Thomas Properties 10-Q 2008 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, 2008.

¨ 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	¨	Accelerated Filer	x
Non-accelerated Filer	¨	Smaller reporting company	¨

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 7, 2008
Common Stock, $.01 par value per share	23,853,904

THOMAS PROPERTIES GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2008

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, 2008 (unaudited) and December 31, 2007	1
	Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)	2
	Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)	3
	Notes to Consolidated Financial Statements (unaudited)	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	31
ITEM 4.	Controls and Procedures	32
PART II. OTHER INFORMATION
ITEM 1A.	Risk Factors	32
ITEM 6.	Exhibits	43
Signatures		44

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

THOMAS PROPERTIES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2008			December 31, 2007
	(unaudited)			(audited)
ASSETS
Investments in real estate:
Land and improvements	$	35,939		$	35,499
Land improvements—development property		98,156			85,253
Construction in progress		131,391			135,396
Buildings and improvements		261,221			259,031
Tenant improvements		42,512			59,804
		569,219			574,983
Less accumulated depreciation		(98,012	)		(111,619	)
		471,207			463,364
Investments in unconsolidated real estate entities		43,005			49,199
Cash and cash equivalents		91,946			126,647
Restricted cash		22,934			26,251
Rents and other receivables, net		3,524			2,352
Receivables from condominium sales contracts		65,008			—
Receivables - unconsolidated real estate entities		5,255			6,640
Deferred rents		11,975			14,696
Deferred leasing and loan costs, net		15,608			13,051
Other assets, net		23,026			18,692
Total assets	$	753,488		$	720,892
LIABILITIES AND EQUITY
Liabilities:
Mortgage loans	$	256,558		$	257,278
Other secured loans		170,130			134,829
Unsecured loan		3,900			3,900
Accounts payable and other liabilities, net		68,810			74,733
Dividends and distributions payable		2,370			2,354
Due to affiliate		—			2,000
Prepaid rent		1,957			3,402
Total liabilities		503,725			478,496
Minority Interests:
Unitholders in the Operating Partnership		98,853			95,245
Minority interests in consolidated real estate entities		3,878			4,581
Total minority interests		102,731			99,826
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as of June 30, 2008 and December 31, 2007		—			—
Common stock, $.01 par value, 75,000,000 shares authorized, 23,853,904 and 23,747,936 shares issued and outstanding as of June 30, 2008 and December 31, 2007, respectively		238			237
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 14,496,666 shares issued and outstanding as of June 30, 2008 and December 31, 2007		145			145
Additional paid-in capital		159,936			157,799
Retained deficit and dividends		(13,287	)		(15,611	)
Total stockholders' equity		147,032			142,570
Total liabilities and stockholders' equity	$	753,488		$	720,892

See accompanying notes to consolidated financial statements.

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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,
	2008			2007			2008			2007
Revenues:
Rental	$	8,002		$	8,219		$	15,835		$	16,381
Tenant reimbursements		7,270			6,659			14,125			13,244
Parking and other		862			899			1,822			1,892
Investment advisory, management, leasing, and development services		2,338			2,177			4,403			4,380
Investment advisory, management, leasing, and development services - unconsolidated real estate entities		6,294			5,308			12,212			9,666
Condominium sales - percentage of completion		76,136			—			76,136			—
Total revenues		100,902			23,262			124,533			45,563
Expenses:
Rental property operating and maintenance		6,851			5,468			12,859			11,207
Real estate taxes		1,576			1,549			3,176			3,024
Investment advisory, management, leasing, and development services		6,613			4,473			11,796			7,947
Cost of condominium sales - percentage of completion		59,115			—			59,115			—
Rent - unconsolidated real estate entities		61			60			126			120
Interest		3,860			3,782			7,937			8,043
Depreciation and amortization		2,779			3,048			5,550			6,107
General and administrative		5,285			4,539			9,382			8,515
Total expenses		86,140			22,919			109,941			44,963
Gain on sale of real estate		1,099			1,420			3,618			2,389
Gain from early extinguishment of debt		255			—			255			—
Interest income		691			1,730			1,754			2,569
Equity in net loss of unconsolidated real estate entities		(2,575	)		(1,363	)		(5,140	)		(4,532	)
Minority interests - unitholders in the Operating Partnership		(5,511	)		(941	)		(5,858	)		(348	)
Minority interests in consolidated real estate entities		(41	)		10			—			35
Income before provision for income taxes		8,680			1,199			9,221			713
Provision for income taxes		(3,732	)		(549	)		(4,054	)		(318	)
Net income	$	4,948		$	650		$	5,167		$	395
Earnings per share-basic	$	0.21		$	0.03		$	0.22		$	0.02
Earnings per share-diluted	$	0.21		$	0.03		$	0.22		$	0.02
Weighted average common shares - basic		23,678,260			20,540,116			23,670,418			17,468,385
Weighted average common shares - diluted		23,678,260			20,611,368			23,670,418			17,531,688

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,
	2008			2007
Cash flows from operating activities:
Net income	$	5,167		$	395
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Gain on sale of land		(3,618	)		(2,389	)
Gain on sale of condominiums - closed units		(2,501	)		—
Gain on sale of condominiums - units under contract		(14,520	)		—
Equity in net loss of unconsolidated real estate entities		5,140			4,532
Deferred rents		2,721			2,920
Depreciation and amortization expense		5,550			6,108
Amortization of loan costs		159			164
Amortization of above and below market leases, net		(58	)		(4	)
Share-based compensation		1,609			1,777
Minority interests		5,862			313
Distributions from operations of unconsolidated real estate entities		28			2,809
Changes in assets and liabilities:
Rents and other receivables		(1,264	)		416
Receivables - unconsolidated real estate entities		1,385			(23	)
Deferred leasing and loan costs		(3,584	)		(278	)
Other assets		(4,577	)		(158	)
Deferred interest payable		88			88
Accounts payable and other liabilities		3,284			4,157
Due to affiliates		(2,000	)		—
Prepaid rent		(1,224	)		(174	)
Deferred tax liability		—			(2,392	)
Net cash (used in) provided by operating activities:		(2,353	)		18,261
Cash flows from investing activities:
Expenditures for improvements to real estate		(77,565	)		(45,099	)
Proceeds from sale of condominiums		11,128			—
Purchases of interests in unconsolidated real estate entities		—			(18,438	)
Return of capital from unconsolidated real estate entities		2,442			3,487
Contributions to unconsolidated real estate entities		(1,250	)		(1,788	)
Payments for purchase of naming rights		—			(750	)
Change in restricted cash		3,317			986
Net cash used in investing activities		(61,928	)		(61,602	)

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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		(4,718	)		(3,850	)
Proceeds from mortgage and other secured loans		55,655			25,784
Principal payments of mortgage and other secured loans		(21,162	)		(4,785	)
Minority interest distributions		(195	)		—
Proceeds from exercise of stock options		—			320
Net cash provided by financing activities		29,580			123,217
Net (decrease) increase in cash and cash equivalents		(34,701	)		79,876
Cash and cash equivalents at beginning of period		126,647			64,343
Cash and cash equivalents at end of period	$	91,946		$	144,219
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts capitalized	$	11,138		$	11,753
Supplemental disclosure of non-cash investing and financing activities:
Increase in accrual for declaration of dividends to common shareholders and distributions to limited partners of the operating partnership	$	16		$	438
Investments in real estate included in accounts payable and other liabilities	$	(5,761	)	$	6,373
Decrease in investments in real estate and accumulated depreciation for removal of fully amortized improvements	$	18,037		$	—
Reclassification of minority interest for limited partnership units in the Operating Partnership from additional paid in capital	$	918		$	21,484
Receivables from condominium units under contract	$	65,008		$	—
Other comprehensive income	$	(166	)	$	—

See accompanying notes to consolidated financial statements.

4

Notes to Consolidated Financial Statements (Unaudited)

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.

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

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

Our operations are carried on through 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 in exchange for limited partnership units (“Units”) in the Operating Partnership issued to the contributors and the assumption of debt and other specified liabilities. As of June 30, 2008, we held a 61.0% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.

As of June 30, 2008, we were invested in the following real estate properties:

Property	Type	Location
Consolidated properties:
One Commerce Square	High-rise office	Philadelphia Central Business District,
		Pennsylvania (“PCBD”)
Two Commerce Square	High-rise office	PCBD
Murano	Construction near completion; Residential condominiums	PCBD
2100 JFK Boulevard	Undeveloped land; Residential/Office/Retail	PCBD
Four Points Centre	Construction in progress and undeveloped land; Office/Retail/Research and Development/Hotel	Austin, Texas
Campus El Segundo	Site infrastructure in progress and undeveloped land; Office/Retail/ Research and Development/Hotel	El Segundo, California
Metro Studio@Lankershim	Entitlements and pre-development in progress; Office/Studio/Production/Retail	Los Angeles, California
Property	Type	Location
Unconsolidated properties:
2121 Market Street	Residential and Retail	PCBD
TPG/CalSTRS, LLC:
City National Plaza	High-rise office	Los Angeles Central Business District, California
Reflections I	Suburban office—single tenancy	Reston, Virginia

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Property	Type	Location
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	Houston, Texas
Brookhollow Central I, II and III	Suburban office	Houston, Texas
CityWestPlace	Suburban office and undeveloped land	Houston, Texas
Centerpointe I & II	Suburban office	Fairfax, Virginia
Fair Oaks Plaza	Suburban office	Fairfax, Virginia
San Jacinto Center	High-rise office	Austin Central Business District, Texas, (“ACBD”)
Frost Bank Tower	High-rise office	ACBD
One Congress Plaza	High-rise office	ACBD
One American Center	High-rise office	ACBD
300 West 6th Street	High-rise office	ACBD
Research Park Plaza I & 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 contributed to the Operating Partnership by Mr. Thomas and entities majority owned by him in exchange for Units have been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. Accordingly, the contributed assets and assumed liabilities were recorded at TPGI Predecessor’s historical cost basis, except for the minority owners’ share. The pooling-of-interests method of accounting also requires the reporting of results of operations, for the period in which the combination occurred as though the entities had been combined at either the beginning of the period or inception. Prior to the Offering, Thomas Properties Group, Inc. and the Operating Partnership had no operations. The combination did not require any material adjustments to conform the accounting policies of the separate entities. The remaining interests, which were acquired for cash and Units, have been accounted for as a purchase, and the excess of the purchase price over the related historical cost basis has been allocated to the assets acquired and liabilities assumed.

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 TPGI Predecessor, or were considered a variable interest entity. The equity method of accounting is utilized to account for investments in real estate entities over which we 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 (beginning June 1, 2004 through December 30, 2007), and Two Commerce Square (beginning October 13, 2004), not owned by us are reflected as minority interest. On December 31, 2007, we exercised our option to purchase the remaining 11% interest in One Commerce Square for $2.0 million, resulting in our 100% ownership of One Commerce Square. For the period from October 13, 2004 through June 30, 2008, no losses of Two Commerce Square have been allocated to Mr. Thomas, as no further contributions are required from Mr. Thomas. The unrecognized minority interest in the deficit of Two Commerce Square is $820,000 at June 30, 2008 and is $847,000 at December 31, 2007, respectively. Future income allocable to Mr. Thomas will be reduced by such unrecognized losses.

We have a $20,510,000 preferred equity interest in Murano. Excluding the preferred equity interest, a third party has a 27.0% ownership interest in Murano.

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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 restricted stock that have been granted, all calculated using the treasury stock method.

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 $26.1 million and $16.3 million as of June 30, 2008 and December 31, 2007, respectively.

Condominium Sales-Percentage of Completion Method

We have one high-rise condominium project for which we use the percentage of completion accounting method to recognize revenues and costs. Under the provisions of FASB Statement No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”), revenues and costs for projects are recognized using the percentage of completion method of accounting when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit, sufficient units in the project have been sold to ensure that the property will not revert to rental property, the sales proceeds are collectible and the aggregate sales proceeds and the costs of the project can be reasonably estimated. Revenues are recognized on the individual project’s aggregate value of units which have closed and units for which the home buyers have signed binding agreements of sale, less an allowance for cancellations, and are based on the percentage of total estimated construction costs. The total estimated costs of the project are allocated to these units on a relative sales value basis. Total estimated revenues and construction costs are reviewed periodically, and any change is applied to current and future periods.

Forfeited customer deposits are recognized as a reduction in the amount of revenues reversed in the period in which we determine that the customer will not complete the purchase of the condominium unit and when we determine that we have the right to keep the deposit. As of June 30, 2008, there were no such forfeited deposits.

Gains on Sale of Real Estate

Gains on sales of real estate are recognized pursuant to the provisions of 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. When we sell land upon which we have not developed any significant building improvements, the revenue and cost of the disposition is reflected as a net gain in our accompanying statements of operations.

Recent Accounting Pronouncements

On January 1, 2008 we adopted FASB Statement No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

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Currently, we use interest rate caps to manage the interest rate risk of our investments in unconsolidated investments resulting from variable interest payments on our floating rate debt. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

To comply with the provisions of FAS 157, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. We have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements using significant unobservable inputs (Level 3) as of June 30, 2008.

The table below presents our unconsolidated investments assets and liabilities measured at fair value on a recurring basis as of June 30, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2008
Assets
Interest rate contracts	$	—	$	20	$	—	$	20
Liabilities
Interest rate contracts	$	—	$	2,143	$	—	$	2,143

In February 2008, the FASB issued FASB Staff Position No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“SFAS 157-1”). SFAS No. 157-1 amends SFAS 157, to exclude the FASB issued FASB Statement No. 13, “Accounting for Leases” (“SFAS 13”), and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141 (R), “Business Combinations” (“SFAS 141R”), regardless of whether those assets and liabilities are related to leases. We are evaluating SFAS 157-1 and have not yet determined the impact the adoption will have on our financial position or results of operations.

In December 2007, FASB issued SFAS 141R, to create greater consistency in the accounting and financial reporting of business combinations. SFAS 141R requires a company to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity to be measured at their fair values as of the acquisition date. SFAS 141R also requires companies to recognize the fair value of assets acquired, the liabilities assumed and any noncontrolling interest in acquisitions of less than a one hundred percent interest when the acquisition constitutes a change in control of the acquired entity. In addition, SFAS 141R requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. We are evaluating SFAS 141R and have not yet determined the impact the adoption will have on our financial position or results of operations.

In February 2007, the Financial Accounting Standards Board (FASB) issued FAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007, which for us means our fiscal year 2008. We did not elect the fair value measurement option for any financial assets or liabilities during the second quarter of 2008, but are still evaluating whether we will elect this option for any financial assets or liabilities in the near future.

In December 2007, FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity.

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SFAS No. 160 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. In addition, SFAS No. 160 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. SFAS No. 160 applies to fiscal years beginning after December 15, 2008 and is adopted prospectively. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The adoption of SFAS 160 will result in a reclassification of minority interest to a separate component of total equity and net income attributable to noncontrolling interests will no longer be treated as a reduction to net income but will be shown as a reduction from net income in calculating net income available to common stockholders. We are evaluating SFAS 160 and have not yet determined the impact the adoption will have on our 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. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. 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. Certain prior period amounts have been reclassified to conform to the current period presentation.

3. Unconsolidated Real Estate Entities

The unconsolidated real estate entities include the entities that own 2121 Market Street, Harris Building Associates, and TPG/CalSTRS. TPG/CalSTRS owns the following properties:

City National Plaza (purchased January 2003)

Reflections I (purchased October 2004)

Reflections II (purchased October 2004)

Four Falls Corporate Center (purchased March 2005)

Oak Hill Plaza (purchased March 2005)

Walnut Hill Plaza (purchased March 2005)

San Felipe Plaza (purchased August 2005)

2500 City West (purchased August 2005)

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

Intercontinental Center (purchased August 2005, sold May 2007)

2500 City West land (purchased December 2005)

CityWestPlace (purchased June 2006)

Centerpointe I & II (purchased January 2007)

Fair Oaks Plaza (purchased January 2007)

TPG/CalSTRS also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties (“Austin Portfolio 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 West 6th Street (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)

9

Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of June 30, 2008:

2121 Market Street	50.0	%
TPG/CalSTRS, LLC:
City National Plaza	21.3	%(1)
All other properties, excluding Austin Portfolio Properties	25.0	%
Austin Portfolio Properties	6.3	%

(1) 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.

10

Investments in unconsolidated real estate entities as of June 30, 2008 and December 31, 2007 are as follows:

	June 30, 2008			December 31, 2007
TPG/CalSTRS:
City National Plaza	$	(11,400	)	$	(9,168	)
Reflections I		1,459			1,402
Reflections II		1,655			1,609
Four Falls Corporate Center		967			1,069
Oak Hill/Walnut Hill		586			700
Valley Square		(9	)		(9	)
San Felipe		4,037			4,450
2500 City West		1,458			1,962
Brookhollow Central I, II and III/ Intercontinental Center		1,462			1,934
2101 CityWest Place		21,421			21,280
Centerpointe I, II		5,986			6,526
Fair Oaks Plaza		2,814			2,957
Austin Portfolio Investor		(914	)		(472	)
Frost Bank Tower		2,888			3,057
300 West 6th Street		2,379			2,611
San Jacinto Center		1,924			2,059
One Congress Plaza		2,356			2,587
One American Center		2,166			2,411
Stonebridge Plaza II		713			762
Park 22 I-III		667			671
Research Park Plaza I & II		862			1,002
Westech 360 I-IV		496			540
Great Hills Plaza		365			397
TPG/CalSTRS		40			51
2121 Market Street and Harris Building Associates		(1,373	)		(1,189	)
	$	43,005		$	49,199
The following is a summary of the investments in unconsolidated real estate entities for the six months ended June 30, 2008:
Investment balance, December 31, 2007	$	49,199
Contributions		1,250
Other comprehensive income		166
Equity in net loss		(5,140	)
Distributions		(2,470	)
Investment balance, June 30, 2008	$	43,005

TPG/CalSTRS 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 certain stabilized properties, as to which we are required to perform a hold/sell analysis at least annually and make a recommendation to the TPG/CalSTRS’ management committee regarding the appropriate holding period.

The total capital commitment to the joint venture was $353.3 million as of December 31, 2007, of which approximately $3.28 million and $1.13 million was unfunded by CalSTRS and us, respectively. On February 1, 2008, we revised our agreement with CalSTRS providing for $25 million in additional capital commitments, $18.75 million and $6.25 million from CalSTRS and us, respectively. As of June 30, 2008, there were unfunded capital commitments of approximately $18.3 million and $6.1 million by CalSTRS and us, respectively.

A buy-sell provision may be exercised by either CalSTRS or us. Under this provision, the initiating party sets a price for its interest in the joint venture, and the other party has a specified time to either elect to buy the initiating party’s interest, or to sell its own interest

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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 owner of City National Plaza has the option to require the joint venture to purchase its interests for an amount equal to what would be payable to it upon liquidation of the asset at fair market value.

Following is summarized financial information for the unconsolidated real estate entities as of June 30, 2008 and December 31, 2007 and for the three and six month periods ended June 30, 2008 and June 30, 2007.

Summarized Balance Sheets

	June 30, 2008		December 31, 2007
ASSETS
Investments in real estate, net	$	2,326,205	$	2,326,679
Land held for sale		3,722		3,418
Assets associated with discontinued operations		8		28
Receivables including deferred rents		76,301		62,954
Other assets		303,033		330,537
Total assets	$	2,709,269	$	2,723,616
LIABILITIES AND OWNERS’ EQUITY
Mortgage and other secured loans	$	2,213,584	$	2,162,556
Other liabilities		182,988		208,977
Obligations associated with discontinued operations		74		23
Total liabilities		2,396,646		2,371,556
Minority interest		—		—
Owners’ equity:
Thomas Properties, including $163 and $272 of other comprehensive loss as of June 30, 2008 and December 31, 2007, respectively		48,753		54,041
Other owners, including $2,251 and $2,612 of other comprehensive loss as of June 30, 2008 and December 31, 2007, respectively		263,870		298,019
Total owners’ equity		312,623		352,060
Total liabilities and owners’ equity	$	2,709,269	$	2,723,616

Summarized Statements of Operations

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Revenues	$	82,897		$	57,898		$	162,557		$	103,177
Expenses:
Operating and other expenses		42,158			30,900			82,010			56,928
Interest expense		32,120			25,055			64,700			43,964
Depreciation and amortization		31,153			21,021			62,806			36,231
Total expenses		105,431			76,976			209,516			137,123
Loss from continuing operations		(22,534	)		(19,078	)		(46,959	)		(33,946	)
Gain on sale of real estate		—			7,932			—			7,932
Minority interest		—			(25	)		—			(51	)
Loss from discontinued operations		(63	)		(8	)		(71	)		(212	)
Net loss	$	(22,597	)	$	(11,179	)	$	(47,030	)	$	(26,277	)
Thomas Properties’ share of net loss		(3,311	)		(1,675	)		(6,699	)		(5,465	)
Intercompany eliminations		736			312			1,559			933
Equity in net loss of unconsolidated real estate entities	$	(2,575	)	$	(1,363	)	$	(5,140	)	$	(4,532	)

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Included in the preceding summarized balance sheets as of June 30, 2008 and December 31, 2007, are the following balance sheets of TPG/CalSTRS, LLC:

	June 30, 2008		December 31, 2007
ASSETS
Investments in real estate, net	$	1,207,345	$	1,194,028
Land held for sale		3,722		3,418
Assets associated with discontinued operations		8		28
Receivables including deferred rents		61,064		55,582
Investments in unconsolidated real estate entities		54,829		61,662
Other assets		178,684		174,383
Total assets	$	1,505,652	$	1,489,101
LIABILITIES AND MEMBERS’ EQUITY
Mortgage and other secured loans	$	1,287,111	$	1,235,932
Other liabilities		69,820		83,914
Obligations associated with discontinued operations		74		23
Total liabilities		1,357,005		1,319,869
Minority interest		—		—
Members’ equity
Thomas Properties, including $163 and $272 of other comprehensive loss as of June 30, 2008 and December 31, 2007, respectively		49,125		54,250
Other members, including $501 and $2,612 of other comprehensive loss as of June 30, 2008 and December 31, 2007, respectively		99,522		114,982
Total members’ equity		148,647		169,232
Total liabilities and members’ equity	$	1,505,652	$	1,489,101

Following is summarized financial information by real estate entity for the unconsolidated real estate entities for the three months ended June 30, 2008 and 2007:

	Three months ended June 30, 2008
	2121 Market Street		TPG/ CalSTRS, LLC			Austin Portfolio Properties			Eliminations		Total
Revenues	$	884	$	51,234		$	30,779		$	—	$	82,897
Expenses:
Operating and other expenses		322		28,161			13,675			—		42,158
Interest expense		291		17,453			14,376			—		32,120
Depreciation and amortization		240		15,869			15,044			—		31,153
Total expenses		853		61,483			43,095			—		105,431
Income (loss) from continuing operations		31		(10,249	)		(12,316	)		—		(22,534	)
Equity in net loss of unconsolidated real estate entities		—		(3,368	)		—			3,368		—
Minority interest		—		—			—			—		—
Income (loss) from discontinued operations		—		(63	)		—			—		(63	)
Net income (loss)	$	31	$	(13,680	)	$	(12,316	)	$	3,368	$	(22,597	)
Thomas Properties’ share of net income (loss)	$	16	$	(2,557	)	$	(770	)	$	—	$	(3,311	)
Intercompany eliminations												736
Equity in net loss of unconsolidated real estate entities											$	(2,575	)

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	Three months ended June 30, 2007
	2121 Market Street			TPG/ CalSTRS, LLC			Austin Portfolio Properties			Eliminations		Total
Revenues	$	1,475		$	45,669		$	10,754		$	—	$	57,898
Expenses:
Operating and other expenses		838			26,025			4,037			—		30,900
Interest expense		296			19,798			4,961			—		25,055
Depreciation and amortization		241			15,362			5,418			—		21,021
Total expenses		1,375			61,185			14,416			—		76,976
Income (loss) from continuing operations		100			(15,516	)		(3,662	)		—		(19,078	)
Gain on sale of real estate		—			7,932			—			—		7,932
Equity in net loss of unconsolidated real estate entities		—			(965	)		—			965		—
Minority interest		(25	)		—			—			—		(25	)
Loss from discontinued operations		—			(8	)		—			—		(8	)
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	)

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Following is summarized financial information by real estate entity for the unconsolidated real estate entities for the six months ended June 30, 2008 and 2007:

	Six months ended June 30, 2008
	2121 Market Street			TPG/ CalSTRS, LLC			Austin Portfolio Properties			Eliminations			Total
Revenues	$	1,821		$	101,193		$	59,543		$	—		$	162,557
Expenses:
Operating and other expenses		665			54,815			26,530			—			82,010
Interest expense		583			34,505			29,612			—			64,700
Depreciation and amortization		891			31,379			30,536			—			62,806
Total expenses		2,139			120,699			86,678			—			209,516
Loss from continuing operations		(318	)		(19,506	)		(27,135	)		—			(46,959	)
Equity in net loss of unconsolidated real estate entities		—			(6,786	)		—			6,786			—
Minority interest		—			—			—			—			—
Loss from discontinued operations		—			(71	)		—			—			(71	)
Net income (loss)	$	(318	)	$	(26,363	)	$	(27,135	)	$	6,786		$	(47,030	)
Thomas Properties’ share of net loss	$	(159	)	$	(4,844	)	$	(1,696	)	$	—		$	(6,699	)
Intercompany eliminations														1,559
Equity in net loss of unconsolidated real estate entities													$	(5,140	)
	Six months ended June 30, 2007
	2121 Market Street			TPG/ CalSTRS, LLC			Austin Portfolio Properties			Eliminations			Total
Revenues	$	2,873		$	89,550		$	10,754		$	—		$	103,177
Expenses:
Operating and other expenses		1,737			51,154			4,037			—			56,928
Interest expense		589			38,414			4,961			—			43,964
Depreciation and amortization		481			30,332			5,418			—			36,231
Total expenses		2,807			119,900			14,416			—			137,123
Income (loss) from continuing operations		66			(30,350	)		(3,662	)		—			(33,946	)
Gain on sale of real estate		—			7,932			—			—			7,932
Equity in net loss of unconsolidated real estate entities		—			(965	)		—			965			—
Minority interest		(51	)		—			—			—			(51	)
Loss from discontinued operations					(212	)		—			—			(212	)
Net income (loss)	$	15		$	(23,595	)	$	(3,662	)	$	965		$	(26,277	)
Thomas Properties’ share of net income (loss)	$	6		$	(5,230	)	$	(241	)	$	—		$	(5,465	)
Intercompany eliminations														933
Equity in net loss of unconsolidated real estate entities												��	$	(4,532	)

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, 2008 and December 31, 2007:

	June 30, 2008			December 31, 2007
Our share of owners’ equity recorded by unconsolidated real estate entities	$	48,753		$	54,041
Intercompany eliminations and other adjustments		(5,748	)		(4,842	)
Investments in unconsolidated real estate entities	$	43,005		$	49,199

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4. Mortgage and Other Secured Loans

A summary of our consolidated properties’ outstanding mortgage and other secured loans as of June 30, 2008 is as follows:

Secured debt	Interest Rate		Outstanding Debt		Maturity Date
One Commerce Square mortgage loan (1)	5.7	%	$	130,000	1/6/2016
Two Commerce Square:
Mortgage Loan (2)	6.3			109,299	5/9/2013
Senior mezzanine loan (3) (4)	19.1			32,453	1/9/2010
Junior mezzanine loan (3) (5)	15.0			4,373	1/9/2010
Campus El Segundo mortgage loan (6)	6.5			17,259	10/10/2008
Four Points Centre construction Loan (7)	5.0			22,194	6/11/2010
Murano construction loan (8)	7.0			109,556	7/31/2009
Loan secured by our preferred equity interest in Murano (9)	6.5			1,554	7/7/2008
Total secured debt			$	426,688

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

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

(3) These loans are guaranteed by Mr. Thomas up to an aggregate maximum of $7.5 million. 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, 2008 was 19.10% per annum. The loan may not be prepaid prior to August 9, 2009, and thereafter is subject to yield maintenance payments unless the loan is prepaid within 60 days of maturity. The loan is secured by our ownership interest in the real estate entities that own Two Commerce Square.

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

(6) The weighted average interest rate as of June 30, 2008 was 6.5% per annum. The loan has two one-year extension options at our election. We have notified the lender of our intent to exercise the first option.

(7) The weighted average interest rate as of June 30, 2008 was 5.0% per annum. The loan has two one-year extension options at our election subject to certain conditions. The first extension option and the second extension option are subject to achievement of 75% and 90% occupancy levels, respectively, and certain other conditions.

(8) We may borrow an additional $24.9 million under this construction loan. This loan has two six-month extension options. The first extension option is conditional on the closing of 100 residential units. The interest rate for this loan as of June 30, 2008 was 7.0%.

(9) Subsequent to June 30, 2008, the loan balance was paid in full on the maturity date.

The loan agreement for Two Commerce Square requires that all receipts collected from this property be deposited in lockbox accounts under the control of the lenders to fund reserves, debt service and operating expenditures. Included in restricted cash at June 30, 2008 and December 31, 2007 is $8,079,000 and $3,263,000, respectively, which has been deposited in the lockbox account.

16

As of June 30, 2008, principal payments due for the secured and unsecured outstanding debt are as follows:

2008	$	20,413
2009		113,956
2010		58,607
2011		1,971
2012		2,160
Thereafter		233,481
	$	430,588

5. Unsecured Loan

In October 2005, we purchased the entire interest of our unaffiliated minority partner in TPG-El Segundo Partners, LLC, of which $3,900,000 was financed with an unsecured loan from the former minority partner. The loan bears interest at 5% per annum. Principal and interest of $4,692,000 will be payable at maturity on October 12, 2009.

6. Earnings per Share and Dividends Declared

The following is a summary of the components used in calculating basic and diluted earnings per share for the three and six months ended June 30, 2008 and 2007 (in thousands except share and per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Earnings available to common shares	$	4,948	$	650	$	5,167	$	395
Weighted average common shares outstanding – basic		23,678,260		20,540,116		23,670,418		17,468,385
Potentially dilutive common shares (1)
Stock options		—		60,867		—		53,446
Restricted stock		—		10,385		—		9,857
Adjusted weighted average common shares outstanding – diluted		23,678,260		20,611,368		23,670,418		17,531,688
Earnings per share – basic	$	0.21	$	0.03	$	0.22	$	0.02
Earnings per share – diluted	$	0.21	$	0.03	$	0.22	$	0.02
Dividends declared per share	$	0.06	$	0.06	$	0.06	$	0.06

(1) For the three and six months ended June 30, 2008, the potentially dilutive shares were not included in the income per share calculation as their effect is antidilutive.

7. Stockholders’ Equity

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 1,193,336 incentive units to certain employees. 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 23,853,904 shares of common stock, and 14,496,666 Units outstanding as of June 30, 2008, and 1,148,336 incentive units outstanding which were issued under our Incentive Plan, defined below.

17

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 June 2008, the shareholders approved an increase in the number of shares of the common stock reserved for issuance or transfer under the plan from 2,361,906 shares to a total of 3,361,906 shares. In addition, under our Non-Employee Directors Restricted Stock Plan (“the Non-Employee Directors Plan”) a total of 60,000 shares are reserved for grant.

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)		Vesting Status
Issued in October 2004	46,667	$	560	Fully vested
Issued in February 2006	60,000		740	See below
Issued in March 2007	100,000		1,580	See below
Issued in March 2008	100,000		855	See below
Issued from inception to June 30, 2008	306,667	$	3,735

Vesting for the 60,000, 100,000 and 100,000 shares commenced as of February 22, 2006, March 7, 2007 and March 19, 2008 respectively. The restricted shares will vest in full on the third anniversary of the vesting commencement date, provided that vesting for the March 2007 and March 2008 grants 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)		Vesting Status
Issued in October 2004	10,000	$	120	Fully vested
Issued in 2005	4,984		60	Fully vested
Issued in 2006	6,419		82	Fully vested
Issued in 2007	3,564		60	Fully vested
Issued in 2008	5,968		60	2009 - see below
Issued from inception to June 30, 2008	30,935	$	382

The 5,968 shares granted will vest subject to the continued service of the directors up to and through the 2009 Annual Meeting of Stockholders. The holders of these shares have full voting rights and will receive any dividends paid.

As of June 30, 2008, there was $1,873,000 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 2.0 years. The weighted-average grant date fair value of restricted stock granted during the six months ended June 30, 2008 was $8.63.

We recorded compensation expense totaling $281,000 and $504,000 for the vesting of the restricted stock grants for the three and six months ended June 30, 2008, respectively, and $257,000 and $415,000 for the vesting of the restricted stock grants for the three and six months ended June 30, 2007, respectively. The total income tax benefit recognized in the statement of operations related to this compensation expense was $121,000 and $217,000 for the three and six months ended June 30, 2008, respectively, and $104,000 and $168,000 for the three and six months ended June 30, 2007, respectively.

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, which fully vested on October 13, 2007. In February 2006 we issued 120,000 incentive units to

18

certain executives, which units vest on the third anniversary of the grant date. In March 2007 we issued an additional 183,336 incentive units to certain executives, which units vest over a three year period, with one third vesting each on the first, second, and third anniversary dates of the grant. In March 2008 we issued an additional 160,000 incentive units to certain executives, which units vest over a three year period, with one third vesting each on the first, second, and third anniversary dates of the grant.

For the three and six months ended June 30, 2008, we recorded compensation expense of $513,000 and $995,000, respectively, and for the three and six months ended June 30, 2007, we recorded compensation expense of $757,000 and $1,258,000, respectively, relating to the incentive units. As of June 30, 2008, there was $2,233,000 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, 2008 was $8.10.

Stock options

Under our Incentive Plan, we have 670,609 stock options outstanding as of June 30, 2008. The options vest at the rate of one third per year over three years and expire ten years after the date of commencement of vesting. 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 2008 and 2007:

	2008	2007
Expected dividend yield	2.9%	2.0%
Expected life of option	5 to 8 years	2 to 4 years
Risk-free interest rate	3.2%	4.4%
Expected stock price volatility	11%	15%

The following is a summary of stock option activity under our Incentive Plan as of June 30, 2008 and for the six months ended June 30, 2008:

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2008	501,197	$	13.44
Granted	169,412		10.45
Forfeitures	—
Exercised	—
Outstanding at June 30, 2008	670,609	$	12.74	7.2	—
Options exercisable at June 30, 2008	359,102	$	12.72	7.3	—

As of June 30, 2008, there was $220,000 of total unrecognized compensation cost related to the nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.5 years. The weighted-average grant date fair value of options granted during the six months ended June 30, 2008 was $1.00. There were no options exercised during the three and six months ended June 30, 2008.

We recorded compensation expense totaling $69,000 and $111,000 related to the stock options for the three and six months ended June 30, 2008, respectively, and $54,000 and $103,000 related to the stock options for the three and six months ended June 30, 2007, respectively. The total income tax benefit recognized in the statement of operations related to this compensation expense was $30,000 and $48,000 for the three and six months ended June 30, 2008, respectively, and $22,000 and $42,000 for the three and six months ended June 30,2007, respectively.

8. 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, 2008, we held a 61% capital interest in the Operating Partnership. For the three and six months ended June 30, 2008, we were allocated 61% of the income and losses from the Operating Partnership.

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Our effective tax rate is 43.10% and 44.07% for the three and six months ended June 30, 2008, respectively. The higher effective tax rate compared to the federal statutory rate of 35% is primarily due to the amortization of the incentive units granted and the interest expense recorded during the quarter related to the Company’s unrecognized tax benefits.

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.

Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) 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.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the three and six months ended June 30, 2008, we recorded $233,000 ($152,000, net of federal benefit) and $382,000 ($248,000, net of federal benefit), of accrued interest related to unrecognized tax benefits as a component of income tax expense. We have not recorded any penalties with respect to unrecognized tax benefits.

We do not anticipate any significant increases or decreases to the amounts of unrecognized tax benefits within the next twelve months.

9. 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, 2008 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, rent and other receivables, due from affiliate, accounts payable and other liabilities approximate fair value due to the short-term nature of these instruments.

As of June 30, 2008, the fair value of our mortgage and other secured loans and unsecured loan aggregates $433.5 million, compared to the aggregate carrying value of $430.6 million.

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,

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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, tightening of the credit markets, 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.

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 61.0% 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, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo 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

City National Plaza (as of January 2003, the date of acquisition)

Reflections I (as of October 2004, the date of acquisition)

Reflections II (as of October 2004, the date of acquisition)

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)

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 through 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 & II (as of January 2007, the date of acquisition)

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

TPG/CalSTRS, LLC also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties (“Austin Portfolio Properties”):

San Jacinto Center (purchased June 2007)

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Frost Bank Tower (purchased June 2007)

One Congress Plaza (purchased June 2007)

One American Center (purchased June 2007)

300 West 6th Street (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)

Comparison of three months ended June 30, 2008 to three months ended June 30, 2007

Rental revenues.Rental revenue decreased $0.2 million, or less than 1%, to $8.0 million for the three months ended June 30, 2008 compared to $8.2 million for the three months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

Tenant reimbursements.Tenant reimbursements increased $0.6 million, or 9%, to $7.3 million for the three months ended June 30, 2008 compared to $6.7 million for the three months ended June 30, 2007 primarily related to electricity costs and janitorial costs resulting from a new collective bargaining agreement between the vendor and the union representing the vendor’s employees.

Parking and other revenues.Parking and other revenues remained consistent at $0.9 million for each of the three month periods ended June 30, 2008 and 2007.

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 remained consistent at approximately $2.3 million for each of the three month periods ended June 30, 2008 and 2007

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 $1.0 million, or 19%, to $6.3 million for the three months ended June 30, 2008 compared to $5.3 million for the three months ended June 30, 2007. This increase was primarily a result of an increase in fee income of $1.6 million related to the Austin Portfolio Properties acquired in June 2007, which was partially offset by a decrease in acquisition fees of $1.1 million related to this same acquisition. The remaining increase is primarily attributable to recording property-related benefits. In 2008, we recorded revenue and corresponding expense related to benefits that were paid by the management company on behalf of the property for which the management company was subsequently reimbursed for by the property.

Condominium sales – percentage of completion. This caption represents the revenue recognized on the percentage of completion method of accounting of the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized revenue of $76.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rental property operating and maintenance expense.Rental property operating and maintenance increased by $1.4 million, or 25%, to $6.9 million for the three months ended June 30, 2008 compared to $5.5 million for the three months ended June 30, 2007. The increase was primarily a result of higher operating expenses, increased bad debt charges, wind-down costs related to the termination of a restaurant tenant at Commerce Square, and marketing and other expenses related to our development properties.

Real estate taxes.Real estate taxes remained consistent at $1.5 million for each of the three month periods ended June 30, 2008 and 2007.

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Investment advisory, management, leasing and development services expenses.Expenses for these services increased by $2.1 million, or 47%, to $6.6 million for the three months ended June 30, 2008 compared to $4.5 million for the three months ended June 30, 2007, primarily as a result of an increase in salaries and employment related costs related to the Austin Portfolio Properties acquired in June 2007, an increase in the use of consultants for accounting software initiatives and consultants for our third party development services business and legal fees related to our Green Fund.

Cost of condominium sales – percentage of completion.This caption represents the cost recognized on the percentage of completion method of accounting for the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized cost of sales of $59.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rent – unconsolidated entities.Rent – unconsolidated entities remained consistent for each of the three month periods ended June 30, 2008 and 2007.

Interest expense.Interest expense remained consistent at $3.8 million for each of the three month periods ended June 30, 2008 and 2007.

Depreciation and amortization expense.Depreciation and amortization expense decreased to $0.2 million or 7% to $2.8 million for the three months ended June 30, 2008 compared to $3.0 million for the three months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

General and administrative.General and administrative expense increased by $0.8 million, or 18%, to $5.3 million for the three months ended June 30, 2008 compared to $4.5 million for the three months ended June 30, 2007. The increase was primarily a result of an increase in salaries and employment related costs for corporate personnel, an increase in the use of consultants for information technology-related projects, and an increase in new franchise taxes in the State of Texas.

Gain on sale of real estate.Gain on sale of real estate was $1.1 million for the three months ended June 30, 2008 related to recognition of deferred gain upon completion of infrastructure costs related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006.

Interest income.Interest income decreased by $1.0 million, or 59%, to $0.7 million for the three months ended June 30, 2008 compared to $1.7 million for the three months ended June 30, 2007 primarily due to declining investment balances and lower 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 three months ended June 30, 2008 and 2007 (in thousands):

	2008			2007
Revenue	$	82,897		$	57,898
Operating and other expenses		(42,158	)		(30,900	)
Interest expense		(32,120	)		(25,055	)
Depreciation and amortization		(31,153	)		(21,021	)
Minority interest					(25	)
Gain on sale of real estate		—			7,932
Loss from discontinued operations		(63	)		(8	)
Net loss	$	(22,597	)	$	(11,179	)
Thomas Properties’ share of net loss	$	(3,311	)	$	(1,675	)
Intercompany eliminations		736			312
Equity in net loss of unconsolidated real estate entities	$	(2,575	)	$	(1,363	)

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Aggregate revenue, operating and other expenses, interest expense and depreciation and amortization for unconsolidated real estate entities for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 increased primarily due to the acquisition of the Austin Portfolio Properties in June 2007.

Comparison of six months ended June 30, 2008 to six months ended June 30, 2007

Rental revenues.Rental revenue decreased $0.6 million, or 4%, to $15.8 million for the six months ended June 30, 2008 compared to $16.4 million for the six months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

Tenant reimbursements.Tenant reimbursements increased by $0.9 million, or 7%, to $14.1 million for the six months ended June 30, 2008 compared to $13.2 million for the six months ended June 30, 2007 primarily related to electricity costs and janitorial costs resulting from a new collective bargaining agreement between the vendor and the union representing the vendor’s employees.

Parking and other revenues.Parking and other revenues remained consistent at $1.8 million for each of the six month periods ended June 30, 2008 and 2007.

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 remained consistent at approximately $4.4 million for each of the six month periods ended June 30, 2008 and 2007.

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 $2.5 million, or 26%, to $12.2 million for the six months ended June 30, 2008 compared to $9.7 million for the six months ended June 30, 2007. This increase was primarily a result of an increase in fee income of $3.5 million related to the Austin Portfolio Properties acquired in June 2007, which was partially offset by a decrease in acquisition fees of $1.7 million related to the property investments in Fairfax, Virginia acquired in January 2007, and Austin, Texas acquired in June 2007. The remaining increase is primarily attributable to recording property-related benefits. In 2008, we recorded revenue and corresponding expense related to benefits that were paid by the management company on behalf of the property for which the management company was subsequently reimbursed for by the property.

Condominium sales – percentage of completion. This caption represents the revenue recognized on the percentage of completion method of accounting of the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized revenue of $76.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rental property operating and maintenance expense.Rental property operating and maintenance increased by $1.7 million, or 15%, to $12.9 million for the six months ended June 30, 2008 compared to $11.2 million for the six months ended June 30, 2007. The increase was primarily a result of higher operating expenses, increased bad debt charges, wind-down costs related to the termination of a restaurant tenant at Commerce Square, and marketing and other expenses related to our development properties.

Real estate taxes.Real estate taxes remained consistent at approximately $3.1 million for each of the six month periods ended June 30, 2008 and 2007.

Investment advisory, management, leasing and development services expenses.Expenses for these services increased by $3.9 million, or 49%, to $11.8 million for the six months ended June 30, 2008 compared to $7.9 million for the six months ended June 30, 2007, primarily as a result of an increase in salaries and employment related costs related to the Austin Portfolio Properties acquired in June 2007, an increase in the use of consultants for accounting software initiatives and consultants for our third party development services business and legal fees related to our Green Fund.

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Cost of condominium sales – percentage of completion.This caption represents the cost recognized on the percentage of completion method of accounting for the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized cost of sales of $59.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rent – unconsolidated entities.Rent – unconsolidated entities remained consistent for each of the six month periods ended June 30, 2008 and 2007.

Interest expense.Interest expense remained consistent at $8.0 million for each of the six month periods ended June 30, 2008 and 2007.

Depreciation and amortization expense.Depreciation and amortization expense decreased by $0.5 million, or 8%, to $5.6 million for the six months ended June 30, 2008 compared to $6.1 million for the six months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

General and administrative.General and administrative expense increased by $0.9 million, or 11%, to $9.4 million for the six months ended June 30, 2008 compared to $8.5 million for the six months ended June 30, 2007. The increase was primarily a result of an increase in salaries and employment related costs for corporate personnel, an increase in the use of consultants for information technology-related projects, and an increase in new franchise taxes in the State of Texas.

Gain on sale of real estate.Gain on sale of real estate was $3.6 million for the six months ended June 30, 2008 related to recognition of deferred gain upon completion of infrastructure costs related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006.

Interest income.Interest income decreased by $0.8 million, or 31%, to $1.8 million for the six months ended June 30, 2008 compared to $2.6 million for the six months ended June 30, 2007 primarily due to declining investment balances and lower 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, 2008 and 2007 (in thousands):

	2008			2007
Revenue	$	162,557		$	103,177
Operating and other expenses		(82,010	)		(56,928	)
Interest expense		(64,700	)		(43,964	)
Depreciation and amortization		(62,806	)		(36,231	)
Minority interest		—			(51	)
Gain on sale of real estate		—			7,932
Loss from discontinued operations		(71	)		(212	)
Net loss	$	(47,030	)	$	(26,277	)
Thomas Properties’ share of net loss	$	(6,699	)	$	(5,465	)
Intercompany eliminations		1,559			933
Equity in net loss of unconsolidated real estate entities	$	(5,140	)	$	(4,532	)

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Aggregate revenue, operating and other expenses, interest expense and depreciation and amortization for unconsolidated real estate entities for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 increased primarily due to the acquisition of the Austin Portfolio Properties in June 2007.

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Liquidity and Capital Resources

Analysis of liquidity and capital resources

As of June 30, 2008, we have unrestricted cash and cash equivalents of $91.9 million. Our management believes that our company will have sufficient capital to satisfy our liquidity needs over the next 12 months through 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. 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.

As of June 30, 2008, we have unfunded capital commitments to (1) our joint venture with CalSTRS of $6.1 million; (2) the Thomas High Performance Green Fund, an investment fund formed by us, CalSTRS and other institutional investors, of $50.0 million; and (3) the UBS North American Property Fund, an investment fund formed by us and UBS Wealth Management-North American Property Fund Limited, of $50.0 million. Our requirement to fund all or a portion of these commitments is subject to our identifying properties to acquire that are mutually acceptable to us, and our partners.

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, we may enter future financing arrangements that 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 six redevelopment properties and two development sites. We commenced construction of Murano, a 302-unit high-rise residential condominium project, in the second quarter of 2006. We received certificates of occupancy on June 18, 2008, and July 15, 2008 for the units on floors 2-23 and floors 24-38, respectively. We anticipate securing the remaining certificates of occupancy on the top five floors in the third quarter of 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008. Under the percentage-of-completion method of accounting, we recognized a gain on sale of approximately $17.0 million related to the 20 units and 17 parking spaces sold and the 103 units and 97 parking spaces under contract as of June 30, 2008. We expect to settle the 103 units under contract at June 30, 2008 throughout the third and fourth quarters of 2008. We commenced construction of two buildings totaling approximately 192,000 square feet at Four Points Centre in the second quarter of 2007. We expect construction to be substantially complete in the third quarter of 2008. We are presently entitling approximately 14.4 acres in Los Angeles, California, for office, production facility, residential and retail uses. The project, called Metro Studio@Lankershim, will include approximately 1.5 million square feet. Upon completion of entitlements, we expect to enter into a long-term ground lease with the Los Angeles Metropolitan Transportation Authority, which owns the land. Also, we have been engaged by NBC/Universal to entitle 124 acres located adjacent to Universal City in Los Angeles for the development of a residential and retail town center. We anticipate completing the development of these projects as market feasibility permits. We also anticipate seeking to mitigate development risk by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. There can be no assurance we will be able to successfully implement these risk mitigation measures.

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 2006, we refinanced the loan for City National Plaza, which provides proceeds to cover the estimated future redevelopment costs for this property. Construction of the Murano is financed in part with a construction loan up to $142.5 million. The balance of the Murano construction loan as of June 30, 2008 was $109.6 million and we may borrow an additional $24.9 million under this construction loan. Repayment of this loan is expected to be made with proceeds from the sales of condominium units. The development at Four Points is financed in part with a construction loan up to $42.7 million. Presently, we have not obtained construction financing for the development at Campus El Segundo. If we finance these development projects through construction loans and are unable to 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.

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Leasing, Tenant Improvement and Capital Needs

In addition to our development and redevelopment projects, we also own One Commerce Square and a majority interest in 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 $3.3 million in tenant improvements and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square collectively during 2008 through 2010.

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, 2008 is as follows (in thousands):

	Payments Due by Period
	Remainder of 2008		2009		2010		2011		2012		Thereafter		Total
Regularly scheduled principal payments	$	1,600	$	500	$	492	$	1,971	$	2,160	$	5,826	$	12,549
Balloon payments		18,813		113,456		58,115		—		—		227,655		418,039
Interest payments - fixed rate debt		10,541		21,708		14,912		14,290		14,205		24,806		100,462
Interest payments - variable rate debt (1)		—		—		—		—		—		—		—
Capital commitments (2)		24,670		38,853		37,524		8,333		—		—		109,380
Operating lease (3)		64		53		—		—		—		—		117
FIN 48 obligations, including interest and penalties (4)														—
Total	$	55,688	$	174,570	$	111,043	$	24,594	$	16,365	$	258,287	$	640,547

(1) As of June 30, 2008, 65.0% of our debt was contractually fixed. The information in the table above reflects our projected interest rate obligations for the fixed-rate payments based on the contractual interest rates and scheduled maturity dates. The remaining 35.0% of our debt consists of variable debt that bears interest at variable rates based on the prime rate or LIBOR plus a spread that ranges from 1.5% to 4.0%. The interest payments on the variable rate debt have not been reported in the table above because we cannot reasonably determine the future interest obligations on our variable rate debt as we cannot predict what prime and LIBOR rates will be in the future. As of June 30, 2008, the one-month LIBOR was 2.46% and the prime rate was 5.00%.

(2) Capital commitments of our company and consolidated subsidiaries include approximately $3.3 million of tenant improvements and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square. We have an unfunded capital commitment of $6.1 million to TPG/CalSTRS, which we estimate we will fund $3.9 million in 2008 and $2.2 million in 2009. Additionally, we have an unfunded capital commitment of $50.0 million to the Thomas High Performance Green Fund, an investment fund formed by us, CalSTRS and other institutional investors which we estimate we will fund $8.3 million, $16.7 million, $16.7 million, and $8.3 million in 2008, 2009, 2010, and 2011, respectively, subject to the identification and approval of projects. These cash requirements could be reduced by contributions to our Green Fund by us of assets in which we have an interest. Further, we have an unfunded capital commitment of $50.0 million to the UBS North American Property Fund, an investment fund formed by us and UBS Wealth Management-North American Property Fund, Limited. We estimate we will fund $10.0 million, $20.0 million, and $20.0 million in 2008, 2009 and 2010, respectively, subject to the identification and approval of projects.

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

(4) The FIN 48 obligations in the table above should represent amounts associated with uncertain tax positions related to temporary differences. However, reasonable estimates cannot be made about the amount and timing of payment for these obligations. As of June 30, 2008, $16.3 million of unrecognized tax benefits have been recorded as liabilities in accordance with FIN 48, and we are uncertain as to if and when such amounts may be settled. We have recorded $1.1 million of accrued interest with respect to unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.

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

As of June 30, 2008, 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. Therefore, we account for them using the equity method of accounting. The table below summarizes the outstanding debt for the properties as of June 30, 2008 (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) (3)	$	355,300	7/17/2009
Senior mezzanine loan-Note A (4)	LIBOR + 2.59%	(2) (3)		55,636	7/17/2009
Senior mezzanine loan-Note B	LIBOR + 1.90%	(2) (3)		24,000	7/17/2009
Senior mezzanine loan-Note C	LIBOR + 2.25%	(2) (3)		24,000	7/17/2009
Senior mezzanine loan-Note D	LIBOR + 2.50%	(2) (3)		24,000	7/17/2009
Senior mezzanine loan-Note E	LIBOR + 3.05%	(2) (3)		22,700	7/17/2009
Junior mezzanine loan (5)	LIBOR + 5.00%	(2) (3)		47,688	7/17/2009
CityWestPlace
Fixed	6.16%			121,000	7/6/2016
Floating	LIBOR + 1.25%	(2) (6)		92,400	7/1/2009
San Felipe Plaza
Mortgage loan - Note A	5.28%			101,500	8/11/2010
Mortgage loan - Note B (7)	LIBOR + 3.00%			12,624	8/11/2010
2500 City West
Mortgage loan-Note A	5.28%			70,000	8/11/2010
Mortgage loan-Note B (8)	LIBOR + 3.00%			10,363	8/11/2010
Brookhollow Central I, II and III
Mortgage loan-Note A	LIBOR + 0.44%	(2) (3)		24,154	8/9/2009
Mortgage loan-Note B	LIBOR + 4.25%	(2) (3)		16,746	8/9/2009
Mortgage loan-Note C	LIBOR + 4.86%	(2) (3)		20,318	8/9/2009
Four Falls Corporate Center
Mortgage loan-Note A	5.31%			42,200	3/6/2010
Mortgage loan-Note B (9)	LIBOR + 3.25%	(2) (10)		9,867	3/6/2010
Oak Hill Plaza/Walnut Hill Plaza
Mortgage loan-Note A	5.31%			35,300	3/6/2010
Mortgage loan-Note B (9)	LIBOR + 3.25%	(10)		9,152	3/6/2010
2121 Market Street mortgage loan (11)	6.05%			18,973	8/1/2033
Reflections I mortgage loan	5.23%			22,351	4/1/2015
Reflections II mortgage loan	5.22%			9,312	4/1/2015
Centerpointe I & II
Senior mortgage loan	LIBOR + 0.60%	(2)		55,000	2/9/2009
Mezzanine loan (Note A) (12) (13)	LIBOR + 1.51%	(2)		13,521	2/9/2009
Mezzanine loan (Note B) (12) (14)	LIBOR + 4.79%	(2)		11,692	2/9/2009
Mezzanine loan (Note C) (12) (15)	LIBOR + 3.26%	(2)		11,987	2/9/2009
Fair Oaks Plaza (16)	5.52%			44,300	2/9/2017

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Austin Portfolio Properties:
San Jacinto Center
Mortgage loan-Note A	6.05%			43,000	6/11/2017
Mortgage loan-Note B	6.05%			58,000	6/11/2017
Frost Bank Tower
Mortgage loan-Note A	6.06%			61,300	6/11/2017
Mortgage loan-Note B	6.06%			88,700	6/11/2017
One Congress Plaza
Mortgage loan-Note A	6.08%			57,000	6/11/2017
Mortgage loan-Note B	6.08%			71,000	6/11/2017
One American Center
Mortgage loan-Note A	6.03%			50,900	6/11/2017
Mortgage loan-Note B	6.03%			69,100	6/11/2017
300 West 6th Street	6.01%			127,000	6/11/2017
Research Park Plaza I & II
Senior mortgage loan	LIBOR + 0.55%	(2) (17)		23,560	6/9/2009
Mezzanine loan	LIBOR + 2.01%	(2) (17)		27,940	6/9/2009
Stonebridge Plaza II
Senior mortgage loan	LIBOR + 0.63%	(2) (17)		19,800	6/9/2009
Mezzanine loan	LIBOR + 1.76%	(2) (17)		17,700	6/9/2009
Austin Bank Term Loan	LIBOR + 3.25%	(18) (19)		192,500	6/1/2013
Revolving Credit Facility	LIBOR + 3.25%	(20)		—	6/1/2012
Subtotal - Austin, TX Portfolio			$	907,500
Total outstanding debt of unconsolidated properties			$	2,213,584

The LIBOR rate for the loans above was 2.5% at June 30, 2008.

(1) The City National Plaza loans collectively have maximum borrowings of $580 million. The senior mortgage loan and Notes B, C, D and E under the senior mezzanine loans are subject to exit fees equal to .25% of the loan amounts. Note A under the senior mezzanine loan and the junior mezzanine loan are subject to an exit fee equal to .50% of the loan amount. Under certain circumstances all of the exit fees will be waived.

(2) The partnership that owns each property has purchased interest rate cap agreements for the funded portion of these loans.

(3) These loans have a one-year extension option at our election.

(4) TPG/CalSTRS may borrow an additional $14.4 million.

(5) TPG/CalSTRS may borrow an additional $12.3 million.

(6) These loans have two one-year extension options at our election.

(7) TPG/CalSTRS may borrow an additional $3.6 million under this loan.

(8) TPG/CalSTRS may borrow an additional $5.1 million under this loan.

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

(10) 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, 2008, one month LIBOR exceeds 2.25%, per annum.

(11) The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this loan 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.

(12) The loans are subject to exit fees of up to 1.0% through February 9, 2009. The Centerpointe I & II senior mortgage loan bears interest at a rate equal to one month LIBOR plus 0.60%. The mezzanine loans bear interest at a rate such that the weighted average of the rate on these loans and the rate on the senior mortgage loan secured by Centerpointe I & II equals LIBOR plus 1.59% per annum. The effective interest rate on the mezzanine loans as of June 30, 2008 was 6.31% per annum. The weighted average interest rate on all of the loans was 4.05% per annum. All of these loans have three one-year extension options at our election.

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(13) TPG/CalSTRS may borrow an additional $11.5 million under this loan.

(14) TPG/CalSTRS may borrow an additional $9.9 million under this loan.

(15) TPG/CalSTRS may borrow an additional $10.2 million under this loan.

(16) This loan may be defeased in full after three years (or January 31, 2010), or prepaid in full after 9 years and 8 months (or October 2016).

(17) These loans have three one-year extension options at our election.

(18) The Austin Portfolio Joint Venture 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.

(19) 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 Properties, a pledge of equity interests in the remaining seven Austin Portfolio Properties and guarantees of certain other Austin Portfolio Properties.

(20) The Austin Portfolio Joint Venture has obtained a $100 million secured revolving credit commitment to fund future capital requirements, bearing interest at LIBOR plus 3.25%. The margin above LIBOR on this facility is subject to adjustment under certain circumstances. As of June 30, 2008, this revolving credit facility was undrawn.

Cash Flows

Comparison of six months ended June 30, 2008 to six months ended June 30, 2007

Cash and cash equivalents were $91.9 million as of June 30, 2008 and $144.2 million as of June 30, 2007.

Operating Activities - Net cash (used in) provided by operating activities decreased by $20.7 million to $(2.4) million for the six months ended June 30, 2008 compared to $18.3 million for the six months ended June 30, 2007. The decrease was primarily the result of an increase in non-cash items of $1.2 million primarily related 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, a gain on sale related to the sale of condominium units of $17.0 million, and decreased distributions from unconsolidated real estate entities of $2.8 million. Further, there was a change in assets and liabilities of $(7.9) million primarily related to an increase in payments made for accounts payable, affiliate obligations and year-end accrued expenses and bonuses, offset by an increase in net income of $4.8 million, from $0.4 million for the six months ended June 30, 2007 to $5.2 million, for the six months ended June 30, 2008.

Investing Activities - Net cash (used in) investing activities decreased by $0.3 million to $(61.9) million for the six months ended June 30, 2008 compared to $(61.6) million for the six months ended June 30, 2007 primarily due to uses of cash for increased expenditures of $32.6 million on our Murano, Four Points Center, Campus El Segundo and MetroStudio@Lankershim development projects offset by our equity investment of $18.4 million in the Austin Portfolio Properties in June 2007, and proceeds from sales of our Murano condominium units of $11.1 million in the quarter ended June 30, 2008.

Financing Activities - Net cash provided by financing activities decreased by $93.6 million to $29.6 million for the six months ended June 30, 2008 compared to $123.2 million for the six months ended June 30, 2007. The decrease was primarily the result of net equity proceeds of $139.4 million and redemption payments of $33.6 million in April 2007, and principal payments on the Murano construction loan and the loan secured by our preferred equity interest in Murano totaling $16.3 million in the six months ended June 30, 2008, offset by increased borrowings on our Murano and Four Points Center construction loans of $29.9 million in the six months ended June 30, 2008.

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 multi-family residential rental property and are nearing completion of construction on Murano, a high-rise residential tower in Philadelphia. The existing residential property is located in the Philadelphia central business district and subject to short-term leases. 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. 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, 2008, our company had $150.6 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 $2.2 billion, of which $1.12 billion bears interest at floating rates. As of June 30, 2008, interest rate caps have been purchased for $1.10 billion of the floating rate loans.

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Our fixed and variable rate consolidated long-term debt at June 30, 2008 consisted of the following (in thousands):

Year of Maturity	Fixed Rate			Variable Rate			Total
2008	$	1,600		$	18,813		$	20,413
2009		4,400			109,556			113,956
2010		36,413			22,194			58,607
2011		1,971			—			1,971
2012		2,160			—			2,160
Thereafter		233,481			—			233,481
Total	$	280,025		$	150,563		$	430,588
Weighted average interest rate		7.61	%		6.65	%		7.27	%

We utilize sensitivity analyses to assess the potential effect of our variable rate debt. At June 30, 2008, our variable rate long-term debt represents 11.3% 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, 2008, the net impact would be increased interest costs of $1.1 million per year.

As of June 30, 2008, the fair value of our mortgage and other secured loans and unsecured loan aggregate $433.5 million, compared to the aggregate carrying value of $430.6 million.

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 Securities and Exchange Commission (“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.

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 quarter ended June 30, 2008 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 Austin Portfolio Joint Venture in which we invested through our joint venture with CalSTRS, provide us with substantial fee revenues. For the three and six months ended June 30, 2008,

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approximately 28.9% and 28.5%, respectively, of our revenue has been derived from fees earned from these relationships. We also expect in the future to earn fee revenues from the Green Fund as a result of CalSTRS’ investment in that partnership.

We cannot assure you that our relationships with CalSTRS will continue and we may not be able to replace these relationships with other strategic alliances that would provide comparable revenues. Our interest in TPG/CalSTRS 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 James A. Thomas, our Chairman, President and CEO, 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.

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 partners 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 June 30, 2008, we hold interests in 22 of our properties through TPG/CalSTRS, 10 of which are held indirectly through TPG/CalSTRS’ interest in the Austin Portfolio Joint Venture. TPG/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

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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.

TPG/CalSTRS is the general partner of the partnership that owns ten properties in Austin, Texas. The limited partners in this 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 under certain circumstances. These rights could adversely affect us.

We may not be able to realize expected fees from the Austin Portfolio Joint Venture due to the failure to syndicate interests.

TPG/CalSTRS entered into a partnership agreement and syndication agreement with Lehman in relation to the Austin Portfolio Joint Venture that required us to assist Lehman in syndicating a significant portion of Lehman’s current equity position by June 1, 2008. As of June 30, 2008, 33% of Lehman’s original equity in the joint venture had been sold to an unrelated institutional investor. We and Lehman were unable to sell Lehman’s remaining equity to investors during the syndication period, and Lehman has not extended the syndication period. As a result of the failed syndication, Lehman retains certain control rights with respect to major decisions of the joint venture, and we may not receive certain fees, such as a promote and administration fees, on the unsold equity. In the event that Lehman is able to syndicate some or all of their remaining equity in the joint venture subsequent to June 1, 2008, we may be eligible to receive certain fees, subject to discretion by Lehman.

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

As of June 30, 2008, the 20 largest tenants for properties in which we hold an ownership interest collectively leased 32.0% of the rentable square feet of space, representing 55.7% 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 10.4% of the total annualized rent generated by all of our consolidated and unconsolidated properties as of June 30, 2008. In addition, Conrail’s rental revenues and tenant reimbursements accounted for approximately 33.4% and 30.6% of total consolidated revenue for the three and six months ended June 30, 2008, respectively.

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, 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

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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 and in the national office market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, 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 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 service obligations reduce cash available to fund business growth and may expose us to the risk of default under our debt obligations.

As of June 30, 2008, our total consolidated indebtedness is approximately $430.6 million. In addition, we own interests in unconsolidated entities subject to total indebtedness in the amount of $2.2 billion as of June 30, 2008. 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. We may need to incur significant additional debt to finance 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 need for debt financing, our existing 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 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.

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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.

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, 2008, $150.6 million of our consolidated debt and $1.12 billion of our unconsolidated debt was at variable interest rates. As of June 30, 2008, interest rate caps have been purchased for $1.10 billion of the unconsolidated 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 approximately 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;

• 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.

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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 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;

• 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; and

• inability to sell or close on the sale of condominium units at Murano.

If we are not successful in our property development initiatives, it 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 a residential project, we may encounter unfamiliar problems that adversely impact our ability to complete the project on a timely basis. During 2007 and 2008 the residential housing market has experienced a decline and we could experience difficulties in selling or closing on the sale of condominium units at Murano.

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

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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, 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, 2008, leases representing 3.5% and 7.8% of the rentable square feet of the office and mixed-use properties in which we hold an ownership interest will expire in 2008 and 2009, respectively. Further, an additional 13.6% of the square feet of these properties was available for lease as of June 30, 2008. Rental rates on existing leases 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. Approximately half or 375,000 square feet of this lease expired in June 2008 and the remaining half expires in June 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. We have entered into direct leases for 623,000 square feet of the Conrail space. The lease terms range from 5 months to 145 months. If we are unable to lease the remaining 130,000 square feet of the space currently leased by Conrail in Two Commerce Square prior to the expiration of the lease and assuming the subtenants to the Conrail lease occupying that space 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 $1.7 million in 2008 as compared to 2007, $1.7 million in 2009 as compared to 2008, and $2.4 million in 2010 as compared to 2009.

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. During the second half of 2007 and first half of 2008, we experienced a significant tightening of the credit markets, and we may experience difficulty refinancing existing debt or obtaining new debt to complete acquisitions. 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. Our access to third-party sources of capital depends, in part, on:

• our current debt levels, which were $430.6 million of consolidated debt and $2.2 billion of unconsolidated debt as of June 30, 2008;

• our current cash flow from operating activities, which reflects a use of cash of $ 2.4 million for the six months ended June 30, 2008;

• 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.

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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. 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 of, by signs and labels, 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 managers 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 three of our properties in which we hold an ownership interest. Prior to commencing construction at our Murano development 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. All soil remediation work has been completed. We are operating under a regulatory requirement to monitor the ground water to achieve four consecutive quarters of acceptable sample results.

With respect to asbestos-containing materials present at our City National Plaza and Brookhollow properties, these materials have been removed or abated from certain tenant and common areas of the building structures. We continue to remove or abate asbestos-containing materials from various areas of the building structures and as of June 30, 2008, have accrued $2.2 million and $0.2 million for estimated future costs of such removal or abatement at City National Plaza and Brookhollow, respectively.

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.

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 have 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 28.2% of annualized rent for properties in which we hold an ownership interest as of June 30, 2008. This 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.

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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;

• difficulty in accessing credit in the present economic environment, in particular for larger mortgage loans;

• 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;

• changing submarket demographics; and

• the significant transaction costs related to property sales, including a high transfer tax rate in the City of Philadelphia.

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 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. The obligation to make readily achievable accommodations is an ongoing one, and we assess our properties and make alterations as appropriate. 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.

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, pollution legal liability, 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 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. We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, and terrorism insurance on all of our properties. Our terrorism insurance is subject

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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, 2008, Mr. Thomas owns or controls a significant interest in our Operating Partnership consisting of 14,496,666 units, or a 37.1% interest (including units beneficially owned by other senior executive officers) as of such date. In addition, our senior executive officers, excluding Mr. Thomas, collectively hold an interest in Operating Partnership units and incentive units (vested and unvested) aggregating a 4.7% interest in our company.

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.

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 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 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.

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Mr. Thomas has a significant vote in certain matters as a result of his control 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 38.3% of our outstanding voting stock (including outstanding shares of common stock owned by Mr. Thomas and his affiliates) as of June 30, 2008. These limited voting shares are entitled to vote in the election of directors, for 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. Mr. Thomas is 71 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. The issuance of any preferred stock could diminish the rights of holders of our common 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.

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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 2008 annual meeting of its stockholders held on June 12, 2008 in Los Angeles, California, our stockholders elected James A. Thomas (32,648,685 votes for and 2,403,088 votes against), R. Bruce Andrews (34,885,956 votes for and 165,817 votes against), Edward D. Fox (34,661,266 votes for and 390,507 votes against), Winston H. Hickox (34,885,956 votes for and 165,817 votes against), John L. Goolsby (34,885,956 votes for and 165,817 votes against), Randall L. Scott (32,624,335 votes for and 2,427,438 votes against), and John R. Sischo (32,624,335 votes for and 2,427,438 votes against), as directors of our company each to serve a one-year term expiring following our annual meeting in 2009. Stockholders also ratified the selection of Ernst & Young LLP as our independent auditors for the fiscal year ended December 31, 2008 (20,554,726 votes for and 381 votes against). In addition, stockholders approved the amendments of the Company’s 2004 Equity Incentive Plan (14,686,730 votes for and 5,868,377 votes against).

ITEM 6. EXHIBITS

(a)	Exhibits
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.
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 11, 2008

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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