Equity Office Properties Trust 10Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2006
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 1-13115

EQUITY OFFICE PROPERTIES TRUST

(Exact name of registrant as specified in its charter)


Maryland		36-4151656
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Two North Riverside Plaza, Suite 2100, Chicago, Illinois		60606
(Address of principal executive offices)		(Zip Code)

(312) 466-3300

Registrant’s telephone number, including area code

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

On July 31, 2006, 350,124,220 common shares of beneficial interest, $.01 par value per share (“Common Shares”)were outstanding.

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
CONSOLIDATED STATEMENTS OF NET COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.
	Item 4. Controls and Procedures.
PART II -- OTHER INFORMATION
	Item 1. Legal Proceedings.
	Item 1A. Risk Factors.
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
	Item 4. Submission of Matters to a Vote of Security Holders.
	Item 6. Exhibits.
SIGNATURES
Summary of Trustee Compensation Agreement
Statement of Computation of Ratio of Earnings to Fixed Charges
Certification of CEO
Certification of CFO
Section 906 Certifications

PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements.

EQUITY OFFICE PROPERTIES TRUST

CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except per share amounts)				June 30, 2006			December 31, 2005

				(Unaudited)
Assets:
	Investments in real estate			$	25,846,400		$	22,949,723
	Developments in process				611,173			567,129
	Land available for development				174,078			176,868
	Investments in real estate held for sale, net of accumulated depreciation				—			75,211
	Accumulated depreciation				(3,970,681	)		(3,336,789	)

		Investments in real estate, net of accumulated depreciation			22,660,970			20,432,142
	Cash and cash equivalents				152,628			78,164
	Tenant and other receivables (net of allowance for doubtful accounts of $9,297 and $8,853, respectively)				76,454			94,858
	Deferred rent receivable				565,188			496,826
	Escrow deposits and restricted cash				230,170			38,658
	Investments in unconsolidated joint ventures				120,678			947,989
	Deferred financing costs (net of accumulated amortization of $50,988 and $45,920, respectively)				88,237			58,809
	Deferred leasing costs and other related intangibles (net of accumulated amortization of $324,185 and $232,024, respectively)				665,429			522,926
	Prepaid expenses and other assets				245,388			303,181

			Total Assets	$	24,805,142		$	22,973,553


Liabilities, Minority Interests, Mandatorily Redeemable Preferred Shares and Shareholders’ Equity:
Liabilities:
	Mortgage debt (net of (discounts) of $(4,977) and $(5,185), respectively)			$	3,432,004		$	2,164,198
	Unsecured notes (net of (discounts) of $(24,389) and $(23,936), respectively)				10,032,104			9,032,620
	Lines of credit				1,148,800			1,631,000
	Accounts payable and accrued expenses				582,476			574,225
	Distribution payable				131,298			3,736
	Other liabilities (net of (discounts) of $(24,127) and $(25,597), respectively)				511,804			483,468
	Commitments and contingencies				—			—

			Total Liabilities		15,838,486			13,889,247

Minority Interests:
	EOP Partnership				721,199			863,923
	Partially owned properties				1,370,979			172,278

			Total Minority Interests		2,092,178			1,036,201

Mandatorily Redeemable Preferred Shares:
	5.25% Series B Convertible, Cumulative Redeemable Preferred Shares, liquidation preference $50.00 per share, 5,989,930 issued and outstanding				299,497			299,497

Shareholders’ Equity:
	Preferred Shares, 100,000,000 authorized:
	7.75% Series G Cumulative Redeemable Preferred Shares, liquidation preference $25.00 per share, 8,500,000 issued and outstanding				212,500			212,500
	Common Shares, $0.01 par value; 750,000,000 shares authorized, 349,760,401 and 380,674,998 issued and outstanding, respectively				3,498			3,807
	Other Shareholders’ Equity:
		Additional paid in capital			8,671,119			9,745,819
		Deferred compensation			—			(533	)
		Dividends in excess of accumulated earnings			(2,259,442	)		(2,156,627	)
		Accumulated other comprehensive loss (net of accumulated amortization of $15,356 and $11,948, respectively)			(52,694	)		(56,358	)

			Total Shareholders’ Equity		6,574,981			7,748,608

			Total Liabilities, Minority Interests, Mandatorily Redeemable Preferred Shares and Shareholders’ Equity	$	24,805,142		$	22,973,553

See accompanying notes.

EQUITY OFFICE PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


				For the three months ended						For the six months ended
				June 30,						June 30,

(Dollars in thousands, except per share amounts)				2006			2005			2006			2005

Revenues:
	Rental			$	664,423		$	572,243		$	1,328,497		$	1,136,701
	Tenant reimbursements				120,318			91,510			251,452			184,528
	Parking				37,510			28,447			73,471			55,943
	Other				16,634			17,791			33,421			75,889
	Fee income				1,478			3,697			2,394			8,474

			Total revenues		840,363			713,688			1,689,235			1,461,535

Expenses:
	Depreciation				195,750			160,269			386,473			315,588
	Amortization				32,844			21,475			69,244			42,612
	Real estate taxes				101,146			83,304			209,101			165,764
	Insurance				9,091			7,034			17,490			12,736
	Repairs and maintenance				104,039			76,646			196,861			147,045
	Property operating				120,103			99,548			248,501			198,187
	Ground rent				6,758			5,074			12,616			10,193
	Corporate general and administrative				16,056			15,218			33,050			32,391
	Impairment				—			24,382			—			24,382

			Total expenses		585,787			492,950			1,173,336			948,898

			Operating income		254,576			220,738			515,899			512,637

Other income (expense):
	Interest and dividend income				5,963			3,566			9,328			6,658
	Interest:
		Expense incurred			(223,392	)		(207,932	)		(447,619	)		(420,704	)
		Amortization of deferred financing costs and prepayment expenses			(3,032	)		(2,594	)		(5,961	)		(5,389	)

			Total other income (expense)		(220,461	)		(206,960	)		(444,252	)		(419,435	)

Income before income taxes, allocation to minority interests, income from investments in unconsolidated joint ventures and gain on sales of real estate					34,115			13,778			71,647			93,202
Income taxes					147			(437	)		(1,064	)		(891	)
Minority Interests:
	EOP Partnership				(9,675	)		23,677			(14,791	)		11,923
	Partially owned properties				(13,710	)		(2,499	)		(26,515	)		(5,527	)
Income from investments in unconsolidated joint ventures (including (loss) gain on sales of real estate of $(91), $17,376, $(91) and $17,376, respectively)					34			28,681			90			38,199
Gain on sales of real estate					379			—			533			—

Income from continuing operations					11,290			63,200			29,900			136,906
Discontinued operations (including net gain (loss) on sales of real estate and provision for (loss) on properties held for sale of $82,503, $(94,220), $116,943 and $(83,513), respectively)					85,268			(259,941	)		120,979			(224,076	)

Net income (loss)					96,558			(196,741	)		150,879			(87,170	)
Preferred distributions					(8,701	)		(8,701	)		(17,402	)		(17,402	)

Net income (loss) available to common shareholders				$	87,857		$	(205,442	)	$	133,477		$	(104,572	)

Earnings (loss) per share — basic:
	Income from continuing operations per share			$	0.03		$	0.07		$	0.07		$	0.24

	Net income (loss) available to common shareholders per share			$	0.24		$	(0.51	)	$	0.36		$	(0.26	)

	Weighted average Common Shares outstanding				363,933,914			406,164,577			366,488,855			404,514,824

Earnings (loss) per share — diluted:								��
	Income from continuing operations per share			$	0.03		$	0.07		$	0.07		$	0.24

	Net income (loss) available to common shareholders per share			$	0.24		$	(0.50	)	$	0.36		$	(0.26	)

	Weighted average Common Shares outstanding and dilutive potential common shares				408,494,060			455,609,570			411,497,236			454,101,167

Distributions declared per Common Share outstanding				$	0.33		$	0.50		$	0.66		$	1.00

See accompanying notes.

EQUITY OFFICE PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF NET COMPREHENSIVE INCOME (LOSS)

(Unaudited)


		For the three months						For the six months
		ended June 30,						ended June 30,

(Dollars in thousands)		2006			2005			2006		2005

Net income (loss)		$	96,558		$	(196,741	)	$	150,879	$	(87,170	)
Other comprehensive income:
	Amortization of net payments in settlement of forward starting interest rate swaps		1,704			1,704			3,408		3,408
	Unrealized holding (losses) gains from investments		(14	)		(26	)		256		(65	)

Net comprehensive income (loss)		$	98,248		$	(195,063	)	$	154,543	$	(83,827	)

See accompanying notes.

EQUITY OFFICE PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


					For the three months ended						For the six months ended
					June 30,						June 30,

(Dollars in thousands)					2006			2005			2006			2005

Operating Activities:
	Net income (loss)				$	96,558		$	(196,741	)	$	150,879		$	(87,170	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				236,629			208,077			472,759			414,513
		Compensation expense related to restricted shares and stock options				6,697			5,917			14,236			13,322
		Income from investments in unconsolidated joint ventures				(34	)		(28,681	)		(90	)		(38,199	)
		Net (contributions to) distributions from unconsolidated joint ventures				(3,026	)		17,506			(2,592	)		23,610
		Net (gain) loss on sales of real estate and provision for loss on properties held for sale				(82,882	)		94,220			(117,476	)		83,513
		Impairment				—			180,856			—			180,856
		Provision for doubtful accounts				1,821			1,114			3,839			3,529
		Income allocated to minority interests				23,385			8,809			41,306			24,044
		Other				—			—			—			448
		Changes in assets and liabilities:
			Decrease in rent receivable			32,030			344			27,207			509
			(Increase) in deferred rent receivable			(12,795	)		(19,193	)		(26,791	)		(36,675	)
			Decrease (increase) in prepaid expenses and other assets			10,860			17,202			44,147			(23,502	)
			Increase (decrease) in accounts payable and accrued expenses			42,464			33,254			(58,622	)		(59,768	)
			(Decrease) in other liabilities			(6,609	)		(23,531	)		(19,536	)		(30,702	)

				Net cash provided by operating activities		345,098			299,153			529,266			468,328

Investing Activities:
	Property acquisitions (including deposits made for property acquisitions)					(74,219	)		(294,078	)		(164,623	)		(364,786	)
	Property dispositions (including deposits received for property dispositions)					103,714			1,169,669			242,176			1,308,778
	Increase in cash upon consolidation of certain joint ventures					—			—			51,357			—
	(Investments in) distributions from unconsolidated joint ventures					(11,359	)		62,301			(13,425	)		62,301
	Capital and tenant improvements (including development costs)					(141,822	)		(74,557	)		(223,425	)		(150,963	)
	Lease commissions and other costs					(30,639	)		(29,381	)		(64,585	)		(53,750	)
	Decrease in escrow deposits and restricted cash					40,866			2,696			71,657			133,630

				Net cash (used for) provided by investing activities		(113,459	)		836,650			(100,868	)		935,210

EQUITY OFFICE PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

(Unaudited)


			For the three months ended						For the six months ended
			June 30,						June 30,

(Dollars in thousands)			2006			2005			2006			2005

Financing Activities:
	Proceeds from mortgage debt			404,476			150			584,107			150
	Principal payments on mortgage debt			(7,071	)		(251,764	)		(14,824	)		(355,521	)
	Proceeds from unsecured notes			1,470,000			14,025			1,470,000			28,369
	Repayment of unsecured notes			(20	)		—			(500,063	)		(525,000	)
	Proceeds from lines of credit			8,702,349			1,877,600			14,876,999			4,000,600
	Repayment of lines of credit			(9,905,649	)		(2,053,600	)		(15,359,199	)		(3,855,600	)
	Payments of loan costs and offering costs			(1,687	)		6			(2,732	)		(59	)
	(Distributions to) minority interests in partially owned properties			(23,691	)		(2,158	)		(38,800	)		(7,860	)
	Proceeds from exercise of stock options			51,393			78,282			85,178			121,542
	Distributions to common shareholders and unitholders			(134,789	)		(226,758	)		(135,878	)		(226,758	)
	Repurchase of Common Shares			(724,744	)		(5,029	)		(1,214,720	)		(7,758	)
	Redemption of Units			(17,273	)		(44,810	)		(87,906	)		(50,676	)
	Payment of preferred distributions			(8,048	)		(8,048	)		(16,096	)		(16,096	)

		Net cash (used for) financing activities		(194,754	)		(622,104	)		(353,934	)		(894,667	)

	Net increase in cash and cash equivalents			36,885			513,699			74,464			508,871
	Cash and cash equivalents at the beginning of the period			115,743			102,298			78,164			107,126

	Cash and cash equivalents at the end of the period		$	152,628		$	615,997		$	152,628		$	615,997

Supplemental Information:
	Interest paid during the period (including capitalized interest of $6,566, $4, $7,040 and $4, respectively)		$	192,247		$	158,689		$	455,604		$	429,109

EQUITY OFFICE PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

(Unaudited)


				For the three months ended						For the six months ended
				June 30,						June 30,

(Dollars in thousands)				2006			2005			2006			2005

Non-Cash Investing and Financing Activities:
	Investing Activities:
		Escrow deposits related to property dispositions		$	(190,389	)	$	(8,811	)	$	(232,597	)	$	(150,324	)

		Mortgage loan repayment as a result of a property disposition		$	—		$	—		$	—		$	(13,386	)

		Mortgage loan assumed upon acquisition of a property		$	15,200		$	44,975		$	15,200		$	44,975

		Units issued in connection with a property acquisition		$	—		$	3,339		$	—		$	3,339

		Changes in accounts due to consolidation of certain joint ventures:
			Decrease in investments in unconsolidated joint ventures	$	—		$	—		$	(844,591	)	$	—

			Increase in investments in real estate	$	—		$	—		$	2,843,118		$	—

			Increase in accumulated depreciation	$	—		$	—		$	(286,569	)	$	—

			Increase in mortgage debt, net of discounts	$	—		$	—		$	(681,986	)	$	—

			Increase in minority interests — partially owned properties	$	—		$	—		$	(1,205,236	)	$	—

			Increase in other assets and liabilities	$	—		$	—		$	123,907		$	—

	Financing Activities:
		Mortgage loan repayment as a result of a property disposition		$	—		$	—		$	—		$	13,386

		Mortgage loan assumed upon acquisition of a property		$	(15,200	)	$	(44,975	)	$	(15,200	)	$	(44,975	)

		Units issued in connection with a property acquisition		$	—		$	(3,339	)	$	—		$	(3,339	)

See accompanying notes.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our consolidated financial statements have been prepared pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations. The following notes, which present interim disclosures as required by the SEC, highlight significant changes to the notes to our December 31, 2005 audited consolidated financial statements and should be read together with the financial statements and notes thereto included in our Form 10-K.

NOTE 1 — BUSINESS OF EQUITY OFFICE

Equity Office Properties Trust is a Maryland real estate investment trust (“REIT”) and the sole general partner of EOP Operating Limited Partnership, a Delaware limited partnership (“EOP Partnership”). The use of the words “Equity Office”, “we”, “us”, or “our” in this Form 10-Q refers to Equity Office Properties Trust and its subsidiaries, including EOP Partnership, except where the context otherwise requires. We are a fully integrated, self-administered and self-managed real estate company principally engaged, through our subsidiaries, in owning, managing, leasing and developing office properties.

As of June 30, 2006, we owned whole or partial interests in 595 office buildings comprising 109.2 million square feet in 16 states and the District of Columbia (“Total Office Portfolio”). After excluding the partial interests owned by our joint venture partners, our share of the Total Office Portfolio is 99.4 million square feet and is referred to as the “Effective Office Portfolio.” The Effective Office Portfolio represents our economic interest in the office properties from which we derive the net income we recognize in accordance with U.S. generally accepted accounting principles (“GAAP”). The Effective Office Portfolio square feet of 99.4 million has not been reduced to reflect our minority interest partners’ share of EOP Partnership. Properties that have been taken out of service and properties under development are not included in these property statistics. Throughout this report, information is disclosed for either the Total Office Portfolio or the Effective Office Portfolio, or both. The table below shows, in summary, the property statistics for each portfolio as of June 30, 2006.


				Total Office Portfolio					Effective Office Portfolio

		Number of		Occupied					Occupied
		Buildings		Square Feet			Square Feet		Square Feet			Square Feet

Wholly-Owned Properties			538		76,119,182			83,826,263		76,119,182			83,826,263
Consolidated Joint Ventures			51		19,916,489			21,848,392		13,036,377			14,375,603
Unconsolidated Joint Ventures			6		3,036,104			3,522,073		1,009,939			1,180,384

	Total		595		99,071,775			109,196,728		90,165,498			99,382,250

Percent Occupied					90.7	%				90.7	%

Percent Leased					92.4	%				92.4	%

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


	Basis of Presentation

We own substantially all of our assets and conduct substantially all of our operations through EOP Partnership and its subsidiary entities. We owned 89.8% and 89.7% of EOP Partnership at June 30, 2006 and December 31, 2005, respectively, through our ownership of partnership units of EOP Partnership (“Units”). All intercompany transactions and balances have been eliminated in consolidation. Property holding entities and other subsidiaries of which we own 100% of the equity or receive all of the economics are consolidated. We consolidate certain property holding entities and other subsidiaries in which we own less than a 100% equity interest if the entity is a variable interest entity and we are the primary beneficiary (as defined in Financial Accounting Standards Board (“FASB”) Interpretation 46(R),Consolidation of Variable Interest Entities,an Interpretation of ARB No. 51, as revised (“FIN 46(R)”)). In accordance with Emerging Issues

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

Task Force 04-5,Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”), we also consolidate certain joint ventures in which we have the direct or indirect ability to control certain decisions that would be expected to be made in the ordinary course of the joint venture’s business. Such decisions are defined in the respective joint venture agreements and include, but are not limited to, participating rights with respect to operating, capital and leasing decisions affecting the joint venture (generally through the annual budgeting process).


	Minority Interests in Partially Owned Properties

We are the controlling partner in various consolidated entities having a minority interest book value of $1.2 billion at June 30, 2006. The organizational documents of these entities contain provisions that require the entities to be liquidated through the sale of their assets upon reaching the future date specified in each respective agreement. As controlling partner, we have an obligation to cause these property owning entities to distribute proceeds of liquidation to the minority interest partners in these partially owned properties only if the net proceeds received by the entities from the sale of its assets warrant a distribution based on the agreements. In accordance with the disclosure provisions of Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(“FAS 150”), we estimate the value of minority interest distributions would have been $2.1 billion (“Settlement Value”) had the entities been liquidated as of June 30, 2006. This Settlement Value is based on the estimated third party consideration realizable by the entities upon a hypothetical disposition of the properties and is net of all other assets and liabilities and yield maintenance (or prepayment penalties) associated with the hypothetical repayment of any mortgages encumbering the properties, that would have been due. The amount of any actual distributions to minority interest holders in our partially owned properties is very difficult to predict due to many factors, including the inherent uncertainty of real estate sales. If the entities’ underlying assets are worth less than the underlying liabilities, we have no obligation to remit any consideration to the minority interest holders in partially owned properties.


	Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.


	Unaudited Interim Statements

The consolidated financial statements as of and for the three and six months ended June 30, 2006 and 2005 and related footnote disclosures are unaudited. In the opinion of management, such financial statements reflect all adjustments necessary for a fair presentation of the results of the interim periods. All such adjustments are of a normal and recurring nature.


	Reclassifications

Certain reclassifications have been made to the previously reported 2005 statements in order to provide comparability with the 2006 statements reported herein. These reclassifications have not changed the 2005 results of operations or combined shareholders’ equity and mandatorily redeemable preferred shares.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	Share Based Employee Compensation Plans

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(“FAS 123(R)”), which replaced Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(“FAS 123”). FAS 123(R) requires compensation cost related to share-based payment transactions to be recognized in the financial statements. We adopted FAS 123(R) effective January 1, 2006 using the modified-prospective method. Previously, we had adopted FAS 123 on January 1, 2003 using the prospective method. Under this method, the fair value of compensation expense was recorded for all share options and other equity awards granted or modified after January 1, 2003. Accordingly, the adoption of FAS 123(R) did not have a material effect on our results of operations and financial position.

The following table illustrates the unaudited effect on net (loss) available to common shareholders and (loss) per share for the three and six months ended June 30, 2005 if a fair value based method had been applied to all outstanding and unvested share options granted prior to January 1, 2003. Compensation expense related to restricted share awards is not presented in the table below because the expense amount is the same under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”), which we applied prior to adopting FAS 123, and, therefore, is already reflected in net (loss).


		For the three			For the six
		months ended			months ended
(Dollars in thousands, except per share amounts)		June 30, 2005			June 30, 2005

Historical net (loss) available to common shareholders		$	(205,442	)	$	(104,572	)
Add back compensation expense for share options included in historical net (loss) available to common shareholders			1,710			3,337
Deduct compensation expense for share options determined under fair value based method			(1,726	)		(3,833	)
Allocation of net expense to minority interests in EOP Partnership			2			51

Pro forma net (loss) available to common shareholders		$	(205,456	)	$	(105,017	)

(Loss) per share — basic:
	Historical net (loss) available to common shareholders per share	$	(0.51	)	$	(0.26	)

	Pro forma net (loss) available to common shareholders per share	$	(0.51	)	$	(0.26	)

(Loss) per share — diluted:
	Historical net (loss) available to common shareholders per share	$	(0.50	)	$	(0.26	)

	Pro forma net (loss) available to common shareholders per share	$	(0.50	)	$	(0.26	)


	Impact of a New Accounting Standard

In June 2005, the FASB ratified the consensus in EITF 04-5, which states that the general partner in a limited partnership is presumed to control that limited partnership. This presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of business and thereby preclude the general partner from exercising unilateral control over the partnership. EITF 04-5 is effective June 30, 2005 for new or modified limited partnership arrangements and effective January 1, 2006 for existing limited partnership arrangements.

Upon adoption of EITF 04-5, effective January 1, 2006, we consolidated the assets, liabilities and results of operations of the following properties that we previously accounted for under the equity method:


Rowes Wharf	10 & 30 South Wacker	Pasadena Towers
Promenade II	SunTrust Center	Columbia Center
161 North Clark	Prominence in Buckhead	World Trade Center East
Treat Towers	Parkshore Plaza I & II	Bridge Pointe Corporate Center I & II
1111 19th Street	1620 L Street	1333 H Street
Yahoo! Center	201 Mission Street	580 California

We adopted EITF 04-5 using the prospective method; therefore prior periods have not been restated for this change. The table below summarizes the effect on our assets and liabilities as a result of the consolidation of these joint ventures.


(Dollars in thousands)	As of January 1, 2006

Increase in investments in real estate, net of accumulated depreciation	$	2,556,549
Decrease in investments in unconsolidated joint ventures	$	844,591
Increase in mortgage debt, net of (discounts) of $(0.2) million	$	681,986
Increase in minority interests — partially owned properties	$	1,205,236
Increase in net other assets and liabilities	$	175,264
Change in total shareholders’ equity	$	—

Prior to January 1, 2006, our share of the net income from these joint ventures was included in “Income from investments in unconsolidated joint ventures” on the consolidated statements of operations. Upon consolidation, our results of operations include the revenues and expenses of these joint ventures and an allocation to the minority interest partners for their share of the net income. The consolidation of the joint ventures did not impact income from continuing operations or net income available to common shareholders. The table below summarizes the effect on our results of operations for the three and six months ended June 30, 2006 as a result of the consolidation of these joint ventures.


	For the three		For the six
	months ended		months ended
(Dollars in thousands)	June 30, 2006		June 30, 2006

Increase in total revenues	$	101,890	$	200,675
Increase in total operating expenses	$	72,796	$	141,546
Increase in other expense (primarily interest expense)	$	7,105	$	18,171
Decrease in income from investments in unconsolidated joint ventures	$	11,319	$	20,435
Increase in minority interests — partially owned properties	$	10,670	$	20,523
Change in income from continuing operations	$	—	$	—

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 3 — ACQUISITIONS

We acquired whole or partial interests in the following properties during the six months ended June 30, 2006:


							Effective Office Portfolio

			Acquisition		Number of		Square
Property		Location	Date		Buildings		Feet		Purchase Price(a)

									(Dollars in thousands)
First Quarter 2006 Acquisitions:
Office properties:
	One and Three Harbor Drive	Sausalito, CA		1/19/2006		2		111,772	$	32,500
	Pointe O’Hare	Rosemont, IL		3/8/2006		1		262,991		55,675
Vacant land:
	Pointe O’Hare Land(b)	Rosemont, IL		3/8/2006		—		—		2,000

Total First Quarter Acquisitions:						3		374,763	$	90,175

Second Quarter 2006 Acquisitions:
Office properties:
	Fountaingrove II(c)	Santa Rosa, CA		4/21/2006		—		—	$	9,597
	1200 Corporate Place(d)	Boca Raton, FL		5/24/2006		1		128,959		29,500
	77 South Bedford	Burlington, MA		5/31/2006		1		144,576		23,500
Other Investments(e)		New York, NY		6/6/2006		—		—		12,375

Total Second Quarter Acquisitions:						2		273,535	$	74,972

Total:						5		648,298	$	165,147


(a)		The purchase price shown above represents the gross purchase price related to property acquisitions. The allocations of the purchase prices and other costs related to the acquisition of tangible and intangible assets are estimates and are subject to adjustment within one year of the closing date of each respective acquisition.

(b)		We acquired a 50% interest in a new joint venture formed with the seller of the Pointe O’Hare office property, who contributed a vacant land parcel and a parking structure to the joint venture. We accounted for our investment in the joint venture under the equity method.

(c)		Fountaingrove II, which consists of one building comprising 42,102 square feet, is a development property and, therefore, is not included in the total number of buildings or total square footage statistics.

(d)		The purchase price for 1200 Corporate Place includes the assumption of $15.2 million of mortgage debt at a fixed coupon rate of 5.60% maturing in June 2014. The effective interest rate on this mortgage debt is 5.67%.

(e)		We acquired a 75%tenant-in-common interest in a land parcel and vacant building, which we account for under the equity method. The building, which comprises 13,475 square feet, is classified as out of service and, therefore, is not included in the total number of buildings or total square footage statistics.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


NOTE 4 —	SALES OF REAL ESTATE


	Sales of Real Estate

We sold the following properties during the six months ended June 30, 2006:


							Effective Office Portfolio

			Disposition		Number of		Square		Sales Price
Property		Location	Date		Buildings		Feet
									(Dollars in thousands)
First Quarter 2006 Dispositions:
	120 Montgomery(a)	San Francisco, CA		1/20/2006		1		430,523	$	67,500
	Westridge	San Diego, CA		2/8/2006		1		53,326		10,500
	Pacific Corporate Plaza	San Diego, CA		2/8/2006		2		104,847		20,000
	8-16 Perimeter(a)	Atlanta, GA		2/17/2006		5		65,350		10,712
	One Crosswoods	Columbus, OH		3/3/2006		1		129,583		5,300
	3001 Stender Way(a)(b)	Santa Clara, CA		3/23/2006		—		—		2,875

Total First Quarter Dispositions:						10		783,629	$	116,887

Second Quarter 2006 Dispositions:
	Southgate Office Plaza I & II	Renton, WA		4/6/2006		2		267,810	$	47,000
	Paces West	Atlanta, GA		4/19/2006		2		646,471		112,750
	California Circle II	Milpitas, CA		6/9/2006		3		95,774		10,007
	Brea Corporate Plaza	Brea, CA		6/21/2006		1		117,195		25,260
	Brea Park Centre	Brea, CA		6/21/2006		3		168,315		34,740
	Crosby Corporate Center I & II	Bedford, MA		6/21/2006		9		588,918		70,745

Total Second Quarter Dispositions:						20		1,884,483	$	300,502

Total:						30		2,668,112	$	417,389


(a)		These properties were classified as held for sale at December 31, 2005.

(b)		This property, which consists of one building comprising 61,825 square feet, was previously taken out of service and, therefore, was no longer included in the total number of buildings or total square footage statistics.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


NOTE 4 —	SALES OF REAL ESTATE — (Continued)


	Gains/Losses on Sales of Real Estate, Impairments and Provisions for Loss on Assets Held for Sale

During the three and six months ended June 30, 2006 and 2005, we recognized gains/losses on sales of real estate, impairments and provisions for loss on assets held for sale, as follows:


			For the three months						For the six months ended
			ended June 30,						June 30,

(Dollars in thousands)			2006			2005			2006			2005

Gain on partial sales of real estate included in Income from Continuing Operations			$	379		$	—		$	533		$	—
Gain on sales of real estate included in Discontinued Operations(c)				82,717			91,971			118,146			116,216
Minority interests’ share of gain on sales of real estate				—			(29,699	)		—			(29,699	)
Our share of (loss) gain on sales of real estate classified as income from unconsolidated joint ventures(d)				(91	)		17,376			(91	)		17,376

		Our share of the gains on sales of real estate	$	83,005		$	79,648		$	118,588		$	103,893

Impairment on properties anticipated to be sold deducted from Income from Continuing Operations			$	—		$	(24,382	)	$	—		$	(24,382	)
Discontinued Operations:
	Impairment on properties sold			—			(156,474	)		—			(156,474	)
	Loss on properties sold			(214	)		(165,927	)		(1,203	)		(165,927	)
	Provision for loss on properties held for sale			—			(20,264	)		—			(33,802	)

		Total non-cash impairment charges and losses on properties sold	$	(214	)	$	(367,047	)	$	(1,203	)	$	(380,585	)


(c)		The gain on sales of real estate included in Discontinued Operations for the six months ended June 30, 2006 includes the recognition of a $25.6 million gain on sale related to a property sold in 2005. The recognition of this gain had previously been deferred until we collected our outstanding $66.3 million note receivable from the buyer in January 2006. As of December 31, 2005, the deferred gain was included in “Prepaid expenses and other assets” on the consolidated balance sheet, as an offset against the related note receivable.

(d)		The $91 thousand loss for the three and six months ended June 30, 2006 represents an adjustment to the gain previously recorded on properties sold in prior periods.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


NOTE 4 —	SALES OF REAL ESTATE — (Continued)


	Discontinued Operations

The net income (loss) for properties sold and properties held for sale is reflected in the consolidated statements of operations as Discontinued Operations for the periods presented. The properties that were partially sold are not reflected as Discontinued Operations in accordance with Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“FAS 144”). Below is a summary of the results of operations for properties classified as Discontinued Operations.


				For the three months						For the six months
				ended June 30,						ended June 30,

(Dollars in thousands)				2006			2005			2006			2005

Property operating revenues				$	7,299		$	71,502		$	16,200		$	157,933

Expenses:
	Depreciation and amortization				897			21,236			3,588			46,684
	Property operating				3,441			28,447			8,567			62,038
	Ground rent				181			1,148			379			2,419
	Impairment				—			156,474			—			156,474

		Total expenses			4,519			207,305			12,534			267,615

			Operating income (loss)		2,780			(135,803	)		3,666			(109,682	)

Other income (expense):
	Interest income				1			98			386			241
	Interest expense and amortization of deferred financing costs and prepayment expenses				—			(5	)		—			(618	)

		Total other income (expense)			1			93			386			(377	)

Income (loss) before income taxes, allocations to minority interests, net gain (loss) on sales of real estate and provision for (loss) on properties held for sale					2,781			(135,710	)		4,052			(110,059	)
Income taxes					(16	)		(24	)		(16	)		(64	)
Income allocated to minority interests — partially owned properties (including gains on sales of real estate of $0, $29,699, $0 and $29,699, respectively)					—			(29,987	)		—			(30,440	)
Net gain (loss) on sales of real estate					82,503			(73,956	)		116,943			(49,711	)
Provision for (loss) on properties held for sale					—			(20,264	)		—			(33,802	)

Net income (loss)				$	85,268		$	(259,941	)	$	120,979		$	(224,076	)

Property net operating income from discontinued operations				$	3,858		$	43,055		$	7,633		$	95,895

For the properties sold during the six months ended June 30, 2006 and included in discontinued operations, the investments in real estate balance, net of accumulated depreciation was $303.3 million at December 31, 2005.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 5 — INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

Certain properties are owned by us and other unaffiliated parties in joint ventures, which we account for using the equity method. Combined summarized financial information for our unconsolidated joint ventures is shown in the table below. Upon adoption of EITF 04-5, effective January 1, 2006, we consolidated 18 joint ventures that we previously accounted for under the equity method (see Note 2).


(Dollars in thousands)			June 30, 2006		December 31, 2005

Balance Sheets:
	Assets:
	Real estate, net of accumulated depreciation		$	488,952	$	3,002,906
	Other assets			55,512		356,016

		Total Assets	$	544,464	$	3,358,922

	Liabilities and Partners’ and Shareholders’ Equity:
	Mortgage debt		$	454,617	$	1,138,455
	Other liabilities			40,845		151,303
	Partners’ and shareholders’ equity			49,002		2,069,164

		Total Liabilities and Partners’ and Shareholders’ Equity	$	544,464	$	3,358,922

Our share of historical partners’ and shareholders’ equity			$	10,168	$	878,225
Net excess of cost of investments over the net book value of underlying net assets (net of accumulated depreciation of $28,781 and $21,303, respectively)(a)				110,510		69,764

Carrying value of investments in unconsolidated joint ventures			$	120,678	$	947,989

Our share of unconsolidated non-recourse mortgage debt			$	165,762	$	473,725


(a)		This amount represents the aggregate difference between our historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related asset. The basis differentials occur primarily upon the transfer of assets that were previously owned by us into a joint venture or the acquisition of partial interests in joint ventures by us.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 5 — INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES — (Continued)


				For the three months					For the six months
				ended June 30,					ended June 30,

(Dollars in thousands)				2006			2005		2006			2005

Statements of Operations:
	Revenues			$	32,558		$	132,430	$	63,538		$	256,750

	Expenses:
		Interest expense and loan cost amortization			6,523			13,146		13,079			25,645
		Depreciation and amortization			5,630			32,637		10,793			62,898
		Operating expenses, ground rent and general and administrative expenses			18,077			59,904		36,040			119,117

			Total expenses		30,230			105,687		59,912			207,660

	Net income before (loss) gain on sale of real estate				2,328			26,743		3,626			49,090
	(Loss) gain on sale of real estate				(12	)		39,545		(12	)		39,545

	Net income			$	2,316		$	66,288	$	3,614		$	88,635

Our share of:
	Net income			$	34		$	28,681	$	90		$	38,199

	Interest expense and loan cost amortization			$	2,402		$	5,008	$	4,773		$	9,903

	Depreciation and amortization (real estate related)			$	2,887		$	12,506	$	5,659		$	24,768

	(Loss) gain on sale of real estate			$	(91	)	$	17,376	$	(91	)	$	17,376

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 6 — MORTGAGE DEBT

During the six months ended June 30, 2006, the following transactions occurred:


		(Dollars in thousands)

Balance at December 31, 2005(a)		$	2,169,383
	Scheduled principal amortization prior to maturity		(7,753	)
	Consolidation of mortgage debt(b)		682,222
	Mortgage financing(c)		180,000

Balance at March 31, 2006(a)			3,023,852
	Scheduled principal amortization prior to maturity		(7,071	)
	Mortgage financings(d)		405,000
	Assumed through a property acquisition (see Note 3)		15,200

Balance at June 30, 2006(a)		$	3,436,981


(a)		Excludes net discounts on mortgage debt of $5.2 million, $5.2 million and $5.0 million as of December 31, 2005, March 31, 2006 and June 30, 2006, respectively.

(b)		Upon adoption of EITF 04-5, effective January 1, 2006, we consolidated $682.2 million of mortgage debt, excluding discounts, as shown in the table below. Our share of the total mortgage debt consolidated is $306.9 million as of January 1, 2006.


				Our Share of the
Property		Principal Balance		Principal Balance		Coupon Rate			Effective Rate			Maturity Date

		(Dollars in thousands)
Promenade II		$	80,641	$	40,320		7.84	%		7.84	%		10/1/2006
Promenade II			18,967		9,484		6.90	%		6.90	%		10/1/2006
Pasadena Towers			60,614		15,153		6.92	%		6.92	%		8/1/2008
Columbia Center			195,000		97,695		4.48	%		4.48	%		1/4/2010
Yahoo! Center			250,000		125,000		5.27	%		5.27	%		10/1/2015
SunTrust Center			77,000		19,250		5.34	%		5.34	%		1/1/2016

	Total	$	682,222	$	306,902


(c)		During February 2006, the ownership structure of the Sixty State Street property was restructured. Pursuant to this restructure, we converted our former debt position in this property into an approximate 95% equity interest. In addition, new mortgage financing was obtained on the property. The new mortgage loan has a principal balance of $180.0 million, bears interest at a fixed coupon rate of 5.63% and matures in March 2011. The effective interest rate on this loan is 5.67%. Following this restructure, we will continue to consolidate the financial position and results of operations of this property.

(d)		During May 2006, we obtained mortgage financing for the 100 Summer Street property. The mortgage loan has a principal balance of $180.0 million, bears interest at a fixed coupon rate of 5.96% and matures in June 2016. The effective interest rate on this loan is 5.98%.


		During June 2006, we obtained mortgage financing for the 225 Franklin Street property. The mortgage loan has a principal balance of $225.0 million, bears interest at a fixed coupon rate of 6.19% and matures in July 2016. The effective interest rate on this loan is 6.20%.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 7 — UNSECURED NOTES

During the six months ended June 30, 2006, the following transactions occurred:


	Unsecured Notes — Issued:

On June 27, 2006, we issued $1.5 billion of exchangeable senior unsecured notes that mature on July 15, 2026. The notes bear interest at a fixed coupon rate of 4.00% and an effective rate of 4.11%. The notes are exchangeable into our common shares of beneficial interest (“Common Shares”), at the option of the holder, under specific circumstances or on or after July 15, 2025, at an initial exchange rate of 23.2542 shares per $1,000 principal amount of notes. This is equivalent to an initial exchange price of $43.00 per share, which represents an 18.76% premium over the $36.21 closing price of our stock at the time the transaction was priced. The initial exchange rate is subject to adjustment in certain circumstances. Upon an exchange of notes, we will settle any amounts up to the principal amount of the notes in cash and the remaining exchange value, if any, will be settled, at our option, in cash, common shares or a combination thereof.

On or after January 18, 2012, we may redeem the notes at a redemption price equal to the principal amount of the notes plus any accrued and unpaid interest thereon and in certain circumstances, any additional exchange value. In addition, on January 18, 2012, July 15, 2016 and July 15, 2021 or following the occurrence of certain change in control transactions prior to January 18, 2012, note holders may require us to repurchase the notes for an amount equal to the principal amount of the notes plus any accrued and unpaid interest thereon.

We used the net proceeds from the issuance to concurrently repurchase 17.2 million of our Common Shares for $622.7 million at a price of $36.21 per share (see Note 9). The remaining $847.3 million of net proceeds were used to repay indebtedness under our revolving line of credit and term loan facilities.


	Unsecured Notes — Repaid:


Month Repaid		Amount		Coupon Rate			Effective Rate(a)

		(Dollars in thousands)
February		$	20		4.00	%		4.24	%
March			23		4.30	%		4.53	%
March			500,000		8.38	%		7.65	%
April			20		4.40	%		4.71	%

	Total/Weighted Average	$	500,063		8.38	%		7.65	%


(a)		Includes the effect of settled interest rate protection and interest rate swaps, offering and transaction costs and premiums and discounts.

NOTE 8 — LINES OF CREDIT

During the six months ended June 30, 2006, the following transactions occurred:


	Term Loans

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 8 — LINES OF CREDIT — (Continued)

September 30, 2006, we will incur an additional fee equal to ten basis points of the outstanding balance on such date. As of June 30, 2006, $1.0 billion was outstanding under this facility.

In February 2006, we obtained and fully drew upon a $500 million unsecured term loan facility, which had an interest rate of LIBOR plus 55 basis points and was scheduled to mature in February 2007. This facility was repaid and terminated in June 2006.

In April 2006, we obtained and fully drew upon a $225 million unsecured term loan facility, which had an interest rate of LIBOR plus 60 basis points and was scheduled to mature in June 2006. This facility was repaid and terminated in June 2006.


	Revolving Line of Credit

As of June 30, 2006, $148.8 million was outstanding under our $1.25 billion revolving line of credit facility.


NOTE 9 —	SHAREHOLDERS’ EQUITY AND MANDATORILY REDEEMABLE PREFERRED SHARES


	Common Shares

The following table presents the changes in the issued and outstanding Common Shares since December 31, 2005, excluding Units which are exchangeable for Common Shares on a one-for-one basis, or the cash equivalent thereof, subject to certain restrictions:


Outstanding at December 31, 2005		380,674,998
	Repurchased and retired under our open market repurchase program (at an average purchase price of $31.79 per share)(a)	(15,353,600	)
	Repurchased and retired under our Supplemental Retirement Savings Plan (at an average purchase price of $33.26 per share)	(55,831	)
	Issued upon exercise of share options	1,218,350
	Issued upon redemption of Units	10,000
	Restricted shares issued to employees, net of cancellations	596,855
	Common Shares issued as compensation for Board of Trustee fees	9,183

Outstanding at March 31, 2006		367,099,955
	Repurchased and retired under our open market repurchase program or under separate authorization (at an average purchase price of $35.73 per share)(a)	(20,240,240	)
	Repurchased and retired under our Supplemental Retirement Savings Plan (at an average purchase price of $34.36 per share)	(46,739	)
	Issued upon exercise of share options	1,849,652
	Issued upon redemption of Units	1,138,256
	Restricted share cancellations, net of restricted shares issued to employees	(48,712	)
	Common Shares issued as compensation for Board of Trustee fees	8,229

Outstanding at June 30, 2006		349,760,401


(a)		Under our open market repurchase program announced in July 2002, as amended, we have been authorized to repurchase in the open market or in privately-negotiated transactions up to $2.6 billion of Common Shares through May 31, 2007. As of June 30, 2006, $296.6 million remains available to

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


NOTE 9 —	SHAREHOLDERS’ EQUITY AND MANDATORILY REDEEMABLE PREFERRED SHARES — (Continued)


		repurchase Common Shares under the program. Common Shares repurchased to fund our employee benefit programs, including the Employee Share Purchase Plan and Supplemental Retirement Savings Plan, are not considered part of the repurchase program.

		We also obtained separate authorization during June 2006 to repurchase an additional $450.0 million of Common Shares in connection with our $1.5 billion exchangeable unsecured note issuance (see Note 7). Of the Common Shares repurchased during the second quarter 2006, 17,196,740 Common Shares were repurchased concurrently with our issuance of the $1.5 billion exchangeable unsecured notes.


	Distributions

The following distributions were declared with respect to the second quarter 2006:


	Distribution			Shareholder
	per Share		Date Paid	Record Date

Common Shares	$	0.33	July 17, 2006	June 30, 2006
Series B Preferred Shares	$	0.65625	May 15, 2006	May 1, 2006
Series G Preferred Shares	$	0.484375	June 15, 2006	June 1, 2006

NOTE 10 — EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per share:


		For the three months ended						For the six months ended
		June 30,						June 30,

(Dollars in thousands, except per share amounts)		2006			2005			2006			2005

Numerator:
	Income from continuing operations	$	11,290		$	63,200		$	29,900		$	136,906
	Preferred distributions		(8,701	)		(8,701	)		(17,402	)		(17,402	)

	Income from continuing operations available to common shareholders		2,589			54,499			12,498			119,504
	Discontinued operations (including net gain (loss) on sales of real estate and provision for (loss) on properties held for sale of $82,503, $(94,220), $116,943 and $(83,513), respectively)		85,268			(259,941	)		120,979			(224,076	)

	Numerator for basic earnings (loss) per share — net income (loss) available to common shareholders		87,857			(205,442	)		133,477			(104,572	)
	Add back income (loss) allocated to minority interests in EOP Partnership		9,675			(23,677	)		14,791			(11,923	)

	Numerator for diluted earnings (loss) per share — net income (loss) available to common shareholders	$	97,532		$	(229,119	)	$	148,268		$	(116,495	)

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 10 — EARNINGS (LOSS) PER SHARE — (Continued)


				For the three months ended					For the six months ended
				June 30,					June 30,

(Dollars in thousands, except per share amounts)				2006		2005			2006		2005

Denominator:
	Denominator for basic earnings (loss) per share — weighted average Common Shares outstanding				363,933,914		406,164,577			366,488,855		404,514,824

	Effect of dilutive potential common shares:
		Units			40,075,717		45,563,665			40,846,328		46,366,561
		Share options and restricted shares			4,484,429		3,881,328			4,162,053		3,219,782

			Dilutive potential common shares		44,560,146		49,444,993			45,008,381		49,586,343

	Denominator for diluted earnings (loss) per share — weighted average Common Shares outstanding and dilutive potential common shares				408,494,060		455,609,570			411,497,236		454,101,167

Earnings (loss) per share — basic:
	Income from continuing operations available to common shareholders, net of minority interests			$	0.03	$	0.07		$	0.07	$	0.24
	Discontinued operations, net of minority interests				0.21		(0.57	)		0.30		(0.50	)

	Net income (loss) available to common shareholders, net of minority interests(a)			$	0.24	$	(0.51	)	$	0.36	$	(0.26	)

Earnings (loss) per share — diluted:
	Income from continuing operations available to common shareholders			$	0.03	$	0.07		$	0.07	$	0.24
	Discontinued operations				0.21		(0.57	)		0.29		(0.49	)

	Net income (loss) available to common shareholders(a)			$	0.24	$	(0.50	)	$	0.36	$	(0.26	)


(a)	Net income (loss) available to common shareholders per share may not total the sum of the per share components due to rounding.

The following securities were not included in the diluted earnings (loss) per share computation because they would have had an antidilutive effect:


				For the three months ended				For the six months ended
				June 30,				June 30,
		Weighted Average
Antidilutive Securities		Exercise Price		2006		2005		2006		2005

Share options		$	32.99		—		536,875		—		—
Share options		$	33.30		—		—		56,504		—
Share options		$	32.87		—		—		—		555,053
Series B Preferred Shares(b)		$	35.70		8,389,256		8,389,256		8,389,256		8,389,273

	Total				8,389,256		8,926,131		8,445,760		8,944,326


(b)	The amounts shown represent the resulting Common Shares upon conversion.

NOTE 11 — SEGMENT INFORMATION

As discussed in Note 1, our primary business is the ownership and operation of office properties, which represents our only reportable segment. The primary financial measure that our chief operating decision makers use for our office properties is property net operating income, which represents rental revenue, tenant reimbursements, parking and other operating revenues less real estate taxes, insurance, repairs and mainte-

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 11 — SEGMENT INFORMATION — (Continued)

nance and property operating expense (all as reflected in the accompanying consolidated statements of operations). We believe that property net operating income is helpful to investors as a supplemental measure of our operating performance because it represents the actual operating results of our properties. Total assets consists primarily of the assets in our office properties operating segment. There are other assets such as corporate furniture, fixtures and equipment that are not associated with the office property segment, but these assets are immaterial.


			For the three months ended						For the six months ended
			June 30,						June 30,

(Dollars in thousands)			2006			2005			2006			2005

Property Operating Revenues:
	Rental		$	664,423		$	572,243		$	1,328,497		$	1,136,701
	Tenant reimbursements			120,318			91,510			251,452			184,528
	Parking			37,510			28,447			73,471			55,943
	Other(a)			16,634			17,791			33,421			75,889

		Total Property Operating Revenues		838,885			709,991			1,686,841			1,453,061

Property Operating Expenses:
	Real estate taxes			101,146			83,304			209,101			165,764
	Insurance			9,091			7,034			17,490			12,736
	Repairs and maintenance			104,039			76,646			196,861			147,045
	Property operating			120,103			99,548			248,501			198,187

		Total Property Operating Expenses		334,379			266,532			671,953			523,732

		Property Net Operating Income from Continuing Operations	$	504,506		$	443,459		$	1,014,888		$	929,329

Property Operating Margin from Continuing Operations(b)				60.1	%		62.5	%		60.2	%		64.0	%

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 11 — SEGMENT INFORMATION — (Continued)


			For the three months ended						For the six months ended
			June 30,						June 30,

(Dollars in thousands)			2006			2005			2006			2005

Reconciliation of Property Net Operating Income from Continuing Operations to Income from Continuing Operations:
Property Net Operating Income from Continuing Operations			$	504,506		$	443,459		$	1,014,888		$	929,329
Add:
	Fee income			1,478			3,697			2,394			8,474
Less:
	Depreciation			(195,750	)		(160,269	)		(386,473	)		(315,588	)
	Amortization			(32,844	)		(21,475	)		(69,244	)		(42,612	)
	Ground rent			(6,758	)		(5,074	)		(12,616	)		(10,193	)
	Corporate general and administrative			(16,056	)		(15,218	)		(33,050	)		(32,391	)
	Impairment			—			(24,382	)		—			(24,382	)

Operating Income				254,576			220,738			515,899			512,637
Less:
	Other expenses, primarily interest expense			(220,461	)		(206,960	)		(444,252	)		(419,435	)
	Income taxes			147			(437	)		(1,064	)		(891	)
	Minority Interests:
		EOP Partnership		(9,675	)		23,677			(14,791	)		11,923
		Partially owned properties		(13,710	)		(2,499	)		(26,515	)		(5,527	)
Add:
	Income from investments in unconsolidated joint ventures			34			28,681			90			38,199
	Gain on sales of real estate			379			—			533			—

Income from Continuing Operations			$	11,290		$	63,200		$	29,900		$	136,906


(a)		Other income consists primarily of income from early lease terminations and ancillary income from tenants. Income from early lease terminations was $3.0 million and $9.8 million for the three months ended June 30, 2006 and 2005, respectively, and $8.4 million and $61.9 million for the six months ended June 30, 2006 and 2005, respectively.

(b)		Defined as Property Net Operating Income from Continuing Operations divided by Total Property Operating Revenues.

NOTE 12 — RELATED PARTY TRANSACTIONS

We owned the San Felipe Plaza office property in a partnership with an affiliate of Samuel Zell, the Chairman of our Board of Trustees. As part of the agreements governing the initial acquisition of this property, we agreed to pay any capital gains tax incurred by the affiliate if the property was sold. As a result of the sale of this property in August 2005, we paid $1.0 million to this affiliate in May 2006, to cover its capital gains tax liability.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 13 — COMMITMENTS AND CONTINGENCIES


	Concentration of Credit Risk

We maintain our cash and cash equivalents at various high quality financial institutions. The combined account balances at each institution typically exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. We believe this risk is not significant.


	Environmental

As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws has not had a material adverse effect on our financial condition and results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on our properties, properties that we have sold or on properties that may be acquired in the future.


	Litigation

We are not presently subject to material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine actions for negligence and other claims and administrative proceedings arising in the ordinary course of business. Some of this litigation is expected to be covered by liability insurance or third party indemnifications. We do not expect any or all of this litigation to have a material adverse effect on our financial condition, results of operations or liquidity.


	Property Acquisitions

In May 2006, we signed an agreement to acquire the 1540 Broadway office property comprising 906,287 square feet located in New York, New York for $525.1 million. This acquisition closed on July 11, 2006.


	Contingencies

Certain joint venture agreements contain buy/sell options in which each party has the option to acquire the interest of the other party but do not generally require that we buy our partners’ interests. We have one joint venture which allows our unaffiliated partners, at their election, to require that we buy their interests during a specified future time period commencing in 2009 based on a formula contained in the agreement. In addition, we have granted options to each of two tenants to purchase the property it occupies. In accordance with Statement of Accounting Standards No. 5,Accounting for Contingencies, we have not recorded a liability or the related asset that would result from the acquisition (in connection with the above potential obligations) because the probability of our unaffiliated partners requiring us to buy their interest is not currently determinable and we are unable to estimate the amount of the payment required for that purpose.

194 of our properties, consisting of 27.9 million square feet, are subject to restrictions on taxable dispositions under tax protection agreements entered into with some of the contributors of the properties. The carrying value of these properties was $6.0 billion at June 30, 2006. The restrictions on taxable dispositions are effective for periods expiring at different times through 2031. The terms of these tax protection agreements generally prevent us from selling the properties in taxable transactions unless we indemnify the contributing partners for their income tax liability on the portion of the gain on sale allocated to them as a result of the property’s value at the time of its contribution to us or to our predecessor. We do not believe that the tax protection agreements materially affect the conduct of our business or our decisions whether to dispose of

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 13 — COMMITMENTS AND CONTINGENCIES — (Continued)

restricted properties because we generally hold our properties for long-term investment purposes. However, where we have deemed it to be in our shareholders’ best interests to dispose of restricted properties, we have endeavored to do so, when practicable, through transactions structured as tax-deferred transactions under section 1031 of the Internal Revenue Code.

Whenever practicable, we anticipate structuring most future dispositions of restricted properties as transactions intended to qualify for tax-deferred treatment. We therefore view the likelihood of incurring any material indemnification obligations as a result of our tax protection agreements to be remote. Were we to dispose of a restricted property in a taxable transaction, we generally would be required to pay to a partner (that is a beneficiary of one of the tax protection agreements) an amount based on the amount of income tax the partner would be required to pay on the incremental gain allocated to such partner as a result of the built-in gain that existed with respect to such property at the time of its contribution to us or to our predecessor. In some cases there is a further requirement to reimburse any additional tax liability arising from the indemnification payment itself. The exact amount that would be payable with respect to any particular taxable sale of a restricted property would depend on a number of factors, many of which can only be calculated at the time of any future sale, including the sale price of the property at the time of the sale, the partnership’s basis in the property at the time of the sale, the partner’s basis in the assets at the time of the contribution, the partner’s applicable rate of federal, state and local taxation at the time of the sale and the timing of the sale itself.

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 13 — COMMITMENTS AND CONTINGENCIES — (Continued)


	Insurance

Property Damage, Business Interruption, Earthquake and Terrorism: We have a captive insurance company which is a wholly-owned taxable REIT subsidiary. As described below, we are responsible for losses up to certain levels for property damage (including wind and flood damage resulting from hurricanes), business interruption, earthquakes, terrorism and other events prior to third-party insurance coverage. Accordingly, any losses incurred up to our loss exposure amounts or in excess of third-party coverage limitations will be reflected in our financial statements as insurance expense. The insurance coverage provided through third-party insurance carriers is subject to coverage limitations.


		Third-Party Coverage
Type of Insurance Coverage	Our Loss Exposure/Deductible	Limitation

Property damage and business interruption(a)	$50 million per occurrence and $75 million annual aggregate exposure (which includes amounts paid for earthquake loss), plus $1 million per occurrence deductible	$1.0 billion per occurrence(c)
Earthquake(a)(b)	$75 million per occurrence and annual aggregate exposure (which includes amounts paid for property damage and business interruption loss), plus $1 million per occurrence deductible	$325 million in the aggregate per year(c)
Acts of terrorism(d)	$4.9 million per occurrence deductible (plus 10% of the remainder of each and every loss with a maximum per occurrence exposure of $37.4 million which includes the $4.9 million deductible); however, TRIEA provides that if the aggregate industry loss as a result of any such foreign terrorism occurrence is less than $50 million ($100 million in 2007), we are responsible for 100% of such loss. Our intent is to insure such amounts in excess of $50 million in 2007.	$825 million per occurrence(e)


(a)		We retain up to $75 million annual aggregate loss throughout the portfolio. In the event of a loss in excess of the per occurrence or annual aggregate amount, the third-party insurance carriers would be obligated to cover the losses up to the stated coverage amounts in the table above.

(b)		The amount of the third party insurance relating to earthquakes is based on maximum probable loss studies performed by independent third parties. The maximum annual aggregate payment amount for earthquake loss is $325 million, inclusive of our loss exposure of $75 million plus $1 million per occurrence deductible. There can be no assurance that the actual losses suffered in the event of an earthquake would not exceed the amount of such insurance coverage.

(c)		These amounts include our loss exposure/deductible amount.

(d)		This coverage includes nuclear, chemical and biological events under the Terrorism Risk Insurance Act of 2002 (“TRIA”). This coverage does not apply to non-TRIA events (which are terrorism events that are not committed by a foreigner or a foreign country). We maintain separate insurance with a $325 million annual aggregate limit subject to a deductible of $1 million for non-TRIA events. This separate coverage for non-TRIA events excludes nuclear, biological and chemical events.

		TRIA established the Terrorism Risk Insurance Program (“TRIP”) to mandate that insurance carriers offer insurance covering physical damage from terrorist incidents certified by the U.S. government as foreign terrorist acts. Under TRIP, the federal government shares in the risk of loss associated with certain future terrorist acts. TRIA was extended for two years under the Terrorism Risk Insurance

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	NOTE 13 — COMMITMENTS AND CONTINGENCIES — (Continued)

Extension Act (“TRIEA”), which established new requirements and expires on December 31, 2007. TRIEA created a new program trigger for any certified act of terrorism occurring after March 31, 2006 that prohibits payment of federal compensation unless the aggregate industry insured losses resulting from that act of terrorism exceed $50 million for 2006 and $100 million for 2007.


(e)		This amount is in excess of our deductible amounts.

Pollution: We have pollution and remediation insurance coverage for both sudden and gradual events. Limits for this exposure are $2 million per loss and $10 million aggregate per year subject to a deductible of $100,000 per occurrence.

Workers Compensation, Automobile Liability and General Liability: We have per occurrence deductible amounts for workers compensation of $500,000, auto liability of $250,000 and general liability of $1,000,000.

NOTE 14 — SUBSEQUENT EVENTS

The following events occurred subsequent to June 30, 2006, through August 1, 2006:

1. We entered into an amendment that increased our $1.0 billion unsecured term loan facility to $1.6 billion. We fully drew upon this additional capacity in July 2006, which increased the amount outstanding under this facility to $1.6 billion.

2. We acquired the following property:

Effective Office

Portfolio

Acquisition

Number of

Square

Purchase

Property

Location

Date

Buildings

Feet

Price

(Dollars in

thousands)

1540 Broadway

New York, NY

7/11/2006

906,287

525,057

Total

906,287

525,057

3. We sold the following property:

Effective

Office Portfolio

Disposition

Number of

Square

Sales

Property

Location

Date

Buildings

Feet

Price

(Dollars in

thousands)

Centerpointe III Land

Fairfax, VA

7/20/2006

—

16,500

Total

—

16,500

4. We repaid the mortgage debt that encumbered the Bayhill Office Center, prior to its scheduled maturity date, at par, for a total of $83.9 million. This mortgage debt was comprised of two notes, which had principal balances of $46.3 million and $37.6 million as of the prepayment date. These notes had coupon interest rates of 8.35% and 6.90%, respectively, and were scheduled to mature in December 2006.

5. We gave notice of our intent to repay the mortgage debt encumbering both the E.J. Randolph and Northridge I office properties in September 2006, prior to their scheduled maturity dates, at par, for a total of

EQUITY OFFICE PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

NOTE 14 — SUBSEQUENT EVENTS — (Continued)

$24.8 million. The mortgage debt on each of these properties has a coupon interest rate of 8.19% and was scheduled to mature in January 2007.

6. One Pacific Square, an office property comprising one building and 240,338 square feet located in Portland, OR, was classified as held for sale. The investment in real estate balance, net of accumulated depreciation for this property is $35.9 million. This disposition is subject to certain contingencies and is expected to close in the third quarter of 2006.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which relate to, without limitation, future economic performance, plans and objectives of each of Equity Office Properties Trust (“Equity Office”) and EOP Operating Limited Partnership for future operations and projections of revenue and other financial items, which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereof or compatible terminology. These forward-looking statements are based on management’s present expectations and beliefs about future events. As with any projection or forecast, these statements are subject to risks and uncertainties. Important factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the outlook of Equity Office include, but are not limited to, the following: although our occupancy and market rents are increasing, we continue to experience rent roll down in certain markets, although at diminishing levels, as leases expire and are renewed at current rates and our operations may continue to be negatively impacted by the effect of increased expenses (including energy costs and repairs and maintenance expense) and higher tenant improvement and leasing costs; our long term leases cause our operating results to lag improving market conditions; our geographic market diversity may cause our operating results to be less favorable than operating results in the strongest markets; in order to continue to pay distributions to our common shareholders and unitholders at anticipated levels, we must borrow funds or sell assets; we were a net seller of real estate in 2005 and the first six months of 2006 and expect to continue to sell assets during the remainder of 2006, which may further reduce our income from continuing operations and funds from operations; future disposition activity may also result in gains or losses on sale of real estate, earnings dilution and impairment charges; our performance and share value are subject to risks associated with the real estate industry; new acquisitions may fail to perform as expected; our ability to dispose of assets on terms we find acceptable will be subject to market conditions we do not control; our properties face significant competition; we face potential adverse effects from tenant bankruptcies or insolvencies; competition for acquisitions or an oversupply of properties for sale could adversely affect us; and a hurricane, earthquake or terrorist act could adversely affect our business and such losses, or other potential losses, may not be fully covered by third-party insurance.

These and other risks and uncertainties are detailed from time to time in our filings with the SEC, including Form 10-K filed on March 15, 2006 and Form 8-K filed on March 9, 2006, as amended by Part II — Item 1A of this Form 10-Q. Except with respect to material changes in such risk factors as may be reflected from time to time in our quarterly filings, we are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of changes, new information, subsequent events or otherwise.

The following discussion should be read together with our consolidated financial statements and notes thereto.

Overview

This MD&A is organized as follows:


I.	Executive Summary


	A description of our business as well as key factors and trends that affect our business.

II. Results of Operations


	Period-to-period comparison of our results of operations for the three and six months ended June 30, 2006 and 2005.

III. Liquidity and Capital Resources


	A discussion of our liquidity and capital resources, including distributions to our shareholders and unitholders, contractual obligations, debt financing, market risk, equity securities, capital improvements, tenant improvements and leasing costs, developments, cash flows and additional items.


IV.	Critical Accounting Policies and Estimates


	A review of the critical accounting policies and estimates that affect the financial statements and impact of new accounting standards.


V.	Funds From Operations


	A reconciliation of this non-GAAP financial measure to net income, the most directly comparable GAAP measure.


I.	Executive Summary

Equity Office is the largest publicly traded owner and manager of office properties in the United States. We own, manage, lease and develop office properties. At June 30, 2006, we had a national office portfolio comprised of whole or partial interests in 595 office buildings located in 16 states and the District of Columbia. We own premium quality office buildings. Based on our Effective Office Portfolio, which consists of 99.4 million square feet, 39.4% and 60.6% of our properties are located in central business districts and suburban locations, respectively. At June 30, 2006, we owned buildings in 23 markets and 99 submarkets, including our 17 principal markets which are:


Atlanta	New York	San Francisco
Austin	Oakland	San Jose
Boston	Orange County	Seattle
Chicago	Portland	Stamford
Denver	Sacramento	Washington, D.C.
Los Angeles	San Diego

We believe our principal markets generally offer the following: a strong opportunity for us to be a market leader; an ability to leverage our operating platform; sufficient market size for us to achieve scale and grow; an intellectual and cultural infrastructure; and a highly educated workforce.

We operate our properties using a portfolio-based model as compared to many real estate owners who operate on a property-by-property basis. We believe this approach allows us to operate efficiently while providing a high level of service to our tenants. Our market concentrations enable us to provide a wide range of office solutions to tenants who have local, regional and national office space needs.

The following are among the factors that affect our business and are important to consider when reviewing our financial and operating results:


	•	the economic environment;

	•	our operating and leasing results;

	•	our investment activity and our use of the proceeds from dispositions; and

	•	our liquidity and capital resources.

Economic Environment

We typically experience long business cycles because our average lease term is four to six years. Accordingly, when office business fundamentals improve, our operating results tend to improve more slowly than would be the case if, for example, we re-priced a substantial percentage of our product “to market” on an annual basis. Conversely, when the fundamentals of the office business decline, our operating results do not

deteriorate as quickly. Further, we have chosen to diversify our portfolio risk by operating in a large number of office markets whose conditions may not recover or deteriorate in tandem. As a result of these factors, variations in our operating results are likely to lag those in the general economy. Our operating results are also likely to vary from those generated by portfolios which are concentrated in fewer markets.

At the present time, the office market fundamentals are generally improving from prior years. Office job growth, a principal driver of demand for our properties, has been positive for three years and is forecasted to increase modestly in 2006 in most of our principal markets. Measured over the course of the past three years, all of our principal markets have experienced positive net absorption. Occupancy has increased in most of our principal markets, and we expect most markets to show continued modest increases for the remainder of 2006. However, in a few markets with new construction deliveries, a modest decline in occupancy is possible for the remaining portion of 2006. Although construction activity in several of our markets has recently increased, such activity remains below historical levels. Within the last twelve months, construction costs have increased (including material costs which are partially driven by rising energy costs) and this may ultimately reduce new competitive supply in a number of our markets.

Rental rates have begun to trend upwards in many of our principal markets. Although rising rents and occupancy trends are expected to positively impact our operating results over time, our results will continue to be negatively impacted by anticipated decreases in rental rates on new and renewal leases in certain of our markets as compared to expiring leases (commonly referred to as rent roll down) and the effect of increased expenses (including energy costs and repairs and maintenance expense) and higher tenant improvement and leasing costs.

Operating and Leasing Results


	Operating Results for the Six Months Ended June 30, 2006

As the economy and office markets recover, we are seeing improvements in substantially all of our markets. Rental rates on new and renewal leases continue to be below those of expiring leases across our portfolio; however occupancy and rental rates on our new leases have gradually been improving, which has offset the impact of the rent roll down. We also repositioned our portfolio by disposing of $2.7 billion of assets in 2005 which resulted in earnings dilution. Consolidated income from early lease terminations from continuing operations declined during the six months ended June 30, 2006 by $53.4 million (2005 included lease termination income from one tenant in the amount of $48.7 million) as compared to the prior year period. Also during the six months ended June 30, 2006, operating expenses increased primarily because of increased utility and repairs and maintenance costs (although a portion of such increases can be recovered from our tenants). As a result, our income from continuing operations for the six months ended June 30, 2006 was $0.07 per diluted share, down from $0.24 per diluted share for the comparable prior year period. Although our income from continuing operations is down, our net income available to common shareholders increased from a loss of $0.26 per diluted share for the six months ended June 30, 2005 to income of $0.36 per diluted share for the six months ended June 30, 2006, mainly as a result of the non-cash impairment charges and losses on assets sold in 2005.

In accordance with Emerging Issues Task Force04-5,Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”), effective January 1, 2006, we consolidated the assets, liabilities and results of operations of 18 joint ventures that we previously accounted for under the equity method (“JV Consolidation”). We adopted EITF 04-5 using the prospective method; therefore prior periods have not been

restated for this change. The table below summarizes the effect on our assets and liabilities as a result of the consolidation of these joint ventures.


(Dollars in thousands)	As of January 1, 2006

Increase in investments in real estate, net of accumulated depreciation	$	2,556,549
Decrease in investments in unconsolidated joint ventures	$	844,591
Increase in mortgage debt, net of (discounts) of $(0.2) million	$	681,986
Increase in minority interests — partially owned properties	$	1,205,236
Increase in net other assets and liabilities	$	175,264
Change in total shareholders’ equity	$	—

Prior to January 1, 2006, our share of the net income from these joint ventures was included in “Income from investments in unconsolidated joint ventures” on the consolidated statements of operations. Upon consolidation, our results of operations include the revenues and expenses of these joint ventures and an allocation to the minority interest partners for their share of the net income. The consolidation of the joint ventures did not impact income from continuing operations, net income available to common shareholders or funds from operations available to common shareholders. The table below summarizes the effect on our results of operations for the three and six months ended June 30, 2006 as a result of the consolidation of these joint ventures.


	For the three months		For the six months
(Dollars in thousands)	ended June 30, 2006		ended June 30, 2006

Increase in total revenues	$	101,890	$	200,675
Increase in total operating expenses	$	72,796	$	141,546
Increase in other expense (primarily interest expense)	$	7,105	$	18,171
Decrease in income from investments in unconsolidated joint ventures	$	11,319	$	20,435
Increase in minority interests — partially owned properties	$	10,670	$	20,523
Change in income from continuing operations	$	—	$	—


	Leasing Results


	Occupancy

Total square feet for leases under which tenants took occupancy during the six months ended June 30, 2006 and 2005 were 8.8 million and 10.7 million, respectively. This decrease was primarily a result of our asset dispositions, partially offset by property acquisitions. Our Effective Office Portfolio occupancy was 90.7% as of June 30, 2006, an increase from 90.4% at the end of 2005 and 87.5% at the end of 2004. The increase in occupancy since December 31, 2004 was mainly due to selling properties with low occupancy and improved leasing results. As a result of occupancy growth, our revenues have increased in recent periods. We expect occupancy to be in the 91% to 92% range by year-end 2006.


	Rental Rates

Rental rates on new leases for tenants that have taken occupancy declined during the six months ended June 30, 2006 and 2005 by 8.6% and 12.6% (on a weighted average cash basis), respectively, when compared to rates on expiring and terminating leases. Market rents began a downward trend in 2001 as vacancy rates increased across the nation. While we have recently been able to increase rental rates in most areas (market rents increased in our principal markets an estimated 7.3% since year end 2005), we expect it to take time for rental rates to improve across the portfolio since only a portion of our leases expire each year. We estimate that rental rates on our leases that are scheduled to expire during the remainder of 2006 are 5% to 10% above current market rental rates. The decline in rents to current market levels adversely affects our rental revenues. Until market rental rates increase from their current levels to the level payable under expiring leases (which

we believe may not occur in a majority of our markets until mid 2007), we expect that rent roll down will reduce our rental revenues and results of operations.


	Early Lease Terminations

We had 1.2 million square feet of early lease terminations during the six months ended June 30, 2006, which compares to 2.0 million square feet (including 0.3 million from a single tenant) in the six months ended June 30, 2005. Income from early lease terminations was significantly lower in the first six months of 2006 than the first six months of 2005 primarily because of one large termination fee in the first quarter of 2005.


	Tenant Improvements and Leasing Costs

In order to retain tenants and obtain new tenants, we incur tenant improvement and leasing costs, which have been at historically high levels since 2003. Our share of such costs for the six months ended June 30, 2006 averaged $17.17 per square foot as compared to the full year 2005 average of $20.23 per square foot. We expect a significant increase in tenant improvements and leasing costs during the latter half of 2006 resulting in the average costs for all of 2006 to be between $21.50 and $23.50 per square foot. These increasing costs are due to higher construction costs across the country. Also, the repositioning of our portfolio has resulted in a higher concentration of buildings in markets that require higher tenant improvement costs.


	Trends in Occupancy and Rental Rates for the Total Office Portfolio

Below is a summary of leasing activity for tenants taking occupancy in the periods presented.


			For the three months						For the six months
			ended June 30,						ended June 30,

			2006			2005			2006			2005

Office Property Data for Total Office Portfolio:
	Occupancy at end of period			90.7	%		88.4	%		90.7	%		88.4	%
	Gross square footage for tenants whose lease term commenced during the period			3,809,418			4,692,085			8,844,682			10,699,742
	Weighted average annual rent per square foot for tenants whose lease term commenced during the period:
		GAAP basis(a,b)	$	29.02		$	28.60		$	28.42		$	27.19
		Cash basis(b,c)	$	27.98		$	27.83		$	27.61		$	26.11
	Gross square footage for expiring and terminated leases during the period			3,802,754			4,445,114			9,093,743			10,621,890
	Weighted average annual rent per square foot for expiring and terminated leases during the period:
		GAAP basis(a)	$	29.47		$	30.07		$	29.51		$	29.10
		Cash basis(c)	$	30.67		$	30.94		$	30.21		$	29.89
	Change in weighted average annual rent per square foot between expiring and terminated leases and leases that commenced during the period:
		GAAP basis — change in annual rent per square foot	$	(0.45	)	$	(1.47	)	$	(1.09	)	$	(1.91	)
		GAAP basis — percent change in annual rent per square foot		(1.5	)%		(4.9	)%		(3.7	)%		(6.6	)%
		Cash basis — change in annual rent per square foot	$	(2.69	)	$	(3.11	)	$	(2.60	)	$	(3.78	)
		Cash basis — percent change in annual rent per square foot		(8.8	)%		(10.1	)%		(8.6	)%		(12.6	)%


(a)		Based on the average annual base rent per square foot over the lease term and current estimated tenant reimbursements, if any.

(b)		Weighted average annual rent per square foot for new leases for tenants whose lease term commenced during the period may lag the market because leasing decisions typically are made one month to 12 or more months prior to taking occupancy.

(c)		Based on the monthly contractual rent when the lease commenced, expired or terminated multiplied by 12 months. For new and renewal leases, if the monthly contractual rent when the lease commenced is $0 (as a result of rent abatements), then the rental rate represents the first monthly rent payment due multiplied by 12 months (“Annualized Cash Rent”). The contractual rent amounts include total base rent and estimated expense reimbursements from tenants before any adjustments for rent abatements and contractual increases or decreases in rent. We believe Annualized Cash Rent is a useful measure because this information can be used for comparison to current market rents as published by various third party sources.


	Investment Activity

We continually evaluate our portfolio on both a property-by-property and a market basis and are focused on maximizing the value and total return of every asset. There are times when market conditions or asset management strategy warrants selling properties in our principal markets. We expect to continue to take advantage of market opportunities and to engage in further sales based on market conditions and achieving our return criteria. On August 1, 2006, we announced that we are exploring the sale of $2.0 billion to $2.5 billion of additional assets over the next six to 12 months. Dispositions under consideration include certain assets in principal markets such as Chicago, Denver and Northern California. As a part of this strategy, we may also exit the Atlanta market over time. While we expect to recognize an overall net gain from any such dispositions should they occur, the decision to sell certain assets may require material non-cash impairment charges in the third quarter and perhaps in subsequent quarters.

We may continue to use disposition proceeds, in part, for acquisitions, capital spending in our existing portfolio, debt repayments, distributions to our shareholders and unitholders, and repurchases of our common shares of beneficial interest (“Common Shares”) and partnership units of EOP Partnership (“Units”). When we sell assets in the future, we may recognize gains, losses or impairment charges, and may experience earnings dilution. Ultimately, the amount and duration of dilution, if any, from asset sales will depend upon the manner in which we redeploy our capital over time. We believe any short-term earnings dilution is outweighed by our improved prospects for long-term growth.

Since 2003, on a net square footage basis, we have decreased our Total Office Portfolio by more than 16 million square feet, or 13%, and reduced our number of markets by nine. We recently announced a significant realignment with the objective of bringing our corporate and property operating general and administrative costs further in line with our reduced size. The changes include moving from a regional to a functional structure. We will continue to centralize operations with the primary focus on the three key functions of our business — property management, leasing and asset management. As a result of the realignment, we anticipate recording a severance charge of $30 million in the second half of 2006 with the majority being recognized in the third quarter.

We expect to continue, as market conditions permit, to invest a portion of the capital from our dispositions or other sources of capital into acquisitions and developments which we expect to meet our return

criteria. While the current commercial real estate market has provided us with favorable valuations for assets we have sold, this same market has also created an extremely competitive atmosphere for acquiring properties. Most of the properties we acquired during the first six months of 2006 had average occupancy rates lower than our weighted average portfolio occupancy. We acquired these properties, however, because they were attractively priced, located in our principal markets and have growth potential that we believe will make them accretive to our earnings over the long term.

As of June 30, 2006, our overall debt levels increased $1.8 billion as compared to December 31, 2005, mainly as a result of funds used for share repurchases and the JV Consolidation, which totaled $682.0 million (our share of which is $306.9 million). We repurchased 35.6 million Common Shares (at an average purchase price of $34.03 per share for $1.2 billion) and redeemed 2.8 million Units (at an average purchase price of $30.89 per Unit for $87.9 million). Included in these amounts are 17.2 million Common Shares repurchased concurrently with the June 2006 issuance of $1.5 billion of exchangeable senior unsecured notes.

Liquidity and Capital Resources

As discussed later in the Liquidity and Capital Resources section, for 2006 we anticipate that our net cash flow provided by operating activities will be insufficient to meet all of our cash requirements including capital improvements, tenant improvements and leasing costs as well as distributions to shareholders and unitholders and that we will cover the shortfall with proceeds primarily from financing activities and asset sales.


II.	Results of Operations


	Period-to-Period Comparisons

The financial results presented in the consolidated statements of operations show significant changes fromperiod-to-period. Ourperiod-to-period financial results may not be comparable because we acquire and dispose of properties on an ongoing basis. We have also consolidated properties (that we previously recorded under the equity method) as a result of the JV Consolidation. During 2005, we completed a significant amount of disposition activity which resulted in earnings dilution. The net income for properties sold and properties held for sale (including all revenue and expense line items) is included in Discontinued Operations. See Item 1 — Note 4 for more information, including the results of operations for the properties classified as Discontinued Operations.

Below is a summary of changes in our Total Office Portfolio and our Effective Office Portfolio:


						Square Feet

						Total Office			Effective Office
			Buildings			Portfolio			Portfolio

Properties owned as of:
	December 31, 2004			698			125,713,245			115,279,743
		Acquisitions		55			3,959,956			3,959,956
		Development placed in service		1			115,340			115,340
		Dispositions		(131	)		(18,275,376	)		(17,644,205	)
		Property taken out of service(a)		(1	)		(61,825	)		(61,825	)
		Building remeasurements		—			57,713			59,282

	December 31, 2005			622			111,509,053			101,708,291
		Acquisitions		3			374,763			374,763
		Dispositions		(10	)		(783,629	)		(783,629	)
		Building remeasurements and other		—			22,133			(15,081	)

	March 31, 2006			615			111,122,320			101,284,344
		Acquisitions		2			273,535			273,535
		Development placed in service		1			93,349			93,349
		Dispositions		(20	)		(1,884,483	)		(1,884,483	)
		Property taken out of service(a)		(1	)		(313,333	)		(313,333	)
		Building remeasurements and other		(2	)		(94,660	)		(71,162	)

	June 30, 2006			595			109,196,728			99,382,250


(a)	The properties taken out of service represent office properties we are no longer attempting to lease which may be redeveloped or sold in the future.

As a result of the significant acquisition, disposition and consolidation activity, we have presented condensed consolidated results for properties owned during the comparable periods (the “Same Store Portfolio”). The Total Company results include the Same Store Portfolio as well as amounts attributable to acquisitions, dispositions, the JV Consolidation and corporate level expenses (“Non-Same Store”).


	Comparison of the three months ended June 30, 2006 to the three months ended June 30, 2005

The table below represents selected operating information for the Total Company and for the Same Store Portfolio. The Same Store Portfolio consists of 499 consolidated office properties and six unconsolidated joint venture properties acquired or placed in service on or prior to April 1, 2005.


																						Same Store
				For the three months ended									For the three months ended									Portfolio Change						Total Company
				June 30, 2006									June 30, 2005									Favorable/						Change Favorable/
																						(Unfavorable)						(Unfavorable)
				Same Store			Non-Same			Total			Same Store			Non-Same			Total
(Dollars in thousands)				Portfolio			Store			Company			Portfolio			Store			Company			Amount			%			Amount			%

Revenues:
	Property operating revenues			$	701,009		$	137,876		$	838,885		$	699,389		$	10,602		$	709,991		$	1,620			0.2	%	$	128,894			18.2	%
	Fee income				—			1,478			1,478			—			3,697			3,697			—			—			(2,219	)		(60.0	)

		Total revenues			701,009			139,354			840,363			699,389			14,299			713,688			1,620			0.2			126,675			17.7

Expenses:
	Depreciation and amortization				183,201			45,393			228,594			173,714			8,030			181,744			(9,487	)		(5.5	)		(46,850	)		(25.8	)
	Real estate taxes				79,767			21,379			101,146			81,569			1,735			83,304			1,802			2.2			(17,842	)		(21.4	)
	Insurance				6,652			2,439			9,091			6,747			287			7,034			95			1.4			(2,057	)		(29.2	)
	Repairs and maintenance				83,360			20,679			104,039			75,049			1,597			76,646			(8,311	)		(11.1	)		(27,393	)		(35.7	)
	Property operating				103,842			16,261			120,103			97,558			1,990			99,548			(6,284	)		(6.4	)		(20,555	)		(20.6	)
	Ground rent				6,169			589			6,758			4,992			82			5,074			(1,177	)		(23.6	)		(1,684	)		(33.2	)
	Corporate general and administrative(a)				—			16,056			16,056			—			15,218			15,218			—			—			(838	)		(5.5	)
	Impairment				—			—			—			4,204			20,178			24,382			4,204			100.0			24,382			100.0

		Total expenses			462,991			122,796			585,787			443,833			49,117			492,950			(19,158	)		(4.3	)		(92,837	)		(18.8	)

			Operating income		238,018			16,558			254,576			255,556			(34,818	)		220,738			(17,538	)		(6.9	)		33,838			15.3

Other income (expense):
	Interest and dividend income				2,020			3,943			5,963			2,118			1,448			3,566			(98	)		(4.6	)		2,397			67.2
	Interest expense(b)				(41,433	)		(184,991	)		(226,424	)		(47,125	)		(163,401	)		(210,526	)		5,692			12.1			(15,898	)		(7.6	)

		Total other income (expense)			(39,413	)		(181,048	)		(220,461	)		(45,007	)		(161,953	)		(206,960	)		5,594			12.4			(13,501	)		(6.5	)

Income before income taxes, allocation to minority interests, income from investments in unconsolidated joint ventures and gain on sales of real estate					198,605			(164,490	)		34,115			210,549			(196,771	)		13,778			(11,944	)		(5.7	)		20,337			147.6
Income taxes					(368	)		515			147			(71	)		(366	)		(437	)		(297	)		(418.3	)		584			133.6
Minority Interests:
	EOP Partnership				—			(9,675	)		(9,675	)		—			23,677			23,677			—			—			(33,352	)		(140.9	)
	Partially owned properties				(3,040	)		(10,670	)		(13,710	)		(2,499	)		—			(2,499	)		(541	)		(21.6	)		(11,211	)		(448.6	)
Income from investments in unconsolidated joint ventures (including (loss) gain on sales of real estate of $(91) and $17,376, respectively)					162			(128	)		34			(69	)		28,750			28,681			231			334.8			(28,647	)		(99.9	)
Gain on sales of real estate					347			32			379			—			—			—			347			—			379			—

Income from continuing operations					195,706			(184,416	)		11,290			207,910			(144,710	)		63,200			(12,204	)		(5.9	)		(51,910	)		(82.1	)
Discontinued operations (including net gain (loss) on sales of real estate and provision for (loss) on properties held for sale of $82,503 and $(94,220), respectively)					—			85,268			85,268			—			(259,941	)		(259,941	)		—			—			345,209			132.8

Net income (loss)				$	195,706		$	(99,148	)	$	96,558		$	207,910		$	(404,651	)	$	(196,741	)	$	(12,204	)		(5.9	)%	$	293,299			149.1	%

Selected Items from Continuing Operations:
Property net operating income(c)				$	427,388		$	77,118		$	504,506		$	438,466		$	4,993		$	443,459		$	(11,078	)		(2.5	)%	$	61,047			13.8	%

Property operating margin(c,d)					61.0	%		55.9	%		60.1	%		62.7	%		47.1	%		62.5	%					(1.7	)%					(2.4	)%

Deferred rental revenue				$	5,520		$	3,129		$	8,649		$	14,839		$	646		$	15,485		$	(9,319	)		(62.8	)%	($	6,836	)		(44.1	)%

Income from early lease terminations				$	2,917		$	53		$	2,970		$	9,825		$	—		$	9,825		$	(6,908	)		(70.3	)%	($	6,855	)		(69.8	)%


(a)		Corporate general and administrative expense is not allocated to the Same Store Portfolio because these expenses are not directly incurred in connection with any specific property.

(b)		Interest expense (including amortization of deferred financing costs and prepayment expenses) for the Same Store Portfolio represents interest expense on mortgage debt and does not include interest expense on the unsecured notes or the lines of credit.


(c)		Property net operating income consists of property operating revenues minus property operating expenses. Included in property operating revenues are rental revenue, tenant reimbursements, parking and other income, which includes income from early lease terminations. Included in property operating expenses are real estate taxes, insurance, repairs and maintenance and property operating expenses. See Item 1 — Note 11 for more information.

(d)		Property operating margin is determined by dividing property operating revenues less property operating expenses by property operating revenues.


	Property Operating Revenues

Property operating revenues in the Same Store Portfolio increased primarily because of increased occupancy and an increase in tenant reimbursements (we recover a portion of increases in our operating expenses from our tenants), partially offset by a decrease in income from early lease terminations and the effect of the rent roll down. Same store occupancy increased from 89.5% at March 31, 2005 to 91.1% at June 30, 2006.

Property operating revenues in the Total Company increased primarily because of property acquisitions, consolidations and developments, which accounted for $127.3 million of the increase ($97.1 million of which was due to the JV Consolidation), and increases in the Same Store Portfolio, as explained above.


	Depreciation and Amortization

Depreciation and amortization expense in the Same Store Portfolio increased because of capital and tenant improvements placed in service since the beginning of the prior period.

Depreciation and amortization expense in the Total Company increased because of property acquisitions, consolidations and developments, which accounted for $37.4 million of the increase ($25.6 million of which was due to the JV Consolidation), and the increases in the Same Store Portfolio, as explained above.


	Real Estate Taxes

Real estate taxes in the Same Store Portfolio decreased primarily due to a reduction of prior year taxes due to successful appeals, partially offset by increases in taxes at other properties. We anticipate real estate taxes will continue to fluctuate based on changes in property assessments and tax rates.

Real estate taxes increased in the Total Company because of property acquisitions, consolidations and developments, which accounted for $19.6 million of the increase ($15.1 million of which was due to the JV Consolidation). This increase in real estate taxes was partially offset by the decrease in the Same Store Portfolio, as explained above.


	Repairs and Maintenance

Repairs and maintenance expense increased in the Same Store Portfolio as a result of increased cleaning expense attributable to higher contractual rates and increased occupancy, higher payroll costs for building engineers and higher spending for major repairs. We increased our spending in repairs and maintenance as part of a program to maintain high levels of quality in our properties. Repairs and maintenance expense is expected to continue at an increased level as a result of planned projects in 2006.

Repairs and maintenance expense increased in the Total Company because of property acquisitions, consolidations and developments, which accounted for $19.1 million of the increase ($15.2 million of which was due to the JV Consolidation), and increases in the Same Store Portfolio, as explained above.


	Property Operating

Property operating expense increased for the Same Store Portfolio primarily due to an increase in utilities expense of $4.1 million attributable to higher utility rates and increased occupancy and increased payroll expenses. We anticipate that utility costs will increase in the coming quarters when compared to historical

costs if utility rates and the occupancy levels of our properties continue to increase. A portion of such expenses will be recoverable from tenants.

Property operating expenses in the Total Company increased because of property acquisitions, consolidations and developments, which accounted for $14.3 million of the increase ($11.1 million of which was due to the JV Consolidation), and increases in the Same Store Portfolio, as explained above.

In conjunction with our recently announced realignment, we anticipate recording a severance charge of $30 million (primarily in property operating general and administrative expense) in the second half of 2006 with the majority being recognized in the third quarter.


	Impairment

Refer to Item 1 — Note 4.


	Interest Expense

Interest expense in the Same Store Portfolio decreased primarily because of mortgage debt repayments.

Interest expense for the Total Company increased primarily as a result of increased indebtedness used for Common Share and Unit repurchases during 2005 and 2006 and the JV Consolidation (which accounted for $7.7 million of the increase). The increase in interest expense was partially offset by the repayment of higher interest rate debt with proceeds from asset sales and the issuance of new debt at lower interest rates. In addition, capitalized interest increased $6.6 million due to an increase in development activity (capitalized interest has the effect of reducing overall interest expense). As of June 30, 2006, 89% of our total debt was at a fixed interest rate and our weighted average interest rate on consolidated debt was 6.33% compared to 6.68% at June 30, 2005. Our fixed to floating debt ratio will fluctuate periodically based on, among other things, our capital transaction activities, including acquisitions, dispositions, share repurchases and debt maturities.


	Minority Interest — Partially Owned Properties

Income allocated to minority interests in partially owned properties for the Total Company increased primarily because of the JV Consolidation, which accounted for $10.7 million of the increase.


	Income from Investments in Unconsolidated Joint Ventures

Income from investments in unconsolidated joint ventures for the Total Company decreased primarily because of the 2005 sales of our interests in three properties, which accounted for $18.4 million (consisting primarily of gain on sale of assets) of the decrease, and the JV Consolidation, which accounted for $10.0 million of the decrease.


	Discontinued Operations

Discontinued operations consists of properties we sold and also properties classified as held for sale. See Item 1 — Note 4 for additional information regarding discontinued operations.

Comparison of the six months ended June 30, 2006 to the six months ended June 30, 2005

The table below represents selected operating information for the Total Company and for the Same Store Portfolio. The Same Store Portfolio consists of 495 consolidated office properties and six unconsolidated joint venture properties acquired or placed in service on or prior to January 1, 2005.


																						Same Store
				For the six months ended									For the six months ended									Portfolio Change						Total Company
				June 30, 2006									June 30, 2005									Favorable/						Change Favorable/
																						(Unfavorable)						(Unfavorable)
				Same Store			Non-Same			Total			Same Store			Non-Same			Total
(Dollars in thousands)				Portfolio			Store			Company			Portfolio			Store			Company			Amount			%			Amount			%

Revenues:
	Property operating revenues			$	1,407,602		$	279,239		$	1,686,841		$	1,432,832		$	20,229		$	1,453,061		$	(25,230	)		(1.8	)%	$	233,780			16.1	%
	Fee income				—			2,394			2,394			—			8,474			8,474			—			—			(6,080	)		(71.7	)

		Total revenues			1,407,602			281,633			1,689,235			1,432,832			28,703			1,461,535			(25,230	)		(1.8	)		227,700			15.6

Expenses:
	Depreciation and amortization				358,954			96,763			455,717			343,411			14,789			358,200			(15,543	)		(4.5	)		(97,517	)		(27.2	)
	Real estate taxes				165,336			43,765			209,101			161,863			3,901			165,764			(3,473	)		(2.1	)		(43,337	)		(26.1	)
	Insurance				12,472			5,018			17,490			12,145			591			12,736			(327	)		(2.7	)		(4,754	)		(37.3	)
	Repairs and maintenance				158,391			38,470			196,861			143,888			3,157			147,045			(14,503	)		(10.1	)		(49,816	)		(33.9	)
	Property operating				215,171			33,330			248,501			194,586			3,601			198,187			(20,585	)		(10.6	)		(50,314	)		(25.4	)
	Ground rent				11,372			1,244			12,616			10,031			162			10,193			(1,341	)		(13.4	)		(2,423	)		(23.8	)
	Corporate general and administrative(a)				—			33,050			33,050			—			32,391			32,391			—			—			(659	)		(2.0	)
	Impairment				—			—			—			4,204			20,178			24,382			4,204			100.0			24,382			100.0

		Total expenses			921,696			251,640			1,173,336			870,128			78,770			948,898			(51,568	)		(5.9	)		(224,438	)		(23.7	)

			Operating income		485,906			29,993			515,899			562,704			(50,067	)		512,637			(76,798	)		(13.6	)		3,262			0.6

Other income (expense):
	Interest and dividend income				3,021			6,307			9,328			4,290			2,368			6,658			(1,269	)		(29.6	)		2,670			40.1
	Interest expense(b)				(80,336	)		(373,244	)		(453,580	)		(100,113	)		(325,980	)		(426,093	)		19,777			19.8			(27,487	)		(6.5	)

		Total other income (expense)			(77,315	)		(366,937	)		(444,252	)		(95,823	)		(323,612	)		(419,435	)		18,508			19.3			(24,817	)		(5.9	)

Income before income taxes, allocation to minority interests, income from investments in unconsolidated joint ventures and gain on sales of real estate					408,591			(336,944	)		71,647			466,881			(373,679	)		93,202			(58,290	)		(12.5	)		(21,555	)		(23.1	)
Income taxes					(372	)		(692	)		(1,064	)		(375	)		(516	)		(891	)		3			0.8			(173	)		(19.4	)
Minority Interests:
	EOP Partnership				—			(14,791	)		(14,791	)		—			11,923			11,923			—			—			(26,714	)		(224.1	)
	Partially owned properties				(5,991	)		(20,524	)		(26,515	)		(5,527	)		—			(5,527	)		(464	)		(8.4	)		(20,988	)		(379.7	)
Income from investments in unconsolidated joint ventures (including (loss) gain on sales of real estate of $(91) and $17,376, respectively)					194			(104	)		90			406			37,793			38,199			(212	)		(52.2	)		(38,109	)		(99.8	)
Gain on sales of real estate					347			186			533			—			—			—			347			—			533			—

Income from continuing operations					402,769			(372,869	)		29,900			461,385			(324,479	)		136,906			(58,616	)		(12.7	)		(107,006	)		(78.2	)
Discontinued operations (including net gain (loss) on sales of real estate and provision for (loss) on properties held for sale of $116,943 and $(83,513), respectively)					—			120,979			120,979			—			(224,076	)		(224,076	)		—			—			345,055			154.0

Net income (loss)				$	402,769		$	(251,890	)	$	150,879		$	461,385		$	(548,555	)	$	(87,170	)	$	(58,616	)		(12.7	)%	$	238,049			273.1	%

Selected Items from Continuing Operations:
Property net operating income(c)				$	856,232		$	158,656		$	1,014,888		$	920,350		$	8,979		$	929,329		$	(64,118	)		(7.0	)%	$	85,559			9.2	%

Property operating margin(c,d)					60.8	%		56.8	%		60.2	%		64.2	%		44.4	%		64.0	%					(3.4	)%					(3.8	)%

Deferred rental revenue				$	13,837		$	7,291		$	21,128		$	31,124		$	1,134		$	32,258		$	(17,287	)		(55.5	)%	$	(11,130	)		(34.5	)%

Income from early lease terminations				$	6,514		$	1,918		$	8,432		$	61,874		$	(1	)	$	61,873		$	(55,360	)		(89.5	)%	$	(53,441	)		(86.4	)%


(a)	Corporate general and administrative expense is not allocated to the Same Store Portfolio because these expenses are not directly incurred in connection with any specific property.


(b)		Interest expense (including amortization of deferred financing costs and prepayment expenses) for the Same Store Portfolio represents interest expense on mortgage debt and does not include interest expense on the unsecured notes or the lines of credit.

(c)		Property net operating income consists of property operating revenues minus property operating expenses. Included in property operating revenues are rental revenue, tenant reimbursements, parking and other


		income, which includes income from early lease terminations. Included in property operating expenses are real estate taxes, insurance, repairs and maintenance and property operating expenses. See Item 1 — Note 11 for more information.

(d)		Property operating margin is determined by dividing property operating revenues less property operating expenses by property operating revenues.


	Property Operating Revenues

Property operating revenues in the Same Store Portfolio decreased primarily because of a decrease in income from early lease terminations of $55.4 million, of which $48.7 million related to a single tenant during the first half of 2005, and the effect of the rent roll down. The decrease was partially offset by increased occupancy and an increase in tenant reimbursements (we recover a portion of increases in our operating expenses from our tenants). Same store occupancy increased from 89.5% at December 31, 2004 to 91.1% at June 30, 2006.

Property operating revenues in the Total Company increased primarily because of property acquisitions, consolidations and developments, which accounted for $259.0 million of the increase ($191.1 million of which was due to the JV Consolidation). This increase in property operating revenues was partially offset by the decreases in the Same Store Portfolio, as explained above.


	Depreciation and Amortization

Depreciation and amortization expense in the Same Store Portfolio increased because of capital and tenant improvements placed in service since the beginning of the prior period.

Depreciation and amortization expense in the Total Company increased because of property acquisitions, consolidations and developments, which accounted for $82.0 million of the increase ($50.7 million of which was due to the JV Consolidation), and the increases in the Same Store Portfolio, as explained above.


	Real Estate Taxes

Real estate taxes in the Same Store Portfolio increased primarily due to property tax increases on certain properties, partially offset by a reduction of prior year taxes due to successful appeals recorded in the second quarter of 2006. We anticipate real estate taxes will continue to fluctuate based on changes in property assessments and tax rates.

Real estate taxes increased in the Total Company because of property acquisitions, consolidations and developments, which accounted for $39.9 million of the increase ($30.5 million of which was due to the JV Consolidation), and the increase in the Same Store Portfolio, as explained above.


	Repairs and Maintenance

Repairs and maintenance expense increased in the Total Company because of property acquisitions, consolidations and developments, which accounted for $35.3 million of the increase ($27.9 million of which was due to the JV Consolidation), and increases in the Same Store Portfolio, as explained above.


	Property Operating

Property operating expense increased for the Same Store Portfolio primarily due to an increase in utilities expense of $11.9 million attributable to higher utility rates and increased occupancy and increased payroll expenses. We anticipate that utility costs will increase in the coming quarters when compared to historical

costs if utility rates and the occupancy levels of our properties continue to increase. A portion of such expenses will be recoverable from tenants. In addition, we incurred severance expense of $3.1 million in 2006 and $2.8 million in 2005.

Property operating expenses in the Total Company increased because of property acquisitions, consolidations and developments, which accounted for $29.7 million of the increase ($21.3 million of which was due to the JV Consolidation), and increases in the Same Store Portfolio, as explained above.


	Impairment

Refer to Item 1 — Note 4.


	Interest Expense

Interest expense in the Same Store Portfolio decreased primarily because of mortgage debt repayments.

Interest expense for the Total Company increased primarily as a result of increased indebtedness used for Common Share and Unit repurchases during 2005 and 2006 and the JV Consolidation (which accounted for $19.2 million of the increase). The increase in interest expense was partially offset by the repayment of higher interest rate debt with proceeds from asset sales and the issuance of new debt at lower interest rates. In addition, capitalized interest increased $7.0 million due to an increase in development activity (capitalized interest has the effect of reducing overall interest expense). As of June 30, 2006, 89% of our total debt was at a fixed interest rate and our weighted average interest rate on consolidated debt was 6.33% compared to 6.68% at June 30, 2005. Our fixed to floating debt ratio will fluctuate periodically based on, among other things, our capital transaction activities, including acquisitions, dispositions, share repurchases and debt maturities.


	Minority Interest — Partially Owned Properties

Income allocated to minority interests in partially owned properties for the Total Company increased primarily because of the JV Consolidation, which accounted for $20.5 million of the increase.


	Income from Investments in Unconsolidated Joint Ventures

Income from investments in unconsolidated joint ventures for the Total Company decreased primarily because of the 2005 sales of our interests in three properties, which accounted for $19.9 million (consisting primarily of gain on sale of assets) of the decrease, and the JV Consolidation, which accounted for $17.5 million of the decrease.


	Discontinued Operations

Discontinued operations consists of properties we sold and also properties classified as held for sale. See Item 1 — Note 4 for additional information regarding discontinued operations.


III.	Liquidity and Capital Resources

Liquidity

Net cash provided by operating activities is primarily dependent upon occupancy levels of our properties, rental rates on our leases and our level of operating and other expenses. Our primary sources of liquidity to fund cash requirements include cash provided by operating activities, borrowings against our lines of credit, other unsecured notes and proceeds from asset sales. Cash requirements include capital improvements, tenant improvements, leasing costs, distributions to our shareholders and unitholders and minority interest in partially owned properties, repurchases of our securities and acquisition and development costs.

Our ability to draw upon our lines of credit and to incur additional indebtedness is dependent in part on our compliance with various financial and other covenants as required by existing indentures. A material adverse change in our net cash provided by operating activities may affect the financial performance covenants under our lines of credit and unsecured notes. If we fail to satisfy these covenants and are unable to reach a satisfactory resolution with our lenders, our lines of credit could become unavailable to us, the maturity dates for our unsecured notes could be accelerated, the interest charged on the lines of credit could increase and we may not be able to access other sources of financing. Moodys, Standard & Poor’s and Fitch provide credit ratings on EOP Partnership. If two or more of these agencies downgrade our credit ratings, the interest rate charged on our lines of credit will increase. In addition, the interest rate associated with any future financings is likely to be higher due to a decline in our credit ratings. (A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating).

During the last few years, we took steps to reposition our portfolio for long-term growth. We took advantage of a favorable asset-sale environment and during 2005 sold, on an Effective Office Portfolio basis, $2.7 billion of assets and acquired $1.4 billion of assets. During the six months ended June 30, 2006 we sold $417.4 million of assets comprising 2.7 million square feet and acquired five buildings, one vacant land parcel, one development property and one other investment for $165.1 million. We expect to continue to take advantage of market opportunities and to engage in further sales based on market conditions and achieving our return criteria. On August 1, 2006, we announced that we are exploring the sale of $2.0 billion to $2.5 billion of additional assets over the next six to 12 months. Dispositions under consideration include certain assets in principal markets such as Chicago, Denver and Northern California. As a part of this strategy, we may also exit the Atlanta market over time. While we expect to recognize an overall net gain from any such dispositions should they occur, the decision to sell certain assets may require material non-cash impairment charges in the third quarter and perhaps in subsequent quarters. We may continue to use disposition proceeds, in part, for acquisitions, capital spending in our existing portfolio, debt repayments, distributions to our shareholders and unitholders, and repurchases of our Common Shares and Units.

In order to qualify as a REIT for U.S. federal income tax purposes, we must distribute an amount equal to at least 90% of our taxable income (excluding capital gains) to our shareholders. We currently distribute amounts attributable to capital gains to our shareholders; however, these amounts can be retained by us and taxed at the corporate tax rate. Accordingly, we currently intend, although we are not legally obligated, to continue to make regular quarterly distributions to holders of our common and preferred shares, at least at the level required to maintain our REIT status for U.S. federal income tax purposes. The declaration of distributions on capital shares is at the discretion of the Board of Trustees, which decision is made quarterly by the Board of Trustees based on then prevailing circumstances.

Reduced rental rates, reduced revenues as a result of asset sales and increased operating expenses (including utilities and repairs and maintenance) have reduced our net cash provided by operating activities. In addition, tenant improvement and leasing costs have increased as compared to historical levels due to competitive market conditions, higher construction costs and location of the portfolio. We anticipate that net cash provided by operating activities will be insufficient to satisfy all our cash needs including capital improvements, tenant improvement and leasing costs and distributions to our shareholders and unitholders in 2006 and that we will cover the shortfall with proceeds primarily from financing activities and asset sales. Our Board declared distributions on Common Shares for the second quarter 2006 at $0.33 per Common Share. Although we anticipate a shortfall during 2006, we expect our cash needs will fluctuate throughout the year and are dependent on factors such as the timing of our distributions, our leasing activities and asset dispositions and acquisitions.

As of June 30, 2006, we had $1.3 billion of debt maturing in the remainder of 2006. Because REIT rules for federal income tax purposes require us to distribute 90% of our taxable income, we will not be able to retain sufficient cash to repay all of our debt as it comes due using only cash from operating activities. As a result, we will be required to repay most of our maturing debt with borrowings and proceeds from asset sales, although there can be no assurance that such dispositions or financings at acceptable terms will be available to us.

We believe that net cash provided by operating activities, proceeds from existing or future lines of credit, proceeds from other financing sources that we expect to be available to us and proceeds from asset sales will together provide sufficient liquidity to meet our cash needs during 2006.


	Distributions

In the second quarter 2006, distributions were paid on the preferred shares as reflected below:


					Total Distributions
	Quarterly		Annual
	Distribution		Distribution		For the three months		For the six months
Security	per Share		per Share		ended June 30, 2006		ended June 30, 2006

					(Dollars in thousands)
Series B Preferred Shares	$	0.65625	$	2.625	$	3,931	$	7,862
Series G Preferred Shares	$	0.484375	$	1.9375	$	4,117	$	8,234

The Board of Trustees also declared distributions on Common Shares for the first and second quarter at the rate of $0.33 per Common Share per quarter.

Contractual Obligations

As of June 30, 2006, we were subject to certain material contractual payment obligations as shown in the table below. We were not subject to any material capital lease obligations.


		Payments Due by Period

(Dollars in thousands)		Total		2006		2007		2008		2009		2010		Thereafter

Mortgage debt(a)		$	3,436,981	$	194,526	$	267,127	$	219,699	$	634,352	$	449,654	$	1,671,623
Unsecured notes(a)			10,056,493		152,924		988,523		490,333		862,475		1,564,207		5,998,031
Lines of Credit			1,148,800		1,000,000		—		—		148,800		—		—
Series B Preferred Shares			299,497		—		—		299,497		—		—		—
Share of mortgage debt of unconsolidated joint ventures			165,762		1,066		2,245		2,403		9,922		3,297		146,829
Consolidated operating lease obligations(b)			1,385,635		11,596		23,401		23,137		22,927		23,015		1,281,559

	Total Contractual Obligations	$	16,493,168	$	1,360,112	$	1,281,296	$	1,035,069	$	1,678,476	$	2,040,173	$	9,098,042


(a)	Balance excludes net discounts and premiums.


(b)	Represents payments due under long-term leases in which we are the lessee of ground parcels and air rights associated with our office properties.

In addition to the contractual payment obligations shown in the table above, we also have various properties under development for which we expect to incur an additional $636 million of costs through 2008. As of June 30, 2006, we are subject to $79 million of payment obligations under our development contracts, which will be paid as costs are incurred through 2007. For a complete listing of properties currently under development, refer to Developments in Process in this MD&A.


	Derivative Financial Instruments

As of June 30, 2006, we had no outstanding derivative financial instruments.


	Energy Contracts

In an ongoing effort to control energy costs, we have entered into contracts for the purchase of gas or electricity for certain properties in states which have deregulated energy markets. Typically, the terms of the contracts range from one to three years. Although all or a portion of the commodity price under these contracts is generally fixed, the amounts actually expended under these contracts will vary in accordance with actual energy usage and the timing of energy usage during the period. Our failure to purchase the amount of energy for which we have contractual commitments could result in penalties, depending on market conditions, some of which could be significant. As these contracts expire, we will be subject to market pricing which could have the effect of increasing our energy costs.


	Off-Balance Sheet Arrangements

As listed above, our share of mortgage debt of unconsolidated joint ventures is $165.8 million. We do not have any other off-balance sheet arrangements with any unconsolidated investments or joint ventures that we believe have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources.


	Property Acquisitions

See Item 1 — Note 13 for information regarding any commitments to acquire properties.

Debt Financing


	Consolidated Debt

The table below summarizes our consolidated mortgage debt, unsecured notes and lines of credit indebtedness:


					June 30,			December 31,
(Dollars in thousands)					2006			2005

Balance (includes discounts and premiums):
	Fixed rate:
		Mortgage debt			$	3,256,183		$	1,988,377
		Unsecured notes				9,787,104			8,787,620

			Total			13,043,287			10,775,997

	Variable rate(a):
		Mortgage debt				175,821			175,821
		Unsecured notes and lines of credit				1,393,800			1,876,000

			Total			1,569,621			2,051,821

				Total	$	14,612,908		$	12,827,818

Percent of total debt:
	Fixed rate					89.3	%		84.0	%
	Variable rate(a)					10.7	%		16.0	%

		Total				100.0	%		100.0	%

	Mortgage debt					23.5	%		16.9	%
	Unsecured notes and lines of credit					76.5	%		83.1	%

		Total				100.0	%		100.0	%


					June 30,			December 31,
(Dollars in thousands)					2006			2005

Effective interest rate at end of period:
	Fixed rate:
		Mortgage debt				6.51	%		7.01	%
		Unsecured notes				6.35	%		6.80	%

			Effective interest rate			6.39	%		6.84	%

	Variable rate(a):
		Mortgage debt				5.93	%		5.17	%
		Unsecured notes and lines of credit				5.85	%		5.02	%

			Effective interest rate			5.86	%		5.03	%

				Total		6.33	%		6.55	%


(a)	The interest rates for the variable rate debt are based on various spreads over LIBOR.


	Unconsolidated Joint Venture Debt

The table below summarizes our share of unconsolidated joint venture debt, which consists solely of mortgage debt:


			June 30,			December 31,
(Dollars in thousands)			2006			2005

Balance (includes discounts and premiums):
	Fixed rate		$	164,409		$	472,372
	Variable rate			1,353			1,353

		Total	$	165,762		$	473,725

Effective interest rate at end of period:
	Fixed rate			5.41	%		5.47	%
	Variable rate			11.14	%		10.40	%

		Total		5.46	%		5.48	%

Mortgage Debt

During the six months ended June 30, 2006, the following transactions occurred:


		(Dollars in thousands)

Balance at December 31, 2005(a)		$	2,169,383
	Scheduled principal amortization prior to maturity		(7,753	)
	Consolidation of mortgage debt		682,222
	Mortgage financing		180,000

Balance at March 31, 2006(a)			3,023,852
	Scheduled principal amortization prior to maturity		(7,071	)
	Mortgage financings		405,000
	Assumed through a property acquisition		15,200

Balance at June 30, 2006(a)		$	3,436,981


(a)		Excludes net discounts on mortgage debt of $5.2 million, $5.2 million and $5.0 million as of December 31, 2005, March 31, 2006 and June 30, 2006, respectively.

See Item 1 — Note 6 for more information on our mortgage debt.


	Unconsolidated Joint Venture Mortgage Debt

During the six months ended June 30, 2006, our share of the transactions for unconsolidated joint venture mortgage debt was as follows:


		(Dollars in thousands)

Balance at December 31, 2005		$	473,725
	Scheduled principal amortization prior to maturity		(549	)
	Consolidation of mortgage debt		(306,902	)

Balance at March 31, 2006			166,274
	Scheduled principal amortization prior to maturity		(512	)

Balance at June 30, 2006		$	165,762


	Restrictions on Mortgage Debt

The mortgages encumbering the properties may include restrictions regarding transfer of title to the respective property subject to the terms of the mortgage, prohibit additional liens, require payment of real estate taxes on the properties, require maintenance of the properties in good condition, require maintenance of insurance on the properties and include a requirement to obtain lender consent to enter into material tenant leases.


	Lines of Credit


	Term Loans

In January 2006, we exercised our option to increase our existing $750 million unsecured term loan facility by an additional $250 million, which increased the amount outstanding under the facility to $1.0 billion. This facility bears interest at LIBOR plus 55 basis points (the spread is subject to change based on EOP Partnership’s credit rating) and matures in October 2006. We incurred a fee of $1.0 million on this facility based on the outstanding balance as of June 30, 2006, which was reflected as additional interest expense in the consolidated statements of operations. To the extent the facility is outstanding on September 30, 2006, we will incur an additional fee equal to ten basis points of the outstanding balance on such date. As of June 30, 2006, $1.0 billion was outstanding under this facility. Subsequent to June 30, 2006, we entered into an amendment that increased our $1.0 billion unsecured term loan facility to $1.6 billion. We fully drew upon this additional capacity in July 2006, which increased the amount outstanding under this facility to $1.6 billion.


	Revolving Line of Credit

As of June 30, 2006, $148.8 million was outstanding under our $1.25 billion revolving line of credit facility, which had an interest rate of LIBOR plus 60 basis points and an annual facility fee of 20 basis points, or $2.5 million. This facility matures in August 2009 and we have one option to extend the maturity date for an additional year for an extension fee of $1.875 million. We are in the process of renegotiating our $1.25 billion revolving line of credit facility, which may result in an increase in the facility amount and changes to our financial covenants. We expect to complete these renegotiations in the third quarter of 2006, subject to mutual agreement of the parties involved.

We use our lines of credit and proceeds from other unsecured notes, together with net cash provided by operating activities and proceeds generated from asset sales, to fund capital improvements, tenant improvement and leasing costs, distributions to our shareholders and unitholders, financing and investing activities and for other general working capital purposes. As a result of the nature and timing of the draws, the outstanding balance on our lines of credit is subject to ongoing fluctuation and amounts outstanding under the lines of credit may from time to time be significant. We consider all such borrowings to be in the ordinary course of our business and expect fluctuations in the outstanding balance under the lines of credit.


	Unsecured Notes

During the six months ended June 30, 2006, the following transactions occurred:


		(Dollars in thousands)

Balance at December 31, 2005(a)		$	9,056,556
	Repayments		(500,043	)

Balance at March 31, 2006(a)			8,556,513
	Issuance		1,500,000
	Repayments		(20	)

Balance at June 30, 2006(a)		$	10,056,493


(a)	Excludes net discounts of $23.9 million, $24.6 million and $24.4 million at December 31, 2005, March 31, 2006 and June 30, 2006, respectively.

See Item 1 — Note 7 for more information on our unsecured notes.

As of June 30, 2006, $2.1 billion was available for issuance under two previously filed shelf registration statements totaling $7.0 billion.


	Restrictions and Covenants under Unsecured Indebtedness

The terms of our lines of credit and unsecured notes contain various financial covenants which require satisfaction of certain financial ratios. As of June 30, 2006, we believe we were in compliance with each of these financial covenants. If we fail to comply with any of these covenants, the indebtedness could become due and payable before its stated maturity date.


	Market Risk

Since December 31, 2005 there were no material changes in the information regarding market risk that was provided in Form 10-K for the year ended December 31, 2005.


	Equity Securities

The following table presents the changes in our issued and outstanding Common Shares and EOP Partnership’s Units (exclusive of Units owned by us) since December 31, 2005:


		Common Shares			Units			Total

Outstanding at December 31, 2005			380,674,998			43,639,766			424,314,764
	Repurchased and retired under our open market repurchase program (at an average purchase price of $31.79 per share)(a)		(15,353,600	)		—			(15,353,600	)
	Repurchased and retired under our Supplemental Retirement Savings Plan (at an average purchase price of $33.26 per share)		(55,831	)		—			(55,831	)
	Issued upon exercise of share options		1,218,350			—			1,218,350
	Units redeemed for Common Shares		10,000			(10,000	)		—
	Units redeemed for cash (at an average purchase price of $30.51 per unit)		—			(2,315,316	)		(2,315,316	)
	Restricted shares issued to employees, net of cancellations		596,855			—			596,855
	Common Shares issued as compensation for Board of Trustees fees		9,183			—			9,183

Outstanding at March 31, 2006			367,099,955			41,314,450			408,414,405
	Repurchased and retired under our open market repurchase program or under separate authorization (at an average purchase price of $35.73 per share)(a)		(20,240,240	)		—			(20,240,240	)
	Repurchased and retired under our Supplemental Retirement Savings Plan (at an average purchase price of $34.36 per share)		(46,739	)		—			(46,739	)
	Issued upon exercise of share options		1,849,652			—			1,849,652
	Units redeemed for Common Shares		1,138,256			(1,138,256	)		—
	Units redeemed for cash (at an average purchase price of $32.58 per unit)					(530,220	)		(530,220	)
	Restricted share cancellations, net of restricted shares issued to employees		(48,712	)		—			(48,712	)
	Common Shares issued as compensation for Board of Trustees fees		8,229			—			8,229

Outstanding at June 30, 2006			349,760,401			39,645,974			389,406,375

(a)

Under our open market repurchase program announced in July 2002, as amended, we have been authorized to repurchase in the open market or in privately-negotiated transactions up to $2.6 billion of Common Shares through May 31, 2007. As of June 30, 2006, $296.6 million remains available to repurchase Common Shares under the program. Common Shares repurchased to fund our employee benefit programs, including the Employee Share Purchase Plan and Supplemental Retirement Savings Plan, are not considered part of the repurchase program.

We also obtained separate authorization during June 2006 to repurchase an additional $450.0 million of Common Shares in connection with our $1.5 billion exchangeable unsecured note issuance (see Item 1 — Note 7). Of the Common Shares repurchased during the second quarter 2006, 17,196,740 Common Shares were repurchased concurrently with our issuance of the $1.5 billion exchangeable unsecured notes.

Capital Improvements, Tenant Improvements and Leasing Costs


	Capital Improvements

Significant renovations and improvements, which improve or extend the useful life of our properties are capitalized and depreciated over the improvement’s useful life. We categorize these capital expenditures as follows:


	•	Capital Improvements — costs for improvements that enhance the value of the property such as lobby renovations, roof replacement, significant renovations for Americans with Disabilities Act compliance, chiller replacement and elevator upgrades.

	•	Development and Redevelopment Costs — costs associated with the development or redevelopment of a property including construction costs, tenant improvements, leasing commissions, capitalized interest and operating costs incurred while the property is made ready for its intended use.

The table below shows the costs incurred for each type of improvement.


			For the three months ended June 30,

			2006						2005

							Consolidated						Consolidated
					Consolidated		Joint				Consolidated		Joint
			Wholly-		Joint		Ventures		Wholly-		Joint		Ventures
			Owned		Ventures		(JV Partner		Owned		Ventures		(JV Partner
(Dollars in thousands)			Properties		(Our Share)		Share)		Properties		(Our Share)		Share)

Capital Improvements:
	Capital improvements		$	22,564	$	2,134	$	3,651	$	10,848	$	540	$	14
	Development costs and redevelopment costs			38,508		—		—		3,610		—		—

		Total capital improvements	$	61,072	$	2,134	$	3,651	$	14,458	$	540	$	14


			For the six months ended June 30,

			2006						2005

							Consolidated						Consolidated
					Consolidated		Joint				Consolidated		Joint
			Wholly-		Joint		Ventures		Wholly-		Joint		Ventures
			Owned		Ventures		(JV Partner		Owned		Ventures		(JV Partner
(Dollars in thousands)			Properties		(Our Share)		Share)		Properties		(Our Share)		Share)

Capital Improvements:
	Capital improvements		$	33,957	$	2,722	$	3,789	$	15,145	$	802	$	18
	Development costs and redevelopment costs			55,857		—		—		4,695		—		—

		Total capital improvements	$	89,814	$	2,722	$	3,789	$	19,840	$	802	$	18

During 2005 and the first six months of 2006, we increased our spending for capital improvements as part of a program to maintain high levels of quality in our properties. We anticipate continuing to spend at similar or higher levels in the remainder of 2006 as a result of planned projects.


	Tenant Improvements and Leasing Costs

Investments in properties related to the renovation, alteration or build-out of existing office space, as well as related leasing costs, are capitalized and depreciated over the shorter of the asset’s useful life or the lease term. These tenant improvements may include, but are not limited to, floor coverings, ceilings, walls, HVAC, mechanical, electrical, plumbing and fire protection systems.

The amounts shown below represent total tenant improvements and leasing costs for tenants who commenced occupancy during the respective period shown.


			For the three months ended June 30,

			2006				2005

			Tenant		Weighted		Tenant		Weighted
			Improvement		Average Cost		Improvement		Average Cost
			and Leasing		per Square		and Leasing		per Square
(Dollars in thousands, except per square foot amounts)			Costs		Foot Leased		Costs		Foot Leased

*Wholly-Owned Properties:*
	Renewals		$	11,024	$	8.66	$	16,685	$	11.33

	Retenanted
		Vacant for less than 12 months		26,880		19.81		29,480		19.46
		Vacant longer than 12 months		17,491		28.45		18,022		26.76

	Total Retenanted			44,371		22.50		47,502		21.71

		Total/Weighted Average		55,395		17.07		64,187		17.53

*Consolidated Joint Ventures (Our Share):*
	Renewals			754		7.07		21,783		45.72

	Retenanted
		Vacant for less than 12 months		2,745		26.92		2,597		33.80
		Vacant longer than 12 months		3,251		56.75		1,255		37.44

	Total Retenanted			5,996		37.65		3,852		34.90

		Total/Weighted Average		6,750		25.39		25,635		43.69

*Consolidated Joint Ventures (JV Partner Share):*
	Renewals			296		7.13		44		7.69

	Retenanted
		Vacant for less than 12 months		3,941		34.93		68		29.27
		Vacant longer than 12 months		1,966		44.78		48		35.90

	Total Retenanted			5,907		37.69		116		31.68

		Total/Weighted Average		6,203		31.29		160		17.10

*Unconsolidated Joint Ventures (Our Share):*
	Renewals			67		12.46		517		12.41

	Retenanted
		Vacant for less than 12 months		765		61.91		2,657		32.62
		Vacant longer than 12 months		1,164		38.38		3,238		52.52

	Total Retenanted			1,929		45.19		5,895		41.20

		Total/Weighted Average		1,996		41.49		6,412		34.71

*Totals:*
	Our share of Total/Weighted Average			64,141		18.02		96,234		21.71
	JV partners’ share of Total/Weighted Average			6,203		31.29		160		17.10

		Total/Weighted Average	$	70,344	$	18.72	$	96,394	$	21.70


			For the six months ended June 30,

			2006				2005

			Tenant		Weighted		Tenant		Weighted
			Improvement		Average Cost		Improvement		Average Cost
			and Leasing		per Square		and Leasing		per Square
(Dollars in thousands, except per square foot amounts)			Costs		Foot Leased		Costs		Foot Leased

*Wholly-Owned Properties:*
	Renewals		$	29,985	$	8.93	$	47,462	$	11.08

	Retenanted
		Vacant for less than 12 months		62,043		21.16		51,477		19.05
		Vacant longer than 12 months		28,564		26.59		44,299		28.10

	Total Retenanted			90,607		22.61		95,776		22.38

		Total/Weighted Average		120,592		16.38		143,238		16.73

*Consolidated Joint Ventures (Our Share):*
	Renewals			5,642		13.01		22,291		41.82

	Retenanted
		Vacant for less than 12 months		7,826		28.31		8,199		17.83
		Vacant longer than 12 months		4,814		50.30		1,477		33.50

	Total Retenanted			12,640		33.97		9,676		19.20

		Total/Weighted Average		18,282		22.69		31,967		30.83

*Consolidated Joint Ventures (JV Partner Share):*
	Renewals			1,940		8.23		77		7.24

	Retenanted
		Vacant for less than 12 months		6,127		31.68		226		33.96
		Vacant longer than 12 months		3,208		41.89		107		30.16

	Total Retenanted			9,335		34.58		333		32.64

		Total/Weighted Average		11,275		22.30		410		19.67

*Unconsolidated Joint Ventures (Our Share):*
	Renewals			79		7.09		1,126		10.18

	Retenanted
		Vacant for less than 12 months		947		46.06		6,619		32.49
		Vacant longer than 12 months		1,534		40.93		9,476		52.45

	Total Retenanted			2,481		42.75		16,095		41.87

		Total/Weighted Average		2,560		36.99		17,221		34.79

*Totals:*
	Our share of Total/Weighted Average			141,434		17.17		192,426		19.06
	JV partners’ share of Total/Weighted Average			11,275		22.30		410		19.67

		Total/ Weighted Average	$	152,709	$	17.46	$	192,836	$	19.07

The information above includes capital improvements incurred during the periods shown. Tenant improvements and leasing costs are reported for tenants whose lease commenced during the periods shown which is consistent with how we report our per square foot tenant improvements and leasing costs. The amounts included in the consolidated statements of cash flows represent the cash expenditures made during the period, regardless of when the leases commence. The differences between these amounts represent timing differences between the lease commencement dates and the actual cash expenditures. In addition, the figures below include expenditures for furniture, fixtures and equipment, software, leasehold improvements and other.

The reconciliation between these amounts for the consolidated properties and the amounts disclosed in the consolidated statements of cash flows is as follows:


			For the three months ended
			June 30,

(Dollars in thousands)			2006		2005

Capital improvements:
	Wholly-owned properties		$	22,564	$	10,848
	Consolidated joint ventures (our share)			2,134		540
	Consolidated joint ventures (JV partner share)			3,651		14
Tenant improvements and leasing costs:
	Wholly-owned properties			55,395		64,187
	Consolidated joint ventures (our share)			6,750		25,635
	Consolidated joint ventures (JV partner share)			6,203		160
Expenditures for corporate furniture, fixtures and equipment, software, leasehold improvements and other				5,144		5,047

	Subtotal			101,841		106,431
Development and redevelopment costs				38,508		3,610
Timing differences				32,112		(6,103	)

	Total capital improvements, tenant improvements and leasing costs		$	172,461	$	103,938

Selected items from the consolidated statements of cash flows:
	Capital and tenant improvements (including development costs)		$	141,822	$	74,557
	Lease commissions and other costs			30,639		29,381

		Total	$	172,461	$	103,938


			For the six months ended
			June 30,

(Dollars in thousands)			2006		2005

Capital improvements:
	Wholly-owned properties		$	33,957	$	15,145
	Consolidated joint ventures (our share)			2,722		802
	Consolidated joint ventures (JV partner share)			3,789		18
Tenant improvements and leasing costs:
	Wholly-owned properties			120,592		143,238
	Consolidated joint ventures (our share)			18,282		31,967
	Consolidated joint ventures (JV partner share)			11,275		410
Expenditures for corporate furniture, fixtures and equipment, software, leasehold improvements and other				9,754		7,983

	Subtotal			200,371		199,563
Development and redevelopment costs				55,857		4,695
Timing differences				31,782		455

	Total capital improvements, tenant improvements and leasing costs		$	288,010	$	204,713

Selected items from the consolidated statements of cash flows:
	Capital and tenant improvements (including development costs)		$	223,425	$	150,963
	Lease commissions and other costs			64,585		53,750

		Total	$	288,010	$	204,713

Developments in Process

We own 100% of the following properties which are under development. Our developments consist of new construction as well as a significant renovation of an existing building. Development costs are primarily funded by our lines of credit. Specifically identifiable direct acquisition, development and construction costs are capitalized, including salaries and related payroll costs, real estate taxes and interest incurred in developing the property. All figures stated below are as of June 30, 2006, unless otherwise noted.


		Estimated
		Placed in								Costs		Total
		Service				Number of		Square		Incurred to		Estimated		Percentage
Property		Date(a)		Location		Buildings		Feet		Date(b)		Costs(c)		Leased

										(Dollars in thousands)
Kruse Oaks II(d)			Q4 2006		Portland, OR		1		102,000	$	11,243	$	20,119		6	%
Bridge Pointe Corporate Center III			Q4 2006		San Diego, CA		2		150,000		22,338		35,967		0	%
1095 Avenue of the Americas(e)			Q3 2007		New York, NY		1		1,023,998		536,604		849,753		(e)
Foundry Square I (Barclays)			Q4 2007		San Francisco, CA		1		335,890		25,829		144,789		96	%
City Center Plaza West			Q1 2008		Bellevue, WA		1		572,000		16,614		196,242		0	%
Fountaingrove II			Q2 2006		Santa Rosa, CA		1		42,102		9,587		11,698		31	%

	Total						7		2,225,990	$	622,215	$	1,258,568		15	%


(a)		The Estimated Placed in Service Date represents the date the certificate of occupancy was obtained or is currently anticipated to be obtained. Subsequent to obtaining the certificate of occupancy, the property will undergo alease-up period.

(b)		The Costs Incurred to Date are presented in the balance sheet as follows:


		(Dollars in thousands)

Developments in process		$	611,173
Deferred leasing costs and other related intangibles recorded at acquisition			11,042

	Total costs incurred to date	$	622,215


(c)		The Total Estimated Costs include the acquisition cost of the land and building in addition to the costs to develop the property. The Total Estimated Costs are subject to change upon, or prior to, the completion of the development and include amounts required tolease-up the property. The Total Estimated Costs for City Center Plaza West have been updated subsequent to June 30, 2006, based on revised cost estimates.

(d)		We lease the land underlying this development from a third party. We have the right to acquire this land under certain conditions. Total Estimated Costs do not reflect potential costs to acquire the land at a future date.

(e)		On September 29, 2005, we acquired 79% of the square feet of 1095 Avenue of the Americas. Verizon, the sole tenant, occupied 96.8% of the portion of the property acquired by us at its acquisition. Verizon has been moving out in phases throughout 2006 and has vacated more than 90% of that space as of June 30, 2006. We have begun to redevelop the property as Verizon has vacated the premises, and we anticipate completing the redevelopment in Q3 2007.

In addition to the developments described above, we own or partially own various land parcels available for development. These sites represent possible future development of up to approximately ten million square feet of office space. These potential developments will be impacted by the timing and likelihood of success of the entitlement processes, both of which are uncertain. These various sites include: Russia Wharf, Boston, MA; Prominence in Buckhead, Atlanta, GA; Perimeter Center, Atlanta, GA; Tabor Center, Denver, CO; Bridge Pointe Corporate Center, San Diego, CA; La Jolla Center, San Diego, CA; Orange Center, Orange, CA; Skyport Plaza, San Jose, CA; Station Landing, Walnut Creek, CA; NE 8th Street, Bellevue, WA; 175 Wyman, Waltham, MA; Parkshore Plaza, Folsom, CA; Commerce Plaza, Oakbrook, IL; Pointe O’Hare Land, Rosemont, IL; Kruse Oaks, Portland, OR; Reston Town Center, Reston, VA; and First & Main, Portland, OR.

Inflation

Substantially all of our office leases require the tenant to pay, as additional rent, their respective portion of real estate taxes and operating expenses. In addition, many of our office leases provide for fixed increases in base rent or escalations indexed to the Consumer Price Index or other measures. We believe that a significant portion of increases in property operating expenses will be offset, in part, by expense reimbursements and contractual rent increases described above.

Cash Flows

Throughout this MD&A, we have discussed the significant transactions that impacted our cash flows. Our consolidated statements of cash flows include cash flows from continuing and discontinued operations. Cash provided by operating activities from discontinued operations was $8 million and $71 million for the six months ended June 30, 2006 and 2005, respectively. The properties included in discontinued operations for the six months ended June 30, 2006 include dispositions that occurred during the first six months of 2006, while the properties included in discontinued operations for the six months ended June 30, 2005 included those same properties and all 2005 dispositions. We expect to continue, as market conditions permit, to invest a portion of the capital from our dispositions into acquisitions in targeted growth markets. We may continue to use disposition proceeds, in part, for capital spending in our existing portfolio, debt repayments, distributions to our shareholders and unitholders, and repurchases of our Common Shares and Units. As a result of the significant level of dispositions, we have experienced and may continue to experience earnings dilution. Ultimately, the amount and duration of this dilution will depend upon the manner in which we redeploy our capital over time. We believe short-term earnings dilution, if any, is outweighed by our improved prospects for long-term growth. Except as disclosed on our consolidated statements of cash flows, there was no other material impact on cash flows used for or provided by investing activities and cash flows used for financing activities from discontinued operations for either period presented.

The table below summarizes the changes in our cash and cash equivalents as a result of operating, investing and financing activities for the following periods:


		For the six months ended
		June 30,

(Dollars in thousands)		2006			2005

Cash and cash equivalents at the beginning of the period		$	78,164		$	107,126
	Net cash provided by operating activities		529,266			468,328
	Net cash (used for) provided by investing activities		(100,868	)		935,210
	Net cash (used for) financing activities		(353,934	)		(894,667	)

Cash and cash equivalents at the end of the period		$	152,628		$	615,997


	Operating Activities

Cash provided by operating activities depends primarily on cash received from tenants in our properties in accordance with their lease obligations, less payments for our operating and other expenses. The increase in net cash provided by operating activities (which includes amounts from both continuing and discontinued operations) for the six months ended June 30, 2006 is primarily due to a decrease in prepaid expenses and other assets, the impact of the JV Consolidation and the collection of tenant and other receivables for operating expense reimbursements that were due from tenants, partially offset by the impact of discontinued operations. The decrease in prepaid expenses and other assets primarily relates to prepaid real estate taxes and a receivable from a tenant that was recorded in the first quarter 2005 and subsequently collected in September 2005. As previously discussed within this MD&A, we consolidated the assets, liabilities and results of operations of 18 joint ventures that we previously accounted for under the equity method. Prior to consolidation, we reflected the distributions from unconsolidated joint ventures in cash provided by operating activities. Beginning in 2006, the cash flows from operating activities for these joint ventures is reflected in

virtually all captions within the operating activities section, representing both our share and our minority interest partners’ share. The distributions to our minority interest partners are included in financing activities.


	Investing Activities

Net cash used for or provided by investing activities reflects the net impact of acquisitions and dispositions of properties, expenditures for capital and tenant improvements (including development costs) and lease costs. It also includes cash associated with the JV Consolidation and decreases in escrow deposits and restricted cash which primarily relate to the release of escrow funds from property sales.


	Financing Activities

Net cash used for financing activities generally includes cash provided by or used for debt transactions, distributions to our common and preferred shareholders and repurchases of our securities.


	Analysis of Selected Balance Sheet Items

As discussed in the Operating Results section of this MD&A, our consolidated balance sheet has changed significantly due to the JV Consolidation. The table below contains other selected balance sheet items that have changed significantly from December 31, 2005 to June 30, 2006.


	June 30,		December 31,
(Dollars in thousands)	2006		2005		Change

Investments in real estate held for sale, net of accumulated depreciation	$	—	$	75,211	$	(75,211	)
Escrow deposits and restricted cash	$	230,170	$	38,658	$	191,512
Deferred financing costs	$	88,237	$	58,809	$	29,428
Deferred leasing costs and other related intangibles	$	665,429	$	522,926	$	142,503
Prepaid expenses and other assets	$	245,388	$	303,181	$	(57,793	)
Distribution payable	$	131,298	$	3,736	$	127,562


	Investment in Real Estate Held for Sale, Net of Accumulated Depreciation

In accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment and Disposal of Long-Lived Assets(“FAS 144”), we have classified certain properties as held for sale. Properties held for sale are reflected in our consolidated balance sheets at the lower of their historical cost or their fair value less cost to sell (determined based on the estimated sales prices and estimated transaction costs). The properties’ net income and provision for losses, if any, are included in discontinued operations (see Item 1 — Note 4). At June 30, 2006, we had no properties held for sale. The December 31, 2005 balance includes amounts for the three properties that were held for sale at December 31, 2005 (which were sold in the first quarter 2006).


	Escrow Deposits and Restricted Cash

The increase in escrow deposits and restricted cash was primarily the result of increased escrow deposits related to the sales of two properties during the second quarter 2006 that were structured as tax-deferred exchanges and the deposit for the acquisition of 1540 Broadway which closed in July 2006.


	Deferred Financing Costs

The increase in deferred financing costs was primarily the result of loan costs related to the $1.5 billion exchangeable senior unsecured notes issued during the second quarter 2006.


	Deferred Leasing Costs and Other Related Intangibles

The increase in deferred leasing costs and other related intangibles was primarily the result of the JV Consolidation. In addition, we incurred leasing costs during 2006 for new and renewal leases and recorded deferred leasing costs in accordance with Statement of Financial Accounting Standards No. 141,Business Combinations(“FAS 141”).


	Prepaid Expenses and Other Assets

The decrease in prepaid expenses and other assets was primarily the result of the repayment of the $40.7 million note receivable, net of deferred gain, representing a bridge loan that we made to the buyer of an office property and a decrease in prepaid real estate taxes.


	Distribution Payable

The increase in distribution payable was primarily the result of the accrual for Common Share and Unit distributions declared during the second quarter but not paid until the third quarter.


IV.	Critical Accounting Policies and Estimates

Refer to our 2005 Annual Report on Form 10-K for a discussion of critical accounting policies, which includes revenue recognition including allowance for doubtful accounts, impairment of long-lived assets, depreciation and amortization, insurance and the fair value of financial instruments.

Refer to Item 1 — Note 2 for a discussion of the impact of new accounting standards.

Related Party Transactions

See Item 1 — Note 12 for a discussion of related party transactions.

Subsequent Events

See Item 1 — Note 14 for events that occurred subsequent to June 30, 2006 through August 1, 2006.


V.	Funds From Operations (“FFO”)

FFO is a non-GAAP financial measure. We believe FFO, as defined by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), to be an appropriate measure of performance for an equity REIT, for the reasons, and subject to the qualifications, specified below.

The following tables reflect the reconciliation of FFO to net income (loss), the most directly comparable GAAP measure, for the periods presented:


			For the three months ended June 30,

(Dollars in thousands, except per share amounts)			2006				2005

Reconciliation of net income (loss) to FFO(a):
Net income (loss)				$	96,558			$	(196,741	)
Adjustments:
	Plus depreciation and amortization:
		Included in income from continuing operations and discontinued operations			229,491				202,980
		Included in income from investments in unconsolidated joint ventures			2,888				12,616
		Allocated to minority interests in partially owned properties			(16,930	)			(1,416	)
		Non-real estate related depreciation and amortization			(4,268	)			(3,422	)
	Less net gain on sales of real estate:
		Included in income from continuing operations and discontinued operations			(83,096	)			(91,971	)
		Included in income from investments in unconsolidated joint ventures(b)			91				(17,376	)
		Allocated to minority interests in partially owned properties			—				29,699
Less minority interests in EOP Partnership share of the above adjustments					(12,597	)			(13,158	)

FFO					212,137				(78,789	)
Preferred distributions					(8,701	)			(8,701	)

FFO available to common shareholders — basic				$	203,436			$	(87,490	)

Net income (loss) available to common shareholders per share — basic				$	0.24			$	(0.51	)

FFO available to common shareholders per share — basic				$	0.56	(c)		$	(0.22	)(c)

		��
	Net Income			FFO			Net Loss			FFO

Adjustments to arrive at net income (loss) and FFO available to common shareholders:
Net income (loss) and FFO	$	96,558		$	212,137		$	(196,741	)	$	(78,789	)
Preferred distributions		(8,701	)		(8,701	)		(8,701	)		(8,701	)

Net income (loss) and FFO available to common shareholders		87,857			203,436			(205,442	)		(87,490	)
Net income (loss) allocated to minority interests in EOP Partnership		9,675			9,675			(23,677	)		(23,677	)
Minority interests in EOP Partnership share of the above adjustments		—			12,597			—			13,158

Net income (loss) and FFO available to common shareholders — diluted	$	97,532		$	225,708		$	(229,119	)	$	(98,009	)

Weighted average Common Shares and dilutive potential common shares outstanding		408,494,060			408,494,060			455,609,570			455,609,570

Net income (loss) and FFO available to common shareholders per share — diluted	$	0.24		$	0.55	(c)	$	(0.50	)	$	(0.22	)(c)


		Common Shares and common share equivalents

Weighted average Common Shares outstanding (used for both net income (loss) and FFO basic per share calculation)			363,933,914	406,164,577
Effect of dilutive potential common shares:
	Units		40,075,717	45,563,665
	Share options and restricted shares		4,484,429	3,881,328

Weighted average Common Shares and dilutive potential common shares used for net income (loss) available to common shareholders and the calculation of FFO available to common shareholders			408,494,060	455,609,570


(a)		FFO is a non-GAAP financial measure. The most directly comparable GAAP measure is net income (loss), to which it is reconciled. See definition below.

(b)		The loss for the three months ended June 30, 2006 represents an adjustment to the gain previously recorded on properties sold in prior periods.

(c)		FFO for the three months ended June 30, 2006 and 2005 includes $0.2 million and $367.0 million, respectively, of non-cash impairment charges and losses on properties sold and properties held for sale, which is equivalent to $0.00 and $0.81 per share on a diluted basis, respectively. These charges are not added back to net income (loss) when calculating FFO.


			For the six months ended June 30,

			2006				2005
(Dollars in thousands, except per share amounts)

Reconciliation of net income (loss) to FFO(a):
Net income (loss)				$	150,879			$	(87,170	)
Adjustments:
	Plus depreciation and amortization:
		Included in income from continuing operations and discontinued operations			459,305				404,884
		Included in income from investments in unconsolidated joint ventures			5,661				25,048
		Allocated to minority interests in partially owned properties			(34,139	)			(2,979	)
		Non-real estate related depreciation and amortization			(8,395	)			(7,022	)
	Less net gain on sales of real estate:
		Included in income from continuing operations and discontinued operations			(118,679	)			(116,216	)
		Included in income from investments in unconsolidated joint ventures(b)			91				(17,376	)
		Allocated to minority interests in partially owned properties			—				29,699
Less minority interests in EOP Partnership share of the above adjustments					(30,311	)			(32,346	)

FFO					424,412				196,522
Preferred distributions					(17,402	)			(17,402	)

FFO available to common shareholders — basic				$	407,010			$	179,120

Net income (loss) available to common shareholders per share — basic				$	0.36			$	(0.26	)

FFO available to common shareholders per share — basic				$	1.11	(c)		$	0.44	(c)


	Net Income			FFO			Net Loss			FFO

Adjustments to arrive at net income (loss) and FFO available to common shareholders:
Net income (loss) and FFO	$	150,879		$	424,412		$	(87,170	)	$	196,522
Preferred distributions		(17,402	)		(17,402	)		(17,402	)		(17,402	)

Net income (loss) and FFO available to common shareholders		133,477			407,010			(104,572	)		179,120
Net income (loss) allocated to minority interests in EOP Partnership		14,791			14,791			(11,923	)		(11,923	)
Minority interests in EOP Partnership share of the above adjustments		—			30,311			—			32,346

Net income (loss) and FFO available to common shareholders — diluted	$	148,268		$	452,112		$	(116,495	)	$	199,543

Weighted average Common Shares and dilutive potential common shares outstanding		411,497,236			411,497,236			454,101,167			454,101,167

Net income (loss) and FFO available to common shareholders per share — diluted	$	0.36		$	1.10	(c)	$	(0.26	)	$	0.44	(c)


		Common Shares and common share equivalents

Weighted average Common Shares outstanding (used for both net income (loss) and FFO basic per share calculation)			366,488,855	404,514,824
Effect of dilutive potential common shares:
	Units		40,846,328	46,366,561
	Share options and restricted shares		4,162,053	3,219,782

Weighted average Common Shares and dilutive potential common shares used for net income (loss) available to common shareholders and the calculation of FFO available to common shareholders			411,497,236	454,101,167


(a)		FFO is a non-GAAP financial measure. The most directly comparable GAAP measure is net income (loss), to which it is reconciled. See definition below.

(b)		The loss for the six months ended June 30, 2006 represents an adjustment to the gain previously recorded on properties sold in prior periods.


(c)		FFO for the six months ended June 30, 2006 and 2005 includes $1.2 million and $380.6 million, respectively, of non-cash impairment charges and losses on properties sold and properties held for sale, which is equivalent to $0.00 and $0.84 per share on a diluted basis, respectively. These charges are not added back to net income (loss) when calculating FFO.


	FFO Definition:

FFO is defined as net income (loss), computed in accordance with accounting principles generally accepted in the United States (“GAAP”), excluding gains from sales of properties (but not losses from sales of properties, impairments or provisions for losses on properties held for sale), plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. We believe that FFO is helpful to investors as one of several measures of the performance of an equity REIT. We further believe that by excluding the effect of depreciation, amortization and gains from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. Investors should review FFO, along with GAAP net income (loss) when trying to understand an equity REIT’s operating performance. We compute FFO in accordance with our interpretation of the standards established by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other equity REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. FFO does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered as an alternative to net income (loss), determined in accordance with GAAP, as an indication of our financial performance, or to cash flow from operating activities, determined in accordance with GAAP, as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

Quantitative and qualitative disclosures about market risk are incorporated herein by reference from Item 2.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) are effective as of such date to ensure that information required to be disclosed by us in our Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.	Legal Proceedings.

Legal proceedings are incorporated herein by reference from “Item 1. — Financial Statements — Note 13 — Commitments and Contingencies.”


Item 1A.	Risk Factors.

There have been no material changes to the risk factors included in our Form 10-K filed on March 15, 2006, except for the risk factor entitled “We were a net seller of real estate in 2005, which will further reduce our income from continuing operations and funds from operations. Future disposition activity may also result in gains or losses on sales of real estate and impairment charges,” which is replaced by the following risk factor.

We were a net seller of real estate in 2005, which has reduced our income from continuing operations and funds from operations. Future disposition activity may also result in gains or losses on sales of real estate, impairment charges and earnings dilution.

We were a net seller of real estate in 2003, a net buyer in 2004 and a net seller of real estate in 2005. We expect to engage in significant additional disposition activity in 2006, continuing into 2007, which will further reduce our income from continuing operations and funds from operations and may also result in gains or losses on sales of real estate, impairment charges and earnings dilution. The impact from such dispositions on our financial condition and results of operations will depend, to a great extent, on how we utilize the proceeds of such dispositions and the timing of such utilization. The actual extent of our future disposition activities will depend on various factors, certain of which are beyond our control, including market conditions.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

Under our repurchase program announced in July 2002, as amended, we have been authorized to repurchase in the open market or in privately-negotiated transactions up to $2.6 billion of our Common Shares through May 31, 2007. We also obtained separate authorization during June 2006 to repurchase an additional $450.0 million of our Common Shares in a privately-negotiated transaction concurrently with our issuance of $1.5 billion of exchangeable senior unsecured notes (see Part 1 — Financial Information — Item 1. Financial Statements — Note 7). In addition, we announced in May 2004 that we may repurchase Common Shares from time to time to fund our employee benefit programs, including the 1997 Employee Share Purchase Plan and Supplemental Retirement Savings Plan (“SERP”). Such repurchases are not considered part of our open market repurchase program. The following table summarizes repurchases of our Common Shares during the second quarter of 2006:


						Total Number of
						Shares Purchased as		Dollar Value of Shares
						Part of Publicly		That May Yet be
		Total Number of		Average Price Paid		Announced Plans or		Purchased Under the
Period		Shares Purchased (a)		Per Share (a)		Programs (a)		Plans or Programs (b)

April 1 – 30			2,118,400	$	32.93		2,118,400	$	500,048,520
May 1 – 31			799,101		33.13		799,101	$	474,021,722
June 1 – 30			17,410,208		36.18		17,410,208	$	296,645,088

	Second quarter 2006		20,327,709	$	35.72		20,327,709


(a)		Of the Common Shares repurchased during the second quarter 2006, 7,812,734 represent Common Shares repurchased under our open market repurchase program, 12,427,506 represent Common Shares repurchased under separate authorization obtained in connection with our issuance of $1.5 billion of exchangeable senior unsecured notes and 46,739 represent Common Shares repurchased under our SERP. In addition, 30,641 represent Common Shares repurchased in the open market to fund Common Shares purchased under our 1997 Employee Share Purchase Plan and 8,229 represent Common Shares


	repurchased in the open market to fund fees paid in Common Shares to each of our non-employee trustees, except Mr. Zell. The remaining 1,860 Common Shares repurchased represent Common Shares surrendered to Equity Office to satisfy tax withholding obligations in connection with the vesting of restricted stock.


(b)		This dollar value relates to the $2.6 billion open market repurchase program only. The number of Common Shares that may yet be repurchased in the open market to fund shares purchased under our 1997 Employee Share Purchase Plan, as amended, was 1,321,249 at April 30, 2006 and May 31, 2006 and 1,290,608 at June 30, 2006.

The above table excludes the cash redemption by EOP Partnership of 530,220 partnership units in EOP Partnership (“Units”) at an average purchase price of $32.58 per unit for an aggregate dollar value of $17.3 million.


Item 4.	Submission of Matters to a Vote of Security Holders.


	(a)	The annual meeting of shareholders of Equity Office was held on May 24, 2006.

	(b)	Marilyn A. Alexander, Thomas E. Dobrowski, William M. Goodyear, James D. Harper, Jr., Richard D. Kincaid, Sheli Z. Rosenberg, Stephen I. Sadove, Sally Susman, Jan H.W.R. van der Vlist and Samuel Zell were reelected as trustees at the meeting.

	(c)	The following votes were taken in connection with the election of trustees at the meeting:


Trustee	Votes For		Withhold Authority

Marilyn A. Alexander		312,522,062		3,979,120
Thomas E. Dobrowski		312,555,221		3,945,961
William M. Goodyear		312,560,096		3,941,086
James D. Harper, Jr.		312,529,963		3,971,219
Richard D. Kincaid		311,525,909		4,975,273
Sheli Z. Rosenberg		310,909,545		5,591,637
Stephen I. Sadove		309,480,886		7,020,296
Sally Susman		312,526,818		3,974,364
Jan H.W.R. van der Vlist		312,175,100		4,326,082
Samuel Zell		305,726,919		10,774,263


	The proposal to ratify the Audit Committee’s appointment of Ernst & Young LLP as independent auditors for 2006 was approved. The following votes were taken in connection with this proposal:


Proposal	Votes For		Votes Against		Abstentions		Broker Non-Votes

Ratification of the Audit Committee’s appointment of Ernst & Young LLP as independent auditors for 2006		311,217,306		3,430,740		1,853,136		—

(d) Not applicable


Item 6.	Exhibits.

The exhibits required by this item are set forth on the Exhibit Index attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	EQUITY OFFICE PROPERTIES TRUST

Date: August 8, 2006


	/s/ RICHARD D. KINCAID


	Richard D. Kincaid
	President and Chief Executive Officer

Date: August 8, 2006


	/s/ MARSHA C. WILLIAMS

	Marsha C. Williams
	Executive Vice President and
	Chief Financial Officer

EXHIBIT INDEX


Exhibit
No.			Description	Location

	4	.1	Second Supplemental Indenture, dated as of June 27, 2006, among EOP Partnership, Equity Office and U.S. Bank National Association (formerly U.S. Bank Trust National Association)	Incorporated by reference to Exhibit 4.1 to EOP Partnership’s and Equity Office’s Current Report on Form 8-K filed with the SEC on June 28, 2006
	4	.2	Form of 4.00% exchangeable senior note due 2026 (attached as Exhibit A to the Second Supplemental Indenture filed as Exhibit 4.1 hereto)	Incorporated by reference to Exhibit 4.2 to EOP Partnership’s and Equity Office’s Current Report on Form 8-K filed with the SEC on June 28, 2006
	4	.3	Registration Rights Agreement, dated as of June 27, 2006, among EOP Partnership, Equity Office and Merrill Lynch, as representative of the Initial Purchasers	Incorporated by reference to Exhibit 4.3 to EOP Partnership’s and Equity Office’s Current Report on Form 8-K filed with the SEC on June 28, 2006
	10	.1	Common Share Delivery Agreement dated as of June 27, 2006 between EOP Partnership and Equity Office	Incorporated by reference to Exhibit 10.1 to EOP Partnership’s and Equity Office’s Current Report on Form 8-K filed with the SEC on June 28, 2006
	10	.2	Amendment No. 1 made as of June 21, 2006 to Amended and Restated Credit Agreement dated December 9, 2005, by and among EOP Operating Limited Partnership, Equity Office Properties Trust, the Banks listed therein, Wachovia Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank, N.A., as Documentation Agent.	Incorporated by reference to Exhibit 10.1 to EOP Partnership’s and Equity Office’s Current Report on Form 8-K filed with the SEC on July 13, 2006
	10	.3	Amendment No. 2 made as of July 7, 2006 to Amended and Restated Credit Agreement dated December 9, 2005, by and among EOP Operating Limited Partnership, Equity Office Properties Trust, the Banks listed therein, Wachovia Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank, N.A., as Documentation Agent.	Incorporated by reference to Exhibit 10.2 to EOP Partnership’s and Equity Office’s Current Report on Form 8-K filed with the SEC on July 13, 2006
	10	.4*	Summary of Trustee Compensation Agreement effective as of January 1, 2006 between Samuel Zell and Equity Office	Filed herewith
	12	.1	Statement of Computation of Ratio of Earnings to Fixed Charges	Filed herewith
	31	.1	Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	Filed herewith
	31	.2	Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	Filed herewith
	32	.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith


*	Represents a management contract or compensatory plan, contract or agreement.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Equity Office Properties Trust (EOP) Inactive 10-Q2006 Q2 Quarterly report

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