UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from to.
 Commission File Number 1-31824
 FIRST POTOMAC REALTY TRUST
  MARYLAND
(State or other jurisdiction of 
incorporation or organization)
    
    37-1470730
(I.R.S. Employer
Identification No.)
 7600 Wisconsin Avenue, 11 th Floor, Bethesda, MD 20814
 (301) 986-9200
 þ o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o  o þ




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##### 



FIRST POTOMAC REALTY TRUST
FORM 10-Q
 INDEX
 PagePart I:
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated balance sheets as of June 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2008 and 2007
    
    
    4Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2008 and 2007
    
    
    5Notes to consolidated financial statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35Part II:
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    36Item 6.
    
    Exhibits
    
    
    36Signatures
 2




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##### 



FIRST POTOMAC REALTY TRUST
 June 30, 2008
    
    
    December 31, 2007(unaudited)Assets:Rental property, net
    
    $
    947,877
    
    
    $
    977,106Cash and cash equivalents
    
    
    6,398
    
    
    
    5,198Escrows and reserves
    
    
    13,785
    
    
    
    13,360Accounts and other receivables, net of
allowance for doubtful accounts of $491
and $700, respectively
    
    
    4,326
    
    
    
    4,365Accrued straight-line rents, net of
allowance for doubtful accounts of $61
and $43, respectively
    
    
    7,286
    
    
    
    6,638Deferred costs, net
    
    
    14,148
    
    
    
    12,377Prepaid expenses and other assets
    
    
    5,321
    
    
    
    6,525Intangible assets, net
    
    
    21,090
    
    
    
    26,730Total assets
    
    $
    1,020,231
    
    
    $
    1,052,299Liabilities:Mortgage loans
    
    $
    377,290
    
    
    $
    390,072Exchangeable senior notes, net of discount
    
    
    89,601
    
    
    
    122,797Senior notes
    
    
    75,000
    
    
    
    75,000Secured term loan
    
    
    50,000
    
    
    
    50,000Unsecured revolving credit facility
    
    
    47,400
    
    
    
    38,600Accounts payable and other liabilities
    
    
    14,243
    
    
    
    11,450Accrued interest
    
    
    2,480
    
    
    
    2,776Rents received in advance
    
    
    3,724
    
    
    
    4,709Tenant security deposits
    
    
    5,228
    
    
    
    5,422Deferred market rent
    
    
    7,906
    
    
    
    9,117Total liabilities
    
    
    672,872
    
    
    
    709,943Minority interests (redemption value $11,832
and $13,957, respectively)
    
    
    11,228
    
    
    
    11,545Shareholders equity:Common shares, $0.001 par value, 100,000
shares authorized; 24,478 and 24,251 shares
issued and outstanding, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    431,170
    
    
    
    429,870Accumulated other comprehensive income
    
    
    682
    
    
    
    Dividends in excess of accumulated earnings
    
    
    (95,745
    )
    
    
    (99,083
    )Total shareholders equity
    
    
    336,131
    
    
    
    330,811Total liabilities and shareholders equity
    
    $
    1,020,231
    
    
    $
    1,052,299
  3




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##### 



FIRST POTOMAC REALTY TRUST
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Rental
    
    $
    25,160
    
    
    $
    24,714
    
    
    $
    49,826
    
    
    $
    48,508Tenant reimbursements and other
    
    
    5,252
    
    
    
    4,869
    
    
    
    10,727
    
    
    
    9,977Total revenues
    
    
    30,412
    
    
    
    29,583
    
    
    
    60,553
    
    
    
    58,485Operating expenses:Property operating
    
    
    6,227
    
    
    
    6,019
    
    
    
    12,931
    
    
    
    12,412Real estate taxes and insurance
    
    
    3,032
    
    
    
    2,726
    
    
    
    5,949
    
    
    
    5,257General and administrative
    
    
    2,838
    
    
    
    2,621
    
    
    
    5,539
    
    
    
    5,587Depreciation and amortization
    
    
    9,022
    
    
    
    10,117
    
    
    
    18,261
    
    
    
    19,791Total operating expenses
    
    
    21,119
    
    
    
    21,483
    
    
    
    42,680
    
    
    
    43,047Operating income
    
    
    9,293
    
    
    
    8,100
    
    
    
    17,873
    
    
    
    15,438Other expenses (income):Interest expense
    
    
    8,776
    
    
    
    8,835
    
    
    
    17,908
    
    
    
    17,124Interest and other income
    
    
    (104
    )
    
    
    (172
    )
    
    
    (235
    )
    
    
    (366
    )Gain on early retirement of debt
    
    
    (2,620
    )
    
    
    
    
    
    
    (4,732
    )
    
    
    Total other expenses
    
    
    6,052
    
    
    
    8,663
    
    
    
    12,941
    
    
    
    16,758Income (loss) from continuing operations before
minority interests
    
    
    3,241
    
    
    
    (563
    )
    
    
    4,932
    
    
    
    (1,320
    )Minority interests
    
    
    (100
    )
    
    
    18
    
    
    
    (152
    )
    
    
    40Income (loss) from continuing operations
    
    
    3,141
    
    
    
    (545
    )
    
    
    4,780
    
    
    
    (1,280
    )Discontinued operations:Income from operations of disposed property
    
    
    651
    
    
    
    579
    
    
    
    1,335
    
    
    
    1,110Gain on sale of disposed property
    
    
    14,274
    
    
    
    
    
    
    
    14,274
    
    
    
    Minority interests in discontinued operations
    
    
    (460
    )
    
    
    (18
    )
    
    
    (481
    )
    
    
    (35
    )Income from discontinued operations
    
    
    14,465
    
    
    
    561
    
    
    
    15,128
    
    
    
    1,075Net income (loss)
    
    $
    17,606
    
    
    $
    16
    
    
    $
    19,908
    
    
    $
    (205
    )Net income (loss) per share  basic:Income (loss) from continuing operations
    
    $
    0.13
    
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.05
    )Income from discontinued operations
    
    
    0.60
    
    
    
    0.02
    
    
    
    0.63
    
    
    
    0.04Net income (loss)
    
    $
    0.73
    
    
    $
    
    
    
    $
    0.83
    
    
    $
    (0.01
    )Net income (loss) per share  diluted:Income (loss) from continuing operations
    
    $
    0.13
    
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.05
    )Income from discontinued operations
    
    
    0.60
    
    
    
    0.02
    
    
    
    0.62
    
    
    
    0.04Net income (loss)
    
    $
    0.73
    
    
    $
    
    
    
    $
    0.82
    
    
    $
    (0.01
    )Weighted
average common shares outstanding 
basic
    
    
    24,115
    
    
    
    24,040
    
    
    
    24,106
    
    
    
    24,033Weighted average common shares outstanding 
diluted
    
    
    24,173
    
    
    
    24,040
    
    
    
    24,154
    
    
    
    24,033
  4




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##### 



FIRST POTOMAC REALTY TRUST
 Six Months Ended June 30,2008
    
    
    2007Cash flows from operating activitiesNet income (loss)
    
    $
    19,908
    
    
    $
    (205
    )Adjustments to reconcile net income to net cash provided by
operating activities:Discontinued operations:Gain on sale of disposed property
    
    
    (14,274
    )
    
    
    Depreciation and amortization
    
    
    478
    
    
    
    550Minority interests
    
    
    481
    
    
    
    35Depreciation and amortization
    
    
    18,993
    
    
    
    20,164Bad debt (recovery) expense
    
    
    (12
    )
    
    
    315Stock based compensation
    
    
    919
    
    
    
    715Amortization of deferred market rent
    
    
    (903
    )
    
    
    (886
    )Amortization of deferred financing costs and bond discount
    
    
    876
    
    
    
    774Amortization of rent abatement
    
    
    1,233
    
    
    
    517Minority interests
    
    
    152
    
    
    
    (40
    )Gain on early retirement of debt
    
    
    (4,732
    )
    
    
    Changes in assets and liabilities:Escrows and reserves
    
    
    (425
    )
    
    
    (2,035
    )Accounts and other receivables
    
    
    88
    
    
    
    (189
    )Accrued straight-line rents
    
    
    (1,086
    )
    
    
    (919
    )Prepaid expenses and other assets
    
    
    1,172
    
    
    
    1,235Tenant security deposits
    
    
    (194
    )
    
    
    495Accounts payable and other liabilities
    
    
    892
    
    
    
    1,570Accrued interest
    
    
    (296
    )
    
    
    30Rents received in advance
    
    
    (945
    )
    
    
    (61
    )Deferred costs
    
    
    (4,102
    )
    
    
    (1,908
    )Total adjustments
    
    
    (1,685
    )
    
    
    20,362Net cash provided by operating activities
    
    
    18,223
    
    
    
    20,157Cash flows from investing activitiesPurchase deposit on future acquisitions
    
    
    
    
    
    
    (50
    )Proceeds from sale of real estate assets
    
    
    50,573
    
    
    
    Additions to rental property
    
    
    (9,819
    )
    
    
    (7,607
    )Additions to construction in process
    
    
    (7,685
    )
    
    
    (5,226
    )Acquisition of land parcels
    
    
    
    
    
    
    (4,650
    )Acquisition of rental property and associated intangible assets
    
    
    
    
    
    
    (73,196
    )Net cash provided by (used in) investing activities
    
    
    33,069
    
    
    
    (90,729
    )Cash flows from financing activitiesFinancing costs
    
    
    (328
    )
    
    
    (1,264
    )Proceeds from debt
    
    
    58,300
    
    
    
    64,000Repayments of debt
    
    
    (90,921
    )
    
    
    (5,992
    )Dividends to shareholders
    
    
    (16,570
    )
    
    
    (16,427
    )Distributions to minority interests
    
    
    (531
    )
    
    
    (521
    )Redemption of partnership units
    
    
    (80
    )
    
    
    (5,170
    )Stock option exercises
    
    
    38
    
    
    
    42Net cash (used in) provided by financing activities
    
    
    (50,092
    )
    
    
    34,668Net increase (decrease) in cash and cash equivalents
    
    
    1,200
    
    
    
    (35,904
    )Cash and cash equivalents, beginning of period
    
    
    5,198
    
    
    
    41,367Cash and cash equivalents, end of period
    
    $
    6,398
    
    
    $
    5,463
  5




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##### 



FIRST POTOMAC REALTY TRUST
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Description of Business
    (2) Summary of Significant Accounting Policies
 (a) Principles of Consolidation
    (b) Use of Estimates
  (c) Revenue Recognition
 Accounting for Leases
 6




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##### 



(d) Cash and Cash Equivalents
  (e) Escrows and Reserves
  (f) Rental Property
  Buildings
    
    39 yearsBuilding improvements
    
    5 to 15 yearsFurniture, fixtures and equipment
    
    5 to 15 yearsTenant improvements
    
    Shorter of the useful lives of the
assets or the terms of the related
leases
    Capitalization of Interest Cost
 7




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##### 



(g) Purchase Accounting
  
    
    the value of leases in-place on the date of acquisition based on the leasing origination
costs at the date of the acquisition, which approximates the market value of the lease
origination costs had the in-place leases been originated on the date of acquisition; the
value of in-place leases represents absorption costs for the estimated lease-up period in
which vacancy and foregone revenue are incurred;
    
    the value of above and below market in-place leases based on the present value (using a
discount rate that reflects the risks associated with the acquired leases) of the
difference between the contractual rent amounts to be paid under the lease and the
estimated fair market lease rates for the corresponding spaces over the remaining
non-cancelable terms of the related leases, which range from one to nineteen years; and
    
    the value of intangible tenant or customer relationships.
  (h) Intangible Assets
 Business Combinations
  Goodwill and Other Intangibles
 8




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##### 



(i) Derivatives and Hedging
      (j) Income Taxes
  9




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##### 



(k) Minority Interests
 Implementation Issues Related to
the Treatment of Minority Interests in Certain Real Estate Investment Trusts.
  (l) Earnings Per Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator for basic and diluted earnings (loss)
per share calculations:Income (loss) from continuing operations
    
    $
    3,141
    
    
    $
    (545
    )
    
    $
    4,780
    
    
    $
    (1,280
    )Income from discontinued operations
    
    
    14,465
    
    
    
    561
    
    
    
    15,128
    
    
    
    1,075Net income (loss)
    
    $
    17,606
    
    
    $
    16
    
    
    $
    19,908
    
    
    $
    (205
    )Denominator for basic and diluted earnings
(loss) per share calculations:Weighted average shares outstanding  basic
    
    
    24,115
    
    
    
    24,040
    
    
    
    24,106
    
    
    
    24,033Effect of dilutive shares:Employee stock options and non-vested shares
    
    
    58
    
    
    
    
    
    
    
    48
    
    
    
    Weighted average shares outstanding  diluted
    
    
    24,173
    
    
    
    24,040
    
    
    
    24,154
    
    
    
    24,033Net income (loss) per share  basic:Income (loss) from continuing operations
    
    $
    0.13
    
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.05
    )Income from discontinued operations
    
    
    0.60
    
    
    
    0.02
    
    
    
    0.63
    
    
    
    0.04Net income (loss)
    
    $
    0.73
    
    
    $
    
    
    
    $
    0.83
    
    
    $
    (0.01
    )Net income (loss) per share  diluted:Income (loss) from continuing operations
    
    $
    0.13
    
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.05
    )Income from discontinued operations
    
    
    0.60
    
    
    
    0.02
    
    
    
    0.62
    
    
    
    0.04Net income (loss)
    
    $
    0.73
    
    
    $
    
    
    
    $
    0.82
    
    
    $
    (0.01
    )
 10




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##### 



Earnings Per Share
 Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Stock option awards
    
    
    680
    
    
    
    662
    
    
    
    693
    
    
    
    663Non-vested share awards
    
    
    85
    
    
    
    106
    
    
    
    96
    
    
    
    107765
    
    
    
    768
    
    
    
    789
    
    
    
    770
  (m) Share-Based Compensation
 Stock Options Summary
  Non-vested share awards
    Weighted AverageNon-vested
    
    
    Grant Date FairShares
    
    
    ValueNon-vested at December 31, 2007
    
    
    175,091
    
    
    $
    23.26Granted
    
    
    180,867
    
    
    
    8.73Non-vested at March 31, 2008
    
    
    355,958
    
    
    
    15.88Granted
    
    
    17,500
    
    
    
    17.05Vested
    
    
    (19,060
    )
    
    
    26.69Non-vested at June 30, 2008
    
    
    354,398
    
    
    $
    15.35
 (n) Reclassifications
  11




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##### 



(o) Application of New Accounting Standards
 Fair Value Measurements, Effective Date of FASB Statement No. 157
 Business
Combinations
 Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 51
 Disclosures about
Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133 Accounting for
Derivative Instruments and Hedging Activities
 Determination of the Useful Life of
Intangible Assets
 12




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##### 



Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities Earnings Per Share
 (3) Rental Property
  June 30, 2008
    
    
    December 31, 2007Land
    
    $
    226,600
    
    
    $
    236,636Buildings and improvements
    
    
    742,135
    
    
    
    764,664Tenant improvements
    
    
    45,972
    
    
    
    39,786Furniture, fixtures and equipment
    
    
    9,898
    
    
    
    9,900Construction in process
    
    
    21,107
    
    
    
    14,1951,045,712
    
    
    
    1,065,181Less: accumulated depreciation
    
    
    (97,835
    )
    
    
    (88,075
    )$
    947,877
    
    
    $
    977,106
 (a) Development and Redevelopment Activity
   (b) Acquisitions
  13




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##### 



(4) Discontinued Operations
   Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Revenue
    
    $
    1,028
    
    
    $
    1,226
    
    
    $
    2,473
    
    
    $
    2,494Income from operations of
disposed property
    
    
    651
    
    
    
    579
    
    
    
    1,335
    
    
    
    1,110Gain on sale of disposed property
    
    
    14,274
    
    
    
    
    
    
    
    14,274
    
    
    
    
 (5) Debt
  June 30,
    
    
    December 31,2008
    
    
    2007Mortgage debt, effective interest rates ranging from 5.13% to 8.53%,
maturing at various dates through June 2021
    
    $
    377,290
    
    
    $
    390,072Exchangeable senior notes, net of discount, effective interest rate of
4.45%, maturing December 2011
    
    
    89,601
    
    
    
    122,797Series A senior notes, effective interest rate of 6.41%, maturing June 2013
    
    
    37,500
    
    
    
    37,500Series B senior notes, effective interest rate of 6.55%, maturing June 2016
    
    
    37,500
    
    
    
    37,500Secured term loan, with a variable interest rate of LIBOR + 1.10%,
maturing August 2010(1)
    
    
    50,000
    
    
    
    50,000Unsecured revolving credit facility, with a variable interest rate of
LIBOR + 1.20%, maturing April 2010
    
    
    47,400
    
    
    
    38,600$
    639,291
    
    
    $
    676,469
 
 (1)
    
    In January 2008, the Company entered into an interest rate swap agreement
that fixed the underlying interest rate on the $50 million term loan at 2.71%,
plus a spread of 70 to 125 basis points, based on certain leverage ratios,
for the life of the term loan. 14




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##### 



(a) Mortgage Debt
  ContractualInterest
    
    
    Effective
    
    
    MaturityProperty
    
    Rate
    
    
    Interest Rate
    
    
    Date
    
    
    June 30, 2008
    
    
    December 31, 2007Herndon Corporate Center(1)
    
    
    5.11
    %
    
    
    5.66
    %
    
    
    
    
    
    $
    
    
    
    $
    8,538Norfolk Commerce Park II (2)
    
    
    6.90
    %
    
    
    5.28
    %
    
    August 2008
    
    
    7,057
    
    
    
    7,192Suburban Maryland Portfolio(3,4)
    
    
    6.71
    %
    
    
    5.54
    %
    
    September 2008
    
    
    72,364
    
    
    
    73,546Glenn Dale Business Center
    
    
    7.83
    %
    
    
    5.13
    %
    
    May 2009
    
    
    8,327
    
    
    
    8,4964200 Tech Court
    
    
    8.07
    %
    
    
    8.07
    %
    
    October 2009
    
    
    1,739
    
    
    
    1,752Park Central I
    
    
    8.00
    %
    
    
    5.66
    %
    
    November 2009
    
    
    4,873
    
    
    
    4,9914212 Tech Court
    
    
    8.53
    %
    
    
    8.53
    %
    
    June 2010
    
    
    1,700
    
    
    
    1,710Park Central II
    
    
    8.32
    %
    
    
    5.66
    %
    
    November 2010
    
    
    6,051
    
    
    
    6,196Enterprise Center(3)
    
    
    8.03
    %
    
    
    5.20
    %
    
    December 2010
    
    
    18,443
    
    
    
    18,772Indian Creek Court(3)
    
    
    7.80
    %
    
    
    5.90
    %
    
    January 2011
    
    
    13,012
    
    
    
    13,199403 and 405 Glenn Drive
    
    
    7.60
    %
    
    
    5.50
    %
    
    July 2011
    
    
    8,662
    
    
    
    8,7904612 Navistar Drive(3)
    
    
    7.48
    %
    
    
    5.20
    %
    
    July 2011
    
    
    13,353
    
    
    
    13,565Campus at Metro Park(3)
    
    
    7.11
    %
    
    
    5.25
    %
    
    February 2012
    
    
    24,533
    
    
    
    24,8931434 Crossways Blvd Building II
    
    
    7.05
    %
    
    
    5.38
    %
    
    August 2012
    
    
    10,369
    
    
    
    10,535Crossways Commerce Center
    
    
    6.70
    %
    
    
    6.70
    %
    
    October 2012
    
    
    25,196
    
    
    
    25,377Newington Business Park Center
    
    
    6.70
    %
    
    
    6.70
    %
    
    October 2012
    
    
    15,893
    
    
    
    16,008Prosperity Business Center
    
    
    6.25
    %
    
    
    5.75
    %
    
    January 2013
    
    
    3,807
    
    
    
    3,862Aquia Commerce Center I
    
    
    7.28
    %
    
    
    7.28
    %
    
    February 2013
    
    
    668
    
    
    
    7251434 Crossways Blvd Building I
    
    
    6.25
    %
    
    
    5.38
    %
    
    March 2013
    
    
    8,870
    
    
    
    8,992Linden Business Center
    
    
    6.01
    %
    
    
    5.58
    %
    
    October 2013
    
    
    7,448
    
    
    
    7,515Owings Mills Business Center
    
    
    5.85
    %
    
    
    5.75
    %
    
    March 2014
    
    
    5,697
    
    
    
    5,742Annapolis Commerce Park East
    
    
    5.74
    %
    
    
    6.25
    %
    
    June 2014
    
    
    8,782
    
    
    
    8,834Plaza 500, Van Buren Business Park, Rumsey
Center, Snowden Center, Greenbrier
Technology Center II, Norfolk Business
Center , Northridge I & II and 15395 John
Marshall Highway(5)
    
    
    5.19
    %
    
    
    5.19
    %
    
    August 2015
    
    
    100,000
    
    
    
    100,000Hanover Business Center:Building D
    
    
    8.88
    %
    
    
    6.63
    %
    
    August 2015
    
    
    912
    
    
    
    961Building C
    
    
    7.88
    %
    
    
    6.63
    %
    
    December 2017
    
    
    1,311
    
    
    
    1,359Chesterfield Business Center:Buildings C,D,G and H
    
    
    8.50
    %
    
    
    6.63
    %
    
    August 2015
    
    
    2,375
    
    
    
    2,501Buildings A,B,E and F
    
    
    7.45
    %
    
    
    6.63
    %
    
    June 2021
    
    
    2,763
    
    
    
    2,829Gateway Centre Building I
    
    
    7.35
    %
    
    
    5.88
    %
    
    November 2016
    
    
    1,578
    
    
    
    1,649Airpark Business Center
    
    
    7.45
    %
    
    
    6.63
    %
    
    June 2021
    
    
    1,507
    
    
    
    1,543Total Mortgage Debt
    
    
    
    
    
    
    5.60
    %(6)
    
    
    
    
    
    $
    377,290
    
    
    $
    390,072
 
 (1)
    
    The loan was prepaid in February 2008.(2)
    
    The loan was prepaid in July 2008.(3)
    
    The maturity date on these loans represents the anticipated repayment date of the
loans, after which date the interest rates on the loans increase.(4)
    
    The Suburban Maryland Portfolio consists of the following properties: Deer Park
Center, 6900 English Muffin Way, Gateway Center, Gateway West, 4451 Georgia Pacific, 20270
Goldenrod Lane, 15 Wormans Mill Court, Girard Business Center, Girard Place, Old Courthouse
Square, Patrick Center, 7561 Lindbergh Drive, West Park and Woodlands Business Center.(5)
    
    On June 5, 2008, the Company sold its Alexandria Corporate Park property and
replaced it in the collateral base with two properties, Northridge I & II and 15395 John
Marshall Highway.(6)
    
    Weighted average interest rate on total mortgage debt. 15




---



##### 



(b) Exchangeable Senior Notes
  (c) Unsecured Revolving Credit Facility
  (6) Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    June 30, 2007Net income (loss)
    
    $
    17,606
    
    
    $
    16
    
    
    $
    19,908
    
    
    $
    (205
    )Unrealized gain on derivative, net
of minority interests
    
    
    978
    
    
    
    
    
    
    
    682
    
    
    
    Total comprehensive income (loss)
    
    $
    18,584
    
    
    $
    16
    
    
    $
    20,590
    
    
    $
    (205
    )
 (7) Fair Value Measurements
 The Fair Value Option for Financial Assets and Financial Liabilities
- Including an Amendment of FASB Statement No. 115
 16




---



##### 



Balance atJune 30, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Derivative instrument-swap agreement
    
    $
    682
    
    
    $
    
    
    
    $
    682
    
    
    $
    
  (8) Segment Information
    Three Months Ended June 30, 2008Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedNumber of buildings
    
    
    63
    
    
    
    47
    
    
    
    53
    
    
    
    163Square feet
    
    
    3,362,270
    
    
    
    2,759,654
    
    
    
    5,241,891
    
    
    
    11,363,815Total revenues
    
    $
    10,374
    
    
    $
    9,111
    
    
    $
    10,927
    
    
    $
    30,412Property operating expense
    
    
    (1,884
    )
    
    
    (1,861
    )
    
    
    (2,482
    )
    
    
    (6,227
    )Real estate taxes and insurance
    
    
    (923
    )
    
    
    (1,074
    )
    
    
    (1,035
    )
    
    
    (3,032
    )Total property operating income
    
    $
    7,567
    
    
    $
    6,176
    
    
    $
    7,410
    
    
    
    21,153Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,022
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,776
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,838
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,624Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,465Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,606Total assets(1)
    
    $
    384,289
    
    
    $
    279,744
    
    
    $
    312,691
    
    
    $
    1,020,231Capital expenditures(2)
    
    $
    5,647
    
    
    $
    7,019
    
    
    $
    4,720
    
    
    $
    17,504
 17




---



##### 



Three Months Ended June 30, 2007Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedNumber of buildings
    
    
    63
    
    
    
    48
    
    
    
    53
    
    
    
    164Square feet
    
    
    3,288,182
    
    
    
    2,978,966
    
    
    
    5,100,823
    
    
    
    11,367,971Total revenues
    
    $
    9,852
    
    
    $
    9,125
    
    
    $
    10,606
    
    
    $
    29,583Property operating expense
    
    
    (1,766
    )
    
    
    (1,818
    )
    
    
    (2,435
    )
    
    
    (6,019
    )Real estate taxes and insurance
    
    
    (887
    )
    
    
    (847
    )
    
    
    (992
    )
    
    
    (2,726
    )Total property operating income
    
    $
    7,199
    
    
    $
    6,460
    
    
    $
    7,179
    
    
    
    20,838Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,117
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,835
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,621
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    561Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16Total assets(1)
    
    $
    380,799
    
    
    $
    325,494
    
    
    $
    302,840
    
    
    $
    1,046,426Capital expenditures(2)
    
    $
    1,942
    
    
    $
    4,461
    
    
    $
    6,294
    
    
    $
    12,833
 Six Months Ended June 30, 2008Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedTotal revenues
    
    $
    20,666
    
    
    $
    17,868
    
    
    $
    22,019
    
    
    $
    60,553Property operating expense
    
    
    (4,175
    )
    
    
    (3,790
    )
    
    
    (4,966
    )
    
    
    (12,931
    )Real estate taxes and insurance
    
    
    (1,886
    )
    
    
    (2,003
    )
    
    
    (2,060
    )
    
    
    (5,949
    )Total property operating income
    
    $
    14,605
    
    
    $
    12,075
    
    
    $
    14,993
    
    
    
    41,673Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,261
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,908
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,539
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,815Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,908
 Six Months Ended June 30, 2007Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedTotal revenues
    
    $
    19,750
    
    
    $
    18,095
    
    
    $
    20,640
    
    
    $
    58,485Property operating expense
    
    
    (3,971
    )
    
    
    (3,875
    )
    
    
    (4,566
    )
    
    
    (12,412
    )Real estate taxes and insurance
    
    
    (1,748
    )
    
    
    (1,567
    )
    
    
    (1,942
    )
    
    
    (5,257
    )Total property operating income
    
    $
    14,031
    
    
    $
    12,653
    
    
    $
    14,132
    
    
    
    40,816Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,791
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,124
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,587
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,075Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (205
    )
 
 (1)
    
    Corporate assets not allocated to any of the Companys reportable segments
totaled $43,507 and $37,293 at June 30, 2008 and 2007, respectively.(2)
    
    Capital expenditures for corporate assets not allocated to any of the Companys
reportable segments totaled $118 and $136 at June 30, 2008 and 2007, respectively. 18




---



##### 



(9) Supplemental Disclosure of Cash Flow Information
  2008
    
    2007Cash paid for interest, net
    
    $
    17,829
    
    
    $
    17,848Non-cash investing and financing activities:Debt assumed in connection with acquisitions of real
estate
    
    
    
    
    
    
    8,883Issuance of Operating Partnership units in exchange
for limited partnership interests
    
    
    
    
    
    
    1,701Conversion of Operating Partnership units into common
shares
    
    
    358
    
    
    
    219
    19




---



##### 



The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the financial statements and notes thereto appearing
elsewhere in this Form 10-Q . The discussion and analysis is derived from the consolidated operating
results and activities of First Potomac Realty Trust.
    
    
    maintain and increase occupancy rates and/or increase rental rates at its properties;
    
    sell assets to third parties or contribute properties to a joint venture; and
    
    continue to grow its portfolio through acquisition of new properties, potentially
through a joint venture.
  Executive Summary
   20




---



##### 



Significant Second Quarter Transactions
 
    
    On June 5, 2008, the Company sold its Alexandria Corporate Park property, located at
6315 Bren Mar Drive in Alexandria, Virginia, for net proceeds of $50.6 million. The
Company reported a gain on the sale of $14.3 million in its second quarter results.
Operating results and the gain on sale for the Alexandria Corporate Park property are
reflected as discontinued operations in the Companys Consolidated Statement of
Operations. The Company used the proceeds to pay down a portion of the outstanding
balance on its unsecured revolving credit facility;
    
    During the second quarter of 2008, the Company executed 347,000 square feet of new
leases, including 76,000 square feet at Ammendale Business Park, 54,000 square feet at
Windsor at Battlefield and 33,000 square feet at Norfolk Commerce Park. Rent is expected
to commence for all new leases by the end of the first quarter of 2009;
    
    During the second quarter of 2008, the Company executed 541,000 square feet of renewal
leases, which include 172,000 square feet at Plaza 500 and 118,000 square feet at Glenn
Dale Business Center;
    
    On July 23, 2008, the Company received an amended commitment for a $70 million secured
term loan from KeyBank, N.A. to refinance the approximately $70 million mortgage loan on
its Suburban Maryland Portfolio. It is anticipated that the new loan will have an initial
balance of $35 million with the ability to increase the loan by $35 million. This will
allow certain Suburban Maryland Portfolio assets to be included in the Companys
unencumbered borrowing base, allowing the Company to make full use of its unsecured
revolving credit facility, which has a lower interest rate. The new loan will have a
two-year term, with a Company option to extend the loan for an additional one-year period
with the payment of a 25 basis point extension fee. The loan will bear interest at a rate
of LIBOR plus 225 basis points;
    
    On July 7, 2008, the Company prepaid the $7.0 million remaining principal balance and
the related accrued interest on the mortgage loan that encumbered a building in Norfolk
Commerce Park. The loan, which was to mature on August 7, 2008, had a contractual
interest rate of 6.90% and an effective interest rate of 5.28%. The prepayment was
funded with borrowings on the Companys unsecured revolving credit facility and available
cash; and
    
    In May 2008, the Company repurchased $20.25 million of its Exchangeable Senior Notes,
at an average price of 85.24%, which resulted in a gain of $2.6 million, net of deferred
financing costs and original issue discount write-offs. The repurchases were funded with
borrowings on the Companys unsecured revolving credit facility and available cash.
 Development and Redevelopment Activity
    
    
    Ammendale Business Park  a 76,000 square foot business park property redevelopment.
Costs incurred to date include architectural and engineering demolition drawings as well as
construction costs that include the complete gutting of the interior (floors, walls, doors,
ceiling, mechanical, electrical, etc.) in addition to the previously completed roofing and
roof top unit demolition costs;
    
    Enterprise Parkway  a 71,000 square foot multi-tenanted office space redevelopment.
Costs incurred to date include building, lobby and common corridor renovation as well as
schematic architectural and engineering design for future tenant layouts;
    
    Gateway 270  a 55,000 square foot business park redevelopment. Costs incurred to date
include architectural and engineering design and permitting;
 21




---



##### 




    
    Greenbrier Technology Center III  a 48,000 square foot office building is currently in
the design phase. Architectural and civil schematic designs have been completed and design
development drawings are in progress; and
    
    Sterling Park Business Center  a 57,000 business park building, adjacent to the
recently completed building mentioned above, is in the initial phases of construction.
Costs to date are for site preparation work as well as design planning.
  Critical Accounting Policies and Estimates
   Revenue Recognition
   Investments in Real Estate and Real Estate Entities
   Buildings
    
    39 yearsBuilding improvements
    
    5 to 15 yearsFurniture, fixtures and equipment
    
    5 to 15 yearsTenant improvements
    
    Shorter of the useful lives of
the assets or the terms of the
related leasesLease related intangible assets
    
    Term of related lease
 22




---



##### 



Purchase Accounting
  
    
    value of leases in-place on the date of acquisition based on the leasing origination
costs at the date of the acquisition, which approximates the market value of the lease
origination costs had the in-place leases been originated on the date of acquisition; the
value of in-place leases represents absorption costs for the estimated lease-up period in
which vacancy and foregone revenue are incurred;
    
    the value of above and below market in-place leases based on the present values (using a
discount rate that reflects the risks associated with the leases acquired) of the
difference between the contractual rent amounts to be paid under the lease and the
estimated fair market lease rates for the corresponding spaces over the remaining
non-cancelable terms of the related leases, which range from one to twenty years; and
    
    the intangible value of tenant or customer relationships.
  Share-Based Compensation
 Share-Based
Payment
 23




---



##### 



Results of Operations
 Comparison of the Three and Six Months Ended June 30, 2008 to the Three and Six Months Ended June
30, 2007
 2007 Acquisitions
   Total Revenues
  Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Increase
    
    Change
    
    Increase
    
    ChangeRental
    
    $
    25,160
    
    
    $
    24,714
    
    
    $
    49,826
    
    
    $
    48,508
    
    
    $
    446
    
    
    
    2
    %
    
    $
    1,318
    
    
    
    3
    %Tenant reimbursements & other
    
    $
    5,252
    
    
    $
    4,869
    
    
    $
    10,727
    
    
    $
    9,977
    
    
    $
    383
    
    
    
    8
    %
    
    $
    750
    
    
    
    8
    %
 Rental Revenue
    Tenant Reimbursements and Other Revenues
   24




---



##### 



Total Expenses
 Property Operating Expenses
  Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Increase
    
    Change
    
    Increase
    
    ChangeProperty operating
    
    $
    6,227
    
    
    $
    6,019
    
    
    $
    12,931
    
    
    $
    12,412
    
    
    $
    208
    
    
    
    3
    %
    
    $
    519
    
    
    
    4
    %Real estate taxes & insurance
    
    $
    3,032
    
    
    $
    2,726
    
    
    $
    5,949
    
    
    $
    5,257
    
    
    $
    306
    
    
    
    11
    %
    
    $
    692
    
    
    
    13
    %
     Other Operating Expenses
  Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Increase
    
    Change
    
    Decrease
    
    ChangeGeneral and
administrative
    
    $
    2,838
    
    
    $
    2,621
    
    
    $
    5,539
    
    
    $
    5,587
    
    
    $
    217
    
    
    
    8
    %
    
    $
    48
    
    
    
    1
    %
   25




---



##### 



Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Decrease
    
    Change
    
    Decrease
    
    ChangeDepreciation and amortization
    
    $
    9,022
    
    
    $
    10,117
    
    
    $
    18,261
    
    
    $
    19,791
    
    
    $
    1,095
    
    
    
    11
    %
    
    $
    1,530
    
    
    
    8
    %
  Other Expense
  Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Decrease
    
    Change
    
    Increase
    
    ChangeInterest expense
    
    $
    8,776
    
    
    $
    8,835
    
    
    $
    17,908
    
    
    $
    17,124
    
    
    $
    59
    
    
    
    1
    %
    
    $
    784
    
    
    
    5
    %
   26




---



##### 



Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Decrease
    
    Change
    
    Decrease
    
    ChangeInterest and other
income
    
    $
    104
    
    
    $
    172
    
    
    $
    235
    
    
    $
    366
    
    
    $
    68
    
    
    
    40
    %
    
    $
    131
    
    
    
    36
    %
   Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Increase
    
    Change
    
    Increase
    
    ChangeGain on early
retirement of debt
    
    $
    2,620
    
    
    $
    
    
    
    $
    4,732
    
    
    $
    
    
    
    $
    2,620
    
    
    
    
    
    
    $
    4,732
    
    
    
    
  Minority Interests from Continuing Operations
  Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Increase
    
    Change
    
    Increase
    
    ChangeMinority interests
    
    $
    100
    
    
    $
    (18
    )
    
    $
    152
    
    
    $
    (40
    )
    
    $
    118
    
    
    
    656
    %
    
    $
    192
    
    
    
    480
    %
  27




---



##### 



Income from Discontinued Operations
  Three Months
    
    Six MonthsThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2008
    
    2007
    
    2008
    
    2007
    
    Increase
    
    Change
    
    Increase
    
    ChangeIncome from
discontinued
operations
    
    $
    14,465
    
    
    $
    561
    
    
    $
    15,128
    
    
    $
    1,075
    
    
    $
    13,904
    
    
    
    2478
    %
    
    $
    14,053
    
    
    
    1307
    %
  Liquidity and Capital Resources
     Cash Flows
  Six Months EndedJune 30,(amounts in thousands)
    
    2008
    
    2007
    
    ChangeCash provided by operating activities
    
    $
    18,223
    
    
    $
    20,157
    
    
    $
    (1,934
    )Cash provided by (used in) investing activities
    
    $
    33,069
    
    
    $
    (90,729
    )
    
    $
    123,798Cash (used in) provided by financing activities
    
    $
    (50,092
    )
    
    $
    34,668
    
    
    $
    (84,760
    )
 28




---



##### 



Same Property Net Operating Income
  29




---



##### 



Comparison of the Three and Six Months Ended June 30, 2008 to the Three and Six Months Ended June
30, 2007
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    $
    
    
    %
    
    
    June 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeNumber of buildings (1)
    
    
    159
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    153
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    24,283
    
    
    $
    24,429
    
    
    $
    (146
    )
    
    
    (0.6
    )
    
    $
    45,139
    
    
    $
    45,815
    
    
    $
    (676
    )
    
    
    (1.5
    )Tenant reimbursements
    
    
    4,831
    
    
    
    4,705
    
    
    
    126
    
    
    
    2.7
    
    
    
    9,382
    
    
    
    9,391
    
    
    
    (9
    )
    
    
    (0.1
    )Total same property revenue
    
    
    29,114
    
    
    
    29,134
    
    
    
    (20
    )
    
    
    
    
    
    
    54,521
    
    
    
    55,206
    
    
    
    (685
    )
    
    
    (1.2
    )Same property operating expensesProperty
    
    
    5,422
    
    
    
    5,551
    
    
    
    (129
    )
    
    
    (2.3
    )
    
    
    10,842
    
    
    
    11,287
    
    
    
    (445
    )
    
    
    (3.9
    )Real estate taxes and insurance
    
    
    2,936
    
    
    
    2,687
    
    
    
    249
    
    
    
    9.3
    
    
    
    5,469
    
    
    
    4,996
    
    
    
    473
    
    
    
    9.5Total same property operating
expenses
    
    
    8,358
    
    
    
    8,238
    
    
    
    120
    
    
    
    1.5
    
    
    
    16,311
    
    
    
    16,283
    
    
    
    28
    
    
    
    0.2Same property net operating income
    
    $
    20,756
    
    
    $
    20,896
    
    
    $
    (140
    )
    
    
    (0.7
    )
    
    $
    38,210
    
    
    $
    38,923
    
    
    $
    (713
    )
    
    
    (1.8
    )Reconciliation to net income (loss)Same property net operating income
    
    $
    20,756
    
    
    $
    20,896
    
    
    
    
    
    
    
    
    
    
    $
    38,210
    
    
    $
    38,923Non-comparable net operating income
(2)
    
    
    397
    
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    3,463
    
    
    
    1,893General and administrative expenses
    
    
    (2,838
    )
    
    
    (2,621
    )
    
    
    
    
    
    
    
    
    
    
    (5,539
    )
    
    
    (5,587
    )Depreciation and amortization
    
    
    (9,022
    )
    
    
    (10,117
    )
    
    
    
    
    
    
    
    
    
    
    (18,261
    )
    
    
    (19,791
    )Other expenses, net
    
    
    (6,052
    )
    
    
    (8,663
    )
    
    
    
    
    
    
    
    
    
    
    (12,941
    )
    
    
    (16,758
    )Minority interests
    
    
    (100
    )
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    40Discontinued operations (3)
    
    
    14,465
    
    
    
    561
    
    
    
    
    
    
    
    
    
    
    
    15,128
    
    
    
    1,075Net income (loss)
    
    $
    17,606
    
    
    $
    16
    
    
    
    
    
    
    
    
    
    
    $
    19,908
    
    
    $
    (205
    )
 Weighted Average
    
    Weighted AverageOccupancy at June 30,
    
    Occupancy at June 30,2008
    
    2007
    
    2008
    
    2007Same Properties
    
    
    85.6
    %
    
    
    87.2
    %
    
    
    85.7
    %
    
    
    87.1
    %Non-comparable Properties(4)
    
    
    96.6
    %
    
    
    87.1
    %
    
    
    93.2
    %
    
    
    89.4
    %Total
    
    
    86.1
    %
    
    
    87.2
    %
    
    
    86.4
    %
    
    
    87.3
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an
administrative overhead allocation for comparative purposes.(3)
    
    Discontinued operations represent income and the gain on sale related to Alexandria Corporate Park, which was sold in June 2008.(4)
    
    Non-comparable Properties include: Alexandria Corporate Park, Crossways Commerce Center (expansion), Rivers Bend Center II and Annapolis Commerce Park
East. In addition, non-comparable properties for the six months ended June 30, 2008 also include: John Marshall Highway (Building II), Greenbrier Circle
Corporate Center, Greenbrier Technology Center I, Pine Glen and Ammendale Commerce Center.  30




---



##### 



Maryland
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    

    $
    
    
    %
    
    
    June 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeNumber of buildings (1)
    
    
    61
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    59
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    8,167
    
    
    $
    8,050
    
    
    $
    117
    
    
    
    1.5
    
    
    $
    15,999
    
    
    $
    15,851
    
    
    $
    148
    
    
    
    0.9Tenant reimbursements
    
    
    1,497
    
    
    
    1,612
    
    
    
    (115
    )
    
    
    (7.1
    )
    
    
    3,194
    
    
    
    3,441
    
    
    
    (247
    )
    
    
    (7.2
    )Total same property revenue
    
    
    9,664
    
    
    
    9,662
    
    
    
    2
    
    
    
    
    
    
    
    19,193
    
    
    
    19,292
    
    
    
    (99
    )
    
    
    (0.5
    )Same property operating expensesProperty
    
    
    1,622
    
    
    
    1,650
    
    
    
    (28
    )
    
    
    (1.7
    )
    
    
    3,615
    
    
    
    3,812
    
    
    
    (197
    )
    
    
    (5.2
    )Real estate taxes and insurance
    
    
    894
    
    
    
    882
    
    
    
    12
    
    
    
    1.4
    
    
    
    1,784
    
    
    
    1,716
    
    
    
    68
    
    
    
    4.0Total same property operating
expenses
    
    
    2,516
    
    
    
    2,532
    
    
    
    (16
    )
    
    
    (0.6
    )
    
    
    5,399
    
    
    
    5,528
    
    
    
    (129
    )
    
    
    (2.3
    )Same property net operating income
    
    $
    7,148
    
    
    $
    7,130
    
    
    $
    18
    
    
    
    0.3
    
    
    $
    13,794
    
    
    $
    13,764
    
    
    $
    30
    
    
    
    0.2Reconciliation to total property operating income:Same property net operating income
    
    $
    7,148
    
    
    $
    7,130
    
    
    
    
    
    
    
    
    
    
    $
    13,794
    
    
    $
    13,764Non-comparable net operating
income(2)
    
    
    419
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    811
    
    
    
    267Total property operating income
    
    $
    7,567
    
    
    $
    7,199
    
    
    
    
    
    
    
    
    
    
    $
    14,605
    
    
    $
    14,031
 Weighted Average
    
    Weighted AverageOccupancy at June 30,
    
    Occupancy at June 30,2008
    
    2007
    
    2008
    
    2007Same Properties
    
    
    88.9
    %
    
    
    88.5
    %
    
    
    88.8
    %
    
    
    88.7
    %Non-comparable Properties(3)
    
    
    98.8
    %
    
    
    
    
    
    
    99.2
    %
    
    
    Total
    
    
    89.2
    %
    
    
    88.5
    %
    
    
    89.3
    %
    
    
    88.7
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.(3)
    
    Non-comparable Properties include: Annapolis Commerce Park East. In addition, non-comparable properties for the six months ended
June 30, 2008 also include: Ammendale Commerce Center.  31




---



##### 



Northern Virginia
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    $
    
    
    %
    
    
    June 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeNumber of buildings (1)
    
    
    47
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    7,509
    
    
    $
    7,826
    
    
    $
    (317
    )
    
    
    (4.1
    )
    
    $
    14,260
    
    
    $
    15,036
    
    
    $
    (776
    )
    
    
    (5.2
    )Tenant reimbursements
    
    
    1,579
    
    
    
    1,298
    
    
    
    281
    
    
    
    21.6
    
    
    
    2,990
    
    
    
    2,713
    
    
    
    277
    
    
    
    10.2Total same property revenue
    
    
    9,088
    
    
    
    9,124
    
    
    
    (36
    )
    
    
    (0.4
    )
    
    
    17,250
    
    
    
    17,749
    
    
    
    (499
    )
    
    
    (2.8
    )Same property operating expensesProperty
    
    
    1,690
    
    
    
    1,679
    
    
    
    11
    
    
    
    0.7
    
    
    
    3,428
    
    
    
    3,650
    
    
    
    (222
    )
    
    
    (6.1
    )Real estate taxes and insurance
    
    
    1,074
    
    
    
    847
    
    
    
    227
    
    
    
    26.8
    
    
    
    1,949
    
    
    
    1,562
    
    
    
    387
    
    
    
    24.8Total same property operating
expenses
    
    
    2,764
    
    
    
    2,526
    
    
    
    238
    
    
    
    9.4
    
    
    
    5,377
    
    
    
    5,212
    
    
    
    165
    
    
    
    3.2Same property net operating income
    
    $
    6,324
    
    
    $
    6,598
    
    
    $
    (274
    )
    
    
    (4.2
    )
    
    $
    11,873
    
    
    $
    12,537
    
    
    $
    (664
    )
    
    
    (5.3
    )Reconciliation
to total property operating incomeSame property net operating income
    
    $
    6,324
    
    
    $
    6,598
    
    
    
    
    
    
    
    
    
    
    $
    11,873
    
    
    $
    12,537Non-comparable net operating
income(2)
    
    
    (148
    )
    
    
    (138
    )
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    116Total property operating income
    
    $
    6,176
    
    
    $
    6,460
    
    
    
    
    
    
    
    
    
    
    $
    12,075
    
    
    $
    12,653
 Weighted Average
    
    Weighted AverageOccupancy at June 30,
    
    Occupancy at June 30,2008
    
    2007
    
    2008
    
    2007Same Properties
    
    
    85.8
    %
    
    
    90.5
    %
    
    
    85.7
    %
    
    
    90.3
    %Non-comparable Properties(3)
    
    
    89.9
    %
    
    
    82.3
    %
    
    
    94.5
    %
    
    
    84.3
    %Total
    
    
    86.2
    %
    
    
    89.7
    %
    
    
    86.5
    %
    
    
    89.6
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an
administrative overhead allocation for comparative purposes.(3)
    
    Non-comparable Properties include: Alexandria Corporate Park. In addition, non-comparable properties for the six months ended June 30, 2008
also include: John Marshall Highway (Building II).  32




---



##### 



Southern Virginia
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    $
    
    
    %
    
    
    June 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeNumber of buildings (1)
    
    
    51
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    8,607
    
    
    $
    8,553
    
    
    $
    54
    
    
    
    0.6
    
    
    $
    14,880
    
    
    $
    14,928
    
    
    $
    (48
    )
    
    
    (0.3
    )Tenant reimbursements
    
    
    1,755
    
    
    
    1,795
    
    
    
    (40
    )
    
    
    (2.2
    )
    
    
    3,198
    
    
    
    3,237
    
    
    
    (39
    )
    
    
    (1.2
    )Total same property revenue
    
    
    10,362
    
    
    
    10,348
    
    
    
    14
    
    
    
    0.1
    
    
    
    18,078
    
    
    
    18,165
    
    
    
    (87
    )
    
    
    (0.5
    )Same property operating expensesProperty
    
    
    2,110
    
    
    
    2,222
    
    
    
    (112
    )
    
    
    (5.0
    )
    
    
    3,799
    
    
    
    3,825
    
    
    
    (26
    )
    
    
    (0.7
    )Real estate taxes and insurance
    
    
    968
    
    
    
    958
    
    
    
    10
    
    
    
    1.0
    
    
    
    1,736
    
    
    
    1,718
    
    
    
    18
    
    
    
    1.0Total same property operating
expenses
    
    
    3,078
    
    
    
    3,180
    
    
    
    (102
    )
    
    
    (3.2
    )
    
    
    5,535
    
    
    
    5,543
    
    
    
    (8
    )
    
    
    (0.1
    )Same property net operating income
    
    $
    7,284
    
    
    $
    7,168
    
    
    $
    116
    
    
    
    1.6
    
    
    $
    12,543
    
    
    $
    12,622
    
    
    $
    (79
    )
    
    
    (0.6
    )Reconciliation
to total property operating incomeSame property net operating income
    
    $
    7,284
    
    
    $
    7,168
    
    
    
    
    
    
    
    
    
    
    $
    12,543
    
    
    $
    12,622Non-comparable net operating
income (2)
    
    
    126
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    2,450
    
    
    
    1,510Total property operating income
    
    $
    7,410
    
    
    $
    7,179
    
    
    
    
    
    
    
    
    
    
    $
    14,993
    
    
    $
    14,132
 Weighted Average
    
    Weighted AverageOccupancy at June 30,
    
    Occupancy at June 30,2008
    
    2007
    
    2008
    
    2007Same Properties
    
    
    83.2
    %
    
    
    84.4
    %
    
    
    83.4
    %
    
    
    84.2
    %Non-comparable Properties(3)
    
    
    100.0
    %
    
    
    
    
    
    
    91.5
    %
    
    
    Total
    
    
    84.0
    %
    
    
    84.4
    %
    
    
    84.6
    %
    
    
    84.2
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an
administrative overhead allocation for comparative purposes.(3)
    
    Non-comparable Properties include: Crossways Commerce Center (expansion) and Rivers Bend Center II. In addition, non-comparable
properties for the six months ended June 30, 2008 also include: Greenbrier Circle Corporate Center, Greenbrier Technology Center I and Pine Glen.  Contractual Obligations
  Dividends and Distributions
   33




---



##### 



Funds From Operations
     Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    17,606
    
    
    $
    16
    
    
    $
    19,908
    
    
    $
    (205
    )Add:
    
    Depreciation and amortization of real estate assets
    
    
    9,022
    
    
    
    10,117
    
    
    
    18,261
    
    
    
    19,791Discontinued operations depreciation and amortization
    
    
    197
    
    
    
    275
    
    
    
    478
    
    
    
    550Minority interests
    
    
    560
    
    
    
    
    
    
    
    633
    
    
    
    (5
    )Less: Gain on sale of disposed property
    
    
    (14,274
    )
    
    
    
    
    
    
    (14,274
    )
    
    
    FFO available to common shareholders and
unitholders
    
    $
    13,111
    
    
    $
    10,408
    
    
    $
    25,006
    
    
    $
    20,131Weighted average common shares and
Operating Partnership units outstanding
 diluted
    
    
    24,953
    
    
    
    25,004
    
    
    
    24,937
    
    
    
    25,049
 Forward Looking Statements
  34




---



##### 



35




---



##### 



PART II: OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  Item 6. Exhibits
 No.
    
    Description3.1
    
    Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed
with the SEC on October 1, 2003.3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the
SEC on October 1, 2003.4.1
    
    Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated
September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration
Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003.4.2
    
    Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.3
    
    Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.4
    
    Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22,
2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
on June 23, 2006).4.5
    
    Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference
to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006).4.6
    
    Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed on June 23, 2006).4.7
    
    Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited
Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
December 12, 2006).
 36




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##### 



No.
    
    Description4.8
    
    Form of First Potomac Realty
Investment Limited Partnership
4.0% Exchangeable Senior Note due
2011 (incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report on
Form 8-K filed on December 12,
2006).10.1
    
    Form of Restricted Common Share
Award for Trustees (incorporated by
reference to Exhibit 10.1 to the
Registrants Current Report on Form
8-K filed on May 28, 2008).31.1
    
    Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
 37




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##### 



FIRST POTOMAC REALTY TRUSTDate: August 8, 2008
    /s/ Douglas J. DonatelliDouglas J. DonatelliChairman of the Board and Chief Executive OfficerDate: August 8, 2008
    /s/ Barry H. BassBarry H. BassExecutive Vice President and Chief Financial Officer 38




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##### 



EXHIBIT INDEX
 No.
    
    Description3.1
    
    Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed
with the SEC on October 1, 2003.3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the
SEC on October 1, 2003.4.1
    
    Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated
September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration
Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003.4.2
    
    Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.3
    
    Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.4
    
    Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22,
2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
on June 23, 2006).4.5
    
    Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference
to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006).4.6
    
    Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed on June 23, 2006).4.7
    
    Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited
Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
December 12, 2006).4.8
    
    Form of First Potomac Realty
Investment Limited Partnership
4.0% Exchangeable Senior Note due
2011 (incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report on
Form 8-K filed on December 12,
2006).10.1
    
    Form of Restricted Common Share
Award for Trustees (incorporated by
reference to Exhibit 10.1 to the
Registrants Current Report on Form
8-K filed on May 28, 2008).31.1
    
    Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)