First Potomac Realty Trust 10K 2006 Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)


MARYLAND		37-1470730
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7600 Wisconsin Avenue, 11^th Floor
Bethesda, MD
(Address of principal executive offices)

20814
(Zip Code)

(301) 986-9200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange upon Which Registered

Common Shares of beneficial interest, $0.001 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. YESo NOþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YESo NOþ

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. YESþ NOo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.þ

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).

o Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act) YESo NOþ

The aggregate market value of the registrant’s Common Shares of beneficial interest, $0.001 par value per share, at June 30, 2006, held by those persons deemed by the registrant to be non-affiliates was approximately $584,373,599.

As of March 15, 2007, there were 24,127,449 Common Shares of beneficial interest, par value $0.001 per share, outstanding.

Documents Incorporated By Reference

Portions of the Company’s definitive proxy statement relating to the 2007 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K as indicated herein.

FIRST POTOMAC REALTY TRUST
FORM 10-K

INDEX


		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		20
Item 2.	Properties		21
Item 3.	Legal Proceedings		22
Item 4.	Submission of Matters to a Vote of Security Holders		22

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
Item 6.	Selected Financial Data		25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 8.	Financial Statements and Supplementary Data		45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		45
Item 9A.	Controls and Procedures		45
Item 9B.	Other Information		45

Part III
Item 10.	Directors, Executive Officers and Corporate Governance		47
Item 11.	Executive Compensation		47
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		47
Item 13.	Certain Relationships and Related Transactions, and Director Independence		47
Item 14.	Principal Accounting Fees and Services		47

Part IV
Item 15.	Exhibits, Financial Statement Schedules		48

	Signatures		51

PART I

ITEM 1. BUSINESS

Overview

First Potomac Realty Trust (the “Company”) is a self-managed, self-administered Maryland real estate investment trust that focuses on owning, developing and operating industrial and flex properties in the Washington, D.C. metropolitan area and other major markets in Virginia and Maryland, which we collectively refer to as the southern Mid-Atlantic region. The Company has elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code (the “Code”).

The Company was formed in July 2003 to be the successor general partner of First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company owns all of its properties and conducts its business through the Operating Partnership. The Company is the sole general partner of, and owns a 96.2% interest in, the Operating Partnership.

References in this Annual Report on Form 10-K to “we,” “our” or “First Potomac,” refer to First Potomac Realty Trust and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company focuses on acquiring properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company has also begun developing assets adjacent to buildings that it owns in some of its stronger submarkets. The Company’s portfolio contains a mix of single-tenant and multi-tenant industrial and flex properties. Industrial properties generally are used as warehouse, distribution and manufacturing facilities, while flex properties combine office building features with industrial property space. As of December 31, 2006, the Company owned 65 properties totaling approximately 10.4 million square feet, and the Company’s properties were approximately 88.0% leased to a total of 599 tenants. The Company’s largest tenant is the U.S. Government, which leases approximately 725,343 square feet under 27 leases, representing approximately 9.4% of the Company’s annualized base rent as of December 31, 2006.

Narrative Description of Business

The Operating Partnership was formed in 1997 to utilize management’s knowledge of and experience in the southern Mid-Atlantic real estate market to seek to create the leading industrial and flex property owner in the region. The Company believes that the large number of properties meeting its investment criteria and the fragmented ownership of industrial and flex property in the region creates an opportunity for it to achieve this goal. According to data from CoStar Group, a real estate market research firm, at December 31, 2006, First Potomac is the largest owner of flex and industrial properties in the Washington, D.C. metropolitan area with a 2.9% share of the market.

The Company’s acquisition strategies focus on industrial and flex properties in its target markets that generally meet the following investment criteria:

	§		established locations;

	§		below-market rents; and/or

	§		absentee ownership.

The Company also targets properties that it believes can be converted, in whole or in part, to a higher use. With flex property in particular, the Company has found that, over time, the property can be improved by converting space that is primarily warehouse space into space that contains more office use. Because office rents are generally higher than warehouse rents, the Company has been able to add revenue and value by converting space as market demand allows.

The Company uses its contacts, relationships and local market knowledge to identify and opportunistically acquire industrial and flex properties in its target markets. The Company also believes that its reputation for professional property management allows it to attract high-quality tenants to the properties that it acquires, enabling the Company to increase the properties’ profitability and value.

Significant 2006 Developments

During 2006, we completed the following:

	§		Acquired 14 properties totaling 2.2 million square feet for a contractual purchase price of approximately $233 million;

	§		Sold one property for $15.4 million;

	§		Reached a total portfolio size of over 10 million square feet;

	§		Raised net proceeds of approximately $90 million through an underwritten public offering of 3,450,000 common shares at a price of $27.46 per share;

	§		Entered into a private placement of unsecured Senior Notes totaling $75 million. The transaction was comprised of $37.5 million in 7-year Series A Senior Notes bearing a fixed interest rate of 6.41% and $37.5 million in 10-year Series B Senior Notes bearing a fixed interest rate of 6.55%;

	§		Issued $125 million of Exchangeable Senior Notes for net proceeds of approximately $122.2 million, net of discount; and

	§		Entered into an amendment and restatement to our unsecured revolving credit facility, which increased the permitted borrowings from $100 million to $125 million with the potential to increase the size of the facility to up to $225 million.

Total assets at December 31, 2006 were $994.6 million compared to $727.8 million at December 31, 2005.

Competitive Advantages

The Company believes that its business strategy and operating model distinguish it from other owners, operators and acquirers of real estate in a number of ways, including:

	§		Experienced Management Team.The Company’s Executive Officers average more than 20 years of real estate experience in the Washington, D.C. metropolitan area.

	§		Focused Strategy.The Company is the only publicly traded REIT focused exclusively on industrial and flex properties in the southern Mid-Atlantic region, one of the largest, most stable markets for assets of this type.

	§		Value-Added Management Approach.Through the Company’s hands-on approach to management, leasing, renovation and repositioning, the Company endeavors to add significant value to the properties that it acquires from absentee institutional landlords and smaller, less sophisticated owners by improving tenant quality and increasing occupancy rates and net rent per square foot.

	§		Strong Market Dynamics.The Company’s target markets exhibit stable rental rates, frequent acquisition opportunities, and strong tenant bases, according to Delta Associates, a market research firm. The Company believes that additional U.S. Government spending for national defense and homeland security will continue to increase demand for industrial and flex space in its markets by both U.S. Government agencies and government contractors working on related projects.

	§		Local Market Knowledge.The Company has established relationships with local owners, the brokerage community, prospective tenants and property managers in its markets. The Company believes these relationships enhance its efforts to locate attractive acquisition opportunities and lease space in its properties.

	§		Favorable Lease Terms.As of December 31, 2006, 456 of the Company’s 741 leases (representing 71.6% of the leased space in our portfolio) were triple net leases, under which tenants are contractually obligated to reimburse the Company for virtually all costs of occupancy, including property taxes, utilities, insurance and maintenance. In addition, the Company’s leases generally provide for rent growth through contractual rent increases.

	§		Tenant Mix.As of December 31, 2006, the Company’s tenants included the U.S. Government (9.4% of its annualized base rent), government contractors (13.7%), Fortune 500 companies (15.6%) and more than 530 additional smaller tenants, most of which hold leases covering less than 15,000 square feet (61.3%). The Company believes its current tenant base provides a desirable mix of stability, diversity and growth potential.

Executive Officers of the Company

The following table sets forth information with respect to the Company’s executive officers:


Name	Age		Position
Douglas J. Donatelli		45	President, Chief Executive Officer and Trustee Douglas J. Donatelli is one of the co-founders of the Company and has served as President, Chief Executive Officer and Trustee since its predecessor’s founding in 1997. Prior to 1997, Mr. Donatelli served as Executive Vice President of Donatelli & Klein, Inc. (“D&K”) located in Washington, D.C. and President of D&K Management, D&K’s property management subsidiary, where he oversaw all of the major operational aspects of D&K’s property ownership activities. From 1985 to 1991, Mr. Donatelli also served as President of D&K Broadcasting, a communications-related subsidiary of D&K that owned Fox-network affiliated television stations. Mr. Donatelli holds a Bachelor of Science degree in Business Administration from Wake Forest University and is a member of the Urban Land Institute and National Association of Real Estate Investment Trusts.

Barry H. Bass		43	Executive Vice President, Chief Financial Officer Barry H. Bass served as Senior Vice President and Chief Financial Officer since joining the Company in 2002 and was elected Executive Vice President in February 2005. From 1999 to 2002, Mr. Bass was a senior member of the real estate investment banking group of Legg Mason Wood Walker, Inc. where he advised a number of public and private real estate companies in their capital raising efforts. From 1996 to 1999, Mr. Bass was Executive Vice President of the Artery Organization in Bethesda, Maryland, an owner and operator of real estate assets in the Washington, D.C. area, and prior to that a Vice President of Winthrop Financial Associates, a real estate firm with over $6 billion of assets under management, where he oversaw the Company’s asset management group. Mr. Bass is a cum laude graduate of Dartmouth College and is a member of the National Association of Real Estate Investment Trusts.

Joel F. Bonder		58	Executive Vice President, General Counsel and Secretary Joel F. Bonder has served as Executive Vice President, General Counsel and Secretary since joining the Company in January 2005. He was General Counsel of Apartment Investment and Management Company (AIMCO), one of the largest public apartment REITs in the country, from 1997 to 2002, and General Counsel of National Corporation for Housing Partnerships, the largest private owner of FHA-insured multifamily housing, and its parent, NHP Incorporated, from 1994 to 1997. Mr. Bonder was Counsel at Bryan Cave LLP from 1993 to 1994 in Washington, D.C., where he specialized in corporate, real estate and project finance. Mr. Bonder is a graduate of the University of Rochester and received his JD degree from Washington University School of Law. He is admitted to the bar in the District of Columbia, Massachusetts and Illinois.

James H. Dawson		49	Executive Vice President, Chief Operating Officer James H. Dawson served as Senior Vice President and Chief Operating Officer of the Company since 1998 and was elected Executive Vice President in February 2005. Mr. Dawson has coordinated the Company’s management and leasing activities since joining the Company in 1998. Prior to joining the Company, Mr. Dawson spent 18 years with Reico Distributors, a large user of industrial and flex product in the Baltimore/Washington corridor. At Reico, he was responsible for the construction and management of the firm’s warehouse portfolio. Mr. Dawson received his Bachelor of Science degree in Business Administration from James Madison University and is a member of the Northern Virginia Board of Realtors, the Virginia State Board of Realtors and the Institute of Real Estate Management.


Name	Age		Position
Nicholas R. Smith		42	Executive Vice President, Chief Investment Officer Nicholas R. Smith is one of the co-founders of the Company and has served as Executive Vice President and Chief Investment Officer since its predecessor’s founding in 1997. He has over 15 years of experience in commercial real estate in the Washington, D.C. area, including seven years with D&K and D&K Management from 1990 to 1997. Prior to joining D&K, Mr. Smith was with Garrett & Smith, Inc., a real estate investment and development firm based in McLean, Virginia and Transwestern/Carey Winston (formerly Barrueta & Associates, Inc.) a Washington-based commercial real estate brokerage and property management firm. Mr. Smith is a graduate of the Catholic University of America. He is a member of the District of Columbia Building Industry Association and the Urban Land Institute.

Michael H. Comer		41	Senior Vice President, Chief Accounting Officer Michael H. Comer served as the Company’s Vice President and Chief Accounting Officer since August 2003 and was elected Senior Vice President in February 2005. Prior to joining the Company, Mr. Comer was Controller at Washington Real Estate Investment Trust (WRIT), a Washington, D.C.-based, diversified real estate investment trust, where from 1999 to 2003 he was responsible for overseeing the Company’s accounting operations and its internal and external financial reporting. Prior to his tenure at WRIT, he was a manager in corporate accounting at The Federal Home Loan Mortgage Corp., and, prior to that position, was with KPMG LLP in Washington, D.C. where he performed audit, consultation and advisory services from 1990 to 1994. He is a CPA and a graduate of the University of Maryland where he received a Bachelor of Science in Accounting. Mr. Comer is a member of the American Institute of Certified Public Accountants and a member of the National Association of Real Estate Investment Trusts.

Timothy M. Zulick		43	Senior Vice President, Leasing Timothy M. Zulick has been the Senior Vice President, Leasing since August 2004. Prior to joining the Company, Mr. Zulick was Senior Vice President at Trammell Crow Company where, from 1998 to 2004, he concentrated on leasing, sales and development of flex and industrial properties in the Baltimore-Washington Corridor. From 1994 to 1998, he worked as a tenant and landlord representative with Casey ONCOR International where he also focused on leasing and sales of industrial properties. Prior to that, Mr. Zulick was with Colliers Pinkard and specialized in the valuation of commercial real estate in Maryland. He received a Bachelors degree in Business Administration from Roanoke College. Mr. Zulick is a licensed real estate person and an active member of the Society of Industrial and Office Realtors (SIOR).

The Company’s Market

Ownership of industrial and flex properties in the southern Mid-Atlantic region is highly fragmented. According to a report by Delta Associates, a real estate market research firm, the southern Mid-Atlantic region contains approximately 475 million square feet of industrial and flex property, which the Company estimates has an aggregate fair market value of more than $40 billion based on its knowledge of comparable per square foot sale prices of these property classes in this region. According to CoStar Group, these properties are owned by hundreds of different owners, ranging from large institutional investors to small investors and owner/occupants, with no single owner holding a significant share of the property market. For example, in the Washington, D.C. metropolitan area, First Potomac has become the largest owner of industrial and flex property with 2.9% of the market by square footage.

The Washington, D.C. metropolitan area has the largest economy of the Company’s target markets. In addition to its size, the Washington, D.C. metropolitan area also boasts one of the most stable economies in the country, primarily attributable to the presence of the U.S. Government and the private contractors that service the U.S. Government. The private sector is supported by the procurement spending of the U.S. Government, which has enhanced the area’s technology industry and tempered the negative impact of national economic cycles. The Washington, D.C. area is the country’s eighth largest metropolitan area in population and seventh in jobs according to the U.S. Department of Labor, and fourth in economic output according to the U.S. Conference of Mayors.

The Company’s other primary markets are Norfolk, Virginia, Baltimore, Maryland and Richmond, Virginia. Norfolk is home to the largest military station in the world, according to the United States Navy, and has an even larger percentage of federal government employees than Washington, D.C. In addition, the Norfolk port is the second busiest port, in terms of container volume, on the East Coast of the United States. The Baltimore metropolitan area, with approximately 200 million square feet of industrial space, has recently strengthened its position as a major trade and distribution center with strong employment growth in wholesale and retail trade. Richmond, the capital of Virginia, maintains a market demand for smaller to mid-size tenants.

Recent increased U.S. Government spending relating to national defense, including increased military and defense spending by the Department of Defense and the creation of the Department of Homeland Security, has benefited the industrial and flex markets in the southern Mid-Atlantic region, and the Company believes that additional defense and homeland security related spending will continue to create further demand for industrial and flex property in its markets.

Competition

We compete with other REITs, other public and private real estate companies, private real estate investors and lenders in acquiring properties. Many of these entities have greater resources than we do or other competitive advantages. We also face competition in leasing or subleasing available properties to prospective tenants.

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. Such laws typically impose clean up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under such laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken. These costs may be substantial, and can exceed the value of the property. The presence of contamination or the failure to properly remediate contamination on such property may adversely affect the ability of the owner, operator or tenant to sell or rent such property or to borrow using such property as collateral, and may adversely impact our investment on a property.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of the regulations. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials.

Prior to closing any property acquisition, if appropriate, the Company obtains such environmental assessments as may be prudent in order to attempt to identify potential environmental concerns at such properties. These assessments are carried out in accordance with an appropriate level of due diligence and generally may include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs. The Company may also conduct limited subsurface investigations and test for substances of concern where the results of the first phase of the environmental assessments or other information indicates possible contamination or where the Company’s consultants recommend such procedures.

The Company believes that its properties are in compliance in all material respects with all federal and state regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matter in connection with any of its properties.

In 1991, it was discovered that portions of the soil and groundwater under the Newington Business Park Center in Lorton, Virginia (“Site”) had been affected by one or more leaking underground storage tanks from an adjacent property owned by a third-party and operated by Waste Management of Virginia, Inc. The Virginia Department of Environmental Quality (DEQ), ordered the third-party to cleanup the petroleum-based free product (gasoline range petroleum hydrocarbons) on the adjacent property and the Site. A treatment system was designed to capture and monitor the contamination from both the adjacent property and the Site. The case was closed by the DEQ after risk-based levels of contamination were contained, but re-opened when free petroleum product was again found on top of the groundwater under the Site. The third-party owner paid for further removal of free petroleum product directly from two groundwater wells at the Site. In August 2004, the DEQ requested that three additional monitoring wells be installed on the Site because free petroleum product continued to be present in two of the monitoring wells. The three new monitoring wells were installed by Waste Management of Virginia, Inc. and sampling revealed no free petroleum product in those wells. However, free petroleum product was observed in 2005 in the two older wells. As a result of the presence of free petroleum product, Waste Management submitted a Corrective Action Plan to the DEQ, which was approved. The plan requires periodic free product recovery from the impacted wells and annual groundwater quality sampling and analysis of four down gradient wells. The January 2007 product gauging and recovery was the first sampling that did not identify observable free product on the groundwater table. A total of four consecutive events exhibiting no observable free product are required for closure by DEQ. Groundwater monitoring and product gauging and recovery continue at the site. The Company believes that liability for future cleanup, if any, of this subsurface contamination will be imposed on the third-party owner and not the Company.

Employees

The Company had 119 employees as of March 2, 2007. The Company believes relations with its employees are good.

Availability of Reports Filed with the Securities and Exchange Commission

A copy of this Annual Report on Form 10-K, as well as the Company’s quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, on its Internet website (www.first-potomac.com). All of these reports are made available on the Company’s web site as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The Company’s Governance Guidelines and Code of Business Conduct and Ethics and the charters of the Audit, Compensation and Nominating and Governance Committees of the Board of Trustees are also available on the Company’s web site atwww.first-potomac.com, and are available in print to any shareholder upon request in writing to First Potomac Realty Trust, c/o Investor Relations, 7600 Wisconsin Avenue, 11^th Floor, Bethesda, MD 20814. The information on the Company’s web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filing it makes with the SEC.

ITEM 1A. RISK FACTORS

Investing in our Company involves various risks, including the risk that you might lose your entire investment. The following discussion concerns some of the risks associated with our business. These risks are interrelated, and you should treat them as a whole. The risks described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us or not identified below, may also materially and adversely affect our business, financial condition, results of operations and ability to make distributions to our shareholders.

Risks Related to Our Business and Properties

We have recently experienced rapid growth and may not be able to adapt our management and operational systems without unanticipated disruption or expense.

We are currently experiencing a period of rapid growth. As a result of our rapid growth, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate properties into our portfolio or manage any future acquisitions of properties without operating disruptions or unanticipated costs. Our acquisitions of properties will generate additional operating expenses that we will be required to pay. Our growth has required, and our growth will continue to require, increased investment in management personnel, professional fees, other personnel, financial and management systems and controls and facilities, which could cause our operating margins to decline from historical levels, especially in the absence of revenue growth. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. Our failure to successfully integrate acquisitions into our portfolio and manage our growth could have a material adverse effect on our results of operations and financial condition.

We are subject to the credit risk of our tenants, which may fail to make lease payments and thereby cause a significant decrease in our revenues.

We are subject to the credit risk of our tenants. We cannot assure you that our tenants will not default on their leases and fail to make rental payments to us. In particular, local economic conditions and factors affecting the industries in which our tenants operate may affect our tenants’ ability to make lease payments to us. Moreover, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms if a tenant defaults on its lease. The loss of rental revenues from a number of our tenants and our inability to replace such tenants may adversely affect our profitability and our ability to meet our financial obligations.

A majority of our tenants hold leases covering less than 10,000 square feet. Many of these tenants are small companies with nominal net worth. The loss of rental revenues from a number of our tenants may adversely affect our profitability and our ability to meet our financial obligations.

Loss of the U.S. Government as a tenant could lead to a substantial decrease in our cash flow and an impairment of the value of our properties.

The U.S. Government accounts for 9.4% of our annualized base rent as of December 31, 2006. On July 31, 2002, the United States Department of Defense issued the Unified Facilities Criteria (“UFC”), which establish minimum antiterrorism standards for the design and construction of new and existing buildings leased by the departments and agencies of the Department of Defense. The loss of the federal government as a tenant resulting from our inability to comply with the UFC standards or for any other reason or the loss of a future significant tenant would have an adverse effect on our financial results and the value of our affected properties. A reduction or elimination of rent from the U.S. Government or other significant tenants would reduce our cash flow and adversely affect our ability to make distributions to our shareholders.

Our debt level may have a negative impact on our ability to make distributions to our shareholders and pursue our business plan.

We have incurred indebtedness in connection with the acquisition of our properties, and we will incur new indebtedness in the future in connection with our acquisition, development and operating activities.

Our use of debt financing creates risks, including risks that:

	§		that our cash flow will be insufficient to make required payments of principal and interest;

	§		that we will be unable to refinance some or all of our indebtedness or that any refinancing will not be on terms as favorable as those of the existing indebtedness;

	§		that required debt payments will not be reduced if the economic performance of any property declines;

	§		that debt service obligations will reduce funds available for distribution to our shareholders and funds available for acquisitions;

	§		that most of our secured debt obligations require the lender to be made whole to the extent we decide to pay off the debt prior to the maturity date; and

	§		that any default on our indebtedness could result in acceleration of those obligations and possible loss of property to foreclosure.

If the economic performance of any of our properties declines, our ability to make debt service payments would be adversely affected. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, we may lose that property to lender foreclosure with a resulting loss of income and asset value.

We do not have a policy limiting the amount of debt that we may incur, although we have established 55% to 65% as the target range for our total debt to market capitalization. Accordingly, our management and board of trustees have discretion to increase the amount of our outstanding debt at any time. Our leverage levels may make it difficult to obtain additional financing based on our current portfolio or to refinance existing debt on favorable terms or at all. In addition, the terms of our revolving credit facility limit the amount of indebtedness that we may incur. Failure to obtain additional financing could impede our ability to grow and develop our business. Our leverage levels also may adversely affect the market price of our common shares if an investment in our Company is perceived to be more risky than an investment in our peers.

Our variable rate debt subjects us to interest rate risk.

We have a revolving credit facility that bears interest at a variable rate on any amounts drawn on the facility. We may incur additional variable rate debt in the future. Increases in interest rates on variable rate debt would increase our interest expense, which would adversely affect net earnings and cash available for payment of our debt obligations and distributions to our shareholders.

We compete with other parties for tenants and property acquisitions and many of these parties have substantially greater resources than we have.

Our business strategy contemplates expansion through acquisition. The commercial real estate industry is highly competitive, and we compete with substantially larger companies, including substantially larger REITs, for the acquisition, development and leasing of properties. Some of these companies are national or regional operators with far greater resources than we have. As a result, we may not be able or have the opportunity to make suitable investments on favorable terms in the future. Competition in a particular area also could adversely affect our ability to lease our properties or to increase or maintain rental rates.

Newly developed and acquired properties may not produce the cash flow that we expect, which could adversely affect our overall financial performance.

Over the last few years, we have focused our efforts on the acquisition and redevelopment of industrial and flex properties. During 2006, we began development activities at five of our properties. We intend to continue to acquire and develop industrial and flex properties. In deciding whether to acquire or develop a particular property, we make assumptions regarding the expected future performance of that property. In particular, we estimate the return on our investment based on expected occupancy and rental rates. If our estimated return on investment proves to be inaccurate and the property is unable to achieve the expected occupancy and rental rates, it may fail to perform as we expected in analyzing our investment. When we acquire a property, we often plan to reposition or redevelop that property with the goal of increasing profitability. Our estimate of the costs of repositioning or redeveloping an acquired property may prove to be inaccurate, which may result in our failure to meet our profitability goals. Additionally, we have acquired properties not fully leased, and the cash flow from existing operations may be insufficient to pay the operating expenses and debt service associated with that property until the property is more fully leased. If one or more of these new properties do not perform as expected or we are unable to successfully integrate new properties into our existing operations, our financial performance may be adversely affected.

All of our properties are located in the southern Mid-Atlantic region, making us vulnerable to changes in economic conditions in that region.

Economic conditions in the southern Mid-Atlantic region may significantly affect the occupancy and rental rates of our properties. A decline in occupancy and rental rates, in turn, may significantly affect our profitability and our ability to satisfy our financial obligations. The economic condition of the region may depend on one or more industries and, therefore, an economic downturn in one of these industry sectors may adversely affect our performance. Local real estate market conditions may include a large supply of competing space, and we compete for tenants based on rental rates, attractiveness and location of a property, and quality of maintenance and management services. As a result of the geographic concentration of our properties, our performance, our ability to make cash distributions, and the value of our properties will depend upon economic conditions in the region, including local real estate conditions and competition. There can be no assurance that these markets will continue to grow or that economic conditions will remain favorable. If unfavorable economic conditions occur in the region, our ability to make distributions to our shareholders could be adversely affected. In particular, we are directly affected by decreases in federal government spending.

Development and construction risks could adversely affect our profitability.

Our renovation, redevelopment, development and related construction activities may subject us to the following risks:

	§		we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased costs or our abandonment of these projects.

	§		we may incur construction costs for a property which exceed our original estimates due to increased costs for materials or labor or other costs that we did not anticipate.

	§		we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our development activities.

	§		we may be unable to complete construction and lease-up of a property on schedule, which could result in increased debt service expense or construction costs.

Additionally, the time frame required for development, construction and lease-up of these properties means that we may have to wait years for a significant cash return. Because we are required to make cash distributions to our shareholders, if the cash flow from operations or refinancing is not sufficient, we may be forced to borrow additional money to fund such distributions.

Failure to succeed in new markets may limit our growth.

We may make selected acquisitions outside our current geographic market from time to time as appropriate opportunities arise. Our historical experience is in the southern Mid-Atlantic region, and we may not be able to operate successfully in other market areas. We may be exposed to a variety of risks if we choose to enter new markets. These risks include:

	§		a lack of market knowledge and understanding of the local economies;

	§		an inability to identify promising acquisition or development opportunities;

	§		an inability to obtain construction trades people; and

	§		an unfamiliarity with local government and permitting procedures.

Any of these factors could adversely affect the profitability of projects outside our current markets and limit the success of our acquisition and development strategy. If our acquisition and development strategy is negatively affected, the profitability, growth, and development of our business may be impeded.

We may be unable to renew expiring leases or re-lease vacant space on a timely basis or on attractive terms, which could significantly decrease our cash flow.

Current tenants may not renew their leases upon the expiration of their terms. Alternatively, current tenants may attempt to terminate their leases prior to the expiration of their current terms. If non-renewals or terminations occur, we may not be able to locate qualified replacement tenants and, as a result, we could lose a significant source of revenue while remaining responsible for the payment of our obligations. Moreover, the terms of a renewal or new lease may be less favorable than the current lease terms. Any of these factors could cause a decline in lease revenue, which would have a negative impact on our profitability.

Under some of our leases, tenants have the right to terminate prior to the scheduled expiration of the lease.

Some of our leases for our current properties provide tenants with the right to terminate prior to the scheduled expiration of the lease. If a tenant terminates its lease with us prior to the expiration of the term, we may be unable to re-lease that space on as favorable terms, or at all, which could adversely affect our cash flow.

Property owned through joint ventures, or in limited liability companies and partnerships in which we are not the sole equity holder, may limit our ability to act exclusively in our interests.

We may make investments through partnerships, limited liability companies or joint ventures in the future. Partnership, limited liability company or joint venture investments may involve various risks, including the following:

	§		our partners, co-members or joint venturers might become bankrupt (in which event we and any other remaining general partners or joint venturers would generally remain liable for the liabilities of the partnership or joint venture);

	§		our partners, co-members or joint venturers might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals;

	§		our partners, co-members or joint venturers may be in a position to take action contrary to our instructions, requests, policies, or objectives, including our current policy with respect to maintaining our qualification as a real estate investment trust; and

	§		agreements governing joint ventures, limited liability companies and partnerships often contain restrictions on the transfer of a joint venturer’s, member’s or partner’s interest or “buy-sell” or other provisions that may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms.

Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies or joint ventures. The occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to make distributions with respect to, and the market price of, our common shares.

Risks Related to Our Organization and Structure

Our executive officers have agreements that provide them with benefits in the event of a change in control of our Company or if their employment agreement is not renewed.

We have entered into employment agreements with our executive officers, Douglas J. Donatelli, Nicholas R. Smith, Barry H. Bass, James H. Dawson and Joel F. Bonder that provide them with severance benefits if their employment ends under certain circumstances following a change in control of our Company or if the executive officer resigns for “good reason” as defined in the employment agreements. These benefits could increase the cost to a potential acquirer of our Company and thereby prevent or deter a change in control of the Company that might involve a premium price for our common shares or otherwise be in the interests of our shareholders.

We may experience conflicts of interest with several members of our board of trustees and our executive officers relating to their ownership of units of our Operating Partnership.

Our trustees and executive officers may have conflicting duties because, in their capacities as our trustees and executive officers, they have a duty to our Company, and in our capacity as general partner of our Operating Partnership, they have a fiduciary duty to the limited partners, and some of them are themselves limited partners. These conflicts of interest could lead to decisions that are not in your best interest. Conflicts may arise when the interests of our shareholders and the limited partners of our Operating Partnership diverge, particularly in circumstances in which there may be an adverse tax consequence to the limited partners, such as upon the sale of assets or the repayment of indebtedness.

We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

Our future success depends, to a significant extent, upon the continued services of our senior management team, including Douglas J. Donatelli. In particular, the extent and nature of the relationships that Mr. Donatelli has developed in the real estate community in our markets is critically important to the success of our business. Although we have an employment agreement with Mr. Donatelli and other key executive officers, there is no guarantee that Mr. Donatelli will remain employed with us. We do not maintain key person life insurance on any of our officers. The loss of services of one or more members of our senior management team, particularly Mr. Donatelli, would harm our business and prospects. Further, loss of a member of our senior management team could be negatively perceived in the capital markets, which could have an adverse effect on the market price of our common shares.

The chairman of our board of trustees, Louis T. Donatelli, and certain other of our trustees may have conflicts of interest with our Company.

Our chairman, Louis T. Donatelli, has other business interests that may hinder his ability to spend adequate time on our business. Mr. Donatelli is also Chairman of Donatelli Development, Inc. (formerly Donatelli & Klein, Inc), a real estate development investment firm that focuses on the Washington, D.C. area. Mr. Donatelli continues to provide services to Donatelli Development, Inc. In addition, Mr. Donatelli may own industrial or flex property outside of the Company’s specific geographic area of operation.

One of the Company’s trustees, Terry L. Stevens, currently serves as Vice President and Chief Financial Officer of Highwoods Properties, Inc., a fully integrated, North Carolina-based REIT that owns, leases, manages, develops, and constructs office, industrial and retail properties, some of which are located in our target markets. As a result, conflicts may arise when the Company and Highwoods Properties, Inc. compete in the same markets for properties, tenants, personnel and other services.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Maryland law provides that a trustee has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our amended and restated declaration of trust authorizes us to indemnify our trustees and officers for actions taken by them in those capacities to the extent permitted by Maryland law. In addition, our declaration of trust limits the liability of our trustees and officers for money damages, except for liability resulting from:

	§		actual receipt of an improper benefit or profit in money, property or services; or

	§		a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist. Our amended and restated bylaws require us to indemnify each trustee or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our trustees and officers.

Our board of trustees may approve the issuance of preferred shares with terms that may discourage a third party from acquiring us.

Our declaration of trust permits our board of trustees to issue up to 50,000,000 preferred shares, issuable in one or more classes or series. Our board of trustees may increase the number of preferred shares authorized by our declaration of trust without shareholder approval. Our board of trustees may also classify or reclassify any unissued preferred shares and establish the preferences and rights (including the right to vote, to participate in earnings and to convert into securities) of any such preferred shares, which rights may be superior to those of our common shares. Thus, our board of trustees could authorize the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of the common shares might receive a premium for their shares over the then current market price of our common shares.

Our ownership limitations may restrict business combination opportunities.

To qualify as a REIT under the Internal Revenue Code, no more than 50% of the value of our outstanding shares of beneficial interest may be owned, directly or under applicable attribution rules, by five or fewer individuals (as defined to include certain entities) during the last half of each taxable year (other than our first REIT taxable year). To preserve our REIT qualification, our declaration of trust generally prohibits direct or indirect ownership by any person of (i) more than 8.75% of the number or value of our outstanding common shares or (ii) more than 8.75% of the value of our outstanding shares of all classes. Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limitation. Our declaration of trust has created a special higher ownership limitation of no more than 14.9% for the group comprised of Louis T. Donatelli, Douglas J. Donatelli and certain related persons. Unless the applicable ownership limitation is waived by our board of trustees prior to transfer, any transfer of our common shares that would violate the ownership limitation will be null and void, and the intended transferee will acquire no rights in such shares. Common shares that would otherwise be held in violation of the ownership limit will be designated as “shares-in-trust” and transferred automatically to a trust effective on the day before the purported transfer or other event giving rise to such excess ownership. The beneficiary of the trust will be one or more charitable organizations named by us. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of common shares might receive a premium for their common shares over the then current market price or that such holders might believe to be otherwise in their best interests. The ownership limitation provisions also may make our common shares an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of (i) more than 8.75% of the number or value of our outstanding common shares or (ii) more than 8.75% in value of our outstanding shares of all classes.

Our board of trustees may change our investment and operational policies and practices without a vote of our common shareholders, which limits your control of our policies and practices.

Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification and distributions, are determined by our board of trustees. Although we have no present intention to do so, our board of trustees may amend or revise these and other policies from time to time without a vote of our shareholders. Accordingly, our shareholders have limited control over changes in our policies.

Our declaration of trust and bylaws do not limit the amount of indebtedness that we or our operating partnership may incur. If we become highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and harm our financial condition.

Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.

Our declaration of trust provides that a trustee may only be removed upon the affirmative vote of holders of a majority of our outstanding common shares. Vacancies may be filled by the board of trustees. This requirement makes it more difficult to change our management by removing and replacing trustees.

Our bylaws may only be amended by our board of trustees, which could limit your control of certain aspects of our corporate governance.

Our board of trustees has the sole authority to amend our bylaws. Thus, the board is able to amend the bylaws in a way that may be detrimental to your interests.

Maryland law may discourage a third party from acquiring us.

Maryland law provides broad discretion to our board of trustees with respect to its fiduciary duties in considering a change in control of our Company, including that our board is subject to no greater level of scrutiny in considering a change in control transaction than with respect to any other act by our board.

The Maryland Business Combination Act restricts mergers and other business combinations between our Company and an interested shareholder. An “interested shareholder” is defined as any person who is the beneficial owner of 10% or more of the voting power of our common shares and also includes any of our affiliates or associates that, at any time within the two year period prior to the date of a proposed merger or other business combination, was the beneficial owner of 10% or more of our voting power. Additionally, the “control shares” provisions of the Maryland General Corporation Law, or MGCL, are applicable to us as if we were a corporation. These provisions eliminate the voting rights of shares acquired in quantities so as to constitute “control shares,” as defined under the MGCL. Our amended and restated declaration of trust and/or bylaws, provide that we are not bound by the Maryland Business Combination Act or the control share acquisition statute. However, in the case of the control share acquisition statute, our board of trustees may opt to make this statute applicable to us at any time, and may do so on a retroactive basis.

Finally, the “unsolicited takeovers” provisions of the MGCL permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement takeover defenses that we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then current market price or would otherwise be in the interests of our shareholders.

Risks Related to the Real Estate Industry

Real estate investments are inherently risky, which could adversely affect our profitability and our ability to make distributions to our shareholders.

Real estate investments are subject to varying degrees of risk. If we acquire or develop properties and they do not generate sufficient operating cash flow to meet operating expenses, including debt service, capital expenditures and tenant improvements, our income and ability to make distributions to our shareholders will be adversely affected. Income from properties may be adversely affected by:

	§		decreases in rent and/or occupancy rates due to competition or other factors;

	§		increases in operating costs such as real estate taxes, insurance premiums, site maintenance and utilities;

	§		changes in interest rates and the availability of financing; and

	§		changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.

General economic conditions may adversely affect our financial condition and results of operations.

Periods of economic slowdown or recession in the United States and in other countries, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults by our tenants under existing leases, which could adversely affect our financial position, results of operations, cash flow, trading price of our common shares and our ability to satisfy our debt service obligations and to make distributions to our shareholders.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to adverse changes in the performance of such properties may be limited, thus harming our financial condition. The real estate market is affected by many factors that are beyond our control, including:

	§		adverse changes in national and local economic and market conditions;

	§		changes in interest rates and in the availability, cost and terms of debt financing;

	§		changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance with laws and regulations, fiscal policies and ordinances;

	§		the ongoing need for capital improvements, particularly in older buildings;

	§		changes in operating expenses; and

	§		civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. We may also acquire properties that are subject to a mortgage loan that may limit our ability to sell the properties prior to the loan’s maturity. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our shareholders.

The costs of compliance with or liabilities under environmental laws may harm our operating results.

Our operating expenses could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

	§		our knowledge of the contamination;

	§		the timing of the contamination;

	§		the cause of the contamination; or

	§		the party responsible for the contamination of the property.

There may be environmental problems associated with our properties of which we are unaware. Some of our properties contain, or may have contained in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.

The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition. In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could nonetheless be subject to strict liability by virtue of our ownership interest for environmental liabilities created by our tenants, and we cannot be sure that our tenants would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of material environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our shareholders.

The Company’s properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our ability to make distributions to our shareholders.

All of our properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in the imposition of fines by the U.S. Government or an award of damages to private litigants, or both. While the tenants to whom we lease properties are obligated by law to comply with the ADA provisions, and typically under our leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition and our ability to make distributions to shareholders. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our ability to make distributions to our shareholders.

An uninsured loss or a loss that exceeds the policies on our properties could subject us to lost capital or revenue on those properties.

Under the terms and conditions of the leases currently in force on our properties, our tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability and full replacement value property damage insurance policies. Our largest tenant, the federal government, is not required to maintain property insurance at all. We have obtained comprehensive liability, casualty, flood and rental loss insurance policies on our properties. All of these policies may involve substantial deductibles and certain exclusions. In addition, we cannot assure you that our tenants will properly maintain their insurance policies or have the ability to pay the deductibles. Should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our shareholders.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect any market on which our securities trade, the markets in which we operate, our operations and our profitability.

Terrorist attacks may negatively affect our operations. These attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. The terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. In addition, certain losses resulting from these types of events are uninsurable and others would not be covered by our current terrorism insurance. Additional terrorism insurance may not be available at a reasonable price or at all.

The United States may enter into armed conflicts in the future. The consequences of any armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.

Any of these events could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our shareholders, and may result in volatility in the market price for our securities.

Tax Risks of our Business and Structure

If we fail to remain qualified as a REIT for federal income tax purposes, we will not be able to deduct our distributions, and our income will be subject to taxation.

We elected to be taxed as a REIT under the Internal Revenue Code commencing with our short taxable year ended December 31, 2003, which affords us significant tax advantages. The requirements for qualification as a REIT, however, are complex and our management has limited experience in operating a REIT. If we fail to meet these requirements and do not qualify for certain relief provisions, our distributions to our shareholders will not be deductible by us and we will be subject to a corporate level tax on our taxable income. This would substantially reduce our cash available to make distributions to our shareholders. In addition, incurring corporate income tax liability might cause us to borrow funds, liquidate some of our investments or take other steps that could negatively affect our operating results. Moreover, if our REIT status is terminated because of our failure to meet a REIT qualification requirement or if we voluntarily revoke our election, unless relief provisions applicable to certain REIT qualification failures apply, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost.

Distribution requirements relating to qualification as a REIT for federal income tax purposes limit our flexibility in executing our business plan.

Our business plan contemplates growth through acquisitions. To qualify and maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our shareholders at least 90% of our REIT taxable income each year. REIT taxable income is determined without regard to the deduction for dividends paid and by excluding net capital gains. We are also required to pay tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year. In addition, we are required to pay a 4% nondeductible excise tax on the amount, if any, by which certain distributions we pay with respect to any calendar year are less than the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year and any amount of our income that was not distributed in prior years.

We have distributed, and intend to distribute, to our shareholders all or substantially all of our taxable REIT income each year in order to comply with the distribution requirements of the Internal Revenue Code and to avoid federal income tax and the 4% nondeductible excise tax. Our distribution requirements limit our ability to fund acquisitions and capital expenditures through retained earnings. Thus, our ability to grow through acquisitions will be limited if we are unable to obtain debt or equity financing. In addition, differences in timing between the receipt of income and the payment of expenses in arriving at REIT taxable income and the effect of required debt amortization payments could require us to borrow funds to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

Moreover, even if we maintain our status as a REIT, any net income of a taxable REIT subsidiaries owned by our Operating Partnership would be subject to federal, state and local income taxes at regular corporate rates.

Our disposal of properties may have negative implications, including unfavorable tax consequences.

If we make a sale of a property directly or through an entity that is treated as a partnership or a disregarded entity, for federal income tax purposes, and it is deemed to be a sale of dealer property or inventory, the sale may be deemed to be a “prohibited transaction” under federal tax laws applicable to REITs, in which case our gain, or our share of the gain, from the sale would be subject to a 100% penalty tax. If we believe that a sale of a property might be treated as a prohibited transaction, we may dispose of that property through a taxable REIT subsidiary, in which case the gain from the sale would be subject to corporate income tax but not the 100% prohibited transaction tax. We cannot assure you, however, that the Internal Revenue Service will not assert successfully that sales of properties that we make directly or through an entity that is treated as a partnership or a disregarded entity, for federal income tax purposes, rather than through a taxable REIT subsidiary, are sales of dealer property or inventory, in which case the 100% penalty tax would apply.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or the market price of our securities.

If we or our predecessor entity failed to qualify as an S corporation for any of our tax years prior to our initial public offering, we may fail to qualify as a REIT.

To qualify as a REIT, we may not have at the close of any year undistributed “earnings and profits” accumulated in any non-REIT year, including undistributed “earnings and profits” accumulated in any non-REIT year for which we or our predecessor, First Potomac Realty Investment Trust, Inc., did not qualify as an S corporation. Although we believe that we and our predecessor corporation qualified as an S corporation for federal income tax purposes for all tax years prior to our initial public offering, if it is determined that we did not so qualify, we will not qualify as a REIT. Any such failure to qualify may also prevent us from qualifying as a REIT for any of the following four tax years.

If First Potomac Management, Inc. failed to qualify as an S corporation during any of its tax years, we may be responsible for any entity level taxes due.

We believe First Potomac Management, Inc., a Delaware S corporation and subsidiary of the Company, (“FPM, Inc.”) qualified as an S corporation for federal and state income tax purposes from the time of its incorporation in 1997. However, the Company may be responsible for any entity level taxes due if FPM, Inc. did not qualify as an S corporation at any time. FPM, Inc. shareholders have severally indemnified the Company against any such loss, however, in the event one or more of the shareholders is unable to fulfill its indemnification obligation, the Company may not be reimbursed for a portion of the taxes.

Risks Related to an Investment in Our Common Shares

Our common shares trade in a limited market which could hinder your ability to sell our common shares.

Our equity market capitalization places us at the low end of market capitalization among all REITs. Because of our small market capitalization, many of our investors are individuals. Our common shares experience relatively, limited trading volume; many investors may not be interested in owning our common shares because of the inability to acquire or sell a substantial block of our common shares at one time. This illiquidity could have an adverse effect on the market price of our common shares. In addition, a shareholder may not be able to borrow funds using our common shares as collateral because lenders may be unwilling to accept the pledge of common shares having a limited market. Any substantial sale of our common shares could have a material adverse effect on the market price of our common shares.

The market price and trading volume of our common shares may be volatile.

The market price of our common shares may become highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common shares include:

	§		actual or anticipated declines in our quarterly operating results or distributions;

	§		reductions in our funds from operations;

	§		increases in market interest rates that lead purchasers of our securities to demand a higher dividend yield;

	§		changes in market valuations of similar companies;

	§		adverse market reaction to any increased indebtedness we incur in the future;

	§		additions or departures of key management personnel;

	§		actions by institutional shareholders;

	§		speculation in the press or investment community; and

	§		general market and economic conditions.

The vesting of equity based compensation awards upon achievement of certain performance measures may result in unanticipated charges that could impact our operating results.

Broad market fluctuations could negatively impact the market price of our common shares.

In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and prospects may be below the expectations of investors or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline in the market price of our common shares.

An increase in market interest rates may have an adverse effect on the market price of our common shares.

One of the factors that investors may consider in deciding whether to buy or sell our common shares is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution rate on our common shares or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings that we derive from rental income with respect to our properties and our related distributions to shareholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares. For instance, if interest rates rise without an increase in our distribution rate, the market price of our common shares could decrease because potential investors may require a higher yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and make distributions to our shareholders.

Shares eligible for future sale may have adverse effects on our share price.

The Company cannot predict the effect, if any, of future sales of common shares, or the availability of shares for future sales, on the market price of our common shares. Sales of substantial amounts of common shares, including up to approximately 1.6 million common shares issuable upon (i) the redemption of units of our Operating Partnership, and (ii) exercise of options, or the perception that these sales could occur, may adversely affect prevailing market prices for our common shares and impede our ability to raise capital.

The Company also may issue from time to time additional common shares or preferred shares or units of our Operating Partnership in connection with the acquisition of properties, and we may grant demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of securities or the perception that these sales could occur may adversely affect the prevailing market price for our securities. In addition, the sale of these shares could impair our ability to raise capital through a sale of additional equity securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As of December 31, 2006, the Company owned in fee simple the following 65 properties totaling approximately 10.4 million square feet:


								Leased at
				Year of		Square		December 31,
Property	Property Type	Location		Acquisition		Footage		2006¹
13129 Airpark Road	Multi-tenant industrial		Culpeper, VA		1997		149,795		100.0	%
Plaza 500	Multi-tenant industrial		Alexandria, VA		1997		507,019		96.1	%
Van Buren Business Park	Flex		Herndon, VA		1997		109,310		93.2	%
Tech Court	Flex		Chantilly, VA		1998		64,064		77.0	%
Crossways Commerce Center I	Multi-tenant industrial		Chesapeake, VA		1999		348,615		95.5	%
Crossways Commerce Center II	Flex		Chesapeake, VA		1999		147,736		100.0	%
Coast Guard Building	Flex		Chesapeake, VA		1999		61,992		100.0	%
Newington Business Park Center	Multi-tenant industrial		Lorton, VA		1999		254,242		92.2	%
Greenbrier Technology Center II	Flex		Chesapeake, VA		2002		79,684		99.0	%
Norfolk Business Center	Flex		Norfolk, VA		2002		90,682		97.6	%
Rumsey Center	Flex		Columbia, MD		2002		134,344		86.4	%
Snowden Center	Flex		Columbia, MD		2002		140,186		89.8	%
Virginia Center	Flex		Glen Allen, VA		2003		118,884		95.9	%
Interstate Plaza	Single-tenant industrial		Alexandria, VA		2003		107,320		100.0	%
Alexandria Corporate Park	Multi-tenant industrial		Alexandria, VA		2003		278,130		81.9	%
Herndon Corporate Center	Flex		Herndon, VA		2004		127,246		96.3	%
Aquia Commerce Center I & II	Flex		Stafford, VA		2004		64,488		100.0	%
6900 English Muffin Way	Multi-tenant industrial		Frederick, MD		2004		165,690		100.0	%
Deer Park	Flex		Randallstown, MD		2004		171,140		80.8	%
Gateway Center	Flex		Gaithersburg, MD		2004		44,307		96.5	%
Gateway West	Flex		Westminster, MD		2004		110,107		79.7	%
4451 Georgia Pacific Boulevard	Multi-tenant industrial		Frederick, MD		2004		169,750		100.0	%
20270 Goldenrod Lane	Flex		Germantown, MD		2004		24,468		96.1	%
Girard Business Center	Flex		Gaithersburg, MD		2004		123,900		85.5	%
Girard Place	Flex		Gaithersburg, MD		2004		175,217		100.0	%
Old Courthouse Square	Retail		Martinsburg, WV		2004		201,350		96.6	%
Patrick Center	Office		Frederick, MD		2004		66,706		88.4	%
15 Worman’s Mill Court	Flex		Frederick, MD		2004		39,966		100.0	%
7561 Lindbergh Drive	Single-tenant industrial		Gaithersburg, MD		2004		36,000		100.0	%
West Park	Office		Frederick, MD		2004		28,950		93.4	%
Woodlands Business Center	Office		Largo, MD		2004		37,940		60.1	%
Airpark Place	Flex		Gaithersburg, MD		2004		82,178		75.1	%
15395 John Marshall Highway	Single-tenant industrial		Haymarket, VA		2004		123,777		100.0	%
Crossways II	Flex		Chesapeake, VA		2004		85,004		100.0	%
Norfolk Commerce Park II	Flex		Norfolk, VA		2004		128,147		100.0	%
Windsor at Battlefield	Flex		Manassas, VA		2004		154,226		83.1	%
4612 Navistar Drive	Single-tenant industrial		Frederick, MD		2004		215,085		100.0	%
Campus at Metro Park North	Flex		Rockville, MD		2004		190,238		100.0	%
Reston Business Campus	Flex		Reston, VA		2005		82,469		94.0	%
1400 Cavalier Boulevard	Multi-tenant industrial		Chesapeake, VA		2005		299,963		100.0	%
Enterprise Center	Flex		Chantilly, VA		2005		188,941		81.9	%
Glenn Dale Business Center	Multi-tenant industrial		Glenn Dale, MD		2005		315,191		99.2	%
Gateway Centre	Flex		Manassas, VA		2005		99,607		86.1	%
1434 Crossways Boulevard	Office		Chesapeake, VA		2005		220,501		100.0	%
Gateway Hampton Roads	Multi-tenant industrial		Hampton, VA		2005		421,100		9.5	%
403/405 Glenn Drive	Flex		Sterling, VA		2005		197,201		80.9	%
Diamond Hill Distribution Center	Multi-tenant industrial		Chesapeake, VA		2005		712,550		90.2	%
Linden Business Center	Flex		Manassas, VA		2005		108,237		90.4	%
Owings Mills Business Center	Flex		Owings Mills, MD		2005		87,148		100.0	%
Prosperity Business Center	Multi-tenant industrial		Merrifield, VA		2005		71,572		92.5	%
1000 Lucas Way	Flex		Hampton, VA		2005		182,175		91.5	%
River’s Bend Center	Multi-tenant industrial		Chester, VA		2006		492,200		93.2	%
Northridge I, II	Multi-tenant industrial		Ashland, VA		2006		140,390		100.0	%
Crossways I	Flex		Chesapeake, VA		2006		143,398		85.1	%
Sterling Park Business Center	Flex		Sterling, VA		2006		127,859		83.2	%
1408 Stephanie Way	Flex		Chesapeake, VA		2006		51,209		64.6	%
Airpark Business Center	Flex		Richmond, VA		2006		42,142		62.4	%
Chesterfield Business Center	Flex		Richmond, VA		2006		189,871		93.7	%
Hanover Business Center	Flex		Ashland, VA		2006		183,546		97.5	%
Gateway 270 West	Flex		Clarksburg, MD		2006		255,460		57.0	%
Davis Drive	Flex		Sterling, VA		2006		52,581		70.7	%
Indian Creek Court	Multi-tenant industrial		Beltsville, MD		2006		185,496		84.2	%
Gateway II	Flex		Norfolk, VA		2006		42,429		100.0	%
Owings Mills Commerce Center	Flex		Owings Mills, MD		2006		132,765		82.9	%
Park Central	Flex		Richmond, VA		2006		204,280		78.1	%

TOTAL							10,388,164		88.0	%


¹		Leased percentages includes ten leases totaling 189,270 square feet executed as of December 31, 2006 that commence in the first half of 2007.

Our principal executive offices are located at 7600 Wisconsin Avenue, 11^th Floor, Bethesda, Maryland 20814. The Company leases approximately 18,000 square feet at this location and believes this space is sufficient to meet our current needs. We have five other offices for our property management operations, which occupy 23,000 square feet within properties we own.

ITEM 3. LEGAL PROCEEDINGS

As of December 31, 2006, the Company was not involved in any material litigation, nor, to management’s knowledge, is any material litigation threatened against the Company or the Operating Partnership.

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

No matters were submitted to a vote of security holders during the fourth quarter of the Company’s fiscal year ended December 31, 2006.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s common shares are listed on the New York Stock Exchange under the symbol “FPO.” The Company’s common shares began trading on the New York Stock Exchange upon the closing of the initial public offering in October 2003. As of December 31, 2006, there were 42 shareholders of record and an estimated 10,286 beneficial owners.

The following table sets forth the high and low sales prices for the Company’s common shares and the dividends paid per share for 2006 and for 2005.


	Price Range				Dividends
2006	High		Low		Per Share
Fourth Quarter	$	31.71	$	27.80	$	0.310
Third Quarter		31.30		26.99		0.310
Second Quarter		29.79		25.57		0.310
First Quarter		30.55		26.29		0.310


	Price Range				Dividends
2005	High		Low		Per Share
Fourth Quarter	$	28.04	$	23.87	$	0.300
Third Quarter		27.22		24.25		0.290
Second Quarter		25.35		21.77		0.275
First Quarter		24.34		20.85		0.260

The Company will pay future distributions at the discretion of our board of trustees. The Company’s ability to make cash distributions in the future will be dependent upon (i) the income and cash flow generated from Company operations, (ii) cash generated or used by the Company’s financing and investing activities and (iii) the annual distribution requirements under the REIT provisions of the Code described above and such other factors as the board of trustees deems relevant. The Company’s ability to make cash distributions will also be limited by the terms of our Operating Partnership agreement and our financing arrangements as well as limitations imposed by state law and the agreements governing any future indebtedness.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

A total of 1,560,800 equity securities have been authorized under the Company’s equity compensation plan. The following table sets forth information as of December 31, 2006 with respect to compensation plans under which equity securities of the Company are authorized for issuance. The Company has no equity compensation plans that were not approved by its security holders.


	Number of Securities to be				Number of Securities
	Issued upon Exercise of		Weighted-Average Exercise		Remaining Available for Future
	Outstanding Options, Warrants		Price of Outstanding Options,		Issuance Under Equity
Plan Category	and Rights		Warrants and Rights		Compensation Plan
Equity compensation plans approved by security holders		588,283	$	17.73		693,678
Equity compensation plans not approved by security holders		—		—		—

Total		588,283	$	17.73		693,678

The Company has not sold any unregistered equity securities or purchased any of its registered equity securities in the twelve months ended December 31, 2006. During 2006, 462,135 Operating Partnership units were redeemed for 462,135 common shares valued at $6.8 million and 1,000 Operating Partnership units were acquired for $31 thousand, in cash, resulting in 940,654 Operating Partnership units outstanding as of December 31, 2006.

Performance Graph

The following graph compares the cumulative total return on the Company’s common shares with the cumulative total return of the S&P 500 Stock Index and The MSCI US REIT Index for the period October 23, 2003, the date of the Company’s initial public offering, through December 31, 2006 assuming the investment of $100 at our initial public offing price of $15.00 per share on October 23, 2003 and the reinvestment of dividends. The performance reflected in the graph is not necessarily indicative of future performance.

COMPARISON OF CUMULATIVE TOTAL RETURNS FOR THE PERIOD
OCTOBER 23, 2003 THROUGH DECEMBER 31, 2006
FIRST POTOMAC REALTY TRUST COMMON STOCK AND S&P 500 AND
THE MSCI US REIT INDEX (RMS)


	10/23/2003		12/31/2003		12/31/2004		12/31/2005		12/31/2006
First Potomac Realty Trust	$	100.00	$	124.93	$	157.81	$	193.12	$	203.79
MSCI US REIT Index (RMS)	$	100.00	$	107.53	$	141.38	$	158.53	$	217.40
S&P 500	$	100.00	$	107.92	$	117.62	$	121.15	$	137.04

We cannot assure you that our share performance will continue into the future with the same or similar trends depicted in the above graph. We will not make or endorse any predictions as to our future share performance.

The foregoing graph and chart shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference and shall not be deemed filed under those acts.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial information of the Company and its subsidiaries. The financial information has been derived from the consolidated balance sheets and statements of operations of the Company and the combined balance sheets and statements of operations of the First Potomac Predecessor, the designation for the entities comprising the Company’s historical operations prior to the closing of the initial public offering. The First Potomac Predecessor’s historical operations include the activities of the Operating Partnership, First Potomac Realty Investment Trust, Inc. (the predecessor general partner of the Operating Partnership) and First Potomac Management, Inc. (the entity that formerly managed our properties for the periods prior to October 28, 2003, the date of completion of our initial public offering).

The following financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.


	Year Ended December 31,
(amounts in thousands, except per share amounts)	2006		2005		2004		2003			2002
Operating Data:
Rental revenue and tenant reimbursements	$	104,536	$	76,438	$	40,958	$	17,221		$	10,433

Income (loss) from continuing operations	$	2,566	$	1,139	$	163	$	(10,590	)	$	(6,543	)
Income from discontinued operations		7,465		211		2,467		447			417

Net income (loss)	$	10,031	$	1,350	$	2,630	$	(10,143	)	$	(6,126	)

Basic net income (loss) per share:
Income (loss) from continuing operations	$	0.12	$	0.07	$	0.02	$	(0.74	)¹	$	—
Income from discontinued operations		0.34		0.01		0.21		0.01			—

Net income (loss) per share	$	0.46	$	0.08	$	0.23	$	(0.73	)¹	$	—


Diluted net income (loss) per share:
Income (loss) from continuing operations	$	0.11	$	0.07	$	0.02	$	(0.74	)¹	$	—
Income from discontinued operations		0.34		0.01		0.21		0.01			—

Net income (loss) per share	$	0.45	$	0.08	$	0.23	$	(0.73	)¹	$	—


	Year Ended December 31,
(amounts in thousands, except per share amounts)	2006		2005		2004		2003		2002
Balance Sheet Data:
Total assets	$	994,567	$	727,763	$	510,076	$	244,148	$	126,592
Mortgage loans and other debt		588,627		396,265		298,719		127,840		123,938
Shareholders’ equity and partners’ capital		363,586		289,331		177,693		92,132		(1,324	)

Cash dividends paid per share	$	1.240	$	1.125	$	0.740	$	—	$	—


¹		Loss per share from continuing operations for 2003 is calculated based upon the loss incurred subsequent to the closing of the initial public offering on October 28, 2003.

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

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Annual Report onForm 10-K. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust.

Significant 2006 Developments

During 2006, we completed the following:

	§		Acquired 14 properties totaling 2.2 million square feet at a contractual purchase price of $233 million;

	§		Increased our total portfolio to over 10 million square feet;

	§		Sold 6600 Business Parkway in Elkridge, Maryland for $15.4 million (proceeds were reinvested through like-kind exchanges);

	§		Raised $90 million through a private offering of 3,450,000 common shares at a price of $27.46 per share;

	§		Issued $125 million of 4.00% Exchangeable Senior Notes for proceeds of approximately $122.2 million, net of a $2.8 million discount at issuance, resulting in an effective interest rate of 4.45%. Under certain circumstances, these notes may be exchanged for the Company’s common shares, cash, or a combination of both;

	§		Completed a private placement of unsecured Senior Notes totaling $75 million. The placement was comprised of $37.5 million in 7-year Series A Senior Notes bearing a fixed interest rate of 6.41% and $37.5 million in 10-year Series B Senior Notes bearing a fixed interest rate of 6.55%; and

	§		Entered into an amended and restated unsecured revolving credit facility, which increased the permitted borrowings under the facility from $100 to $125 million with the potential to increase the size of the facility to up to $225 million.

Total assets at December 31, 2006 were $994.6 million compared to $727.8 million at December 31, 2005.

Development Activity

During 2006, the Company commenced development of several parcels of land including land adjacent to previously acquired properties and land acquired with the intent to develop. The Company intends to construct flex and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction.

As of December 31, 2006, the Company had incurred qualifying development expenditures for the properties noted below:

	§		John Marshall Highway — a 112,305 square-foot warehouse addition/expansion is approximately two-thirds complete and fully pre-leased to the existing property’s current sole tenant. Development costs of $6.2 million incurred through December 31, 2006, include architectural design, site and building engineering, site work, concrete construction, steel, roofing, doors, mechanical, electrical and plumbing activities. The total estimated cost of the addition is $8.5 million. The Company anticipates placing this asset in service in the second quarter of 2007;

	§		Sterling Park Business Center – a 60,000 square-foot flex office building is expected to break ground in late 2007. The Company began development efforts on approximately 25% of the total developable land. Development costs of $0.5 million incurred through December 31, 2006, include master planning design, site planning, geotechnical and wetland studies, architectural design, site and building engineering and access road completion expenditures. The total estimated cost of the addition is $9.7 million. The Company anticipates completing the initial development of this multi-year project in the second quarter of 2008;

	§		1400 Cavalier Boulevard – a 96,000 square-foot warehouse building broke ground in February 2007. The initial development cost of $0.1 million incurred through December 31, 2006, include architectural design, site and building engineering, site planning and permitting. The total estimated cost of the addition is $5.9 million. The Company anticipates placing this asset in service in the fourth quarter of 2007;

	§		Crossways Commerce Center I — a 46,000 square-foot office building addition broke ground in February 2007. The development costs of $0.1 million incurred through December 31, 2006, include architectural design, site and building engineering and site planning. The total estimated cost of the addition is $5.4 million. The Company has an executed lease for 15,000 square feet of space at the building and anticipates placing this asset in service in the fourth quarter of 2007; and

	§		Snowden Center – a 4,500 square-foot new retail building is planned to break ground in April 2007. Development costs of $0.1 million were incurred through December 31, 2006, and the total estimated cost of the addition is $1 million. The Company anticipates placing this asset in service in the fourth quarter of 2007.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) that require the Company to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that the Company deems most important to the portrayal of its financial condition and results of operations. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our consolidated financial statements. The Company’s critical accounting policies relate to revenue recognition, including evaluation of the collectibility of accounts receivable, impairment of long-lived assets and purchase accounting for acquisitions of real estate.

The following section is a summary of certain aspects of these critical accounting policies.

Revenue Recognition

Rental revenue under leases with scheduled rent increases or rent abatements is recognized using the straight-line method over the term of the leases. Accrued straight-line rents included in the Company’s consolidated balance sheets represent the aggregate excess of rental revenue recognized on a straight-line basis over contractual rent under applicable lease provisions. The Company’s leases generally contain provisions under which the tenants reimburse the Company for a portion of the Company’s property operating expenses and real estate taxes. Such reimbursements are recognized in the period that the expenses are incurred. Lease termination fees are recognized on the date of termination when the related leases are canceled and the Company has no continuing obligation to provide services to such former tenants.

The Company must make estimates to the collectibility of its accounts receivables related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and other income. The Company specifically analyzes accounts receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of its allowance for doubtful accounts receivable. These estimates have a direct impact on the Company’s net income as a higher required allowance for doubtful accounts receivable will result in lower net income.

Investments in Real Estate and Real Estate Entities

Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.

Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:


Buildings		39 years
Building improvements		5 to 15 years
Furniture, fixtures and equipment		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases

The Company reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions or changes in management’s intended holding period indicate a possible impairment of the value of a property, an impairment analysis is performed. The Company assesses the recoverability based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. This estimate is based on projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly used by appraisers. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make subjective assessments as to whether there are impairments in the values of its investments in real estate.

The Company will classify a building as held-for-sale when the sale of the building is probable and likely to be completed within one year. Accordingly, the Company classifies assets as held-for-sale and will cease recording depreciation when our Board of Trustees has approved a plan of disposal, an active program to complete the plan to sell has been initiated, including active marketing of the property, and the asset is available for immediate sale in its present condition. If these criteria are met, the Company will record an impairment loss if the fair value reduced by selling costs is lower than the carrying amount of the building. The Company will classify the impairment loss, together with the building’s operating results, as discontinued operations on its statement of operations and classify the assets and related liabilities as held-for-sale on the balance sheet. Interest expense is reclassified to discontinued operations only to the extent the property to be disposed of secures specific mortgage debt.

During May 2006 and November 2004, the Company sold its properties located at 6600 Business Parkway and 6251 Ammendale Road, respectively. As a result, operating results and the gains on disposal for these assets are reflected as discontinued operations in the Company’s consolidated statements of operations. The Company has had no continuing involvement with the properties subsequent to their disposal.

Purchase Accounting

Acquisitions of rental property from third parties are accounted for at fair value. Fair value of the real estate acquired is determined on an as-if-vacant basis. That value is allocated between land and building based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the net carrying value of the tenant improvements, which approximates their fair value. The difference between the purchase price and the fair value of the tangible assets on an as-if-vacant basis is allocated as follows:

	§		value of leases based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred and leasing commissions;

	§		the value of above and below market in-place leases based on the present values (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual rent amounts including amounts related to the reimbursement of fixed operating costs and market rents over the remaining non-cancelable lease terms, ranging from one to twenty-one years; and

	§		the intangible value of tenant or customer relationships.

The Company’s determination of these values requires it to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, depreciation expense and amortization expense it recognizes for these leases and associated intangible assets and liabilities.

Stock Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R,Share-Based Payment, (“SFAS No. 123R”), which requires that the cost for all share-based payment transactions be recognized as a component of income from continuing operations. The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (usually the vesting period).

Results of Operations

Comparison of the Years Ended December 31, 2006, 2005 and 2004

The Company completed acquisitions totaling $746 million during the three years ended December 31, 2006 and owned 65, 52 and 39 properties at December 31, 2006, 2005 and 2004, respectively. The results of operations for the year ended December 31, 2004 represented the Company’s initial full year of earnings and results subsequent to its initial public offering completed in the fourth quarter of 2003. Operating results period over period are significantly affected by the volume and timing of acquisitions.

Outlined below is a summary of properties acquired during each of the years being compared:

2006 Acquisitions

The Company acquired the following 14 properties at an aggregate purchase cost of $238 million during 2006: River’s Bend Center, Northridge I & II, Crossways I, Sterling Park Business Center, 1408 Stephanie Way, Airpark Business Center, Chesterfield Business Center, Hanover Business Center, Gateway 270 West, Davis Drive, Indian Creek Court, Gateway II, Owings Mills Commerce Center and Park Central. Collectively, the properties are referred to as the “2006 Acquisitions.”

2005 Acquisitions

The Company acquired the following 13 properties at an aggregate purchase cost of $225 million during 2005: Reston Business Campus, 1400 Cavalier Boulevard, Enterprise Center, Glenn Dale Business Center, Gateway Centre, 1434 Crossways Boulevard, 2000 Gateway Boulevard, 403/405 Glenn Drive, Diamond Hill Distribution Center, Linden Business Center, Prosperity Business Center, Owings Mills Business Center and 1000 Lucas Way. Collectively, the properties are referred to as the “2005 Acquisitions.”

2004 Acquisitions

The Company acquired the following 23 properties at an aggregate purchase cost of $283 million during 2004: Herndon Corporate Center, Aquia Commerce Center I & II, Deer Park, 6900 English Muffin Way, Gateway Center, Gateway West, 4451 Georgia Pacific Boulevard, 20270 Goldenrod Lane, 15 Worman’s Mill Court, Girard Business Center, Girard Place, Old Courthouse Square, Patrick Center, 7561 Lindbergh Drive, West Park, Woodlands Business Center, Airpark Place Business Center, 15395 John Marshall Highway, Norfolk Commerce Park II, Crossways II, Windsor at Battlefield, 4612 Navistar Drive and Campus at Metro Park North. Collectively, the properties are referred to as the “2004 Acquisitions.”

The balance of the portfolio is referred to as the “Remaining Portfolio”.

Total Revenues

Revenue is summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Increase		Change
Rental	$	87,534	$	64,322	$	23,212		36	%	$	64,322	$	35,519	$	28,803		81	%
Tenant reimbursements & other	$	17,002	$	12,116	$	4,886		40	%	$	12,116	$	5,439	$	6,677		123	%

Rental Revenue

Rental revenue is comprised of contractual rent, including the impacts of straight-line revenue, and the amortization of above and below market leases. Rental revenue increased $23.2 million in 2006 as compared to 2005 primarily due to recognizing a full year of operations for the 2005 Acquisitions, which contributed $12.3 million in additional rental revenue to the portfolio in 2006 compared to 2005. Also, the 2006 Acquisitions contributed rental revenue of $10.1 million during 2006. The remaining increase in rental revenue can be attributed to an increase in rental rates, as the average rental rates on new and renewal leases increased 19.3% and 6.7%, respectively, during 2006.

The Company’s portfolio occupancy was 88.0% at December 31, 2006 compared to 89.3% at December 31, 2005. The change in occupancy can be primarily attributed to the 2006 Acquisitions having vacancy rates in excess of our existing portfolio, such as Gateway 270 West and 1408 Stephanie Way, which were 54.3% leased and fully vacant, respectively, at acquisition and 57.0% and 64.6% leased, respectively, at December 31, 2006.

Rental revenue increased $28.8 million in 2005 as compared to 2004, primarily due to the result of recognizing a full year of operations for the 2004 Acquisitions, which contributed $18.9 million in additional rental revenue in 2005 compared to 2004. In addition, the 2005 Acquisitions generated rental revenue of $8.5 million in 2005. The remaining portfolio contributed to the additional increase in rental revenue as a result of increased occupancy at several properties and higher rental rates. During 2005, average rental rates on new and renewal leases increased 7.9% and 4.8%, respectively, over existing leases.

Tenant Reimbursement and Other Revenues

Tenant reimbursement revenue includes operating and common area maintenance costs reimbursed by the Company’s tenants as well as incidental other revenues such as late fees and lease termination fees. Tenant reimbursements and other revenues increased $4.9 million from 2006 to 2005, primarily due to the recognition of a full year of operations for the 2005 Acquisitions, which resulted in $2.9 million of additional tenant reimbursement revenue during 2006. The increase can also be attributed to the 2006 Acquisitions, which contributed $1.9 million in tenant reimbursement revenue.

Tenant reimbursements and other revenues increased $6.7 million from 2005 to 2004, primarily due to the recognition of a full year of operations for the 2004 Acquisitions. These acquisitions resulted in $3.7 million of additional tenant reimbursement revenue during 2005. In addition, the 2005 Acquisitions contributed $1.8 million in tenant reimbursement revenue in 2005. Termination fee income of $1.4 million was recognized during 2005 resulting in an increase of $1.3 million in termination fee income compared to 2004. The termination fee income was primarily attributable to two tenants that leased approximately 41,000 square feet with whom the Company negotiated lease terminations. In 2006, the Company leased approximately 16,000 of the 41,000 square feet at a higher rental rate.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Increase		Change
Property operating expenses	$	20,193	$	13,477	$	6,716		50	%	$	13,477	$	7,495	$	5,982		80	%
Real estate taxes and insurance	$	9,026	$	6,440	$	2,586		40	%	$	6,440	$	3,736	$	2,704		72	%

Property Expenses

The $6.7 million increase in property operating expense in 2006 as compared to 2005 is primarily the result of recognizing a full year of operating expenses for the 2005 Acquisitions and the partial-year impact of the 2006 Acquisitions, which contributed $3.6 million and $2.1 million, respectively, in additional property expenses during 2006. A portion of the balance of the increase in overall operating expenses was driven in part by increased utility costs on the Remaining Portfolio in 2006 as compared to 2005, primarily due to higher electrical rates and usage. The impact of deregulation of utilities for our Maryland properties in particular also resulted in higher comparative utility costs in 2006 as compared to 2005. The Company entered into utility contracts, which became effective in the fourth quarter of 2006, that provide for fixed utility rates, thus minimizing future rate fluctuation impacts.

The $6.0 million increase in property operating expense in 2005 as compared to 2004 is primarily the result of recognizing a full year of operating expenses for the 2004 Acquisitions and the partial-year impact of the 2005 Acquisitions, which contributed $4.0 million and $1.8 million, respectively, in additional property operating expense in 2005 compared to 2004. Occupancy in 2005, excluding the effects of 2000 Gateway Boulevard, a 421,100 square foot properly acquired in 2005 while fully vacant, trended at a higher average rate compared to 2004. This contributed to higher variable operating costs throughout 2005, including increased administrative and overhead costs, repairs and maintenance expense that were generally anticipated at acquisition on many of our properties and higher utility costs.

Real Estate Taxes and Insurance

Real estate taxes and insurance increased $2.6 million during 2006 compared to 2005, due primarily to $1.4 million in additional real estate taxes and insurance costs in 2006 for the 2005 Acquisitions. The remaining increase is largely attributable to the 2006 Acquisitions, which incurred $1.2 million of real estate taxes and insurance costs during 2006.

The $2.7 million increase in real estate taxes and insurance during 2005 compared to 2004, is due primarily to $1.9 million in real estate taxes and insurance costs for the 2004 Acquisitions. The remaining increase is largely attributable to the 2005 Acquisitions, which incurred $0.9 million of real estate taxes and insurance costs during 2005. The Company’s increased portfolio size distributed risk within the overall portfolio creating economies of scale that, in turn, resulted in lower insurance premiums and insurance expense during 2005 within the Remaining Portfolio, which partially offsets the increases from the 2005 and 2004 Acquisitions.

Other Operating Expenses

General and administrative expenses are summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Increase		Change
	$	9,832	$	7,940	$	1,892		24	%	$	7,940	$	4,702	$	3,238		69	%

General and administrative expenses increased in 2006 from 2005, primarily due to share-based compensation expense. Expense was accelerated due to the vesting of a portion of restricted shares awarded in 2005, as certain market based performance measures were achieved in 2006. The adoption of SFAS No. 123R,Share-Based Payment, in 2006 further resulted in an increase in expense associated with stock options as well as increased expense from nonvested share awards due to the issuance of additional restricted share awards in 2006 and expense recognition using a derived service period and fair value for awards based on market conditions rather than contractual life of the award. As a result, share-based compensation expense increased $1.3 million in 2006 as compared to 2005. The balance of the difference resulted primarily from higher rent expense and increased personnel costs in 2006 as compared to 2005.

General and administrative expenses increased $3.2 million during 2005 compared to 2004 primarily due to increased personnel resulting in higher compensation and benefits-related expenses. The number of employees of the Company increased to 86 at December 31, 2005, compared to 44 at December 31, 2004, many of whom are included in corporate overhead. The relocation of the Company’s corporate office in August 2005, also resulted in higher rent expense in 2005. These increases were partially offset by a decline in professional fees in 2005, as lower accounting, legal and consulting fees were incurred.

Depreciation and amortization expenses are summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Increase		Change
	$	34,536	$	24,751	$	9,785		40	%	$	24,751	$	13,216	$	11,535		87	%

Depreciation and amortization expense includes depreciation of real estate assets, amortization of intangible assets and leasing commissions. Depreciation and amortization expense increased $9.8 million in 2006 from 2005 primarily due to depreciation and amortization expense from the 2006 and 2005 Acquisitions, which generated additional expense of $6.0 million and $5.8 million, respectively, in 2006. This was offset by lower expense of $1.6 million and $0.6 million on the 2004 Acquisitions and the Remaining Portfolio, respectively, due to lower depreciation costs as a result of certain acquired tenant improvements, in-place leases, leasing commissions and customer relations amortizing in full as lease terms reached maturity.

Depreciation and amortization expense increased $11.5 million in 2005 from 2004 primarily due to depreciation and amortization expense from the 2004 Acquisitions, which increased by $8.6 million. Depreciation expense further increased $4.1 million during 2005 as a result of the 2005 Acquisitions. This was offset by lower depreciation and amortization expense on the Remaining Portfolio, primarily as a result of certain five-year personal property associated with the Company’s Remaining Portfolio fully depreciating during 2004.

Other Expense

Interest expense is summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Increase		Change
	$	28,500	$	20,191	$	8,309		41	%	$	20,191	$	11,091	$	9,100		82	%

Interest expense increased $8.3 million during 2006 from 2005 due largely to the issuance of additional debt in 2006 to fund acquisitions and development. During 2006, the Company completed a private placement of unsecured Senior Notes totaling $75.0 million, the proceeds of which were used to fund the purchase of several of the 2006 Acquisitions and repay outstanding debt. Also, the Company issued $125 million of Exchangeable Senior Notes for net proceeds of $122.2 million, net of discount. The outstanding balances on the two notes resulted in additional interest expense of $2.8 million in 2006. Further, interest expense increased $2.4 million and $0.7 million as a result of the mortgage debt assumed with the 2005 and 2006 Acquisitions, respectively. The increase in interest expense can also be attributed to higher average borrowings and higher average interest rates on the Company’s unsecured revolving credit facility, as proceeds from the facility were used to fund the 2006 Acquisitions. Weighted average borrowings on the unsecured revolving credit facility increased $13.9 million and the weighted average interest rate increased 1.5 percentage points, which resulted in $1.5 million of additional interest expense in 2006. The Company had no outstanding borrowings under the credit facility as of December 31, 2006. The increase in interest expense was partially offset by $0.3 million of capitalized interest related to development activity in 2006. No capitalized interest was recognized in 2005.

Interest expense increased $9.1 million during 2005 from 2004 due largely to $4.9 million and $1.8 million of interest expense associated with mortgage debt assumed with the 2004 and 2005 Acquisitions, respectively. The Company assumed mortgage debt on acquisitions with fair values of $79.7 million in 2005 and $140.1 million in 2004. Interest expense for our variable rate borrowings on our unsecured revolving credit facility associated with the 2005 Acquisitions increased by $1.5 million as a result of higher average balances outstanding and higher short-term interest rates during 2005. The weighted average borrowings the facility increased $32 million and the weighted average interest rate increased 1.2 percentage points during 2005 compared to 2004.

Interest and other income are summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Decrease		Change
	$	1,032	$	137	$	895		653	%	$	137	$	214	$	77		36	%

Interest income includes amounts earned on the Company’s funds held in various cash operating and escrow accounts. Interest income increased $0.9 million in 2006 primarily due to maintaining higher average cash balances and increased interest rates. The Company earned an interest rate of 5.00% on an average cash balance of $6.4 million during 2006, compared to 2.47% on an average cash balance of $1.6 million during 2005. During the first quarter of 2006, the Company received a $0.3 million settlement of a bankruptcy claim from a former tenant that vacated while under lease in 2003. This amount is included in other income. In addition, in 2006 the Company earned $0.2 million in sub-tenant rental revenue associated with the sub-lease of its former corporate offices from three sub-tenants.

Interest income decreased $0.1 million in 2005 as compared to 2004 primarily due to maintaining lower average cash balances. The Company earned an interest rate of 2.47% on an average cash balance of $1.6 million during 2005, compared to 1.06% and $11.6 million during 2004.

Loss on interest-rate lock agreement is summarized as follows:


	Years Ended December 31,						Percent		Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change		2005		2004		Change		Change
	$	671		—	$	671		—		—		—		—		—

In May 2006, the Company entered into a forward Treasury Lock Agreement (“treasury lock”) to lock-in the interest rate on an anticipated future debt issuance that subsequently closed in June 2006. The intent of the treasury lock was to minimize the risk of rising interest rates during the period prior to issuance. The derivative did not qualify for hedge accounting treatment, and upon the cash settlement of the contract in June 2006, the Company recognized the $0.7 million change in fair value as an expense.

Loss on early retirement of debt is summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Decrease		Change			2005		2004		Increase		Change
	$	121	$	2,546	$	2,425		95	%	$	2,546	$	753	$	1,793		238	%

During the first quarter of 2006, the Company entered into a $50 million Term Loan Agreement with Key Bank, N.A. Proceeds from the loan were used to fund acquisitions and partially pay down the Company’s unsecured revolving credit facility. The Company paid off the Term Loan with proceeds from its Senior Notes. The early repayment resulted in a $0.1 million loss on early retirement of debt during 2006 due to the write-off of deferred financing costs.

During 2005, the Company closed on a $100 million fixed-rate secured financing with Jackson National Life Insurance Company. The loan was funded in two stages with proceeds from the first funding used to repay all of the Company’s floating rate mortgage debt and reduce the balance outstanding on its unsecured revolving credit facility. The Company incurred a $0.1 million charge associated with the write-off of unamortized financing costs on the debt retired. Proceeds from the second funding were used to satisfy the obligation under a mortgage loan maturing in December 2007 and bearing interest at 7.26%. The Company incurred a $2.8 million charge related to the costs associated with satisfying the obligation under this loan and writing off unamortized financing costs. Included in the charge was $0.3 million associated with the mortgage that encumbered 6600 Business Parkway, which was reclassified to income from discontinued operations. The Company terminated its secured credit facility during the fourth quarter of 2004 and wrote off $0.6 million in unamortized deferred financing costs. The remainder of the 2004 loss can be attributed to the write-off of unamortized debt costs associated with the January 2004 repayment of $7 million of the $22 million first mortgage loan encumbering the Rumsey Center and Snowden Center properties.

Minority Interests from Continuing Operations

Minority interests are summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Increase		Change
	$	123	$	91	$	32		35	%	$	91	$	16	$	75		469	%

Minority interests reflect the ownership interests of the Operating Partnership held by parties other than the Company. At December 31, 2006, 3.8% of the interests were owned by limited partners compared to 6.5% at December 31, 2005. The decrease in minority interest ownership in 2006 as compared to 2005 is attributable to the redemption of 463,135 Operating Partnership units in 2006 and the Company’s common stock offering of 3,450,000 common shares in July 2006. Minority interest expense increased in 2006 as a result of the increase in income from continuing operations, primarily driven by the impacts of the 2005 and 2006 Acquisitions.

At December 31, 2005, 6.5% of the interests were owned by limited partners compared to 8.9% at December 31, 2004. The decrease in minority interest ownership in 2005 as compared to 2004 is primarily attributable to the Company’s common stock offerings of 2,050,000 and 3,450,000 common shares in March 2005 and October 2005, respectively, and 285,913 Operating Partnership units redeemed for common shares during 2005, all of which decreased the limited partners percentage ownership of the Operating Partnership. This was partially offset by the issuance of 300,429 Operating Partnership units for the Owings Mills Business Center and Prosperity Business Center acquisitions during 2005. Minority interest expense further increased in 2005 as a result of the increase in income from continuing operations.

Income from Discontinued Operations

Income from discontinued operations is summarized as follows:


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
(dollars in thousands)	2006		2005		Increase		Change			2005		2004		Decrease		Change
	$	7,465	$	211	$	7,254		3438	%	$	211	$	2,467	$	2,256		91	%

During May 2006, the Company sold 6600 Business Parkway located in Elkridge, Maryland and recognized a gain on sale of $7.5 million. No properties were sold during 2005. In 2004, the Company sold 6251 Ammendale Road and recognized a gain on sale of $2.1 million. The Company has had no continuing involvement with the properties it has sold; therefore the operating results and the gains on sale from the two properties are classified as discontinued operations. Income from discontinued operations in 2005 represented the operating results of 6600 Business Parkway. The Company had not committed to a disposition plan nor had it disposed of any additional real estate as of December 31, 2006.

Cash Flows

Consolidated cash flow information is summarized as follows:


	Years ended December 31,									Change
(dollars in thousands)	2006			2005			2004			2006 vs. 2005			2005 vs. 2004
Cash and cash equivalents	$	41,367		$	3,356		$	2,532		$	38,011		$	824
Cash provided by operating activities		35,942			25,012			13,596			10,930			11,416
Cash used in investing activities		(204,152	)		(142,011	)		(137,666	)		(62,141	)		(4,345	)
Cash provided by financing activities		206,221			117,823			110,295			88,398			7,528

Comparison of the Years Ended December 31, 2006 and 2005

Net cash provided by operating activities increased $10.9 million in 2006. This increase was largely the result of an increase in operating income before depreciation and amortization from the 2006 and 2005 Acquisitions.

Net cash used in investing activities increased $62.1 million in 2006 primarily as a result of funding the cash portion of the 2006 acquisitions, which were acquired for a total purchase price of $237.6 million, including mortgage debt assumed as part of the acquisitions with a total fair value of $37.5 million. In 2006, the Company received net proceeds of $15.4 million from the sale of 6600 Business Parkway. The Company had no property sales during 2005. The Company also commenced significant development activities on various development efforts through investing $5.4 million during 2006, largely in the John Marshall Highway addition and Sterling Park Business Center projects.

Net cash provided by financing activities increased $88.4 million in 2006 from net proceeds on borrowings of $334.9 million incurred to finance acquisitions and repay outstanding debt, compared to net proceeds on borrowings of $286.9 million in 2005. The 2006 borrowings include proceeds from the $75 million and $125 million Senior Note issuances, with the remaining proceeds drawn on the revolving credit facility. The Company received net proceeds of $90 million from the July 2006 common share offering and repaid borrowings of $180.1 million in 2006 compared to offering proceeds received and repayment of borrowings of $124.0 million and $271.5 million, respectively, in 2005. The Company also purchased a capped call option for $7.6 million concurrent with the issuance of the $125 million Exchangeable Senior Notes in December 2006. Finally, the Company paid dividends to shareholders of $27.5 million compared to $19.0 million in 2005.

Comparison of the Years Ended December 31, 2005 and 2004

Net cash provided by operating activities increased $11.4 million in 2005. This increase was largely the result of the increased cash flow generated by the 2005 and 2004 Acquisitions. The increased cash provided by these acquisitions in 2005 more than offset increases in escrows and reserves, accrued straight-line rents, and deferred costs, all of which resulted from a larger portfolio in 2005.

Net cash used in investing activities increased $4.3 million in 2005 primarily as a result of funding the cash portion of the 2005 Acquisitions, which were acquired for a total purchase price of $225.1 million, including mortgage debt assumed as part of the acquisitions with a total fair value of $79.7 million and the issuance of Operating Partnership units valued at $7.7 million. The cash funding of 2005 Acquisitions was $6.0 million less than the cash funding of 2004 Acquisitions. This was offset by $8.2 million in cash received related to the sale of 6251 Ammendale Road in 2004. The Company also invested $4.8 million in capital and tenant improvement costs during the year ended December 31, 2005 compared to $3.0 million in 2004.

Net cash provided by financing activities increased $7.5 million in 2005 due primarily to borrowings of $186.9 million under the Company’s credit facility incurred to finance the 2005 Acquisitions. The Company incurred additional mortgage debt of $100.0 million and had net proceeds of $124.0 million from offerings of 2,050,000 and 3,450,000 common shares that closed on March 31, 2005 and October 26, 2005, respectively. The borrowings and offerings proceeds were used to repay mortgage and credit facility debt, including prepayment charges, of $271.5 million. Additionally, the Company paid $2.3 million in financing costs during 2005 related to its mortgage and credit facility transactions. The Company paid dividends to shareholders and distributions to minority interests of $20.4 million and received proceeds from employee stock option exercises of $1.1 million.

Same Property Net Operating Income

Same Property Net Operating Income (“Same Property NOI”), defined as the Company’s property operating revenues (rental income, tenant reimbursements and other income) less its property operating expenses (property expenses, real estate taxes and insurance) from the properties owned by the Company for the entirety of the periods presented, is a primary performance measure the Company uses to assess the results of operations at its properties. As an indication of the Company’s operating performance, Same Property NOI should not be considered an alternative to net income calculated in accordance with GAAP. A reconciliation of the Company’s Same Property NOI to net income from its consolidated statements of operations is presented below. The Same Property NOI results are presented without the inclusion of corporate-level expenses, as well as depreciation and amortization expense, and exclude termination fees as they are infrequent and can vary significantly period over period thus impacting trends and comparability. The Company eliminates its corporate-level expenses to arrive at the property level results, which it feels provides the investor with greater insight into the performance of its properties and useful information for evaluating the period over period operating performance of its portfolio. This presentation allows management and investors to distinguish whether growth or declines in Same Property NOI are a result of increases or decreases in property operations or the acquisition of additional properties. While this presentation provides useful information to management and investors, the results below should be combined with the results from the consolidated statements of operations to provide an accurate depiction of total Company performance. The Company eliminates depreciation and amortization, which is a property level expense, in computing Same Property NOI as these are non-cash expenses that are based on historical cost accounting and do not offer the investor any insight into the operations of the property.

2006 Compared to 2005

The following tables of selected operating data provide the basis for our discussion of Same Property NOI in 2006 compared to 2005:


	Years Ended December 31,
(dollars in thousands)	2006			2005			$ Change			% Change
Number of properties		38			38			—			—

Same property revenue
Rental	$	56,649		$	55,809		$	840			1.5
Tenant reimbursement and other		10,292			8,999			1,293			14.4

Total same property revenue		66,941			64,808			2,133			3.3


Same property operating expenses
Property		12,642			11,637			1,005			8.6
Real estate taxes and other		5,513			5,540			(27	)		(0.5	)

Total same property operating expenses		18,155			17,177			978			5.7


Same property net operating income	$	48,786		$	47,631		$	1,155			2.4


Reconciliation to net income
Same property net operating income	$	48,786		$	47,631
Acquisition property revenues		37,595			11,630
Acquisition property operating expenses		(11,064	)		(2,740	)
General and administrative expenses		(9,832	)		(7,940	)
Depreciation and amortization		(34,536	)		(24,751	)
Interest expense, net		(27,468	)		(20,054	)
Other expenses		(792	)		(2,546	)
Minority interests		(123	)		(91	)
Discontinued operations⁽¹⁾		7,465			211

Net income	$	10,031		$	1,350



	Occupancy at Year End
	2006			2005
Same Properties⁽²⁾		93.7%			93.3%
Acquisition Properties		83.0%			83.8%
Total		88.0%			89.3%


(1)		Discontinued operations include the gain on disposal and income from the operations of 6600 Business Parkway, which was sold in May 2006.

(2)		Same Properties include: Plaza 500, Van Buren Business Park, 13129 Airpark Road, 4200 & 4212 Tech Court, Newington Business Park Center, Crossways Commerce Center I, Crossways Commerce Center II, Coast Guard Building, Snowden Center, Rumsey Center, Greenbrier Technology Center II, Norfolk Business Center, Virginia Center, Interstate Plaza, Alexandria Corporate Park, Herndon Corporate Center, Aquia Commerce Center I & II, 6900 English Muffin Way, Deer Park, Gateway Center, Gateway West, 4451 Georgia Pacific Boulevard, 20270 Goldenrod Lane, Girard Business Center, Girard Place, Old Courthouse Square, Patrick Center, 15 Worman’s Mill Court, 7561 Lindbergh Drive, West Park, Woodlands Business Center, Airpark Place, 15395 John Marshall Highway, Crossways II, Norfolk Commerce Park II, Windsor at Battlefield, 4612 Navistar Drive and Campus at Metro Park North.

Same Property NOI increased $1.2 million, or 2.4%, in 2006 over 2005. Rental revenue increased $0.8 million, or 1.5%, in 2006 as a result of higher rental rates on new and renewal leases, while occupancy remained relatively unchanged. Tenant reimbursement and other revenue increased $1.3 million, or 14.4%, generally reflecting the Company’s conversion of many new and renewal leases to a triple-net basis whereby a higher percentage of operating expenses are recovered. Total Same Property operating expenses increased $1.0 million, or 5.7%, due substantially to higher variable operating costs, with a portion attributable to the deregulation of utility contracts on our Maryland properties (the Company entered into fixed-rate utility contracts in late 2006). The increase in property operating expense was more than offset by the increase in tenant reimbursement revenue as a result of the increase in triple-net leases.

2005 Compared to 2004

The following tables of selected operating data provide the basis for our discussion of Same Property NOI in 2005 compared to 2004:


	Years Ended December 31,
(dollars in thousands)	2005			2004			$ Change			% Change
Number of properties		15			15			—			—

Same property revenue
Rental	$	27,173		$	25,774		$	1,399			5.4
Tenant reimbursement and other		4,502			3,917			585			14.9

Total same property revenue		31,675			29,691			1,984			6.7


Same property operating expenses
Property		5,756			5,214			542			10.4
Real estate taxes and other		2,593			2,724			(131	)		(4.8	)

Total property operating expenses		8,349			7,938			411			5.2


Same property net operating income	$	23,326		$	21,753		$	1,573			7.2


Reconciliation to net income
Same property net operating income	$	23,326		$	21,753
Acquisition property revenues		44,763			11,267
Acquisition property operating expenses		(11,568	)		(3,293	)
General and administrative expenses		(7,940	)		(4,702	)
Depreciation and amortization		(24,751	)		(13,216	)
Interest expense, net		(20,054	)		(10,877	)
Other expenses		(2,546	)		(753	)
Minority interests		(91	)		(16	)
Discontinued operations⁽¹⁾		211			2,467

Net income	$	1,350		$	2,630



	Occupancy at Year End
	2005			2004
Same Properties⁽²⁾		93.3%			93.3%
Acquisition Properties		87.7%			94.2%
Total		89.3%			93.8%


(1)		Discontinued operations include the income from operations from 6600 Business Parkway, which was sold in May 2006, and the gain on disposal and the income from operations from 6251 Ammendale Road, which was sold in November 2004.

(2)		Same Properties include: Plaza 500, Van Buren Business Park, 13129 Airpark Road, 4200 & 4212 Tech Court, Newington Business Park Center, Crossways Commerce Center I, Crossways Commerce Center II, Coast Guard Building, Snowden Center, Rumsey Center, Greenbrier Technology Center II, Norfolk Business Center, Virginia Center, Interstate Plaza and Alexandria Corporate Park.

Same Property NOI increased $1.6 million, or 7.2% in 2005 over 2004. The $1.4 million, or 5.4%, increase in rental revenue was due primarily to $1.0 million of additional rental revenue in 2005 generated by the increased leasing activity during 2004 at Van Buren Business Park, 13129 Airpark Road, Plaza 500 and Virginia Technology Center. Tenant reimbursement and other revenue increased $0.6 million, or 14.9%, in 2005 reflecting a higher recovery of property operating expenses due to increased occupancy and a higher percentage of triple-net leases in the portfolio. Total property operating expenses increased $0.4 million, or 5.2%, generally due to higher variable cost including snow removal and utilities. Though year-end occupancy on these properties was unchanged, occupancy in 2005 trended at a higher average rate compared to 2004 and contributed to the increase in operating expenses. The increase in operating expenses was partially offset by a decrease in insurance expense during 2005 as a result of lower insurance premiums due to achieving some economies of scale with a larger portfolio that resulted in a size distribution risk.

Liquidity and Capital Resources

The Company expects to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on its revolving credit facility. As a REIT, the Company is required to distribute at least 90% of its taxable income to its shareholders on an annual basis. The Company also regularly requires capital to invest in its existing portfolio of operating assets for capital projects. These capital projects include routine capital improvements and maintenance and leasing-related costs, including tenant improvements and leasing commissions.

On March 31, 2005, the Company sold 2,050,000 common shares of beneficial interest at $21.95 per share, generating net proceeds of approximately $44.9 million.

On June 28, 2005, the Company entered into a first amendment to its unsecured credit facility. The amendment reduced the applicable LIBOR margin and resulted in changes to other financial covenants. As part of the transaction, the Company paid an amendment fee to the lenders of five basis points on the amount of the facility. On October 12, 2005, the Company entered into a second amendment to its unsecured credit facility, which increased the permitted borrowings under the revolving credit facility from $75 million to $100 million. The unsecured facility contains financial and other covenants. The Company met all requirements under these covenants as of December 31, 2006.

In July 2005, the Company closed on a $100 million fixed-rate secured financing with Jackson National Life Insurance Company. The loan has a 10-year term with a fixed rate of 5.19%, with interest only payments for the first five years and based on a 30-year amortization thereafter. Terms of the financing allow the Company to substitute collateral as long as certain debt service coverage and loan-to-value ratios are maintained. Proceeds from the loan were used to repay the Company’s floating rate mortgage debt on Greenbrier Technology Center II, Norfolk Business Center, Rumsey Center and Snowden Center and to reduce the balance outstanding on its revolving credit facility. Proceeds were also used to repay a mortgage loan bearing interest at 7.26% that was scheduled to mature in December 2007. The Company incurred a one-time charge totaling approximately $2.8 million in the fourth quarter of 2005 related to the costs associated with repaying this loan and writing off unamortized deferred financing costs. Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center and Alexandria Corporate Park served as the collateral for the first funding, and Plaza 500 and Van Buren Business Park were added to the collateral base with the second funding.

On October 26, 2005, the Company completed an offering of 3,450,000 common shares of beneficial interest at $24.23 per share, generating net proceeds of approximately $79.1 million.

On February 27, 2006, the Company entered into a $50 million Loan Term Agreement with Key Bank, N.A. The loan had a five-year term maturing in March 2011 with interest payable at a variable interest rate of LIBOR plus a spread determined by the Company’s leverage levels. Proceeds from the loan were used to partially fund acquisitions and pay down a portion of the Company’s unsecured revolving credit. The Company repaid this loan in June 2006 using proceeds from the private placement of Senior Notes discussed below.

On April 26, 2006, the Company entered into an amendment and restatement to its unsecured revolving credit facility, which increased the permitted borrowings under the facility from $100 million to $125 million. The facility, which matures in May 2009, has a feature that allows the Company to increase the size of the facility to up to $225 million. Borrowings on the facility bear interest at 120 to 160 basis points over LIBOR depending on the Company’s overall leverage levels. The exact interest payable under the facility depends upon the ratio of our total indebtedness to total asset value, and this ratio cannot exceed 65%. The Company is required to pay annual commitment fees that vary from 0.15% to 0.25% based on the amount of unused capacity under the credit facility. The unsecured facility contains financial and other covenants. The Company met all requirements under these covenants as of December 31, 2006.

On June 22, 2006, the Operating Partnership completed a private placement of unsecured Senior Notes totaling $75 million. The transaction comprised of $37.5 million in 7-year Series A Senior Notes, maturing on June 15, 2013, bearing a fixed interest rate of 6.41% and $37.5 million in 10-year Series B Senior Notes, maturing on June 15, 2016, bearing a fixed interest rate of 6.55%. Interest is payable for the Series A and Series B Senior Notes on June 15 and December 15 of each year beginning on December 15, 2006. The Senior Notes are equal in right of payment with all the Company’s other senior unsubordinated indebtedness. The proceeds from the issuance of the Senior Notes were used to repay the outstanding $50 million term loan, described above, and to fund a portion of the purchase price of Airpark Business Center, Hanover Business Center and Chesterfield Business Center in Richmond, Virginia.

On July 21, 2006, the Company completed an offering of 3,450,000 common shares of beneficial interest at $27.46 per share, generating net proceeds of approximately $90 million. The Company used $55.5 million of the net proceeds to repay the balance and accrued interest on its unsecured revolving credit facility and the remaining proceeds were applied toward the purchase of Gateway 270 West.

On December 11, 2006, the Operating Partnership issued $125 million of 4.00% Exchangeable Senior Notes for net proceeds of approximately $122.2 million, net of a $2.8 million discount at issuance resulting in an effective interest rate of 4.45%. The Exchangeable Senior Notes mature on December 15, 2011 and are equal in right of payment with all of the Company’s other senior unsubordinated indebtedness. Interest is payable on June 15 and December 15 of each year beginning on June 15, 2007. Holders may, under certain conditions, exchange their notes for cash or a combination of cash and the Company’s common shares, at the Company’s option, at any time after October 15, 2011. The Exchangeable Senior Notes are exchangeable into the Company’s common shares at an initial rate of 27.6855 shares for each $1,000 of principal amount of the notes for a total of approximately 3.5 million shares, which is equivalent to an initial exchange price of $36.12 per Company common share representing an exchange premium of approximately 20% over the market price of the Company’s common shares at the time of the transaction. The exchange rate is adjusted for, among other things, the payment of dividends to the Company’s common shareholders subject to a maximum exchange rate. Holders may exchange their notes prior to maturity under certain conditions, including during any calendar quarter beginning after December 31, 2006 (and only during such calendar quarter), if and only if, the closing sale price of the Company’s common shares for at least 20 trading days in the period of 30 trading days ending on the last trading day of the preceding quarter is greater than 130% of the exchange price on the applicable trading day. The Exchangeable Senior Notes have not been registered under the Securities Act and may not be traded or sold except to certain defined qualified institutional buyers. The notes are senior unsecured obligations of the Operating Partnership and guaranteed by the Company.

The Company used $73.6 million of the net proceeds from the Exchangeable Senior Notes issuance to repay the outstanding balance on its unsecured revolving credit facility, including accrued interest, and $7.6 million of the proceeds to purchase a capped call option. The capped call option is designed to reduce the potential dilution of common shares upon the exchange of the notes and protects the Company against any dilutive effects of the conversion feature if the market price of the Company’s common shares is between $36.12 and $42.14 per share. This option allows the Company to receive shares of the Company’s common stock from a counterparty equal to the amount of common stock and/or cash related to the excess conversion value that the Company would pay the holders of the Exchangeable Senior Notes upon conversion. The option will terminate upon the earlier of the maturity date of the notes or the first day in which the notes are no longer outstanding due to conversion or otherwise. The option was recorded as a reduction of shareholders’ equity. To the extent the then market value per Company common share exceeds the cap price during the observation period relating to an exchange of notes, the reduction in potential dilution will be limited to the difference between the strike price and the cap price. The Company applied the majority of the remaining proceeds toward the January 2007 purchases of Greenbrier Circle Corporate Center and Greenbrier Technology Center I.

The Company intends to meet long-term funding requirements for property acquisitions, development and other non-recurring capital improvements through net cash from operations, long-term secured and unsecured indebtedness, including borrowings under its unsecured revolving credit facility, term loans, unsecured notes and the issuance of equity and debt securities. The Company’s ability to raise funds through sales of debt and equity securities is dependent on, among other things, general economic and market conditions for REITs, rental rates, occupancy levels, market perceptions and the trading price of the Company’s shares. The Company will continue to analyze which sources of capital are most advantageous to it at any particular point in time, but the capital markets may not be consistently available on terms the Company deems attractive.

As of December 31, 2006, the Company has approximately $76.7 million available for issuance pursuant to its existing shelf registration statement.

The Company could also fund property acquisitions, development and other non-recurring capital improvements through additional borrowings, sales of assets or joint ventures. The Company could also issue units of partnership interest in the Operating Partnership to fund a portion of the purchase price for some of its future property acquisitions. During 2005, the Company issued 300,429 Operating Partnership units as partial consideration for the acquisitions of Owings Mills Business Center and Prosperity Business Center.

Debt Financing

The following table sets forth certain information with respect to the Company’s indebtedness outstanding as of December 31, 2006.


				Principal
	Effective			Balance		Annualized		Earliest
	Interest			December 31,		Debt		Maturity		Balance at
(amounts in thousands, except percentages)	Rate			2006		Service		Date		Maturity
Fixed Rate Debt
Herndon Corporate Center		5.66	%	$	8,654	$	603		4/01/2008	$	8,549
Norfolk Commerce Park II		5.28	%		7,453		648		8/07/2008		7,034
Suburban Maryland Portfolio¹		5.54	%		75,841		6,434		9/11/2008		71,825
Glenn Dale Business Center		5.13	%		8,825		780		5/01/2009		8,033
4200 Tech Court		8.07	%		1,776		168		10/01/2009		1,705
Park Central I		5.66	%		5,216		519		11/01/2009		4,523
4212 Tech Court		8.53	%		1,730		169		6/01/2010		1,654
Park Central II		5.66	%		6,474		638		11/01/2010		5,289
Enterprise Center		5.20	%		19,410		1,647		12/01/2010		16,712
Indian Creek Court		5.90	%		13,559		1,162		1/01/2011		11,982
403/405 Glenn Drive		5.50	%		9,037		746		7/01/2011		7,807
4612 Navistar Drive		5.20	%		13,978		1,131		7/11/2011		11,921
Campus at Metro Park North		5.25	%		25,594		2,028		2/11/2012		21,581
1434 Crossways Boulevard Building II		5.38	%		10,854		826		8/05/2012		8,866
Crossways Commerce Center		6.70	%		25,727		2,087		10/01/2012		23,313
Newington Business Park Center		6.70	%		16,229		1,316		10/01/2012		14,706
Prosperity Business Center		5.75	%		3,966		332		1/01/2013		3,242
Aquia Commerce Center I		7.28	%		831		165		2/01/2013		42
1434 Crossways Boulevard Building I		5.38	%		9,225		665		3/05/2013		7,597
Linden Business Center		5.58	%		7,645		559		10/01/2013		6,596
Owings Mills Business Center		5.75	%		5,829		425		3/01/2014		5,066
Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center and Alexandria Corporate Park		5.19	%		100,000		5,190		8/01/2015		100,000
Gateway Centre (Building I)		5.88	%		1,786		239		11/01/2016		—
Hanover Business Center
Hanover Building D		6.63	%		1,055		161		8/01/2015		13
Hanover Building B		8.00	%		1,941		154		6/15/2016		1,911
Hanover Building C		6.63	%		1,452		161		12/01/2017		13
Chesterfield Business Center
Chesterfield Buildings C, D and H		6.63	%		2,740		414		8/01/2015		34
Chesterfield Buildings A, B, E and F		6.63	%		2,954		318		6/01/2021		26
Airpark Business Center		6.63	%		1,612		173		6/01/2021		14

					391,393		29,858				350,054

Convertible Debt
Exchangeable Senior Notes²		4.45	%		122,234		5,000		12/15/2011		125,000

Senior Unsecured Debt
Series A Notes		6.41	%		37,500		2,404		6/15/2013		37,500

Series B Notes		6.55	%		37,500		2,456		6/15/2016		37,500

Total Fixed Rate Debt		5.47	%³	$	588,627	$	39,718			$	550,054


¹		Deer Park, Gateway Center, Gateway West, Girard Business Center, Girard Place, 15 Worman’s Mill Court, 20270 Goldenrod Lane, 6900 English Muffin Way, 4451 Georgia Pacific Blvd, 7561 Lindbergh Drive, Patrick Center, West Park, Woodlands Business Center and Old Courthouse Square collectively are referred to as the Suburban Maryland Portfolio.

²		The balance is net of original issue discount.

³		Weighted average interest rate on total fixed rate debt.

All of our outstanding debt contains customary, affirmative covenants including financial reporting, standard lease requirements and certain negative covenants, all of which the Company was in compliance with as of December 31, 2006. The Company is also subject to cash management agreements with most of its mortgage lenders. These agreements require that revenue generated by the subject property be deposited into a clearing account and then swept into a cash collateral account for the benefit of the lender from which cash is distributed only after funding of improvement, leasing and maintenance reserves and payment of debt service, insurance, taxes, capital expenditures and leasing costs.

Derivative Financial Instruments

The Company may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities of fair value with the offset to accumulated other comprehensive income in shareholders’ equity for effective hedging relationships. Derivative transactions that do not qualify for hedge accounting treatment or are considered ineffective will result in changes in fair value recognized in earnings.

The Company had interest rate cap agreements with a notional amount of $25.5 million on floating rate mortgage debt that were repaid in July 2005. The cap agreements were not designated as cash flow hedges and were recorded at fair value as a component of prepaid and other assets. The Company recognized insignificant charges during 2005 and 2004 related to the decline in fair market value of the cap agreements. The interest rate caps were terminated in July 2005, upon retirement of the underlying mortgage debt.

In May 2006, the Company entered into a forward treasury lock agreement to effectively lock the interest rate in anticipation of a planned debt issuance in an effort to minimize the risk of rising interest rates during the period prior to issuance. The Company closed out the derivative in June 2006 upon the pricing of the $75.0 million Senior Notes and settled the contract with a cash payment of $0.7 million to the counterparty.

On December 11, 2006, the Operating Partnership issued $125 million of 4.00% Exchangeable Senior Notes for net proceeds of approximately $122.2 million, net of a $2.8 million discount at issuance. These notes are exchangeable into the Company’s common shares at an initial rate of 27.6855 shares for each $1,000 of principal amount of the notes for a total of approximately 3.5 million shares, which is equivalent to an initial exchange price of $36.12 per common share representing an exchange premium of approximately 20% over the market price of the Company’s common shares at the time of the transaction. The exchange rate is adjusted for, among other things, the payment of dividends to the Company’s common shareholders subject to a maximum exchange rate. Holders may exchange their notes prior to maturity under certain conditions, including during any calendar quarter beginning after December 31, 2006 (and only during such calendar quarter), if and only if, the closing sale price of the Company’s common shares for at least 20 trading days in the period of 30 trading days ending on the last trading day of the preceding quarter is greater than 130% of the exchange price on the applicable trading day.

In December 2006, and concurrent with the issuance of $125 million of Exchangeable Senior Notes, the Company purchased, for $7.6 million, a capped call option on its common shares in a separate transaction. The notes are exchangeable into the Company’s common shares at an initial rate of 27.6855 shares for each $1,000 of principal amount of the notes for a total of approximately 3.5 million shares, which is equivalent to an initial exchange price of $36.12 per Company common share. The capped call option is designed to reduce the potential dilution of common shares upon the exchange of the notes and protects the Company against any dilutive effects of the conversion feature if the market price of the Company’s common shares is between $36.12 and $42.14 per share. This option allows the Company to receive shares of the Company’s common stock from a counterparty equal to the amount of common stock and/or cash related to the excess conversion value that the Company would pay the holders of the notes upon conversion. The option will terminate upon the earlier of the maturity date of the notes or the first day in which the notes are no longer outstanding due to conversion or otherwise. The option was recorded as a reduction of shareholders’ equity. To the extent the then market value per Company common share exceeds the cap price during the observation period relating to an exchange of notes, the reduction in potential dilution will be limited to the difference between the strike price and the cap price.

Off-Balance Sheet Arrangements

The Company was not a party to any joint venture agreements and had no off-balance sheet arrangements as of December 31, 2006 or 2005.

Disclosure of Contractual Obligations

The following table summarizes known material contractual obligations associated with investing and financing activities as of December 31, 2006 (amounts in thousands).


			Payments due by period
									More than 5
Contractual Obligations	Total		Less than 1 year		1-3 Years		3 -5 Years		Years
Mortgage loans	$	391,393	$	10,500	$	115,199	$	67,244	$	198,450
Exchangeable senior notes¹		125,000		—		—		125,000		—
Senior notes		75,000		—		—		—		75,000
Interest expense		172,657		32,194		77,501		35,796		27,166
Operating leases		4,380		752		1,604		1,490		534
Development		2,723		2,723		—		—		—
Capital expenditures		2,924		2,924		—		—		—
Tenant improvements		3,952		3,952		—		—		—

Total	$	778,029	$	53,045	$	194,304	$	229,530	$	301,150


¹		Total carrying value of the Exchangeable Senior Notes was $122, 234, net of discount, at December 31, 2006.

Development contractual obligations include commitments primarily related to the expansion of John Marshall Highway and the Sterling Park Business Center projects. Capital expenditure obligations represent commitments for roof, asphalt and HVAC replacements contractually obligated as of December 31, 2006. Tenant improvement obligations include costs the Company expects to incur on leases in place at December 31, 2006. The Company had no other material contractual obligations as of December 31, 2006.

Funds From Operations

Many investors and analysts following the real estate industry use funds from operations (“FFO”) as a supplemental performance measure. While the Company believes net income available to common shareholders as defined by GAAP is the most appropriate measure of operating results, management considers FFO an appropriate supplemental measure given its wide use by and relevance to investors and analysts. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume that the value of real estate diminishes predictably over time.

As defined by the National Association of Real Estate Investment Trusts, or NAREIT, in its March 1995 White Paper (as amended in November 1999 and April 2002), FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company computes FFO in accordance with NAREIT’s definition, which may differ from the methodology for calculating FFO, or similarly titled measures, used by other companies and, therefore, our presentation may not be comparable to their presentations. The Company adds back minority interest in the income from its Operating Partnership in determining FFO. The Company believes this is appropriate as Operating Partnership units are presented on an as-converted, one-for-one basis for shares of stock in determining FFO per fully diluted share.

FFO should not be viewed as a substitute for net income as a measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs that could materially impact the Company’s results of operations.

The following table presents a reconciliation of net income to FFO available to common share and unitholders for the years presented:


	Funds From Operations
	Year Ended December 31,
(amounts in thousands)	2006			2005		2004
Net income	$	10,031		$	1,350	$	2,630
Add: Depreciation and amortization of real estate assets		34,536			24,751		13,216
Discontinued operations depreciation and amortization		3			147		329
Minority interests		509			109		251
Deduct: Gain on sale of disposed property		(7,475	)		—		(2,092	)

FFO available to common shareholders and unitholders	$	37,604		$	26,357	$	14,334


Weighted average number of diluted common shares and Operating Partnership units outstanding		23,265			18,059		13,052

Forward Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete current and future acquisitions; the Company’s ability to obtain additional financing; and other risks detailed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this discussion, or elsewhere, might not occur.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market interest rates. The Company uses derivative financial instruments to manage, or hedge, interest rate risks related to its borrowings. The Company does not use derivatives for trading or speculative purposes and only enters into contracts with major financial institutions based on their credit rating and other factors.

As of December 31, 2006, the Company did not have any outstanding borrowings under its unsecured revolving credit facility.

For fixed-rate debt, changes in interest rates generally affect the fair value of debt but not the earnings or cash flow of the Company. The Company estimates the fair value of its fixed rate debt outstanding at December 31, 2006 to be $585.2 million compared to the $588.6 million carrying value at that date.

The Company had no variable rate debt outstanding at December 31, 2006. Based on the Company’s variable-rate debt balances, including borrowings outstanding on the unsecured revolving credit facility, interest expense would have varied by approximately $500 thousand in 2005 if interest rates had been, on average, 1% higher or lower during the period.

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company has entered into derivative agreements to mitigate exposure to unexpected changes in interest. The Company used interest rate protection, or “cap” agreements in periods prior to 2006 to reduce the impact of interest rate changes on its variable rate debt. The Company will only enter into these agreements with highly rated institutional counterparts and does not expect that any counterparties will fail to meet contractual obligations. The interest rate caps were terminated in July 2005, upon retirement of the underlying mortgage debt.

The following table represents the Company’s long-term debt obligations, principal cash flows by scheduled maturity and weighted average interest rates at December 31, 2006 (dollars in thousands).


	Years ended December 31,
	2007			2008			2009			2010			2011			Thereafter			Total
Fixed rate mortgage debt	$	10,500		$	95,006		$	20,193		$	41,854		$	25,390		$	198,450		$	391,393
Exchangeable senior notes¹		—			—			—			—			125,000			—			125,000
Senior notes		—			—			—			—			—			75,000			75,000
Weighted average interest rate – fixed rate debt		5.47	%		5.44	%		5.43	%		5.41	%		5.84	%		5.76	%		5.46	%


¹		The carrying value of the Exchangeable Senior Notes was $122,234, net of discount at December 31, 2006.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are filed with this Annual Report on Form 10-K immediately following the signature page of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of trustees, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

	1.		Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	2.		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and trustees of the Company; and

	3.		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. The Company’s controls and procedures over financial reporting are designed to provide reasonable assurance of achieving their objectives.

Management has used the framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006, the end of the most recent fiscal year. KPMG LLP, our independent registered public accounting firm, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting.

Changes in Internal Controls Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
First Potomac Realty Trust:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that First Potomac Realty Trust (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Frameworkissued by COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2006 and 2005 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006 and the related financial statement schedule of real estate and accumulated depreciation of First Potomac Realty Trust and subsidiaries and our report dated March 15, 2007, expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ KPMG LLP

McLean, Virginia
March 15, 2007

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information is hereby incorporated by reference to the material appearing in the Company’s proxy statement to be filed in connection with the Company’s Annual Meeting of Shareholders to be held on May 22, 2007 (the “Proxy Statement”) under the headings “Proposal 1: Election of Trustees,” “Committees and Meetings of our Board of Trustees,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11. EXECUTIVE COMPENSATION

The information is hereby incorporated by reference to the Proxy Statement under the headings “Compensation of Trustees,” “Executive Compensation,” “Committee Interlocks and Insider Participation” and “Compensation Committee Report.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information is incorporated by reference to Item 5 herein (under the heading “Securities Authorized for Issuance Under Equity Compensation Plan”) and to the Proxy Statement under the headings “Share Ownership of Trustees and Executive Officers” and “Share Ownership of Certain Beneficial Owners.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information is incorporated by reference to the Proxy Statement under the heading “Certain Relationships and Related Transactions” and “Information on Our Board of Trustees and its Committees.”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information is incorporated by reference to the Proxy Statement under the heading “Audit Committee Report.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Schedules

Reference is made to the Index to Financial Statements and Schedules on page 50 for a list of the financial statements and schedules included in this report.

Exhibits

The following is a list of the exhibits included in this report:


Exhibit		Description of Document

3.1⁽¹⁾		Amended and Restated Declaration of Trust of the Registrant.
3.2⁽¹⁾		Amended and Restated Bylaws of the Registrant.
4.1⁽¹⁾		Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September 15, 2003.
4.2⁽²⁾		Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013.
4.3⁽³⁾		Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016.
4.4⁽⁴⁾		Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006.
4.5⁽⁵⁾		Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006.
4.6⁽⁶⁾		Subsidiary Guaranty, dated as of June 22, 2006.
4.7⁽⁷⁾		Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee.
4.8⁽⁸⁾		Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011.
10.1⁽¹⁾		Deed of Trust Note between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.2⁽¹⁾		Deed of Trust, Assignment of Leases and Rents and Security Agreement between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.3⁽¹⁾		Fixed Rate Note between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.4⁽¹⁾		Deed of Trust and Security Agreement between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.5⁽¹⁾		Fixed Rate Note between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.6⁽¹⁾		Deed of Trust and Security Agreement between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.7⁽¹⁾		Fixed Rate Note between Newington Terminal Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.8⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Newington Terminal Associates, LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.9⁽¹⁾		Fixed Rate Note between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.10⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.11⁽¹⁾		Promissory Note between Norfolk First LLC and GTC II First LLC, as borrowers, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.12⁽¹⁾		Deed of Trust and Security Agreement by and between GTC II First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.13⁽¹⁾		Deed of Trust and Security Agreement by and between Norfolk First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.14⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Rumsey/Snowden Holding LLC and First Potomac Realty Investment Limited Partnership.


Exhibit		Description of Document
10.15⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Greenbrier/Norfolk Holding LLC and First Potomac Realty Investment Limited Partnership.
10.16⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Kristina Way, LLC and Newington Terminal Associates LLC and First Potomac Realty Investment Limited Partnership.
10.17⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and FPM Management, LLC, as acquirer, dated July 18, 2003.
10.18⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and First Potomac Realty Investment Limited Partnership, as acquirer, dated July 18, 2003.
10.19⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Douglas J. Donatelli and the Registrant.
10.20⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Nicholas R. Smith and the Registrant.
10.21⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Barry H. Bass and the Registrant.
10.22⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between James H. Dawson and the Registrant.
10.23⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Louis T. Donatelli and the Registrant.
10.24⁽⁹⁾		Employment Agreement, dated February 14, 2005, by and between Joel F. Bonder and the Registrant.
10.25⁽¹⁰⁾		Summary of 2004 Cash Incentive Compensation, 2005 Base Salary Compensation and 2005 Restricted Stock Awards.
10.26⁽¹¹⁾		Summary of 2006 Non-Employee Trustee Compensation.
10.27⁽¹⁾		2003 Equity Compensation Plan.
10.28⁽¹²⁾		Amendment No. 1 to Equity Compensation Plan.
10.29⁽¹³⁾		Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association, as Managing Administrative Agent, and Wells Fargo Bank.
10.30⁽¹⁴⁾		Consent to Sub-Sublease, by and among Bethesda Place II Limited Partnership, Informax, Inc. and the Registrant, dated March 31, 2005.
10.31⁽¹⁵⁾		First Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated June 28, 2005.
10.32⁽¹⁶⁾		Loan Agreement, by and among Jackson National Life Insurance Company, as lender, and Rumsey First LLC, Snowden First LLC, GTC II First LLC, Norfolk First LLC, Bren Mar, LLC, Plaza 500, LLC and Van Buren, LLC, as the borrowers, dated July 18, 2005.
10.33⁽¹⁷⁾		Second Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated October 12, 2005.
10.34⁽¹⁸⁾		Joinder Agreement, by and between, Gateway Hampton Roads, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.35⁽¹⁹⁾		Joinder Agreement, by and between FP Campostella Road, LLC, FP Diamond Hill, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.36⁽²⁰⁾		Agreement between First Potomac Realty Investment Limited Partnership and Louis T. Donatelli, dated as of February 28, 2006.
10.37⁽²¹⁾		Agreement and Plan of Merger by and between First Potomac Management Inc. and the Registrant, dated as of February 28, 2006.
10.38⁽²²⁾		Amended and Restated Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and Key Bank N.A., Wachovia Bank, N.A., Wells Fargo Bank N.A., Bank of Montreal and Key Bank N.A. as Administrative Agent, dated as of April 28, 2006.
10.39⁽²³⁾		2006 Base Salary Compensation.
10.40⁽²⁴⁾		Form of Restricted Common Shares Award Agreement for Officers.
10.41⁽²⁵⁾		Form of Restricted Common Shares Award Agreement for Trustees.
10.42⁽²⁶⁾		Registration Rights Agreement, dated December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant and Wachovia Capital Markets, LLC, as the Representative.
10.43⁽²⁷⁾		Letter Agreement with respect to Capped-Call Transaction, dated December 5, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant and Wachovia Bank, National Association.
10.44⁽²⁸⁾		Letter Agreement with respect to Capped-Call Transaction, dated December 8, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant and Wachovia Bank, National Association.
12*		Statement Regarding Computation of Ratios.
21*		Subsidiaries of the Registrant.
23*		Consent of KPMG LLP (independent registered public accounting firm).
31.1*		Section 302 Certification of Chief Executive Officer.
31.2*		Section 302 Certification of Chief Financial Officer.
32.1*		Section 906 Certification of Chief Executive Officer.
32.2*		Section 906 Certification of Chief Financial Officer.


⁽¹⁾		Incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-11 (Registration No. 333-107172).

⁽²⁾		Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽³⁾		Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁴⁾		Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁵⁾		Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁶⁾		Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁷⁾		Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽⁸⁾		Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽⁹⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽¹⁰⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽¹¹⁾		Incorporated by reference to Item 1.01 of the Company’s Current Report on Form 8-K filed on December 7, 2005.

⁽¹²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2005.

⁽¹³⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 6, 2004.

⁽¹⁴⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2005.

⁽¹⁵⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 30, 2005.

⁽¹⁶⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2005.

⁽¹⁷⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁸⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁹⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽²⁰⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 7, 2006.

⁽²¹⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 7, 2006.

⁽²²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2006.

⁽²³⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2006.

⁽²⁴⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2006.

⁽²⁵⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 13, 2006.

⁽²⁶⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽²⁷⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽²⁸⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

*		Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the state of Maryland on March 15, 2007.


		FIRST POTOMAC REALTY TRUST

		/s/ Douglas J. Donatelli Douglas J. Donatelli
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2007.


Signature		Title

/s/ Louis T. Donatelli Louis T. Donatelli		Chairman of the Board of Trustees

/s/ Douglas J. Donatelli Douglas J. Donatelli		President, Chief Executive Officer and Trustee

/s/ Barry H. Bass Barry H. Bass		Executive Vice President, Chief Financial Officer

/s/ Michael H. Comer Michael H. Comer		Senior Vice President, Chief Accounting Officer

/s/ Robert H. Arnold Robert H. Arnold		Trustee

/s/ Richard B. Chess Richard B. Chess		Trustee

/s/ J. Roderick Heller, III J. Roderick Heller, III		Trustee

/s/ R. Michael McCullough R. Michael McCullough		Trustee

/s/ Alan G. Merten Alan G. Merten		Trustee

/s/ Terry L. Stevens Terry L. Stevens		Trustee

FIRST POTOMAC REALTY TRUST
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

The following consolidated financial statements and schedule of First Potomac Realty Trust and Subsidiaries and report of our independent registered public accounting firm thereon are attached hereto:

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES


	Page
Report of independent registered public accounting firm		53
Consolidated Balance Sheets as of December 31, 2006 and 2005		54
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004		55
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004		56
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		57
Notes to consolidated financial statements		58

FINANCIAL STATEMENT SCHEDULES

Schedule III: Real Estate and Accumulated Depreciation

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

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
First Potomac Realty Trust:

We have audited the accompanying consolidated balance sheets of First Potomac Realty Trust and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of real estate and accumulated depreciation. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Potomac Realty Trust and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Paymentin 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First Potomac Realty Trust’s internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

McLean, Virginia
March 15, 2007

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2005

(Amounts in thousands, except share amounts)


	2006			2005
Assets:
Rental property, net	$	884,882		$	668,730
Cash and cash equivalents		41,367			3,356
Escrows and reserves		11,139			9,818
Accounts and other receivables, net of allowance for doubtful accounts of $334 and $339, respectively		4,212			2,705
Accrued straight-line rents, net of allowance for doubtful accounts of $41 and $35, respectively		4,973			3,638
Deferred costs, net		9,006			6,676
Prepaid expenses and other assets		6,191			3,322
Intangible assets, net		32,797			29,518


Total assets	$	994,567		$	727,763


Liabilities:
Mortgage loans	$	391,393		$	369,266
Exchangeable senior notes, net of discount		122,234			—
Senior notes		75,000			—
Unsecured revolving credit facility		—			26,999
Accounts payable and accrued expenses		8,898			4,734
Accrued interest		2,420			1,618
Rents received in advance		3,196			2,932
Tenant security deposits		4,965			3,973
Deferred market rent		8,883			7,281


Total liabilities		616,989			416,803

Minority interests		13,992			21,629

Shareholders’ equity:
Common shares, $0.001 par value, 100,000,000 shares authorized: 24,126,886 and 20,072,755 shares issued and outstanding, respectively		24			20
Additional paid-in capital		430,271			338,564
Dividends in excess of accumulated earnings		(66,709	)		(49,253	)


Total shareholders’ equity		363,586			289,331


Total liabilities and shareholders’ equity	$	994,567		$	727,763

See accompanying notes to consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2006, 2005 and 2004

(Amounts in thousands, except per share amounts)


	2006			2005			2004
Revenues:
Rental	$	87,534		$	64,322		$	35,519
Tenant reimbursements and other		17,002			12,116			5,439


Total revenues		104,536			76,438			40,958


Operating expenses:
Property operating		20,193			13,477			7,495
Real estate taxes and insurance		9,026			6,440			3,736
General and administrative		9,832			7,940			4,702
Depreciation and amortization		34,536			24,751			13,216


Total operating expenses		73,587			52,608			29,149


Operating income		30,949			23,830			11,809


Other expenses (income):
Interest expense		28,500			20,191			11,091
Interest and other income		(1,032	)		(137	)		(214	)
Loss on interest-rate lock agreement		671			—			—
Loss from early retirement of debt		121			2,546			753


Total other expenses		28,260			22,600			11,630


Income from continuing operations before minority interests		2,689			1,230			179

Minority interests		(123	)		(91	)		(16	)


Income from continuing operations		2,566			1,139			163


Discontinued operations:
Income from operations of disposed property		376			229			610
Gain on sale of disposed property		7,475			—			2,092
Minority interests in discontinued operations		(386	)		(18	)		(235	)


Income from discontinued operations		7,465			211			2,467


Net income	$	10,031		$	1,350		$	2,630


Basic net income per share:
Income from continuing operations	$	0.12		$	0.07		$	0.02
Income from discontinued operations		0.34			0.01			0.21

Net income per share	$	0.46		$	0.08		$	0.23


Weighted average common shares outstanding — basic		21,950			16,595			11,530

Diluted net income per share:
Income from continuing operations	$	0.11		$	0.07		$	0.02
Income from discontinued operations		0.34			0.01			0.21

Net income per share	$	0.45		$	0.08		$	0.23


Weighted average common shares outstanding — diluted		22,202			16,805			11,662

See accompanying notes to consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2006, 2005 and 2004

(Amounts in thousands)


						Dividends in Excess			Total
			Additional Paid-in			of Accumulated			Shareholders’
	Par Value		Capital			Earnings			Equity
Balance at December 31, 2003	$	9	$	117,526		$	(25,401	)	$	92,134
Dividends paid to shareholders		—		—			(8,818	)		(8,818	)
Redemption of partnership units		—		(39	)		—			(39	)
Issuance of common stock		5		91,781			—			91,786
Net income		—		—			2,630			2,630


Balance at December 31, 2004		14		209,268			(31,589	)		177,693

Dividends paid to shareholders		—		—			(19,014	)		(19,014	)
Redemption of partnership units		—		3,821			—			3,821
Exercise of stock options		1		1,168			—			1,169
Restricted stock expense		—		294			—			294
Issuance of common stock		5		124,013			—			124,018
Net income		—		—			1,350			1,350


Balance at December 31, 2005		20		338,564			(49,253	)		289,331

Dividends paid to shareholders		—		—			(27,487	)		(27,487	)
Redemption of partnership units		1		6,739			—			6,740
Restricted stock expense		—		1,450			—			1,450
Exercise of stock options		—		847			—			847
Stock option expense		—		325			—			325
Issuance of common stock		3		89,993			—			89,996
Purchase of capped call option		—		(7,647	)		—			(7,647	)
Net income		—		—			10,031			10,031


Balance at December 31, 2006	$	24	$	430,271		$	(66,709	)	$	363,586

See accompanying notes to the consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2005 and 2004

(Amounts in thousands)


	2006			2005			2004
Cash flow from operating activities
Net income	$	10,031		$	1,350		$	2,630
Adjustments to reconcile net income to net cash provided by operating activities:
Discontinued operations:
Gain on sale of disposed property		(7,475	)		—			(2,092	)
Depreciation and amortization		3			147			329
Minority interests		386			18			235
Loss on early retirement of debt		—			325			—
Depreciation and amortization		34,953			24,866			14,240
Stock based compensation		1,637			430			56
Bad debt (recovery) expense		(145	)		340			—
Amortization of deferred market rent		(2,150	)		(1,388	)		(563	)
Amortization of deferred financing costs and bond discount		959			783			—
Amortization of rent abatement		587			122			—
Minority interests		123			91			16
Loss on early retirement of debt		121			2,546			753
Changes in assets and liabilities:
Escrows and reserves		(1,321	)		(3,517	)		(2,879	)
Accounts and other receivables		(1,376	)		(230	)		(2,193	)
Accrued straight-line rents		(1,321	)		(1,376	)		(504	)
Prepaid expenses and other assets		(1,986	)		(1,315	)		(1,296	)
Tenant security deposits		993			1,169			1,779
Accounts payable and accrued expenses		2,919			596			2,476
Accrued interest		801			818			648
Rents received in advance		264			1,188			942
Deferred costs		(2,061	)		(1,951	)		(981	)

Total adjustments		25,911			23,662			10,966


Net cash provided by operating activities		35,942			25,012			13,596


Cash flows from investing activities
Purchase deposit on future acquisitions		(1,250	)		(100	)		—
Additions to rental property		(12,031	)		(4,044	)		(3,003	)
Additions to construction in progress		(5,429	)		(169	)		—
Acquisition of land parcels		(716	)		—			—
Proceeds from sale of real estate assets		15,366			—			8,240
Acquisition of rental property and associated intangible assets		(200,092	)		(137,698	)		(142,903	)


Net cash used in investing activities		(204,152	)		(142,011	)		(137,666	)


Cash flows from financing activities
Financing costs		(2,876	)		(2,286	)		(1,828	)
Proceeds from debt		334,888			286,853			66,680
Repayments of debt		(180,095	)		(271,496	)		(36,360	)
Purchase of capped call option		(7,647	)		—			—
Proceeds from issuance of stock, net		89,996			124,018			91,786
Redemption of partnership units		(31	)		—			(132	)
Distributions to minority interests		(1,374	)		(1,365	)		(1,033	)
Dividends to shareholders		(27,487	)		(19,014	)		(8,818	)
Stock option exercises		847			1,113			—


Net cash provided by financing activities		206,221			117,823			110,295


Net increase (decrease) in cash and cash equivalents		38,011			824			(13,775	)

Cash and cash equivalents, beginning of year		3,356			2,532			16,307


Cash and cash equivalents, end of year	$	41,367		$	3,356		$	2,532

See accompanying notes to consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

(a) Description of Business

First Potomac Realty Trust (the “Company”) is a self-managed, self-administered Maryland real estate investment trust. The Company focuses on owning and operating industrial and flex properties in the Washington, D.C. metropolitan area and other major markets in Virginia and Maryland, which we collectively refer to as the southern Mid-Atlantic region.

References to “we,” “our” or “First Potomac,” refer to First Potomac Realty Trust and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company owns all of its properties and conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). At December 31, 2006, the Company was the sole general partner of and owned a 96.2% interest in the Operating Partnership. The remaining interests in the Operating Partnership consist of limited partnership interests owned by third parties, including some of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and are presented as minority interests in the accompanying consolidated financial statements.

As of December 31, 2006, the Company owned a 65-property portfolio consisting of 154-buildings totaling approximately 10.4 million square feet. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(b) Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, the subsidiaries of the Operating Partnership and First Potomac Management LLC. All intercompany balances and transactions have been eliminated in consolidation.

(c) Revenue Recognition

The Company generates substantially all of its revenue from leases on its industrial and flex properties. The Company recognizes rental revenue on a straight-line basis over the life of the respective leases in accordance with SFAS No. 13,Accounting for Leases. Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. The Company considers current information and events regarding the tenants’ ability to pay their obligations in determining if accrued straight-line rents are ultimately collectible. The uncollectible portion of accrued straight-line rents is charged to earnings in the period in which the determination is made.

Tenant leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred by the Company. Such reimbursements are recognized in the period that the expenses are incurred. The Company records a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination.

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents.

(e) Escrows and Reserves

Escrows and reserves represent cash restricted for debt service, real estate taxes, insurance, capital items and tenant security deposits.

(f) Deferred Costs

Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using a method that approximates the interest method. Leasing costs related to the execution of tenant leases are deferred and amortized over the term of the related leases. Accumulated amortization of these combined costs was $3.5 million and $1.8 million at December 31, 2006 and 2005, respectively.

(g) Rental Property

Rental property is carried at historical cost less accumulated depreciation and, impairment losses when appropriate. Improvements and replacements are capitalized at historical cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of the Company’s assets by class are as follows:


Buildings		39 years
Buildings improvements		5 to 15 years
Furniture, fixtures and equipment		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases

The Company will classify a building as held-for-sale when the sale of the building is probable and likely to be completed within one year. Accordingly, the Company classifies assets as held-for-sale and will cease recording depreciation when our Board of Trustees has approved a plan of disposal, an active program to complete the plan to sell has been initiated including active marketing of the property and the asset is available for immediate sale in its present condition. If these criteria are met, the Company will record an impairment loss if the fair value, less selling costs, is lower than the carrying amount of the building. The Company will classify the impairment loss, together with the building’s operating results, as discontinued operations on its statement of operations and classify the assets and related liabilities as held-for-sale on its balance sheet. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property secures specific mortgage debt.

The Company recognizes the fair value of any liability for conditional asset retirement obligations when incurred, which is generally upon acquisition, construction, or development and/or through the normal operation of the asset, if sufficient information exists to reasonably estimate the fair value of the obligation.

The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development while being readied for their intended use in accordance with SFAS No. 34,Capitalization of Interest Cost. The Company will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. Capitalization of interest will end when the asset is substantially complete and ready for its intended use. The Company began new development activities on several parcels of land during 2006. Total interest expense capitalized to real estate assets under development was $0.3 million at December 31, 2006. No interest expense was capitalized during 2005 or 2004 as the Company had not incurred any qualifying expenditures during those years. Interest capitalized will be amortized over the useful life of the related underlying assets upon those assets being placed into service.

(h) Purchase Accounting

Acquisitions of rental property from third parties are accounted for at fair value. Fair value of the real estate acquired was determined on an as-if-vacant basis. That value is allocated between land and building based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the net carrying value of the tenant improvements, which approximates their fair value. The difference between the purchase price and the fair value of the tangible assets on an as-if-vacant basis was allocated as follows:

	§		value of leases based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred;

	§		the value of above and below market in-place leases based on the present values (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual rent amounts and market rents over the remaining non-cancelable lease terms, ranging from one to twenty-one years; and

	§		the intangible value of tenant or customer relationships.

The Company’s determination of these values requires it to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, and depreciation and amortization expense recognized for these leases and associated intangible assets and liabilities.

(i) Intangible Assets

Intangible assets include the value of acquired tenant or customer relationships and the origination value of leases in accordance with SFAS No. 141. Customer relationship values are determined based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics we consider include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of customer relationship intangible assets is amortized to expense over the lesser of the initial lease term and any expected renewal periods or the remaining useful life of the building. We determine the fair value of the cost of acquiring existing tenants by estimating the leasing commissions avoided by having in-place tenants and the operating income that would have been lost during the estimated time required to lease the space occupied by existing tenants at the acquisition date. The cost of acquiring existing tenants is amortized to expense over the initial term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value will be fully charged to expense by the date of termination.

Deferred market rent liability consists of the acquired leases with below-market rents at the date of acquisition. The effect of above-market rents acquired is recorded as a component of deferred costs. Above market and below market in-place lease values are determined on a lease-by-lease basis based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid under the lease including amounts related to the reimbursement of fixed operating costs and (b) our estimate of the fair market lease rate for the corresponding space over the remaining non-cancelable terms of the related leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any below-market renewal periods of the related leases. Capitalized above-market lease values are amortized as a decrease to rental income over the initial term of the related leases.

In conjunction with the Company’s initial public offering and related formation transactions, First Potomac Management, Inc. contributed all of the capital interests in FPM Management LLC, the entity that manages our properties, to the Operating Partnership. The $2.1 million fair value of the in-place workforce acquired has been classified as goodwill in accordance with SFAS No. 141 and is included as a component of intangible assets on the consolidated balance sheet. Goodwill is assessed for impairment annually at the end of our fiscal year and in interim periods if certain events occur, such as the loss of key personnel, indicating the carrying value is impaired. The Company performs its analysis for potential impairment of goodwill in accordance with SFAS No. 142,Goodwill and Other Intangibles(“SFAS 142”). SFAS 142 requires that a two-step impairment test be performed on goodwill. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed in order to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value then an impairment loss is recorded equal to the difference. No impairment losses were recognized during the three years ended December 31, 2006, 2005 and 2004.

(j) Derivatives and Hedging

In May 2006, the Company entered into a forward treasury lock agreement to effectively lock the interest rate in anticipation of a planned debt issuance to hedge the risk of rising interest rates during the period prior to issuance. The derivative did not qualify for hedge accounting treatment and the Company recorded a $671 thousand loss upon the cash settlement of the contract in June 2006. The Company did not enter into any derivative contracts during 2005 or 2004, and had no accumulated other comprehensive income or loss related to derivatives during these respective periods.

In December 2006, and concurrent with the issuance of $125 million of Exchangeable Senior Notes, the Company purchased a capped call option on its common stock. The notes are exchangeable into the Company’s common shares at an initial rate of 27.6855 shares for each $1,000 of principal amount of the notes for a total of approximately 3.5 million shares, which is equivalent to an initial exchange price of $36.12 per Company common share. The capped call option is designed to reduce the potential dilution of common shares upon the exchange of the notes and protects the Company against any dilutive effects of the conversion feature if the market price of the Company’s common shares is between $36.12 and $42.14 per share. This option allows the Company to receive shares of the Company’s common stock from a counterparty equal to the amount of common stock and/or cash related to the excess conversion value that the Company would pay the holders of the notes upon conversion. The option will terminate upon the earlier of the maturity date of the notes or the first day in which the notes are no longer outstanding due to conversion or otherwise. The option was recorded as a reduction of shareholders’ equity.

The Company had interest rate cap agreements with a notional amount of $25.5 million on floating rate mortgage debt that were repaid in July 2005. The cap agreements were not designated as cash flow hedges and were recorded at fair value as a component of prepaid and other assets. The Company recognized insignificant charges during 2005 and 2004 related to the decline in fair market value of the caps. The remaining balances of the interest rate caps were fully written off in July 2005, upon retirement of the underlying mortgage debt.

(k) Income Taxes

The Company has elected to be taxed as a REIT. To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income annually to its shareholders and meet other organizational and operational requirements. As a REIT, the Company will not be subject to federal income tax and any nondeductible excise tax if it distributes at least 100% of its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate tax rates. The Company had a taxable REIT subsidiary (“TRS”) which was inactive in 2006. The Company had two TRS entities that generated taxable income during 2005 and 2004; however, the Company determined any taxes resulting from TRS activities were inconsequential. This elimination of the TRS ownership interest resulted in a taxable distribution of property, and the Company recognized an estimated tax liability of $0.1 million in general and administrative expenses in 2005 as a result of the contribution of ownership interests by the TRS to the Operating Partnership.

For federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return of capital. The characterization of the Company’s dividends for 2006, 2005 and 2004 are as follows:


	2006			2005			2004
Ordinary income		41.43	%		40.03	%		59.39	%
Return of capital		58.57	%		57.25	%		40.61	%
Long-term capital gain		—			2.72	%		—

(l) Minority Interests

Minority interests relate to the interests in the Operating Partnership not owned by the Company. Interests in the Operating Partnership are owned by limited partners who contributed properties and other assets for the Operating Partnership in exchange for Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at the Company’s option, common shares of the Company on a one-for-one basis or an equivalent amount of cash. Unitholders receive distributions per unit equivalent to the dividend per common share.

The Company owned 96.2%, 93.5% and 91.1% of the outstanding Operating Partnership units at December 31, 2006, 2005 and 2004, respectively. During 2006, 462,135 Operating Partnership units were redeemed for 462,135 common shares valued at $6.8 million and 1,000 Operating Partnership units were redeemed for $31 thousand in cash resulting in 940,654 Operating Partnership units outstanding as of December 31, 2006. During 2005, 300,429 Operating Partnership units valued at $7.7 million were issued with the acquisition of Owings Mills Business Center and Prosperity Business Centers while 285,913 Operating Partnership units were redeemed for common shares valued at $3.8 million resulting in 1,403,789 Operating Partnership units outstanding at December 31, 2005. During 2004, 6,250 Operating Partnership units were redeemed for $132 thousand in cash resulting in 1,389,273 Operating Partnership units outstanding as of December 31, 2004. There were no redemptions of Operating Partnership units in 2004.

(m) Earnings Per Share

Basic earnings per share (“EPS”), is calculated by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of diluted common equivalent shares outstanding during the period. The effect of stock options, nonvested shares and operating partnership units, if dilutive, is computed using the treasury stock method.

The following table sets forth the computation of the Company’s basic and diluted earnings per share both before and after consideration of income from discontinued operations and income available to common shareholders (amounts in thousands, except per share amounts):


	2006		2005		2004
Numerator for basic and diluted per share calculations:
Income from continuing operations	$	2,566	$	1,139	$	163
Income from discontinued operations		7,465		211		2,467

Net income	$	10,031	$	1,350	$	2,630


Denominator for basic and diluted per share calculations:
Weighted average shares outstanding — basic		21,950		16,595		11,530
Effect of dilutive shares:
Employee stock options and nonvested shares		252		210		132

Weighted average shares outstanding — diluted		22,202		16,805		11,662


Basic net income per share:
Continuing operations	$	0.12	$	0.07	$	0.02
Discontinued operations		0.34		0.01		0.21

Net income	$	0.46	$	0.08	$	0.23


Diluted net income per share:
Continuing operations	$	0.11	$	0.07	$	0.02
Discontinued operations		0.34		0.01		0.21

Net income	$	0.45	$	0.08	$	0.23

(n) Share Based Compensation

Prior to January 1, 2006 and as permitted by SFAS No. 123,Accounting for Stock Based Compensation, the Company elected to follow the intrinsic value-based method of accounting prescribed by the Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan share options. As such, compensation expense would be recorded only if the market price of the underlying shares on the date of grant exceeded the exercise price.

The Company has adopted SFAS No. 123R using the modified-prospective-transition method. Under this method, compensation cost for the year ended December 31, 2006 includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated. The Company has elected to recognize equity compensation costs on a straight-line basis over the requisite service period for each award.

Under SFAS No. 123, compensation expense of $0.7 million and $0.2 million would have been recorded during 2005 and 2004, respectively, for our 2003 Equity Compensation Plan based upon the fair value of the awards.

Pro forma net income and net income per share for the years ended December 31, 2005 and 2004 had compensation for stock options been determined based on the grant date fair value would have been as follows (amounts in thousands, except per share amounts):


	2005			2004
Net income, as reported	$	1,350		$	2,630
Add: total stock-based employee compensation expense included in reported net income, net of minority interests		401			50
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of minority interests		(658	)		(246	)

Pro forma net income	$	1,093		$	2,434


Net income per share, as reported – basic and diluted	$	0.08		$	0.23
Pro forma net income per share – basic and diluted	$	0.07		$	0.21

(o) Use of Estimates

The preparation of consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

(p) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

(q) Application of New Accounting Standards

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – A replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. The provisions in SFAS 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Accordingly, the Company adopted SFAS 154 effective January 1, 2006. The adoption of SFAS 154 did not have a material effect on the results of operations of the Company.

In July 2006, the FASB issued FASB Interpretation Number 48,Accounting for Uncertainty in Income Taxes, and Interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxed subject to FASB Statement No. 109,Accounting for Income Taxes. The Company will adopt the provisions of this statement beginning in the first quarter of 2007. The cumulative effect to applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of the retained earnings on January 1, 2007. The adoption of this statement will not have a material effect on our financial position or results of operations.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the Company’s fiscal year ending December 31, 2006. The Company’s adoption of SAB 108 did not have a material impact on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after December 31, 2007, with early adoption permitted. The Company is in the process of determining how the adoption of SFAS 157 will impact our financial position and results of operations.

(2) Rental Property

Rental property represents 65 and 52 industrial and flex rental properties as of December 31, 2006 and 2005, respectively, all located in the southern Mid-Atlantic region. Rental property is comprised of the following at December 31 (amounts in thousands):


	2006			2005
Land	$	215,004		$	153,762
Buildings and improvements		687,901			529,673
Construction in process		6,980			169
Tenant improvements		27,958			17,558
Furniture, fixtures and equipment		9,880			9,794

		947,723			710,956
Less: accumulated depreciation		(62,841	)		(42,226	)

	$	884,882		$	668,730

Development and Construction Activity

In 2006, the Company commenced pre-development and development activity with respect to several of our properties, as well as certain land parcels. The Company intends to construct industrial and/or flex buildings on a build-to-suit basis or with the intent to lease upon completion of construction. As of December 31, 2006, the Company had development activities underway at John Marshall Highway, Crossways Commerce Center I, Snowden Center, Sterling Park Business Center and 1400 Cavalier Boulevard. The majority of these costs were incurred for the 112,000 square-foot warehouse building addition at John Marshall Highway. This addition is fully pre-leased to the current sole tenant of the property and the Company anticipates placing the new building in service in the second quarter of 2007.

(3) Acquisitions

The Company acquired the following properties in 2005 and 2006:


		Acquisition			Square		Leased at			Acquisition
(dollars in thousands)	Location	Date		Property Type	Feet		12/31/06			Cost
2006 Acquisitions:
River’s Bend Center	Chester, VA		1/19/2006	Multi-Tenant Industrial		492,200		93	%	$	31,346
Northridge I & II	Ashland, VA		1/19/2006	Multi-Tenant Industrial		140,390		100	%		8,893
Crossways I	Chesapeake, VA		2/10/2006	Flex		143,398		85	%		15,623
Sterling Park Business Center	Sterling, VA		2/27/2006	Flex		127,859		83	%		31,106
1408 Stephanie Way	Chesapeake, VA		5/11/2006	Flex		51,209		65	%		5,191
Airpark Business Center	Richmond, VA		6/26/2006	Flex		42,142		62	%		3,283
Chesterfield Business Center	Richmond, VA		6/26/2006	Flex		189,871		94	%		14,692
Hanover Business Center	Ashland, VA		6/26/2006	Flex		183,546		98	%		14,016
Gateway 270 West	Clarksburg, MD		7/27/2006	Flex		255,460		57	%		39,864
Davis Drive	Sterling, VA		8/1/2006	Flex		52,581		71	%		5,449
Indian Creek Court	Beltsville, MD		8/28/2006	Multi-Tenant Industrial		185,496		84	%		24,536
Gateway II	Norfolk, VA		11/2/2006	Flex		42,429		100	%		3,917
Owings Mills Commerce Center	Owings Mills, MD		11/15/2006	Flex		132,765		83	%		16,919
Park Central	Richmond, VA		11/17/2006	Flex		204,280		78	%		22,780

Total 2006						2,243,626		84	%	$	237,615


2005 Acquisitions:
Reston Business Campus	Reston, VA		3/17/2005	Flex		82,469		94	%	$	11,725
1400 Cavalier Boulevard	Chesapeake, VA		4/7/2005	Multi-Tenant Industrial		299,963		100	%		13,342
Enterprise Center	Chantilly, VA		4/14/2005	Flex		188,941		82	%		32,157
Glenn Dale Business Center	Glenn Dale, MD		5/18/2005	Multi-Tenant Industrial		315,191		99	%		18,453
Gateway Centre	Manassas, VA		7/19/2005	Multi-Tenant Industrial		99,607		86	%		10,597
1434 Crossways Boulevard	Chesapeake, VA		8/17/2005	Office		220,501		100	%		30,443
2000 Gateway Boulevard	Hampton, VA		9/30/2005	Flex		421,100		10	%		14,806
403 & 405 Glenn Drive	Sterling, VA		10/7/2005	Multi-Tenant Industrial		197,201		81	%		17,073
Diamond Hill Distribution Center	Chesapeake, VA		10/12/2005	Multi-Tenant Industrial		712,550		90	%		29,358
Linden Business Center	Manassas, VA		10/13/2005	Office		108,237		90	%		16,567
Prosperity Business Center	Merrifield, VA		11/3/2005	Flex		71,572		93	%		9,403
Owings Mills Business Center	Owings Mills, MD		11/3/2005	Office		87,148		100	%		8,977
1000 Lucas Way	Hampton, VA		12/8/2005	Office		182,175		92	%		12,202

Total 2005						2,986,655		81	%	$	225,103

As discussed in Note 1, we allocate the purchase price to land, building, tenant improvements and in-place leases based on their fair values in accordance with SFAS No. 141,Business Combinations. The value of above and below market in-place leases is based on the present value of the difference between the contractual rent and the market rents over the remaining non-cancelable lease term (using a discount rate that reflects the risks associated with the leases acquired).

The aggregate purchase cost of properties acquired in 2005 and 2006 was allocated as follows (amounts in thousands):


	2006			2005
Land	$	63,176		$	43,988
Acquired tenant improvements		7,163			5,038
Building and improvements		156,146			166,567
In-place leases intangible		12,151			12,152
Acquired leasing commissions		2,009			404
Customer relations intangible		24			—
Above market leases acquired		1,332			789

Total assets acquired		242,001			228,938


Below market leases acquired		(4,386	)		(3,835	)
Debt assumed		(37,523	)		(79,690	)

Net assets acquired	$	200,092		$	145,413

On November 3, 2005, the Company acquired Prosperity Business Center and Owings Mills Business Center through the assumption of mortgage debt and the issuance of 300,429 units of limited partnership interest in the Company’s Operating Partnership. The units were valued at $7.7 million based on the closing price of the Company’s common shares on the date of acquisition.

The weighted average amortization period of the intangible assets acquired in 2006 is 5.4 years. These intangible assets are comprised of the following categories with their respective weighted average amortization periods as follows: in-place leases 4.9 years, leasing commissions 8.5 years, customer relations 2.0 years and above market leases 4.8 years.

Pro Forma Financial Information

The pro forma financial information set forth below presents results as of December 31 as if all of the Company’s 2006 and 2005 acquisitions, dispositions, common share offerings and senior note offerings had occurred on January 1, 2005. The pro forma information is not necessarily indicative of the results that actually would have occurred nor does it intend to indicate future operating results (amounts in thousands, except per share amounts).


	2006		2005
Pro forma total revenues	$	114,020	$	113,073
Pro forma net income (loss)	$	2,669	$	(334	)
Pro forma basic and diluted earnings (loss) per share	$	0.11	$	(0.01	)

(4) Intangible Assets

Intangible assets consisted of the following at December 31 (amounts in thousands):


	2006							2005
			Accumulated			Net		Gross		Accumulated			Net
	Gross Intangible		Amortization			Intangibles		Intangible		Amortization			Intangibles
In-place leases	$	50,367	$	(23,557	)	$	26,810	$	38,449	$	(12,791	)	$	25,658
Customer relations		528		(200	)		328		504		(130	)		374
Leasing commissions		1,997		(228	)		1,769		404		(103	)		301
Above market leases		3,007		(1,217	)		1,790		1,675		(590	)		1,085
Goodwill		2,100		—			2,100		2,100		—			2,100

	$	57,999	$	(25,202	)	$	32,797	$	43,132	$	(13,614	)	$	29,518

The Company recognized $11.3 million, $8.3 million and $4.1 million of amortization expense on intangible assets for the years ended December 31, 2006, 2005 and 2004, respectively. Losses due to termination of tenant leases and defaults were $0.3 million, $0.7 million and $0.1 million during 2006, 2005 and 2004, respectively.

Projected amortization of intangible assets as of December 31, 2006, for each of the five succeeding fiscal years is as follows (amounts in thousands):


2007	$	10,328
2008		6,811
2009		4,574
2010		3,006
2011		1,775
Thereafter		4,203

	$	30,697

(5) Discontinued Operations

Income from discontinued operations includes revenues and expenses associated with the sales of 6600 Business Parkway and 6251 Ammendale Road in May 2006 and November 2004, respectively. The proceeds from these disposals were escrowed and used to fund subsequent acquisitions as tax-free like-kind exchanges. The Company has had no continuing involvement with the properties subsequent to their disposal. Interest expense that is specifically identifiable to disposal properties is included in the presentation of income from discontinued operations. Interest expense for 2005 and 2004 was associated with the allocable portion of interest for mortgage debt that encumbered 6600 Business Parkway and other properties. This mortgage obligation, including a one-time charge, was repaid in 2005; therefore no interest expense was associated with this property in 2006.

The following table summarizes the components of income from discontinued operations as of December 31 (amounts in thousands):


	For the Years Ended December 31,
	2006			2005			2004
Revenues	$	443		$	1,195		$	1,919
Property operating expenses		64			170			643
Depreciation and amortization		3			147			329
Interest expense		—			324			337
Loss from early retirement of debt		—			325			—

Income from operations of disposed properties		376			229			610
Gain on sale of disposed property		7,475			—			2,092
Minority interests in discontinued operations		(386	)		(18	)		(235	)

Income from discontinued operations	$	7,465		$	211		$	2,467

(6) Debt

The Company’s borrowings consisted of the following as of December 31 (amounts in thousands):


	2006		2005
Mortgage debt, effective interest rates ranging from 5.13% to 8.53%, maturing at various dates through June 2021	$	391,393	$	369,266
Exchangeable senior notes, net of discount, effective interest rate of 4.45%, matures December 2011		122,234		—
Series A senior notes, effective interest rate of 6.41%, matures June 2013		37,500		—
Series B senior notes, effective interest rate of 6.55%, matures June 2016		37,500		—
Credit facility, variable interest rate of LIBOR + 1.20%, matures April 2009		—		26,999

	$	588,627	$	396,265

(a) Mortgage Debt

At December 31, 2006 and 2005, the Company’s mortgage debt was as follows (dollars in thousands):


	Contractual			Effective			Earliest Maturity		December 31,		December 31,
Property	Interest Rate			Interest Rate			Date		2006		2005
Interstate Plaza		7.45	%		5.30	%		—	$	—	$	8,546
Herndon Corporate Center		5.11	%		5.66	%	April 2008			8,654		8,764
Norfolk Commerce Park II		6.90	%		5.28	%	August 2008			7,453		7,700
Suburban Maryland Portfolio		6.71	%		5.54	%	September 2008			75,841		78,012
Glenn Dale Business Center		7.83	%		5.13	%	May 2009			8,825		9,128
4200 Tech Court		8.07	%		8.07	%	October 2009			1,776		1,798
Park Central I		8.00	%		5.66	%	November 2009			5,216		—
4212 Tech Court		8.53	%		8.53	%	June 2010			1,730		1,748
Park Central II		8.32	%		5.66	%	November 2010			6,474		—
Enterprise Center		8.03	%		5.20	%	December 2010			19,410		20,016
Indian Creek Court		7.80	%		5.90	%	January 2011			13,559		—
4612 Navistar Drive		7.48	%		5.20	%	July 2011			13,978		14,371
403 and 405 Glenn Drive		7.60	%		5.50	%	July 2011			9,037		9,265
Campus at Metro Park North		7.11	%		5.25	%	February 2012			25,594		26,259
1434 Crossways Boulevard Bldg II		7.05	%		5.38	%	August 2012			10,854		11,158
Crossways Commerce Center		6.70	%		6.70	%	October 2012			25,727		26,054
Newington Business Park Center		6.70	%		6.70	%	October 2012			16,229		16,435
Prosperity Business Center		6.25	%		5.75	%	January 2013			3,966		4,058
Aquia Commerce Center I		7.28	%		7.28	%	February 2013			831		931
1434 Crossways Boulevard Bldg I		6.25	%		5.38	%	March 2013			9,225		9,447
Linden Business Center		6.01	%		5.58	%	October 2013			7,645		7,760
Owings Mills Business Center		5.85	%		5.75	%	March 2014			5,829		5,911
Chesterfield Business Center:
Buildings CDGH		8.50	%		6.63	%	August 2015			2,740		—
Buildings ABEF		7.45	%		6.63	%	June 2021			2,954		—
Plaza 500, Van Buren Business Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center and Alexandria Corporate Park		5.19	%		5.19	%	August 2015			100,000		100,000
Hanover Business Center:
Building D		8.88	%		6.63	%	August 2015			1,055		—
Building II B		4.00	%		8.00	%	June 2016			1,941		—
Building C		7.88	%		6.63	%	December 2017			1,452		—
Gateway Centre		7.35	%		5.88	%	November 2016			1,786		1,905
Airpark Business Center		7.45	%		6.63	%	June 2021			1,612		—

Total Mortgage Debt					5.60	%¹			$	391,393	$	369,266


¹		Weighted average interest rate on total mortgage debt.

In October 2006, the Company repaid the $8.3 million remaining principal balance on the mortgage that encumbered Interstate Plaza. The repayment was funded with borrowings on the Company’s credit facility, and no prepayment penalties were incurred.

In July 2005, the Company closed on a $100 million fixed-rate secured financing with Jackson National Life Insurance Company. The loan has a 10-year term with a fixed rate of 5.19%, with interest only payments for the first five years and based on a 30-year amortization thereafter. Terms of the financing allow the Company to substitute collateral as long as certain debt service coverage and loan-to-value ratios are maintained. Proceeds from the loan were used to repay the Company’s floating rate mortgage debt on Greenbrier Technology Center II, Norfolk Business Center, Rumsey Center and Snowden Center and to reduce the balance outstanding on its revolving credit facility. The Company incurred charges totaling approximately $2.5 million in the fourth quarter of 2005 related to the costs associated with satisfying the obligations and writing off unamortized deferred financing costs. Proceeds from the loan were also used to repay a mortgage loan bearing interest at 7.26% that was scheduled to mature in December 2007 for a property that was sold in 2006. The Company incurred $0.3 million of charges associated with the retirement of this debt, which was allocated to discontinued operations when the property was sold. Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center and Alexandria Corporate Park served as the collateral for the first funding, and Plaza 500 and Van Buren Business Park were added to the collateral base with the second funding.

The Company’s mortgage debt is recourse solely to specific assets. The Company had 43 and 39 properties that secured mortgage debt at December 31, 2006 and 2005, respectively.

(b) Exchangeable Senior Notes

On December 11, 2006, the Company issued $125 million of 4.00% Exchangeable Senior Notes for net proceeds of approximately $122.2 million, net of a $2.8 million discount at issuance resulting in an effective interest rate of 4.45%. The Exchangeable Senior Notes mature on December 15, 2011 and are equal in right of payment with all of the Company’s other senior unsubordinated indebtedness. Interest is payable on June 15 and December 15 of each year beginning on June 15, 2007. Holders may, under certain conditions, exchange their notes for cash or a combination of cash and the Company’s common shares, at the Company’s option, at any time after October 15, 2011. The Exchangeable Senior Notes are exchangeable into the Company’s common shares at an initial rate of 27.6855 shares for each $1,000 of principal amount of the notes for a total of approximately 3.5 million shares, which is equivalent to an initial exchange price of $36.12 per Company common share representing an exchange premium of approximately 20% over the market price of the Company’s common shares at the time of the transaction. The exchange rate is adjusted for, among other things, the payment of dividends to the Company’s common shareholders subject to a maximum exchange rate. Holders may exchange their notes prior to maturity under certain conditions, including during any calendar quarter beginning after December 31, 2006 (and only during such calendar quarter), if and only if, the closing sale price of the Company’s common shares for at least 20 trading days in the period of 30 trading days ending on the last trading day of the preceding quarter is greater than 130% of the exchange price on the applicable trading day. The Exchangeable Senior Notes have not been registered under the Securities Act and may not be traded or sold except to certain defined qualified institutional buyers. The notes are senior unsecured obligations of the Operating Partnership and guaranteed by the Company.

(c) Senior Notes

On June 22, 2006, the Operating Partnership completed a private placement of unsecured Senior Notes totaling $75.0 million. The transaction was comprised of $37.5 million in 7-year Series A Senior Notes, maturing on June 15, 2013 and bearing a fixed interest rate of 6.41%, and $37.5 million in 10-year Series B Senior Notes, maturing on June 15, 2016 and bearing a fixed interest rate of 6.55%. Interest is payable for the Series A and Series B Senior Notes on June 15 and December 15 of each year beginning December 15, 2006. The Senior Notes are equal in right of payment with all the Operating Partnership’s other senior unsubordinated indebtedness. The proceeds from the issuance of the Senior Notes were used to repay outstanding indebtedness and to acquire Airpark Business Center, Hanover Business Center and Chesterfield Business Center in Richmond, Virginia. As of December 31, 2006, the weighted average effective interest rate on the Senior Notes was 6.48%.

(d) Credit Facility

On June 28, 2005, the Company entered into a first amendment to its unsecured credit facility. The amendment reduced the applicable LIBOR margin and resulted in changes to other financial covenants. As part of the transaction, the Company paid an amendment fee to the lenders of five basis points on the amount of the facility. On October 12, 2005, the Company entered into a second amendment to its unsecured credit facility, which increased the permitted borrowings under the revolving credit facility from $75 million to $100 million. As part of these transactions, the Company paid an amendment fee to the lenders of five basis points on the amount of the facility.

The weighted average borrowings outstanding on the credit facility during 2006 were $50.0 million with a weighted average interest rate of 6.47% associated with the borrowings, compared to $36.1 million and 5.01%, respectively, during 2005. The Company’s maximum daily borrowings outstanding were $87.5 million and $84.8 million during 2006 and 2005, respectively. There were no borrowings outstanding under the credit facility at December 31, 2006. Outstanding borrowings under the credit facility were $27.0 million with a weighted average interest rate of 6.30% at December 31, 2005.

Aggregate Debt Maturities

The Company’s aggregate debt maturities as of December 31, 2006 are as follows (amounts in thousands):


2007	$	10,500
2008		95,006
2009		20,193
2010		41,854
2011		150,390
Thereafter		273,450

		591,393
Discount on exchangeable senior notes		(2,766	)

	$	588,627

(7) Commitments and Contingencies

(a) Operating Leases

The Company’s rental properties are subject to non-cancelable operating leases generating future minimum rental payments based on contractual rental revenue, which as of December 31, 2006 are follows (amounts in thousands):


			% of square
	Future		feet under
	minimum rents		leases expiring
2007	$	87,171		16	%
2008		72,922		15	%
2009		58,707		16	%
2010		43,257		14	%
2011		29,300		21	%
Thereafter		45,564		18	%

	$	336,921		100	%

At December 31, 2006, the Company’s portfolio was approximately 88% leased to 599 tenants.

The Company rents office space for its corporate office under a non-cancelable operating lease, which it entered upon relocating its corporate offices in 2005. The Company subleased the majority of its former corporate office space to three tenants, including one related party (see Note 8) in 2005. The Company remains the primary obligor under the terms of the original lease on its former corporate office space through the end of the lease term in 2010.

Rent expense incurred under the terms of the corporate office leases, net of subleased revenue, was $0.8 million, $0.4 million and $0.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Future minimum rental payments under the corporate office leases and contractual rent from the three subleases of the former corporate office space are summarized as follows (amounts in thousands):


			Contractual			Future
	Corporate		sublease			minimum rent
	offices		revenue			expense, net
2007	$	752	$	(253	)	$	499
2008		779		(260	)		519
2009		825		(268	)		557
2010		871		(276	)		595
2011		619		—			619
Thereafter		534		—			534

	$	4,380	$	(1,057	)	$	3,323

(b) Legal Proceedings

The Company is subject to legal proceeds and claims arising in the ordinary course of its business. In the opinion of management and the Company’s legal counsel, the amount of ultimate liability with respect to these actions will not have a material effect on the results of operations or financial position of the Company.

(8) Related Party Transaction

In September 2005, the Company subleased a portion of its former corporate office space to Donatelli Development, Inc. (formerly Donatelli & Klein), a privately held real estate investment firm that develops multifamily properties, which is owned by the Chairman of the Company’s Board of Trustees. The rental rate under the sublease is representative of market rates, and rent due under the terms of the sublease is approximately $200 thousand per year over the remaining four years of the original lease. The Company remains obligated as primary lessee under the terms of the original lease.

(9) Fair Value of Financial Instruments

The carrying amounts of cash, accounts and other receivables and accounts payable approximate their fair values due to their short-term maturities. The line of credit is carried at its fair value due to the variable nature of its interest rate. We calculate fair value by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. The carrying amount and estimated fair value of certain other financial instruments at December 31, 2006 and 2005 are as follows (amounts in thousands):


	2006				2005
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Fixed-rate mortgage debt	$	391,393	$	388,107	$	369,266	$	368,817
Exchangeable senior notes		122,234		122,234		—		—
Series A senior notes		37,500		37,453		—		—
Series B senior notes		37,500		37,447		—		—

Total	$	588,627	$	585,241	$	369,266	$	368,817

(10) Shareholders’ Equity

On March 31, 2005, the Company sold 2.1 million common shares of beneficial interest to an investor for $21.95 per share. The transaction generated net proceeds of approximately $44.9 million. The Company completed another follow-on offering of 3.5 million common shares that closed on October 26, 2005, raising net proceeds of approximately $79.1 million. The Company used the net proceeds from both offerings to substantially pay down the balance outstanding on its revolving credit facility.

On July 21, 2006, the Company completed an offering of 3.5 million common shares of beneficial interest at $27.46 per share, generating net proceeds of approximately $90 million. The Company used $55.5 million of the net proceeds to pay down the balance and accrued interest on its unsecured revolving credit facility and the remaining proceeds were applied toward the purchase of Gateway 270 West.

The Company declared dividends per share on it common stock of $1.24, $1.125 and $0.74 during 2006, 2005 and 2004, respectively.

(11) Benefit Plans

(a) Share-based compensation

The Company adopted the 2003 Equity Compensation Plan (“the Plan”) during 2003. The Plan provides for the issuance of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Options granted under the plan are non-qualified, and all employees and non-employee trustees are eligible to receive grants. The Plan originally authorized the issuance of 910,800 common share equity awards. An additional 650,000 common shares of equity awards were authorized in 2005. Of the common share equity awards authorized under the Plan, 693,678 awards remained available for issuance under the Plan as of December 31, 2006.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, which require that the cost for all share-based payment transactions be recognized as a component of income from continuing operations. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (usually the vesting period).

Options

At December 31, 2006, 740,650 options were awarded of which 588,283 remained outstanding. Options vest 25% on the first anniversary of the date of grant and 6.25% in each subsequent calendar quarter thereafter until fully vested. The maximum term of the options granted is ten years.

The following table summarizes the option activity in the Plan for the three years ended December 31:


						Weighted
				Weighted		Average	Aggregate
				Average		Remaining	Intrinsic
	Shares			Exercise Price		Contractual Term	Value
Balance, December 31, 2003		505,000		$	15.00	9.7 years	$	1,888,700
Granted		70,000			19.01
Exercised		—			—
Forfeited		—			—

Balance, December 31, 2004		575,000		$	15.49	8.8 years	$	4,204,400
Granted		99,000			22.48
Exercised		(74,218	)		15.00
Forfeited		(11,187	)		16.73

Balance, December 31, 2005		588,595		$	16.70	8.0 years	$	5,826,044
Granted		66,650			26.60
Exercised		(53,780	)		15.74
Forfeited		(13,182	)		24.67

Balance, December 31, 2006		588,283		$	17.73	7.2 years	$	6,693,254


					Weighted
			Weighted		Average	Aggregate
			Average		Remaining	Intrinsic
	Shares		Exercise Price		Contractual Term	Value
Exercisable at December 31:
2006		363,258	$	16.20	6.9 years	$	4,690,621
2005		225,471		15.41	7.8 years	$	2,523,147
2004		157,813		15.00	8.7 years	$	1,230,941
Options expected to vest, December 31, 2006		216,295	$	20.00	7.7 years	$	1,970,721

The following table summarizes information about stock options at December 31, 2006:


	Options Outstanding					Options Exercisable
			Weighted Average	Weighted				Weighted
			Remaining	Average				Average
Range of Exercise Prices	Shares		Contractual Life	Exercise Price		Shares		Exercise Price
$15.00		375,563	6.7 years	$	15.00		286,782	$	15.00
18.70 – 19.78		65,000	7.4 years		19.03		39,376		19.01
22.42 – 22.54		89,220	8.0 years		22.47		37,101		22.47
26.60		58,500	9.0 years		26.60		—		—

		588,283					363,259

As of December 31, 2006, the Company had $0.4 million of unrecognized compensation cost related to these awards. The Company anticipates this cost will be recognized over a weighted-average period of approximately 1.5 years. The Company calculates the grant date fair value of option awards using a Black-Scholes option-pricing model. Expected volatility is based on an assessment of the Company’s realized volatility as well as analysis of a peer group of comparable entities. The expected term represents the period of time the options are anticipated to remain outstanding as well as the Company’s historical experience for groupings of employees that have similar behavior and considered separately for valuation purposes. The risk-free rate is based on the U.S. Treasury rate at the time of grant for instruments of similar term.

The fair value determination of stock options granted for the years ended December 31 used the following assumptions:


	2006			2005			2004
Weighted average fair value	$	3.56		$	1.93		$	1.67
Weighted average risk free interest rate		4.31	%		3.68	%		3.82	%
Expected volatility		21.0	%		15.4	%		15.4	%
Expected dividend yield		5	%		5	%		5	%
Weighted average expected life of options	5 years			5 years			5 years

Option Exercises

The total intrinsic value of options exercised was $0.8 million during both 2006 and 2005. No stock options were exercised during 2004.

The Company received approximately $0.8 million and $1.1 million from the exercise of stock options during 2006 and 2005, respectively. Shares issued as a result of stock option exercises are funded through the issuance of new shares. The Company recognized $0.3 million, $0.1 million and $49 thousand of compensation expense associated with these awards in 2006, 2005 and 2004, respectively.

Nonvested share awards

The Company granted 60,171 restricted common shares to executive officers in 2005, of which 4,047 shares were forfeited during 2005. These grants vest at the end of the seven-year award period, or earlier upon achieving certain defined market conditions over the term of the award. In both February and August 2006, 25% of the outstanding 56,124 shares awarded to executive officers vested upon achievement of one of the specified market conditions. In April 2006, the Company awarded a total of 68,049 restricted common shares in two separate awards to executive officers. The first award of 30,931 shares will vest at the end of the approximately four-year award period. The second award of 37,118 shares will vest only upon the achievement of specified market conditions. The Company recognized $1.1 million and $0.2 million of compensation expense associated with these share based awards in 2006 and 2005, respectively. Dividends on all restricted share awards are recorded as a reduction of shareholders’ equity rather than compensation expense.

Independent members of our Board of Trustees received annual grants of common shares aggregating 5,167 in January 2006 and 2,500 in January 2005 as a component of compensation for serving on the Company’s Board of Trustees in 2005 and 2004, respectively. The trustee share awards in 2006 (for 2005) and 2005 (for 2004) were fully vested at the date of grant. In addition, 3,000 shares were awarded to the Chairman of the Board in February 2006, and the shares were fully vested upon award. In May 2006, the Company issued a total of 12,000 restricted common shares to all trustees, all of which vest ratably in quarterly increments over the twelve-month period from the award date. The Company recognized $0.2 million and $0.1 million of compensation expense associated with trustee share based awards for the years ended December 31, 2006 and 2005, respectively.

During the third quarter of 2005, certain stock option awards were deemed vested as part of a severance agreement negotiated with a former officer of the Company. Under the terms of this agreement, the vesting of 8,438 options was accelerated, resulting in additional compensation expense of approximately $0.1 million based on the intrinsic value of the accelerated awards at the date of modification. All remaining unvested stock options and restricted common share awards granted to this individual were forfeited as of the date of separation.

A summary of the Company’s nonvested share awards as of December 31, 2006 is as follows:


				Weighted
	Nonvested			Average Grant
	Shares			Date Fair Value
Nonvested at December 31, 2004		—		$	—
Granted		62,671			26.25
Vested		(2,500	)		22.54
Forfeited		(4,047	)		26.40

Nonvested at December 31, 2005		56,124			26.40
Granted		88,216			22.97
Vested		(42,229	)		26.72

Nonvested at December 31, 2006		102,111		$	23.31

As of December 31, 2006, the Company had $1.8 million of unrecognized compensation cost related to nonvested share-based compensation arrangements under the Plan. The Company anticipates this cost will be recognized over a weighted-average period of approximately four years. The Company derived the requisite service period over which the compensation expense will be recognized using a lattice model for shares vesting based on specified market conditions. The Company used the following assumptions in determining the derived service period and the fair value of its awards that vest solely on market conditions:


	2006			2005
Risk-free interest rate (twenty year)		5.28	%		4.84	%
Volatility		36	%		35	%
Market average return (fifty years of S&P 500)		8.94	%		8.93	%
Total expected return		6.6	%		6.3	%

The total fair value of shares vested was $1.1 million and $0.1 million at December 31, 2006 and 2005, respectively.

(b) 401(k) Plan

The Company has a 401(k) defined contribution plan covering all employees in accordance with the Internal Revenue Code. The maximum employer or employee contribution cannot exceed the IRS limits for the plan year. Employees are eligible to contribute after one year of consecutive service. The Company matches employee contributions after one year of service up to a specified percentage of a participant’s annual compensation. The Company matched employee contributions up to 6% for 2006 and 7.5% for 2005 and 2004. Employee and employer contributions vest immediately. The Company pays for administrative expenses and matching contributions with cash. The Company’s plan does not allow for the Company to make additional discretionary contributions. The Company’s contributions for the years ended December 31, 2006, 2005 and 2004 were $0.2 million, $0.2 million and $0.1 million, respectively. The employer match payable to the 401(k) plan was fully funded as of December 31, 2006.

(12) Segment Information

The Company operates in one segment; industrial and flex office properties all located in the southern Mid-Atlantic region of the United States. As of December 31, 2006 and 2005, the Company’s tenant base contained one significant tenant, the United States Government, which leased 7% and 8%, respectively, of the Company’s total rentable square feet.

(13) Supplemental Disclosure of Cash Flow Information

Supplemental disclosures of cash flow information for the years ended December 31 are as follows (amounts in thousands):


	2006		2005		2004
Cash paid for interest on indebtedness, net	$	29,436	$	19,958	$	10,393
Non-cash investing and financing activities:
Issuance of common shares to trustees		137		56		��
Debt assumed in connection with acquisitions of real estate		37,523		79,690		140,559
Conversion of operating partnership units		6,756		3,821		—
Issuance of units in exchange for limited partnership interests		—		7,715		—

Cash paid for interest on indebtedness is net of capitalized interest of $0.3 million in 2006. The Company did not capitalize any interest in 2005 and 2004.

During 2006, the Company acquired 14 properties at an aggregate purchase cost of $237.6 million, including the assumption of mortgages with acquisition date fair values of $37.5 million. During 2005, the Company acquired 13 properties at an aggregate purchase cost of $225.1 million, including the assumption of mortgages with acquisition date fair values of $79.7 million. During 2004, the Company acquired properties at an aggregate purchase cost of $283.5 million, including the assumption of mortgages with acquisition date fair values of $140.6 million.

(14) Quarterly Financial Information (unaudited)


	2006
	First		Second		Third		Fourth
(amounts in thousands, except per share amounts)	Quarter		Quarter		Quarter		Quarter
Revenues	$	24,374	$	25,224	$	27,130	$	27,808
Operating expenses		17,272		17,049		19,403		19,863
Income from continuing operations		864		280		718		704
Income from discontinued operations		244		7,221		—		—

Net income	$	1,108	$	7,501	$	718	$	704


Basic net income per share:
Income from continuing operations	$	0.04	$	0.01	$	0.03	$	0.03
Income from discontinued operations		0.01		0.36		—		—

Net Income	$	0.05	$	0.37	$	0.03	$	0.03


Diluted net income per share:
Income from continuing operations	$	0.04	$	0.01	$	0.03	$	0.03
Income from discontinued operations		0.01		0.35		—		—

Net Income	$	0.05	$	0.36	$	0.03	$	0.03


	2005
	First		Second		Third		Fourth
(amounts in thousands, except per share amounts)	Quarter		Quarter		Quarter		Quarter
Revenues	$	16,135	$	17,744	$	20,410	$	22,149
Operating expenses		11,269		12,189		13,517		15,633
Income (loss) from continuing operations		412		922		1,431		(1,626)	*
Income (loss) from discontinued operations		114		116		131		(150	)

Net (loss) income	$	526	$	1,038	$	1,562	$	(1,776	)


Basic and diluted net income (loss) per share:
Income (loss) from continuing operations	$	0.03	$	0.05	$	0.09	$	(0.08	)
Income (loss) from discontinued operations		0.01		0.01		—		(0.01	)

Net income (loss)	$	0.04	$	0.06	$	0.09	$	(0.09	)


*		Includes $2.8 million loss on early retirement of debt.

In March 2005, October 2005 and July 2006, the Company sold 2.0 million, 3.5 million and 3.5 million common shares, respectively. The sum of the basic and diluted earnings (loss) per share for the four quarters in all years presented differs from the annual earnings per share due to the required method of computing the weighted average number of shares in the respective periods.

(15) Subsequent Events

On January 9, 2007, the Company acquired two properties for $36.0 million in Chesapeake, Virginia. Greenbrier Circle Corporate Center is a two-building, 229,163-square-foot flex/office property and Greenbrier Technology Center I is a 95,843-square-foot flex/office property, respectively. The acquisitions were funded with proceeds from the Company’s issuance of $125 million of Exchangeable Senior Notes.

On January 29, 2007, the Company purchased 171,723 Operating Partnership units, from unaffiliated limited partners, for approximately $5.0 million in cash, or $29.02 per Operating Partnership unit. After the transaction, the Company owns a 96.9% interest in the Operating Partnership with 768,931 Operating Partnership units held by other limited partners.

On February 20, 2007, the Company acquired Pine Glen, an 86,720 square-foot flex/office property in Richmond, Virginia, for $5.3 million in cash.

SCHEDULE III

FIRST POTOMAC REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2006
(Amounts in thousands)

Encumbrances at

Description

Location

Date Acquired

Type

December 31, 2006

13129 Airpark Road

Culpeper, VA

Dec-97

Multi-tenant industrial

—

Plaza 500

Alexandria, VA

Dec-97

Multi-tenant industrial

33,801

Van Buren Business Park

Herndon, VA

Dec-97

Flex

7,580

4200 Technology Court

Chantilly, VA

Oct-98

Flex

1,776

4212 Technology Court

Chantilly, VA

Oct-98

Flex

1,730

Crossways Commerce Center

Chesapeake, VA

Dec-99

Multi-tenant industrial

25,727

Newington Business Park

Lorton, VA

Dec-99

Multi-tenant industrial

16,229

Greenbrier Technology Center

Chesapeake, VA

Oct-02

Flex

4,972

Norfolk Business Center

Norfolk, VA

Oct-02

Flex

4,665

Rumsey Center

Columbia, MD

Oct-02

Flex

9,114

Snowden Center

Columbia, MD

Oct-02

Flex

12,373

Virginia Ctr Technology Park

Glen Allen, VA

Oct-03

Flex

—

Interstate Plaza

Alexandria, VA

Dec-03

Single-tenant industrial

—

Alexandria Corporate Park

Alexandria, VA

Dec-03

Multi-tenant industrial

27,495

Herndon Corporate Center

Herndon, VA

Apr-04

Flex

8,654

Aquia Commerce Center

Stafford, VA

Jun-04

Flex

831

6900 English Muffin Way

Frederick, MD

Jul-04

Multi-tenant industrial

6,954

Deer Park

Randallstown, MD

Jul-04

Flex

7,690

Gateway Center

Gaithersburg, MD

Jul-04

Flex

3,955

Gateway West

Westminster, MD

Jul-04

Flex

5,971

4451 Georgia Pacific Boulevard

Frederick, MD

Jul-04

Multi-tenant industrial

6,717

2027 Goldenrod Lane

Germantown, MD

Jul-04

Flex

2,090

Girard Business Center

Gaithersburg, MD

Jul-04

Flex

7,612

Girard Place

Gaithersburg, MD

Jul-04

Flex

9,702

Old Courthouse Square

Martinsburg, WV

Jul-04

Retail

7,463

Patrick Center

Frederick, MD

Jul-04

Office

7,911

15 Worman’s Mill Court

Frederick, MD

Jul-04

Flex

2,612

7561 Lindbergh Drive

Gaithersburg, MD

Jul-04

Single-tenant industrial

1,940

West Park

Frederick, MD

Jul-04

Office

2,687

Woodland Business Center

Largo, MD

Jul-04

Office

2,537

Airpark Place

Gaithersburg, MD

Aug-04

Flex

—

15395 John Marshall Highway

Haymarket, VA

Oct-04

Single-tenant industrial

—

Crossways II

Chesapeake, VA

Oct-04

Flex

—

Norfolk Commerce Park II

Norfolk, VA

Oct-04

Flex

7,453

Windsor at Battlefield

Manassas, VA

Dec-04

Flex

—

4612 Navistar Drive

Frederick, MD

Dec-04

Single-tenant industrial

13,978

Campus at Metro Park North

Rockville, MD

Dec-04

Flex

25,594

Reston Business Campus

Reston, VA

Mar-05

Flex

—

1400 Cavalier Boulevard

Chesapeake, VA

Apr-05

Multi-tenant industrial

—

Enterprise Center

Chantilly, VA

Apr-05

Flex

19,410

Glenn Dale Business Center

Glenn Dale, MD

May-05

Multi-tenant industrial

8,825

Gateway Centre

Manassas, VA

Jul-05

Flex

1,786

1434 Crossways Boulevard

Chesapeake, VA

Aug-05

Office

20,079

Gateway Hampton Roads

Hampton, VA

Sep-05

Multi-tenant industrial

—

403/405 Glenn Drive

Sterling, VA

Oct-05

Flex

9,037

Diamond Hill Distribution Center

Chesapeake, VA

Oct-05

Multi-tenant industrial

—

Linden Business Center

Manassas, VA

Oct-05

Flex

7,645

Owings Mills Business Center

Owings Mills, MD

Nov-05

Flex

5,829

Prosperity Business Center

Merrifield, VA

Nov-05

Multi-tenant industrial

3,966

1000 Lucas Way

Hampton, VA

Dec-05

Flex

—

River’s Bend Center

Chester, VA

Jan-06

Multi-tenant industrial

—

Northridge I&II

Ashland, VA

Jan-06

Multi-tenant industrial

—

Crossways I

Chesapeake, VA

Feb-06

Flex

—

Sterling Park Business Center

Sterling, VA

Feb-06

Flex

—

1408 Stephanie Way

Chesapeake, VA

May-06

Flex

—

Airpark Business Center

Richmond, VA

Jun-06

Flex

1,612

Chesterfield Business Center

Richmond, VA

Jun-06

Flex

5,694

Hanover Business Center

Ashland, VA

Jun-06

Flex

4,448

Gateway 270 West

Clarksburg, MD

Jul-06

Flex

—

Davis Drive

Sterling, VA

Aug-06

Flex

—

Indian Creek Court

Beltsville, MD

Aug-06

Multi-tenant industrial

13,559

Gateway II

Norfolk, VA

Nov-06

Flex

—

Owings Mills Commerce Center

Owings Mills, MD

Nov-06

Flex

—

Park Central

Richmond, VA

Nov-06

Flex

11,690

391,393


		Building &		Since					Building &				Accumulated
Land		Improvements		Acquisition			Land		Improvements		Total		Depreciation

$	443	$	3,103	$	1,177		$	442	$	4,281	$	4,723	$	1,022
	6,265		35,433		2,068			6,265		37,501		43,766		8,919
	3,592		7,652		1,830			3,592		9,482		13,074		2,465
	528		2,421		231			528		2,652		3,180		611
	528		2,423		265			528		2,688		3,216		573
	5,160		23,660		2,459			5,160		26,119		31,279		7,096
	3,135		10,354		4,513			3,135		14,867		18,002		3,526
	1,365		5,119		765			1,483		5,766		7,249		1,657
	1,323		4,967		344			1,554		5,080		6,634		1,608
	2,675		10,196		1,274			2,675		11,470		14,145		2,278
	3,404		12,824		1,146			3,404		13,970		17,374		2,734
	1,922		7,026		729			1,922		7,755		9,677		1,432
	2,185		8,972		295			2,185		9,267		11,452		909
	10,046		27,243		540			10,045		27,784		37,829		2,354
	4,087		14,651		416			4,082		15,072		19,154		1,193
	1,795		8,689		58			1,795		8,747		10,542		615
	3,136		8,642		—			3,136		8,642		11,778		589
	3,680		7,697		357			3,677		8,057		11,734		561
	1,717		3,943		26			1,715		3,971		5,686		293
	891		6,925		760			890		7,686		8,576		591
	3,445		8,923		—			3,445		8,923		12,368		612
	1,416		2,060		85			1,415		2,146		3,561		174
	4,675		7,151		154			4,671		7,309		11,980		557
	5,170		9,507		45			5,165		9,557		14,722		687
	3,485		12,862		—			3,485		12,862		16,347		1,037
	1,778		8,721		113			1,777		8,835		10,612		636
	546		3,329		4			545		3,334		3,879		249
	2,966		306		—			2,966		306		3,272		31
	520		5,177		284			520		5,461		5,981		377
	1,323		2,920		256			1,322		3,177		4,499		247
	2,697		7,141		248			2,697		7,389		10,086		474
	2,736		7,301		6,121			2,736		13,422		16,158		504
	1,036		6,254		—			1,036		6,254		7,290		438
	1,221		8,693		474			1,221		9,167		10,388		769
	3,228		11,696		1,714			3,228		13,410		16,638		1,055
	3,808		18,658		—			3,808		18,658		22,466		974
	9,220		32,056		87			9,220		32,143		41,363		2,076
	1,996		8,778		139			1,996		8,917		10,913		481
	1,387		11,362		171			1,387		11,533		12,920		532
	3,728		27,274		543			3,728		27,817		31,545		1,332
	3,369		14,504		569			3,369		15,073		18,442		664
	3,015		6,734		218			3,015		6,952		9,967		498
	4,447		24,739		222			4,815		24,593		29,408		1,272
	4,132		10,674		47			4,132		10,721		14,853		343
	3,940		12,547		155			3,940		12,702		16,642		501
	3,290		24,949		174			3,290		25,123		28,413		821
	4,829		10,978		20			4,829		10,998		15,827		466
	1,382		7,416		594			1,382		8,010		9,392		263
	5,881		3,495		23			5,881		3,518		9,399		126
	2,592		8,563		136			2,592		8,699		11,291		455
	3,153		26,294		142			3,153		26,436		29,589		1,022
	1,172		7,417		50			1,172		7,467		8,639		286
	2,657		11,597		318			2,657		11,915		14,572		406
	19,898		10,750		911			19,898		11,661		31,559		281
	1,292		3,899		37			1,292		3,936		5,228		58
	250		2,814		8			250		2,822		3,072		42
	900		13,335		19			900		13,354		14,254		193
	1,794		11,561		45			1,795		11,605		13,400		173
	18,302		20,562		14			18,302		20,576		38,878		286
	1,614		3,611		(35	)		1,614		3,576		5,190		51
	5,673		17,168		37			5,673		17,205		22,878		193
	1,360		2,293		—			1,360		2,293		3,653		11
	3,323		12,295		—			3,323		12,295		15,618		95
	1,789		19,712		—			1,789		19,712		21,501		67

$	214, 312	$	700,016	$	33,395		$	215,004	$	732,719	$	947,723	$	62,841

Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets range from 5 to 39 years. The tax basis of the assets above is $958,302 at December 31, 2006.

(a) Reconciliation of Real Estate

The following table reconciles the real estate investments for the three years ended December 31, 2006 (amounts in thousands):


	2006			2005			2004
Balance at beginning of year	$	710,956		$	491,031		$	226,361
Acquisitions of rental property		226,485			215,593			268,287
Capital expenditures		18,282			5,081			2,605
Cost of real estate sold		(7,708	)		—			(6,221	)
Dispositions		(292	)		(749	)		(1	)

Balance at end of year	$	947,723		$	710,956		$	491,031

(b) Reconciliation of Accumulated Depreciation

The following table reconciles the accumulated depreciation on the real estate investments for the three years ended December 31, 2006 (amounts in thousands):


	2006			2005			2004
Balance at beginning of year	$	42,226		$	27,094		$	18,026
Depreciation of acquisitions of rental property		3,164			2,217			1,769
Depreciation of all other rental property and capital expenditures		18,640			13,061			7,487
Dispositions – real estate sold		(1,104	)		—			(184	)
Dispositions – write-off		(85	)		(146	)		(4	)

Balance at end of year	$	62,841		$	42,226		$	27,094

Exhibit Index


Exhibit		Description of Document

3.1⁽¹⁾		Amended and Restated Declaration of Trust of the Registrant.
3.2⁽¹⁾		Amended and Restated Bylaws of the Registrant.
4.1⁽¹⁾		Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September 15, 2003.
4.2⁽²⁾		Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013.
4.3⁽³⁾		Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016.
4.4⁽⁴⁾		Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006.
4.5⁽⁵⁾		Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006.
4.6⁽⁶⁾		Subsidiary Guaranty, dated as of June 22, 2006.
4.7⁽⁷⁾		Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee.
4.8⁽⁸⁾		Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011.
10.1⁽¹⁾		Deed of Trust Note between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.2⁽¹⁾		Deed of Trust, Assignment of Leases and Rents and Security Agreement between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.3⁽¹⁾		Fixed Rate Note between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.4⁽¹⁾		Deed of Trust and Security Agreement between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.5⁽¹⁾		Fixed Rate Note between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.6⁽¹⁾		Deed of Trust and Security Agreement between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.7⁽¹⁾		Fixed Rate Note between Newington Terminal Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.8⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Newington Terminal Associates, LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.9⁽¹⁾		Fixed Rate Note between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.10⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.11⁽¹⁾		Promissory Note between Norfolk First LLC and GTC II First LLC, as borrowers, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.12⁽¹⁾		Deed of Trust and Security Agreement by and between GTC II First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.13⁽¹⁾		Deed of Trust and Security Agreement by and between Norfolk First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.14⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Rumsey/Snowden Holding LLC and First Potomac Realty Investment Limited Partnership.
10.15⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Greenbrier/Norfolk Holding LLC and First Potomac Realty Investment Limited Partnership.
10.16⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Kristina Way, LLC and Newington Terminal Associates LLC and First Potomac Realty Investment Limited Partnership.
10.17⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and FPM Management, LLC, as acquirer, dated July 18, 2003.
10.18⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and First Potomac Realty Investment Limited Partnership, as acquirer, dated July 18, 2003.
10.19⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Douglas J. Donatelli and the Registrant.
10.20⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Nicholas R. Smith and the Registrant.


Exhibit		Description of Document
10.21⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Barry H. Bass and the Registrant.
10.22⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between James H. Dawson and the Registrant.
10.23⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Louis T. Donatelli and the Registrant.
10.24⁽⁹⁾		Employment Agreement, dated February 14, 2005, by and between Joel F. Bonder and the Registrant.
10.25⁽¹⁰⁾		Summary of 2004 Cash Incentive Compensation, 2005 Base Salary Compensation and 2005 Restricted Stock Awards.
10.26⁽¹¹⁾		Summary of 2006 Non-Employee Trustee Compensation.
10.27⁽¹⁾		2003 Equity Compensation Plan.
10.28⁽¹²⁾		Amendment No. 1 to Equity Compensation Plan.
10.29⁽¹³⁾		Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association, as Managing Administrative Agent, and Wells Fargo Bank.
10.30⁽¹⁴⁾		Consent to Sub-Sublease, by and among Bethesda Place II Limited Partnership, Informax, Inc. and the Registrant, dated March 31, 2005.
10.31⁽¹⁵⁾		First Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated June 28, 2005.
10.32⁽¹⁶⁾		Loan Agreement, by and among Jackson National Life Insurance Company, as lender, and Rumsey First LLC, Snowden First LLC, GTC II First LLC, Norfolk First LLC, Bren Mar, LLC, Plaza 500, LLC and Van Buren, LLC, as the borrowers, dated July 18, 2005.
10.33⁽¹⁷⁾		Second Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated October 12, 2005.
10.34⁽¹⁸⁾		Joinder Agreement, by and between, Gateway Hampton Roads, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.35⁽¹⁹⁾		Joinder Agreement, by and between FP Campostella Road, LLC, FP Diamond Hill, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.36⁽²⁰⁾		Agreement between First Potomac Realty Investment Limited Partnership and Louis T. Donatelli, dated as of February 28, 2006.
10.37⁽²¹⁾		Agreement and Plan of Merger by and between First Potomac Management Inc. and the Registrant, dated as of February 28, 2006.
10.38⁽²²⁾		Amended and Restated Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and Key Bank N.A., Wachovia Bank, N.A., Wells Fargo Bank N.A., Bank of Montreal and Key Bank N.A. as Administrative Agent, dated as of April 28, 2006.
10.39⁽²³⁾		2006 Base Salary Compensation.
10.40⁽²⁴⁾		Form of Restricted Common Shares Award Agreement for Officers.
10.41⁽²⁵⁾		Form of Restricted Common Shares Award Agreement for Trustees.
10.42⁽²⁶⁾		Registration Rights Agreement, dated December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant and Wachovia Capital Markets, LLC, as the Representative.
10.43⁽²⁷⁾		Letter Agreement with respect to Capped-Call Transaction, dated December 5, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant and Wachovia Bank, National Association.
10.44⁽²⁸⁾		Letter Agreement with respect to Capped-Call Transaction, dated December 8, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant and Wachovia Bank, National Association.
12*		Statement Regarding Computation of Ratios.
21*		Subsidiaries of the Registrant.
23*		Consent of KPMG LLP (independent registered public accounting firm).
31.1*		Section 302 Certification of Chief Executive Officer.
31.2*		Section 302 Certification of Chief Financial Officer.
32.1*		Section 906 Certification of Chief Executive Officer.
32.2*		Section 906 Certification of Chief Financial Officer.


⁽¹⁾		Incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-11 (Registration No. 333-107172).

⁽²⁾		Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽³⁾		Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁴⁾		Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁵⁾		Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 23, 2006.


⁽⁶⁾		Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on June 23, 2006.

⁽⁷⁾		Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽⁸⁾		Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽⁹⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽¹⁰⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽¹¹⁾		Incorporated by reference to Item 1.01 of the Company’s Current Report on Form 8-K filed on December 7, 2005.

⁽¹²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2005.

⁽¹³⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 6, 2004.

⁽¹⁴⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2005.

⁽¹⁵⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 30, 2005.

⁽¹⁶⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2005.

⁽¹⁷⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁸⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁹⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽²⁰⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 7, 2006.

⁽²¹⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 7, 2006.

⁽²²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2006.

⁽²³⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2006.

⁽²⁴⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2006.

⁽²⁵⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 13, 2006.

⁽²⁶⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽²⁷⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

⁽²⁸⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 12, 2006.

*		Filed herewith.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

First Potomac Realty Trust (FPO) Inactive 10-K2006 FY Annual report

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