Thomas Properties 10-K/A 2006 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment no. 1)

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

For the fiscal year ended December 31, 2006

or

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

For the transition period from              to             

Commission file number 0-50854

Thomas Properties Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-0852352
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)

515 South Flower Street, Sixth Floor, Los Angeles, CA	90071
(Address of principal executive offices)	Zip Code

Registrant’s telephone number, including area code

(213) 613-1900

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

Title of Each Class

Common Stock, $0.01 par value

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 the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

Large Accelerated Filer  ¨ Accelerated Filer  x Non-accelerated Filer  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $169,558,749 based on the closing price on the Nasdaq Global Market for such shares on June 30, 2006.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at April 17, 2007
Common Stock, $0.01 par value per share	14,526,594

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement with respect to its 2007 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s fiscal year are incorporated by reference into Part III hereof as noted therein.

Explanatory Note

This amendment no. 1 on Form 10-K/A includes within Part IV a revised note to the consolidated and combined financial information for the registrant and restated financial statements for TPG/CalSTRS, LLC, which have been amended solely to adjust the amounts in the balance sheet captions (1) prepaid expenses and other assets and (2) members’ equity in the consolidated balance sheet as of December 31, 2006, and to adjust the consolidated statement of cash flows for the year ended December 31, 2006, of our TPG/CalSTRS joint venture to reflect the return of an equity contribution to our joint venture member, the California State Teachers’ Retirement System, in December 2006, in connection with the acquisition of two office properties in Fairfax, Virginia (see Notes 8 and 9 of the consolidated financial statements of TPG/CalSTRS for further details).

1

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements and Financial Statement Schedules

The following consolidated and combined financial information is included as a separate section of this report on Form 10-K:

INDEX TO FINANCIAL STATEMENTS

	Page
Thomas Properties Group, Inc. and Subsidiaries and Thomas Properties Group, Inc. Predecessor:
Report of Independent Registered Public Accounting Firm	2
Report of Independent Registered Public Accounting Firm	3
Consolidated Balance Sheets as of December 31, 2006 and 2005	4
Consolidated and Combined Statements of Operations for Thomas Properties Group, Inc. and Subsidiaries for the years ended December 31, 2006 and 2005 and period from October 13, 2004 through December 31, 2004 and for Thomas Properties Group, Inc. Predecessor for the period from January 1, 2004 through October 12, 2004	5
Consolidated and Combined Statements of Stockholders’ Equity (Owners’ Deficit) for Thomas Properties Group, Inc. and Subsidiaries for the years ended December 31, 2006 and 2005 and period from October 13, 2004 through December 31, 2004 and for Thomas Properties Group, Inc. Predecessor for the period from January 1, 2004 through October 12, 2004	6
Consolidated and Combined Statements of Cash Flows for Thomas Properties Group, Inc. and Subsidiaries for the years ended December 31, 2006 and 2005 and period from October 13, 2004 through December 31, 2004 and for Thomas Properties Group, Inc. Predecessor for the period from January 1, 2004 through October 12, 2004	7
Notes to Consolidated and Combined Financial Information	9
Schedule III: Investments in Real Estate	41
TPG/CalSTRS, LLC:
Report of Independent Registered Public Accounting Firm	42
Report of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets as of December 31, 2006 and 2005 (As restated, Note 8)	44
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 (As restated, Note 8) and 2004 (As restated, Note 8)	45
Consolidated Statements of Members’ Equity and Comprehensive Loss for the years ended December 31, 2006 (As restated, Note 8), 2005 (As restated, Note 8) and 2004 (As restated, Note 8)	46
Consolidated Statements of Cash Flows for the years ended December 31, 2006 (As restated, Note 8), 2005 (As restated, Note 8) and 2004 (As restated, Note 8)	47
Notes to Consolidated Financial Information	48

(b) Exhibits

23.1	Consent of Independent Registered Public Accounting Firm.
23.2	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Thomas Properties Group, Inc.:

We have audited the accompanying consolidated balance sheet of Thomas Properties Group, Inc. and subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity (owners’ deficit), and cash flows of the Company for the year then ended. Our audit also included the 2006 financial statement schedule listed in the Index to the Financial Statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule 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 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 audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the 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 3 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for a deferred tax asset recorded upon the Company’s initial formation transaction.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 2, 2007 expressed an unqualified opinion thereon.

ERNST & YOUNG LLP

Los Angeles, California

April 2, 2007

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Thomas Properties Group, Inc.:

We have audited the accompanying consolidated balance sheet of Thomas Properties Group, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity (owners’ deficit), and cash flows of the Company for the year ended December 31, 2005 and for the period from October 13, 2004 (commencement of operations) through December 31, 2004 and the related combined statements of operations, owners’ deficit and cash flows of Thomas Properties Group, Inc. Predecessor, as defined in Note 1, for the period from January 1, 2004 through October 12, 2004. Our audits also included the financial statement schedule listed in the Index to the Financial Statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and the 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, such consolidated/combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005, and the results of operations and cash flows of the Company for the year ended December 31, 2005 and for the period from October 13, 2004 (commencement of operations) through December 31, 2004 and the results of operations and cash flows of Thomas Properties Group, Inc. Predecessor for the period from January 1, 2004 through October 12, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated and combined financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in 2006 the Company changed its method of accounting for the deferred tax asset recorded for differences between the tax basis and reported amounts related to Thomas Properties Group, L.P. and retrospectively adjusted the accompanying financial statements to give effect to the accounting change.

DELOITTE & TOUCHE LLP

Los Angeles, California

March 15, 2006 (April 2, 2007 as to Note 2)

3

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

December 31, 2006 and 2005

	2006			2005
ASSETS
Investments in real estate:
Land and improvements	$	35,499		$	30,017
Land and improvements—development property		65,526			55,389
Construction in progress		25,403			—
Buildings and improvements		254,539			253,095
Tenant improvements		61,831			66,921
		442,798			405,422
Less accumulated depreciation		(106,644	)		(104,325	)
		336,154			301,097
Investment in real estate—development property held for sale		—			12,064
		336,154			313,161
Investments in unconsolidated real estate entities		52,364			41,124
Cash and cash equivalents		64,343			63,915
Restricted cash		21,500			15,511
Rents and other receivables, net of allowance for doubtful accounts of $419 and $345 as of 2006 and 2005, respectively		2,195			1,804
Receivables—unconsolidated real estate entities		4,074			3,335
Deferred rents		17,610			23,111
Deferred leasing and loan costs, net of accumulated amortization of $7,783 and $7,663 as of 2006 and 2005, respectively		14,707			16,173
Other assets, net		5,133			4,313
Total assets	$	518,080		$	482,447
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage loans	$	265,823		$	273,575
Other secured loans		62,105			47,704
Unsecured loan		3,900			3,900
Accounts payable and other liabilities, net		35,458			13,545
Dividends and distributions payable		1,916			1,905
Prepaid rent		3,558			3,753
Deferred tax liability		2,392			308
Total liabilities		375,152			344,690
Minority interests:
Unitholders in the Operating Partnership		76,390			74,099
Minority interests in consolidated real estate entities		4,288			26
Total minority interests		80,678			74,125
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as December 31, 2006 and 2005		—			—
Common stock, $.01 par value, 75,000,000 shares authorized, 14,418,261 and 14,347,465 shares issued and outstanding as of December 31, 2006 and December 31, 2005, respectively		144			143
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 16,666,666 shares issued and outstanding as of December 31, 2006 and 2005		167			167
Additional paid-in capital		71,095			66,965
Retained deficit		(9,156	)		(3,379	)
Unearned compensation, net		—			(264	)
Total stockholders’ equity		62,250			63,632
Total liabilities and stockholders’ equity	$	518,080		$	482,447

See accompanying notes to consolidated and combined financial information.

4

THOMAS PROPERTIES GROUP, INC AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

	The Company									TPGI Predecessor
	Year ended December 31, 2006			Year ended December 31, 2005			Period from October 13, 2004 through December 31, 2004			Period from January 1, 2004 through October 12, 2004
Revenues:
Rental	$	33,076		$	32,618		$	7,356		$	20,611
Tenant reimbursements		19,399			18,899			3,882			10,703
Parking and other		3,945			4,224			815			2,172
Investment advisory, management, leasing, and development services		7,913			4,633			1,427			5,089
Investment advisory, management, leasing and development services—unconsolidated/uncombined real estate entities		14,241			8,876			969			4,494
Total revenues		78,574			69,250			14,449			43,069
Expenses:
Rental property operating and maintenance		15,115			14,605			3,369			8,371
Real estate taxes		5,904			5,803			1,267			3,392
Investment advisory, management, leasing, and development services		9,759			6,218			856			4,986
Rent—unconsolidated/uncombined real estate entities		227			233			48			217
Interest		20,570			20,784			5,611			18,695
Depreciation and amortization		12,661			12,408			2,614			6,206
General and administrative		17,202			12,914			2,095			4,487
Total expenses		81,438			72,965			15,860			46,354
Gain on sale of real estate		10,640			—			—			975
Gain on purchase of other secured loan		—			25,776			—			—
Loss from early extinguishment of debt		(360	)		(4,497	)		—			—
Interest income		2,974			1,268			300			17
Equity in net loss of unconsolidated/uncombined real estate entities		(12,909	)		(16,259	)		(988	)		(1,099	)
Minority interests income (loss)—unitholders in the Operating Partnership		1,577			(1,559	)		1,128			—
Minority interests (loss) income in consolidated/combined real estate entities		(472	)		328			—			(1,614	)
(Loss) income before (provision) benefit for income taxes		(1,414	)		1,342			(971	)		(5,006	)
(Provision) benefit for income taxes		(635	)		(698	)		390			—
Net (loss) income	$	(2,049	)	$	644		$	(581	)	$	(5,006	)
(Loss) earnings per share—basic and diluted	$	(0.14	)	$	0.05		$	(0.04	)
Weighted average common shares outstanding—basic		14,339,032			14,301,932			14,290,097
Weighted average common shares outstanding—diluted		14,339,032			14,308,087			14,290,097

See accompanying notes to consolidated and combined financial information.

5

THOMAS PROPERTIES GROUP, INC AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY

(OWNERS’ DEFICIT)

(In thousands, except share data)

Years/Periods Ended December 31, 2006, 2005 and 2004

	Common stock			Limited Voting Stock		Additional Paid-In Capital			Deficit			Unearned Compensation, net			Total
	Shares	Amount
TPGI Predecessor
Balance, December 31, 2003	—	$	—	$	—	$	—		$	(2,870	)	$	—		$	(2,870	)
Contributions	—		—		—		—			6,952			—			6,952
Distributions	—		—		—		—			(15,059	)		—			(15,059	)
Net loss	—		—		—		—			(5,006	)		—			(5,006	)
Balance, October 12, 2004	—		—		—		—			(15,983	)		—			(15,983	)
The Company
Reclassify TPGI Predecessor owners’ deficit	—		—		—		(15,983	)		15,983			—			—
Issuance of limited voting stock	—		—		167		1			—			—			168
Sale of common stock	14,285,814		143		—		151,723			—			—			151,866
Fair value of Operating Partnership units granted to certain minority owners of TPGI Predecessor	—		—		—		8,200			—			—			8,200
Minority interests of former owners’ continuing interests	—		—		—		(78,133	)		—			—			(78,133	)
Commitment to issue unvested restricted common stock, net of minority interests	56,667		—		—		680			—			(314	)		366
Vesting of restricted stock, net of minority interests	—		—		—		—			—			24			24
Commitment to issue stock options, net of minority interests	—		—		—		437			—			(202	)		235
Vesting of stock options, net of minority interests	—		—		—		—			—			23			23
Net loss	—		—		—		—			(581	)		—			(581	)
Balance, December 31, 2004	14,342,481	$	143	$	167	$	66,925		$	(581	)	$	(469	)	$	66,185
Issuance of unvested restricted common stock, net of minority interests	4,984		—		—		40			—			(28	)		12
Vesting of restricted stock, net of minority interests	—		—		—		—			—			127			127
Vesting of stock options, net of minority interests	—		—		—		—			—			106			106
Dividends	—		—		—		—			(3,442	)		—			(3,442	)
Net income	—		—		—		—			644			—			644
Balance, December 31, 2005	14,347,465	$	143	$	167	$	66,965		$	(3,379	)	$	(264	)	$	63,632
Beginning balance adjustment	—		—		—		4,603			(269	)		—			4,334
Reclass due to adoption of 123(R)	—		—		—		(264	)		—			264			—
Issuance of unvested restricted common stock, net of minority interests	66,419		1		—		408			—			—			409
Vesting of restricted stock, net of minority interests	—		—		—		235			—			—			235
Vesting of stock options, net of minority interests	—		—		—		77			—			—			77
Vesting of incentive units, net of minority interest	—		—		—		1,390			—			—			1,390
Change in minority interest (see Note 3)	—		—		—		(2,373	)		—			—			(2,373	)
Exercise of stock options	4,377		—		—		54			—			—			54
Dividends	—		—		—		—			(3,459	)		—			(3,459	)
Net loss	—		—		—		—			(2,049	)		—			(2,049	)
Balance, December 31, 2006	14,418,261	$	144	$	167	$	71,095		$	(9,156	)	$	—		$	62,250

See accompanying notes to consolidated and combined financial information.

6

THOMAS PROPERTIES GROUP, INC AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

	The Company									TPGI Predecessor
	Year ended December 31, 2006			Year ended December 31, 2005			Period from October 13, 2004 through December 31, 2004			Period from January 1, 2004 through October 12, 2004
Cash flows from operating activities:
Net income (loss)	$	(2,049	)	$	644		$	(581	)	$	(5,006	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of real estate		(10,640	)		—			—			(975	)
Gain on purchase of other secured loan		—			(25,776	)		—			—
Loss from early extinguishment of debt		360			4,475			—			—
Loss from early extinguishment of debt applied to loan premiums		—			(1,098	)		—			—
Reversal of deferred interest on other secured loan		—			(515	)		—			—
Write-off of unamortized deferred loan costs		—			1,120			—			—
Equity in net loss of unconsolidated/uncombined real estate entities		12,909			16,259			988			1,099
Deferred rents		5,543			5,355			1,028			4,034
Depreciation and amortization expense		12,661			12,408			2,614			6,206
Bad debt expense reversal		—			—			—			26
Amortization of loan costs		488			563			129			312
Amortization of loan premium		—			(459	)		(99	)		—
Amortization of above and below market leases, net		(259	)		(284	)		(82	)		—
Vesting of stock options and restricted stock		3,754			505			—			—
Minority interests		(1,105	)		1,231			(1,128	)		1,614
Distributions from operations of unconsolidated real estate entities		7,958			2,108			—			—
Changes in assets and liabilities:
Rents and other receivables		(752	)		912			(1,507	)		457
Receivables—unconsolidated/uncombined real estate entities		(739	)		(2,578	)		163			(358	)
Deferred leasing and loan costs		(419	)		(1,115	)		(110	)		(1,025	)
Deferred tax asset/liability		635			698			(390	)		—
Other assets		28			1,151			(593	)		10
Deferred interest payable		177			195			(5,892	)		2,736
Accounts payable and other liabilities		(749	)		3,961			(135	)		2,567
Due to affiliate		—			(1,852	)		1,852			—
Prepaid rent		(195	)		2,912			(1,692	)		(442	)
Net cash provided by (used in) operating activities		27,606			20,820			(5,435	)		11,255
Cash flows from investing activities:
Expenditures for improvements to real estate		(29,257	)		(6,981	)		(1,452	)		(4,817	)
Exercise of Campus El Segundo purchase option and buy-out of minority partner		—			(31,100	)		—			—
Purchases of interests in unconsolidated/uncombined real estate entities		(24,150	)		(25,733	)		(68,774	)		—
Proceeds from sale of real estate		29,450			—			—			3,321
Return of capital from unconsolidated/uncombined real estate entities		19,875			8,386			144			2,445
Contributions to unconsolidated/uncombined real estate entities		(21,980	)		(10,520	)		(51	)		(96	)
Cash acquired from One Commerce Square investment		—			—			—			2,619
Change in short-term investments		—			14,000			(14,000	)		—
Change in restricted cash		560			(2,562	)		(4,613	)		1,908
Net cash (used in) provided by investing activities		(25,502	)		(54,510	)		(88,746	)		5,380

See accompanying notes to consolidated and combined financial information.

7

THOMAS PROPERTIES GROUP, INC AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS—(Continued)

(In thousands)

	The Company									TPGI Predecessor
	Year ended December 31, 2006			Year ended December 31, 2005			Period from October 13, 2004 through December 31, 2004			Period from January 1, 2004 through October 12, 2004
Cash flows from financing activities:
Proceeds from equity offering		—			—			171,429			—
Payment of offering costs		—			—			(19,563	)		—
Contributions from owners of TPGI Predecessor		—			—			—			6,952
Distributions to owners of TPGI Predecessor		—			—			—			(15,059	)
Minority interest contributions		52			—			318			—
Minority interest distributions		(550	)		—			—			(1,101	)
Payment of dividends to common shareholders and distributions to limited partners of the Operating Partnership		(7,653	)		(5,715	)		—			—
Principal payments on notes payable		(10,962	)		(8,995	)		(5,030	)		(7,577	)
Repayment of notes payable, including principal defeased and defeasance costs		—			(89,798	)		—			—
Purchase of Two Commerce Square Junior B mezzanine loan					(2,500	)		—			—
Proceeds from mortgage and other secured loans		17,434			149,500			—			93
Payment of loan costs		(51	)		(1,393	)		—			—
Stock option exercise		54			—			—			—
Net cash (used in) provided by financing activities		(1,676	)		41,099			147,154			(16,692	)
Net increase (decrease) in cash and cash equivalents		428			7,409			52,973			(57	)
Cash and cash equivalents at beginning of period		63,915			56,506			3,533			3,590
Cash and cash equivalents at end of period	$	64,343		$	63,915		$	56,506		$	3,533
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest of $4,710, $2,165, $238 and $116 for the year ended December 31, 2006, December 31, 2005 and the periods from October 13, 2004 through December 31, 2004 and from January 1, 2004 through October 12, 2004	$	19,180		$	27,201		$	6,987		$	16,588
Supplemental disclosure of non-cash investing and financing activities:
Consolidation of One Commerce Square:
Assets acquired, net of cash		—			—		$	—			105,101
Elimination of One Commerce Square investment		—			—			—			(9,804	)
Liabilities assumed		—			—			—			(97,916	)
Cash acquired	$			$	—		$	—		$	(2,619	)
Accrual for declaration of dividends to common shareholders and distributions to limited partners of the Operating Partnership	$	1,916		$	1,905		$	—		$	—
Investments in real estate included in accounts payable and other liabilities		5,789			692			—			—
Decrease in investments in real estate and accumulated depreciation for removal of fully amortized improvements		8,730			—			—			—
Increase in investments in real estate for the consolidation of Murano		7,436			—			—			—
Financing provided by minority partner relating to acquisition of minority partner’s interest		—			3,900			—			—
Increase in investments in real estate and additional paid in capital for fair value of Operating Partnership units granted to certain minority owners of TPGI Predecessor		—			—			8,200			—
Reclassification of owners’ deficit to additional paid in capital		—			—			15,983			—
Reclassification of minority interest for limited partnership units in the Operating Partnership from additional paid in capital		2,373			20,238			78,133			—
Assumption of debt relating to the acquisition of the 50% interest in One Commerce Square		—			—			9,985			—

See accompanying notes to consolidated and combined financial information.

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION

December 31, 2006, 2005, and 2004

(Tabular amounts in thousands)

1. Organization and Description of Business

The terms “Thomas Properties”, “us”, “we” and “our” as used in this report refer to Thomas Properties Group, Inc. together with our Operating Partnership, Thomas Properties Group, L.P., or the “Operating Partnership.”

We were formed to succeed to certain businesses of the Thomas Properties predecessor (Thomas Properties Group, Inc. Predecessor, or “TPGI Predecessor”), which was not a legal entity but rather a combination of real estate entities and operations. We own, manage, lease, acquire and develop real estate, consisting primarily of office properties and related parking garages, located in Southern California; Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas; and Austin, Texas. The ultimate owners of TPGI Predecessor were Mr. James A. Thomas, our Chairman, Chief Executive Officer and President, and certain others who had minor ownership interests.

We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering (the “Offering”), which consisted of the sale of 14,285,714 shares of common stock at $12.00 per share, resulting in net proceeds of $151.9 million, after underwriting discounts and expenses of the Offering. Concurrent with the consummation of the Offering, Thomas Properties and the Operating Partnership, together with the partners and members of the affiliated partnerships and limited liability companies of TPGI Predecessor and other parties which held direct or indirect ownership interests in the properties engaged in certain formation transactions (the “Formation Transactions”). The Formation Transactions were designed to (i) continue the operations of TPGI Predecessor, (ii) enable us to raise the necessary capital to acquire increased interests in certain of the properties and repay certain property level indebtedness, (iii) fund joint venture capital commitments, (iv) provide capital for future acquisitions, and (v) fund future development costs at our development properties.

Our operations are carried on through the Operating Partnership. We are the sole general partner in the Operating Partnership. Pursuant to contribution agreements among the owners of TPGI Predecessor and the Operating Partnership, the Operating Partnership received a contribution of interests in the real estate properties, as well as the investment advisory, property management, leasing and real estate development operations of TPGI Predecessor in exchange for limited partnership units (“Units”) in the Operating Partnership issued to the contributors and the assumption of debt and other specified liabilities. As of December 31, 2006, we held a 45.2% interest in the Operating Partnership which we consolidated, as we have control over the major decisions of the Operating Partnership.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

As of December 31, 2006, we were invested in the following real estate entities:

Entity	Type; Possible Planned Development	Location
Consolidated entities:
One Commerce Square	High-rise office	Philadelphia Central Business District, Pennsylvania (“PCBD”)
Two Commerce Square	High-rise office	PCBD
Murano	Construction in progress; Residential	PCBD
2100 JFK Boulevard	Undeveloped land; Residential/Office/Retail	PCBD
Four Points Centre	Undeveloped land; Office/Retail/Research and Development/Hotel	Austin, Texas
Campus El Segundo	Undeveloped land; Office/Retail/Research and Development/Hotel	El Segundo, California
Unconsolidated entities:
2121 Market Street and Harris Building Associates	Residential and Retail	PCBD
TPG/CalSTRS, LLC:
City National Plaza	High-rise office	Los Angeles Central Business District, California
Reflections I	Suburban office—single tenancy	Reston, Virginia
Reflections II	Suburban office—single tenancy	Reston, Virginia
Four Falls Corporate Center	Suburban office	Conshohocken, Pennsylvania
Oak Hill Plaza	Suburban office	King of Prussia, Pennsylvania
Walnut Hill Plaza	Suburban office	King of Prussia, Pennsylvania
San Felipe Plaza	High-rise office	Houston, Texas
2500 City West	Suburban office and undeveloped land	Houston, Texas
Brookhollow Central I, II and III	Suburban office	Houston, Texas
Intercontinental Center	Suburban office	Houston, Texas
CityWestPlace	Suburban office and undeveloped land	Houston, Texas

2100 JFK Boulevard includes a surface parking lot that services One Commerce Square, Two Commerce Square and other unrelated properties. The City National Plaza property also includes an off-site garage that provides parking for City National Plaza and other properties. The office properties typically include on-site parking, retail and storage space.

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THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

From the late 1980s through 2000, TPGI Predecessor developed One Commerce Square, Two Commerce Square, 2121 Market Street and the California Environmental Protection Agency (“CalEPA”) headquarters building in Sacramento, California. We have the responsibility for the day-to-day operations of CalEPA building, but have no ownership interest in the property. We provide investment advisory services for the California State Teachers Retirement System (“CalSTRS”) with respect to four properties that are wholly owned by CalSTRS—800 South Hope Street, Valencia Town Center, 1835 Market Street and Pacific Financial Plaza—as well as the properties owned in a joint venture between CalSTRS and us. In addition, we provide property management, leasing and development services to the properties discussed above, except we do not provide property management services for 2121 Market Street, Reflections I and Reflections II.

In 2001, TPGI Predecessor formed a joint venture with a third party, which entered into an agreement to purchase the land commonly referred to as Campus El Segundo. In October 2005, we purchased the entire interest of our unaffiliated minority partner in the joint venture and exercised the option to acquire the land.

Effective October 13, 2004, Mr. Thomas owns an 11% ownership interest in One Commerce Square and Two Commerce Square.

As of December 31, 2006, we hold a 73% interest in Murano, which was formed to hold a general partnership interest in the Murano development project. As of August 2, 2006, we consolidate this entity.

2. Change in Method of Accounting for Deferred Tax Asset

As of January 1, 2006, we elected to change the method of accounting for the deferred tax effects of Thomas Properties Group, Inc.’s investment in its consolidated operating partnership. Paragraph 34 of SFAS No.109, Accounting for Income Taxes (SFAS No. 109), notes that a deferred tax asset related to an investment in a consolidated subsidiary or corporate joint venture should not be recorded unless it is apparent it will reverse in the foreseeable future. Because partnerships are not taxable entities and their tax consequences flow through to their investors they generally are not considered consolidated subsidiaries or corporate joint ventures. However, because the deferred tax assets related to the outside basis difference of the Company’s investment in the operating partnership bears the same attributes as the outside basis difference of a consolidated subsidiary, we have adopted, as a change in accounting policy, a limitation on recording deferred tax assets related to the investment in consolidated partnerships unless the temporary difference will reverse in the foreseeable future. This preferable alternative results in an application whereby we do not recognize a deferred tax asset related to these temporary differences as they will not reverse in the foreseeable future. In accordance with SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154), we have retrospectively applied this preferable alternative and adjusted our previously issued consolidated financial statements. The following financial statement line items as of December 31, 2005 and 2004 were affected by the change in accounting principle.

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Consolidated Balance Sheets

	As Originally Reported			As Adjusted			Effect of Change
As of December 31, 2004
Deferred tax asset	$	40,138		$	390		$	(39,748	)
Total assets		491,602			451,854			(39,748	)
Stockholders’ equity:
Common stock		143			143			—
Limited voting stock		167			167			—
Additional paid-in capital		106,673			66,925			(39,748	)
Retained deficit		(581	)		(581	)		—
Unearned compensation, net		(469	)		(469	)		—
Total stockholders’ equity		105,933			66,185			(39,748	)
Total liabilities and stockholders’ equity		491,602			451,854			(39,748	)
As of December 31, 2005
Deferred tax asset	$	39,440		$	—		$	(39,440	)
Total assets		521,887			482,447			(39,440	)
Deferred tax liability		—			308			308
Total liabilities		344,382			344,690			308
Stockholders’ equity:
Common stock		143			143			—
Limited voting stock		167			167			—
Additional paid-in capital		106,713			66,965			(39,748	)
Retained deficit		(3,379	)		(3,379	)		—
Unearned compensation, net		(264	)		(264	)		—
Total stockholders’ equity		103,380			63,632			(39,748	)
Total liabilities and stockholders’ equity		521,887			482,447			(39,440	)

3. Summary of Significant Accounting Policies

Principles of Consolidation and Combination

The accompanying consolidated financial statements of our company include all the accounts of Thomas Properties Group, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership. Property interests contributed to the Operating Partnership by Mr. Thomas and entities majority owned by him in exchange for Units have been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. Accordingly, the contributed assets and assumed liabilities were recorded at TPGI Predecessor’s historical cost basis, except for the minority owners’ share. The pooling-of-interests method of accounting also requires the reporting of results of operations, for the period in which the combination occurred as though the entities had been combined at either the beginning of the period or inception. Accordingly, the results of operations for the year ended December 31, 2004 comprise those of our company from October 13, 2004 through December 31, 2004, and of TPGI Predecessor from January 1, 2004 through October 12, 2004. Prior to the Offering, Thomas Properties Group, Inc. and the Operating Partnership had no operations. The combination did not require any material adjustments to conform the accounting policies of the separate entities. The remaining interests, which were acquired for cash and Units, have been accounted for as a purchase, and the excess of the purchase price over the related historical cost basis has been allocated to the assets acquired and liabilities assumed.

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

The accompanying combined financial statements of TPGI Predecessor include interests in certain of our properties and the property management, leasing, acquisition and real estate development business of Thomas Development Partners, Ltd.

The real estate entities included in the consolidated and combined financial statements have been consolidated or combined only for the periods that such entities were under control by us or TPGI Predecessor, or were considered a variable interest entity. The equity method of accounting is utilized to account for investments in real estate entities over which we or TPGI Predecessor have significant influence, but not control over major decisions, including the decision to sell or refinance the properties owned by such entities. All significant intercompany balances and transactions have been eliminated in the consolidated and combined financial statements.

The interests in One Commerce Square (beginning June 1, 2004), Two Commerce Square (beginning October 13, 2004), and Campus El Segundo (through October 11, 2005), not owned by us or TPGI Predecessor are reflected as minority interest. For the period from October 13, 2004 through December 31, 2005, no losses of Two Commerce Square have been allocated to the minority partner, as no further contributions are required from the minority partner. The unrecognized minority interest in the deficit of Two Commerce Square is $282,000 and $480,000 at December 31, 2006 and 2005, respectively. Future income allocable to the minority partner will be reduced by such unrecognized losses.

We have a $20,510,000 preferred equity interest in Murano, and as of December 31, 2006, have contributed $11,662,000 of this commitment. Excluding the preferred equity interest, a third party has a 27.0% ownership interest in Murano.

Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less when acquired.

Restricted Cash

Restricted cash consists of security deposits from tenants and prospective condominium buyers as well as funds required under the terms of certain secured notes payable. There are restrictions on our ability to withdraw these funds other than for their specified usage. See Note 5 for additional information on restrictions under the terms of certain secured notes payable.

Short-term Investments

Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Our short-term investments are classified as available-for-sale, and are carried at fair value, with unrealized gains and losses, net of tax, recorded in stockholders’ equity.

Investments in Real Estate

Investments in real estate are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:

Buildings	40 to 50 years
Building improvements	5 to 40 years
Tenant improvements	Shorter of the useful lives or the terms of the related leases

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

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.

Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development related costs incurred during construction periods are capitalized and depreciated on the same basis as the related assets. Included in investments in real estate is capitalized interest of $8,109,000 and $3,399,000 as of December 31, 2006 and 2005, respectively.

Unconsolidated/Uncombined Real Estate Entities

Investments in unconsolidated/uncombined real estate entities are accounted for using the equity method of accounting whereby our investments in partnerships and limited liability companies are recorded at cost and the investment accounts are adjusted for our share of the entities’ income or loss and for distributions and contributions.

We use the equity method to account for our unconsolidated/uncombined real estate entities since we have significant influence but not control over the entities and none of the entities, other than One Commerce Square effective June 1, 2004 and Murano, effective August 1, 2006 are considered variable interest entities.

Impairment of Long-Lived Assets

We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Management believes no impairment in the net carrying values of the investments in real estate and investments in unconsolidated/uncombined real estate entities has occurred for the periods presented.

Deferred Leasing and Loan Costs

Deferred leasing commissions and other direct costs associated with the acquisition of tenants are capitalized and amortized on a straight-line basis over the terms of the related leases. Costs associated with unsuccessful leasing opportunities are expensed. Leasing costs, net of related amortization, totaled $12,084,000 and $13,150,000 as of December 31, 2006 and 2005, respectively, and are included in Deferred leasing and loan costs, net of accumulated amortization, in the accompanying consolidated balance sheets. For the years ended 2006 and 2005, amortization of leasing costs was $1,720,000, and $1,831,000, respectively.

Loan costs are capitalized and amortized to interest expense over the terms of the related loans using a method that approximates the effective-interest method. Loan costs, net of related amortization, totaled $2,315,000 and $2,878,000 as of December 31, 2006 and 2005, respectively, and are included in Deferred leasing and loan costs, net of accumulated amortization, in the accompanying consolidated balance sheets.

Deferred leasing and loan costs also include the carrying value of acquired in-place leases, which are discussed below.

Purchase Accounting for Acquisition of Interests in Real Estate Entities

Purchase accounting was applied, on a pro rata basis, to the assets and liabilities related to real estate entities for which we or TPGI Predecessor acquired interests, based on the percentage interest acquired. For purchases of

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

additional interests that were consummated subsequent to June 30, 2001, the effective date of SFAS No. 141, Business Combinations, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. Loan premiums, in the case of any above market rate loans, or loan discounts, in the case of below market loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute leases including leasing commissions, legal and other related costs.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values, included in other assets, are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values, included in other liabilities, are amortized as an increase to rental income over the terms in the respective leases. As of December 31, 2006 and 2005, we had a net asset and liability related to above and below market leases of $187,000 and $72,000, respectively. The weighted average amortization period for our above and below market leases was approximately 7.4 and 6.9 years as of December 31, 2006 and 2005, respectively.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the additional interests in real estate entities acquired by us and TPGI Predecessor because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to depreciation and amortization expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

The table below presents the expected amortization related to the acquired in-place lease value and acquired above and below market leases at December 31, 2006:

	2007			2008			2009			2010			2011			Thereafter			Total
Amortization expense:
Acquired in-place lease value	$	446		$	435		$	655		$	631		$	574		$	1,162		$	3,903
Adjustments to rental revenues
Above market leases	$	(226	)	$	(197	)	$	(197	)	$	(197	)	$	(197	)		(364	)		(1,378	)
Below market leases		238			222			206			191			183			151			1,191
Net adjustment to rental revenues	$	12		$	25		$	9		$	(6	)	$	(14	)	$	(213	)	$	(187	)

Minority Interests of Unitholders in the Operating Partnership

Minority interests of unitholders in the Operating Partnership represent the interests in the Operating Partnership units which are held primarily by entities affiliated with Mr. Thomas. The ownership percentage of the minority interest is determined by dividing the number of Operating Partnership units by the total shares of common stock and Operating Partnership units outstanding. Net income is allocated based on the ownership percentages. The issuance of additional shares of common stock or Operating Partnership units results in changes to the Minority Interest of the Operating Partnership percentage as well as the total net assets to the Company. As a result, all common transactions result in an allocation between the stockholders’ equity and Minority Interest of the Operating Partnership in the accompanying consolidated balance sheets to account for the change in the Minority Interest of the Operating Partnership ownership percentage as well as the change in total net assets of the company.

Revenue Recognition

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The impact of the straight line rent adjustment decreased revenue by $5,543,000, $5,355,000, $1,028,000, and $4,034,000 for the year ended December 31, 2006, December 31, 2005 and the periods from October 13, 2004 through December 31, 2004 and from January 1, 2004 through October 12, 2004, respectively. Additionally, the net impact of the amortization of acquired above market leases and acquired below market leases increased revenue by $259,000, $284,000 and $82,000 for the years ended December 31, 2006, December 31, 2005 and period from October 13, 2004 through December 31, 2004, respectively. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred rents in the accompanying consolidated and combined balance sheets and contractually due but unpaid rents are included in rents and other receivables. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this allowance is based on the tenants’ payment history and current credit status, as well as certain industry or specific credit considerations. If estimates of collectibility differ from the cash received, then the timing and amount of our reported revenue could be impacted. The credit risk is mitigated by the high quality of the existing tenant base, reviews of prospective tenant’s risk profiles prior to lease execution and continual monitoring of our tenant portfolio to identify potential problem tenants.

Tenant reimbursements for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Lease termination fees, which are included in other income in the accompanying consolidated and combined statements of operations, are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Investment advisory fees are based on a percentage of net operating income earned by a property under management and are recorded on a monthly basis as earned. Property management fees are based on a percentage of the revenue earned by a property under management and are recorded on a monthly basis as earned. Generally, 50% of leasing fees are recognized upon the execution of the lease and the remainder upon tenant occupancy unless significant future contingencies exist. Development fees are recognized as the real estate development services are rendered using the percentage-of-completion method of accounting based on total project costs incurred to total estimated costs.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R). SFAS No. 123R required that all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We adopted this statement as of January 1, 2006. The adoption of this statement did not significantly impact our financial statements, as we previously adopted the fair value based method of accounting of SFAS No. 123, Accounting for Stock-Based Compensation.

In July 2006, FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which is effective for fiscal years beginning after December 15, 2006, and clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize the impact of a tax position in our financial statements if that position would more likely than not be sustained on audit, based on the technical merits of the position. The cumulative effect of the change in accounting principle would be recorded as an adjustment to opening retained earnings. The Company has not yet completed its evaluation of the impact of adoption on the Company’s financial position or results of operations.

In September 2006, FASB issued SFAS No. 157 (SFAS No. 157), “Fair Value Measurement,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and provides for expanded disclosure about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, except for SFAS No. 123R. This guidance was issued to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect that the adoption of SFAS No. 157 will have a material impact on our financial statements.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB 108) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” to address diversity in practice regarding consideration of the effects of prior year errors when quantifying misstatements in current year financial statements. The SEC staff concluded that registrants should quantify financial statement errors using both a balance sheet approach 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 states that if correcting an error in the current year materially affects the current year’s income statement, the prior period financial statements must be restated. SAB 108 is effective for fiscal years ending after November 15, 2006, and we have elected early application of SAB 108. See below and Note 16 for the impact of SAB 108 on our financial statements.

Opening Additional Paid in Capital and Retained Deficit Adjustment and Reclassifications

In accordance with SAB 108, we adjusted our opening stockholders’ equity and minority interest of unitholders in the Operating Partnership for 2006 and financial results in the accompanying consolidated

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

financial statements to reflect (1) a change in the allocation of depreciation expense relating to our investment in TPG/CalSTRS, LLC, and (2) expense attributable to incentive units in our Operating Partnership. See Notes 4 and 8 for additional information regarding the allocation of depreciation expense and incentive unit expense, respectively, and Note 16 for additional information on SAB 108.

Equity Offering Costs

Underwriting commissions and costs and expenses from our October 2004 initial public offering are reflected as a reduction to additional paid-in-capital.

Income Taxes

We account for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, as measured by applying currently enacted tax laws. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

TPGI Predecessor’s real estate entities were partnerships and limited liability companies, and its property management, leasing, and real estate development operations were held by a partnership. Under applicable federal and state income tax rules, the allocated share of net income or loss from partnerships and limited liability companies is reportable in the income tax returns of the partners and members. Accordingly, no income tax provision is included in the accompanying combined financial statements for the period from January 1, 2004 through October 12, 2004.

Earnings (loss) per share

Earnings (loss) per share is calculated based on the weighted average number of shares of our common stock outstanding during the period. The assumed exercise of outstanding stock options and the effect of the vesting of unvested restricted stock that has been granted or has been committed to be granted, all using the treasury stock method, are not dilutive for the year ended December 31, 2006 and the period from October 13, 2004 through December 31, 2004.

Stock-based Compensation

On January 1, 2006, in connection with the adoption of SFAS No. 123R using the modified prospective method, we reclassified $264,000 to net the unearned compensation line item within equity against additional paid in capital. Under SFAS No. 123R, an equity instrument is not recorded to stockholders’ equity until the related compensation expense is recorded over the requisite service period of the award. Prior to the adoption of SFAS No. 123R, and in accordance with the previous accounting guidance, we recorded the full fair value of all issued but nonvested stock options and restricted shares in additional paid in capital and recorded an offsetting deferred compensation balance on a separate line item within equity for the amount of compensation costs not yet recognized for these nonvested instruments. We use the Black-Scholes option pricing model to estimate the fair value of granted options. This model takes into account the option’s exercise price, the option’s expected life, the current price of the underlying stock, the expected volatility of the underlying stock, expected dividends, and a risk-free interest rate.

Management’s Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We have identified certain critical accounting policies that affect management’s more significant judgments and estimates used in the preparation of the consolidated and combined financial statements. On an ongoing basis, we evaluate estimates related to critical accounting policies, including those related to revenue recognition and the allowance for doubtful accounts receivable and investments in real estate and asset impairment. The estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances.

We must make estimates related to the collectibility of accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income.

We are required to make subjective assessments as to the useful lives of the properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate, including real estate held by the unconsolidated/uncombined real estate entities accounted for using the equity method. These assessments have a direct impact on our net income because recording an impairment loss results in a negative adjustment to net income.

We are required to make subjective assessments as to the fair value of assets and liabilities in connection with purchase accounting related to interests in real estate entities acquired by us. These assessments have a direct impact on our net income subsequent to the acquisition of the interests as a result of depreciation and amortization being recorded on these assets and liabilities over the expected lives of the related assets and liabilities. We estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.

Segment Disclosure

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. We currently operate in one operating segment: the acquisition, development, ownership, and management of commercial real estate. Additionally, we operate in one geographic area: the United States.

Our office portfolio includes revenues from the rental of office space to tenants, parking, rental of storage space and other tenant services.

Concentration of Credit Risk

Financial instruments that subject us to credit risk consist primarily of cash and accounts receivable. We maintain our cash and cash equivalents and restricted cash on deposit with high quality financial institutions.

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. There is a concentration of risk related to amounts that exceed the FDIC insurance coverage. We believe that the risk is not significant.

We have two operating properties and one of our unconsolidated operating properties located in downtown Philadelphia, Pennsylvania. In addition, the Murano residential high-rise project is under construction in downtown Philadelphia, Pennsylvania. The ability of the tenants to honor the terms of their respective leases, and the ability of prospective buyers to close on the acquisition of a condominium unit, is dependent upon the economic, regulatory and social factors affecting the communities in which the tenants operate.

We generally require either a security deposit, letter of credit or a guarantee from our tenants. We require a 15% cumulative, non-refundable deposit of prospective buyers of our Murano condominium project.

4. Unconsolidated/Uncombined Real Estate Entities

The unconsolidated/uncombined real estate entities include the entities that own One Commerce Square (through May 31, 2004, as this entity was considered to be a variable interest entity on June 1, 2004), 2121 Market Street, Harris Building Associates, TPG/CalSTRS, LLC, a joint venture with CalSTRS, and Murano (through August 1, 2006, as this entity was considered to be a variable interest entity on August 2, 2006). TPG/CalSTRS, LLC owns the following properties:

City National Plaza (purchased January 2003)

Reflections I (purchased October 2004)

Reflections II (purchased October 2004)

Four Falls Corporate Center (purchased March 2005)

Oak Hill Plaza (purchased March 2005)

Walnut Hill Plaza (purchased March 2005)

Valley Square Office Park (purchased March 2005, sold April 2006)

San Felipe Plaza (purchased August 2005)

2500 City West (purchased August 2005)

Brookhollow Central I, II and III (purchased August 2005)

Intercontinental Center (purchased August 2005)

2500 City West land (purchased December 2005)

CityWestPlace (purchased June 2006)

Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of May 31, 2004 for One Commerce Square (after which date this entity was combined or consolidated), as of July 31, 2006 for Murano (after which date this entity was consolidated) and as of December 31, 2006 for all other entities:

One Commerce Square	50.0	%(1)
2121 Market Street	50.0	%
Harris Building Associates	0.1	%(2)
TPG/CalSTRS, LLC:
City National Plaza	21.3	%(3)
All other properties	25.0	%(4)
Murano	73.0	%

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

(1) Prior to October 13, 2004, TPGI Predecessor and an unaffiliated third party each owned 50.0% of the Series A preferred capital and non-preferred capital of the partnership that owned One Commerce Square. In addition, an unaffiliated third party owned the $6.75 million Series B preferred capital. In accordance with the partnership agreement, the holder of the Series B preferred capital was entitled to preferred cumulative distributions of 17.5% per annum, after the holders of the Series A preferred capital received their preferred cumulative distributions. Thereafter, distributions went to the holders of the non-preferred capital.

In March 2004, TPGI Predecessor entered into an agreement to purchase the 50% partnership interest in One Commerce Square not owned by it for a purchase price of $24,000,000, subject to certain adjustments. Based on the terms of the purchase agreement, TPGI Predecessor considered One Commerce Square to be a variable interest entity as of June 1, 2004, and had combined the accounts of that property with TPGI Predecessor beginning June 1, 2004.

On October 13, 2004, at the consummation of the Offering, we acquired the 50% ownership interest from the unaffiliated third party, and redeemed the preferred equity interests. In addition, TPGI Predecessor contributed a 39% ownership interest in the property to us, resulting in an 89% ownership interest, and we have consolidated the accounts of that property.

(2) The partnership that owns 2121 Market Street entered into a master lease for the property with Harris Building Associates designed to allow a third party investor to take advantage of the historic tax credits for the property. The Operating Partnership and an unrelated party each hold a 0.05% general partnership interest in Harris Building Associates. The 99.9% limited partner of Harris Building Associates contributed $3.5 million and no further contributions are required. In addition, this partner is entitled to various distributions, fees, and priority returns. During 2004, the accumulated losses and distributions for this limited partner exceeded their contribution amount and priority return. As such, net loss is allocated equally to the general partners, resulting in an allocation of 50% net loss to us.

(3) On October 13, 2004, at the consummation of the Offering, we increased our ownership interest in the property from 4.3% to 21.3%.

In accordance with the limited liability agreement, prior to January 1, 2006, the minority owner of City National Plaza and the Operating Partnership are initially allocated depreciation expense of City National Plaza ahead of CalSTRS. This resulted in the allocation to us of 22.5% of City National Plaza’s depreciation expense and 4.3% of City National Plaza’s net income/loss (excluding depreciation expense) for periods prior to October 13, 2004, and an allocation of 22.5% of City National Plaza’s depreciation expense and 21.3% of City National Plaza’s net income/loss (excluding depreciation expense) for periods subsequent to October 13, 2004.

During 2005, the accumulated losses and distributions for the minority owner equaled their contribution amount. As such, net income/loss is allocated to the Operating Partnership and CalSTRS.

Beginning January 1, 2006, the Operating Partnership is allocated 25% of net income/loss, including depreciation expense. See Note 16 for discussion of the adjustment to opening retained deficit as a result of the change in allocation of depreciation expense.

(4) Prior to January 1, 2006, the Operating Partnership was allocated depreciation expense of the properties ahead of CalSTRS, resulting in the allocation to us of 100% of depreciation expense and 25% of net income/loss (excluding depreciation expense) of the properties. Beginning January 1, 2006, the Operating Partnership is allocated 25% of net income/loss, including depreciation expense, which is equal to the economic ownership of the Operating Partnership. See Note 16 for discussion of the adjustment to opening retained deficit as a result of the change in allocation of depreciation expense.

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Investments in unconsolidated real estate entities as of December 31, 2006 and 2005 are as follows:

	2006			2005
TPG/CalSTRS, LLC:
City National Plaza	$	10,146		$	19,848
Reflections I		1,525			1,161
Reflections II		1,778			1,499
Four Falls Corporate Center		1,989			2,018
Oak Hill Plaza / Walnut Hill Plaza		1,532			1,801
Valley Square Office Park		60			1,320
San Felipe Plaza		6,514			6,858
2500 City West		3,874			4,505
Brookhollow Central I, II and III / Intercontinental Center		2,942			1,853
CityWestPlace		23,328			—
2121 Market Street and Harris Building Associates		(1,324	)		(1,020	)
Murano		—	(1)		1,281
	$	52,364		$	41,124

(1) This entity was consolidated beginning August 1, 2006.

The following is a summary of the investments in unconsolidated/uncombined real estate entities for the years ended December 31, 2006, 2005, and 2004:

Investment balance, December 31, 2003	$	13,207
Elimination of One Commerce Square investment at May 31, 2004 due to consolidation		(9,804	)
Contributions		96
Equity in net loss of uncombined real estate entities		(1,099	)
Distributions		(2,445	)
Investment balance, October 12, 2004		(45	)
Acquisition of 25% interest in Reflections I and Reflections II		11,750
Acquisition of additional interest in City National Plaza		21,000
Contributions		51
Equity in net loss of unconsolidated real estate entities		(988	)
Distributions		(144	)
Investment balance, December 31, 2004	$	31,624
Contributions, including $25,733 for acquisition of new properties		36,253
Equity in net loss of unconsolidated real estate entities		(16,259	)
Distributions		(10,494	)
Investment balance, December 31, 2005	$	41,124
Beginning balance adjustment for recalculated depreciation expense allocation		9,836
Contributions, including $24,150 for acquisition of new properties		46,130
Equity in net loss of unconsolidated real estate entities		(12,909	)
Distributions		(31,817	)
Investment balance, December 31, 2006	$	52,364

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

TPG/CalSTRS, LLC, was formed to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management. Under the joint venture agreement, we have an exclusive obligation until the earlier of May 1, 2007 and the date CalSTRS has contributed its full capital commitment to the joint venture to first present all acquisition opportunities involving core plus and value-add properties to the joint venture before we may pursue them individually or in a joint venture with other parties. We are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except that for Reflections I and II, which are 100% leased, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period.

The total initial capital commitment to the joint venture was $333,333,000, which was fully funded as of December 31, 2006. On June 8, 2006, we amended our agreement with CalSTRS to allow for all capital distributions to be recalled as additional capital contributions through May 1, 2007. As of December 31, 2006, the amounts subject to reinvestment by CalSTRS and the Company were $74,936,000 and $24,978,000, respectively.

A buy-sell provision may be exercised by either CalSTRS or us. Under this provision, the initiating party sets a price for its interest in the joint venture, and the other party has a specified time to either elect to buy the initiating party’s interest, or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase our interest in the joint venture. The buyout price is based upon a 3% discount to the appraised fair market value. In addition, the minority owners of City National Plaza have the option to require the joint venture to purchase their interests for an amount equal to what would be payable to them upon liquidation of the assets at fair market value. On June 8, 2006, we amended our agreement with CalSTRS to allow for all capital distributions to be recalled as additional capital contributions through May 1, 2007.

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Following is summarized financial information for the unconsolidated/uncombined real estate entities as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004:

Summarized Balance Sheets

	Restated 2006		2005
ASSETS
Investments in real estate, net	$	1,022,480		746,551
Receivables including deferred rents		42,176		21,246
Other assets		204,141		140,260
Total assets	$	1,268,797		908,057
LIABILITIES AND OWNERS’ EQUITY
Mortgage and other secured loans	$	1,050,019		678,319
Other liabilities		73,812		60,566
Total liabilities		1,123,831		738,885
Minority interest		—		—
Owners’ equity:
Thomas Properties, including $258 and $28 of other comprehensive loss as of 2006 and 2005, respectively		55,442		42,576
Other owners, including $1,199 and $323 of other comprehensive loss as of 2006 and 2005, respectively		89,524		126,596
Total owners’ equity		144,966		169,172
Total liabilities and owners’ equity	$	1,268,797	$	908,057

Summarized Statements of Operations

	2006			2005			2004
Revenues	$	138,259		$	75,845		$	58,894
Expenses:
Operating and other expenses		86,672			51,855			39,377
Interest expense		57,807			29,730			14,338
Depreciation and amortization		56,817			33,086			11,852
Total expenses		201,296			114,671			65,567
Loss from continuing operations		(63,037	)		(38,826	)		(6,673	)
Minority interest		(1,650	)		3,910			5,950
Income (loss) from discontinued operations		6,328			(1,566	)		—
Cumulative effect of a change in accounting principle		—			(1,279	)		—
Net (loss)	$	(58,359	)	$	(37,761	)	$	(723	)
Thomas Properties / TPGI Predecessor’s share of net (loss) income	$	(14,473	)	$	(17,112	)	$	(2,458	)

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Included in the preceding summarized balance sheets as of December 31, 2006 and 2005, are the following balance sheets of TPG/CalSTRS, LLC:

	Restated 2006		2005
ASSETS
Investments in real estate, net	$	1,004,584	$	718,044
Receivables including deferred rents		39,189		18,697
Other assets		201,912		144,062
Total assets	$	1,245,685	$	880,803
LIABILITIES AND MEMBERS’ EQUITY
Mortgage and other secured loans	$	1,030,615	$	658,589
Other liabilities		68,600		54,306
Total liabilities		1,099,215		712,895
Minority interest		—		—
Members’ equity:
Thomas Properties, including $258 and $28 of other comprehensive loss as of 2006 and 2005, respectively		55,916		41,687
Other members, including $1,199 and $323 of other comprehensive loss as of 2006 and 2005, respectively		90,554		126,221
Total members’ equity		146,470		167,908
Total liabilities and members’ equity	$	1,245,685	$	880,803

Following is summarized financial information by real estate entity for the years ended December 31, 2006 and December 31, 2005 and the periods from October 13, 2004 through December 31, 2004 and January 1, 2004 through October 12, 2004:

	Year ended December 31, 2006
	2121 Market Street and Harris Building Associates			Murano			TPG/CalSTRS, LLC			Total
Revenues	$	5,608		$	—		$	132,651		$	138,259
Expenses:
Operating and other		3,463			418			82,790			86,672
Interest		1,199			—			56,608			57,807
Depreciation and amortization		1,082			452			55,283			56,817
Total expenses		5,744			870			194,681			201,296
Loss from continuing operations		(136	)		(870	)		(62,030	)		(63,037	)
Minority interest		(104	)					(1,546	)		(1,650	)
Income from discontinued operations		—						6,328			6,328
Net loss	$	(240	)	$	(870	)	$	(57,248	)	$	(58,359	)
Thomas Properties’ share of net loss	$	(120	)	$	(435	)	$	(13,918	)	$	(14,473	)
Intercompany eliminations											1,564
Equity in net loss of unconsolidated real estate entities										$	(12,909	)

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

	Year ended December 31, 2005
	2121 Market Street and Harris Building Associates			Murano			TPG/CalSTRS, LLC			Total
Revenues	$	5,324		$	—		$	70,521		$	75,845
Expenses:
Operating and other		3,344			412			48,099			51,855
Interest		1,212			—			28,518			29,730
Depreciation and amortization		1,135			—			31,951			33,086
Total expenses		5,691			412			108,568			114,671
Loss from continuing operations		(367	)		(412	)		(38,0 47	)		(38,826
Minority interest		—			—			3,910	)		3,910
Loss from discontinued operations		—			—			(1,566	)		(1,566	)
Cumulative effect of a change in accounting principle		—			—			(1,279	)		(1,279	)
Net loss	$	(367	)	$	(412	)	$	(36,982	)	$	(37,761	)
Thomas Properties’ share of net loss	$	(183	)	$	(206	)	$	(16,723	)	$	(17,112	)
Intercompany eliminations											853
Equity in net loss of unconsolidated real estate entities										$	(16,259	)

	Period from October 13, 2004 through December 31, 2004
	2121 Market Street and Harris Building Associates			TPG/CalSTRS, LLC			Total
Revenues	$	1,269		$	9,361		$	10,630
Expenses:
Operating and other		1,234			7,268			8,502
Interest		309			3,180			3,489
Depreciation and amortization		286			2,315			2,601
Total expenses		1,829			12,763			14,592
Loss from continuing operations		(560	)		(3,402	)		(3,962	)
Minority interest		—			1,828			1,828
Net loss	$	(560	)	$	(1,574	)	$	(2,134	)
Thomas Properties’ share of net loss	$	(95	)	$	(996	)	$	(1,091	)
Intercompany eliminations								103
Equity in net loss of unconsolidated real estate entities							$	(988	)

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

	Period from January 1, 2004 through October 12, 2004
	One Commerce Square (through May 31, 2004)			2121 Market Street and Harris Building Associates			TPG/CalSTRS, LLC			Total
Revenues	$	9,629		$	3,772		$	34,863		$	48,264
Expenses:
Operating and other		4,531			2,530			23,814			30,875
Interest		2,373			925			7,551			10,849
Depreciation and amortization		2,035			849			6,367			9,251
Total expenses		8,939			4,304			37,732			50,975
Income (loss) from continuing operations		690			(532	)		(2,869	)		(2,711	)
Minority interest		—			—			4,122			4,122
Net income (loss)	$	690		$	(532	)	$	1,253		$	1,411
TPGI Predecessor’s share of net loss	$	(33	)	$	(109	)	$	(1,225	)	$	(1,367	)
Intercompany eliminations											268
Equity in net loss of uncombined real estate entities										$	(1,099	)

One tenant of TPG/CalSTRS, LLC accounted for approximately 12.2% and 10.1% of rental revenues and tenant reimbursements for the years ended December 31, 2006 and 2005, respectively. Three tenants of TPG/CalSTRS, LLC accounted for approximately 56.4% of rental revenues and tenant reimbursements for the year ended December 31, 2004.

Following is a reconciliation of our share of owners’ equity of the unconsolidated real estate entities as shown above to amounts recorded by us as of December 31, 2006 and 2005:

	2006			2005
Our share of owners’ equity recorded by unconsolidated real estate entities	$	55,442		$	42,576
Intercompany eliminations and other adjustments		(3,078	)		(1,452	)
Investments in unconsolidated real estate entities	$	52,364		$	41,124

5. Mortgage and Other Secured Loans

A summary of the outstanding mortgage and other secured loans as of December 31, 2006 and 2005 is as follows:

	Interest rate		Outstanding debt				Maturity date
			2006		2005
One Commerce Square mortgage loan (1)	5.7	%	$	130,000	$	130,000	1/6/16
Two Commerce Square:
Mortgage loan (2)	6.3			114,564		120,075	5/09/13
Senior mezzanine loan (3) (4)	17.5			40,564		43,774	1/09/10
Junior A mezzanine loan (3) (5)	15.0			4,107		3,930	1/09/10
Campus El Segundo mortgage loan (6)	Prime Rate or LIBOR + 2.25			17,259		19,500	10/10/07
Four Points Centre mortgage loan (7)	Prime Rate			4,000		4,000	8/28/07
Murano loan (8)	LIBOR + 1.5			17,434		—	9/27/07
Total mortgage loans and other secured loans			$	327,928	$	321,279

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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

(1) The mortgage loan is subject to interest only payments for the first five years, and thereafter, principal and interest payments are due based on a thirty-year amortization schedule. The loan is subject to yield maintenance payments for any prepayments prior to October 2015, and beginning January 2009, may be defeased.

(2) The mortgage loan may be defeased, and beginning February 2012, may be prepaid.

(3) These loans are guaranteed by Mr. Thomas up to an aggregate maximum of $7,500,000. We have agreed to indemnify Mr. Thomas in the event his guarantees are called upon.

(4) The senior mezzanine loan bears interest at a rate such that the weighted average of the rate on this loan and the rate on the Mortgage Loan secured by Two Commerce Square equals 9.2% per annum. The effective interest rate on this loan as of December 31, 2006 was 17.5% per annum. The loan may not be prepaid prior to August 9, 2009, and thereafter is subject to yield maintenance payments unless the loan is prepaid within 60 days of maturity. The loan is secured by our ownership interest in the real estate entities that own Two Commerce Square.

(5) Interest at a rate of 10% per annum is payable currently, and additional interest of 5% per annum is deferred until maturity. The loan is subject to a prepayment penalty in the amount of the greater of 3% of the principal amount or a yield maintenance premium. The loan is secured by our ownership interest in the real estate entities that own Two Commerce Square.

(6) The weighted average interest rate as of December 31, 2006 was 7.8% per annum.

(7) The prime rate as of December 31, 2006 and 2005 was 8.25% and 7.25% per annum, respectively.

(8) A subsidiary of our Operating Partnership pledged its preferred equity interest in Murano to a lender for $17,434,000. With the consent of the lender, the maturity date can be extended until September 2008. The Operating Partnership has guaranteed this loan.

The loan agreement for Two Commerce Square requires that all receipts collected from this property be deposited in lockbox accounts under the control of the lenders to fund reserves, debt service and operating expenditures. Included in restricted cash at December 31, 2006 and 2005 is $3,071,000 and $3,687,000, respectively, which has been deposited in the lockbox account.

Certain mortgage and other secured loans were repaid or defeased, which resulted in repayment and defeasance costs. Such costs, along with the write-off of unamortized loan costs, net of loan premiums recorded, are presented as loss from early extinguishment of debt in the accompanying consolidated statements of operations.

As of December 31, 2006, principal payments due for the outstanding debt are as follows:

Year ending December 31,
2007	$	47,585
2008		3,200
2009		500
2010		34,924
2011		6,099
Thereafter		235,620
	$	327,928

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

6. Unsecured Loan

In October 2005, we purchased the entire interest of our unaffiliated minority partner in TPG-El Segundo Partners, LLC, $3,900,000 of which was financed with an unsecured loan from the former minority partner. The loan bears interest at 5% per annum. Principal and interest is payable at maturity on October 12, 2009.

7. Earnings (loss) per Share

The following is a summary of the elements used in calculating basic and diluted earnings (loss) per share for the years ended December 31, 2006, December 31, 2005 and the period from October 13, 2004 through December 31, 2004 (in thousands except share and per share amounts):

	2006			2005		2004
Net income (loss) attributable to common shares	$	(2,049	)	$	644	$	(581	)
Weighted average common shares outstanding—basic		14,339,032			14,301,932		14,290,097
Potentially dilutive common shares(1):
Stock options		—			4,675		—
Restricted stock		—			1,480		—
Adjusted weighted average common shares outstanding—diluted		14,339,032			14,308,087		14,290,097
Earnings (loss) per share—basic and diluted	$	(0.14	)	$	0.05	$	(0.04	)

(1) For the year ended December 31, 2006 and the period October 13, 2004 through December 31, 2004, the potentially dilutive shares were not included in the loss per share calculation as their effect is antidilutive.

8. Stockholders’ Equity

We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc. (the “Incentive Plan”) concurrent with the closing of the Offering. The Incentive Plan provides incentives to our employees and serves to attract, reward and retain personnel. Our Incentive Plan permits the granting of awards in the form of options to purchase common stock, restricted shares of common stock and restricted incentive units in our Operating Partnership. We may issue up to 1,392,858 shares reserved under the Incentive Plan as either restricted stock awards or incentive unit awards and up to 619,048 shares upon the exercise of options granted pursuant to the Incentive Plan. In addition, we approved the Non-employee Directors Restricted Stock Plan (“the Non-employee Directors Plan”), under which a total of 60,000 shares are available for grant, 10,000 of which were granted to our four non-employee directors upon the consummation of the Offering which vested on October 13, 2006.

A Unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. A Unit may be redeemed for cash, or exchanged for shares of common stock at our election, on a one-for-one basis after December 13, 2005. As of February 22, 2006 and October 13, 2004 we committed to issue 850,003 and 730,003 incentive units to certain employees, respectively. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular units in the Operating Partnership and rank pari passu with the Units as to payment of regular and special periodic and other distributions and distributions of assets upon liquidation. Incentive units are subject to vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into Units, but only to the extent of the incentive units’ economic capital account balance. As general partner, we may also cause any number of vested incentive units to be converted into

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Units to the extent of the incentive units’ economic capital account balance. We had 14,418,261 and 14,347,465 shares of common stock, and 16,666,666 of Units outstanding as of December 31, 2006 and 2005, respectively, and had committed to issue 850,003 and 730,003 of incentive units, respectively. Beginning as of January 1, 2006, we record compensation expense for the incentive units based on the fair value of the units recognized ratably over the applicable vesting period. See Note 16 for discussion of the adjustment to opening stockholders’ equity as a result of the change in recording incentive unit expense. For the year ended December 31, 2006, we recognized incentive unit expense of $3,068,000. We did not recognize any tax benefit related to this compensation expense. As of December 31, 2006 there was $1,812,000 of total unrecognized compensation cost related to the nonvested incentive units.

Under the Incentive Plan, we issued 46,667 shares of restricted stock with an aggregate value of $560,004 in March 2005, which shares will fully vest in October 2007, subject to continued service, and, in February 2006, we issued 60,000 shares with an aggregate value of $740,400, which shares will fully vest in February 2009, subject to continued service. Under the Non-employee Directors Plan, we issued 10,000 shares with an aggregate value of $120,000 upon the consummation of the Offering in October 2004 and 4,984 shares with an aggregate value of $60,000 upon the closing of the 2005 Annual Meeting, which 14,984 shares fully vested upon the closing of our 2006 Annual Meeting; and 6,419 shares of restricted stock with an aggregate value of $82,500 upon the closing of our 2006 Annual Meeting, 3,501 of which shares will vest upon the closing of our Annual Meeting of stockholders in 2007, and 2,918 will vest following the close of our 2008 Annual Meeting. The holders of all restricted shares have full voting rights and receive all dividends paid. We recorded deferred compensation charges totaling $517,000, $276,000 and $51,000 for the vesting of the restricted stock grants for the year ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004, respectively. The total tax benefit recognized in the statements of operations related to restricted stock compensation expense for the year ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004 was $212,000, $113,000 and $21,000, respectively. As of December 31, 2006, there was $718,000 of total unrecognized compensation cost related to the nonvested restricted stock.

We granted 360,000 stock options in March 2005 under our Incentive Plan with an exercise price of $12.26, and the options vest over the course of a three year period commencing October 13, 2004. The options vest at the rate of one third per year and expire ten years after the date of commencement of vesting. During 2006 and 2005, 13,817 and 25,973, respectively, of the options were forfeited and 4,377 were exercised in 2006. The fair market value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

Dividend yield	2.0	%
Expected life of option	1 to 3 years
Risk-free interest rate	2.88	%
Expected stock price volatility	20	%

We granted 15,000 stock options on February 2, 2006 under our Incentive Plan with an exercise price of $12.36, and the options vest over the course of a three year period commencing February 2, 2006. The options vest at the rate of one third per year and expire ten years after the date of commencement of vesting. During 2006, none of these options were forfeited. The fair market value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

Dividend yield	2.0	%
Expected life of option	1 to 3 years
Risk-free interest rate	4.4	%
Expected stock price volatility	15	%

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

We granted 58,333 stock options on May 5, 2006 under our Incentive Plan with an exercise price of $13.25, and the options vest over the course of a three year period commencing May 5, 2006. The options vest at the rate of one third per year and expire ten years after the date of commencement of vesting. During 2006, none of these options were forfeited. The fair market value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

Dividend yield	2.0	%
Expected life of option	1 to 3 years
Risk-free interest rate	4.4	%
Expected stock price volatility	15	%

The following is a summary of stock option activity under our Incentive Plan as of and for the year ended December 31, 2006:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2006	334,027		$	12.26
Granted	73,333			13.07
Forfeitures	(13,817	)		12.26
Exercised	(4,377	)		12.26
Outstanding at December 31, 2006	389,166		$	12.41	8.1	$	1,400
Options exercisable at December 31, 2006	210,555		$	12.26	7.8	$	790

As of December 31, 2006, there was $116,000 of total unrecognized compensation cost related to the nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.3 years. The total fair value of shares vested during the years ended December 31, 2006 and 2005 was $2,022,000 and $1,560,000. The weighted-average grant date fair value of options granted during the year ended December 31, 2006 was $1.50. The options exercised during the year ended December 31, 2006 had an intrinsic value of $4,000.

Included in the consolidated statement of operations for the years ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004 is $169,000, $229,000 and $50,000, respectively, in stock compensation expense related to stock options. The total income tax benefit recognized in the statements of operations related to this compensation expense was $69,000, $94,000, and $21,000 for the years ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004, respectively.

9. Related Party Transactions

As of December 31, 2004, we owed an entity controlled by Mr. Thomas $1,852,000 as a result of certain Offering transactions. This amount was repaid in 2005.

As of December 31, 2006 and 2005, we advanced TPG/CalSTRS, LLC $1,758,000 and $1,806,000, respectively, and these amounts were repaid in January of the following year.

An affiliate of Mr. Thomas leases retail space located at One Commerce Square and Two Commerce Square through May 31, 2007, for which rent is based on a percentage of retail sales. For the years ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004, we earned rental revenues and

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

tenant reimbursements from this affiliate of $56,000, $81,000 and $5,000, respectively, of which $51,000, $0, and $3,000, respectively, was reserved as bad debt expense. For the period from January 1, 2004 through October 12, 2004, TPGI Predecessor earned rental revenues and tenant reimbursements from this affiliate of $44,000, of which $10,000, respectively, was reserved as bad debt expense.

Mr. Thomas has guaranteed up to $7,500,000 with respect to the mezzanine loans on Two Commerce Square and we have agreed to indemnify Mr. Thomas (see Note 5).

10. Income Taxes

All operations are carried on through the Operating Partnership and other subsidiaries. The Operating Partnership is not subject to income tax, and all of the taxable income, gains, losses, deductions and credits are passed through to its partners. We are responsible for our share of taxable income or loss of the Operating Partnership allocated to us in accordance with the Operating Partnership’s Agreement of Limited Partnership (“LP Agreement”). As of December 31, 2006 and 2005, we held a 45.15% and 46.3%, respectively, capital interest in the Operating Partnership. For the years ended December 31, 2006 and 2005 and period from October 13, 2004 through December 31, 2004, we were allocated 45.15%, 46.3% and 46.3%, respectively, of the losses from the Operating Partnership.

The provision for income taxes is based on reported income (loss) before income taxes. Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amount recognized for tax purposes, as measured by applying the currently enacted tax laws.

The provision for income taxes consists of the following for the years ended December 31, 2006 and December 31, 2005:

	2006			2005
Deferred income tax provision:
Federal	$	(541	)	$	(551	)
State		(94	)		(147	)
Provision for income taxes	$	(635	)	$	(698	)

A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income (loss) before income taxes for the years ended December 31, 2006 and December 31, 2005 is as follows:

	2006			2005
Tax (provision) benefit at statutory rate of 35%	$	495		$	(470	)
State income taxes, net of federal tax benefit		(149	)		(73	)
Restricted incentive unit compensation		(1,073	)		(43	)
Other, net		92			(112	)
Provision for income taxes	$	(635	)	$	(698	)
Effective income tax rate		(45	)%		52	%

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

The significant components of the net deferred tax liability as of December 31, 2006 and 2005 are as follows:

	2006			2005
Deferred tax (asset) liability:
Net operating loss carry forward	$	(4,212	)	$	(2,212	)
State taxes		(507	)		(75	)
Stock compensation		(546	)		(78	)
Loss from Operating Partnership		9,472			3,219
Interest income from loan receivable		(1,764	)		(448	)
Other, net		(51	)		(98	)
Deferred tax liability, net	$	2,392		$	308

The future tax benefits of the net operating loss carryforwards expire in 2015 to 2026.

SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Realization of the deferred tax asset is dependent on us generating sufficient taxable income in future years as the deferred income tax charges become currently deductible for tax reporting purposes. Although realization is not assured, management believes that it is more likely than not that the net deferred income tax asset will be realized.

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”, which will become effective for the Company on January 1, 2007. FIN 48 prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain position may be recognized if it is “more likely than not” that the position is sustainable upon examination by taxing authorities. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. The Company has not yet completed its evaluation of the impact of adoption on the Company’s financial position or results of operations.

11. Fair Value of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires us to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.

Our estimates of the fair value of financial instruments at December 31, 2006 and 2005, respectively, were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and cash equivalents, restricted cash, rents and other receivables, due from affiliates, accounts payable and other liabilities approximate fair value because of the short-term nature of these instruments.

As of December 31, 2006 and 2005, the fair value of our mortgage and other secured loans and unsecured loan aggregates $325,886,000 and $324,541,000, respectively, compared to the aggregate carrying value of $331,828,000 and $325,179,000, respectively.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

12. Minimum Future Lease Rentals

We have entered into various lease agreements with tenants as of December 31, 2006. The minimum future cash rents receivable under non-cancelable operating leases in each of the next five years and thereafter are as follows:

Year ending December 31,
2007	$	38,938
2008		34,234
2009		28,441
2010		25,715
2011		25,961
Thereafter		67,212
	$	220,501

The leases generally also require reimbursement of the tenant’s proportional share of common area, real estate taxes and other operating expenses, which are not included in the amounts above.

13. Revenue Concentrations

(a) Rental revenue concentrations:

A significant portion of our rental revenues and tenant reimbursements were generated from one tenant. The revenue recognized related to this tenant for the years ended December 31,2006 and 2005, and the periods from October 13, 2004 through December 31, 2004 and January 1, 2004 through October 12, 2004 were $24,920,000, $24,648,000, $5,162,000 and $19,618,000, respectively.

In March 1990, Two Commerce Square entered into a long-term lease agreement with Conrail to occupy approximately 753,000 square feet of office space in Two Commerce Square, a portion of which expires in 2008 and the remainder in 2009. As an inducement to enter into the lease, Two Commerce Square agreed to pay Conrail $34,000,000 no later than the fifth anniversary of the commencement of the lease, as defined, plus accrued interest at 8% per annum, compounded annually, under certain circumstances.

In accordance with the agreement, $34,000,000 was paid to Conrail in 1997. This lease concession has been reflected in the accompanying financial statements as a deferred rent receivable, and is being recognized ratably over Conrail’s lease period as a reduction in rental revenue. Interest is payable only in the event of sufficient cash flow from Two Commerce Square, as defined. We have not paid any interest through December 31, 2006 and believe that an accrual for interest expense at December 31, 2006 is not required. Conrail has entered into sublease agreements for substantially all of the space leased.

As of December 31, 2006 and 2005, $11,242,000 and $16,900,000 respectively, of the deferred rents relates to Conrail. As of December 31, 2006 and 2005, we had received prepaid rents of $2,560,000 from Conrail.

(b) Concentrations related to investment advisory, property management, leasing and development services revenue:

Under agreements with CalSTRS, we provide property acquisition, investment advisory, property management, leasing and development services for CalSTRS under a separate account relationship and through a joint venture relationship. At December 31, 2006 and 2005, there are four office properties subject to the separate account relationship and eleven office properties subject to the joint venture relationship all of which properties we asset manage.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Under the separate account relationship, we earn acquisition fees over the first three years after a property is acquired, if the property meets or exceeds the pro forma operating results that were submitted at the time of acquisition and a performance index associated with the region in which the property is located. Under the joint venture relationship, we are paid acquisition fees at the time a property is acquired, as a percent of the total acquisition price. For the years ended December 31, 2006 and 2005, we earned acquisition fees of $1,106,000 and $1,802,000, respectively, from our joint venture with CalSTRS.

Under the separate account relationship, we earn asset management fees paid on a quarterly basis, based on the annual net operating income of the properties. Under the joint venture relationship, asset management fees are paid on a monthly basis, initially based upon a percentage of a property’s annual appraised value. At the point of stabilization of the property, asset management fees are calculated based on net operating income. For the years ended December 31, 2006 and 2005, we earned asset management fees under these agreements of $4,349,000 and $2,899,000, respectively, including $3,379,000 and $1,905,000, respectively, from our joint venture with CalSTRS.

We perform property management and leasing services for thirteen of the fifteen properties subject to the asset management agreements with CalSTRS. We are entitled to property management fees calculated based on 2% or 3% of the gross revenues of the particular property, paid on a monthly basis. In addition, we are reimbursed for compensation paid to certain of our employees and direct out-of-pocket expenses. The management and leasing agreements expire on the third anniversary of each property’s acquisition. The agreements are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. For the years ended December 31, 2006 and 2005, we earned property management fees under these agreements of $3,960,000 and $2,604,000 respectively, including $2,891,000 and $1,573,000, respectively, from our joint venture with CalSTRS. In addition, for the years ended December 31, 2006 and 2005, we were reimbursed $2,265,000 and $2,074,000, respectively, including $1,639,000 and $1,072,000, respectively, from our joint venture with CalSTRS. The reimbursements represent primarily the cost of on-site property management personnel incurred on behalf of the managed properties.

For properties in which we are responsible for the leasing and development services, we are entitled to receive market leasing commissions and development fees as defined in the agreements with CalSTRS. For the years ended December 31, 2006 and 2005, we earned leasing commissions under the agreements of $4,450,000 and $2,093,000, respectively, including $4,084,000 and $1,784,000, respectively, from our joint venture with CalSTRS. For the years ended December 31, 2006 and 2005, we earned development fees under these agreements of $1,291,000 and $842,000, respectively, including $1,142,000 and $739,000, respectively, from our joint venture with CalSTRS.

Under the separate account relationship, we receive incentive compensation based upon performance above a minimum hurdle rate, at which time we begin to participate in cash flow from the relevant property. Incentive compensation is paid at the time an investment is sold, and none was earned during the years ended December 31, 2006 and 2005. Under the joint venture relationship, incentive compensation is based on a minimum return on investment to CalSTRS, following which we participate in cash flow above the stated return, subject to a clawback provision if returns for a property fall below the stated return. No incentive compensation was earned during the year ended December 31, 2005. We earned incentive compensation of $521,000 related to the sale of our joint venture property, Valley Square, during the year ended December 31, 2006. Of this amount, 25% was eliminated in consolidation and the remaining 75% was recorded as deferred revenue due to the clawback provision.

We provide property management, leasing and development services for One Commerce Square, under an agreement that expires on March 16, 2013. Property management fees are calculated based on 3% of the

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

property’s gross revenues. For the period from January 1, 2004 through May 31, 2004 (date of consolidation), TPGI Predecessor earned property management fees from One Commerce Square of $156,000 and was reimbursed $139,000, representing primarily the cost of on-site property management personnel incurred on behalf of the managed property. Leasing commissions are calculated based on 3% – 4% of the rent payable by a tenant. For the period from January 1, 2004 through May 31, 2004 (date of consolidation), TPGI Predecessor earned leasing commissions from One Commerce Square of $18,000. Development fees are calculated based on 3% – 5% of the cost of the tenant improvements work performed. No development fees were earned for the period from January 1, 2004 to May 31, 2004. Beginning June 1, 2004, all fees have been eliminated in consolidation.

At December 31, 2006 and 2005, we had accounts receivable under the above agreements of $4,456,000 and $3,681,000, respectively, including $4,068,000 and $1,505,000, respectively, due from our joint venture with CalSTRS.

We also provide property management and leasing services for the CalEPA building for the City of Sacramento. The property management agreement expires on June 30, 2016, is extendable for an additional 5 years through June 30, 2020 and is subject to early termination on June 30, 2011 based on the terms in the agreement. Property management fees are $74,000 per month. For the years ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004, we earned property management fees from the City of Sacramento of $970,000, $1,046,000 and $218,000, respectively, and were reimbursed $355,000, $375,000 and $47,000, respectively. For the period from January 1, 2004 through October 12, 2004, TPGI Predecessor earned property management fees from the City of Sacramento of $828,000 and was reimbursed $431,000. The reimbursements represent the cost of on-site property management personnel incurred on behalf of the managed property. At December 31, 2006 and 2005, we had accounts receivable from the CalEPA building of $45,000 and $24,000, respectively.

We obtain insurance under a master insurance policy that includes all the properties in which we have an investment and for which we perform investment advisory or property management services. Property insurance premiums are allocated based on estimated insurable values. Liability insurance premiums are allocated based on relative square footage. The allocated expense to us for the years ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004 was $1,851,000, $1,947,000 and $469,000, respectively, and the allocated expense to TPGI Predecessor for the period from January 1, 2004 through October 12, 2004, was $922,000, and is included in rental property operating and maintenance expense.

14. Commitments and Contingencies

We have been named as a defendant in a number of lawsuits in the ordinary course of business. We believe that the ultimate settlement of these suits will not have a material adverse effect on our financial position and results of operations.

We sponsor a 401(k) plan for our employees. Our contributions were $322,000, $352,000 and $12,000 for the years ended December 31, 2006 and 2005 and the period from October 13, 2004 through December 31, 2004, respectively. TPGI Predecessor’s contribution was $266,000 for the period from January 1, 2004 through October 12, 2004.

We are a tenant in City National Plaza through May 2009 and in One Commerce Square through December 2009. For the period from January 1, 2004 through May 31, 2004 (date of consolidation), TPGI Predecessor incurred rent expense of $132,000, to One Commerce Square. For the years ended December 31, 2006 and 2005

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

and period from October 13, 2004 through December 31, 2004 we incurred rent expense of $227,000, $233,000 and $48,000, respectively, to City National Plaza. For the period from January 1, 2004 through October 12, 2004, we incurred rent expense of $85,000, to City National Plaza. These expense amounts are included in rent—unconsolidated/uncombined real estate entities.

The minimum future rents payable under the City National Plaza lease in each of the next five years are as follows:

Year ending December 31,
2007	$	127
2008		127
2009		53
	$	307

In connection with the ownership, operation and management of the real estate properties, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of the properties, and we are not aware of any other environmental condition with respect to any of the properties that management believes will have a material adverse effect on our assets or results of operations.

A mortgage loan, with an outstanding balance of $19,404,000 and $19,688,000 as of December 31, 2006 and 2005, respectively, secured by a first trust deed on 2121 Market Street is guaranteed by that partnership’s general partners, including the Operating Partnership, up to a maximum amount of $3,300,000. Also in connection with this mortgage loan to 2121 Market Street, the Operating Partnership has guaranteed the repayment of up to $3,500,000 of the loan. Upon the occurrence of certain events, such as adjustments to the tax credits or operating losses being sustained by Harris Building Associates, the master lessee of the 2121 Market Street property, the Operating Partnership may be required to make certain payments to the majority partner of Harris Building Associates.

We have entered into an agreement to acquire a 13,000 square foot parcel of land located near our Four Points Centre development project in Austin, Texas for $530,000. We expect this acquisition to close in the second quarter of 2007.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

15. Quarterly Financial Information

The tables below reflect the selected quarterly information for us for the years ended December 31, 2006 and 2005. Certain amounts have been reclassified to conform to the current year presentation (in thousands, except for share and per share amounts) (unaudited).

	Three Months Ended
	December 31, 2006			September 30, 2006			June 30, 2006			March 31, 2006
Total revenue	$	20,769		$	19,291		$	20,842		$	17,672
Loss before gain on purchase of other secured loan, loss from early extinguishment of debt, interest income, equity in net loss of unconsolidated/uncombined real estate entities, and minority interests		(236	)		(397	)		(392	)		(1,839	)
(Loss) income before minority interests and provision/benefit for income taxes		(1,497	)		4,632			(1,159	)		(4,495	)
Net income (loss)		(1,568	)		1,283			(336	)		(1,428	)
Net income (loss) per share—basic	$	(0.11	)		0.09			(0.02	)		(0.10	)
Net income (loss) per share—diluted	$	(0.11	)		0.09			(0.02	)		(0.10	)
Weighted-average shares outstanding—basic		14,354,703			14,338,050			14,332,397			14,320,779
Weighted-average shares outstanding—diluted		14,354,703			14,352,687			14,332,397			14,320,779
	Three Months Ended
	December 31, 2005			September 30, 2005			June 30, 2005			March 31, 2005
Total revenue	$	17,744		$	17,285		$	16,588		$	17,633
Loss before gain on purchase of other secured loan, loss from early extinguishment of debt, interest income, equity in net loss of unconsolidated/uncombined real estate entities, and minority interests		(55	)		(693	)		(1,066	)		(1,901	)
(Loss) income before minority interests and provision/benefit for income taxes		(11,250	)		(5,969	)		22,604	(1)		(2,812	)
Net income (loss)		(2,900	)		(1,746	)		6,066	(1)		(776	)
Net income (loss) per share—basic	$	(0.20	)		(0.12	)		0.42			(0.05	)
Net income (loss) per share—diluted	$	(0.20	)		(0.12	)		0.42			(0.05	)
Weighted-average shares outstanding—basic		14,310,367			14,303,774			14,297,909			14,295,236
Weighted-average shares outstanding—diluted		14,310,367			14,303,774			14,301,017			14,295,236

(1) Includes the gain on purchase of other secured loan, before minority interests and provision for income taxes, of $25,776.

16. Staff Accounting Bulletin No. 108

In September 2006, the SEC released SAB 108, which permits a company to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors. Such adjustments do not require previously filed reports with the SEC to be amended. Effective September 30, 2006, we elected early application of SAB 108.

38

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Accounting for Investments in Our TPG/CalSTRS Joint Venture

In accordance with SAB 108, we have adjusted our opening retained earnings for 2006 as a result of the change in the allocation of depreciation expense relating to our investment in TPG/CalSTRS, LLC. Depreciation expense was previously allocated to the members in accordance with the operating agreement of the limited liability company. For all properties excluding City National Plaza, the Operating Partnership was initially allocated depreciation expense ahead of CalSTRS. For City National Plaza, the minority owner and the Operating Partnership were initially allocated depreciation expense ahead of CalSTRS. Based on the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures,” we determined that the allocation of net income/loss, including depreciation expense, to the members should be based on the allocation of cash distributions and liquidating distributions, not the profit and loss allocation ratios as specified in the operating agreement. We consider these adjustments to be immaterial to prior periods.

The impact on the 2006 opening additional paid in capital and retained deficit was $4,334,000. The pro forma impact to the statements of operations for the year ended December 31, 2005, periods from October 13, 2004 through December 31, 2004 and from January 1, 2004 through October 12, 2004, is an increase in net income of $1,986,000, $53,000, and $1,101,000, respectively. The pro forma cumulative effect on stockholders’ equity and retained deficit as of January 1, 2004 is an increase of $1,194,000.

The aggregate pro forma impact of these adjustments is summarized below:

	As Reported			Pro Forma Adjustment			Pro Forma
As of and for the period from Jan. 1, 2004 – Oct. 12, 2004
Equity in net loss of unconsolidated real estate entities	$	(1,099	)	$	1,101		$	2
Net (loss)		(5,006	)		1,101			(3,905	)
As of and for the period from Oct. 13, 2004 – Dec. 31, 2004
Investments in unconsolidated real estate entities		31,624			2,486			34,110
Deferred tax asset		390			(35	)		355
Minority interests—unitholders in the Operating Partnership		76,458			103			76,561
Stockholders’ equity and retained deficit		66,185			2,348			68,533
Equity in net loss of unconsolidated real estate entities		(988	)		191			(797	)
Minority interests—unitholders loss (income) in the Operating Partnership		1,128			(103	)		1,025
Benefit (provision) for Income Taxes		390			(35	)		355
Net (loss) income		(581	)		53			(528	)
Loss per share—basic and diluted		(0.04	)		0.004			(0.04	)
As of and for the 12 months ended December 31, 2005
Investments in unconsolidated real estate entities		41,124			9,836			50,960
Deferred tax liability		308			1,449			1,757
Minority interests—unitholders in the Operating Partnership		74,099			4,053			78,152
Stockholders’ equity and retained deficit		63,632			4,334			67,966
Equity in net loss of unconsolidated real estate entities		(16,259	)		7,350			(8,909	)
Minority interests—unitholders income in the Operating Partnership		(1,559	)		(3,950	)		(5,509	)
(Provision) for Income Taxes		(698	)		(1,414	)		(2,112	)
Net income		644			1,986			2,630
Income per share—basic and diluted	$	0.05		$	0.13		$	0.18

39

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES AND

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL INFORMATION—(Continued)

Incentive Units

Also in accordance with SAB 108, we adjusted our opening stockholders’ equity and minority interests of unitholders in the Operating Partnership for 2006 as a result of a change in recognizing compensation expense for incentive units issued in our Operating Partnership. Previously, we did not record compensation expense until a book-up event occurred. Based on SFAS 123, we determined that compensation expense should be recorded based on the fair value of the units recognized ratably over the applicable vesting period. We consider these adjustments to be immaterial to prior periods.

The impact on the 2006 opening retained deficit and minority interests of unitholders in the Operating Partnership was $2,308,000 and $2,682,000, respectively. The pro forma impact to the statements of operations for the year ended December 31, 2005 and the period from October 13, 2004 to December 31, 2004, is a decrease in net income of $1,829,000 and $480,000, respectively.

The aggregate pro forma impact of these adjustments is summarized below:

	As Reported			Pro Forma Adjustment			Pro Forma
As of and for the period from Oct. 13, 2004 – Dec. 31, 2004
General and administrative expense	$	2,095		$	1,037		$	3,132
Minority interests—unitholders loss (income) in the Operating Partnership		1,128			(557	)		571
Benefit for income taxes		390			—			390
Net (loss)		(581	)		(480	)		(1,061	)
Loss per share—basic and diluted	$	(0.04	)	$	(0.03	)	$	(0.07	)
As of and for the 12 months ended December 31, 2005
General and administrative expense	$	12,914		$	3,954		$	16,868
Minority interests—unitholders income in the Operating Partnership		(1,559	)		(2,125	)		(3,684	)
(Provision) for income taxes		(698	)		—			(698	)
Net Income (loss).		644			(1,829	)		(1,185	)
Income (loss) per share—basic and diluted	$	0.05		$	(0.13	)	$	(0.08	)

17. Subsequent Events (Unaudited)

In February 2007, our joint venture with CalSTRS, acquired two office properties in Fairfax, Virginia for $166.5 million. The acquisition and closing costs were funded with $135.3 million of mortgage financing proceeds and approximately $43.1 million of equity provided by TPG/CalSTRS. Of the total equity, TPG provided $10.8 million and CalSTRS provided $32.3 million. Financing for the acquisition at closing consisted of a senior two-year $55.0 million loan (with three one-year extension options) bearing interest at LIBOR plus the applicable percentage; a mezzanine two-year $36.0 million loan (with three one-year extension options) bearing interest at LIBOR plus the applicable percentage; and a ten-year $44.3 million mortgage with a fixed rate of 5.52% per annum.

In March 2007, our company, through a joint venture with institutional investment partners, entered into a definitive agreement with affiliates of Blackstone Real Estate Advisors to acquire ten Class A office properties in Austin, Texas for an aggregate purchase price of $1.15 billion. Approximately 75 percent to 80 percent of the gross purchase price, including closing costs, is expected to be funded with property-level mortgage debt, with 20 percent to 25 percent coming from equity investments by investment partners and us. We anticipate funding approximately 6.25 percent of the overall equity to the transaction.

40

SCHEDULE III—INVESTMENTS IN REAL ESTATE

(In thousands)

	One Commerce Square			Two Commerce Square			Murano			Four Points Centre		Campus El Segundo			TPG Developments
Encumbrances, net	$	130,000		$	159,235		$	17,434		$	4,000	$	17,259		$	—
Initial cost to the real estate entity that acquired the property:
Land and improvements		14,259			15,758			11,085			10,523		39,937			—
Buildings and improvements		87,653			147,951			—			—		—			—
Costs capitalized subsequent to construction/acquisition:
Land and improvements		—			—			29,885			8,482		(3,548	)		47
Buildings and improvements		32,269			48,497			—			—		—			—
Total costs:
Land and improvements		14,259			15,758			40,970			19,005		36,389			47
Buildings and improvements		119,922			196,448			—			—		—			—
Accumulated depreciation and amortization		(24,039	)		(82,599	)		(6	)		—		—			—
Date construction completed		1987			1992			N/A			N/A		N/A			N/A

Investments in real estate:

	2006			2005			2004
Balance, beginning of the year	$	417,486		$	377,529		$	231,734
Additions during the year		34,042			41,377	(3)		160,064	(1)
Deductions during the year		(8,730	)		(1,420	)		(14,269	)(2)
Balance, end of the year	$	442,798		$	417,486		$	377,529

Accumulated depreciation related to investments in real estate:

	2006			2005			2004
Balance, beginning of the year	$	(104,325	)	$	(95,044	)	$	(66,998	)
Additions during the year		(11,049	)		(10,701	)(3)		(42,315	)(1)
Deductions during the year		8,730			1,420			14,269	(2)
Balance, end of the year	$	(106,644	)	$	(104,325	)	$	(95,044	)

(1) The additions during 2004 include the effect of consolidating One Commerce Square.

(2) Adjustment resulting from the application of SFAS No. 141 for our acquisition of the 50% interest in One Commerce Square owned by an unaffiliated third party.

(3) The additions during 2005 include the exercise of the Campus El Segundo purchase option.

The aggregate gross cost of our investments in real estate for federal income tax purposes approximated $264.9 million as of December 31, 2006.

41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Members

TPG/CalSTRS, LLC:

We have audited the accompanying consolidated balance sheet of TPG/CalSTRS, LLC (a Delaware limited liability company) (“TPG/CalSTRS”) as of December 31, 2006, and the related consolidated statements of operations, members’ equity and comprehensive loss and cash flows for the year then ended. These financial statements are the responsibility of TPG/CalSTRS’ management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards 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. We were not engaged to perform an audit of TPG/CalSTRS’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of TPG/CalSTRS’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TPG/CalSTRS at December 31, 2006, and the consolidated results of its operations and its cash flows for the period then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 8, TPG/CalSTRS has restated its consolidated balance sheet as of December 31, 2006, and the related consolidated statements of members’ equity and comprehensive loss and cash flows for the year ended December 31, 2006.

ERNST & YOUNG LLP

Los Angeles, California

April 2, 2007

except for Note 8, as to which the date is

April 18, 2007

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Members

TPG/CalSTRS, LLC:

We have audited the accompanying consolidated balance sheet of TPG/CalSTRS, LLC (a Delaware limited liability company) (“TPG/CalSTRS”) as of December 31, 2005, and the related consolidated statements of operations, members’ equity and comprehensive loss and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of TPG/CalSTRS’ management. Our responsibility is to express an opinion on these financial statements 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. TPG/CalSTRS is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of TPG/CalSTRS’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of TPG/CalSTRS as of December 31, 2005, and the results of its operations and its cash flows for the years ended December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 8, TPG/CalSTRS has restated its consolidated balance sheet as of December 31, 2005, and the related consolidated statements of operations, members’ equity and comprehensive loss and cash flows for the years ended December 31, 2005 and 2004.

DELOITTE & TOUCHE LLP

Los Angeles, California

March 15, 2006 (April 2, 2007 as to the effects of the restatement described in Note 8)

43

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005

(In thousands)

	2006			2005
	(As restated, see Note 8)
ASSETS
Investments in real estate:
Land and improvements	$	85,112		$	70,876
Land and improvements—development property		27,047			6,753
Buildings and improvements		829,844			574,695
Tenant improvements		125,688			73,055
		1,067,691			725,379
Less accumulated depreciation		(63,107	)		(35,256	)
		1,004,584			690,123
Investment in real estate, net—held for sale		—			27,921
		1,004,584			718,044
Cash and cash equivalents		9,920			5,810
Restricted cash		60,470			32,308
Accounts receivable, net of allowance for doubtful accounts of $649 and $14 as of 2006 and 2005, respectively		8,190			3,880
Deferred leasing costs and value of in-place leases, net of accumulated amortization of $32,417 and $15,076 as of 2006 and 2005, respectively		100,498			83,598
Deferred loan costs, net of accumulated amortization of $3,070 and $4,794 as of 2006 and 2005, respectively		8,154			5,801
Deferred rents		30,998			14,817
Acquired above market leases, net of accumulated amortization of $3,941 and $1,859 as of 2006 and 2005, respectively		4,779			7,516
Prepaid expenses and other assets		18,092			1,647
Other assets, net—real estate investment held for sale		—			7,382
Total assets	$	1,245,685		$	880,803
LIABILITIES AND MEMBERS’ EQUITY
Liabilities:
Mortgage loans	$	935,916		$	534,859
Mortgage and other secured loans—real estate investment held for sale		—			30,267
Other secured loans		94,700			93,463
Accounts payable and other liabilities		45,847			35,706
Due to affiliates		5,263			4,177
Acquired below market leases, net of accumulated amortization of $5,686 and $8,448 as of 2006 and 2005, respectively		13,365			11,440
Prepaid rent		4,124			2,267
Other liabilities, net—real estate investment held for sale		—			716
Total liabilities		1,099,215			712,895
Minority interest		—			9,574
Members’ equity, including $1,457 and $351 accumulated other comprehensive loss as of 2006 and 2005, respectively		146,470			158,334
Total liabilities and members’ equity	$	1,245,685		$	880,803

See accompanying notes to consolidated financial information.

44

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 2005 and 2004

(In thousands)

	2006			2005			2004
				(As restated, see Note 8)
Revenues:
Rental	$	94,745		$	54,981		$	33,026
Tenant reimbursements		19,793			6,536			3,580
Parking		11,586			8,201			7,078
Interest income		1,624			429			114
Other		4,903			374			426
Total revenues		132,651			70,521			44,224
Expenses:
Operating		71,635			41,850			26,847
General and administrative		8,591			4,206			2,424
Parking		2,564			2,043			1,811
Depreciation and amortization		55,283			31,951			8,682
Interest		56,608			28,518			10,731
Total expenses		194,681			108,568			50,495
Loss from continuing operations before minority interest		(62,030	)		(38,047	)		(6,271	)
Minority interest attributable to continuing operations		(1,546	)		3,398			984
Loss from continuing operations		(63,576	)		(34,649	)		(5,287	)
Income (loss) from discontinued operations		6,328			(1,566	)		—
Loss before cumulative effect of a change in accounting principle		(57,248	)		(36,215	)		(5,287	)
Cumulative effect of a change in accounting principle		—			(1,279	)		—
Net loss	$	(57,248	)	$	(37,494	)	$	(5,287	)

See accompanying notes to consolidated financial information.

45

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY AND COMPREHENSIVE LOSS

Years Ended December 31, 2006, 2005 and 2004

(In thousands)

	CalSTRS			TPG			Total
Balance—December 31, 2003 (As previously reported)	$	88,012		$	3,160		$	91,172
Prior period restatement adjustment (Note 8)		(5,289	)		1,194			(4,095	)
Balance—December 31, 2003 (As restated, see Note 8)		82,723			4,354			87,077
Contributions		41,588			32,898			74,486
Distributions		(52,786	)		(1,055	)		(53,841	)
Net loss (As restated, see Note 8)		(4,396	)		(891	)		(5,287	)
Other comprehensive loss		(342	)		(34	)		(376	)
Comprehensive loss		1,521			(2,218	)		(697	)
Balance—December 31, 2004 (As restated, see Note 8)		66,787			35,271			102,058
Contributions		96,827			34,459			131,286
Distributions		(28,701	)		(8,840	)		(37,541	)
Net loss (As restated, see Note 8)		(28,121	)		(9,373	)		(37,494	)
Other comprehensive income		19			6			25
Comprehensive loss		(20,240	)		(16,717	)		(36,957	)
Balance—December 31, 2005 (As restated, see Note 8)		106,811			51,523			158,334
Contributions		99,806			43,001			142,807
Distributions		(71,847	)		(24,470	)		(96,317	)
Net loss		(43,328	)		(13,920	)		(57,248	)
Other comprehensive loss		(770	)		(336	)		(1,106	)
Comprehensive loss		(44,098	)		(14,256	)		(58,354	)
Balance—December 31, 2006 (As restated, see Note 8)	$	90,672		$	55,798		$	146,470

See accompanying notes to consolidated financial information.

46

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

(In thousands)

	2006			2005			2004
	(As restated, see Note 8)
Cash flows from operating activities:
Net loss	$	(57,248	)	$	(37,494	)	$	(5,287	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of real estate		(6,133	)		—			—
Cumulative effect of a change in accounting principle		—			1,279			—
Minority interest		1,546			(3,398	)		(984	)
Depreciation and amortization		55,283			34,018			8,682
Amortization of above and below market leases, net		317			(585	)		(2,959	)
Amortization of loan costs		4,409			3,600			1,318
Deferred rents		(15,518	)		(5,777	)		(2,446	)
Changes in assets and liabilities:
Accounts receivable		(4,310	)		(3,209	)		(356	)
Prepaid expenses and other assets		(16,600	)		1,178			(2,054	)
Deferred lease costs		(19,884	)		(8,726	)		(6,296	)
Accounts payable and other liabilities		126			15,811			4,663
Prepaid rent		1,857			1,428			(1,310	)
Net cash used in operating activities		(56,155	)		(1,875	)		(7,029	)
Cash flows from investing activities:
Expenditures for real estate		(352,183	)		(479,024	)		(26,222	)
Proceeds from sale of real estate		11,362			—			—
Change in restricted cash		(28,162	)		(17,828	)		(12,069	)
Net cash used in investing activities		(368,983	)		(496,852	)		(38,291	)
Cash flows from financing activities:
Proceeds from mortgage and other secured loans		719,236			412,542			246,338
Repayments of mortgage loan		(316,909	)		—			(175,000	)
Principal payments on mortgage loans		—			(291	)		—
Members’ contributions		142,807			131,286			34,702
Members’ distributions		(96,317	)		(37,541	)		(53,841	)
Minority interest contributions		2,379			2,343			310
Minority interest distributions		(13,500	)		—			(3,647	)
Payment of loan costs		(8,448	)		(5,417	)		(5,529	)
Net cash provided by financing activities		429,248			502,922			43,333
Net increase (decrease) in cash and cash equivalents		4,110			4,195			(1,987	)
Cash and cash equivalents, beginning of period		5,810			1,615			3,602
Cash and cash equivalents, end of period	$	9,920		$	5,810		$	1,615
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, including capitalized interest of $4,345, $2,005, and $47 for the years ended December 31, 2006, 2006 and 2004	$	55,576		$	25,330		$	8,784
Supplemental disclosure of non-cash investing and financing activities:
Contribution of net assets by member	$	—		$	—		$	39,784
Investments in real estate included in accounts payable and other liabilities	$	10,575		$	12,932		$	—
Decrease in investments in real estate and accumulated depreciation for removal of fully amortized improvements	$	2,042		$	—		$	—

See accompanying notes to consolidated financial information.

47

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

NOTES TO CONSOLIDATED FINANCIAL INFORMATION

Years Ended December 31, 2006, 2005 and 2004

(Tabular amounts in thousands)

1. Organization

TPG/CalSTRS, LLC (“TPG/CalSTRS”) was formed on December 23, 2002 as a Delaware limited liability company for the purpose of acquiring office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which can be positively impacted by introduction of new capital and/or management.

The original members of TPG/CalSTRS were Thomas Properties Group, LLC, a Delaware limited liability company, with a 5% ownership interest and California State Teachers’ Retirement System (“CalSTRS”), with a 95% ownership interest.

TPG/CalSTRS is the sole member of TPGA, LLC, a Delaware limited liability company, which is the managing member of TPG Plaza Investments, LLC (“TPG Plaza”), a Delaware limited liability company. TPGA, LLC has an 85.4% ownership interest in TPG Plaza. TPG/CalSTRS’ financial statements are consolidated with the accounts of TPGA, LLC and TPG Plaza. The ownership interests of the other members of TPG Plaza are reflected in the accompanying balance sheets as minority interest.

On January 28, 2003, TPG Plaza purchased an office building complex located in Los Angeles, California, commonly known as City National Plaza. On October 13, 2004, Thomas Properties Group, LLC contributed its interest in TPG/CalSTRS to Thomas Properties Group, L.P. (“TPG”), a Maryland limited partnership, in connection with the initial public offering of TPG’s sole general partner, Thomas Properties Group, Inc. CalSTRS contributed to TPG/CalSTRS its interest in office buildings located in Reston, Virginia, commonly known as Reflections I and Reflections II. In addition, TPG increased its ownership interest in TPG/CalSTRS from 5% to 25%. TPG acts as the managing member of TPG/CalSTRS. During 2005, TPG/CalSTRS acquired four properties in suburban Philadelphia, Pennsylvania, and four properties in Houston, Texas, including a 6.3 acre development site in Houston, Texas. During 2006, TPG/CalSTRS sold a suburban office property in Blue Bell, Pennsylvania, and acquired a four-building campus in Houston, Texas.

As of December 31, 2006, TPG/CalSTRS owned the following properties:

Property	Type	Location
City National Plaza	High-rise office	Los Angeles Central Business District, California
Reflections I	Suburban office—single tenancy	Reston, Virginia
Reflections II	Suburban office—single tenancy	Reston, Virginia
Four Falls Corporate Center	Suburban office	Conshohocken, Pennsylvania
Oak Hill Plaza	Suburban office	King of Prussia, Pennsylvania
Walnut Hill Plaza	Suburban office	King of Prussia, Pennsylvania
San Felipe Plaza	High-rise office	Houston, Texas
2500 City West	Suburban office and undeveloped land	Houston, Texas
Brookhollow Central I, II and III	Suburban office	Houston, Texas
Intercontinental Center	Suburban office	Houston, Texas
CityWestPlace	Suburban office	Houston, Texas

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

The minority members of TPG Plaza have the option to require TPG Plaza or TPGA, LLC to redeem or purchase, as applicable, their member interests for an amount equal to what would be payable to them upon liquidation of the assets of TPG Plaza at fair market value.

Either member of TPG/CalSTRS may trigger a buy-sell provision. Under this provision, the initiating party sets a price for its interest in TPG/CalSTRS, and the other party has a specified time to either elect to buy the initiating party’s interest, or sell its own interest to the initiating party. Under certain events, CalSTRS has a buy-out option to purchase TPG’s interest in TPG/CalSTRS. The buy-out price is generally based on a 3% discount to appraised fair market value.

TPG is required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except that for stabilized properties, TPG is required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period for these properties.

Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of December 31, 2006:

City National Plaza (1):
CalSTRS	64.1	%
TPG	21.3	%
Other members	14.6	%
All Other Properties (2):
CalSTRS	75.0	%
TPG	25.0	%

(1) Prior to January 1, 2006, the minority owner of City National Plaza and TPG were allocated depreciation expense of City National Plaza ahead of CalSTRS, resulting in the allocation to TPG of 22.5% of City National Plaza’s depreciation expense and 21.3% of City National Plaza’s net income/loss (excluding depreciation expense). During 2005, the accumulated losses and distributions for the minority owner equaled their contribution amount. As such, net income/loss is allocated to TPG and CalSTRS.

Beginning January 1, 2006, TPG is allocated 25% of net income/loss, including depreciation expense. See Note 8 for discussion of the adjustment to opening members’ equity and statements of operations for the years ended December 31, 2005 and 2004 as a result of the change in allocation of depreciation expense.

(2) Prior to January 1, 2006, TPG was allocated depreciation expense of the properties ahead of CalSTRS, resulting in the allocation to us of 100% of depreciation expense and 25% of net income/loss (excluding depreciation expense) of the properties. Beginning January 1, 2006, TPG is allocated 25% of net income/loss, including depreciation expense, which is equal to the economic ownership of TPG. See Note 8 for discussion of the adjustment to opening members’ equity as a result of the change in allocation of depreciation expense.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

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Principles of Consolidation

All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash Equivalents

TPG/CalSTRS considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents.

Investments in Real Estate

Investments in real estate are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:

Buildings	40 years
Building improvements	5 to 40 years
Tenant improvements	Shorter of the useful lives or the terms of the related leases.

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.

Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development related costs incurred during construction periods are capitalized and depreciated on the same basis as the related assets. Included in investments in real estate is capitalized interest of $6,397,000, $2,052,000 and $47,000 as of December 31, 2006, 2005 and 2004, respectively.

Impairment of Long-Lived Assets

TPG/CalSTRS assesses whether there has been impairment in the value of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Management believes no impairment in the net carrying values of the investments in real estate has occurred for the periods presented.

Deferred Leasing and Loan Costs

Deferred leasing commissions and other direct costs associated with the acquisition of tenants are capitalized and amortized on a straight-line basis over the terms of the related leases. Costs associated with unsuccessful leasing opportunities are expensed. Loan costs are capitalized and amortized to interest expense over the terms of the related loans using a method that approximates the effective-interest method.

Purchase Accounting for Acquisition of Interests in Real Estate Entities

Purchase accounting was applied, on a pro rata basis, to the assets and liabilities related to real estate entities for which TPG/CalSTRS acquired interests, based on the percentage interest acquired. For purchases of

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

additional interests that were consummated subsequent to June 30, 2001, the effective date of SFAS No. 141, Business Combinations, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values.

The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute leases including leasing commissions, legal and other related costs.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the terms in the respective leases. The weighted average amortization period for the above and below market leases was approximately 3.9 and 4.9 years as of December 31, 2006 and 2005, respectively.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the additional interests in real estate entities acquired by TPG/CalSTRS because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

The table below presents the expected amortization related to the acquired in-place lease value and acquired above and below market leases at December 31, 2006:

	2007			2008			2009			2010			2011			Thereafter			Total
Amortization expense:
Acquired in-place lease value	$	14,350		$	11,467		$	8,451		$	6,441		$	5,258		$	21,590		$	67,557
Adjustments to rental revenues
Above market leases	$	(2,171	)	$	(1,664	)	$	(391	)	$	(239	)	$	(203	)	$	(111	)		(4,779	)
Below market leases		1,985			1,765			1,642			1,511			1,426			5,036			13,365
Net adjustment to rental revenues	$	(186	)	$	101		$	1,251		$	1,272		$	1,223		$	4,925		$	8,586

Revenue Recognition

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The impact of the straight line rent adjustment increased revenue by $13,759,000, $5,777,000, and $2,446,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Additionally, the net impact of the amortization of acquired above market leases and acquired below market leases decreased revenue by $319,000 for the year ended December 31, 2006 and increased revenue by $585,000 and $2,959,000 for the years ended December 31, 2005 and 2004, respectively. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred rents in the accompanying consolidated balance sheets and contractually due but unpaid rents are included in accounts receivable. TPG/CalSTRS also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this allowance is based on the tenants’ payment history and current credit status, as well as certain industry or specific credit considerations. If estimates of collectibility differ from the cash received, then the timing and amount of our reported revenue could be impacted. The credit risk is mitigated by the reviews of prospective tenant’s risk profiles prior to lease execution and continual monitoring of our tenant portfolio to identify potential problem tenants.

Tenant reimbursements for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Lease termination fees, which are included in other income in the accompanying consolidated statement of operations, are recognized when the related leases are canceled and TPG/CalSTRS has no continuing obligation to provide services to such former tenants.

Derivative Instruments and Hedging Activities

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, TPG/CalSTRS records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income, outside of earnings, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. TPG/CalSTRS assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the approximate fair values of our cash flow hedges.

The objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, TPG/CalSTRS primarily uses interest rate caps as part of its cash flow hedging strategy. Under SFAS No. 133, our interest rate caps qualify as cash flow hedges. No derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, TPG/CalSTRS does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

At December 31, 2006 and 2005, derivatives with a fair value of $468,000 and $82,000, respectively, were included in deferred loan costs. The change in net unrealized gain (loss) of $(1,106,000), $25,000 and $(376,000) in 2006, 2005 and 2004, respectively, for derivatives designated as cash flow hedges is separately disclosed in the statements of members’ equity and comprehensive loss.

Asset Retirement Obligation

In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143”, which provides clarification with respect to the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation is conditional on a future event. FIN 47 requires that the fair value of a liability for a conditional asset retirement obligation be recognized in the period in which it was incurred if a reasonable estimate of fair value can be made. TPG/CalSTRS has determined that conditional legal obligations exist for City National Plaza related primarily to asbestos materials. TPG/CalSTRS has adopted this interpretation on December 31, 2005 and recorded a non cash impact of $1,279,000, which is reported as a cumulative effect of a change in accounting principle in the statement of operations, and a liability for conditional asset retirement obligations of $4,239,000.

The following table illustrates the effect on net (loss) income as if FIN 47 had been applied during the years ended December 31, 2005 and 2004:

	2005			2004
Loss from continuing operations before minority interest, as reported	$	(38,047	)	$	(6,271	)
Less: depreciation and accretion expense		(431	)		(426	)
Pro forma loss from continuing operations before minority interest		(38,478	)		(6,697	)
Pro forma minority interest attributable to continuing operations		3,274			1,046
Pro forma (loss) income from continuing operations		(35,204	)		(5,651	)
Loss from discontinued operations		(1,566	)		—
Pro forma (loss) income	$	(36,770	)	$	(5,651	)

The effect on liabilities as of December 31, 2004, as if FIN 47 had been previously applied during all periods affected, would have resulted in an increase in liabilities of $3,888,000.

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Income Taxes

Income taxes are not recorded by TPG/CalSTRS. TPG/CalSTRS is not subject to federal or state income taxes, except certain California corporate franchise taxes. Income or loss is allocated to the members and included in their respective income tax returns.

Management’s Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

TPG/CalSTRS has identified certain critical accounting policies that affect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements. On an ongoing basis, TPG/CalSTRS will evaluate estimates related to critical accounting policies, including those related to revenue recognition and the allowance for doubtful accounts receivable and investments in real estate and asset impairment. The estimates are based on information that is currently available and on various other assumptions that TPG/CalSTRS believes is reasonable under the circumstances.

TPG/CalSTRS must make estimates related to the collectibility of accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. TPG/CalSTRS specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income.

TPG/CalSTRS is required to make subjective assessments as to the useful lives of the properties for purposes of determining the amount of depreciation to record on an annual basis with respect to its investments in real estate. These assessments have a direct impact on net income because if TPG/CalSTRS were to shorten the expected useful lives of its investments in real estate, TPG/CalSTRS would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

TPG/CalSTRS is required to make subjective assessments as to whether there are impairments in the values of its investments in real estate. These assessments have a direct impact on net income because recording an impairment loss results in a negative adjustment to net income.

TPG/CalSTRS is required to make subjective assessments as to the fair value of assets and liabilities in connection with purchase accounting related to interests in real estate entities acquired. These assessments have a direct impact on net income subsequent to the acquisition of the interests as a result of depreciation and amortization being recorded on these assets and liabilities over the expected lives of the related assets and liabilities. TPG/CalSTRS estimates the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.

Concentration of Credit Risk

Financial instruments that subject TPG/CalSTRS to credit risk consist primarily of accounts receivable.

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

For the year ended December 31, 2006, one tenant accounted for approximately 12.2% of rent and other property revenue of TPG/CalSTRS. For the years ended December 31, 2005 and 2004, one tenant accounted for approximately 10.1% and three tenants accounted for approximately 56.4%, respectively, of rent and other property revenue of TPG/CalSTRS.

We generally require either a security deposit, letter of credit or a guarantee from our tenants.

Expenses

Expenses include all costs incurred by TPG/CalSTRS in connection with the management, operation, maintenance and repair of the properties and are expensed as incurred.

Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB 108) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” to address diversity in practice regarding consideration of the effects of prior year errors when quantifying misstatements in current year financial statements. The SEC staff concluded that registrants should quantify financial statement errors using both a balance sheet approach 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 states that if correcting an error in the current year materially affects the current year’s income statement, the prior period financial statements must be restated. SAB 108 is effective for fiscal years ending after November 15, 2006, and we have elected early application of SAB 108. See Note 8 for the impact of SAB 108 on our financial statements.

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

3. Mortgage and Other Secured Loans

A summary of the outstanding mortgage and other secured loans as of December 31, 2006 and 2005 is as follows:

	Interest rate		Outstanding debt				Maturity date
			2006		2005
City National Plaza (1)
Senior mortgage loan	LIBOR + 1.07	%(2)	$	355,300	$	200,000	7/11/08
Senior mezzanine loan (Note A)	LIBOR + 2.59	(2)		12,026		63,819	7/11/08
Senior mezzanine loan (Note B)	LIBOR + 1.90	(2)		24,000			7/11/08
Senior mezzanine loan (Note C)	LIBOR + 2.25	(2)		24,000			7/11/08
Senior mezzanine loan (Note D)	LIBOR + 2.50	(2)		24,000			7/11/08
Senior mezzanine loan (Note E)	LIBOR + 3.05	(2)		22,700			7/11/08
Junior mezzanine loan	LIBOR + 5.00	(2)		10,307		25,000	7/11/08
CityWestPlace
Senior mortgage loan	6.16			121,000		—	7/6/16
Senior mortgage loan	LIBOR + 1.25	(2)		82,400		—	6/1/08
San Felipe Plaza
Senior mortgage loan	5.28			101,500		101,500	8/11/10
Senior mortgage loan (3)	LIBOR + 3.00			2,120		—	8/11/10
2500 City West
Senior mortgage loan	5.28			70,000		70,000	8/11/10
Senior mortgage loan (4)	LIBOR + 3.00			3,113		—	8/11/10
Brookhollow Central I, II and III / Intercontinental Center
Senior mortgage loan	LIBOR + 2.25	(2)		53,000		53,000	8/9/07
Senior mortgage loan (5)	LIBOR + 3.25	(2)		1,984		—	8/9/07
Four Falls Corporate Center
Note A	5.31			42,200		42,200	3/6/10
Note B (6) (7) (8)	LIBOR + 3.25	(2)		7,867		1,600	3/6/10
Oak Hill Plaza/Walnut Hill Plaza
Note A	5.31			35,300		35,300	3/6/10
Note B (7) (8) 9)	LIBOR + 3.25	(2)		5,400		3,044	3/6/10
Valley Square Office Park (10)
Note A	LIBOR + 1.75	(10)		—		27,500	3/1/07
Note B	LIBOR + 3.25	(10)		—		2,767	3/1/07
Reflections I	5.23			22,870		23,195	4/1/15
Reflections II	5.22			9,529		9,664	4/1/15
			$	1,030,616	$	658,589

(1) In July 2006, TPG Plaza was refinanced. The senior mortgage loans and senior mezzanine loans are subject to exit fees equal to .25% of the loan amounts. The senior mezzanine loan A and junior mezzanine loan, with maximum borrowings up to $70 million and $60 million, respectively, are subject to an exit fee equal to .5% of the outstanding loan amount. Under certain circumstances all of the exit fees will be waived.

(2) TPG/CalSTRS has purchased interest rate cap agreements for the funded portion of these loans.

(3) TPG/CalSTRS may borrow up to $16.2 million under this loan.

(4) TPG/CalSTRS may borrow up to $15.5 million under this loan.

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(5) TPG/CalSTRS may borrow up to $32.8 million under this loan.

(6) TPG/CalSTRS may borrow up to $12.9 million under this loan.

(7) These loans are subject to exit fees equal to 1% of the loan amounts, however, under certain circumstances the exit fees will be waived.

(8) These loans bear interest at the greater of the one month LIBOR or 2.25%, plus the applicable margin. As of December 31, 2006, one month LIBOR exceeded 2.25%.

(9) TPG/CalSTRS may borrow up to $13.4 million under this loan.

(10) These loans were secured by property classified as held for sale at December 31, 2005. The property was sold in April 2006.

The loan agreements generally require that all receipts collected from the properties be deposited in a lockbox account under the control of the lender to fund reserves, debt service and operating expenditures.

4. Related Party Transactions

TPG/CalSTRS incurred acquisition fees to an affiliate of TPG of $1,475,000 and $2,384,000, in 2006 and 2005, which have been capitalized to real estate. Such fees were paid upon acquisition of the one property in 2006 and the eight properties and undeveloped land in 2005.

TPG provides asset management services to TPG/CalSTRS. For the years ended December 31, 2006, 2005 and 2004, TPG/CalSTRS incurred asset management fees of $4,402,000, $2,471,000, and $1,240,000, respectively, to TPG, which are included in general and administrative expenses and loss from discontinued operations.

Pursuant to a management and leasing agreement, TPG performs property management and leasing services for TPG/CalSTRS. TPG is entitled to property management fees calculated based on 3% of gross property revenues, paid on a monthly basis. In addition, TPG is reimbursed for compensation paid to certain of its employees and direct out-of-pocket expenses. For the years ended December 31, 2006, 2005 and 2004, TPG charged TPG/CalSTRS $3,792,000, $2,048,000, and $1,153,000, respectively, for property management fees and $1,639,000 $1,072,000, and $674,000, respectively, representing the cost of on-site property management personnel incurred on behalf of TPG/CalSTRS, which are included in operating expenses and loss from operations.

For new leases entered into by TPG/CalSTRS, TPG is entitled to leasing commissions, calculated at 4% of base rent during years 1 through 10 of a lease and 3% of base rent thereafter, where TPG acts as the procuring broker, and 2% of lease rent during years 1 through 10 of a lease and 1.5% of base rent thereafter, where TPG acts as the co-operating broker. For lease renewals, where TPG is the procuring broker and there is no co-operating broker, TPG is entitled to leasing commissions, calculated at 4% of base rent. For lease renewals, where there is both a procuring and co-operating broker, if TPG is the procuring broker, it is entitled to receive 3% of base rents and if it’s the co-operating broker, it is entitled to receive 1.5% of base rents. Commissions are paid 50% at signing and 50% upon occupancy. The leasing commissions will be split on the customary basis between TPG and tenant representative when applicable. For the years ended December 31, 2006, 2005 and 2004, TPG/CalSTRS incurred leasing commissions to TPG of $5,347,000, $2,318,000 and $455,000, respectively, which are included in deferred leasing costs. At December 31, 2006, 2005 and 2004, $2,079,000, $1,880,000 and $452,000, respectively, is payable to TPG pursuant to the management and leasing agreement.

The management and leasing agreement expires on January 27, 2008, and is automatically renewed for successive periods of one year each, unless TPG elects not to renew the agreement.

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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

TPG receives incentive compensation based on a minimum return on investment to CalSTRS, following which TPG would participate in cash flow above the stated return, subject to a clawback provision in the joint venture agreement if returns for a property fall below the stated return. No incentive compensation was earned by TPG during the year ended December 31, 2005. TPG earned incentive compensation of $521,000 related to the sale of Valley Square during the year ended December 31, 2006.

TPG acts as the development manager for the properties. TPG/CalSTRS pays TPG a fee based upon a market rate percentage of the total direct and indirect costs of the property, including the cost of all tenant improvements therein. For the years ended December 31, 2006, 2005 and 2004, TPG/CalSTRS incurred development management fees of $1,472,000, $948,000, and $342,000, respectively, to TPG, which have been capitalized to real estate.

TPG/CalSTRS obtains insurance as part of a master insurance policy that includes all the properties in which TPG and affiliated entities have an investment and for which they perform investment advisory or property management services. Property insurance premiums are allocated to TPG/CalSTRS based on estimated insurable values. Liability insurance premiums are allocated to TPG/CalSTRS based on relative square footage. The allocated premium for the years ended December 31, 2006, 2005 and 2004 is $6,720,000, $3,256,000, and $3,109,000, respectively, and is included in operating expenses and loss from discontinued operations.

TPG is a tenant in City National Plaza through May 2009. For the years ended December 31, 2006, 2005, and 2004, rental revenues from TPG were $289,000, $296,000, and $222,000, respectively.

5. Discontinued Operations

In November 2005, TPG/CalSTRS classified Valley Square Office Park as held for sale, upon the decision to market the property for sale. In accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the results of operations for Valley Square Office Park are reflected in the consolidated statements of operations as discontinued operations since acquisition of the property in March 2005. The property was sold in April 2006. Total assets were approximately $217,000 as of December 31, 2006.

The following table summarizes the income and expense components that comprise income from discontinued operations before minority interests for the year ended December 31, 2006 and 2005:

	2006		2005
Revenues:
Rental	$	1,519	$	3,738
Tenant reimbursements		35		56
Other		31		53
Total revenues		1,585		3,847
Expenses:
Operating and other expenses		634		1,780
Interest expense		756		1,566
Depreciation and amortization		—		2,067
Total expenses		1,390		5,413
Gain on sale of property	$	6,133	$	—
Income (loss) from discontinued operations	$	6,328	$	(1,566	)

58

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

6. Minimum Future Lease Rentals

TPG/CalSTRS has entered into various lease agreements with tenants as of December 31, 2006. The minimum future cash rents receivable on non-cancelable leases, including leases relating to the property held for sale, in each of the next five years and thereafter are as follows:

Year ending December 31,
2007	$	103,251
2008		105,224
2009		97,029
2010		90,836
2011		84,159
Thereafter		440,351
	$	920,850

The leases generally also require reimbursement of the tenant’s proportionate share of common area, real estate taxes and other operating expenses, which are not included in the amounts above.

7. Commitments and Contingencies

TPG/CalSTRS has been named as a defendant in a number of lawsuits in the ordinary course of business. TPG/CalSTRS believes that the ultimate settlement of these suits will not have a material adverse effect on its financial position and results of operations.

In connection with the ownership, operation and management of the real estate properties, TPG/CalSTRS may be potentially liable for costs and damages related to environmental matters. TPG/CalSTRS has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the properties, and TPG/CalSTRS is not aware of any other environmental condition with respect to any of the properties that management believes will have a material adverse effect on TPG/CalSTRS’ assets or results of operations.

8. Restatement

We have restated the 2005 and 2004 consolidated financial statements as a result of the change in the allocation of depreciation expense relating to TPG and CalSTRS. Depreciation expense was previously allocated to the members in accordance with the operating agreement of the limited liability company. For all properties excluding City National Plaza, TPG was initially allocated depreciation expense ahead of CalSTRS. For City National Plaza, the minority owner and TPG were initially allocated depreciation expense ahead of CalSTRS. Based on AICPA Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures,” we determined that the allocation of net income/loss, including depreciation expense, to the members should be based on the allocation of cash distributions and liquidating distributions, not the profit and loss allocation ratios as specified in the operating agreement.

The following table presents the effects of the change in allocation of depreciation expense made to the previously reported consolidated balance sheet of TPG/CalSTRS as of December 31, 2005 (in thousands):

	As Previously Reported		Restatement			As Restated
Assets	$	880,803	$	—		$	880,803
Liabilities	$	712,895	$	—		$	712,895
Minority interest		—		9,574			9,574
Members’ equity		167,908		(9,574	)		158,334
Total liabilities and members’ equity	$	880,803	$	—		$	880,803

59

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

The following table presents the effects of the change in allocation of depreciation expense made to the previously reported consolidated statements of operations in TPG/CalSTRS for the years ended December 31, 2005 and 2004 (in thousands).

	2005									2004
	As Previously Reported			Restatement			As Restated			As Previously Reported			Restatement			As Restated
Revenues	$	70,521		$	—		$	70,521		$	44,224		$	—		$	44,224
Expenses		108,568			—			108,568			50,495			—			50,495
Loss from continuing operations before minority interest		(38,047	)		—			(38,047	)		(6,271	)		—			(6,271	)
Minority interest attributable to continuing operations		3,910			(512	)		3,398			5,950			(4,966	)		984
Loss from continuing operations		(34,137	)		(512	)		(34,649	)		(321	)		(4,966	)		(5,287	)
Loss from discontinued operations		(1,566	)		—			(1,566	)		—			—			—
Loss before cumulative effect of change in accounting principle		(35,703	)		(512	)		(36,215	)		(321	)		(4,966	)		(5,287	)
Cumulative effect of change in accounting principle		(1,279	)		—			(1,279	)		—			—			—
Net loss	$	(36,982	)	$	(512	)	$	(37,494	)	$	(321	)	$	(4,966	)	$	(5,287	)

The restatement did not change any amounts in net cash provided by (used in) operating activities, investing activities, and financing activities in previously reported consolidated statements of cash flows.

We have also restated the 2006 consolidated financial statements as a result of the return of an equity contribution to CalSTRS in December 2006, in connection with the acquisition of two office properties in Fairfax, Virginia (see Note 9 for further details). CalSTRS contribution of $29.2 million was made directly to an escrow account on December 14, 2006. The funds were returned to CalSTRS by the escrow company on December 28^,2006 due to a delay in the closing of the transaction; however the return of funds was not reflected in the previously reported financial statements. The restated financial statements account for the return of funds by adjusting the amounts in the balance sheet captions (1) prepaid expenses and other assets and (2) members’ equity. In January 2007, the funds were recontributed by CalSTRS and the acquisition was completed on February 1, 2007.

The following table presents the effects to the previously reported consolidated balance sheet of TPG/CalSTRS as of December 31, 2006 (in thousands) due to the return of CalSTRS equity contribution:

	As Previously Reported		Restatement			As Restated
Prepaid expenses and other assets	$	47,292	$	(29,200	)	$	18,092
Total Assets	$	1,274,885	$	(29,200	)	$	1,245,685
Liabilities	$	1,099,215	$	—		$	1,099,215
Members’ equity		175,670		(29,200	)		146,470
Total liabilities and members’ equity	$	1,274,885	$	(29,200	)	$	1,245,685

60

TPG/CalSTRS, LLC

(A Delaware Limited Liability Company)

NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)

The following table presents the effects to the previously reported consolidated statement of cash flows of TPG/CalSTRS for the year ended December 31, 2006 due to the return of CalSTRS equity contribution:

	As Previously Reported			Restatement			As Restated
Change in prepaid expenses and other assets	$	(45,800	)	$	29,200		$	(16,600	)
Net cash used in operating activities	$	(85,355	)	$	29,200		$	(56,155	)
Members’ contributions	$	172,007		$	(29,200	)	$	142,807
Net cash provided by financing activities	$	458,448		$	(29,200	)	$	429,248
Cash and cash equivalents, end of period	$	9,920		$	—		$	9,920

The restatement did not change any amounts in previously reported consolidated statements of operations.

9. Subsequent Events (Unaudited)

In February 2007, TPG/CalSTRS acquired two office properties in Fairfax, Virginia for $166.5 million. The acquisition and closing costs were funded with $135.3 million of mortgage financing proceeds and approximately $43.1 million of equity provided by TPG/CalSTRS. Of the total equity, TPG provided $10.8 million and CalSTRS provided $32.3 million. Financing for the acquisition at closing consisted of a senior two-year $55.0 million loan (with three one-year extension options) bearing interest at LIBOR plus the applicable percentage; a mezzanine two-year $36.0 million loan (with three one-year extension options) bearing interest at LIBOR plus the applicable percentage; and a ten-year $44.3 million mortgage with a fixed rate of 5.52% per annum.

In March 2007, TPG/CalSTRS, through a joint venture with an institutional investment partner, entered into a definitive agreement with affiliates of Blackstone Real Estate Advisors to acquire ten Class A office properties in Austin, Texas for an aggregate purchase price of $1.15 billion. Approximately 75 percent to 80 percent of the gross purchase price, including closing costs, is expected to be financed with property-level mortgage debt, with 20 percent to 25 percent coming from equity investments by TPG/CalSTRS and its investment partner. TPG/CalSTRS anticipates funding approximately 25 percent of the overall equity to the transaction.

61

SIGNATURES

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

Dated: April 19, 2007

THOMAS PROPERTIES GROUP, INC.
By:	/s/    JAMES A. THOMAS
	James A. Thomas Chief Executive Officer

POWER OF ATTORNEY

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

Signature	Title	Date
/s/    JAMES A. THOMAS         James A. Thomas	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	April 19, 2007
* R. Bruce Andrews	Director	April 19, 2007
* Edward D. Fox	Director	April 19, 2007
* Winston H. Hickox	Director	April 19, 2007
* John Goolsby	Director	April 19, 2007
* Randall L. Scott	Executive Vice President and Director	April 19, 2007
* John R. Sischo	Executive Vice President and Director	April 19, 2007
/s/    DIANA M. LAING         Diana M. Laing	Chief Financial Officer (Principal Financial Officer)	April 19, 2007
/s/    ROBERT D. MORGAN         Robert D. Morgan	Senior Vice President (Principal Accounting Officer)	April 19, 2007

* The undersigned, pursuant to a power of attorney, executed by each of the officers and directors above and filed with the Securities and Exchange Commission previously, by signing her name hereto, does hereby sign this report on Form 10-K/A on behalf of each of the persons noted above in the capacities indicated.

By:	/s/    DIANA M. LAING
	Diana M. Laing Attorney-in-fact