MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A reconciliation of net income to diluted FFO for the years ended December 31, 2004, 2003 and 2002 are as follows: in thousands  2004  2003 2002 Funds from operations Net income  41,341 29,430 $ 74,612 Real estate depreciation from continuing operations  101,684  99,952 95,334 Real estate depreciation from discontinued operations  2,655  3,402 5,657 Adjustments for unconsolidated joint ventures  2,097  678 2,252 Gain on sale of properties  -  - (20) Gain on sale of discontinued operations  (8,368)  - (29,199) Income allocated to common units from continuing operations  2,765  2,096 1,656 Income from discontinued operations allocated to common units  1,495  141 151 Funds from operations – diluted  $ 143,669  $ 135,699  $ 150,443 Weighted average shares - basic  41,430  39,355 40,441 Incremental shares issuable from assumed conversions of: Common share options and awards granted  434  1,433 1,313 Common units  2,438  2,446 2,462 Weighted average shares – diluted  44,302  43,234 44,216 FFO for the years ended December 31, 2003 and 2002 previously included a reduction of $2.6 million and $0.4 million,  respectively, from gains on sales of undepreciated property. We have adjusted FFO to include these types of gains as  they do not meet NAREIT’s definition of gains that should be adjusted from net income in calculating FFO. We lease apartments under lease terms generally ranging from 6 to 13 months. Management believes that such  short-term lease contracts lessen the impact of inflation due to the ability to adjust rental rates to market levels as  leases expire.  The Securities and Exchange Commission (“SEC”) has issued guidance for the disclosure of “critical accounting  policies”. The SEC defines “critical accounting policies” as those that are most important to the presentation of a  company’s financial condition and results, and require management’s most difficult, subjective or complex judgments,  often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We follow  financial accounting and reporting policies that are in accordance with generally accepted accounting principles.  The more significant of these policies relate to cost capitalization and asset impairment, which are discussed in the  “Business” section under “Property Update”, and income recognition, capital expenditures and notes receivable, which  are discussed below.  Our rental and other property income is recorded when due from residents and is recognized monthly as it is earned.  Other property income consists primarily of utility rebillings, and administrative, application and other transactional  fees charged to our residents. Interest, fee and asset management and all other sources of income are recognized as earned. We capitalize renovation and improvement costs that we believe extend the economic lives and enhance the earnings  of the related assets. Capital expenditures, including carpet, appliances and HVAC unit replacements, subsequent to  initial construction are capitalized and depreciated over their estimated useful lives, which range from 3 to 20 years.  INFLATION  CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Income Recognition Capital Expenditures transforming camden 65