Forward-Looking Statements

This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Business Overview

We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this Report to "we," "us," "our," "the Company," or "UDR" refer collectively to UDR, Inc. and its subsidiaries.

At December 31, 2008, our wholly-owned real estate portfolio included 161 communities with 44,388 apartment homes and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 11 communities with 4,158 apartment homes.

The following table summarizes our market information by major geographic markets as of December 31, 2008.

                                                                                 Percentage of           Total
                                                Number of        Number of           Total              Carrying          Average       Total Income       Net Operating
                                                Apartment        Apartment         Carrying              Value            Physical      per Occupied          Income
                                               Communities         Homes             Value           (In thousands)      Occupancy        Home (a)        (In thousands)

SAME STORE COMMUNITIES
WESTERN REGION
Orange County, CA                                        13           4,067                12.2 %   $        706,764           95.0 %   $       1,588     $        52,925
San Francisco, CA                                         8           1,768                 5.3 %            309,563           96.1 %           1,838              27,017
Los Angeles, CA                                           5           1,052                 3.2 %            185,070           95.2 %           1,538              12,699
Seattle, WA                                               7           1,199                 2.1 %            118,452           95.3 %           1,130              11,278
San Diego, CA                                             5           1,123                 2.9 %            171,177           95.0 %           1,389              12,302
Monterey Peninsula, CA                                    7           1,565                 2.6 %            149,033           95.3 %           1,069              13,275
Inland Empire, CA                                         2             660                 1.4 %             80,309           92.6 %           1,159               5,627
Sacramento, CA                                            2             914                 1.1 %             66,746           91.5 %             926               6,324
Portland, OR                                              3             716                 1.1 %             66,316           94.3 %             987               5,526
MID-ATLANTIC REGION
Metropolitan DC                                           7           1,879                 3.2 %            188,271           96.5 %           1,324              19,009
Baltimore, MD                                             8           1,556                 2.6 %            151,818           96.6 %           1,176              14,865
Richmond, VA                                              6           1,958                 2.6 %            153,747           95.7 %           1,008              16,202
Norfolk, VA                                               6           1,438                 1.4 %             81,493           94.4 %             963              10,578
Other Mid-Atlantic                                        5           1,132                 1.3 %             75,073           94.5 %           1,030               9,410
SOUTHEASTERN REGION
Tampa, FL                                                 9           3,081                 3.9 %            226,859           94.2 %             953              20,857
Orlando, FL                                               8           2,140                 2.6 %            154,385           92.1 %             970              14,331
Nashville, TN                                             7           1,874                 2.4 %            139,667           95.6 %             883              12,439
Jacksonville, FL                                          4           1,557                 2.0 %            117,401           94.4 %             865               9,361
Other Florida                                             3             976                 1.6 %             94,281           93.6 %           1,069               7,322
SOUTHWESTERN REGION
Phoenix, AZ                                               3             914                 1.2 %             69,781           94.2 %             952               6,809
Austin, TX                                                1             250                 0.3 %             20,279           96.9 %             966               1,713
Dallas, TX                                                1             305                 1.1 %             61,469           94.2 %           1,636               3,471

Total/Average Same Store Communities                    120          32,124                58.1 %   $      3,387,954           94.8 %   $       1,176     $       293,340

Non-Matures, Commercial Properties and Other             39          12,099                38.7 %   $      2,256,976

Total Real Estate Held for Investment                   159          44,223                96.8 %   $      5,644,930

Real Estate Under Development(b)                          2             165                 3.2 %   $        186,823

Total                                                   161          44,388               100.0 %   $      5,831,753

(a) Total Income per Occupied Home represents total revenues per weighted average number of apartment homes occupied.

(b) The Company is currently developing seven wholly-owned communities with 2,242 apartment homes that have not yet been completed.

Liquidity and Capital Resources

Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale or maturity of existing assets, or by the acquisition of additional funds through capital management. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as

determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes. We routinely use our unsecured bank credit facility to temporarily fund certain operating, investing, financing and other activities prior to arranging for longer-term financing. During the past several years, proceeds from the sale of real estate have been used for debt repayment, investing and financing activities.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings under credit arrangements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development properties, and potential property acquisitions, through long-term secured and unsecured borrowings, the disposition of properties, and the issuance of additional debt or equity securities. Dividends and budgeted expenditures for improvements and renovations of certain properties are expected to be funded from cash provided by our unsecured revolving credit facility, other debt and equity issuances and cash flows provided by property operations.

We have a shelf registration statement filed with the Securities and Exchange Commission which provides for the issuance of an indeterminate amount of common stock, preferred stock, debt securities, guarantees of debt securities, warrants, subscription rights, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of the financing activity.

Future Capital Needs

Future development expenditures are expected to be funded with proceeds from construction loans, the sale of property, our unsecured revolving credit facility, and to a lesser extent, with cash flows provided by operating activities. Acquisition activity in strategic markets is expected to be largely financed through the reinvestment of proceeds from the sale of properties, the issuance of equity and debt securities, the issuance of operating partnership units, the assumption or placement of secured and/or unsecured debt.

During 2009, we have approximately $146.1 million of secured debt and $250.1 million of unsecured debt maturing and we anticipate repaying that debt with proceeds from borrowings under our secured or unsecured credit facilities, proceeds from our note receivable, the issuance of new unsecured debt securities or equity or from disposition proceeds. We also anticipate using contractually provided extensions for secured debt.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations as well as involves some degree of uncertainty. Estimates are prepared based on management's assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or requires significant judgment.

Capital Expenditures

In conformity with GAAP, we capitalize those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.

During 2008, $131.0 million or $2,838 per home was spent on capital expenditures for all of our communities, excluding development, condominium conversions and commercial properties compared to $194.4 million or $2,829 per home spent in 2007. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as roofs, siding, parking lots, and asset preservation capital expenditures, which aggregated $29.1 million or $630 per home. In addition, revenue enhancing capital expenditures, kitchen and bath upgrades, upgrades to HVAC equipment,

and other extensive exterior/interior upgrades totaled $50.1 million or $1,085 per home, and major renovations totaled $51.8 million or $1,123 per home for the year ended December 31, 2008.

The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, condominium conversions and commercial properties, for the periods presented:

                                                                      Year Ended December 31,
                                                       (dollars in thousands, except for per apartment homes)
                                                                                                  Per Apartment Home
                                          2008              2007          % Change        2008         2007         % Change

Turnover capital expenditures          $     9,342       $   13,362           -30.1 %    $   202      $   194             4.1 %
Asset preservation expenditures             19,737           31,071           -36.5 %        428          452            -5.3 %

Total recurring capital expenditures        29,079           44,433           -34.6 %        630          646            -2.5 %
Revenue enhancing improvements              50,059           78,209           -36.0 %      1,085        1,138            -4.7 %
Major renovations                           51,823           71,785           -27.8 %      1,123        1,045             7.5 %

Total capital expenditures             $   130,961       $  194,427           -32.6 %    $ 2,838      $ 2,829             0.3 %

Repair and maintenance expense         $    32,679       $   42,518           -23.1 %    $   708      $   619            14.4 %

Average Stabilized Home Count               46,149           68,723

We will continue to selectively add revenue enhancing improvements which we believe will provide a return on investment substantially in excess of our cost of capital. Recurring capital expenditures during 2009 are currently expected to be approximately $675 per home.

Impairment of Long-Lived Assets

We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.

Real Estate Investment Properties

We purchase real estate investment properties from time to time and allocate the purchase price to various components, such as land, buildings, and intangibles related to in-place leases in accordance with FASB Statement No. 141, "Business Combinations." The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining contractual lease period.

REIT Status

We are a Maryland corporation that has elected to be treated for federal income tax purposes as a REIT. A REIT is a legal entity that holds interests in real estate and is required by the Code to meet a number of organizational and operational requirements, including a requirement that a REIT must distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. If we were to fail to qualify

as a REIT in any taxable year, we will be subject to federal and state income taxes at the regular corporate rates and may not be able to qualify as a REIT for four years. Based on the net earnings reported for the year ended December 31, 2008 in our Consolidated Statements of Operations we would have incurred $284.8 million in federal and state GAAP income taxes if we had failed to qualify as a REIT.

Statements of Cash Flow

The following discussion explains the changes in net cash provided by operating activities and net cash provided by/(used in) investing and financing activities that are presented in our Consolidated Statements of Cash Flows.

Operating Activities

For the year ended December 31, 2008, our net cash flow provided by operating activities was $179.8 million compared to $269.3 million for 2007. During 2008, the decrease in cash flow from operating activities resulted primarily from a reduction in property operating income from our apartment community portfolio. The reduction was driven by the Company completing the sale of a significant component of our portfolio in the first quarter of 2008. A portion of the proceeds from the disposition were reinvested in subsequent quarters which diluted the net cash provided by operations for the period in which the Company held restricted 1031 cash funds in lieu of revenue generating operating communities.

For the year ended December 31, 2007, our net cash flow provided by operating activities was $269.3 million compared to $237.9 million for 2006. During 2007, the increase in cash flow from operating activities resulted primarily from the increase in property operating income from the Company's portfolio performing well on a same community basis for revenues and NOI.

Investing Activities

For the year ended December 31, 2008, net cash provided by investing activities was $302.3 million compared to net cash used of $90.1 million for 2007. Changes in the level of investing activities from period to period reflects our strategy as it relates to acquisitions, capital expenditures, development and disposition activities, as well as the impact of the capital market environment on these activities, all of which are discussed in further detail throughout this Report.

For the year ended December 31, 2007, net cash used in investing activities was $90.1 million compared to $158.2 million for 2006. Changes in the level of investing activities from period to period reflects our strategy as it relates to our acquisition, capital expenditure, development, and disposition programs, as well as the impact of the capital market environment on these activities.

Acquisitions

For the year ended December 31, 2008, we acquired 13 apartment communities with 4,558 apartment homes, two parcels of land, and one retail property for aggregate consideration of $1.0 billion. Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding our interests in communities located in California, Florida, Metropolitan Washington D.C. and the Washington markets over the past years. Prospectively, we plan to continue to channel new investments into those markets we believe will provide the best investment returns. Markets will be targeted based upon defined criteria including favorable job formation and low housing affordability.

The following wholly-owned communities were acquired during the year ended December 31, 2008 (dollars in thousands).

                                                                                                       Purchase
Property Name                                  Market              Acquisition Date        Units       Price(a)

The Place at Millenia                            Orlando, FL            January 2008          371      $  50,132
Dulaney Crescent                               Baltimore, MD              March 2008          264         57,690
Delancey at Shirlington Village                   Metro D.C.              March 2008          241         85,000
Edgewater                                  San Francisco, CA              March 2008          193        115,000
Circle Towers                                     Metro D.C.              March 2008          606        138,378 (b)
Legacy Village                                    Dallas, TX              March 2008        1,043        118,500
Pine Brook Village II                      Orange County, CA                May 2008          296         87,320
Hearthstone at Merrill Creek                     Seattle, WA                May 2008          220         38,000
Island Square                                    Seattle, WA               July 2008          235        112,202
Almaden Lake Village                       San Francisco, CA               July 2008          250         47,270
Residences at the Domain                          Austin, TX             August 2008          390         59,500
Waterford                                        Phoenix, AZ             August 2008          200         23,666
Vintage Lofts                                      Tampa, FL             August 2008          249         43,672 (c)

                                                                                            4,558      $ 976,330

(a) The purchase price is the contractual amount paid by UDR to the seller and does not include any costs that the Company incurred as a result of the acquisition of the property.

(b) The purchase price does not include the $5.9 million allocated to the commercial space acquired in the transaction.

(c) This community was acquired by the Company while under development and is projected to be completed in the first quarter of 2009.

For the year ended December 31, 2007, we acquired 13 apartment communities with 2,671 apartment homes, six parcels of land, and an interest in an operating joint venture for an aggregate consideration of $486.5 million. In 2006, we acquired eight apartment communities with 2,763 apartment homes for an aggregate consideration of $327.5 million and two parcels of land for $19.9 million.

Real Estate Under Development

At December 31, 2008, our development pipeline for wholly-owned communities totaled 2,407 homes with a budget of $375.9 million in which we have a carrying value of $186.8 million. We expect to have the first of the communities complete development during 2009. In addition, we own several parcels of land held for future development in which the Company is seeking entitlements and preparing for development, although we do not anticipate development to commence during 2009.

For the year ended December 31, 2008, we invested approximately $160.1 million in development projects, an increase of $58.6 million from our 2007 level of $101.5 million. As a result of our investment in developments, we completed development on two wholly-owned communities with 644 apartment homes that have a carrying value of $44.4 million and acquired three pre-sale communities with 820 apartment homes that have a carrying value of $126.4 million during the year ended December 31, 2008.

Consolidated Development Joint Venture

In 2006, we entered into a joint venture to develop an apartment community with 298 apartment homes in Marina del Rey, California. Our initial investment was $27.5 million. Our joint venture partner was the managing partner as well as the developer, general contractor and property manager. In December 2008, we acquired for $1.5 million our joint venture partner's interest in their profit participation and terminated the property management agreement that had approximately two years remaining on the pre-existing contract. As a result of terminating our arrangement, the Company recorded a charge to earnings of $305,000 as the profit component related to the management agreement and capitalized the balance as part of the investment in real estate, which will be depreciated over the average remaining life of the tangible asset. As of December 31, 2008, this property is included as a component of our wholly-owned communities.

Unconsolidated Joint Ventures

UDR is a partner in a joint venture to develop a site in Bellevue, Washington. At closing, we owned 49% of the project that involves building a 430 home high rise apartment building with ground floor retail. The project is currently ongoing and will commence construction once market conditions improve and favorable financing has been obtained. Our investment at December 31, 2008 and 2007 was $10.2 million and $8.1 million, respectively.

UDR is a partner in a joint venture which will develop 274 apartment homes in the central business district of Bellevue, Washington. Construction began in the fourth quarter of 2006 and is scheduled for completion in the third quarter of 2009. At closing, we owned 49% of the project. Our investment at December 31, 2008 and 2007 was $9.9 million and $8.9 million, respectively.

In January 2007, we entered into a joint venture which owns and operates a recently completed 23-story, 166 apartment home high rise community in the central business district of Bellevue, Washington. At closing, UDR owned 49% of the project. Our investment at December 31, 2008 and 2007 was $10.4 million and $11.2 million, respectively.

In November 2007, UDR and an institutional unaffiliated partner formed a joint venture which owns and operates various apartment communities located in Texas. On the closing date, UDR sold nine operating properties, consisting of 3,690 units, and contributed one property under development to the joint venture. The property under development has 302 units and was completed in the third quarter of 2008 and commenced lease up at that time. UDR contributed cash and property equal to 20% of the fair value of the properties. The unaffiliated . . .