Thomas Properties 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007.

¨ 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

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 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 a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

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 August 6, 2007
Common Stock, $.01 par value per share	23,747,936

THOMAS PROPERTIES GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2007

TABLE OF CONTENTS

		PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements of Thomas Properties Group, Inc. Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006	1
	Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (unaudited)	2
	Consolidated Statements of Cash Flows for the three and six months ended June 30, 2007 and 2006 (unaudited)	3
	Notes to Consolidated Financial Statements (unaudited)	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	26
ITEM 4.	Controls and Procedures	27
PART II. OTHER INFORMATION
ITEM 1A.	Risk Factors	27
ITEM 6.	Exhibits	39
Signatures		40

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

THOMAS PROPERTIES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2007			December 31, 2006
	(unaudited)
ASSETS
Investments in real estate:
Land and improvements	$	35,499		$	35,499
Land and improvements - under development		73,351			65,526
Construction in progress		67,787			25,403
Buildings and improvements		255,084			254,539
Tenant improvements		62,895			61,831
		494,616			442,798
Less accumulated depreciation		(111,821	)		(106,644	)
		382,795			336,154
Investments in unconsolidated real estate entities		61,762			52,364
Cash and cash equivalents		144,219			64,343
Restricted cash		20,514			21,500
Rents and other receivables		1,779			2,195
Receivables—unconsolidated real estate entities		4,097			4,074
Deferred rents		14,715			17,610
Deferred leasing and loan costs, net		14,168			14,707
Other assets, net		6,426			5,133
Total assets	$	650,475		$	518,080
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage loans	$	263,550		$	265,823
Other secured loans		85,465			62,105
Unsecured loan		3,900			3,900
Accounts payable and other liabilities, net		44,350			35,458
Dividends and distributions payable		2,354			1,916
Prepaid rent		3,384			3,558
Deferred tax liability		—			2,392
Total liabilities		403,003			375,152
Minority interests:
Unitholders in the Operating Partnership		96,654			76,390
Minority interests in consolidated real estate entities		4,668			4,288
Total minority interests		101,322			80,678
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as of June 30, 2007 and December 31, 2006		—			—
Common stock, $.01 par value, 75,000,000 shares authorized, 23,747,936 and 14,418,261 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively		236			144
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 14,496,666 and 16,666,666 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively		145			167
Additional paid-in capital		156,406			71,095
Retained deficit and dividends		(10,637	)		(9,156	)
Total stockholders’ equity		146,150			62,250
Total liabilities and stockholders’ equity	$	650,475		$	518,080

See accompanying notes to consolidated financial statements.

1

THOMAS PROPERTIES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenues:
Rental	$	8,219		$	8,340		$	16,381		$	16,635
Tenant reimbursements		5,136			4,649			10,307			9,542
Parking and other		939			1,318			1,957			2,215
Investment advisory, management, leasing, and development services		2,177			2,369			4,380			3,783
Investment advisory, management, leasing, and development services—unconsolidated real estate entities		5,308			4,166			9,666			6,339
Total revenues		21,779			20,842			42,691			38,514
Expenses:
Rental property operating and maintenance		3,985			3,849			8,335			8,178
Real estate taxes		1,549			1,463			3,024			2,919
Investment advisory, management, leasing, and development services		3,939			2,301			6,271			4,104
Rent—unconsolidated real estate entities		60			57			120			114
Interest		3,782			5,272			8,043			10,759
Depreciation and amortization		3,048			3,300			6,107			6,405
General and administrative		5,073			4,992			10,191			8,266
Total expenses		21,436			21,234			42,091			40,745
Gain on sale of real estate		1,420			—			2,389			—
Loss from early extinguishment of debt		—			—			—			(360	)
Interest income		1,730			597			2,569			1,272
Equity in net loss of unconsolidated real estate entities		(1,363	)		(1,364	)		(4,532	)		(4,335	)
Minority interests – unitholders in the Operating Partnership		(941	)		633			(348	)		3,325
Minority interests in consolidated real estate entities		10			—			35			(524	)
Income/(loss) before benefit/(provision) for income taxes		1,199			(526	)		713			(2,853	)
Benefit/(provision) for income taxes		(549	)		190			(318	)		1,089
Net income/(loss)	$	650		$	(336	)	$	395		$	(1,764	)
Income/(loss) per share – basic	$	0.03		$	(0.02	)	$	0.02		$	(0.12	)
Income/(loss) per share – diluted	$	0.03		$	(0.02	)	$	0.02		$	(0.12	)
Weighted average common shares outstanding - basic		20,540,116			14,332,397			17,468,385			14,328,162
Weighted average common shares outstanding - diluted		20,611,368			14,332,397			17,531,688			14,328,162

See accompanying notes to consolidated financial statements.

2

THOMAS PROPERTIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income/(loss)	$	395		$	(1,764	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Loss from early extinguishment of debt		—			360
Gain on sale of real estate		(2,389	)		—
Equity in net loss of unconsolidated real estate entities		4,532			4,335
Deferred rents		2,920			2,766
Depreciation and amortization expense		6,108			6,405
Amortization of loan costs		164			261
Amortization of above and below market leases, net		(4	)		(236	)
Share-based compensation		1,777			2,174
Minority interests		313			(2,801	)
Distributions from operations of unconsolidated real estate entities		2,809			1,275
Changes in assets and liabilities:
Rents and other receivables		416			(545	)
Receivables—unconsolidated real estate entities		(23	)		731
Deferred leasing costs		(278	)		15
Deferred tax asset		—			(1,089	)
Other assets		(158	)		(3,420	)
Deferred interest payable		88			88
Accounts payable and other liabilities		4,157			(5,282	)
Prepaid rent		(174	)		11
Deferred tax liability		(2,392	)		—
Net cash provided by operating activities		18,261			3,284
Cash flows from investing activities:
Expenditures for improvements to real estate		(45,099	)		(7,337	)
Purchases of interests in unconsolidated real estate entities		(18,438	)		(24,150	)
Return of capital from unconsolidated real estate entities		3,487			4,194
Contributions to unconsolidated real estate entities		(1,788	)		(8,187	)
Payment for purchase of naming rights		(750	)		—
Change in restricted cash		986			6,100
Net cash used in investing activities		(61,602	)		(29,380	)
Cash flows from financing activities:
Proceeds from equity offering		139,818			—
Payment of offering costs		(424	)		—
Payment for redemption of operating units		(33,646	)		—
Payment of dividends to common stockholders and distributions to limited partners of the operating partnership		(3,850	)		(3,821	)
Proceeds from mortgage and other secured loans		25,784			—
Principal payments of mortgage and other secured loans		(4,785	)		(4,433	)
Minority interest distributions		—			(550	)
Payment of loan costs		—			(32	)
Proceeds from exercise of stock options		320			54
Net cash provided by (used in) financing activities		123,217			(8,782	)
Net increase/(decrease) in cash and cash equivalents		79,876			(34,878	)
Cash and cash equivalents at beginning of period		64,343			63,915
Cash and cash equivalents at end of period	$	144,219		$	29,037
Supplemental disclosure of cash flow information:
Cash paid for interest	$	11,753		$	11,826
Supplemental disclosure of non-cash investing and financing activities:
Accrual for declaration of dividends to common shareholders and distributions to limited partners of the operating partnership	$	2,354		$	1,916
Accrual for real estate improvements		6,373			1,144
Minority interest reclass		21,484			2,195

See accompanying notes to consolidated financial statements.

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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 incorporated in the State of Delaware on March 9, 2004 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, as well as mixed-use and residential, 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.

Our business operations are carried on through our 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 and the assumption of debt and other specified liabilities in exchange for limited partnership units (“Units”) in the Operating Partnership issued to the contributors. As of June 30, 2007, we held a 60.5% interest in the Operating Partnership which we consolidated, as we have control over the major decisions of the Operating Partnership.

As of June 30, 2007, we were invested in the following real estate entities:

Entity	Type; Possible Development	Location
Consolidated entities:
One Commerce Square	High-rise office	Philadelphia Central Business District, Pennsylvania (“PCBD”)
Two Commerce Square	High-rise office	PCBD
Murano	Land and construction in progress; Residential-Condominiums	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

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Entity	Type; Possible Development	Location
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
CityWestPlace	Suburban office and undeveloped land	Houston, Texas
Centerpointe I and II	Suburban office	Fairfax, Virginia
Fair Oaks Plaza	Suburban office	Fairfax, Virginia
San Jacinto Center	High-rise office	Austin, Texas
Frost Bank Tower	High-rise office	Austin, Texas
One Congress Plaza	High-rise office	Austin, Texas
One American Center	High-rise office	Austin, Texas
300 West 6th	High-rise office	Austin, Texas
Research Park Plaza I and II	Suburban office	Austin, Texas
Park 22 I - III	Suburban office	Austin, Texas
Great Hills Plaza	Suburban office	Austin, Texas
Stonebridge Plaza II	Suburban office	Austin, Texas
Westech 360 I - IV	Suburban office	Austin, Texas

2. Summary of Significant Accounting Policies

Principles of Consolidation

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 owned by Mr. Thomas and entities majority owned by him were contributed to the Operating Partnership in exchange for Units and 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. 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.

The real estate entities included in the consolidated financial statements have been consolidated only for the periods that such entities were under control by us, 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 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 financial statements.

The interests in One Commerce Square and Two Commerce Square (for all periods presented) and Murano (beginning August 2, 2006) not owned by us are reflected as minority interests. Mr. Thomas has an 11% ownership interest in each of One Commerce Square and Two Commerce Square. No further losses of One Commerce Square and Two Commerce Square are being allocated to Mr. Thomas, as no further contributions are required from Mr. Thomas. Future income allocable to Mr. Thomas will be reduced by such unrecognized losses. The unrecognized minority interest of Mr. Thomas in the deficit of One Commerce Square and Two Commerce Square is $1.5 million and $1.4 million at June 30, 2007 and December 31, 2006, respectively.

We have a $20,510,000 preferred equity interest in Murano, of which we have fully funded the required cash commitment of $17,422,000 as of June 30, 2007. Excluding the preferred equity interest, a third party has a 27.0% ownership interest in Murano.

Earnings (loss) per share

The computation of basic earnings (loss) per share is based on net earnings (loss) and the weighted average number of shares of our common stock outstanding during the period. The computation of diluted earnings (loss) per share includes the assumed exercise of outstanding stock options and the effect of the vesting of unvested restricted stock that have been granted, all calculated using the treasury stock method.

5

Development Activities

Project costs associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, loan fees, real estate taxes, and general and administrative expenses that are directly associated with and incremental to our development activities and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the pre-development and lease-up phases. Once the development and construction of the building shell of a real estate project is completed, the costs capitalized to construction in progress will be transferred to land and improvements and buildings and improvements. Included in land held for development and construction in progress is capitalized interest of $11,294,000 and $8,109,000 as of June 30, 2007 and December 31, 2006, respectively.

Gains on Dispositions of Real Estate

Gains on sales of real estate are recognized pursuant to the provisions of Financial Accounting Standard Board (FASB) Statement No. 66, Accounting for Sales of Real Estate’ (“SFAS 66”). The specific timing of a sale is measured against various criteria in SFAS 66 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the deposit, finance, installment, percentage of completion or cost recovery methods, as appropriate.

Recent Accounting Pronouncements

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. See note 7 for further details regarding the adoption of FIN 48.

In September 2006, FASB issued FASB Statement No. 157 (SFAS 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. 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 157 will have a material impact on our financial statements.

In September 2006, the Emerging Issues Task Force (EITF) of the FASB issued EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under SFAS No. 66 for the Sale of Condominiums” (EITF 06-8). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to SFAS 66, an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of SFAS 66, including an assessment of collectibility using the initial and continuing investment tests described in SFAS 66, then the entity should apply the deposit method as described in SFAS 66. In November 2006, the FASB ratified the EITF’s recommendation. This statement is effective for financial statements issued for fiscal years beginning after March 15, 2007. The Company is currently applying the deposit method, and will continue to evaluate this method versus the percentage of completion method in future periods.

In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is evaluating SFAS No. 159 and has not yet determined the impact the adoption will have on the Company’s financial position or results of operations.

Interim Financial Data

The accompanying interim financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in our Annual Report for the year ended December 31, 2006 filed with the SEC on Form 10-K as amended by Amendment No. 1. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for the full fiscal year.

3. Unconsolidated Real Estate Entities

The unconsolidated real estate entities include the entities that own 2121 Market Street, Harris Building Associates, and TPG/CalSTRS, LLC, a joint venture with the California State Teachers Retirement System (“CalSTRS”). As of June 30, 2007, TPG/CalSTRS, LLC owns interests in 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)

San Felipe Plaza (purchased August 2005)

2500 City West (purchased August 2005)

6

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

2500 City West land (purchased December 2005)

CityWestPlace (purchased June 2006)

CityWestPlace land (purchased June 2006)

Centerpointe I and II (purchased January 2007)

Fair Oaks Plaza (purchased January 2007)

TPG/CalSTRS, LLC also owns a 25% interest in the following properties:

San Jacinto Center (purchased June 2007)

Frost Bank Tower (purchased June 2007)

One Congress Plaza (purchased June 2007)

One American Center (purchased June 2007)

300 W. 6th (purchased June 2007)

Research Park Plaza I & II (purchased June 2007)

Park 22 I-III (purchased June 2007)

Great Hills Plaza (purchased June 2007)

Stonebridge Plaza II (purchased June 2007)

Westech 360 I-IV (purchased June 2007)

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.Our stated ownership percentages, prior to any preferred or special allocations, as of June 30, 2007, follow:

2121 Market Street	50.0	%
Harris Building Associates	0.1	%(1)
TPG/CalSTRS, LLC:
City National Plaza	21.3	%(2)
Austin portfolio properties	6.3	%
All other properties	25.0	%(3)

(1) 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 equaled their contribution amount and priority return. As such, net income/loss is allocated equally to the general partners, resulting in an allocation of 50% net income/loss to us.

(2) Prior to January 1, 2006, the minority owner of City National Plaza and the Operating Partnership were allocated depreciation expense of City National Plaza ahead of CalSTRS, resulting in the allocation to us 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 the Operating Partnership and CalSTRS.

Beginning January 1, 2006, the Operating Partnership is allocated 25% of net income/loss, including depreciation expense. Depreciation expense was previously allocated to the members in accordance with the operating agreement of the limited liability company. 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.

7

(3) 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. Depreciation expense was previously allocated to the members in accordance with the operating agreement of the limited liability company. The Operating Partnership was 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.

Investments in unconsolidated real estate entities as of June 30, 2007 and December 31, 2006 are as follows (in thousands):

	June 30, 2007			December 31, 2006
TPG/CalSTRS, LLC:
City National Plaza	$	(4,573	)	$	(766	)
Reflections I		1,453			1,525
Reflections II		1,666			1,778
Four Falls Corporate Center		1,877			1,989
Oak Hill Plaza / Walnut Hill Plaza		1,044			1,532
Valley Square Office Park		(6	)		60
San Felipe Plaza		5,486			6,514
2500 City West		2,595			3,874
Brookhollow Central I, II and III / Intercontinental Center		2,292			2,942
CityWestPlace		22,836			23,328
Centerpointe I, II		7,124			—
Fair Oaks Plaza		3,190			—
Austin Portfolio Investor		578			—
Frost Bank Tower		3,335			—
300 West 6th Street		2,842			—
San Jacinto Center		2,256			—
One Congress Plaza		2,844			—
One American Center		2,679			—
Stonebridge Plaza II		840			—
Park 22		688			—
Research Park Plaza		1,139			—
Westech 360		600			—
Great Hills Plaza		437			—
TPG/CalSTRS		(4	)		10,912
2121 Market Street and Harris Building Associates		(1,456	)		(1,324	)
	$	61,762		$	52,364

The following is a summary of the investments in unconsolidated real estate entities for the six months ended June 30, 2007 (in thousands):

Investment balance, December 31, 2006	$	52,364
Contributions		20,226
Equity in net loss of unconsolidated real estate entities		(4,532	)
Distributions		(6,296	)
Investment balance, June 30, 2007	$	61,762

8

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. We are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except for stabilized properties, 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 $333.3 million, which was fully funded as of December 31, 2006. Our aggregate commitment to the joint venture was $83.3 million and CalSTRS’ aggregate commitment was $250.0 million. 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. On May 25, 2007, we revised our agreement with CalSTRS, which amended the investment period to end on the earlier of (a) the date CalSTRS has made aggregate capital contributions at least equal to $265.0 million; or (b) June 1, 2007. We are in the process of finalizing a further amendment with CalSTRS to provide for additional capital commitments in the amounts of $135.0 million and $45.0 million from CalSTRS and us, respectively.

A buy-sell provision may be exercised under the joint venture agreement 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 its interest for an amount equal to what would be payable to them upon liquidation of the assets at fair market value.

Following is summarized financial information for the unconsolidated real estate entities as of June 30, 2007 and December 31, 2006 and for the three and six months ended June 30, 2007 and 2006 (in thousands):

Summarized Balance Sheets

	June 30, 2007		December 31, 2006
ASSETS
Investments in real estate, net	$	2,322,865	$	1,011,212
Assets associated with real estate held for sale		248		14,767
Receivables including deferred rents		51,892		40,754
Other assets		371,755		202,064
Total assets	$	2,746,760	$	1,268,797
LIABILITIES AND OWNERS’ EQUITY
Mortgage and other secured loans	$	2,121,205	$	1,037,491
Other liabilities		197,150		72,664
Obligations associated with real estate held for sale		144		13,676
Total liabilities		2,318,499		1,123,831
Minority interest		—		—
Owners’ equity:
Thomas Properties, including $321 and $258 of other comprehensive loss as of June, 30, 2007 and December 31, 2006, respectively		66,167		55,442
Other owners, including $963 and $1,199 of other comprehensive loss as of June, 30, 2007 and December 31, 2006, respectively		362,094		89,524
Total owners’ equity		428,261		144,966
Total liabilities and owners’ equity	$	2,746,760	$	1,268,797

9

Summarized Statements of Operations

	Three months ended June 30,						Six months ended June 30,
	2007			2006			2007			2006
Revenues	$	56,002		$	30,884		$	99,767		$	57,649
Expenses:
Operating and other expenses		29,004			18,290			53,518			35,395
Interest expense		25,055			12,397			43,964			23,044
Depreciation and amortization		21,021			14,241			36,231			26,521
Total expenses		75,080			44,928			133,713			84,960
Loss from continuing operations		(19,078	)		(14,044	)		(33,946	)		(27,311	)
Minority interest		(25	)		1,061			(51	)		1,964
Gain on sale of real estate		7,932			6,151			7,932			6,151
Income (loss) from discontinued operations		(8	)		(441	)		(212	)		(551	)
Net loss	$	(11,179	)	$	(7,273	)	$	(26,277	)	$	(19,747	)
Thomas Properties’ share of net loss	$	(1,363	)	$	(1,364	)	$	(4,532	)	$	(4,335	)

Included in the preceding summarized balance sheets as of June, 30, 2007 and December 31, 2006, are the following balance sheets of TPG/CalSTRS, LLC (in thousands):

		June, 30, 2007		December 31, 2006
ASSETS
Investments in real estate, net		$	1,172,790	$	993,316
Assets associated with real estate held for sale			248		14,767
Receivables including deferred rents			43,369		37,767
Investments in unconsolidated real estate entities			73,854		—
Other assets			187,038		199,835
Total assets		$	1,477,299	$	1,245,685
LIABILITIES AND MEMBERS’ EQUITY
Mortgage and other secured loans		$	1,194,446	$	1,018,087
Other liabilities			63,627		67,455
Obligations associated with real estate held for sale			144		13,673
Total liabilities			1,258,217		1,099,215
Minority interest			—		—
Members’ equity:
Thomas Properties, including $321 and $258 of other comprehensive loss as of June 30, 2007 and December 31, 2006, respectively			48,086		55,916
CalSTRS, including $963 and $1,199 of other comprehensive loss as of June 30, 2007 and December 31, 2006, respectively			170,996		90,554
Total members’ equity			219,082		146,470
Total liabilities and members’ equity		$	1,477,299	$	1,245,685
	��

10

Following is summarized financial information by real estate entity for the unconsolidated real estate entities for the three months ended June 30, 2007 and 2006 (in thousands):

	Three months ended June 30, 2007
	2121 Market Street and Harris Building Associates			TPG/CalSTRS, LLC			Austin Portfolio Properties			Eliminations		Total
Revenues	$	1,475		$	43,810			10,717			—	$	56,002
Expenses:
Operating and other		838			24,166			4,000			—		29,004
Interest		296			19,798			4,961			—		25,055
Depreciation and amortization		241			15,362			5,418			—		21,021
Total expenses		1,375			59,326			14,379			—		75,080
Income (loss) from continuing operations		100			(15,516	)		(3,662	)		—		(19,078	)
Minority interest		(25	)		—			—			—		(25	)
Gain on sale of asset					7,932			—			—		7,932
Discontinued operations		—			(8	)		—			—		(8	)
Equity in net loss of unconsolidated real estate entities		—			(965	)		—			965		—
Net income/(loss)	$	75		$	(8,557	)	$	(3,662	)		965	$	(11,179	)
Thomas Properties’ share of net income/(loss)	$	36		$	(1,470	)	$	(241	)	$	—	$	(1,675	)
Intercompany eliminations													312
Equity in net loss of unconsolidated real estate entities												$	(1,363	)

	Three months ended June 30, 2006
	2121 Market Street and Harris Building Associates			Murano			TPG/CalSTRS, LLC			Total
Revenues	$	1,353		$	—		$	29,531		$	30,884
Expenses:
Operating and other		939			112			17,239			18,290
Interest		297			—			12,100			12,397
Depreciation and amortization		285			34			13,922			14,241
Total expenses		1,521			146			43,261			44,928
Loss from continuing operations		(168	)		(146	)		(13,730	)		(14,044	)
Minority interest		(28	)		—			1,089			1,061
Gain on sale of real estate		—			—			6,151			6,151
Discontinued operations		—			—			(441	)		(441	)
Net loss	$	(196	)	$	(146	)	$	(6,931	)	$	(7,273	)
Thomas Properties’ share of net loss	$	(44	)		(73	)	$	(1,345	)	$	(1,462	)
Intercompany eliminations											98
Equity in net loss of unconsolidated real estate entities										$	(1,364	)

11

	Six months ended June 30, 2007
	2121 Market Street and Harris Building Associates			TPG/CalSTRS, LLC			Austin Portfolio Properties			Eliminations		Total
Revenues	$	2,873		$	86,177		$	10,717			—	$	99,767
Expenses:
Operating and other		1,737			47,781			4,000			—		53,518
Interest		589			38,414			4,961			—		43,964
Depreciation and amortization		481			30,332			5,418			—		36,231
Total expenses		2,807			116,527			14,379			—		133,713
Income/(loss) from continuing operations		66			(30,350	)		(3,662	)		—		(33,946	)
Equity in net loss of unconsolidated real estate entities					(965	)					965		—
Minority interest		(51	)		—			—			—		(51	)
Gain on sale of asset					7,932			—			—		7,932
Loss from discontinued operations		—			(212	)		—			—		(212	)
Net income/(loss)	$	15		$	(23,595	)	$	(3,662	)	$	965	$	(26,277	)
Thomas Properties’ share of net loss	$	6		$	(5,230	)	$	(241	)	$	—	$	(5,465	)
Intercompany eliminations													933
Equity in net loss of unconsolidated real estate entities												$	(4,532	)

	Six months ended June 30, 2006
	2121 Market Street and Harris Building Associates			Murano			TPG/CalSTRS, LLC			Total
Revenues	$	2,706		$	—		$	54,943		$	57,649
Expenses:
Operating and other		1,796			371			33,228			35,395
Interest		594			—			22,450			23,044
Depreciation and amortization		570			441			25,510			26,521
Total expenses		2,960			812			81,188			84,960
Loss from continuing operations		(254	)		(812	)		(26,245	)		(27,311	)
Minority interest		(54	)		—			2,018			1,964
Gain on sale of asset		—			—			6,151			6,151
Loss from discontinued operations		—			—			(551	)		(551	)
Net loss	$	(308	)	$	(812	)	$	(18,627	)	$	(19,747	)
Thomas Properties’ share of net loss	$	(100	)	$	(406	)	$	(4,269	)	$	(4,775	)
Intercompany eliminations											440
Equity in net loss of unconsolidated real estate entities										$	(4,335	)

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 June, 30, 2007 and December 31, 2006 (in thousands):

	June, 30, 2007			December 31, 2006
Our share of owners’ equity recorded by unconsolidated real estate entities	$	66,167		$	55,442
Intercompany eliminations and other adjustments		(4,405	)		(3,078	)
Investments in unconsolidated real estate entities	$	61,762		$	52,364

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4. Debt

A summary of the outstanding debt as of June 30, 2007 is as follows:

	Interest rate	Outstanding debt (in thousands)		Maturity date
Secured debt
One Commerce Square mortgage loan (1)	5.7%	$	130,000	1/6/16
Two Commerce Square:
Mortgage loan (2)	6.3		112,291	5/09/13
Senior mezzanine loan (3) (4)	17.7		38,052	1/09/10
Junior mezzanine loan (3) (5)	15.0		4,195	1/09/10
Campus El Segundo Mortgage loan (6)	Prime Rate or LIBOR + 2.25		17,259	10/10/07
Four Points Centre Mortgage loan (7)	Prime Rate		4,000	8/28/07
Construction loan (7)(8)	Prime Rate		253	6/11/10
Murano construction loan (9)	7% or LIBOR + 3.25		25,531	7/31/09
Murano loan (10)	LIBOR + 1.50%		17,434	9/26/07
Total debt		$	349,015
Unsecured and other debt
Former minority partner (11)	5.0		3,900	10/12/09
		$	3,900

(1) The mortgage loan is subject to interest only payments through January 9, 2011, and thereafter, principal and interest payments are due based on a thirty-year amortization schedule through maturity on January 6, 2016. The loan is subject to yield maintenance payments for any prepayments prior to October 2015, and may be defeased beginning January 2009.

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

(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 June 30, 2007 was 17.9% 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 the greater of 3% of the principal amount or a yield maintenance premium for any prepayments. 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 June 30, 2007 was 7.6% per annum.

(7) The prime rate as of June 30, 2007 was 8.25% per annum.

(8) The maximum borrowings under this loan are $42.7 million.

(9) In August 2006 an entity developing Murano obtained a construction loan on which we may borrow up to $142,500,000. The interest rate as of June 30, 2007 was 8.6%.

(10) A subsidiary of our Operating Partnership pledged its preferred equity interest in Murano to a lender in the amount of $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.

(11) The loan is due to our former minority partner in TPG-El Segundo Partners, LLC. Principal and interest are due at maturity.

13

5. Earnings (Loss) per Share and Dividends Declared

The following is a summary of the components used in calculating basic and diluted earnings (loss) per share for the three months ended June 30, 2007 and 2006 (in thousands except share and per share amounts):

		Three Months Ended June 30,					Six Months Ended June 30,
		2007		2006			2007		2006
Earnings (loss) available to common shares		$	650	$	(336	)	$	395	$	(1,764	)
Weighted average common shares outstanding — basic			20,540,116		14,332,397			17,468,385		14,328,162
Potentially dilutive common shares (1)
Stock options			60,866		—			53,446		—
Unvested restricted stock			10,385		—			9,857		—
Adjusted weighted average common shares outstanding — diluted			20,611,368		14,332,397			17,531,688		14,328,162
	��
Earnings (loss) per share – basic		$	0.03	$	(0.02	)	$	0.02	$	(0.12	)
Earnings (loss) per share – diluted		$	0.03	$	(0.02	)	$	0.02	$	(0.12	)
Dividends declared per share		$	0.06	$	0.06		$	0.06	$	0.06

(1) For the three and six months ended June 30, 2006, the potentially dilutive shares were not included in the loss per share calculation as their effect is antidilutive.

6. Stockholders’ Equity

On April 25, 2007, we sold 9,200,000 shares of common stock, pursuant to an effective registration statement previously filed with the Securities and Exchange Commission, at $16.00 per share. We received net proceeds, after deducting underwriting discounts and commissions and offering expenses, of $139.3 million from this offering of which $33.7 million was used to redeem 2,170,000 units in our operating partnership held by our Chief Executive Officer and President, and 45,000 units held by another senior executive.

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. We have issued 1,033,339 incentive units to certain employees, of which 45,000 was redeemed for cash in April 2007. 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 distributions, including 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 Units to the extent of the incentive units’ economic capital account balance. We had 23,747,936 shares of common stock, and 14,496,666 Units outstanding as of June 30, 2007, and 988,336 incentive units outstanding which were issued under our Incentive Plan, defined below.

We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc. (the “Incentive Plan”) effective upon the closing of our initial public offering. The Incentive Plan provides incentives to our employees and is designed 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. At the Annual Meeting of shareholders in May 2007, the shareholders approved an increase in the number of shares of the common stock reserved for issuance or transfer under the Plan from 2,011,906 shares to a total of 2,361,906. In addition, the restrictions on the aggregate number of shares that may be issued or transferred with respect to specified awards granted under the Plan were eliminated. In addition, under our Non-Employee Directors Restricted Stock Plan (“the Non-Employee Directors Plan”) a total of 60,000 shares were reserved for grant at the time of our original public offering, of which 35,033 shares remain available for future grant at June 30, 2007.

Shares of newly issued common stock will be issued upon exercise of stock options.

Restricted Stock

Under the Incentive Plan, we have issued the following restricted shares to Mr. Thomas:

	Shares	Aggregate Value
		(in thousands)
Issued in October 2004	46,667	$	560
Issued in February 2006	60,000		740
Issued in March 2007	100,000		1,580
Outstanding at June 30, 2007	206,667	$	2,880

14

Vesting for the 46,667, 60,000 and 100,000 shares commenced as of October 13, 2004, February 22, 2006 and March 7, 2007 respectively. The restricted shares will vest in full on the third anniversary of the vesting commencement date, provided that vesting with respect to the February 2006 and March 2007 awards could occur on the second anniversary of the vesting commencement date if certain performance goals are met. Mr. Thomas has full voting rights and will receive any dividends paid.

Under the Non-Employee Directors Plan, we have issued the following outstanding restricted shares to our non-employee directors:

	Shares	Aggregate Value (in thousands)
Issued in October 2004	10,000	$	120
Issued in 2005	4,984		60
Issued in 2006	6,419		83
Issued in 2007	3,564		60
Outstanding at June 30, 2007	24,967	$	323

The 10,000 and 4,984 shares vested following the 2006 Annual Meeting of Stockholders on May 24, 2006. Vesting for the 6,419 and 3,564 shares commenced as of May 24, 2006 and May 30, 2007, respectively. Of the 6,419 shares granted, 3,501 vested following the 2007 Annual Meeting of Stockholders on May 30, 2007 and 2,918 will vest subject to the continued service of one of our directors following the 2008 Annual Meeting of Stockholders. The 3,564 shares granted will vest subject to the continued service of the directors following the 2008 Annual Meeting of Stockholders. The holders of these shares have full voting rights and will receive any dividends paid.

As of June 30, 2007, there was $1,942,000 of total unrecognized compensation cost related to the nonvested restricted stock under both the Incentive Plan and Non-Employees Directors Plan. The cost is expected to be recognized over a weighted average period of 2.3 years. The total fair value of shares vested during the three months ended June 30, 2007 and 2006, was $295,000 and $139,000, respectively. The weighted-average grant date fair value of restricted stock granted during the six months ended June 30, 2007 was $15.84.

We recorded compensation expense totaling $257,000 and $415,000 related to the amortization of the restricted stock grants for the three and six months ended June 30, 2007, respectively, and $144,000 and $252,000 for the three and six months ended June 30, 2006, respectively. The total income tax benefit recognized in the statement of operations related to this compensation expense was $104,000 and $168,000 for the three and six months ended June 30, 2007, respectively, and $26,000 and $46,000 for the three and six months ended June 30, 2006.

Incentive Units

Under our Incentive Plan, we issued to certain executives 730,003 incentive units upon consummation of our initial public offering in October 2004. 666,668 of these incentive unit awards are vesting over a three-year period, with one part of the incentive units vesting one-third on each of the first, second, and third anniversary dates of the grant, and 63,335 vest in full on the third anniversary of the date of grant, subject to continued services and the terms of the Incentive Plan. On February 2006 we issued 120,000 incentive units to certain executives, these units vest on the third anniversary of the grant date. In March 2007 we issued an additional 183,336 incentive units to certain executives, these units vest over a three year period, with one third vesting each on the first, second, and third anniversary dates of the grant.

We recorded compensation expense totaling $757,000 and $1,258,000 related to the amortization of the restricted stock grants for the three and six months ended June 30, 2007, respectively, and $1,848,000 for the three and six months ended June 30, 2006. As of June 30, 2007, there was $3,317,000 of unrecognized compensation cost related to incentive units. The weighted-average grant date fair value of incentive units granted in the six months ended June 30, 2007 was $14.88.

Stock options

Under our Incentive Plan, we have 514,530 stock options outstanding as of June 30, 2007. Of the total options outstanding, 482,308 stock options vest at the rate of one third per year over three years and expire ten years after the date of commencement of vesting and the other 50,000 stock options vest 100% eighteen months from the date of grant. 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 for grants in 2007 and 2006:

	2007	2006
Expected dividend yield	2.0%	2.0%
Expected life of option	2 to 4 years	2 to 4 years
Risk-free interest rate	4.40%-4.86%	4.40%
Expected stock price volatility	10%-15%	15%

15

The following is a summary of stock option activity under our Incentive Plan as of June 30, 2007 and for the six months ended June 30, 2007:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2007	389,166		$	12.42
Granted	151,475			16.02
Exercised	(26,111	)		12.26
Outstanding at June 30, 2007	514,530		$	13.48	7.4	$	1,131
Options exercisable at June 30, 2007	207,430		$	12.36	7.6	$	656

As of June 30, 2007, there was $293,000 of total unrecognized compensation cost related to the nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.7 years. The total fair value of shares vested during the three months ended June 30, 2007 and 2006 was $302,000 and $385,000, respectively. The weighted-average grant date fair value of options granted during the six months ended June 30, 2007 was $1.89. The options exercised during the three and six months ended June 30, 2007 had an intrinsic value of $26,000, and $72,000, respectively.

We recorded compensation expense totaling $54,000 and $103,000 related to the stock options for the three and six months ended June 30, 2007, respectively, and $38,000 and $75,000 for the three and six months ended June 30, 2006, respectively. The total income tax benefit recognized in the statement of operations related to this compensation expense was $22,000 and $42,000 for the three and six months ended June 30, 2007, respectively, and $7,000 and $14,000 for the three and six months ended June 30, 2006, respectively.

7. Income Taxes

All operations are carried on through the Operating Partnership and its 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. As of June 30, 2007, we held a 60.5% capital interest in the Operating Partnership. For the three and six months ended June 30, 2007, we were allocated 45.1% and 56.0% of the income and losses from the Operating Partnership.

Our effective tax rate is 44.5% and 44.3%, respectively, for the three and six months ended June 30, 2007. The higher effective tax rate compared to the federal statutory rate of 35% is primarily due to state taxes, net of federal tax expense.

The provision for income taxes is based on reported income 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.

FASB Statement No. 109, “Accounting for Income Taxes” (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 Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

16

The Company files U.S. federal income tax returns and returns in various states jurisdictions. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company adopted the provisions of FIN 48 on January 1, 2007, which resulted in unrecognized tax benefits of approximately $10.2 million, of which $134,000 was recorded as a reduction to the opening balance of retained earnings, and if recognized, would effect our effective tax rate. As of January 1, 2007, the Company has recorded $227,000 of accrued interest with respect to unrecognized tax benefits. For the six months ended June 30, 2007, the Company has recorded $161,000 of accrued interest with respect to the unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.

At this time, we are unable to estimate the amount of unrecognized tax benefits for tax positions that may increase or decrease within the next 12 months.

8. 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 June 30, 2007 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 affiliate, accounts payable and other liabilities approximate fair value because of the short-term nature of these instruments.

As of June 30, 2007, the fair value of our mortgage and other secured loans and unsecured loan aggregates $347,914,000, compared to the aggregate carrying value of $352,915,000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This report includes statements that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risks, see the section in this report entitled “Risk Factors.”

When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees.

Forward-Looking Statements

Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current estimations, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

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Overview and Background

We are a full-service real estate operating company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. We conduct our business through our Operating Partnership, of which we own 60.5% and have control over the major decisions of the Operating Partnership.

Results of Operations

The results of operations reflect the consolidation of the affiliates that own One Commerce Square, Two Commerce Square, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo, the Murano and our investment advisory, property management, leasing and real estate development operations. The following properties are accounted for using the equity method of accounting:

2121 Market Street (for all periods presented)

City National Plaza (for all periods presented)

Reflections I (for all periods presented)

Reflections II (for all periods presented)

Murano (as of March 2005, the date of formation, through to August 1, 2006)

Four Falls Corporate Center (as of March 2005, the date of acquisition)

Oak Hill Plaza (as of March 2005, the date of acquisition)

Walnut Hill Plaza (as of March 2005, the date of acquisition)

Valley Square Office Park (from March 2005, the date of acquisition, to April 2006, the date of disposition)

San Felipe Plaza (as of August 2005, the date of acquisition)

2500 City West (as of August 2005, the date of acquisition)

Brookhollow Central I, II, and III (as of August 2005, the date of acquisition)

Intercontinental Center (as of August 2005, the date of acquisition, to May 2007, the date of disposition)

2500 City West land (as of December 2005, the date of acquisition)

CityWestPlace (as of June 2006, the date of acquisition)

CityWestPlace land (as of June 2006, the date of acquisition)

Centerpointe I and II (as of January 2007, the date of acquisition)

Fair Oaks Plaza (as of January 2007, the date of acquisition)

Frost Bank Tower (as of June 1, 2007, the date of acquisition)

300 West 6^th Street (as of June 1, 2007, the date of acquisition)

San Jacinto Center (as of June 1, 2007, the date of acquisition)

One Congress Plaza (as of June 1, 2007, the date of acquisition)

One American Center (as of June 1, 2007, the date of acquisition)

Stonebridge Plaza II (as of June 1, 2007, the date of acquisition)

Park 22 (as of June 1, 2007, the date of acquisition)

Research Park Plaza (as of June 1, 2007, the date of acquisition)

Westech 360 (as of June 1, 2007, the date of acquisition)

Great Hills Plaza (as of June 1, 2007, the date of acquisition)

Comparison of three months ended June 30, 2007 to three months ended June 30, 2006

Rental revenues. Rental revenue remained consistent at $8 million for each of the three month periods ended June 30, 2007 and 2006.

Tenant reimbursements.Revenues increased by $487,000, or 10.5%, to $5.1 million for the three months ended June 30, 2007 compared to $4.6 million for the three months ended June 30, 2006 primarily due to an increase in recoverable expenses.

Parking and other revenues. Revenues decreased by $379,000, or 28.8%, to $939,000 for the three months ended June 30, 2007 compared to $1.3 million for the three months ended June 30, 2006 primarily due to lease termination fees of $427,000 for two tenants in One Commerce Square which were recognized during 2006, offset by an increase of $38,000 due to after hours parking revenue resulting from a special event near one of our properties.

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Investment advisory, management, leasing and development services revenues.This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services decreased by $192,000, or 8.1%, to $2.1 million for the three months ended June 30, 2007 compared to $2.4 million for the three months ended June 30, 2006. The decrease was primarily due to a reduction of approximately $126,000 in leasing commissions and $49,000 in advisor fees from properties we manage on behalf of CalSTRS.

Investment advisory, management, leasing and development services revenues – unconsolidated real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities increased by $1.1 million, or 27.4%, to $5.3 million for the three months ended June 30, 2007 compared to $4.2 million for the three months ended June 30, 2006. This increase was primarily a result of an increase in fee income of $194,000 related to the properties in Fairfax, Virginia acquired on January 31, 2007 by our joint venture with CalSTRS, and $1.4 million related to the Austin properties acquired on June 1, 2007 by our joint venture with CalSTRS, Lehman and other institutional investors, offset by a decrease of $740,000 related to the City West Place acquisition fee recorded in June 2006. There was also an increase of approximately $119,000 in payroll reimbursements due to the purchase of additional properties.

Rental property operating and maintenance expense.Rental property operating and maintenance expense remained consistent at $4 million for each of the three month periods ended June 30, 2007 and 2006.

Real estate taxes.Real estate taxes remained consistent at $1.5 million for each of the three month periods ended June 30, 2007 and 2006.

Investment advisory, management, leasing and development services expenses.Expenses for these services increased by $1.6 million, or 71.2%, to $3.9 million for the three months ended June 30, 2007 compared to $2.3 million for the three months ended June 30, 2006, primarily as a result of an increase in salaries and employment related costs due to an increase in the number of personnel, as well as an increase in various professional services costs.

Interest expense. Interest expense decreased by $1.5 million or 28.3% to $3.8 million for the three months ended June 30, 2007 compared to $5.3 million for the three months ended June 30, 2006. The decrease is primarily due to capitalized interest of $1.2 million during the three months ended June 30, 2007, related to the Campus El Segundo and Murano development properties. In addition there was a decrease in interest expense relating to Two Commerce Square of $209,000 for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006, primarily due to the amortizing loan balances for the mortgage and mezzanine loans.

Depreciation and amortization expense. Depreciation and amortization expense remained consistent at $3 million for each of the three month periods ended June 30, 2007 and 2006.

General and administrative. General and administrative expense increased by $81,000, or 1.6%, to $5.1 million for the three months ended June 30, 2007 compared to $5.0 million for the three months ended June 30, 2006. The increase is primarily due to an increase in salaries and employment related costs due to an increase in the number of personnel, offset by a decrease in stock compensation expense recognized of $961,000 related to the incentive units, a decrease in leasing expenses of approximately $255,000 relating to property investments in Houston and a decrease of $191,000 in City of Philadelphia business taxes due to a 2006 tax adjustment.

Gain on sale of real estate.Gain on sale of real estate was $1.4 million for the three months ended June 30, 2007 due to the recognition of deferred gain on infrastructure costs incurred related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006. The parcel was sold for $24.6 million resulting in a total gain of $18.4 million. We are obligated to fund certain infrastructure improvements of approximately $2.7 million with respect to the development of the sold parcel; therefore we recorded a deferred gain of $8.1 million. The remaining deferred gain as of June 30, 2007 was $5.4 million, which will be recognized as we complete infrastructure improvements on a percentage of completion basis.

Interest income. Interest income increased by $1.1 million, or 189.8%, to $1.7 million for the three months ended June 30, 2007 compared to $597,000 for the three months ended June 30, 2006, primarily due to higher average cash balances and interest rates.

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Equity in net loss of unconsolidated real estate entities.Set forth below is a summary of the unconsolidated condensed financial information for the unconsolidated real estate entities and our share of net loss and equity in net loss for the three months ended June 30, 2007 and 2006 (in thousands):

	2007			2006
Revenue	$	56,002		$	30,884
Operating and other expenses		(29,004	)		(18,290	)
Interest expense		(25,055	)		(12,397	)
Depreciation and amortization		(21,021	)		(14,241	)
Minority interest		(25	)		1,061
Gain on sale of asset		7,932			6,151
Loss from discontinued operations		(8	)		(441	)
Net loss	$	(11,179	)	$	(7,273	)
Thomas Properties’ share of net loss	$	(1,675	)	$	(1,462	)
Intercompany eliminations		312			98
Equity in net loss of unconsolidated real estate entities	$	(1,363	)	$	(1,364	)

Aggregate revenue and operating and other expenses for unconsolidated real estate entities for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 increased primarily due to the acquisition of our interests in City West Place in June 2006, the two properties in Fairfax, Virginia in January 2007 and the Austin properties in June 2007.

Aggregate interest expense increased by $12.7 million, or 102.1%, to $25.1 million for the three months ended June 30, 2007 compared to $12.4 million for the three months ended June 30, 2006 primarily as a result of an increase in interest expense of $2.9 million relating to the debt obligations of City West Place, $2.3 million relating to the debt obligations of the Fairfax, Virginia properties and $4.7 million relating to the debt obligations of the Austin properties. The increase was also due to refinancing of the City National Plaza mortgage and mezzanine loans in July 2006, resulting in higher additional borrowings in 2007, which resulted in an increase in interest expense of $2.3 million.

Aggregate depreciation and amortization expense increased by $6.8 million, or 47.6%, to $21.0 million for the three months ended June 30, 2007 compared to $14.2 million for the three months ended June 30, 2006 primarily as a result of additional depreciation and amortization expense of $1.6 million due to the acquisition of City West Place in June 2006, $2.1 million due to the acquisition of two properties in Fairfax, Virginia in January 2007 and $5.2 million due to the acquisition of the Austin properties in June 2007. In addition, there was a decrease of $2.4 million for the Houston properties primarily due to the expiration of purchased in-place lease values.

Comparison of six months ended June 30, 2007 to six months ended June 30, 2006

Rental revenues. Rental revenue remained consistent at $16 million for each of the six month periods ended June 30, 2007 and 2006.

Tenant reimbursements.Revenues increased by $765,000, or 8.0%, to $10.3 million for the six months ended June 30, 2007 compared to $9.5 million for the six months ended June 30, 2006 primarily due to an increase in recoverable expenses.

Parking and other revenues. Revenues decreased by $258,000, or 11.6%, to $2 million for the six months ended June 30, 2007 compared to $2.2 million for the six months ended June 30, 2006 primarily due to lease termination fees of $427,000 for two tenants in One Commerce Square which were recognized during 2006, offset by an increase of $215,000 in the first six months of 2007 due to after hours parking revenue resulting from a special event near one of our properties.

Investment advisory, management, leasing and development services revenues.This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services increased by $597,000, or 15.8%, to $4.4 million for the six months ended June 30, 2007 compared to $3.8 million for the six months ended June 30, 2006. The increase was primarily due to an increase in development fees of approximately $994,000 relating to a professional services agreement with NBC Universal, Inc. to advise on a plan for future development at its Universal City property in Los Angeles. This ongoing agreement was entered into in March 2006 resulting in four months of revenues in the six months ended June 30, 2006 compared to a full six months for the comparable period of 2007. This was offset by decreases of approximately $130,000 in leasing commissions and approximately $120,000 in advisor fees from properties we manage on behalf of CalSTRS.

Investment advisory, management, leasing and development services revenues – unconsolidated real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities increased by $3.3 million, or 52.5%, to $9.7 million for the six months ended June 30, 2007 compared to $6.3 million for the six months ended June 30, 2006. This increase was primarily a result of an increase in fee income of $953,000 related to the property investments in Fairfax, Virginia acquired on January 31, 2007 by our joint

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venture with CalSTRS and $1.4 million related to the Austin portfolio investments acquired June 1, 2007 by our joint venture with CalSTRS, Lehman and other institutional investors, offset by a decrease of $309,000 related to the City West Place acquisition fee recorded in June 2006. The increase was also due to an increase in leasing commissions of $310,000 and an increase in fee income of $755,000 relating to City National Plaza. There was also an increase of approximately $294,000 in payroll reimbursements due to the purchase of additional properties.

Rental property operating and maintenance expense.Rental property operating and maintenance expense remained consistent at $8 million for each of the six month periods ended June 30, 2007 and 2006.

Real estate taxes.Real estate taxes remained consistent at $3 million for each of the six month periods ended June 30, 2007 and 2006.

Investment advisory, management, leasing and development services expenses.Expenses for these services increased by $2.2 million, or 52.8%, to $6.3 million for the six months ended June 30, 2007 compared to $4.1 million for the six months ended June 30, 2006, primarily as a result of an increase in salaries and employment related costs due to an increase in the number of personnel, as well as an increase in various professional services costs.

Interest expense. Interest expense decreased by $2.7 million or 25.2% to $8.0 million for the six months ended June 30, 2007 compared to $10.8 million for the six months ended June 30, 2006. The decrease is primarily due to capitalized interest of $2.0 million during the six months ended June 30, 2007, related to Campus El Segundo and Murano development properties. In addition there was a decrease in interest expense relating to Two Commerce Square of $412,000 for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006, primarily due to the amortizing loan balances for the mortgage and mezzanine loans.

Depreciation and amortization expense. Depreciation and amortization expense remained consistent at $6 million for each of the six month periods ended June 30, 2007 and 2006.

General and administrative. General and administrative expense increased by $1.9 million, or 23.3%, to $10.2 million for the six months ended June 30, 2007 compared to $8.3 million for the six months ended June 30, 2006. The increase is primarily due to an increase in salaries and employment related costs due to an increase in the number of personnel. This was offset by a decrease in professional fees of approximately $344,000 and a decrease in stock compensation expense recognized of $398,000, related to the incentive units.

Gain on sale of real estate.Gain on sale of real estate was $2.4 million for the six months ended June 30, 2007 due to the recognition of deferred gain on infrastructure costs incurred related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006. The parcel was sold for $24.6 million resulting in a total gain of $18.4 million. We are obligated to fund certain infrastructure improvements of approximately $2.7 million with respect to the development of the sold parcel; therefore we recorded a deferred gain of $8.1 million. The remaining deferred gain as of June 30, 2007 was $5.4 million, which will be recognized as we complete infrastructure improvements on a percentage of completion basis.

Interest income. Interest income increased by $1.3 million, or 102.0%, to $2.6 million for the six months ended June 30, 2007 compared to $1.3 million for the six months ended June 30, 2006, primarily due to higher average cash balances and interest rates.

Equity in net loss of unconsolidated real estate entities.Set forth below is a summary of the unconsolidated condensed financial information for the unconsolidated real estate entities and our share of net loss and equity in net loss for the six months ended June 30, 2007 and 2006 (in thousands):

	2007			2006
Revenue	$	99,767		$	57,649
Operating and other expenses		(53,518	)		(35,395	)
Interest expense		(43,964	)		(23,044	)
Depreciation and amortization		(36,231	)		(26,521	)
Minority interest		(51	)		1,964
Gain on sale of asset		7,932			6,151
Loss from discontinued operations		(212	)		(551	)
Net loss	$	(26,277	)	$	(19,747	)
Thomas Properties’ share of net loss	$	(5,465	)	$	(4,775	)
Intercompany eliminations		933			440
Equity in net loss of unconsolidated real estate entities	$	(4,532	)	$	(4,335	)

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Aggregate revenue and operating and other expenses for unconsolidated real estate entities for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 increased primarily due to the acquisition of our interests in City West Place in June 2006, the two properties in Fairfax, Virginia in January 2007 and the Austin portfolio in June 2007.

Aggregate interest expense increased by $20.9 million, or 90.8%, to $44.0 million for the six months ended June 30, 2007 compared to $23.0 million for the six months ended June 30, 2006 primarily as a result of an increase in interest expense of $6.3 million relating to the debt obligations of City West Place, $4.0 million relating to the debt obligations of the Fairfax, Virginia properties and $4.7 million relating to the debt obligations of the Austin properties. The increase was also due to refinancing of the City National Plaza mortgage and mezzanine loans in July 2006, resulting in higher additional borrowings in 2007, which resulted in an increase in interest expense of $5.1 million.

Aggregate depreciation and amortization expense increased by $9.7 million, or 36.6%, to $36.2 million for the six months ended June 30, 2007 compared to $26.5 million for the six months ended June 30, 2006 primarily as a result of additional depreciation and amortization expense of $3.9 million due to the acquisition of City West Place in June 2006, $3.7 million due to the acquisition of the two Fairfax, Virginia properties in January 2007 and $5.2 million due to the acquisition of the Austin properties in June 2007. In addition, there was an increase of $1.7 million for City National Plaza due to new assets placed into service in 2007, offset by a decrease of $3.6 million for the Houston properties and $890,000 for the Montgomery County properties primarily due to the expiration of purchased in place lease values.

Liquidity and Capital Resources

Analysis of liquidity and capital resources

As of June 30, 2007, we have unrestricted cash and cash equivalents of $144.2 million. Our management believes that our company will have sufficient capital to satisfy our liquidity needs over the next 12 months through cash on hand, working capital and net cash provided by operations. We expect to meet our long-term liquidity requirements, including property and undeveloped land acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, and the potential issuance of common units of our Operating Partnership or additional debt, common or preferred equity securities, including convertible securities. Additionally, as noted elsewhere herein, on April 25, 2007, we sold 9,200,000 shares of common stock, pursuant to an effective registration statement previously filed with the Securities and Exchange Commission, at $16.00 per share. We received net proceeds, after deducting underwriting discounts and commissions, offering expenses and redemption of units in our operating partnership held by our Chief Executive Officer and President and one of our other senior executives, of $105.6 million. We do not have any present intent to reserve funds to retire existing debt upon maturity. We will instead seek to refinance this debt at maturity or retire the long-term debt through the issuance of securities, as market conditions permit.

We intend to declare and pay annual dividends on our common stock. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. Two Commerce Square is subject to debt financing covenants containing lock-box arrangements. Funds generated by Two Commerce Square cannot be distributed to us under the terms of the lock-box arrangements established for the existing lenders for the property. In addition, all of our properties held in our joint venture with CalSTRS are subject to debt financing with a lockbox arrangement. With respect to our joint venture properties, we do not control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us. In addition, future financing arrangements we may enter into may contain restrictions on our use of cash generated from our properties.

Development and Redevelopment Projects

We currently own interests in four development projects and our joint venture with CalSTRS includes nine redevelopment and two development sites. We have considerable expertise in the completion of large-scale development and redevelopment projects. The construction of Murano, a 302 unit high-rise residential condominium project, commenced in the second quarter of 2006. We expect construction to be substantially complete in the second quarter of 2008. We anticipate developing the other development projects as market feasibility permits. We also anticipate seeking to mitigate development risk by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. Our redevelopment projects are primarily financed through property-level bank financing. There can be no assurance we will be able to successfully implement these risk mitigation measures.

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The amount and timing of costs associated with our development and redevelopment projects is inherently uncertain due to market and economic conditions. We presently intend to fund development and redevelopment expenditures primarily through construction or refurbishment financing. In July 2006, a parent of the entity that owns City National Plaza refinanced the loan for City National Plaza, which provides proceeds to cover the future redevelopment costs. In August 2006, the entity developing Murano obtained a $142.5 million construction loan, and in September 2006, we borrowed $17.4 million to finance our preferred equity position in this property. We are obligated to fund our preferred equity to Murano to pay construction costs before we can draw the construction loan. We met this obligation during the quarter ended March 31, 2007, and began making draws on the construction loan. The balance on the construction loan was $25.5 million as of June 30, 2007. If we are unable to sell the condominium units upon completion or obtain permanent financing on advantageous terms or at all, we would need to fund these obligations from cash flow from operations or seek alternative capital sources. If unsuccessful, this could adversely impact our financial condition and results of operations and impair our ability to satisfy our debt service obligations. If we are successful in obtaining construction or refurbishment financing and permanent financing, we anticipate that the corresponding interest costs would represent both a significant use of our cash flow and a material component of our results of operations.

In June 2007, we closed on a construction loan in the amount of $42.7 million to finance the development of two office buildings totaling 200,000 square feet at Four Points Centre. We commenced construction in June 2007, and as of June 30, 2007, we had drawn funds totaling $253,000. We expect to be substantially complete with these two buildings in the third quarter of 2008.

Leasing, Tenant Improvement and Capital Needs

In addition to our development and redevelopment projects, our company also owns majority interests in One Commerce Square and Two Commerce Square. These properties are substantially leased and have significant stabilized cash flows. These properties require routine capital maintenance in the ordinary course of business. The properties also require that we incur expenditures for leasing commissions and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. Based upon historical expenditure levels, the leasing activity for the properties and the current rent roll, we anticipate incurring expenditures of approximately $7.5 million in capital improvements, tenant improvements, and leasing costs for the One Commerce Square and Two Commerce Square properties collectively during the remainder of 2007 and 2008.

Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall market conditions.

Contractual Obligations

A summary of our contractual obligations at June 30, 2007 is as follows (in thousands):

	Payments Due by Period
	Remainder of 2007		2008		2009		2010		2011		Thereafter		Total
Regularly scheduled principal payments	$	4,446	$	3,200	$	500	$	492	$	6,187	$	7,992	$	22,817
Balloon principal payments due at maturity		38,693		—		29,684		34,093		—		227,628		330,098
Interest payments—fixed rate debt		10,889		21,396		21,946		14,932		14,269		39,006		122,438
Interest payments—variable rate debt (1)		1,852		2,219		1,303		10		—		—		5,384
Capital commitments (2)		3,664		2,806		—		—		—		—		6,470
Operating lease (3)		64		127		53		—		—		—		244
Total	$	59,608	$	29,748	$	53,486	$	49,527	$	20,456	$	274,626	$	487,451

(1) The interest payments on Murano, Four Points Centre and Campus El Segundo loans are based on the prime rate or LIBOR.

(2) Capital commitments of our company, our operating partnership and other consolidated subsidiaries include approximately $4.7 million of tenant improvement allowances and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square. In addition, the capital commitments include approximately $2.3 million in required funding of certain infrastructure improvements with respect to the development of the Campus El Segundo parcel we sold in September 2006.

(3) Represents the future minimum lease payments on our long-term operating lease for our corporate office at City National Plaza. The table does not reflect available maturity extension options.

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Off-Balance Sheet Arrangements – Indebtedness of Unconsolidated Real Estate Entities

As of June 30, 2007, our company had investments in entities owning unconsolidated properties with stated ownership percentages ranging from 6.25% to 50.0%. We do not have control of these entities, and none of the entities are considered variable interest entities in accordance with the Financial Accounting Standard Board’s revision to Interpretation No. 46. Therefore, we account for them using the equity method of accounting. The table below summarizes the outstanding debt for the unconsolidated properties as of June 30, 2007 (in thousands). We have not guaranteed any of the debt.

	Interest Rate		Principal Amount			Maturity Date
City National Plaza (1)
Senior mortgage loan	LIBOR + 1.07	%(2)	$	355,300		7/17/08
Senior mezzanine loan (Note A)	LIBOR + 2.59	(2)		26,265		7/17/08
Senior mezzanine loan (Note B)	LIBOR + 1.90	(2)		24,000		7/17/08
Senior mezzanine loan (Note C)	LIBOR + 2.25	(2)		24,000		7/17/08
Senior mezzanine loan (Note D)	LIBOR + 2.50	(2)		24,000		7/17/08
Senior mezzanine loan (Note E)	LIBOR + 3.05	(2)		22,700		7/17/08
Junior mezzanine loan	LIBOR + 5.00	(2)		22,513		7/17/08
CityWestPlace
Senior mortgage loan	6.16			121,000		7/6/16
Senior mortgage loan (Note A)	LIBOR + 1.25	(2)		82,400		7/1/08
Senior mortgage loan (Note B)	LIBOR + 1.25	(2)		3,299		7/1/08
San Felipe Plaza
Senior mortgage loan	5.28			101,500		8/11/10
Senior mortgage loan (3)	LIBOR + 3.00			5,489		8/11/10
2500 City West
Senior mortgage loan	5.28			70,000		8/11/10
Senior mortgage loan (4)	LIBOR + 3.00			7,104		8/11/10
Brookhollow Central I, II and III
Senior mortgage loan (Note A)	LIBOR + 2.25	(2)		24,154		8/9/07
Senior mortgage loan (Note C)(5)	LIBOR + 3.25	(2)		16,746		8/9/07
Four Falls Corporate Center
Note A	5.31			42,200		3/6/10
Note B (6) (7)	LIBOR + 3.25	(2)(9)		9,867		3/6/10
Oak Hill Plaza/Walnut Hill Plaza
Note A	5.31			35,300		3/6/10
Note B (7) (8)	LIBOR + 3.25	(2)(9)		9,152		3/6/10
2121 Market Street mortgage loan (10)	6.05			19,261		8/1/33
Reflections I mortgage loan	5.23			22,699		4/1/15
Reflections II mortgage loan	5.22			9,457		4/1/15
Centerpointe I and II
Note A (11)	LIBOR + 0.60	(2)		55,000		1/31/09
Note B (11)(12)	7.70			36,000		1/31/09
Fair Oaks Plaza (13)	5.52			44,300		1/31/17
Austin, TX Portfolio:
San Jacinto Center	6.05			101,000		6/11/17
Frost Bank Tower	6.06			150,000		6/11/17
One Congress Plaza	6.08			128,000		6/11/17
One American Center	6.03			120,000		6/11/17
300 W. 6th St.	6.01			127,000		6/11/17
Research Park Plaza I & II
Senior mortgage loan	LIBOR + 1.34	(14)		27,000		6/9/09
Mezzanine loan	LIBOR + 1.34	(14)		24,500		6/9/09
Stonebridge Plaza II
Senior mortgage loan	LIBOR + 1.16	(14)		24,000		6/9/09
Mezzanine loan	LIBOR + 1.16	(14)		13,500		6/9/09
Bank term loan	LIBOR + 2.25	(15)(16)		192,500		6/1/13
Revolving credit facility	LIBOR + 2.25	(17)		—		6/1/12
Subtotal – Austin, TX Portfolio:				907,500	(18)
			$	2,121,206

(1) The senior mortgage loan and senior mezzanine loan are subject to exit fees equal to .25% of the loan amounts. The junior mezzanine loan, with maximum borrowings up to $130.0 million, is subject to an exit fee equal to .5% of the outstanding loan amount. Under certain circumstances all of the exit fees will be waived.

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(2) Our joint venture with CalSTRS has purchased interest rate cap agreements for the funded portion of these loans.

(3) Our joint venture with CalSTRS may borrow up to $16.2 million under this loan.

(4) Our joint venture with CalSTRS may borrow up to $15.5 million under this loan.

(5) Our joint venture with CalSTRS may borrow up to $21.7 million under this loan. We have given notice to the lender that we intend to exercise the right to extend the maturity of the loan for an additional year.

(6) Our joint venture with 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) Our joint venture with CalSTRS may borrow up to $13.4 million under this loan.

(9) These loans bear interest at the greater of the one month LIBOR or 2.25% per annum, plus the applicable margin. As of June 30, 2007, one month LIBOR exceeds 2.25%, per annum.

(10) The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this debt will be approximately $17.2 million. The interest rate will increase to the greater of 8.1% or the treasury rate plus 2.0% on August 1, 2013. Any amounts over the initial interest rate may be deferred to the extent excess cash is not available to make such payments. Provided there is no deferred interest, the loan balance will be fully amortized on August 1, 2033, the maturity date of the loan.

(11) These loans are subject to a one year lockout, prepayable subject to a prepayment fee of 1% for the first six months after lockout, thereafter the exit fee equals 0.5%. The Centerpointe I and II senior mortgage loan bears interest at a rate equal to one month LIBOR plus 0.60%. The mezzanine loan bears interest at a rate such that the weighted average of the rate on this loan and the rate on the senior mortgage loan secured by Centerpointe I and II equals LIBOR plus 1.59% per annum. The effective interest rate on the senior mezzanine loan as of June 30, 2007 was 7.7% per annum. The weighted average interest rate on both loans was 6.6% per annum.

(12) Our joint venture with CalSTRS may borrow up to $68.8 million under this loan.

(13) This loan may be defeased in full after three years, or prepaid in full after 9 years and 8 months.

(14) Our joint venture with CalSTRS and Lehman Brothers Holdings, Inc. (“Lehman”) has purchased interest rate cap agreements for these loans.

(15) Our joint venture with CalSTRS and Lehman entered into an interest rate collar agreement for 50% of the loan balance, or $96.25 million, in which we bought a cap and sold a floor.

(16) The margin above LIBOR on the bank term loan is subject to adjustment under certain circumstances. The term loan is secured by mortgages on three of the Austin portfolio assets, a pledge of equity interests in the remaining seven Austin portfolio assets and guarantees of certain other Austin portfolio entities.

(17) Our joint venture with CalSTRS and Lehman has obtained a $100 million secured revolving credit commitment to fund future capital requirements, bearing interest at LIBOR plus 2.25%. The margin above LIBOR on this facility is subject to adjustment under certain circumstances. As of June 30, 2007, this revolving credit facility was undrawn.

(18) Our joint venture with CalSTRS and Lehman has agreed to compensate Lehman at a net profit margin of one percent (1%) of the amount of the financing provided by Lehman.

Cash Flows

Comparison of six months ended June 30, 2007 to six months ended June 30, 2006

Cash and cash equivalents were $144.2 million as of June 30, 2007 and $29.0 million as of June 30, 2006.

Operating Activities - Net cash used in operating activities increased by $15.0 million to $18.3 million for the six months ended June 30, 2007 compared to $3.3 million for the six months ended June 30, 2006. The increase was primarily the result of an increase in changes in assets and liabilities of $9.8 million, a increase in net income of $2.7 million and an increase in minority interest of $3.1 million. The increases were offset by an increase in gain on sale of asset of $2.4 million.

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Investing Activities - Net cash used in investing activities increased by $32.2 million to $61.6 million for the six months ended June 30, 2007 compared to $29.4 million for the six months ended June 30, 2006. The increase was primarily the result of an increase in real estate improvements of $37.8 million, an increase in contributions from unconsolidated real estate entities of $12.0 million and an increase in change in restricted cash of $5.1 million. The increases were offset by a decrease of $24.2 million used for the purchase of interests in unconsolidated real estate entities

Financing Activities - Net cash provided by (used in) financing activities increased by $132.0 million to $123.2 million for the six months ended June 30, 2007 compared to $(8.8) million for the six months ended June 30, 2006. The increase was primarily the result of proceeds from our April 2007 public offering, net of offering costs, of $139.4 million as well as draws on the Murano construction loan of $25.8 million. In addition, there were no minority interest distributions for the six months ended June 30, 2007 compared to $550,000 for the six months ended June 30, 2006. The increases were offset by a decrease of $33.6 million related to payments for the redemption of operating units.

Inflation

Substantially all of our office leases provide for tenants to reimburse us for increases in real estate taxes and operating expenses related to the leased space at the applicable property. In addition, many of the leases provide for increases in fixed base rent. We believe that inflationary increases may be partially offset by the contractual rent increases and expense reimbursements as described above. We have one residential property and are in the process of developing Murano, another residential property. The existing residential property is located in the Philadelphia central business district and subject to short-term leases. Our residential property under development represents units for sale, and is also in the Philadelphia central business district. Inflationary increases can often be offset by increased rental rates, however, a weak economic environment may restrict our ability to raise rental rates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A primary market risk faced by our company is interest rate risk. We intend to mitigate this risk by seeking to maintain a target consolidated debt-to-gross assets ratio of approximately 60%, while continuously evaluating all available debt and equity resources and following established risk management policies and procedures. Our strategy is to match as closely as possible the expected holding periods and income streams of our assets with the terms of our debt. In general, we use floating rate debt on assets with higher growth prospects and less stability to their income streams. Correspondingly, with respect to stabilized assets with lower growth rates, we will generally use longer-term fixed-rate debt. As of June 30, 2007, our company had $64.2 million of outstanding consolidated floating rate debt, which is not subject to an interest rate cap.

The unconsolidated real estate entities have total debt of $2,121.2 million, of which $1,029.5 million bears interest at floating rates. As of June 30, 2007, interest rate caps have been purchased for all of these floating rate loans.

Our fixed and variable rate consolidated long-term debt at June 30, 2007 consisted of the following (in thousands):

Year of Maturity	Fixed Rate			Variable Rate			Total
2007	$	4,446		$	38,693		$	43,139
2008		3,200			—			3,200
2009		4,400			25,784			30,184
2010		34,585			—			34,585
2011		6,187			—			6,187
Thereafter		235,620			—			235,620
Total	$	288,438		$	64,477		$	352,915
Weighted average interest rate		7.6	%		7.8	%		7.7	%

We utilize sensitivity analyses to assess the potential effect of our variable rate debt. At June 30, 2007, our consolidated variable rate long-term debt represents 18.2% of our total long-term debt. If interest rates were to increase by 75 basis points, or by approximately 10% of the weighted average variable rate at June 30, 2007, the net impact would be increased interest costs of $482,000 per year.

As of June 30, 2007, the fair value of our mortgage and other secured loans and unsecured loan aggregate $347.9 million, compared to the aggregate carrying value of $352.9 million.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b), promulgated by the SEC under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

In connection with our Section 404 compliance effort, we continue to address certain internal control deficiencies by, among other things, improving our financial statement close and reporting process and improving review and monitoring controls. All of these initiatives are being conducted under the oversight of the Audit Committee and senior management.

Internal Controls over Financial Reporting

There was no change in our internal control over financial reporting as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act that occurred during the six months ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. From time to time, we may make changes in our company’s internal control processes in the future.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

Risks Related to Our Properties and Our Business

We generate a significant portion of our revenues as a result of our relationships with CalSTRS. If we were to lose these relationships, our financial results and growth prospects would be significantly negatively affected.

Our relationships with CalSTRS are a significant factor in our ability to achieve our intended business growth. Our separate account and joint venture relationships with CalSTRS, including our joint venture with Lehman, provide us with substantial fee revenues. For the six months ended June 30, 2007 and 2006, approximately 26.3% and 21.1 %, respectively, of our revenue has been derived from fees earned from these relationships.

We cannot assure you that our relationships with CalSTRS will continue and we may not be able to replace these relationships with another strategic alliance that would provide comparable revenues. Our interest in our CalSTRS joint venture is subject to a buy-sell provision, and is subject to purchase by CalSTRS upon the occurrence of certain events. Under the buy-sell provision either our Operating Partnership or CalSTRS can initiate a buy-out by delivering a notice to the other specifying a purchase price for all the joint venture’s assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price is based on what each venture partner would receive on liquidation if the joint venture’s assets were sold for the specified price and the joint venture’s liabilities paid and the remaining assets distributed to the joint venture partners. In addition, CalSTRS has the ability to initiate this provision upon an event of default by us under the joint venture agreement or related management and development agreements or upon bankruptcy of our Operating Partnership, or upon the death or disability of either Mr. Thomas or John R. Sischo, one of our Executive Vice Presidents, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (a “Buyout Default”), or upon any transfer of stock of our company or limited partnership units in our Operating Partnership resulting in Mr. Thomas, his immediate family and controlled entities owning less than 30% of our securities entitled to vote for the election of directors. Our Operating Partnership has the ability to initiate the buy-sell provision upon an event of default of CalSTRS, such as a failure to contribute capital in accordance with capital calls. Upon the occurrence of a Buyout Default, the non-defaulting member may elect to purchase the other member’s joint venture interest based on a three percent discount to the appraised fair market value.

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Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30 days’ notice. Termination of either our joint venture or separate account relationship with CalSTRS could adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to co-investment capital to acquire additional properties.

Our joint venture investments may be adversely affected by our lack of control or input on decisions or shared decision-making authority or disputes with our co-venturers.

We hold interests in each of our operating properties in a joint venture or partnership. As a result, we do not exercise sole decision-making authority regarding the property, joint venture or other entity, including with respect to cash distributions or the sale of the property. Furthermore, we expect to co-invest in the future through other partnerships, joint ventures or other entities, acquiring non-controlling interests or in sharing responsibility for managing the affairs of a property, partnership or joint venture.

Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks including third parties who may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on significant decisions, because neither we nor our partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers such as if a partner or co-venturer were to become bankrupt and default on its reimbursement and contribution obligations to us, were to subject property owned by the partnership or joint venture to liabilities in excess of those contemplated by the partnership or joint venture agreement or were to incur debts or liabilities on behalf of the partnership or joint venture in excess of the authority otherwise granted by the partnership or joint venture agreement. In some joint ventures or other investments we make, if the entity in which we invest is a limited partnership, we have acquired and may acquire in the future all or a portion of our interest in such partnership as a general partner. In such event, we may be liable for all the liabilities of the partnership, although we attempt to limit such liability to our investment in the partnership by investing through a subsidiary.

Our joint venture partners have rights under our joint venture agreements that could adversely affect us.

As of August 9, 2007, we hold interests in 12 of our properties through our joint venture with CalSTRS and 10 of our properties through a joint venture with CalSTRS, Lehman and other institutional investors. Our joint venture with CalSTRS requires a unanimous vote of the joint venture’s management committee on certain major decisions, including approval of annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with an approved annual plan. All other decisions, including sales of properties, are made based upon a majority decision of the management committee, which currently consists of two members appointed by CalSTRS and one member appointed by us. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result in an outcome contrary to our interests. In addition to CalSTRS’ ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could adversely affect us. Unless otherwise determined by the management committee of the joint venture, we are required to use diligent efforts to sell each joint venture property generally within five years of that property reaching stabilization, except that the holding period for Reflections I and Reflections II, both of which are 100% leased, will be separately determined by the joint venture management committee. With respect to these two properties, 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, which could be less than five years. We have a right of first offer to purchase a joint venture property upon a required sale at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to assume control of the sale process. This may require us to sell a substantial portion of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.

Our joint venture entity with CalSTRS is the general partner of the partnership that owns ten properties in Austin. The limited partners in the Austin partnership have certain approval rights similar to CalSTRS’ rights described above. These rights include but are not limited to the right to approve annual business plans and budgets, financings and refinancings, sales of properties, additional capital calls not in compliance with an approved annual plan, and agreements with affiliates. The limited partners also have the right to remove the general partner for certain acts. These rights could adversely affect us.

We may not be able to find syndication investors for our joint venture with Lehman

We have entered into a partnership agreement and syndication agreement with Lehman in relation to our joint venture that owns 10 properties in Austin, Texas that requires us to syndicate a significant portion of Lehman’s current equity position within a period up to a year post-closing of the acquisition of the Austin, Texas portfolio. On July 5, 2007, 33% of Lehman’s equity in the joint venture was purchased by an unrelated institutional investor. There is a risk that we will be unable to successfully sell Lehman’s remaining equity to investors. The consequences of a failed syndication are that certain fees on any unsold equity such as promote, administration fees and disposition fees could be reduced or eliminated for us, and Lehman will retain control rights with respect to major decisions of the joint venture.

We depend on significant tenants, and their failure to pay rent could seriously harm our operating results and financial condition.

As of June 30, 2007, the 20 largest tenants for properties in which we hold an ownership interest collectively leased 34.8% of the rentable square feet of space, representing 62.4% of the total annualized rent generated by these properties. Consolidated Rail Corporation, together with its wholly-owned subsidiary New York Central Lines, LLC (“Conrail”), leases the substantial majority of space at Two Commerce Square and accounted for approximately 18.5% of the total annualized rent generated by all of our consolidated and unconsolidated properties as of June 30, 2007. In addition, Conrail’s rental revenues and tenant reimbursements accounted for approximately 31.7% of total consolidated revenue for the year ended December 31, 2006. Our existing lease

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with Conrail expires in two stages in 2008 and 2009. Conrail has subleased substantially all of its space under lease, and we have entered into direct lease agreements with many of these sublease tenants. However, these new leases are at lower rental rates, and we expect to experience a substantial decline in rental revenues from Two Commerce Square when the existing lease with Conrail expires.

We rely on rent payments from our tenants as a source of cash to finance our business. Any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to our company.

In particular, if any of our significant tenants becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a property and prevents us from leasing that property, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce the payment obligations under the lease. In those circumstances, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. We are not aware of an insolvency issue with any of our significant tenants.

Bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property. A tenant bankruptcy would delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these amounts. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy amounts due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims in the event of the bankruptcy of a large tenant, which would adversely impact our financial condition.

Our operating results depend upon the regional economies in which our properties are located and the demand for office and other mixed-use space and an economic downturn in these regions could harm our operating results.

Our operating and development properties are located in three geographic regions of the United States: the West Coast, Southwest and Mid-Atlantic regions. Historically, the largest part of our revenues has been derived from our ownership and management of properties consisting primarily of office buildings. A decrease in the demand for office space in these geographic regions, and Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are susceptible to adverse developments in these regions, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, increased telecommuting, terrorist targeting of high-rise structures, infrastructure quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors, and the national and regional office space market such as oversupply of or reduced demand for office space. Some of the regional issues we face include the more highly regulated and taxed economy of Southern California and high local and municipal taxes for our Philadelphia properties. Any adverse economic or real estate developments in a local region, or any decrease in demand for office space resulting from the local regulatory environment, business climate or energy or fiscal problems, could adversely impact our revenue and profitability, thereby causing a significant downturn in our financial condition, results of operations, cash flow, the trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our debt level reduces cash available to fund business growth and may expose us to the risk of default under our debt obligations.

As of June 30, 2007, our total consolidated indebtedness is approximately $352.9 million. In addition, we own interests in unconsolidated entities subject to total indebtedness in the amount of $2.1 billion as of June 30, 2007. Mortgage loans, which comprise a portion of both the consolidated and unconsolidated indebtedness, are secured by first deeds of trust in the related real property. Mezzanine loans and other secured loans are secured by our direct or indirect ownership interest in the entity that owns the related real property.

Additionally, the Operating Partnership has guaranteed the loans on our Four Points Centre property up to a maximum amount of $5.4 million and $42.7 million. Furthermore, a subsidiary of the Operating Partnership pledged its preferred equity interest in Murano to a lender in the amount of $17,434,000. The Operating Partnership has guaranteed this loan. Mr. Thomas guarantees approximately $7.5 million of the mezzanine loans for Two Commerce Square, and we have accordingly agreed to indemnify Mr. Thomas in the event his guarantees are called upon. We may incur significant additional debt to finance

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future acquisition and development activities. It is possible the required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties profitably. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

• our cash flow may be insufficient to meet our required principal and interest payments or to pay dividends;

• we may be unable to borrow additional funds as needed or on favorable terms;

• we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

• we anticipate that a significant portion of our debt will bear interest at variable rates, and in the event we do not purchase interest rate caps for floating rate debt in the future, increases in interest rates could materially increase our interest expense;

• we may be unable to distribute funds from a property to our Operating Partnership or apply such funds to cover expenses related to another property;

• we could be required to dispose of one or more of our properties, possibly on disadvantageous terms and/or at disadvantageous times;

• we could default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;

• we could violate covenants in our loan documents, including provisions that may limit our ability to further mortgage a property, make distributions, acquire additional properties, repay indebtedness prior to a set date without payment of a premium or other pre-payment penalties, all of which would entitle the lenders to accelerate our debt obligations;

• a default under any one of our mortgage loans with cross default provisions could result in a default on other indebtedness; and

• because we have agreed to use commercially reasonable efforts to maintain certain debt levels to provide the ability for Mr. Thomas and entities controlled by him to guarantee debt of $210 million, including $11 million of debt available for guarantee by Mr. Edward Fox, one of our non-employee directors, and by Mr. Richard Gilchrist, an individual formerly affiliated with Maguire Thomas Partners, we may not be able to refinance our debt when it would otherwise be advantageous to do so or to reduce our indebtedness when our board of directors thinks it is prudent.

If any one of these events were to occur, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations. In addition, foreclosures could also result in our being liable under the terms of our indemnification agreement with Mr. Thomas if we were required to sell all or a portion of our interests in One Commerce Square or Two Commerce Square.

We have a substantial amount of debt which bears interest at variable rates. Our failure to hedge effectively against interest rate changes may adversely affect our results of operations.

As of June 30, 2007, $64.2 million of our consolidated debt and $1.0 billion of our unconsolidated debt was at variable interest rates. As of June 30, 2007, interest rate caps have been purchased for all of the floating rate loans.

We intend to generally limit our exposure to interest rate volatility by using interest rate hedging arrangements and swap agreements to cap our interest rate exposure. These arrangements involve risks, including that our hedging or swap transactions might not achieve the desired effect in eliminating the impact of interest rate fluctuations, or that counterparties may fail to honor their obligations under these arrangements. As a result, these arrangements may not be effective in reducing our exposure to interest rate fluctuations and this could reduce our revenue, require us to modify our leverage strategy, and adversely affect our expected investment returns.

We may be unable to complete acquisitions necessary to grow our business, and even if consummated, we may fail to successfully operate these acquired properties.

Our planned growth strategy includes the acquisition of additional properties as opportunities arise. We regularly evaluate the top 20 markets in the United States for office, mixed-use and other properties for strategic opportunities. Our ability to acquire properties on favorable terms and successfully operate them is subject to the following significant risks:

• we may be unable to acquire a desired property because of competition from other real estate investors with more available capital, including other real estate operating companies, real estate investment trusts and investment funds;

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• we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity to consummate an acquisition or, if obtainable, it may not be on favorable terms;

• we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

• competition from other potential acquirers may significantly increase the purchase price, even if we are able to acquire a desired property;

• agreements for the acquisition of office properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on a potential acquisition we eventually decide not to pursue;

• we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;

• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and

• we may acquire properties subject to liabilities without any recourse, or with only limited recourse, for unknown liabilities such as clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If we cannot complete property acquisitions on favorable terms, or operate acquired properties to meet our expectations, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, trading price of our common stock, and impairing our ability to satisfy our debt service obligations.

Our real estate acquisitions may result in disruptions to our business as a result of the burden in integrating operations placed on our management.

Our business strategy includes acquisitions and investments in real estate on an ongoing basis. These acquisitions may cause disruptions in our operations and divert management’s attention from day-to-day operations, which could impair our relationships with our current tenants and employees. In addition, if we acquire real estate by acquiring another entity, we may be unable to effectively integrate the operations and personnel of the acquired business. In addition, we may be unable to train, retain and motivate any key personnel from the acquired business. If our management is unable to effectively implement our acquisition strategy, we may experience disruptions to our business.

As a result of the limited time during which we have to perform due diligence of many of our acquired properties, we may become subject to significant unexpected liabilities and our properties may not meet projections.

When we enter into an agreement to acquire a property or portfolio of properties, we often have limited time to complete our due diligence prior to acquiring the property. To the extent we underestimate or fail to investigate or identify risks and liabilities associated with the properties we acquire, we may incur unexpected liabilities or the property may fail to perform as we expected. If we do not accurately assess the liabilities associated with properties prior to their acquisition, we may pay a purchase price that exceeds the current fair value of the net identifiable assets of the acquired property. As a result, intangible assets would be required to be recorded, which could result in significant accounting charges in future periods. These charges, in addition to the financial impact of significant liabilities that we may assume, could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations, trading price of our common stock and impairing our ability to satisfy our debt service obligations.

We have a near-term expectation of significant growth, and we may not be able to adapt our management and operational systems to respond to this growth, including the acquisition and integration of additional properties without unanticipated disruption or expense.

We purchased an interest in properties located in Houston, Texas with an aggregate of 1.5 million rentable square feet in 2006 and, in February 2007, an interest in properties in Fairfax, Virginia totaling approximately 586,000 rentable square feet. In addition, we commenced construction of our Murano project in Philadelphia, a high-rise residential tower in 2006. We expect construction to be substantially complete in the second quarter of 2008. In March 2007 we entered into an

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agreement through a joint venture to purchase an interest in properties located in Austin, Texas with an aggregate of 3.5 million square feet. In order to achieve desired and planned business growth, we intend to continue to significantly expand our asset and property management activities, and acquire a significant number of properties in the next 12 to 24 months. With the expected growth of our portfolio, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate these properties into our portfolio and manage these additional properties without operating disruptions or unanticipated costs. The acquisition of additional properties would generate additional operating expenses. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. Our failure to successfully integrate any future acquisitions into our portfolio could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations, trading price of our common stock and impairing our ability to satisfy our debt service obligations.

We may be unable to successfully complete and operate properties under development, which would impair our financial condition and operating results.

A significant part of our business is devoted to the development of office, mixed-use and other properties, including the redevelopment of core plus and value-add properties. Our development, construction and redevelopment activities involve the following significant risks:

• we may be unable to obtain construction or redevelopment financing on favorable terms or at all;

• if we finance development projects through construction loans, we may be unable to obtain permanent financing at all or on advantageous terms;

• we may not complete development projects on schedule or within budgeted amounts;

• we may underestimate the expected costs and time necessary to achieve the desired result with a redevelopment project;

• we may discover structural, environmental or other feasibility issues with properties acquired as redevelopment projects following our acquisition, which may render the redevelopment as planned not possible;

• we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations; and

• occupancy rates and rents at newly developed or renovated properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable.

• adverse weather that damages the project or causes delays;

• changes to the plans or specifications;

• shortages of materials and skilled labor;

• increases in material and labor costs;

• shortages of qualified employees;

• fire, flooding and other natural disasters.

If we are not successful in our property development initiatives, including our Murano, Four Points Centre, Campus El Segundo and City West Place projects, this could adversely impact our revenue and profitability, causing a significant downturn in our business, including our financial condition, results of operations, trading price of our common stock and impairing our ability to satisfy our debt service obligations. Further, our Murano project is the development of a high-rise residential condominium building. Historically, our development and property management activities have centered on office properties. In developing and managing a residential project, we may encounter unfamiliar problems that adversely impact our ability to complete the project on a timely basis and derive sustainable revenues from the property.

Our efforts to expand our geographic presence and diversify into other regional real estate markets may not be successful, thereby constraining our growth to markets in which we currently operate.

We intend to expand our business to new geographic regions where we expect the development, ownership and management of property to result in favorable risk-adjusted investment returns. In order for us to achieve economies of scale, we generally target ownership of 500,000 or more rentable square feet in a market. It may be difficult for us to achieve this level of ownership and our initial entry into a particular market may result in higher administrative expenses for us initially. Presently, we do not possess the same level of familiarity with the development, ownership and management of properties in locations other than the West Coast, Southwest and Mid-Atlantic regions in the United States, which could adversely affect our ability to develop properties outside these regions successfully or at all or to achieve expected performance.

We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.

We face significant competition from other developers, managers and owners of office and mixed-use real estate, many of which own properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services. A number of our competitors are larger and better able to take advantage of efficiencies created by size,

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and have better financial resources, or increased access to capital at lower costs, and may be better known in regional markets in which we compete. Our smaller size as compared to some of our competition may increase our susceptibility to economic downturns and pressures on rents. Our failure to compete successfully in our industry would materially affect our business prospects.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire resulting in increased vacancy rates, lower revenue and an adverse effect on our operating results.

As of June 30, 2007, leases representing 5.3% and 8.9% of the rentable square feet of the office and mixed-use properties in which we hold an ownership interest will expire in the remainder of 2007 and 2008, respectively. Further, an additional 13.7% of the square feet of these properties was available for lease on that date. Rental rates above the current market rate at some of the properties in our office and mixed-use portfolio may require us to renew or re-lease some expiring leases at lower rates. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our revenue and profitability, could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations. In particular, a significant amount of space at our Two Commerce Square property has historically been leased to Conrail. This lease expires in two stages in 2008 and 2009. Conrail currently subleases substantially all of its space to a number of subtenants. While we have entered into agreements with many of the subtenants for direct leases once their sublease term expires, the rental rates are lower than paid by the current tenant. As a result, we currently expect our aggregate revenues from this property will be lower following the expiration of the Conrail lease in 2008 and 2009. If we are unable to lease the remaining portion of the space currently leased by Conrail in Two Commerce Square prior to the expiration of the lease and assuming all subtenants to the Conrail lease exercise no renewal options and exercise all early termination options, our rental revenue (excluding tenant reimbursements revenue) computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”) would decrease by $2.8 million in 2008 as compared to 2007, $2.5 million in 2009 as compared to 2008, and $1.7 million in 2010 as compared to 2009.

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Our growth depends on external sources of capital, some of which are outside of our control. If we are unable to access capital from external sources, we may not be able to implement our business strategy.

Our business strategy requires us to rely significantly on third-party sources to fund our capital needs. We may not be able to obtain debt or equity on favorable terms or at all. Any additional debt we incur will increase our leverage. Any issuance of equity by our company will cause dilution to our existing stockholders, and could have a negative impact on our stock price for the short term. Our access to third-party sources of capital depends, in part, on:

• our current debt levels, which were $352.9 million of consolidated debt and $2.1 billion of unconsolidated debt as of June 30, 2007;

• our current cash flow from operating activities, which was $17.5 million for the six months ended June 30, 2007;

• our current and expected future earnings;

• the market’s perception of our growth potential;

• the market price per share of our common stock;

• the perception of the value of an investment in our common stock; and

• general market conditions.

If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or continue to fund operations.

We could incur significant costs related to government regulation and private litigation over environmental matters, including with respect to clean-up of contaminated properties and litigation from any harm caused by environmental hazards on our properties.

Under various federal, state and local environmental laws and regulations, a current or previous owner, manager or tenant of real estate may be required to investigate and clean up hazardous or toxic substances at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by the parties in connection with the actual or threatened contamination. With respect to properties in which we hold an ownership interest, we have not obtained any recent environmental reports regarding conditions at the properties, nor do we intend to. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under the laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs to the extent such contributions are possible to obtain. These costs may be substantial, and may exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination on a property may limit the ability of the owner, operator or tenant to sell or rent that property or to borrow using the property as collateral, and may cause our investment in that property to decline in value.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, by signs and labels, of potential hazards posed by workplace exposure to installed asbestos- containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building incorporating asbestos-containing materials or potentially asbestos-containing materials that we own or manage.

We are aware of potentially environmentally hazardous or toxic materials at two of our properties in which we hold an ownership interest. At our 2100 JFK Boulevard property, we engaged in remediation efforts as a result of a gasoline spill that occurred on the premises in April 2002, due to an accident caused by the former tenant’s agent. We undertook remedial procedures for the gasoline spill and other contaminants, including removing contaminated soil. As of December 31, 2006, all soil remediation work has been completed. Our lease required the tenant (or its successor in interest) to indemnify us against all costs and expenses of every kind relating directly or indirectly to the tenant’s use and occupancy of the premises. We initiated litigation against the former tenant to enforce its obligation to us under the indemnity provisions of the lease. On April 10, 2007, the lawsuit was settled in our favor for $1,750,000. With respect to asbestos materials present at our City National Plaza property, these materials have been removed or abated from certain tenant and common areas of the building structure. We continue to remove or abate asbestos materials from various areas of the building structure and as of June 30, 2007, have accrued $3.0 million for such estimated future costs.

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Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials. These laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potentially asbestos-containing materials. In addition, fines may be imposed on owners or managers of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potentially asbestos-containing materials.

We are subject to high taxes relating to our Texas and Philadelphia properties that could negatively affect our operating results and may also be adversely affected by new legislation.

In 2006, the Texas legislature enacted a change in that state’s tax structure that took effect on January 1, 2007 and replaced the Texas franchise tax with a “margin” tax on gross receipts. The new tax is imposed on an extended base (including partnerships, joint ventures and other entities as well as corporations) and will be calculated on a combined basis, taking into account the receipts of all members of an affiliated group when one or more members have business presence in the State of Texas. The taxable “margin” is calculated using one of three methods and is then apportioned to Texas using a factor of Texas receipts to total receipts. The calculation methods to be used are not advantageous to capital intensive businesses such as large commercial property owners and therefore may negatively impact such businesses. The new tax structure has been challenged by various groups and entities and may be changed or repealed. We have not evaluated the impact of this tax on our financial condition, results of operations or cash flow.

In Philadelphia, two downtown development sites of which a substantially-leased office tower has been built on one of the sites, have each been designated as a Keystone Opportunity Improvement Zone site by the state of Pennsylvania. This designation confers upon occupants a 15-year abatement of all state and local taxes except the city wage tax. The second site, if developed, along with the office tower already developed on the first site, could, depending on overall supply-demand fundamentals, have a negative impact on central business district Philadelphia rental rates and building values. Further, the transfer tax rate in the City of Philadelphia, which we could incur upon a sale of one of our properties, is one of the highest in the United States and could be a very significant cost in the event of the sale of one of our Philadelphia properties. In Philadelphia, transfers of fee title or partnership interests representing 90% or more of property ownership are subject to a tax of 4% of the transaction price. The 4% amount is comprised of a 3% levy by the City of Philadelphia and a 1% charge by the Commonwealth of Pennsylvania. The transaction price, if not specifically disclosed to the taxing authorities, must be deemed reasonable, and is therefore typically the assessed value of the property for real estate tax purposes.

The risk of future terrorist attacks in the United States could harm the demand for and the value of our properties which are located in major metropolitan areas.

The risk of future terrorist attacks in the U.S. or war could harm the demand for and the value of our properties. We manage properties that are well-known landmarks in high visibility metropolitan areas that may be perceived as more likely terrorist targets than lower profile properties in less commercial areas, which could potentially reduce the demand for and value of these properties. A decrease in demand could make it difficult for us to renew leases or re-lease our properties at rates equal to or above historical lease rates.

Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs. Further, the availability of insurance for acts of terrorism may be limited or may cost more. The three operating properties in which we own interests located in Philadelphia, Pennsylvania — One Commerce Square, Two Commerce Square and 2121 Market Street — are located within a three city block area. Together, these three properties represented approximately 31.6% of the annualized rent for properties in which we hold an ownership interest as of June 30, 2007. Our Murano residential high-rise project which is currently under construction is also located within the same three city block area. Because these properties are located closely together, a catastrophic event in this area could materially damage, destroy or impair the use by tenants of all of these properties. To the extent that our tenants and prospective buyers of condominium units are impacted by future attacks, their ability to continue to honor obligations under their existing leases and purchase contracts with us could be adversely affected, including being unable to make timely rental payments and defaulting under existing leases and purchase contracts. Additionally, some tenants have termination rights in respect of certain casualties. Under the terms of our financing documents, we may be required to apply casualty proceeds to repay loans and may not be able to rebuild or restore the property unless we are able to obtain alternate financing. If we are entitled to receive casualty proceeds, we may not be able to rebuild or restore the property, and we may be forced to recognize taxable gain on the affected property. Failure to reinvest casualty proceeds in the affected property or properties could also result in obligations under our tax indemnification agreement with Mr. Thomas.

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Tax indemnification obligations that may arise in the event we or our Operating Partnership sell an interest in either of two of our properties could limit our operating flexibility.

We and our Operating Partnership agreed to indemnify Mr. Thomas against adverse direct and indirect tax consequences in the event that our Operating Partnership or the underlying property joint venture directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in either One Commerce Square or Two Commerce Square. These two properties represented 31.3% of annualized rent for properties in which we hold an ownership interest as of June 30, 2007. This indemnification period will expire in October 2008, unless Mr. Thomas and related entities contribute the remaining 11% minority interest in each of One Commerce Square and Two Commerce Square to us prior to October 13, 2008 for not more than $4 million in the aggregate, in which event the indemnification period will expire on October 13, 2013, which may be extended to October 13, 2016 provided Mr. Thomas and his controlled entities collectively retain at least 50% of the Operating Partnership units received by them in connection with our formation transactions at the time of our initial public offering.

We have also agreed to use commercially reasonable efforts to make approximately $210 million of debt available to be guaranteed by entities controlled by Mr. Thomas, by Mr. Fox, a non-employee member of our board of directors, and by Mr. Gilchrist, an individual formerly affiliated with Maguire Thomas Partners. We agreed to make this debt available for guarantee in order to assist Mr. Thomas and these other persons in preserving their tax position after their contributions at the time of our initial public offering.

Risks Related to the Real Estate Industry

Illiquidity of real estate investments and the susceptibility of the real estate industry to economic conditions could significantly impede our ability to respond to adverse changes in the performance of our properties.

Our ability to achieve desired and projected results for growth of our business depends on our ability to generate revenues in excess of expenses, and make scheduled principal payments on debt and fund capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may adversely impact results of operations and the value of our properties. These events include:

• vacancies or our inability to rent space on favorable terms;

• inability to collect rent from tenants;

• inability to finance property development and acquisitions on favorable terms;

• increased operating costs, including real estate taxes, insurance premiums and utilities;

• local oversupply, increased competition or reduction in demand for office space;

• costs of complying with changes in governmental regulations;

• the relative illiquidity of real estate investments; and

• changing submarket demographics.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If any of these events were to happen, our revenue and profitability could be impaired, causing a significant downturn in our financial condition, results of operations, cash flow, and trading price of our common stock and our ability to satisfy our debt service obligations could be impaired.

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

All of our commercial properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Although we believe that the properties in which we hold an ownership interest substantially comply with the requirements of the ADA, we have not conducted a portfolio-wide investigation to determine our compliance. Compliance with the ADA requirements could require removal of access barriers. Non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. Typically, we are responsible for changes to a building structure that are required by the ADA, which can be costly. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. We may be required to make substantial capital expenditures to comply with these requirements thereby limiting the funds available to operate, develop and redevelop our properties and acquire additional properties. As a result, these expenditures could negatively impact our revenue and profitability.

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Potential losses may not be covered by insurance and may result in our inability to repair damaged properties and we could lose invested capital.

We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, business interruption and rental loss insurance under our blanket policy covering all of the properties which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the CalEPA headquarters building under our blanket policy because the sole tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons as more specifically excluded under the actual terrorism policies. Some of our policies, like those covering losses due to earthquakes and terrorism, are subject to limitations involving deductibles and policy limits which may not be sufficient to cover losses. We either own or have interests in a number of properties in Southern California, an area especially prone to earthquakes.

Under their leases, tenants are generally required to indemnify us from liabilities resulting from injury to persons, air, water, land or property, on or off the premises due to activities conducted by them on our properties. There is an exception for claims arising from the negligence or intentional misconduct by us or our agents. Additionally, tenants are generally required, with the exception of governmental entities and other entities that are self-insured, to obtain and keep in force during the term of the lease liability and property damage insurance policies issued by companies holding ratings at a minimum level at their own expense.

Although we have not experienced such a loss to date, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property, including lost revenue from unpaid rent from tenants. In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if this property was irreparably damaged. In the event of a significant loss at one or more of the properties covered by the blanket policy, the remaining insurance under our policy, if any, could be insufficient to adequately insure our remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than our current policy.

Risks Related to Our Organization and Structure

Our senior management has existing conflicts of interest with us and our public stockholders that could result in decisions adverse to our company.

As of June 30, 2007, Mr. Thomas owns or controls a very significant interest in our operating partnership consisting of 14,496,666 units, or a 40% interest including outstanding shares of common stock and units (including incentive units held by senior executive officers) as of such date. Mr. Thomas also owns 206,667 shares of restricted stock. In addition, our senior executive officers collectively hold an interest in Operating Partnership units and incentive units aggregating a 40% interest in our company including outstanding shares of common stock and units, vested and unvested.

The various terms of these equity and incentive interests could create conflicts of interest with our public stockholders. Members of executive management could be required to make decisions that could have different implications for our Operating Partnership and for us, including:

• potential acquisitions or sales of properties;

• the issuance or disposition of shares of our common stock or units in our Operating Partnership; and

• the payment of dividends by us and other matters.

For example, an acquisition in exchange for the issuance by our Operating Partnership of additional Operating Partnership units would dilute the interests of members of our management team as limited partners in our Operating Partnership. Dispositions could trigger our tax indemnification obligations with respect to Mr. Thomas. Dividends paid by us to our public stockholders would decrease our funds available to reinvest in our business.

We have a holding company structure and rely upon funds received from our Operating Partnership to pay liabilities.

We are a holding company. Our primary asset is our general partnership interest in our Operating Partnership. We have no independent means of generating revenues. To the extent we require funds to pay taxes or other liabilities incurred by us, to pay dividends or for any other purpose, we must rely on funds received from our Operating Partnership. If our Operating Partnership should become unable to distribute funds to us, we would be unable to continue operations after a short period. Most of the properties owned by our subsidiaries and joint ventures are encumbered by loans that restrict the distribution of funds to our Operating Partnership. The loans generally contain lockbox arrangements, reserve requirements, financial covenants and other restrictions and provisions that prior to an event of default may prevent the distribution of funds from the subsidiaries who own these properties to our Operating Partnership. In the event of a default under these loans, the defaulting subsidiary or joint venture would be prohibited from distributing cash to our Operating Partnership. As a result, our Operating Partnership may be unable to distribute funds to us and we may be unable to use funds from one property to

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support the operation of another property. As we acquire new properties and refinance our existing properties, we may finance these properties with new loans that contain similar provisions. Some of the loans to our subsidiaries and joint ventures may contain provisions that restrict us from loaning funds to our subsidiaries or joint ventures. If we are permitted to loan funds to our subsidiaries or joint ventures, our loans generally will be subordinated to the existing debt on our properties.

Mr. Thomas has a significant vote in certain matters as a result of his ownership of 100% of our limited voting stock.

Each entity that received Operating Partnership units in our formation transactions received shares of our limited voting stock that are paired with units in our Operating Partnership on a one-for-one basis. All of these entities are directly or indirectly controlled by Mr. Thomas, and, as a result, Mr. Thomas controls 100% of our outstanding limited voting stock, or 37% of our outstanding voting stock as of June 30, 2007. Although not entitled to dividends or other distributions, these limited voting shares are entitled to one vote per share in the election of directors, the approval of certain extraordinary transactions including any merger or sale of the company, amendments to our certificate of incorporation and any other matter required to be submitted to a separate class vote under Delaware law. Mr. Thomas may have interests that differ from that of our public stockholders, including by reason of his interests held in Operating Partnership units, and may accordingly vote as a stockholder in ways that may not be consistent with the interests of our public stockholders. This significant voting influence over certain matters may have the effect of delaying, preventing or deterring a change of control of our company, or could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company.

Our success depends on key personnel, the loss of whom could impair our ability to operate our business successfully.

We depend on the efforts of key personnel, particularly Mr. Thomas, our Chairman, Chief Executive Officer, and President. Among the reasons that Mr. Thomas is important to our success is that he has an industry reputation developed over more than 25 years in the real estate industry that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with these parties could diminish. In addition, Mr. Thomas is 70 and, although he has informed us that he does not currently plan to retire, we cannot be certain how long he will continue working on a full-time basis.

Many of our other senior executives also have significant real estate industry experience. Mr. Scott has extensive development and management experience on several large-scale projects, including the development, construction and management of One Commerce Square and Two Commerce Square. Mr. Sischo and Mr. Scott are jointly responsible for oversight of our relationship with CalSTRS. Mr. Sischo is responsible for our acquisition efforts. Mr. Ricci has been extensively involved in the development of large, mixed-use and commercial projects. Ms. Laing has served as chief financial officer of two publicly-traded real estate investment trusts. While we believe that we could find acceptable replacements for these executives, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel. A departure of either Mr. Thomas or Mr. Sischo could also have adverse effects on our joint venture relationship with CalSTRS, including the possible sale of our joint venture interest to CalSTRS at 97% of fair value.

Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.

Some of the provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to possibly sell their shares at a premium over the then market price. Our certificate of incorporation and bylaws contain provisions including the following:

• vacancies on our board of directors may only be filled by the remaining directors;

• only the board of directors can change the number of directors;

• there is no provision for cumulative voting for directors;

• directors may only be removed for cause; and

• our stockholders are not permitted to act by written consent.

In addition, our certificate of incorporation authorizes the board of directors to issue up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. No shares of preferred stock are outstanding and we have no present plans to issue any preferred stock. The issuance of any preferred stock, however, could diminish the rights of holders of our common

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stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders’ control of our company.

Finally, we are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder.

The provisions of our certificate of incorporation and bylaws, described above, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if these events would be in the best interests of our stockholders.

We could authorize and issue stock without stockholder approval, which could cause our stock price to decline and dilute the holdings of our existing stockholders.

Our certificate of incorporation authorizes our board of directors to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of the classified or unclassified shares. Although our board of directors has no intention at the present time, it could establish a series of preferred stock that could, depending on the terms of the series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our company’s 2007 annual meeting of its stockholders held on May 30, 2007 in Los Angeles, California, our stockholders elected James A. Thomas (26,669,347 votes for and 272,458 votes against), R. Bruce Andrews (26,064,352 votes for and 877,453 votes against), Edward D. Fox (26,050,552 votes for and 891,253 votes against), Winston H. Hickox (26,788,505 votes for and 153,300 votes against), John L. Goolsby (26,788,505 votes for and 153,300 votes against), Randall L. Scott (26,536,747 votes for and 405,058 votes against), and John R. Sischo (26,536,747 votes for and 405,058 votes against), as directors of our company each to serve a one-year term expiring following our annual meeting in 2008. Stockholders also ratified the selection of Ernst & Young LLP as our independent auditors for the fiscal year ended December 31, 2007 (12,391,313 votes for and 53,826 votes against). In addition, stockholders approved the amendments of the Company’s 2004 Equity Incentive Plan (12,391,313 votes for and 53,826 votes against).

ITEM 6. EXHIBITS

(a) Exhibits

10.35 Second Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC.

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.

In accordance with SEC Release 33-8212, the following exhibits are being furnished, and are not being filed as part of this report or as a separate disclosure document, and are not being incorporated by reference into any registration statement filed under the Securities Act of 1933.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements 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: August 9, 2007

THOMAS PROPERTIES GROUP, INC.
By:	/s/ James A. Thomas
	James A. Thomas
	Chief Executive Officer
By:	/s/ Diana M. Laing
	Diana M. Laing
	Chief Financial Officer

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