sales and involuntary conversions of operating properties, plus real estate depreciation and income allocated to minority interest. This computation of FFO is consistent with the formal definition promulgated by the National Association of Real Estate Investment Trusts (NAREIT). The reconciliation of FFO to Net Income, the most directly comparable financial measure calculated in accordance with GAAP, is included in the table above. Management generally considers FFO to be a useful measure for reviewing the comparative operating performance of the Trust between periods or as compared to other companies, without giving effect to real estate depreciation and amortization, which assumes that the value of real estate diminishes predictably over time and which can vary among owners of similar assets based upon historical cost and useful life estimates. FFO should not be considered an alternative to net income as a measure of performance nor does it represent cash generated from operating activities in accordance with GAAP and, therefore, it should not be considered indicative of cash available to fund cash needs. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Town and Country Trust owns an approximate 88% general partnership interest in The TC Operating Limited Partnership, which, through wholly-owned subsidiary entities, holds the operating assets of the Company. The remaining 12% is owned by minority interest partners that hold limited partnership units, which are convertible by the holders into the Company's common shares of beneficial interest on a one-for-one basis. The general and limited partnership interests in the TC Operating Limited Partnership are represented by Operating Partnership units ("OP Units"). At December 31, 2004, the Company owned 17,479,576 OP Units and the minority interests held 2,466,535 OP Units. The Town and Country Trust, organized in 1993, is a real estate investment trust ("REIT") focused on the ownership and operation of multifamily apartment communities in selected markets in the Mid-Atlantic and Southeast regions of the U. S. At December 31, 2004, the Company owned 38 apartment communities with 13,065 apartment homes. The Company seeks to acquire additional apartments in certain of its existing markets, and other "high barrier to entry" markets, particularly in the Greater Washington, D. C. and Baltimore metropolitan areas and in Florida. In addition, the Company continues to evaluate its portfolio for communities and/or submarkets that may no longer match its long-term strategy. In 2003, the Company acquired three apartment communities with an average age of 4.3 years while disposing of five apartment communities with an average age of 35.8 years. In 2004, the Company exited the Charlotte, North Carolina market through the strategic disposition of its two apartment communities located there. During 2004, the Company had been unable to find suitable investment opportunities in its preferred markets at acceptable pricing, as the investment climate for multifamily properties has continued to be extremely competitive. The Company continues to aggressively reinvest in its existing portfolio. Renovation projects include modernization of kitchens and bathrooms, new building entrances and windows, new business and fitness centers, and the addition of washers and dryers inside apartment homes. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. 13 GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. IMPAIRMENT OF REAL ESTATE ASSETS The Company periodically evaluates its apartment communities for potential impairment indicators. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the apartment communities. Future events could cause management to conclude that impairment indicators exist and that the Company's portfolio of apartment communities is impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. REAL ESTATE The Company capitalizes expenditures made to acquire new assets or to substantially improve the value or extend the useful life of an existing asset. Any expenditure to repair or maintain an existing asset in normal operating condition is expensed as incurred. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. In assessing estimated useful lives, the Company makes assumptions based on historical experience acquired from both within and outside the Company. The Company accounts for property acquisitions utilizing the purchase method, and accordingly, the results of acquired properties are included in the Company's results of operations from the date of acquisition. The Company allocates the purchase price to the acquired tangibles, consisting of land, building and improvements, and, if material, to identified intangible assets and liabilities, consisting of above/below market leases and at-market leases in place based on their fair values. REVENUE RECOGNITION Revenue from rental property is recognized on a straight-line basis over the terms of the lease. Leases are generally for terms of one year or less. Gains on sales of real estate assets are recognized pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 66, Accounting for Sales of Real Estate. The specific timing of the recognition of the sale and the related gain are measured against the various criteria in SFAS No. 66 related to the terms of the transactions and the Company's continuing involvement, if any, associated with the assets sold. To the extent the sales criteria are not met, the Company defers gain recognition until the sales criteria are met. DISCONTINUED OPERATIONS SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that the assets and liabilities and the results of operations of any communities which have been sold since January 1, 2002, or otherwise qualify as held for sale, be presented as discontinued operations in the Company's consolidated financial statements in both current and prior periods presented. The community-specific components of net income that are presented as discontinued operations include net operating income, depreciation expense, minority interest and interest expense. In addition, the net gain or loss (including any impairment charge) on the disposition of communities held for sale is presented as discontinued operations. A change in presentation for discontinued operations does not have any impact on the Company's financial conditions or results of operations. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less costs to sell, and are presented separately in the accompanying Consolidated Balance Sheet. Subsequent to classification of a community as held for sale, no further depreciation is recorded on the assets. HEDGE ACCOUNTING The Company carries all derivative financial instruments as assets or liabilities on its balance sheets at fair value. Changes in fair value of these instruments, which qualify as cash flow hedges, are recorded as a component of other comprehensive income (loss). Any ineffective portion of the change in value is recorded to current period earnings. Furthermore, should any change in management strategy, or other circumstance, cause an existing highly effective hedge to become entirely ineffective, the accumulated loss or gain in the value of the derivative instrument since its inception may be required to be immediately reclassified from the shareholders' equity section of the balance sheet to the income statement. NEW ACCOUNTING PRONOUNCEMENT In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 123 (revised 2004), Share Based Payment ("Statement No.123(R)"). Statement No. 123(R) requires all 14 share-based payments to employees, including grants of employee stock options, to be recorded as an expense based on their fair values. The grant-date fair value of employee share options and similar instruments will be estimated using an option-pricing model adjusted for any unique characteristics of a particular instrument. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The Company will adopt the provisions of SFAS No. 123(R) during the third quarter 2005. The adoption of this new standard will not have a material effect on the financial position or financial results of the Company. RESULTS OF OPERATIONS The Company's results include the results of both continuing and discontinued operations. Income from Discontinued Operations in the accompanying statement of operations reflects the results of operations of seven apartment communities (2,905 apartment homes) that were sold since the beginning of 2003. The Company's results from continuing operations consist of both "Same Store" results and results of new acquisitions. "Same Store" results reflect results from 12,332 apartment homes owned and operated throughout both 2004 and 2003. Results from new acquisitions include results from three communities (733 apartment homes) acquired in 2003. YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Net income for 2004 was $1,796,000, or $0.10 per diluted share, a decrease of $76,972,000 from $78,768,000, or $4.90 per diluted share, for the year ended December 31, 2003. Included in 2003 net income is an $80,081,000 gain resulting from the sale of five communities in 2003. Included in net income for 2004 and 2003 is $1,672,000 and $4,000,000, respectively, of impairment charges recorded on properties that were sold during 2004. Net income for 2004 also includes a separation charge of $1,533,000 related to the departure of two senior executives consisting primarily of cash payments that will be paid during 2005 and 2006. During 2004, the Company revised the estimated useful lives of certain depreciable assets, principally carpet, to more closely approximate their current economic lives based upon the Company's capital improvement and renovation plans. This change in accounting estimate resulted in additional depreciation expense of $6,493,000. CONTINUING OPERATIONS - Same Store Communities Operating results for the Same Store communities are set forth in the table below:

(In ~~Commission~~thousands) ~~File~~/ NoYear ended December 31, 2004 2003 Change Rental income $115,710 $112,660 $ 3,050 2.7% ~~001~~Operating expenses 49,581 48,570 1,011 2.1% -~~12056~~------- -------- -------- --- Net operating income $ 66,129 $ 64,090 $ 2,039 3.2% ======== ======== ======== ===

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

~~THE~~(In ~~TOWN~~thousands) ~~AND~~/ ~~COUNTRY~~Year ~~TRUST~~ ended December 31, 2004 2003 Same Store net operating income $ 66,129 $ 64,090 Deduct (add): Real estate depreciation 28,859 20,675 Interest expense 32,969 28,785 General and administrative 5,866 4,744 Other depreciation and amortization 1,224 712 Separation expense 1,533 -- (Loss) income from discontinued operations 754 (78,135) Net operating income from acquisitions (7,136) (3,257) Income allocated to minority interest 264 11,798 -------- -------- Net income $ 1,796 $ 78,768 ======== ========

15 The Company uses net operating income (NOI) to measure the operating results of its communities and to compare the operating performance of single assets or groups of assets. The Company defines NOI as property rental income less property operating expenses and does not include general and administrative expenses, interest expense, depreciation and amortization, discontinued operations, or gains/losses on sales of properties. Accordingly, this performance measure is not intended as a replacement for net income determined in accordance with U.S. GAAP. NOI is widely used by management and investors in the real estate industry in connection with the valuation of income-producing real estate and as a supplemental measure of operating performance. NOI measures presented by the Company may not be comparable to other similarly titled measures of other companies. Same Store rental income for the year ended December 31, 2004, grew by $3,050,000 or 2.7%, reflecting an average rental rate increase of 3.3% despite a decline in occupancy of 110 basis points from 93.6% to 92.5%. Occupancy and average rent statistics for the Company's operating markets are as follows:

~~(Exact~~Average ~~Name~~Monthly Rent Occupancy % of ~~Registrant~~Portfolio(1) as2004 ~~Specified~~2003 inChange ~~Its~~2004 ~~Charter~~2003 Change Baltimore, Maryland 37.2% $ 770 $ 734 4.9% 91.1% 93.2% (2.1) % Metropolitan Washington, DC Northern Virginia 14.8% 1,070 1,036 3.3% 94.0% 94.4% (0.4)% Maryland Suburbs 10.0% 938 908 3.3% 92.6% 92.9% (0.3)% Pennsylvania 16.8% 654 638 2.5% 91.1% 94.4% (3.3)% Orlando, Florida 7.6% 724 715 1.3% 94.5% 91.7% 2.8% Sarasota/Bradenton, Florida 6.0% 760 744 2.2% 95.6% 93.2% 2.4% Newark, Delaware 4.0% 888 881 0.8% 93.1% 94.1% (1.0)% Palm Beach Gardens, Florida 3.6% 900 901 (0.1)% 94.7% 94.3% 0.4% Same Store Total 100.0% $ 817 $ 791 3.3% 92.5% 93.6% (1.1)%

(1) Based on number of Same Store apartment homes Same Store operating expenses for the year ended December 31, 2004, increased 2.1% or $1,011,000, to $49,581,000 from $48,570,000 in 2003. Operating expenses reflect an increase in repairs and maintenance of $623,000 or 4.4%, to $14,658,000 from $14,035,000 as the Company experienced approximately $573,000 in damages sustained in the 2004 hurricane season and annual salary increases offset by reduced snow removal cost reflecting return to historical levels of snowfall in 2004 following the record snowfall experienced on the East Coast in early 2003. Marketing and advertising increased $442,000 or 11.2% to $4,388,000 from $3,946,000 related to increased leasing costs as well as increased advertising for newly renovated properties. As a result, Same Store net operating income (i.e., rental income less operating expenses) increased $2,039,000 or 3.2% to $66,129,000 from $64,090,000. ACQUISITIONS During the year ended December 31, 2004, the three communities acquired in 2003 had net operating income of $7,136,000 compared to $3,257,000 for the prior year. INTEREST EXPENSE During 2003, the Company issued $74,750,000 of 5.375% Convertible Senior Notes due 2023. Interest expense for 2004 related to the notes was $4,106,000 compared to $1,659,000 for the year ended December 31, 2003. Interest expense on mortgage debt increased $1,737,000 or 6.4% to $28,863,000 from $27,126,000 last year. Despite a decrease in average debt outstanding attributable to continuing operations, from $457 million to $421 million, the weighted average interest rate attributable to this debt, excluding the Convertible Senior Notes, was 6.42% compared to 5.67% for last year resulting in an increase to interest expense. 16 DISCONTINUED OPERATIONS For the year ended December 31, 2004, the Company recorded a loss on discontinued operations of $654,000 compared to net income of $67,442,000 for the year ended December 31, 2003. The income from discontinued operations for the prior year includes an $80,081,000 gain related to the sale of five apartment communities containing 2,325 apartment homes in the Baltimore, Maryland suburbs. Discontinued operations for 2004 and 2003, included impairment charges of $1,672,000 and a $4,000,000, respectively, recorded on the Charlotte properties sold during 2004. DISTRIBUTIONS TO MINORITY INTEREST IN EXCESS OF EARNINGS U.S. GAAP requires that, for financial reporting purposes, an additional allocation of income be made to the minority interest account in an amount necessary to keep such balance from falling below zero since there is no requirement for the unit holders to make additional contributions. During 2003, earnings were in excess of distributions to minority interests and, therefore, the Company reallocated the $576,000 that had previously been so allocated to the minority interests. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Net income for 2003 was $78,768,000, or $4.90 per diluted share, an increase of $61,476,000 from $17,292,000 or $1.07 per diluted share, for the year ended December 31, 2002. Included in net income in 2003 is an $80,081,000 gain resulting from the sale of five communities in 2003. Also included in 2003 net income is a $4,000,000 impairment charge recorded on a property held for disposition. Net income also reflects a reallocation of additional income to minority interests in prior periods as discussed below. CONTINUING OPERATIONS - Same Store Communities Operating results for the Same Store communities are set forth in the table below:

MARYLAND	52-6613091
(State or Other Jurisdiction	(IRS Employer IdentificationNumber)
of Incorporation or Organization)
100 S. Charles Street
Baltimore, Maryland	21201
(Address of Principal Executive Office)	(ZIP Code)
(410) 539-7600
(Registrant’s Telephone Number, Including Area Code)

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

(In ~~Securities~~thousands) ~~registered~~/ ~~pursuant~~Year toended ~~Section~~December 1231, 2003 2002 Same Store net operating income $ 64,090 $ 65,254 Deduct (badd): ofReal ~~the~~estate ~~Act:~~depreciation 20,675 17,797 Interest expense 28,785 25,216 General and administrative 4,744 4,595 Other depreciation and amortization 712 686 Income from discontinued operations (78,135) (3,669) Net operating income from acquisitions (3,257) -- Income allocated to minority interest 11,798 3,337 -------- -------- Net income $ 78,768 $ 17,292 ======== ========

17 Same Store rental income for the year ended December 31, 2003, grew by $2,428,000 or 2.2%, reflecting an average rental rate increase of 2.1% and no change in physical occupancy at 93.6%. Occupancy and average rent statistics for the Company's operating markets are as follows:

~~Title~~Average ofMonthly ~~Each~~Rent ~~Class~~Occupancy ~~Name~~% of ~~Exchange~~Portfolio(1) on2003 ~~Which~~2002 ~~Registered~~Change ~~Common~~2003 ~~Shares~~2002 ofChange ~~Beneficial~~Baltimore, ~~Interest~~Maryland ~~New~~37.2% ~~York~~$ ~~Stock~~734 ~~Exchange~~$ 703 4.4% 93.2% 93.9% (0.7)% Metropolitan Washington, DC Northern Virginia 14.8% 1,036 1,045 (0.9)% 94.4% 93.0% 1.4% Maryland Suburbs 10.0% 908 869 4.5% 92.9% 93.7% (0.8)% Pennsylvania 16.8% 638 632 0.9% 94.4% 94.4% 0.0% Orlando, Florida 7.6% 715 721 (0.8)% 91.7% 91.5% 0.2% Sarasota/Bradenton, Florida 6.0% 744 746 (0.3)% 93.2% 92.9% 0.3% Newark, Delaware 4.0% 881 858 2.7% 94.1% 95.0% (0.9)% Palm Beach Gardens, Florida 3.6% 901 883 2.0% 94.3% 95.7% (1.4)% ----- ------ ------ --- ---- ---- --- Same Store Total 100.0% $ 791 $ 775 2.1% 93.6% 93.6% 0.0% ===== ====== ====== === ==== ==== ===

(1) Based on number of Same Store apartment homes Same Store operating expenses for the year ended December 31, 2003, increased 8.0% or $3,592,000, to $48,570,000 from $44,978,000 in 2002. Operating expenses reflect an increase in real estate taxes and insurance of $1,010,000, or 9.2%. Of the increase, $556,000 is attributable to the renewal of the Company's 2002-2003 insurance program, and the remaining $454,000 results from increased real estate taxes in certain of the Company's markets. Repairs and maintenance also increased $1,137,000 or 8.8%, to $14,035,000 from $12,898,000 as the Company experienced approximately $351,000 in increased payroll and snow removal cost related to the record snowfall experienced on the East Coast early in the year. An additional $515,000 of the increase reflects increased payroll and related expenses associated with higher staffing levels, lower associate turnover and other increased benefit costs. The harsh weather during the early months of 2003 and rising natural gas prices also adversely affected the Company's utility costs, which increased $677,000 or 10.6%, for the year ended December 31, 2003. Management expense increased $441,000 or 7.1%, to $6,619,000 from $6,178,000 as the Company continued to experience increased personnel and related benefit costs associated with the development of its human resources and technology infrastructure started in 2001. As a result, Same Store net operating income decreased $1,164,000 or 1.8% to $64,090,000 from $65,254,000. ACQUISITIONS During the year ended December 31, 2003, the three acquired communities experienced occupancy of 92.2% and contributed rental income of $5,357,000, operating expenses of $2,100,000, and net operating income of $3,257,000. INTEREST EXPENSE In August, 2003, the Company issued $74,750,000 of 5.375% Convertible Senior Notes due 2023. Interest expense related to the notes was $1,659,000. Interest expense on mortgage debt increased $1,910,000 or 7.6% to $27,126,000 from $25,216,000 the prior year. This increase reflects an increase in the average amount of outstanding debt attributable to continuing operations during the year to $457 million versus $410 million during last year, primarily as a result of borrowings incurred in connection with the 2003 acquisitions and with the funding of the Company's ongoing capital improvement program. During 2003, the weighted average interest rate attributable to the Company's average amount of debt outstanding attributable to continuing operations, excluding the Convertible Senior Notes, was 5.67% compared to 6.01% for the prior year. DISCONTINUED OPERATIONS For the year ended December 31, 2003, income from discontinued operations after minority interest was $67,442,000 compared to $3,177,000 for the prior year. The income from discontinued operations in 2003 includes an $80,081,000 gain related to the sale of five apartment communities containing 2,325 apartment homes in the Baltimore, Maryland suburbs. It also includes a $4,000,000 impairment charge recorded on one of the Charlotte properties held for disposition at December 31, 2003. 18 DISTRIBUTIONS TO MINORITY INTEREST (LESS THAN) IN EXCESS OF EARNINGS U.S. GAAP require that, for financial reporting purposes, an additional allocation of income be made to the minority interest account in an amount necessary to keep such balance from falling below zero since there is no requirement for the unit holders to make additional contributions. During 2003, earnings were in excess of distributions to minority interests and, therefore, the Company reallocated the $576,000 that had previously been so allocated to the minority interests. FUNDS FROM OPERATIONS Funds from operations ("FFO") is computed as net income (loss) (computed in accordance with U.S. GAAP) excluding gains and losses from sales and involuntary conversions of operating properties, plus real estate depreciation. This computation of FFO is consistent with the formal definition promulgated by the National Association of Real Estate Investment Trusts (NAREIT). The reconciliation of FFO to Net Income, the most directly comparable financial measure calculated in accordance with U.S. GAAP, is included in the table below. Management generally considers FFO to be a useful measure for reviewing the comparative operating performance of the Trust between periods or as compared to other companies, without giving effect to real estate depreciation and amortization, which assumes that the value of real estate diminishes predictably over time and which can vary among owners of similar assets based upon historical cost and useful life estimates. FFO should not be considered an alternative to net income as a measure of performance nor does it represent cash generated from operating activities in accordance with U.S. GAAP and, therefore, it should not be considered indicative of cash available to fund cash needs. While the NAREIT definition of FFO does not specifically address involuntary conversions of operating properties, management believes that such conversions are, in substance, sales of property. Since the NAREIT definition of FFO excludes gains and losses on property sales, the reported gain on involuntary conversion has, likewise, been excluded from FFO. A reconciliation between net income and FFO is as follows:

(In ~~Securities~~thousands) ~~registered~~/ ~~pursuant~~Year ended December 31, 2004 2003 2002 Net income $ 1,796 $78,768 $17,292 Income allocated to ~~Section~~minority 12interest 264 11,798 3,337 Gain on involuntary conversion (g558) (621) -- Gain on sales of ~~the~~operating ~~Act:~~properties ~~None~~-- (80,081) -- Real estate depreciation 28,859 23,175 21,153 ------- ------- ------- Funds from operations (1), (2) $30,361 $33,039 $41,782 ======= ======= =======

(1) Funds from operations for 2004 and 2003 include a $1,672,000 and a $4,000,000, respectively, impairment charge on the Charlotte properties sold during 2004. (2) Funds from operations for 2004 includes a $1,533,000 charge for separation expense relating to the departure of two senior officers. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS The following table summarizes the Company's contractual obligations as of December 31, 2004:

(In ~~[Cover~~thousands) ~~Continued~~Total onLess ~~Following~~than ~~Page]~~1 year 1-3 years 3-5 years More than 5 years Long-term debt obligations $491,882 $2,697 $24,577 $389,858 $74,750 Operating lease obligations 5,049 622 1,271 1,163 1,993

See Note 6 to the Consolidated Financial Statements for a discussion of the Company's off-balance sheet obligations upon the exercise of the right of the holders of the 5.375% Convertible Senior Notes to convert their notes into common shares. In connection with the Company's improvement program discussed below, the Company currently has contracts pending that aggregate $7,348,000 for work to be performed over the next one to three years. However, these contracts contain certain provisions to allow for termination without significant penalties. 19 LIQUIDITY AND CAPITAL RESOURCES A summary of the Company's cash flow activities is as follows:

(In ~~[Cover~~thousands) ~~Continued~~/ ~~From~~Year ~~Previous~~ended ~~Page]~~December 31, 2004 2003 2002 Net cash provided by operating activities $ 37,546 $ 43,107 $ 42,875 Net cash used in investing activities (7,542) (30,585) (25,615) Net cash used in financing activities (31,326) (12,896) (16,311)

Operating activities provided unrestricted cash for 2004 of $37,546,000 compared to $43,107,000 for 2003, and $42,875,000 for 2002. The decrease in operating cash flow is primarily the result of increased interest expense and the reduction of income attributable to the portfolio changes. Net cash flow used for capital expenditures has continued to increase over the past few years related to the Company's capital improvement program as discussed below. The Company expects to expand this program to additional properties in the foreseeable future. The proceeds from the sale of the Company's Charlotte properties, along with the issuance of additional common shares, were used to fund the capital expenditure program and pay down debt. Although the trustees consider the appropriateness of the dividend level on a quarterly basis, the Company does not anticipate any change in its dividend policy at this time. The Company makes capital improvements to certain of its properties. These capital improvements include expenditures that increase the value and extend the useful life of an asset. Expenditures for ordinary repairs and maintenance are expensed as incurred. Normal, recurring capital expenditures generally relate to items having economic lives of 10 years or less and include the replacement of appliances, carpeting and tile plus other routine capital expenditures such as landscaping, parking lot sealing and striping, HVAC equipment and various interior and exterior building improvements. The Company also makes certain expenditures that are considered to be non-recurring or revenue-enhancing in nature and generally relate either to (i) items having economic lives of more than 10 years or (ii) renovation projects such as the modernization of kitchen and bathrooms, new building entrances and windows, new business and fitness centers, and the addition of new appliances such as washers and dryers. In conjunction with certain of these renovation projects, the Company enters into commitments to purchase goods and services with vendors performing the work. The Company finances its capital improvements through a revolving credit facility and working capital. The following table details these expenditures for the year ended December 31, 2004 and 2003.

~~Indicate~~2004 by2003 ~~check~~(In ~~mark~~thousands, ~~whether~~except ~~the~~per ~~Registrant~~unit (1data) ~~has~~/ ~~filed~~Year ~~all~~ended ~~reports~~December ~~required~~31, toAmount bePer ~~filed~~Unit byAmount ~~Section~~Per 13Unit orRecurring ~~15(d)~~$ of6,598 ~~the~~$ ~~Securities Exchange~~494 ~~Act~~$ of7,374 ~~1934~~$ ~~during~~497 ~~the~~Non-recurring ~~preceding~~30,389 122,273 ~~months~~22,939 ~~(or~~1,545 ~~for~~------- ~~such~~------ ~~shorter~~------- ~~period~~------ ~~that~~Total ~~the~~capital ~~Registrant~~$36,987 ~~was~~$2,767 ~~required~~$30,313 ~~to file such reports) and (~~$2),042 ~~has~~======= ~~been~~====== ~~subject~~======= ~~to such filing requirements for the past 90 days. Yes X No __~~======

The Company has a $488.2 million credit facility with Fannie Mae. This secured facility matures in 2008. At December 31, 2004, outstanding borrowings under the facility were $340 million. Of the $340 million, $300 million bears interest at a fixed rate of 6.91%. The remaining $40 million outstanding has a weighted-average variable rate of 2.43% at December 31, 2004 and can be converted to a fixed-rate term loan at the Company's option. The Company is party to floating-to-fixed interest rate swaps that effectively fix the interest rate on this $40 million of floating rate debt, changing the weighted average rate at December 31, 2004 to 4.67%. Total outstanding borrowings under the facility at December 31, 2003 were $375 million. Of the $375 million, $300 million bears interest at a fixed rate of 6.91%. The remaining $75 million was outstanding at a weighted-average variable rate of 1.81% at December 31, 2003. After giving effect to the interest rate swaps, the weighted average interest rate on the $75 million was 3.40%. The Company has a $50 million bank line of credit. Advances under the line bear interest at 120 basis points over LIBOR and are due on demand. Up to $10 million of the line may be used for working capital purposes and $40 million may be used to fund acquisitions. This line of credit matures in October 2005. The Company has the option to extend the line through October 2007. As of December 31, 2004, $2,000,000 was outstanding under the line. At December 31, 2003, no amounts were outstanding under the line. 20 The Company has $74.75 million aggregate principal amount of 5.375% Convertible Senior Notes outstanding. The notes mature on August 15, 2023 and are convertible into the Company's common shares under certain circumstances, provided that the share price exceeds $30.61 for a specified period of time. The initial conversion rate of the notes is 39.20185 shares per $1,000 principal amount of notes (equivalent to $25.51 per share). The conversion rate will be adjusted under certain circumstances, including stock splits, stock dividends and increases in the dividend rate over the current quarterly rate of $.43 per share. The shares would be considered in diluted earnings per share if the effect of including the conversion of debt were dilutive to earnings per share from continuing operations. The notes are redeemable at the Company's option for shares or cash at any time on or after August 21, 2010 and are subject to repurchase at the option of the holder on August 15, 2008, August 15, 2010, August 15, 2013 and August 15, 2018, or upon the occurrence of certain events. The notes are unsecured and unsubordinated obligations of the Company. Concurrent with the offering in 2003, the Company used approximately $15.0 million of the proceeds to purchase and retire 646,800 of its common shares ($23.19 per share) in privately negotiated transactions. The following table sets forth certain information regarding the Company's outstanding indebtedness as of December 31, 2004:

~~Indicate~~(Dollar byamounts ~~check~~in ~~mark~~thousands) ifAmount ~~disclosure~~% of ~~delinquent~~Debt ~~filers~~Interest ~~pursuant~~Rate(2) toMaturity ~~Item~~Mortgage ~~405~~debt: ofSecured ~~Regulation~~facility ~~S-K~~(1) is$ ~~not~~340,000 ~~contained~~69.2% ~~herein,~~6.64% ~~and~~2008 ~~will not~~Conventional bemortgages ~~contained~~75,132 to15.2% ~~the~~6.18% ~~best~~2007 of- ~~Registrant’s~~2009 ~~knowledge~~---------- ----- ---- Total mortgage debt 415,132 in84.4% ~~definitive~~6.55% ~~proxy~~Convertible orSenior ~~information~~Notes ~~statements~~74,750 ~~incorporated~~15.2% by5.38% ~~reference~~2023 inNotes ~~Part~~payable ~~III~~2,000 of.4% ~~this~~3.62% ~~Form~~on 10demand -K--------- or----- ~~any~~---- ~~amendment~~Total todebt ~~this~~$ ~~Form~~491,882 ~~10-K~~100.0% ~~[_]~~6.36% ========== ===== ====

(1) The information shown for this debt gives effect to two interest rate swap agreements that have the effect of fixing the interest rate on $40 million of debt at approximately 4.67% from January 2003 to April 2007. (2) Weighted average The following table provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps and caps, the table presents notional amounts and weighted average interest rates or strike rates by contractual maturity dates.

Fair ~~Aggregate~~Value ~~market~~(In ~~value~~thousands) of2005 ~~voting~~2006 ~~stock~~2007 ~~held~~2008 by2009 ~~non~~Thereafter Total at 12/31/04 Long-~~affiliates~~term ofdebt ~~the~~Fixed ~~Registrant~~rate as$ of697 ~~March~~$ 15736 $ 23,841 ~~2002:~~$300,298 $~~345~~ 49,~~289~~560 $ 74,~~034~~750 $449,882 $ 448,339 Avg. interest rate 6.8% 6.8% 6.8% 6.7% 7.2% 5.4% Floating rate 2,000 -- -- 40,000 -- -- 42,000 42,000 Avg. interest rate (1) (1) (1) (1) (1) -- Interest rate derivative financial instruments related to debt Interest rate swaps Pay fixed/receive variable notional amount -- -- 40,000 -- -- -- 40,000 (652) Avg. pay rate 4.16% 4.16% 4.16% -- -- -- Avg. receive rate (2) (2) (2) -- -- -- Interest rate caps Notional amount -- -- 148,172 -- -- -- 148,172 5 Strike rate -- -- 8.7% -- -- --

(1) Average variable interest rate is equivalent to the Fannie Mae MBS pass-through rate plus 49 basis points. (2) Average receive rate is equivalent to LIBOR. 21 At December 31, 2003, the Company had fixed rate debt outstanding of $450,543,000, which had a fair value of $492,225,000. The Company's primary market risk exposure relates to changes in interest rates associated with the variable rate portion of its secured credit facility and its bank line of credit. The Company had $2 million in variable rate debt outstanding at December 31, 2004, excluding amounts on which the interest rates are effectively fixed by floating to fix interest rate swap agreements. A hypothetical 100 basis point increase in interest rates in 2005 over the rates in effect during 2004 would result in an increase of interest expense and a corresponding decrease in income before discontinued operations and minority interest of approximately $20,000. This estimate incorporates only those exposures that exist as of December 31, 2004 and does not consider exposures that could arise after that date. The Company uses interest rate protection agreements to reduce the potential impact of increases in interest rates as required by its secured credit facility. The Company maintains two interest rate protection agreements for $139 million and $49.2 million, capping the Company's exposure to LIBOR at 9.35% and 7.5%, respectively, through March 2007. In addition, the Company executed two $20 million floating to fixed interest rate swaps to effectively fix the interest rate on $40 million of floating rate debt under the secured credit facility at a blended rate of approximately 4.67%. The Company simultaneously sold two $20 million interest rate caps, capping the Company's exposure to LIBOR at 9.35%. These interest rate protection agreements hedge interest payments consistent with the Company's risk management objective and strategy to reduce exposure to variability in cash flows attributable to increases in LIBOR. Debt agreements typically contain representations and financial or other covenants that must be adhered to in order for a borrower to avoid default on the agreement. The Company monitors its compliance with the covenants set forth in its debt agreements and does not believe that it will breach any of them in the ordinary course of business. A breach of a material covenant would normally result in the inability of the Company to maintain funds available until such breach is remedied or would allow the lender to require the Company to repay the debt obligation. The Company has an effective shelf registration statement on file with the SEC that provides for the issuance of up to $75 million in securities. The Company believes that it is prudent to maintain shelf registration capacity in order to facilitate future capital raising activities. In February 2004, the Company sold 1,410,000 of its common shares pursuant to its shelf registration in a private sale at a negotiated price of $24.80 per share. After the sale, approximately $40 million in securities remains available under the shelf registration statement. The net proceeds of approximately $34.7 million from the sale, along with the proceeds of the debt offering in August 2003, were used to pay down floating rate debt. Management believes that the Company has and will have access to the capital resources necessary to adequately fund its business. At December 31, 2004, the Company had $945,000 in cash and cash equivalents and $8 million available under its working capital line of credit. The Company also had $148.2 million in unused capacity on its secured credit facility which it intends to use primarily to fund acquisitions as well as its on-going capital improvements program. In addition, another $40 million is available for acquisitions on its bank line of credit. The Company expects that adequate cash will be available to fund its operating and administrative expenses, normal capital expenditures, debt service obligations and payments of dividends in the foreseeable future. The Company believes that the direct effects of inflation upon its operations are immaterial. Substantially all of its apartment unit leases are for a term of one year or less, which enables the Company to seek increased rents upon renewal or reletting of apartment units. Such short-term leases minimize the risk of the adverse effects of inflation; however, as a general rule, such leases permit tenants to leave at the end of the lease term without penalty. 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information in response to this Item is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Recourses" included in Item 7 of this Form 10-K and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) FINANCIAL STATEMENTS Consolidated Balance Sheets

(In ~~Indicate~~thousands, ~~the~~except ~~number~~share data) / December 31, 2004 2003 ----------- ----------- ASSETS Real estate held for investment: Land $ 103,325 $ 103,325 Buildings and improvements 708,175 701,518 Other 3,818 4,292 ----------- ----------- 815,318 809,135 Less accumulated depreciation 271,984 273,383 ----------- ----------- 543,334 535,752 Real estate and other assets held for disposition -- 32,561 Cash and cash equivalents 945 2,267 Restricted cash 2,390 2,415 Deferred financing costs, net 5,647 6,628 Other assets 9,768 9,367 ----------- ----------- Total assets $ 562,084 $ 588,990 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage notes payable $ 415,132 $ 427,318 5.375% Convertible Senior Notes 74,750 74,750 Mortgage notes payable and other liabilities held for disposition -- 23,734 Notes payable 2,000 -- Accrued interest 4,029 4,021 Accounts payable and other liabilities 9,537 9,157 Security deposits 3,327 3,092 Minority interest 6,592 7,556 ----------- ----------- Total liabilities 515,367 549,628 Shareholders' equity: Common shares of beneficial interest ($0.01 par value), 500,000,000 shares authorized, 17,479,576 and 15,858,619 issued and outstanding ofat ~~each~~December of31, ~~the~~2004 ~~Registrant’s~~and ~~classes~~2003, respectively 175 159 Additional paid-in capital 351,727 316,926 Distributions in excess of ~~common~~accumulated earnings (300,372) (272,370) Deferred compensation - restricted stock (3,799) as(3,299) ofAccumulated ~~the~~other ~~latest~~comprehensive ~~practical~~loss ~~date:~~(1,014) (2,054) ----------- ----------- Total shareholders' equity 46,717 39,362 ----------- ----------- Total liabilities and shareholders' equity $ 562,084 $ 588,990 =========== ===========

See accompanying notes. 23 Consolidated Statements of Operations

(In thousands, except per share data) / Year ended December 31, 2004 2003 2002 --------- --------- --------- REVENUES: Rental income $ 126,975 $ 118,017 $ 110,232 EXPENSES: Operating expenses: Real estate taxes and insurance 13,230 12,647 10,945 Utilities 7,463 7,181 6,360 Repairs and maintenance 15,877 14,664 12,898 Marketing and advertising 4,880 4,172 3,964 Management expense 6,765 6,619 6,018 Other 5,495 5,387 4,793 --------- --------- --------- Total operating expenses 53,710 50,670 44,978 Real estate depreciation 28,859 20,675 17,797 Interest expense 32,969 28,785 25,216 General and administrative 5,866 4,744 4,595 Other depreciation and amortization 1,224 712 686 Separation expense 1,533 -- -- --------- --------- --------- 124,161 105,586 93,272 --------- --------- --------- Income before discontinued operations and minority interest 2,814 12,431 16,~~233~~960 Income allocated to minority interest from continuing operations (364) (1,~~617~~681) ~~Common~~(2,269) ~~Shares~~Minority interest distribution less than (in excess of) ~~Beneficial~~earnings ~~Interest~~-- 576 (576) --------- --------- --------- Income from continuing operations 2,450 11,326 14,115 --------- --------- --------- Discontinued operations: Income from discontinued operations 918 2,054 3,669 Gain on sales of properties -- 80,081 -- Impairment of assets held for disposition (1,672) (4,000) -- Loss (income) allocated to minority interest from discontinued operations 100 (10,693) (492) --------- --------- --------- (Loss) income from discontinued operations (654) 67,442 3,177 --------- --------- --------- Net income $~~.01~~ ~~Par~~1,796 ~~Value~~$ 78,768 at$ ~~March~~17,292 ========= ========= ========= Basic earnings per share: Income from continuing operations $ .15 $ .72 $ .88 (Loss) income from discontinued operations (.04) 4.27 .20 --------- --------- --------- Net income $ .11 $ 4.99 $ 1.08 ========= ========= ========= Diluted earnings per share: Income from continuing operations $ .14 $ .70 $ .87 (Loss) income from discontinued operations (.04) 4.20 .20 --------- --------- --------- Net income $ .10 $ 4.90 $ 1.07 ========= ========= ========= Weighted average common shares outstanding - basic 16,896 ~~2002~~15,773 15,961 Dilutive effect of outstanding options, restricted shares and convertible debt 278 298 253 --------- --------- --------- Weighted average common shares outstanding - diluted 17,174 16,071 16,214 ========== ========= ========= Dividends declared and paid per share outstanding $ 1.72 $ 1.72 $ 1.72 ========= ========= =========

See accompanying notes. 24 Consolidated Statements of Shareholders' Equity(Deficit)

Common ~~DOCUMENTS~~Shares ~~INCORPORATED~~of BYBeneficial ~~REFERENCE~~Distributions Interest Additional in Excess of Other ------------------ Paid-In Accumulated Deferred Comprehensive (In thousands, except per share data) Shares Amount Capital Earnings Compensation Loss Total ------------------------------------- ------ --------- ---------- ------------- ------------ ------------- --------- Balance at January 1, 2002 16,088 $ 161 $ 324,193 $(312,892) $ (1,970) $ -- $ 9,492 Comprehensive income: Net income -- -- -- 17,292 -- -- 17,292 Unrealized loss on derivative financial instruments -- -- -- -- -- (2,024) (2,024) ------ --------- --------- --------- --------- --------- --------- Comprehensive Income -- -- -- 17,292 -- (2,024) 15,268 Dividends declared ($1.72 per share) -- -- -- (27,941) -- -- (27,941) Amortization of deferred compensation -- -- -- -- 597 -- 597 Share options exercised, net of 22 shares surrendered 138 1 1,878 -- -- -- 1,879 Issuance of restricted share awards, net of 45 shares surrendered 31 1 677 -- (1,624) -- (946) Issuance of common shares through Dividend Reinvestment and Share Purchase Plan 2 -- 41 -- -- -- 41 ------ --------- --------- --------- --------- --------- --------- Balance at December 31, 2002 16,259 163 326,789 (323,541) (2,997) (2,024) (1,610) Comprehensive income: Net income -- -- -- 78,768 -- -- 78,768 Unrealized loss on derivative financial instruments -- -- -- -- -- (30) (30) ------ --------- --------- --------- --------- --------- --------- Comprehensive Income -- -- -- 78,768 -- (30) 78,738 Dividends declared ($1.72 per share) -- -- -- (27,597) -- -- (27,597) Amortization of deferred compensation -- -- -- -- 738 -- 738 Share options exercised 52 -- 709 -- -- -- 709 Issuance of restricted share awards, net of 4 shares surrendered 51 1 1,035 -- (1,040) -- (4) Issuance of common shares through Dividend Reinvestment and Share Purchase Plan 144 1 3,386 -- -- -- 3,387 Repurchase of common shares of beneficial interest (647) (6) (14,993) -- -- -- (14,999) ------ --------- --------- --------- --------- --------- --------- Balance at December 31, 2003 15,859 159 316,926 (272,370) (3,299) (2,054) 39,362 Comprehensive income: Net income -- -- -- 1,796 -- -- 1,796 Unrealized gain on derivative financial instruments -- -- -- -- -- 1,040 1,040 ------ --------- --------- --------- --------- --------- --------- Comprehensive Income -- -- -- 1,796 -- 1,040 2,836 Dividends declared ($1.72 per share) -- -- -- (29,798) -- -- (29,798) Amortization of deferred compensation -- -- -- -- 897 -- 897 Share options exercised, net of 184 shares surrendered 158 1 1,498 -- -- -- 1,499 Issuance of restricted share awards, net of 29 shares surrendered 46 1 1,413 -- (1,397) -- 17 Issuance of common shares through Dividend Reinvestment and Share Purchase Plan 7 -- 174 -- -- -- 174 Issuance of common shares 1,410 14 34,731 -- -- -- 34,745 Adjustment to minority interest from change in ownership in TCOLP -- -- (3,015) -- -- -- (3,015) ------ --------- --------- --------- --------- --------- --------- Balance at December 31, 2004 17,480 $ 175 $ 351,727 $(300,372) $ (3,799) $ (1,014) $ 46,717 ====== ========= ========= ========= ========= ========= =========

See accompanying notes. 25 Consolidated Statements of Cash Flows

		Part of Form 10-K Document
Document		In Which Incorporated
	Portions of the Registrant’s	I and III
	Notice of Annual Meeting and
	Proxy Statement dated
	March 29, 2002
	Portions of the Registrant’s	II and IV
	2001 Annual Report to Shareholders

See accompanying notes. 26 Notes to Consolidated Financial Statements NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The Town and Country Trust (the "Company"), a Maryland real estate investment trust, is a self-administered and self-managed real estate investment trust ("REIT") organized in 1993 to own and operate a portfolio of multifamily residential properties. The Company conducts all of its business and owns all of its properties through The TC Operating Limited Partnership ("TCOLP"). At December 31, 2004, the Company owned 13,065 apartment homes in 38 apartment communities in selected markets in the Mid-Atlantic and Southeast. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated. REAL ESTATE ASSETS, DEPRECIATION AND IMPAIRMENT Real estate assets held for investment are carried at historical cost, less accumulated depreciation. Expenditures for repairs and maintenance are expensed as incurred. Significant expenditures for improvements, renovations and replacements are capitalized. The Company accounts for the acquisitions of real estate in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, utilizing the purchase method and includes the results of the acquisition properties in the Company's results of operations from the date of acquisition. The Company allocates the purchase price to the acquired tangibles, consisting of land, building and improvements, and, if material, identified intangible assets and liabilities consisting of above/below market leases and at-market leases in place based on their fair values. If there is an event or change in circumstance that indicates an impairment in the value of an apartment community has occurred, the Company's policy is to assess any impairment in value by comparing the current and estimated future undiscounted operating cash flows of the community over its remaining useful life to the carrying amount of the asset. If such carrying amounts exceed the estimated projected operating cash flows of the community, the Company would recognize an impairment loss equal to the amount necessary to adjust the carrying amount of the asset to its estimated fair market value. The Company did not recognize any impairment losses in 2004, 2003 or 2002 on any of its properties held for investment. However, as discussed in Note 4, the Company recognized an impairment loss in 2004 and 2003 related to properties sold during 2004. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which are 27 1/2 to 40 years for buildings, 15 to 20 years for major improvements and 3 to 12 years for furniture, fixtures and equipment. Intangible assets relating to the value of in-place leases for community acquisitions are amortized over the remaining term of the tenant leases. Depreciation expense was $30,083,000, $21,387,000 and $18,483,000 for 2004, 2003 and 2002, respectively, including amortization expense for in-place leases of $217,000 and $472,000 in 2004 and 2003, respectively. During the year ended December 31, 2004, the Company revised the estimated useful life on certain depreciable assets, principally carpet, to more closely approximate their current economic lives based upon the Company's capital improvement and renovation plans. Consequently, the Company recorded an additional depreciation charge of $6,493,000. DISCONTINUED OPERATIONS On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that the assets and liabilities and the results of operations of any communities which have been sold since January 1, 2002, or otherwise qualify as held for sale, be presented as discontinued operations in the Company's Consolidated Financial Statements in both current and prior periods presented. The community specific components of net income that are presented as discontinued operations include net operating income, depreciation expense, minority interest and interest expense. In addition, the net gain or loss (including any impairment charge) on the disposition of communities held for sale is presented as discontinued operations. A change in presentation for discontinued operations will not have any impact on the Company's financial conditions or results of operations. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less costs to sell, and are presented separately in the accompanying Consolidated Balance Sheet. Subsequent to classification of a community as held for sale, no further depreciation is recorded on the assets. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 27 DEFERRED FINANCING COSTS Deferred financing costs include certain fees and other external costs incurred in connection with debt financings and are amortized to interest expense using the straight-line method, which approximates the effective interest method, over the term of the related debt. Deferred financing costs at December 31, 2004 and 2003 are presented net of accumulated amortization of $4,392,000 and $3,272,000, respectively. Amortization of deferred financing costs are included in interest expense and totaled $1,220,000, $1,055,000 and $638,000, during 2004, 2003 and 2002, respectively. INTEREST RATE RISK MANAGEMENT SFAS No. 133, Accounting for Certain Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting standards requiring all derivative financial instruments to be carried in the balance sheet as either an asset or liability measured at its fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedge transaction. For derivative financial instruments that qualify as cash flow hedges, changes in fair value of the derivative instrument are reported as a component of other comprehensive income with a corresponding offset to other assets and reclassified into earnings during the same period or periods during which the hedged transaction affects earnings. For hedges where a change in the fair value of the derivative exceeds the change in the fair value of the hedged item or the notional amount of the hedge exceeds the expected proceeds under the debt agreements, the ineffective portion, if any, is recognized in other income/expense in current period earnings. The Company uses derivative financial instruments in the normal course of business to limit its exposure to fluctuations in interest rates. The Company does not enter into derivative instruments for speculative purposes. To manage interest rate risk, the Company may employ interest rate swaps, caps and floors, options, forwards or a combination thereof, depending on the underlying exposure. Interest rate swaps and collars are contractual agreements between the Company and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). In the unlikely event that a counterparty fails to meet the terms of an interest rate swap contract or collar agreement, the Company's exposure would be limited to the interest rate differential on the notional amount. The Company does not anticipate non-performance by any of its counterparties. Net interest differentials to be paid or received under a swap contract and/or collar agreement are accrued as interest expense as incurred or earned. REVENUE RECOGNITION Revenues from rental property are recognized on a straight-line basis over the term of the lease. Leases are generally for terms of one year or less. REAL ESTATE SALES Gains on sales of real estate assets are recognized pursuant to the provisions of SFAS No. 66, Accounting for Sales of Real Estate. The specific timing of the recognition of the sale and the related gain are measured against the various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement associated with the assets sold. To the extent the sales criteria are not met, the Company defers gain recognition until the sales criteria are met. ADVERTISING AND PROMOTION COSTS Advertising and promotion costs are expensed as incurred. Total advertising and promotion expense for each of the years ended December 31, 2004, 2003 and 2002 was $1,167,000, $1,110,000 and $1,171,000, respectively. EARNINGS PER COMMON SHARE Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on the Company's average stock price. The Company adopted Emerging Issues Task Force Issue No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share."Issue No. 04-8 requires convertible debt or preferred stock to be included in diluted earnings per share computations if only one or more specified contingencies are required to occur, such as the underlying common stock achieving a specified price target, regardless of whether the market price trigger has been met. The adoption of this new pronouncement had no impact on the Company's diluted earnings per share for any year presented as the effect was anti-dilutive to earnings per share from continuing operations. MINORITY INTEREST Minority interest is comprised of TCOLP common units that are not held by the Company. Minority interest is increased and decreased, respectively, for income and loss as well as distributions allocated to units held by outside interests. Periodically, the Company raises additional equity through the issuance of common shares and contributes the proceeds 28 to TCOLP for an equivalent number of common units. The Company records adjustments to minority interest and shareholders' equity to reflect the Company's increased ownership in TCOLP. As of December 31, 2004 and 2003, there were 2,466,535 common units of TCOLP that were not held by the Company, which represented 12.37% and 13.46% of the units in TCOLP, respectively. These units are exchangeable by the holders, at the Company's option, for either cash or common shares on a one-for-one basis. This exchange right has not been considered in the computation of per share data, as it does not have a dilutive effect. USE OF ESTIMATES The Company's financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, equity, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. STOCK BASED COMPENSATION In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 123 (revised 2004), Share Based Payment ("Statement No.123(R)"). Statement No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recorded as an expense based on their fair values. The grant-date fair value of employee share options and similar instruments will be estimated using an option-pricing model adjusted for any unique characteristics of a particular instrument. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The Company will adopt the provisions of FAS 123R during the third quarter 2005. The adoption of this new standard will not have a material effect on the financial position or financial results of the Company. RECLASSIFICATIONS Certain previously reported amounts have been reclassified to conform to the current presentation. NOTE 2. RESTRICTED CASH The Company maintains certificates of deposit, all with initial maturities of three months or less, to cover the aggregate amount of resident security deposits retained by the respective communities in certain states. NOTE 3. REAL ESTATE The following is a reconciliation of the carrying amount of real estate held for investment:

(In ~~None~~thousands) of2004 ~~the~~2003 ~~Report~~-------------- of--------- ~~the~~-------- ~~Compensation~~Balance ~~Committee~~at ofJanuary ~~the~~1 ~~Board~~$ of809,135 ~~Trustees on Executive Compensation~~$665,998 ~~the~~Real ~~Audit~~estate ~~Committee~~purchased ~~Report~~-- or117,435 ~~the~~Improvements ~~Performance~~36,562 ~~Graph~~26,146 ~~contained~~Real inestate ~~the~~disposed/retired ~~Registrant’s Notice~~(30,379) of(444) ~~Annual~~--------- ~~Meeting~~-------- ~~and~~Balance ~~Proxy~~at ~~Statement~~December ~~dated~~31 ~~March~~$ 29815,318 ~~2002~~$809,135 ~~shall~~========= ~~be deemed incorporated by reference herein.~~ ========

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

Number ~~SAFE~~of ~~HARBOR~~Carrying ~~STATEMENT~~Accumulated Net Carrying (In thousands) Communities Value(1) Depreciation Value Encumbrances(2) -------------- ----------- --------- ------------ ------------ --------------- Baltimore 12 $ 300,445 $ 116,161 $ 184,284 $ 144,432 Metropolitan Washington, D.C. Northern Virginia 6 192,225 49,881 142,344 96,254 Maryland Suburbs 4 65,025 30,850 34,175 41,650 Newark, Delaware 2 30,164 8,239 21,925 16,320 Pennsylvania 7 85,388 48,029 37,359 35,904 Orlando, Florida 3 62,915 8,918 53,997 34,207 Sarasota/ Bradenton, Florida 3 44,001 5,656 38,345 22,890 Palm Beach Gardens, Florida 1 35,155 4,250 30,905 23,475 -- --------- --------- --------- --------- 38 $ 815,318 $ 271,984 $ 543,334 $ 415,132 == ========= ========= ========= =========

(1)Carrying value consists of initial acquisition costs plus improvements subsequent to acquisition. (2)32 properties are cross-collateralized with $340 million outstanding at December 31, 2004 under the Company's existing credit facility. During 2003, the Company acquired two apartment communities in Baltimore, Maryland and another apartment community in Herndon, Virginia containing a total of 733 apartment homes, for approximately $117.4 million, including acquisition costs. The acquisitions were initially funded using the Company's existing credit facilities and the Company's Convertible Senior Notes (see Note 6). The properties were acquired as part of like-kind exchanges under Section 1031 of the Internal Revenue Code (see Note 4). The Company accounted for the acquisitions utilizing the purchase method, and accordingly, the results of the acquisition properties are included in the Company's results of operations from the date of acquisition. The Company allocated the purchase price to the acquired tangibles, consisting of land, building and improvements, and, if material, identified intangible assets and liabilities consisting of above/below market leases and at-market leases in place based on their fair values, as follows (in thousands): Land $ 12,804 Building and improvements 103,796 Other 835 ----------- Total $ 117,435 ===========

The following unaudited pro forma results of operations of the Company reflect the acquisition of the three apartment communities as if these transactions had occurred on January 1, 2003, and 2002. Results for 2004 include these three properties for the entire year.

(In ~~The~~thousands, ~~matters~~except ~~discussed~~per inshare ~~this~~data) ~~Annual~~2003 ~~Report~~2002 ~~on Form 10~~-~~K include certain “forward~~-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that such forward-looking statements be subject to the safe harbors created by such Acts. Words and phrases such as “looking ahead”, “we are confident”, “should be”, “will be”, “predicted”, “believe”, “expect”, “anticipate”, and similar expressions identify forward-~~looking~~--------------------------------- ~~statements. These forward~~-~~looking~~--------- statements reflect the Company’s current views regarding future events and financial performance but are subject to many known and unknown risks, uncertainties, and other factors relating to the Company’s operations and business environment which may cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-~~looking~~-------- ~~statements.~~Revenues ~~Such~~$ ~~factors include~~123,737 ~~but~~$ ~~are not limited to~~121,668 ~~interest~~Net rate fluctuations; competition for tenants and acquisitions from others, many of whom may have greater financial resources than the Company; changes in rental rates which may be charged by the Company in response to market rental rate changes or otherwise; changes in federal income ~~tax~~$ laws and regulations; any changes in the Trust’s capacity to acquire additional apartment properties and any changes in the Company’s financial condition or operating results due to the acquisition of additional apartment properties; unanticipated increases in rental expenses due to factors such as casualties to the Company’s apartment properties or adverse weather conditions in the geographic locations of the Company’s apartment properties; and local economic and business conditions78,619 ~~including,~~$ ~~without limitation~~16,823 ~~conditions~~Income ~~which~~per ~~may~~share ~~affect~~- ~~public~~basic ~~securities~~$ ~~markets generally, the real estate investment trust industry, or the markets in which the Company’s apartment properties are located~~4.98 ~~Although~~$ ~~the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that such statements will prove to be accurate~~1.05 InIncome ~~view~~per ofshare ~~the significant uncertainties associated with such forward~~-~~looking~~ ~~statements,~~diluted ~~the~~$ ~~inclusion of this information should not be construed as a representation by the Company that the results or conditions described in such statements will be achieved~~4.89 ~~The~~$ ~~Company undertakes no obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise~~1. 04

NOTE 4. DISCONTINUED OPERATIONS At December 31, 2003, the Company's two Charlotte communities were classified as held for disposition in the accompanying balance sheet as the Company made the strategic decision to exit the Charlotte, North Carolina market. The communities were sold during 2004 for net proceeds of approximately $31.1 million. Based on the carrying value of each community and the 30 related net sales proceeds, the Company recorded impairment charges totaling approximately $1,672,000 during 2004 and $4,000,000 during 2003. During 2004, the Company also recorded a $558,000 gain on involuntary conversion relating to insurance proceeds received related to fires at two of the communities sold in 2003. During 2003, the Company sold five apartment communities containing 2,325 units for $117.2 million resulting in a gain on sales of $80.1 million. The 2003 sales were structured to qualify as like-kind exchanges for the three acquired properties discussed in Note 2. The results of operations for these seven properties are classified on the Consolidated Statements of Operations as, "Discontinued Operations". The assets and liabilities of the two properties held for sale at December 31, 2003 are included in "Real estate and other assets held for disposition" and "Mortgage notes payable and other liabilities held for disposition" on the Company's Consolidated Balance Sheets. Unaudited condensed summary results of operations of the seven apartment communities is as follows:

~~PART~~(In I thousands) 2004 2003 2002 -------------- --------- ---------- ----------- Rental income $ 2,118 $ 15,132 $ 20,186 Operating expenses 1,289 7,475 8,759 Real estate depreciation -- 2,500 3,356 Interest expense 469 3,724 4,402 Gain on involuntary conversion 558 621 -- --------- ---------- ----------- Income from discontinued operations $ 918 $ 2,054 $ 3,669 ========= ========== ===========

At December 31, 2004, there are no assets and liabilities held for disposition. Assets and liabilities of the apartment communities held for disposition at December 31, 2003 consisted of the following:

(In ~~ITEM~~thousands) 1.2003 ~~BUSINESS~~ -------------- --------- Land $ 6,032 Building and improvements 32,901 Other 78 Accumulated depreciation (6,694) Other assets 244 --------- Real estate and other assets held for disposition $ 32,561 ========= Mortgage notes payable $ 23,475 Other liabilities 259 --------- Mortgage notes payable and other liabilities held for disposition $ 23,734 =========

NOTE 5. MORTGAGE NOTES PAYABLE AND NOTES PAYABLE The Company has a credit facility with Fannie Mae of $488.2 million. This secured facility matures in 2008. At December 31, 2004, outstanding borrowings under the facility were $340 million. Of the $340 million, $300 million bears interest at a fixed rate of 6.91%. The remaining $40 million outstanding has a weighted-average variable rate of 2.43% at December 31, 2004 and can be converted to a fixed-rate term loan at the Company's option. The Company is party to floating-to-fixed interest rate swaps that effectively fix the interest rate on this $40 million of floating rate debt, changing the weighted average rate at December 31, 2004 to 4.67%. Total outstanding borrowings under the facility at December 31, 2003 were $375,000,000. Of the $375,000,000, $300,000,000 bears interest at a fixed rate of 6.91%. The remaining $75,000,000 was outstanding at a weighted-average variable rate of 1.81% at December 31, 2003. After giving effect to the interest rate swaps, the weighted average interest rate on the $75,000,000 was 3.40%. The Company has a $50 million bank line of credit. Advances under the line bear interest at 120 basis points over LIBOR and are due on demand. Up to $10 million of the line may be used for working capital purposes and $40 million may be used to fund acquisitions. This line of credit matures in October 2005. The Company has the option to extend the line through 31 October 2007. As of December 31, 2004, $2,000,000 was outstanding under the line. At December 31, 2003, no amounts were outstanding under the line. The Company uses interest rate protection agreements to reduce the potential impact of increases in interest rates as required by the loan agreement covering its secured credit facility. The Company maintains two interest rate protection agreements for $139 million and $49.2 million, capping the Company's exposure to LIBOR at 9.35% and 7.5%, respectively, through March 2007. In addition, the Company executed two $20 million floating-to-fixed interest rate swaps to effectively fix the interest rate on $40 million of floating rate debt under the secured facility at a blended rate of approximately 4.67%. The Company simultaneously sold two $20 million interest rate caps, capping LIBOR at 9.35%. These interest rate protection agreements hedge interest payments consistent with the Company's risk management objective and strategy to reduce exposure to variability in cash flows attributable to increases in LIBOR. The Company also has mortgages that were obtained in connection with the purchase or refinancing of certain properties. Information concerning these mortgages is summarized below:

Balance ~~GENERAL~~ at December 31, -------------------------- Type Interest Rate Maturity 2004 2003 ---- ------------- -------- ----------- ------------ Amortizing 4.11%-4.18% 2007 $24,507,000 $24,950,000 Non-amortizing 6.81% 2009 $33,175,000 $33,175,000* Amortizing 7.85% 2009 $17,450,000 $17,668,000

* Includes, in 2003, $23,475,000 of mortgage debt allocated to properties held for disposition. All of the Company's 38 properties are secured by first and/or second priority mortgages. In connection with the mortgages, the Company maintains annually renewable bank letters of credit totaling $6,700,000 in lieu of maintaining real estate tax escrow deposits. Certain loan agreements contain restrictive covenants relating to the maintenance of specified financial performance ratios. As of December 31, 2004, the Company was in compliance with these covenants. The following is a summary of scheduled debt maturities that includes the Company's mortgage notes payable, notes payable and Convertible Senior Notes (see Note 6):

(In ~~The~~thousands) ~~Registrant,~~-------------- ~~The~~2005 ~~Town~~$ ~~and~~2,697 ~~Country~~2006 ~~Trust~~736 ~~(“The~~2007 ~~Trust” and~~23,841 ~~together~~2008 ~~with its consolidated subsidiaries and other controlled entities~~340,298 ~~the~~2009 ~~“Company”)~~49,560 isThereafter ~~a self administered and self managed real estate investment trust (“REIT”)~~74,750 ~~organized~~---------- inTotal ~~Maryland~~scheduled indebt ~~1993.~~maturities ~~The~~$ ~~Company operates in one industry segment~~491,882 ~~the ownership and operation of multifamily apartment communities. The Trust conducts substantially all of its operations through its operating~~ ==========

NOTE 6. 5.375% CONVERTIBLE SENIOR NOTES The Company has $74.75 million aggregate principal amount of 5.375% Convertible Senior Notes outstanding. The notes mature on August 15, 2023 and are convertible into the Company's common shares under certain circumstances, provided that the share price exceeds $30.61 for a specified period of time. The initial conversion rate of the notes is 39.20185 shares per $1,000 principal amount of notes (equivalent to $25.51 per share). The conversion rate will be adjusted under certain circumstances, including stock splits, stock dividends and increases in the dividend rate over the current quarterly rate of $.43 per share. The shares would be considered in diluted earnings per share if the effect of including the conversion of debt were dilutive to earnings per share from continuing operations. The notes are redeemable at the Company's option for shares or cash at any time on or after August 21, 2010 and are subject to repurchase at the option of the holder on August 15, 2008, August 15, 2010, August 15, 2013 and August 15, 2018, or upon the occurrence of certain events. The notes are unsecured and unsubordinated obligations of the Company. Concurrent with the offering in 2003, the Company used approximately $15.0 million of the proceeds to purchase and retire 646,800 of its common shares ($23.19 per share) in privately negotiated transactions. 32 NOTE 7. INCOME TAXES Since its inception, the Company has elected to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Company generally is not subject to Federal income taxes provided that it meets certain conditions, including the requirement that it distributes at least 90% of its REIT taxable income to its shareholders. Management believes that the Company has qualified as a REIT for all years presented. Accordingly, no provision has been made for Federal income taxes. Although the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to Federal income and excise taxes on its undistributed income, if any. TCOLP makes a number of special allocations for tax purposes only. In general, 100% of the interest deductions related to $232,000,000 of borrowings are allocated to the Trust and 85% of depreciation deductions related to certain communities are allocated to the minority interest ownership. The following table reconciles GAAP net income to Federal taxable income for the years ended December 31, 2004, 2003 and 2002:

(In thousands, unaudited) 2004 2003 2002 --------------------------------------------------------- -------- -------- -------- GAAP net income $ 1,796 $ 78,768 $ 17,292 Book/tax depreciation and amortization difference 5,682 404 (272) Book/tax gain on 1031 tax deferred exchange difference -- (80,036) -- Book impairment on property held for disposition/tax loss on sale of properties (2,952) 4,000 -- Separation expense, timing differences 1,344 (406) (1,982) Deferred compensation, timing differences (2,124) 734 (1,666) Other operating book/tax differences, net (1,263) (1,417) (1,219) Book/tax minority interest allocation difference 5,327 14,925 5,757 -------- -------- -------- REIT taxable income before dividends $ 7,810 $ 16,972 $ 17,910 ======== ======== ======== Dividends paid $ 29,798 $ 27,597 $ 27,941 ======== ======== ========

For income tax purposes, dividends to common shareholders consist of ordinary income and return of capital. For the years ended December 31, 2004, 2003 and 2002, dividends paid per share were taxable as follows:

2004 ~~partnership,~~2003 ~~The~~2002 ~~TC Operating Limited Partnership~~ (~~the “Operating Partnership”~~Unaudited), inAmount ~~which~~% itAmount ~~holds an 86~~% ~~general~~Amount ~~partnership interest. The remaining 14~~% ~~limited~~------------------- ~~partnership~~-------- ~~interest in~~----- ~~the~~-------- ~~Operating~~----- ~~Partnership~~-------- ~~was~~----- ~~retained~~Ordinary byincome ~~certain~~$ of.48 ~~the~~28.0% ~~indirect~~$ ~~predecessor~~1.10 ~~owners~~64.2% of$ ~~the~~1.13 ~~Company’s original 26 properties, including Messrs~~65.9% ~~Alfred~~Return ~~Lerner, the Trust’s Chairman~~ of ~~the~~capital ~~Board,~~1.24 ~~and~~72.0% ~~Harvey~~.62 ~~Schulweis,~~35.8% ~~the~~.59 ~~Trust’s President and Chief Executive Officer~~34.1% At-------- ~~December~~----- ~~31,~~-------- ~~2001,~~----- ~~the~~-------- ~~Company~~----- ~~owned~~Total 42dividend ~~apartment~~$ ~~communities~~1.72 ~~(the~~100.0% ~~“Properties”)~~$ ~~with~~1.72 ~~15,237~~100.0% ~~apartment~~$ ~~units~~1.72 ~~located~~100.0% in======== ~~selected~~===== ~~markets~~======== in===== ~~the~~======== ~~Mid-Atlantic and Southeast regions of the United States.~~ =====

NOTE 8. SEPARATION EXPENSE During the fourth quarter of 2004, the Company recorded a charge of approximately $1.5 million, relating to the departure of two senior executives. The charge consists primarily of cash payments to be made to the executives during 2005 and 2006. NOTE 9. EMPLOYEE BENEFIT PLANS SHARE OPTION PLANS In 1993, the Company established a long-term incentive plan for the purpose of attracting and retaining executive officers, other key employees and non-employee trustees (the "1993 Plan"). The 1993 Plan provides for the granting of restricted stock and share options (incentive and non-qualified) to purchase up to 750,000 shares of the Company's common shares at prices not less than the fair market value at the date of grant. The 1993 Plan expired in May 2003. During 1997, the Company established an additional long-term incentive plan (the "1997 Plan"). The 1997 Plan provides for the 33 granting of options to purchase up to 1,200,000 of the Company's common shares at a price not less than the fair market value at the date of grant. Under the Plans, options generally become exercisable in equal installments over a three-year period, commencing with the first anniversary of the date of grant. All options expire ten years from the date of grant. A summary of the Company's share option activity during the three years ended December 31, 2004 is as follows:

Incentive ~~The~~Non-qualified ~~Company’s~~Weighted ~~headquarters~~Average ~~are~~Options ~~located~~Options Option Price Exercise Price --------- ------------- ----------------- ---------------- Balance at ~~100~~January ~~South~~1, ~~Charles~~2002 ~~Street~~268,334 ~~Suite~~290,158 ~~1700~~$ 13.50 - $ 22.00 $ 15.68 Granted 96,247 ~~Baltimore~~140,753 ~~Maryland~~$ ~~21201~~20.99 ~~and~~- ~~its~~$ ~~telephone~~21.30 ~~number~~$ is21.29 Exercised (~~410~~102,744) ~~539~~(57,710) $ 14.00 -~~7600~~ $ 15.25 As$ of14.78 ~~March~~Forfeited (200) -- $ 15.125 $ 15.13 --------- ------------- Balance at December 31, 2002 261,637 ~~the~~373,201 ~~Company~~$ ~~had 461~~13.50 ~~employees~~- $ 22.00 $ 18.00 Granted -- 8,000 $ 21.28 $ 21.28 Exercised (39,671) (12,000) $ 14.00 - $ 22.00 $ 16.04 Forfeited (14,589) (4,000) $ 14.75 - $ 22.00 $ 16.44 --------- ------------- Balance at December 31, 2003 207,377 365,201 $ 13.50 - $ 21.28 $ 18.28 Granted -- 8,000 $ 25.40 $ 25.40 Exercised (92,211) (249,167) $ 14.00 - $ 21.30 $ 17.41 Forfeited (7,895) (3,639) $ 21.30 $ 21.30 --------- ------------- Balance at December 31, 2004 107,271 120,395 $ 13.50 - $ 25.40 $ 19.67 ========= ============= Shares exercisable at December 31: 2004 86,838 101,097 $ 13.50 - $ 25.40 $ 19.32 ========= ============= 2003 130,548 276,699 $ 13.50 - $ 21.28 $ 17.11 ========= ============= 2002 138,063 214,441 $ 13.50 - $ 22.00 $ 15.66 ========= =============

An additional 373,034 common shares have been authorized for issuance in future grants of options under the 1997 Plan as of December 31, 2004. The option price of future grants may not be less than the fair market value of the shares on the date of grant. Pro forma information regarding net income and earnings per share as required by SFAS No. 148, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement, is set forth in the table below:

(In ~~The~~thousands, ~~Company’s~~except ~~objective~~per isshare toinformation) ~~continue~~2004 to2003 be2002 a------------------------------------------------------- ~~significant~~------- ~~owner~~-------- ~~of middle~~-~~income~~------- ~~apartment~~Net ~~communities~~income, inas ~~select~~reported ~~markets~~$ in1,796 ~~the~~$ ~~Mid-Atlantic~~78,768 ~~and~~$ ~~Southeast~~17,292 ~~regions~~Add: ofTotal ~~the~~stock ~~United~~compensation ~~States. The~~expense ~~Company~~included ~~seeks~~in toreported ~~own~~net ~~and~~income ~~operate~~897 ~~apartment~~738 ~~communities~~597 inLess: ~~markets~~Total ~~that~~stock itbased ~~expects~~compensation ~~will~~expense ~~achieve~~determined ~~acceptable~~under ~~population~~the ~~and~~fair ~~employment~~value ~~growth~~method ~~and~~for inall ~~other~~awards ~~markets~~(963) it(812) ~~considers~~(688) to------- ~~have~~-------- ~~high~~-------- ~~barriers~~Pro toforma ~~entry.~~net Atincome ~~December~~$ 311,730 ~~2001~~$ 78,694 ~~approximately~~$ ~~45% of~~17,201 ~~the~~======= ~~Company’s~~======== ~~apartments~~======== ~~were~~Earnings ~~located~~per inshare: ~~the~~Basic, ~~greater~~as ~~Baltimore~~reported ~~metropolitan~~$ ~~area~~.11 ~~and~~$ an4.99 ~~additional~~$ ~~20%~~1.08 ~~were~~Basic, ~~located~~pro informa ~~the~~$ ~~greater~~.10 ~~Washington,~~$ D4.C.99 ~~metropolitan~~$ ~~area~~1.08 ~~The~~Diluted, ~~Company~~as ~~seeks~~reported to$ ~~acquire~~.10 ~~additional~~$ ~~apartment~~4.90 ~~communities~~$ in1.07 ~~its operating region~~Diluted, ~~particularly~~pro informa ~~the~~$ ~~greater~~.10 ~~Washington,~~$ D4.C.90 ~~and~~$ ~~Baltimore metropolitan areas, and in Florida~~1. 06

34 For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value for the options was estimated at the date of grant using Black-Scholes option valuation model with the following weighted-average assumptions:

2004 ~~The~~2003 ~~Company~~2002 ~~made~~---- no---- ~~acquisitions~~---- ~~during~~Risk ~~2001,~~free ~~as the low~~ interest rate ~~environment~~3.4% ~~coupled~~3.0% ~~with~~4.3% ~~unrealistic~~Dividend ~~seller~~yield ~~expectations~~8.8% ~~drove~~9.3% ~~prices~~8.1% toVolatility ~~levels~~factor ~~that the Company found unacceptable~~.18 ~~The Company continues to seek new investment opportunities that meet its investment criteria~~.18 While the Company prefers investments within its operating region, it also will consider acquisitions beyond its existing markets if, among other things, they are large enough to support the overhead associated with establishing and maintaining dedicated regional and/or district offices.17 ~~The~~Weighted-average ~~Company~~expected ~~prefers~~life ~~acquisitions that represent value added opportunities for upgrading and repositioning~~ (in ~~markets with~~years) ~~long~~5 ~~term~~5 ~~stability, reasonably high barriers to entry and the potential for establishing a meaningful ownership position over time.~~ 5

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected share price volatility. Because the Company's employee share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee share options. The weighted average per share fair value of options granted during the years ended December 31, 2004, 2003 and 2002 was $1.10, $.87 and $1.10, respectively. The weighted average remaining contractual life of options granted is 6.01 years. 401(k) PLAN The Company has a 401(k) Plan that covers substantially all of its associates with more than thirty days of service. The 401(k) Plan complies with Internal Revenue Service requirements as a 401(k) Safe Harbor Plan whereby discretionary contributions made by the Company are 100% vested. The aggregate cost of the Company's contributions to the 401(k) Plan was $464,000, $483,000, and $472,000 for the years ended December 31, 2004, 2003, and 2002, respectively. RESTRICTED SHARES From 1995 through 2003, the Company granted 484,000 restricted common shares to certain officers, pursuant to the 1993 and 1997 Plans. In February 2004, the Company granted an additional 70,000 restricted shares under the 1997 Plan. The stock price on the date of grant was $26.83. Under the terms of the grants issued prior to 2003, the shares become fully vested upon termination of the officer-shareholder's employment due to (i) retirement from the Company; (ii) death or disability or (iii) a change of control, as defined in the Plans. Should an officer-shareholder leave the Company for any other reason, the restricted shares are subject to forfeiture. Under the terms of the subsequent grants, the shares generally become vested 20% per year in years four through eight of the restricted stock agreement. Should the officer-shareholder leave prior to full vesting, any unvested portion of the grant is subject to forfeiture. The market value of the shares awarded as of the dates of grant has been recorded as Unearned Compensation-Restricted Stock and the unamortized portion ($3,799,000 and $3,299,000 at December 31, 2004 and 2003, respectively) is reflected in the accompanying Balance Sheet as a separate component of Shareholders' Equity and is amortized into income as deferred compensation expense over the estimated vesting period. Such deferred compensation totaled $897,000, $738,000 and $597,000 for the years ended December 31, 2004, 2003, and 2002, respectively. SUPPLEMENTAL EMPLOYEES RETIREMENT PLAN The Company has a split-dollar life insurance plan for certain officers. Through 2003, the Company advanced the premiums on life insurance policies for certain officers where such advances were not considered loans under the Sarbanes-Oxley Act of 2002. In 2004, the Company elected to discontinue paying premiums on all split-dollar policies. The policies are assigned to the Company. In the event of retirement or death, the Company will be repaid the aggregate amount of premiums paid from the cash surrender value at the time the benefits are paid. The remaining value is paid to the employee or beneficiary. The aggregate premiums advanced under the policies totaled $447,000 and are recorded as an asset to the Company. As part of the separation agreement for one of the senior officers, the Company agreed to defer collection of the amount due until the separated officer reaches the age of 65 or the policy is surrendered, during which time, the former officer will pay interest at 4.68% per annum. 35 NOTE 10. LEASES The Company leases certain office facilities under noncancellable operating leases. The lease on the corporate office in Baltimore, Maryland contains escalating annual payments through December 31, 2014 with two five-year renewal options. Future minimum rental commitments under noncancellable leases with remaining terms in excess of one year are as follows at December 31, 2004:

(In ~~During~~thousands) ~~2001,~~-------------- ~~the~~2005 ~~Company~~$ ~~completed~~622 ~~the~~2006 ~~substantial~~631 ~~renovation~~2007 of640 ~~three~~2008 ~~communities~~650 ~~containing~~2009 ~~approximately~~513 Thereafter 1,~~000~~993 ~~units~~------ ~~located~~Total inrental ~~the~~commitments ~~Baltimore metropolitan area and the Maryland suburbs of Washington~~$5,049 D.C. These improvements included extensive landscaping, new property and building entrances, signage, new windows and clubhouse improvements. These improvements followed certain significant interior improvements, primarily the installation of new kitchens and baths, that had been completed at these communities in prior years. Additional communities have been targeted for similar renovations over the next few years. ======

Total rent expense for the years ended December 31, 2004, 2003, and 2002, was approximately $559,000, $552,000 and $483,000, respectively. NOTE 11. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN The Company maintains a Dividend Reinvestment and Share Purchase Plan (the "Plan") pursuant to which shareholders may purchase additional shares of beneficial interest through reinvestment of dividends or by optional cash investment. Shares may be acquired by the Plan either from the Company issuing new shares or by the Plan administrator acquiring shares in the open market. The Company has registered 750,000 common shares of beneficial interest for potential issuance under the Plan.

Year ~~During~~ended ~~2001~~December 31, ~~the~~2004 ~~Company~~2003 ~~invested~~----------------------- ~~heavily~~---- ~~in upgrading its information technology systems and improved business processes. A new software system which includes state~~-of-~~the~~-~~art~~- ~~financial accounting,~~Total ~~corporate~~shares ~~management~~acquired ~~and~~6,804 ~~business~~145,720 ~~intelligent~~Shares ~~modules~~purchased ~~tailored~~from toCompany ~~real~~6,804 ~~estate operating companies~~144,135 ~~was~~Weighted ~~installed~~average ~~during~~price ~~2001~~per ~~and~~share ~~implemented~~$ at25.63 ~~the~~$ ~~beginning of~~ 23.50

At December 31, 2004, 597,196 shares remain available for future purchases under the Plan. NOTE 12. DISTRIBUTIONS TO MINORITY INTEREST LESS THAN (IN EXCESS OF) EARNINGS During 2002, the amount reported under the caption "Minority interest" in the accompanying Balance Sheet was reduced to zero. U.S. GAAP requires that, for financial reporting purposes, an additional allocation of income be made to the minority interest account in an amount necessary to keep such balance from falling below zero since there is no requirement for the unit holders to make additional contributions. During 2003, earnings were in excess of distributions to the minority interests and, therefore, the Company reallocated the $576,000 that had previously been so allocated to the minority interests. NOTE 13. CONTINGENCIES During 2004, the Company determined that two of its wholly owned subsidiaries are subject to filing requirements and franchise taxes in a state in which the Company owns property. The Company is in the process of preparing and filing these returns and has accrued a provision for taxes of approximately $140,000. However, certain provisions of the state's regulations may be subject to varying interpretation as to their applicability to the Company's subsidiaries. The Company is seeking clarification from the state, which, if determined to be adverse to the Company, would subject the Company to additional taxes of approximately $710,000. The Company has made certain changes to its corporate structure such that it will no longer be subject to such taxes. 36 NOTE 14. SHAREHOLDERS' EQUITY On February 3, 2004, the Company sold 1.41 million of its common shares of beneficial interest in a private sale at a negotiated price of $24.80 per share for net proceeds of approximately $34.7 million. The sale was made pursuant to the Company's existing shelf registration statement as previously filed with the Securities and Exchange Commission. NOTE 15. FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2004 and 2003. SFAS No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

DECEMBER 31, 2004 December 31, 2003 --------------------------- --------------------------- (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value -------------- --------------- ---------- --------------- ---------- Fixed rate mortgages $375,132 $374,717 $375,793 $417,781 Floating rate mortgages $ 40,000 $ 40,000 $ 75,000 $ 75,000 5.375% Convertible Senior Notes $ 74,750 $ 73,622 $ 74,750 $ 74,444 Notes payable $ 2,000 $ 2,000 $ -- $ --

The carrying amounts shown in the above table are included in the accompanying Balance Sheet under the captions "Mortgage notes payable," "5.375% Convertible Senior Notes due 2023," "Notes payable," and "Mortgage notes payable and other liabilities held for disposition." The fair value of the fixed rate portion of the Company's mortgage notes payable is estimated by discounting expected cash flows based on the Company's incremental borrowing rate for similar types of borrowing arrangements. The floating rate portion of the Company's mortgage notes payable approximated market. Cash equivalents, other assets, accounts payable and other liabilities are carried at amounts that reasonably approximate their fair value. The following table presents the fair value of outstanding derivative financial instruments, based on external market quotations as of December 31, 2004 and 2003.

Fair Value as of December 31, Notional Amount Fixed Rate Type of Contract Effective Date Contract Maturity 2004 2003 --------------- ---------- ---------------------- -------------- ----------------- ---------- ------------ $ 139,000,000 9.35% Cap April, 2002 April, 2007 $ 2,000 $ 145,000 $ 49,172,000 7.50% ~~The~~Cap ~~Company~~April, ~~believes~~2003 ~~that~~April, ~~prudent~~2007 ~~investment~~$ in4,000 ~~technology~~$ is106,000 ~~necessary~~$ ~~for~~(40,000,000) ~~the~~9.35% ~~Company~~Cap January, 2003 April, 2007 $ (1,000) $ (42,000) $ 20,000,000 4.84% Swap(Floating to ~~effectively~~Fixed) ~~compete~~January, in2003 ~~the~~April, ~~future~~2007 $(624,000) $(1,285,000) $ 20,000,000 3.48% Swap(Floating to Fixed) January, 2003 April, 2007 $ (28,000) $ (423,000)

The following is a summary of the derivative transactions for years ended December 31, 2004, 2003 and 2002.

(In ~~Property~~thousands) ~~Management~~ / Year ended December 31, 2004 2003 2002 ---------------------------------------- ------- -------- -------- Net income $ 1,796 $ 78,768 $ 17,292 Other comprehensive income (loss) - unrealized gain (loss) on hedge instruments 1,040 (30) (2,024) ------- -------- -------- Comprehensive income $ 2,836 $ 78,738 $ 15,268 ======= ======== ======== Adjustment to net income related to the ineffective portion of hedge instruments $ (188) $ 34 $ (56)

The Company expects to reclassify approximately $457,000 of unrealized losses into earnings in the next twelve months. 37 Notes to Consolidated Financial Statements NOTE 16. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following is a summary of quarterly results of operations for the years ended December 31, 2004 and 2003.

(In ~~Each~~thousands, ofexcept ~~the~~per ~~apartment~~share ~~communities~~data) is/ ~~managed~~Quarter byended ~~the~~March ~~Operating~~31 ~~Partnership.~~June ~~The~~30 ~~management~~September ~~staff~~30 ~~for~~December ~~each~~31 ~~community~~----------------------------------------------------- ~~includes~~---------- on-~~site~~--------- ~~management~~------------ ----------- 2004 Revenues $ 30,771 $ 31,297 $ 31,962 $ 32,945 Income (loss) before discontinued operations and ~~maintenance~~minority ~~personnel~~interest as2,282 ~~well~~(3,420) as2,000 ~~off~~1,952 Income (loss) from continuing operations 1,985 (2,987) 1,747 1,705 (Loss) income from discontinued operations (1,173) 543 (4) (20) Net income (loss) 812 (2,444) 1,743 1,685 Basic earnings per share Income (loss) from continuing operations $ .12 $ (.17) $ .10 $ .10 (Loss) income from discontinued operations (.07) .03 -~~site support~~- ~~staff~~-- ---------- ---------- ----------- ----------- Net income (loss) $ .05 On$ (.14) $ .10 $ .10 ========== ========== =========== =========== Diluted earnings Per share Income (loss) from continuing operations $ .12 $ (.17) $ .10 $ .10 (Loss) income from discontinued operations (.07) .03 -~~site~~- ~~staff~~-- ~~performs~~---------- ~~leasing~~---------- ~~and~~----------- ~~rent~~----------- ~~collection~~Net ~~functions~~income ~~and~~(loss) ~~coordinates~~$ ~~maintenance~~.05 ~~and~~$ ~~resident~~(.14) ~~services~~$ .10 ~~Property~~$ ~~management~~.10 ~~staff~~========== ~~are~~========== ~~supervised~~=========== by=========== ~~district~~2003 ~~managers~~Revenues $ 27,756 $ 28,875 $ 30,108 $ 31,278 Income before discontinued operations and ~~regional~~minority ~~managers~~interest 3,457 2,882 3,364 2,728 Income from continuing operations 2,592 1,924 4,457 2,353 Income from discontinued operations 1,271 666 35,660 29,845 Net income 3,863 2,590 40,117 32,198 Basic earnings per share Income from continuing operations $ .16 $ .12 $ .29 $ .15 Income from discontinued operations .08 .04 2.28 1.93 ---------- ---------- ----------- ----------- Net income $ .24 $ .16 $ 2.57 $ 2.08 ========== ========== =========== =========== Diluted earnings per share Income from continuing operations $ .16 $ .12 $ .28 $ .15 Income from discontinued operations .08 .04 2.24 1.89 ---------- ---------- ----------- ----------- Net income $ .24 $ .16 $ 2.52 $ 2.04 ========== ========== =========== ===========

NOTE 17. SUBSEQUENT EVENT On February 2, 2005, the Board of Trustees declared a quarterly dividend of $.43 per share, aggregating approximately $7,500,000. Concurrent with the payment of the dividend, a limited partnership distribution of approximately $1,100,000 will be made to the minority interest holders. The dividend and distribution will be paid on March 10, 2005 to holders of record as of February 18, 2005. 38 Report of Independent Registered Public Accounting Firm To The Board of Trustees and Shareholders The Town and Country Trust We have audited the accompanying consolidated balance sheets of The Town and Country Trust (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Town and Country Trust at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Town and Country Trust's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP --------------------- McLean, Virginia February 24, 2005 39 (b) SUPPLEMENTARY DATA SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION THE TOWN AND COUNTRY TRUST DECEMBER 31, 2004

GROSS ~~Competition~~ AMOUNT AT WHICH INITIAL COST (c) CARRIED AT CLOSE OF PERIOD ---------------- -------------------------- IMPROVEMENTS MADE SUBSEQUENT NON-RECOURSE BUILDINGS TO BUILDINGS ACCUMULATED PROPERTY MORTGAGE AND ACQUISITION AND TOTAL DEPRECIATION YEAR USEFUL DESCRIPTION(a) DEBT(b) LAND IMPROVEMENTS (d) LAND IMPROVEMENTS (e) (f) ACQUIRED LIFE ------------------------------------------------------------------------------------------------------------------------------ MARYLAND Howard Crossing/ West Commercial $40,392 $8,822 $37,785 $28,270 $8,822 $66,055 $74,877 $31,074 1993(h) (g) Excalibur 7,276 2,166 19,493 300 2,166 19,793 21,959 1,038 2003 (g) The Courts of Avalon 17,204 4,277 38,490 131 4,277 38,621 42,898 2,000 2003 (g) Watkins Station 7,616 1,505 6,889 4,870 1,505 11,759 13,264 5,926 1993(h) (g) Hollows 8,432 1,424 10,401 2,835 1,424 13,236 14,660 8,433 1993(h) (g) Woodhill 8,228 1,317 10,097 3,129 1,317 13,226 14,543 8,429 1993(h) (g) Hallfield 1,700 320 2,240 1,573 320 3,813 4,133 1,776 1993(h) (g) Ridgeview 5,032 1,138 7,513 1,770 1,138 9,283 10,421 5,760 1993(h) (g) Bowley's Quarters 8,534 1,795 10,549 3,963 1,795 14,512 16,307 8,666 1993(h) (g) Skylark Pointe 8,568 1,474 10,511 7,022 1,474 17,533 19,007 8,519 1993(i) (g) Tall Oaks 10,982 1,397 9,845 3,562 1,397 13,407 14,804 7,816 1993(h) (g) Willow Lake 13,532 1,781 14,088 6,433 1,781 20,521 22,302 11,862 1993(h) (g) Steeplechase 18,156 2,749 18,151 9,359 2,749 27,510 30,259 15,154 1993(h) (g) Eagles Walk at White Marsh 13,430 3,136 19,944 10,391 3,136 30,335 33,471 16,226 1993(h) (g) Versailles 7,480 1,599 10,921 5,390 1,599 16,311 17,910 9,086 1993(h) (g) Fox Run 9,520 2,498 11,412 745 2,498 12,157 14,655 5,246 1993 (g) Stonegate 8,772 2,887 13,261 512 2,887 13,773 16,660 4,633 1994 (g) PENNSYLVANIA Hidden Village 4,760 1,229 7,447 1,974 1,229 9,421 10,650 6,172 1993(h) (g) Emmaus 7,378 1,394 9,577 3,292 1,394 12,869 14,263 7,875 1993(h) (g) Hanover 3,604 590 4,946 1,629 590 6,575 7,165 4,410 1993(h) (g) Lancaster East 4,488 812 8,249 3,129 812 11,378 12,190 7,033 1993(h) (g) Lancaster West 6,902 1,285 12,794 4,821 1,285 17,615 18,900 10,736 1993(h) (g) York 5,746 1,951 10,622 1,579 1,951 12,201 14,152 9,014 1993(h) (g) Rolling Hills 3,026 1,282 5,842 944 1,282 6,786 8,068 2,789 1993 (g) VIRGINIA Barton's Crossing 23,392 7,320 33,845 6,414 7,320 40,259 47,579 17,072 1993 (g) Lionsgate 20,502 6,361 46,649 -70 6,361 46,579 52,940 1,915 2003 (g) The Glen 4,590 1,157 5,269 1,287 1,157 6,556 7,713 2,674 1993 (g) McNair Farms 11,730 3,564 16,237 2,471 3,564 18,708 22,272 8,323 1993 (g) University Heights 19,958 5,789 26,371 2,154 5,789 28,525 34,314 13,123 1993 (g) Carlyle Station 16,082 4,259 19,610 3,538 4,259 23,148 27,407 6,774 1994 (g) DELAWARE Christina Mill 7,548 2,288 10,454 762 2,288 11,216 13,504 3,606 1994 (g) FLORIDA Windermere 9,700 2,809 12,797 1,375 2,809 14,172 16,981 2,464 1998 (g) Twelve Oaks 9,393 3,100 13,711 1,630 3,100 15,341 18,441 2,702 1998 (g) Heron's Run 5,440 2,795 12,754 1,094 2,795 13,848 16,643 2,200 1999 (g) Kirkman 15,115 4,565 20,795 2,133 4,565 22,928 27,493 3,752 1999 (g) Gardens East 23,475 5,970 27,182 2,003 5,970 29,185 35,155 4,250 2000 (g) Perico 9,958 2,491 11,248 1,437 2,491 12,685 15,176 1,855 1999 (g) McIntosh 7,492 2,029 9,194 959 2,029 10,153 12,182 1,601 1999 (g) ---------------------------------------------------------------------------------------- TOTAL $415,132 $103,325 $577,183 $134,810 $103,325 $711,993 $815,318 $271,984 ========================================================================================

40 NOTES TO SCHEDULE III THE TOWN AND COUNTRY TRUST (IN THOUSANDS) (a) All properties are garden apartment communities with the exception of one commercial building included in the Howard Crossing/West Commercial Partnership. (b) See description of mortgages payable in Note 4 of Notes to Consolidated Financial Statements of the Company. (c) Initial cost for properties originally acquired from the Predecessor (see note (h) below) represents the historical cost as of August 23, 1993 plus the acquisition of non-controlled interests in the Predecessor on August 23, 1993. The initial cost of all other property acquisitions represents the cost to purchase the property at the date of acquisition. (d) The aggregate cost of land, buildings and equipment on a Federal Income Tax basis is $693,059 at December 31, 2004. (e) Reconciliation of Real Estate Properties ------------------------------------------------------------ Balance at January 1, 2002 $ 643,271 Other additions 22,749 Other dispositions (22) ----------- Balance at December 31, 2002 665,998 Acquisition of new operating properties 117,435 Other additions 26,146 Other dispositions (444) ----------- Balance at December 31, 2003 809,135 Other additions 36,562 Other dispositions/retirements (30,379) ----------- Balance at December 31, 2004 $ 815,318 =========== (f) Reconciliation of Accumulated Depreciation ------------------------------------------------------------ Balance at January 1, 2002 $ 235,369 2002 depreciation expense, net of retirements 17,775 ----------- Balance at December 31, 2002 253,144 2003 depreciation expense, net of retirements 20,239 ----------- Balance at December 31, 2003 273,383 2004 depreciation expense, net of retirements (1,399) ----------- Balance at December 31, 2004 $ 271,984 ===========

(g) Depreciation is computed based Assets acquired Assets acquired upon the following estimated lives: subsequent to prior to January 1, 1994 December 31, 1993 ---------------------------------------------------- Buildings 27.5 years 40 years Building improvements 15 to 19 years 20 years Furniture, fixtures and equipment 3 to 12 years 5 to 12 years

(h) Denotes property originally purchased in 1979 by the Predecessor. 41 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES As of December 31, 2004, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2004. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2004. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of The Town and Country Trust (the "Company") is responsible for establishing and maintaining adequate internal controls over financial reporting and for the assessment of the effectiveness of internal controls over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or supervised by, the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles. The Company's internal controls over financial reporting are supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company's management and trustees; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the consolidated financial statements taken as a whole. In connection with the preparation of the Company's annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company's internal controls over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of the design of the Company's internal controls over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded that the Company's internal controls over financial reporting were effective as of December 31, 2004. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this report, have issued an attestation report on management's assessment of internal control over financial reporting, a copy of which is included in this Annual Report on Form 10-K. 42 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting To The Board of Trustees and Shareholders The Town and Country Trust We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting that The Town and Country Trust (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that The Town and Country Trust maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, The Town and Country Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 consolidated financial statements of The Town and Country Trust and our report dated February 24, 2005, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP ----------------------- McLean, Virginia February 24, 2005 43 ITEM 9B. OTHER INFORMATION None. PART III -------- ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required by this item concerning the Registrant's Trustees and Executive Officers is set forth under the captions "Election of Trustees," "Board of Trustees; Committees of the Board of Trustees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005, which information is incorporated herein by reference. The information required by this Item in respect of the Registrant's Executive Officers who are not Trustees is set forth in Item 4 of this Form 10-K and is incorporated herein by reference. The Company's Board of Trustees has not determined whether any of the members of the Audit Committee of the Board of Trustees meets the definition of "audit committee financial expert" as defined in the rules adopted by the Securities and Exchange Commission because the listing standards of the New York Stock Exchange do not require a listed company's audit committee to include as a member a person who satisfies the definition of "audit committee financial expert." The Company's Board of Trustees has determined that each of the present members of the Audit Committee is fiscally literate and has accounting or related management expertise in accordance with the listing standards of the New York Stock Exchange. ITEM 11. EXECUTIVE COMPENSATION Information in response to this Item is set forth under the caption "Compensation of Executive Officers" in the Registrant's Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this Item concerning security ownership of certain beneficial owners and management is set forth under the caption "Ownership of Common Shares of Beneficial Interest" in the Registrant's Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005, which information is incorporated herein by reference. Information in response to this Item concerning equity compensation plan information is set forth in Item 5 of this Form 10-K and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is set forth under the caption "Certain Related Transactions" in the Registrant's Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005, which information is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information in response to this Item concerning fees paid to the independent auditors is set forth under the caption "Selection of Accountants" in the Registrant's Proxy Statement for the annual meeting of shareholders to be held on May 4, 2005, which information is incorporated herein by reference. The Audit Committee of the Board of Trustees must pre-approve all auditing services and all non-audit services (including the fees and terms thereof) to be performed by the independent auditors. The Audit Committee may delegate to the Audit Committee Chairman the authority to grant pre-approvals for audit and permitted non-audit services to be performed for the Company by the independent auditor, provided that decisions of such members to grant pre-approvals shall be presented to the full Committee at its next regularly scheduled meeting. 44 PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:

PAGE ~~All~~---- of(1) ~~the~~Financial ~~Company’s~~Statements: ~~apartments~~--------------------- ~~are~~Consolidated ~~located~~Balance inSheets ~~developed~~of ~~areas~~the ~~and~~Registrant ~~compete~~at ~~with~~December ~~numerous~~31, ~~other~~2004 ~~apartment~~and ~~communities~~at ~~within~~December ~~their~~31, ~~respective~~2003 ~~sub-markets.~~Consolidated InStatements ~~many~~of Operations of the ~~Company’s apartment~~Registrant ~~markets,~~for the ~~competition~~years ~~for~~ended ~~residents~~December is31, ~~intense.~~2004, ~~Some~~December ~~competing~~31, ~~communities~~2003 ~~are~~and ~~larger~~December or31, ~~newer~~2002 ~~than~~Consolidated ~~the~~Statements ~~Company’s~~of ~~apartments~~Shareholders' ~~and~~Equity ~~many~~of ~~offer~~the ~~features~~Registrant ~~that~~for the ~~Company’s~~years ~~communities~~ended doDecember ~~not~~31, ~~have.~~2004, ~~The~~December ~~competitive~~31, ~~position~~2003 and December 31, 2002 Consolidated Statements of ~~each~~ Cash Flows of the ~~Company’s~~Registrant ~~apartment~~for ~~communities~~the ~~varies.~~years ~~Certain~~ended December 31, 2004, December 31, 2003 and December 31, 2002 Notes to Consolidated Financial Statements of the ~~Company’s~~Registrant ~~competitors~~Report ~~may~~of ~~have~~Independent ~~greater~~Registered ~~financial~~Public ~~resources~~Accounting ~~and~~Firm ~~other~~(2) ~~competitive~~Financial ~~advantages~~Statement ~~over~~Schedules: ~~the~~------------------------------ ~~Company.~~ Schedule III--Real Estate and Accumulated Depreciation

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 45 (3) Exhibits -------- Exhibit ------- Number ------ 3.1 First Amended and Restated Declaration of Trust (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-11 (No. 333-63150)). 3.2 By-Laws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-11 (No. 333-63150)). 4.1 Indenture, dated as of August 4, 2003, between The Town and Country Trust and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (No. 333-109157)). 4.2 Form of 5.375% Convertible Senior Note due 2023 (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (No. 333-109157)). 4.3 Registration Rights Agreement, dated as of August 4, 2003, between The Town and Country Trust and Banc of America Securities LLC (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-3 (No. 333-109157)). 10.1 Third Amended and Restated Agreement of Limited Partnership of The TC Operating Limited Partnership dated as of August 4, 2003 (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003). 10.2* Registrant's Amended and Restated 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002). 10.3* Registrant's 1997 Long Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002). 10.4 Amended and Restated Master Credit Facility Agreement, dated as of April 25, 2002, entered into by and among the Registrant, the TC Operating Limited Partnership, The Town and Country Holding Corporation, The TC Property Company, The Town and Country Oriole Corporation, each of the Property Partnerships and Prudential Multifamily Mortgage, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.4.1 First Amendment to Amended and Restated Master Credit Facility Agreement, dated April 16, 2003, entered into by and among the Registrant, The TC Operating Limited Partnership, The Town and County Holding Corporation, the TC Property Company, The Town and Country Oriole Corporation, each of the Property Partnerships and Prudential Multifamily Mortgage, Inc. (incorporated by reference to Exhibit 10.4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year dated December 31, 2003). 10.4.2 Second Amendment to Amended and Restated Master Credit Facility Agreement, dated July 29, 2003, entered into by and among the Registrant, The TC Operating Limited Partnership, The Town and Country Holding Corporation, The TC Property Company, The Town and Country Oriole Corporation, Ivy Acquisitions LLC, Daisy Acquisitions LLC, Shamrock Acquisitions LLC, each of the Property Partnerships, Prudential Multifamily Mortgage, Inc. and Fannie Mae (incorporated by reference to Exhibit 10.4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year dated December 31, 2003). 10.4.3 Third Amendment to Amended and Restated Master Credit Facility Agreement, dated November 4, 2003, entered into by and among the Registrant, The TC Operating Limited Partnership, The Town and Country Holding Company, LLC, The TC Property Company, The Town and Country Oriole Corporation, The TC-Excalibur Company, LLC, The TC-Courts Company, LLC, The TC-Avalon Company, LLC, The TC-Lionsgate Company, LLC, each of the Property Partnerships, Prudential Multifamily Mortgage, Inc. and Fannie Mae (incorporated by reference to Exhibit 10.4.3 to the Registrant's Report on Form 10-K for the fiscal year dated December 31, 2003). 10.5 Financing Agreement dated September 25, 1998, by and among the Registrant, The TC Operating Limited Partnership, The TC Property Company II and Allfirst Bank (fka The First National Bank of Maryland) (incorporated by reference to 46 Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002). 10.6 Letter Agreement dated March 8, 2001 and effective March 1, 2001, between Michael H. Rosen and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on April 4, 2001). 10.7 Letter Agreement dated March 2, 2001 between Jennifer C. Munch and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on April 4, 2001). 10.8 Form of Severance Agreement (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on February 8, 2005). 10.9 Separation Agreement and General Release dated December 21, 2004 between James Dolphin and the Registrant. 10.10 Separation Agreement and General Release dated December 17, 2004 between Gerry J. Haak and the Registrant. 12 Computation of Ratio of Earnings to Combined Fixed Charges 14 Code of Ethics is available on the Company's website at www.tctrust.com. 21 Subsidiaries of the Registrant 23 Consent of Independent Registered Public Accounting Firm 24 Powers of Attorney 31 Rule 13a-14(a)/15d-14(a) Certifications 32 Section 1350 Certifications * Compensation plan or arrangement required to be filed as an exhibit hereto. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TOWN AND COUNTRY TRUST By: /s/ Harvey Schulweis ---------------------------------------------- Harvey Schulweis Chairman of the Board and Chief Executive Officer Dated: March 2, 2005 47 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature ~~Financing~~ Title Date --------- ----- ---- /s/ Harvey Schulweis Chairman of the Board, March 2, 2005 ------------------------- Chief Executive Officer, Harvey Schulweis Principal Executive Officer and Trustee /s/Alan W. Lasker Senior Vice President- March 2, 2005 ------------------------- Chief Financial Officer Alan W. Lasker and Principal Financial Officer /s/ William J. Fishell Vice President -Treasurer March 2, 2005 ------------------------- and Principal Accounting William J. Fishell Officer James H. Berick* Trustee H. Grant Hathaway* Trustee Milton A. Wolf* Trustee Nancy F. Lerner* Trustee

*By: /s/ Harvey Schulweis March 2, 2005 --------------------- Harvey Schulweis Attorney-in-Fact ---------- - Powers of attorney authorizing Harvey Schulweis to sign this annual report on Form 10-K on behalf of certain Trustees of the Registrant is being filed with the Securities and Exchange Commission herewith (Exhibit 24). 48

In September 1997, the Company entered into a financing agreement with the Prudential Mortgage Capital Company, secured principally by first and second priority mortgages on 26 of the Company’s 42 apartment communities. Pursuant to this financing agreement, as subsequently amended, the Trust and certain of its controlled entities has borrowed $382,152,000 as of December 31, 2001 and March 15, 2002. Of this amount, $300,000,000 bears interest at 6.91%, fixed, and matures on April 1, 2008. The remaining $82,152,000 represents a revolving credit facility bearing interest at a floating rate which is the aggregate of the market interest rate for certain Fannie Mae-backed obligations at the time of each advance plus an agreed-upon spread. At December 31, 2001 and March 15, 2002, $82,152,000 in revolving credit advances were outstanding at the rate of interest of 3.0%. As required by the financing agreement, the Company has purchased an interest rate protection contract which limits the maximum variable interest rate on $75,000,000 of the amount outstanding to 10.5%. At the Company’s option, any outstanding portion of the $82,152,000 revolving credit facility can be converted to a fixed-rate loan maturing on April 1, 2008. At March 15, 2002 the Company was engaged in negotiations to expand this financing arrangement by an amount expected to approach $60 million. Because no formal commitment has been issued by the lender, there are no assurances that the expanded facility will be available.

In August, 2001, the Company modified its existing $50 million revolving credit facility with a commercial bank. Under the modified terms, $20 million may be used for working capital purposes, with the remaining $30 million available to fund property acquisitions. The working capital portion of the line bears interest at 135 basis points over LIBOR and the acquisition

-3-

portion bears interest at 120 basis points over LIBOR. At December 31, 2001, $16,250,000 in revolving credit advances were outstanding at a variable rate of interest of 3.28%, and $16,000,000 in working capital advances were outstanding at a rate of 3.28%. The term of this credit facility expires in October, 2002 and may be extended for an additional year through October, 2003 at the Company’s option.

Environmental Matters

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

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

Employees

As of December 31, 2001, the Company had 461 employees.

ITEM 2. PROPERTIES.

The Properties consist of 42 multifamily properties comprising 15,237 apartment units located in suburban Baltimore, Maryland; suburban Washington, D.C. and northern Virginia; southeastern Pennsylvania; Delaware; Charlotte, North Carolina; and Florida.

The average occupancy rate for all Properties for fiscal 2001 and fiscal 2000 was 94.2% and 94.7%, respectively. Tenant leases are generally for one-year terms, with automatic two-month renewals after the completion of the first year, and often require security deposits. Approximately 96% of the apartments in the Properties are one-bedroom and two-bedroom apartments. The balance are three-bedroom apartments. The Properties typically consist of two-

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and three-story buildings in a landscaped setting, many with amenities such as swimming pools, tennis courts, playgrounds and community buildings. All apartments offer air conditioning. The majority of such buildings are of brick construction and all of the Properties are located in mature, fully-developed neighborhoods.

The following table presents certain additional information concerning the Properties:

Property Name	Square Footage (1)	Number of Units	2001 Average Occupancy (2)
Baltimore
Bowleys Quarters	348,005	462	94.4	%
Baltimore, Maryland
Charlesmont	411,349	565	94.0	%
Dundalk, Maryland
Steeplechase	502,878	540	95.8	%
Cockeysville, Maryland
Foxhaven	404,628	460	94.3	%
Baltimore, Maryland
Gardenwood	427,760	492	94.6	%
Baltimore, Maryland
Hallfield	63,276	75	98.5	%
Perry Hall, Maryland
Harford	297,077	336	96.6	%
Carney, Maryland
Hollows	291,091	336	96.9	%
Glen Burnie, Maryland
Ridgeview	217,849	257	94.4	%
Rossville, Maryland
Rolling Road	324,401	384	95.9	%
Baltimore, Maryland
Rossville	532,264	692	94.4	%
Rossville, Maryland
Greensview/West	1,199,359	1,350	95.8	%
Ellicott City, Maryland
Woodhill	281,860	334	96.3	%
Glen Burnie, Maryland

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Woodmoor	341,188	424	93.9	%
Baltimore, Maryland
Versailles	252,669	210	97.2	%
Towson, Maryland
Washington, D.C.
Watkins Station	198,330	210	92.0	%
Gaithersburg, Maryland
Tall Oaks	368,224	352	93.8	%
Laurel, Maryland
Willow Lake	380,748	456	95.5	%
Laurel, Maryland
Fox Run	210,891	218	95.8	%
Germantown, Maryland
Barton’s Crossing	436,876	532	96.8	%
Alexandria, Virginia
University Heights	400,122	466	87.6	%
Ashburn, Virginia
The Glen	123,950	134	95.0	%
Leesburg, Virginia
The Village at	220,748	283	93.0	%
McNair Farms
Herndon, Virginia
Carlyle Station	386,545	408	97.1	%
Manassas, Virginia
Pennsylvania
Hidden Village	223,006	264	96.1	%
Allentown, Pennsylvania
Colonial Crest Emmaus	275,379	329	95.7	%
Emmaus, Pennsylvania
Hanover	186,366	215	97.8	%
Hanover, Pennsylvania
Lancaster West	343,350	413	96.0	%
Lancaster, Pennsylvania
6

Lancaster East	228,294	272	94.7	%
Lancaster, Pennsylvania
York	313,940	396	93.7	%
York, Pennsylvania
Rolling Hills	145,100	184	95.6	%
York, Pennsylvania
Newark, Delaware
Christina Mill	182,604	228	97.3	%
Newark, Delaware
Stonegate	282,072	260	95.6	%
Elkton, Maryland
Charlotte
Forest Ridge	333,258	330	85.7	%
Charlotte, North Carolina
Fairington	267,300	250	86.6	%
Charlotte, North Carolina

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Property Name	Square Footage (1)	Number of Units	2001 Average Occupancy (2)
Florida
Windermere Lakes	223,332	276	88.3	%
Orlando, Florida
Twelve Oaks	222,692	284	91.2	%
Orlando, Florida
Kirkman	336,910	370	93.3	%
Orlando, Florida
McIntosh	191,000	212	91.9	%
Sarasota, Florida
Heron’s Run	245,250	274	91.4	%
Sarasota, Florida
Perico	239,032	256	95.7	%
Bradenton, Florida
Gardens East Apartments	372,712	448	91.9	%
Palm Beach Gardens, Florida
Total	13,233,685	15,237

(1)	Represents total square footage of apartment units at each Property.
(2)	Average occupancy is defined as gross potential rent less vacancy allowance divided by gross potential rent for the period, expressed as a percentage.

ITEM 3. LEGAL PROCEEDINGS

There were no legal proceedings pending at December 31, 2001 or as of the date of this report to which the Registrant, the Operating Partnership or any of the 42 general partnerships which own the Properties is a party or to which the Properties are subject that are likely to have a material adverse impact on the Registrant’s operations.

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

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

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EXECUTIVE OFFICERS OF THE REGISTRANT

The age (as of March 15, 2002), business experience during the past five years and offices presently held by Messrs. Lerner and Schulweis are set forth under the caption “Election of Trustees” in the Registrant’s Proxy Statement dated March 29, 2002, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference. Such information in respect of each of the Registrant’s Executive Officers who are not Trustees is reported below. The Registrant’s Bylaws provide that officers shall hold office until their successors are elected and qualified.

Thomas Brodie: Age 39. Mr. Brodie has served as Senior Vice President and Chief Investment Officer of the Registrant since May 2001. Mr. Brodie also has served as Managing Director of Schulweis Realty, Inc., a private real estate investment and development firm, since 1991. Prior to 1991, Mr. Brodie was a Senior Vice President of Lazard Realty, Inc. Mr. Brodie received his masters degree in business administration from Columbia University and his undergraduate degree from the Wharton School at the University of Pennsylvania.

James Dolphin: Age 52. Mr. Dolphin has served as Senior Vice President, Chief Financial Officer of the Registrant since May 2001. During 1999 and 2000 Mr. Dolphin pursued personal business interests. Previously, he served as a director and the Executive Vice President and Chief Financial Officer of United Dominion Realty Trust, Inc., Richmond, Virginia.

Gerald Haak: Age 48. Mr. Haak has served as Senior Vice President - Operations of the Registrant since March 2001. Prior thereto, he served as Senior Vice President/Regional Manager of the Registrant since 1991 and Vice President of the Registrant since 1982. Mr. Haak holds the CPM designation (Certified Property Manager) from the Institute of Real Estate Management, is on the Board of Directors of the National Multi-Housing Council, and is a Real Estate Associate Broker in Pennsylvania.

Alan W. Lasker: Age 55. Mr. Lasker has served as Senior Vice President-Finance of the Registrant since February 2000. Prior thereto, he served as Vice President-Finance of the Registrant since July, 1997. Mr. Lasker also has served as Senior Vice President of Schulweis Realty, Inc., a private real estate investment and development firm, since 1991. Prior to 1991, Mr. Lasker was a Senior Vice President of Lazard Realty, Inc. Mr. Lasker is a Certified Public Accountant.

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PART II

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

Information in response to this Item is set forth on the inside back cover of the Registrant’s 2001 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

Information in response to this item is set forth on page 10 of the Registrant’s 2001 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.

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

Information in response to this Item is set forth on pages 11 through 15 of the Registrant’s 2001 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information in response to this Item is set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” beginning on page 14 of the Registrant’s 2001 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a) Financial Statements

The financial statements, together with the report thereon of Ernst & Young LLP dated January 28, 2002, appearing on page 28 of the Registrant’s 2001 Annual Report to Shareholders (Exhibit 13), are incorporated herein by reference.

(b) Supplementary Data

Information in response to this Item is set forth in the financial statement schedules appearing on pages F-1 through F-3 of this Form 10-K.

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ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Registrant’s Trustees is set forth under the captions “Election of Trustees” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Registrant’s Proxy Statement dated March 29, 2002, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference. The information required by this Item in respect of the Registrant’s Executive Officers who are not Trustees is set forth in Item 4 on page 9 of this Form 10-K and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this Item is set forth under the caption “Compensation of Executive Officers” in the Registrant’s Proxy Statement dated March 29, 2002, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this Item is set forth under the caption “Ownership of Common Shares of Beneficial Interest” in the Registrant’s Proxy Statement dated March 29, 2002, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in response to this Item is set forth under the caption “Election of Trustees-Certain Related Transactions; Compensation Committee Interlocks and Insider Participation” in the Registrant’s Proxy Statement dated March 29, 2002, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)	The following documents are filed as part of this report:
			PAGE
	(1)	Financial Statements:
		Report of Independent Auditors	28	*
		Consolidated Balance Sheets of
		the Registrant at December 31, 2001
		and at December 31, 2000	16	*
		Consolidated Statements of
		Operations of the Registrant for
		the years ended December 31, 2001,
		December 31, 2000 and December 31, 1999	17	*
		Consolidated Statements of
		Shareholders’ Equity of the
		Registrant for the years ended
		December 31, 2001, December 31,
		2000 and December 31, 1999	18	*
		Consolidated Statements of Cash
		Flows of the Registrant for the
		years ended December 31, 2001,
		December 31, 2000 and
		December 31, 1999	19	*
		Notes to Consolidated Financial
		Statements of the Registrant	20	*
* Incorporated by reference from the indicated page of the Registrant’s 2001 Annual Report to Shareholders. With the exception of this information and the information incorporated in Items 5, 6, 7 and 8, the 2001 Annual Report to Shareholders is not deemed filed as part of this report.
	(2)	Financial Statement Schedules:
		Schedule III--Real Estate and
		Accumulated Depreciation	F-1

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

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	(3)	Exhibits
Exhibit Number
3.1		First Amended and Restated Declaration of Trust (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-11 (No. 33-63150)).
3.2		By-Laws (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11 (No. 33-63150)).
10.1		Amended and Restated Agreement of Limited Partnership of The TC Operating Limited Partnership dated as of January 26, 1995 (incorporated by reference to Exhibit 10.1(b) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.2	*	Registrant’s Amended and Restated 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993).
10.3	*	Registrant’s 1997 Long Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.4		Master Credit Facility Agreement, dated as of September 26, 1997, entered into by and among the Registrant, the TC Operating Limited Partnership, The Town and Country Holding Corporation, The TC Property Company, The Town and Country Oriole Corporation, each of the Property Partnerships and Prudential Mortgage Capital Company (fka Washington Mortgage Financial Group, Ltd.) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
10.5		Form of Payment Guaranty executed by each of the Property Partnerships in favor of Prudential Mortgage Capital Company (fka Washington Mortgage Financial Group, Ltd.) (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
10.6		Form of Amended and Restated Multifamily Deed of Trust, together with Riders thereto, executed by each of the Property Partnerships (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
10.7		Form of Amended and Restated Indemnity Multifamily Deed of Trust, together with Riders thereto, executed by each of the Property Partnerships (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).

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10.8		Financing Agreement dated September 25, 1998, by and among the Registrant, The TC Operating Limited Partnership, The TC Property Company II and Allfirst Bank (fka The First National Bank of Maryland) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
10.9	*	Adoption Agreement for Benefit Designers of Maryland, Inc. Non-Standardized 401(k) Profit Sharing Plan and Trust of The Town and Country Management Company (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
10.10		Letter Agreement dated March 8, 2001 and effective March 1, 2001, between Michael H. Rosen and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 4, 2001).
10.11		Letter Agreement dated March 2, 2001 between Jennifer C. Munch and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 4, 2001).
13		The Registrant’s 2001 Annual Report to Shareholders
21		Subsidiaries of the Registrant
23		Consent of Independent Auditors
24		Powers of Attorney
99		The Registrant’s Notice of Annual Meeting and Proxy Statement dated March 29, 2002
	* Compensation plan or arrangement required to be filed as an exhibit hereto.
(b)	Report on Form 8-K
	No report on Form 8-K has been filed during the last quarter of the Registrant’s fiscal year ended December 31, 2001.

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SIGNATURES

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

	THE TOWN AND COUNTRY TRUST
	By:	/s/ Harvey Schulweis
		Harvey Schulweis
		President
Dated: March 29, 2002

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

Signature			Title	Date
/s/ Harvey Schulweis			Principal Executive	March 29, 2002
Harvey Schulweis			Officer and Trustee
/s/ James Dolphin			Senior Vice President,	March 29, 2002
James Dolphin			Chief Financial Officer
			and Principal Financial
			Officer
Alfred Lerner*			Trustee
James H. Berick*			Trustee
H. Grant Hathaway*			Trustee
Milton A. Wolf*			Trustee
	*By:	/s/ Harvey Schulweis		March 29, 2002
		Harvey Schulweis
		Attorney-in-Fact
* Powers of attorney authorizing Harvey Schulweis to sign this annual report on Form 10-K on behalf of certain Trustees of the Registrant are being filed with the Securities and Exchange Commission herewith (Exhibit 24).

						Schedule III--Real Estate and Accumulated Depreciation The Town and Country Trust December 31, 2001
			Inital Cost (c)						Gross Amount at Which Carried at Close of Period
Property Description (a)	Non-Recourse Mortgage Debt (b)		Land		Buildings and Improvements		Improvements made subsequent to Acquisition (d)		Land		Buildings and Improvements		Total (e)		Accumulated Depreciation (f)		Year acquired		Useful Life
							(in thousands)
Maryland
Foxhaven		$ 8,397		$ 1,849		$ 11,929		$ 3,230		$ 1,849		$ 15,159		$ 17,008		$ 9,621	1993	(h)	(g)
Gardenwood	11,080			0		17,182		2,835		0		20,017		20,017	13,074		1993	(h)	(g)
West/Greensview/
West Commercial	32,688			8,824		37,783		9,411		8,824		47,194		56,018	28,395		1993	(h)	(g)
Montgomery Knolls		5,058		1,505		6,889		4,384		1,505		11,273		12,778		5,226	1993	(h)	(g)
Hollows		7,230		1,424		10,401		1,832		1,424		12,233		13,657		7,990	1993	(h)	(g)
Rolling Road		8,491		0		13,376		2,807		0		16,183		16,183	10,245		1993	(h)	(g)
Woodhill		6,602		1,317		10,097		2,579		1,317		12,676		13,993		7,986	1993	(h)	(g)
Woodmoor		7,081		1,690		11,110		3,152		1,690		14,262		15,952		8,938	1993	(h)	(g)
Hallfield		1,535		320		2,240		371		320		2,611		2,931		1,776	1993	(h)	(g)
Ridgeview		5,382		1,138		7,513		1,225		1,138		8,738		9,876		5,852	1993	(h)	(g)
Charlesmont	10,292			2,049		13,972		3,296		2,049		17,268		19,317	10,764		1993	(h)	(g)
Bowley's Quarters		8,692		1,795		10,549		3,189		1,795		13,738		15,533		7,948	1993	(h)	(g)
Harford		7,398		1,474		10,511		1,625		1,474		12,136		13,610		8,357	1993	(h)	(g)
Tall Oaks		8,718		1,397		9,845		3,915		1,397		13,760		15,157		7,358	1993	(h)	(g)
Willow Lake	10,233			1,781		14,088		6,216		1,781		20,304		22,085	10,974		1993	(h)	(g)
Cockeysville	12,429			2,749		18,151		9,749		2,749		27,900		30,649	14,395		1993	(h)	(g)
Rossville	14,456			3,136		19,944		4,004		3,136		23,948		27,084	15,249		1993	(h)	(g)
Versailles		7,010		1,599		10,921		3,984		1,599		14,905		16,504		8,517	1993	(h)	(g)
Fox Run		500		2,498		11,412		652		2,498		12,064		14,562		4,533	1993		(g)
Stonegate	10,993			2,887		13,261		706		2,887		13,967		16,854		3,648	1994		(g)
Pennsylvania
Hidden Village		5,416		1,229		7,447		1,512		1,229		8,959		10,188		6,102	1993	(h)	(g)
Emmaus		8,077		1,394		9,577		2,499		1,394		12,076		13,470		7,454	1993	(h)	(g)
Hanover		3,837		590		4,946		1,179		590		6,125		6,715		4,116	1993	(h)	(g)
Lancaster East		5,432		812		8,249		2,680		812		10,929		11,741		6,700	1993	(h)	(g)
Lancaster West		8,322		1,285		12,794		3,655		1,285		16,449		17,734	10,374		1993	(h)	(g)
York		8,047		1,951		10,622		1,422		1,951		12,044		13,995		8,403	1993	(h)	(g)
Rolling Hills		4,750		1,282		5,842		643		1,282		6,485		7,767		2,529	1993		(g)
Virginia
Barton's Crossing	25,250			7,320		33,845		2,410		7,320		36,255		43,575	14,249		1993		(g)
The Glen		500		1,157		5,269		1,120		1,157		6,389		7,546		2,278	1993		(g)
McNair Farms		500		3,564		16,237		2,425		3,564		18,662		22,226		6,864	1993		(g)
University Heights		500		5,789		26,371		813		5,789		27,184		32,973	10,877		1993		(g)
Carlyle Station	15,101			4,259		19,610		2,279		4,259		21,889		26,148		5,297	1994		(g)
Delaware
Christina Mill		8,906		2,288		10,454		705		2,288		11,159		13,447		2,813	1994		(g)
North Carolina
Forest Ridge		12,050		3,369		15,705		1,101		3,369		16,806		20,175		2,055	1998		(g)
Fairington		11,425		3,307		15,066		2,396		3,307		17,462		20,769		1,990	1998		(g)
Florida
Windermere		9,700		2,809		12,797		637		2,809		13,434		16,243		1,451	1998		(g)
Twelve Oaks		9,771		3,100		13,711		445		3,100		14,156		17,256		1,543	1998		(g)
Heron's Run		7,748		2,795		12,754		380		2,795		13,134		15,929		1,052	1999		(g)
Kirkman		16,250		4,565		20,795		569		4,565		21,364		25,929		1,953	1999		(g)
Perico		10,303		2,491		11,248		282		2,491		11,530		14,021		917	1999		(g)
Mcintosh		7,752		2,029		9,194		291		2,029		9,485		11,514		758	1999		(g)
Gardens East		19,501		5,970		27,182		414		5,970		27,596		33,566		1,434	2000		(g)
Other		76,000	(1)	0		814		4,559		0		5,373		5,373		2,089	1993		(g)
Total		$ 459,403		$ 102,787		$ 571,703		$ 103,578		$ 102,787		$ 675,281		$ 778,068		$ 294,144

(1) Represents debt secured by 35 properties and not allocated to specific properties.

F-1

NOTES TO SCHEDULE III THE TOWN AND COUNTRY TRUST (IN THOUSANDS)
(a)	All properties are garden apartment communities with the exception of one commercial building included in the West/Greensview/West Commercial Partnership.
(b)	See description of mortgages payable in Note 4 of Notes to Consolidated Financial Statements of the Company.
(c)	Initial cost for properties originally acquired from the Predecessor (see note (h) below) represents the historical cost as of August 23, 1993 plus the acquisition of non-controlled interests in the Predecessor on August 23, 1993. The initial cost of all other property acquisitions represents the cost to purchase the property at the date of acquisition.
(d)	The aggregate cost of land, buildings and equipment on a Federal Income Tax basis is $651,136 at December 31, 2001.

(e)	Reconciliation of Real Estate Properties
	Balance at January 1, 1999	$	666,090
	Acquisition of new partnerships		65,900
	Other additions, net of retirement		13,964
	Other dispositions		(16,208	)
	Balance at December 31, 1999		729,746
	Acquisition of new partnerships		33,156
	Other additions		16,951
	Other dispositions		(22,989	)
	Balance at December 31, 2000		756,864
	Other additions, net of retirements		21,204
	Balance at December 31, 2001	$	778,068

F-2

(f)	Reconciliation of Accumulated Depreciation
	Balance at January 1, 1999	$	248,411
	1999 depreciation expense, net of retirements		15,769
	Balance at December 31, 1999		264,180
	2000 depreciation expense, net of retirements		9,245
	Balance at December 31, 2000		273,425
	2001 depreciation expense, net of retirements		20,719
	Balance at December 31, 2001	$	294,144
(g)	Depreciation is computed based upon the following estimated lives:

		Assets acquired subsequent to January 1, 1994	Assets acquired prior to December 31,1993
	Buildings	27.5 years	40 years
	Building improvements	15 to 19 years	20 years
	Furniture, fixtures and equipment	3 to 12 years	5 to 12 years
(h)	Denotes property originally purchased in 1979 by the Predecessor.

F-3

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