**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**


________________




**Form 10-Q**





**(Mark
                One)**R
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****For
                the quarterly period ended June 30, 2007****or**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****For
                the transition period
                from                                                                       to**





**Commission
      file number: 000-50805**


________________




**Hines
      Real Estate Investment Trust, Inc.**


*(Exact
      Name of Registrant as Specified in its Charter)*





**Maryland**
            **20-0138854***(State
                or Other Jurisdiction of*
            *(I.R.S.
                Employer**Incorporation
                or Organization)*
            *Identification
                No.)***2800
                Post Oak Boulevard****Suite 5000****Houston,
                Texas**
            **77056-6118***(Address
                of principal executive offices)*
            *(Zip
                code)*





**Registrant’s
      telephone number, including area code:**


**(888) 220-6121**





*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 R     No £





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





Large
      accelerated filer £    Accelerated
      filer £     Non-accelerated
      filer R





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





As
      of
      August 7, 2007, 143,223,877 shares of the registrant’s common stock were
      outstanding.








**TABLE
      OF CONTENTS**





**PART I –
                FINANCIAL INFORMATION**Item 1.
            Consolidated
                Financial Statements
                (Unaudited)Condensed
                Consolidated Balance
                Sheets
            
            
            2Condensed
                Consolidated Statements of
                Operations
            
            
            3Condensed
                Consolidated Statement of Shareholders’
                Equity
            
            
            4Condensed
                Consolidated Statements of Cash
                Flows
            
            
            5Notes
                to the Condensed Consolidated Financial
                Statements
            
            
            6Item 2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            
            
            22Item 3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            
            
            36Item 4T.
            Controls
                and
                Procedures
            
            
            37**PART II –
                OTHER INFORMATION**Item 2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            
            
            37Item 6.
            Exhibits
            
            
            37SIGNATURESCertification
                of CEO pursuant to Section
                302Certification
                of CFO pursuant to Section
                302Certification
                of CEO & CFO pursuant to Section
                906


1


**PART I**





**FINANCIAL
      INFORMATION**





**Item 1.*Consolidated
      Financial Statements.***





**HINES
      REAL ESTATE INVESTMENT TRUST, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(UNAUDITED)**





**June
                30,**
              **2007**
            
            
            **December 31,****2006****(In
                thousands, except per share amounts)****ASSETS**Investment
                property, net
            
            $
            1,281,732
            
            
            $
            798,329Investments
                in unconsolidated entities
            
            
            322,553
            
            
            
            307,553Cash
                and cash equivalents
            
            
            210,953
            
            
            
            23,022Restricted
                cash
            
            
            7,473
            
            
            
            2,483Distributions
                receivable
            
            
            6,044
            
            
            
            5,858Interest
                rate swap contracts
            
            
            11,434
            
            
            
            1,511Tenant
                and other receivables
            
            
            17,816
            
            
            
            5,172Out-of-market
                lease assets, net
            
            
            41,282
            
            
            
            36,414Deferred
                leasing costs, net
            
            
            26,328
            
            
            
            17,189Deferred
                financing costs, net
            
            
            5,859
            
            
            
            5,412Other
                assets
            
            
            67,466
            
            
            
            10,719**TOTAL
                ASSETS**
            
            $
            1,998,940
            
            
            $
            1,213,662**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Liabilities:Accounts
                payable and accrued expenses
            
            $
            42,825
            
            
            $
            28,899Due
                to affiliates
            
            
            8,534
            
            
            
            8,954Out-of-market
                lease liabilities, net
            
            
            41,455
            
            
            
            15,814Other
                liabilities
            
            
            9,847
            
            
            
            6,488Interest
                rate swap contracts
            
            
            239
            
            
            
            5,955Participation
                interest liability
            
            
            17,367
            
            
            
            11,801Distributions
                payable
            
            
            18,418
            
            
            
            11,281Notes
                payable
            
            
            716,052
            
            
            
            481,233Total
                liabilities
            
            
            854,737
            
            
            
            570,425Minority
                interest
            
            
            221
            
            
            
            652Commitments
                and Contingencies
            
            
            —
            
            
            
            —Shareholders’
                equity:Preferred
                shares, $.001 par value; 500,000 preferred shares authorized, none
                issued or outstanding as of June 30, 2007 and December 31,
                2006
            
            
            —
            
            
            
            —Common
                shares, $.001 par value; 1,500,000 common shares authorized as of
                June 30, 2007 and December 31, 2006; 137,177 and 80,217 common shares
                issued and outstanding as of June 30, 2007 and December 31, 2006,
                respectively
            
            $
            137
            
            
            $
            80Additional
                paid-in capital
            
            
            1,195,106
            
            
            
            692,780Retained
                deficit
            
            
            (56,572
            )
            
            
            (50,275
            )Accumulated
                other comprehensive income
            
            
            5,311
            
            
            
            —Total
                shareholders’ equity
            
            
            1,143,982
            
            
            
            642,585**TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY**
            
            $
            1,998,940
            
            
            $
            1,213,662





See
      notes
      to the condensed consolidated financial statements.


2


**HINES
      REAL ESTATE INVESTMENT TRUST, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**





**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****(In
                thousands, except per share amounts)****Revenues:**Rental
                revenue
            
            $
            35,251
            
            
            $
            15,920
            
            
            $
            64,606
            
            
            $
            23,997Other
                revenue
            
            
            2,028
            
            
            
            574
            
            
            
            3,347
            
            
            
            890Total
                revenues
            
            
            37,279
            
            
            
            16,494
            
            
            
            67,953
            
            
            
            24,887**Expenses**:Property
                operating expenses
            
            
            9,704
            
            
            
            4,517
            
            
            
            16,833
            
            
            
            7,145Real
                property taxes
            
            
            5,982
            
            
            
            2,673
            
            
            
            10,718
            
            
            
            3,685Property
                management fees
            
            
            958
            
            
            
            390
            
            
            
            1,662
            
            
            
            600Depreciation
                and amortization
            
            
            13,083
            
            
            
            5,780
            
            
            
            24,641
            
            
            
            8,826Asset
                management and acquisition fees
            
            
            4,902
            
            
            
            4,667
            
            
            
            11,131
            
            
            
            7,558Organizational
                and offering expenses
            
            
            1,104
            
            
            
            1,527
            
            
            
            3,501
            
            
            
            1,660General
                and administrative expenses
            
            
            1,309
            
            
            
            918
            
            
            
            2,151
            
            
            
            1,528Total
                expenses
            
            
            37,042
            
            
            
            20,472
            
            
            
            70,637
            
            
            
            31,002**Income
                (loss) before other income (expenses), income tax expense and (income)
                loss allocated to minority interests**
            
            
            237
            
            
            
            (3,978
            )
            
            
            (2,684
            )
            
            
            (6,115
            )**Other
                income (expenses):**Equity
                in losses of Hines-Sumisei U.S. Core Office Fund,
                L.P.
            
            
            (757
            )
            
            
            (812
            )
            
            
            (1,894
            )
            
            
            (913
            )Gain
                on derivative instruments, net
            
            
            15,209
            
            
            
            1,356
            
            
            
            15,847
            
            
            
            1,356Gain
                on foreign currency transactions
            
            
            —
            
            
            
            —
            
            
            
            134
            
            
            
            —Interest
                expense
            
            
            (10,399
            )
            
            
            (5,268
            )
            
            
            (19,832
            )
            
            
            (7,773
            )Interest
                income
            
            
            2,460
            
            
            
            149
            
            
            
            2,861
            
            
            
            233**Income
                (loss) before income tax expense and (income) loss allocated to minority
                interests**
            
            
            6,750
            
            
            
            (8,553
            )
            
            
            (5,568
            )
            
            
            (13,212
            )Income
                tax expense
            
            
            (268
            )
            
            
            —
            
            
            
            (334
            )
            
            
            —(Income)
                loss allocated to minority interests
            
            
            (326
            )
            
            
            131
            
            
            
            (395
            )
            
            
            254**Net
                income (loss)**
            
            $
            6,156
            
            
            $
            (8,422
            )
            
            $
            (6,297
            )
            
            $
            (12,958
            )**Basic
                and diluted loss per common share:**Income
                (loss) per common share
            
            $
            0.05
            
            
            $
            (0.21
            )
            
            $
            (0.06
            )
            
            $
            (0.38
            )Weighted
                average number of common shares outstanding
            
            
            115,588
            
            
            
            41,078
            
            
            
            102,136
            
            
            
            34,053





See
      notes
      to the condensed consolidated financial statements.





3


**HINES
      REAL ESTATE INVESTMENT TRUST, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**


**For
      the Six Months Ended June 30, 2007**


**(UNAUDITED)**





**Common**
              **Shares**
            
            
            **Amount**
            
            
            **Additional**
              **Paid-In**
              **Capital**
            
            
            **Retained**
              **Deficit**
            
            
            **Accumulated**
              **Other**
              **Comprehensive**
              **Income**
            
            
            **Shareholders’**
              **Equity****(In
                thousands)****BALANCE,****January
                1, 2007**
            
            
            80,217
            
            
            $
            80
            
            
            $
            692,780
            
            
            $
            (50,275
            )
            
            $
            —
            
            
            $
            642,585Issuance
                of common shares
            
            
            57,191
            
            
            
            57
            
            
            
            591,935
            
            
            
            —
            
            
            
            —
            
            
            
            591,992Redemption
                of common shares
            
            
            (231
            )
            
            
            —
            
            
            
            (2,160
            )
            
            
            —
            
            
            
            —
            
            
            
            (2,160
            )Distributions
                declared
            
            
            —
            
            
            
            —
            
            
            
            (31,603
            )
            
            
            —
            
            
            
            —
            
            
            
            (31,603
            )Selling
                commissions and dealer manager fees
            
            
            —
            
            
            
            —
            
            
            
            (51,253
            )
            
            
            —
            
            
            
            —
            
            
            
            (51,253
            )Other
                offering costs, net
            
            
            —
            
            
            
            —
            
            
            
            (4,593
            )
            
            
            —
            
            
            
            —
            
            
            
            (4,593
            )Comprehensive
                loss:Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,297
            )
            
            
            —Other
                comprehensive income — Foreign currency translation
                adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,311Total
                comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (986
            )**BALANCE,****June
                30, 2007**
            
            
            137,177
            
            
            $
            137
            
            
            $
            1,195,106
            
            
            $
            (56,572
            )
            
            $
            5,311
            
            
            $
            1,143,982





See
      notes
      to the condensed consolidated financial statements.





4


**HINES
      REAL ESTATE INVESTMENT TRUST, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS**


**(UNAUDITED)**





**Six
                Months Ended June 30,****2007**
            
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (6,297
            )
            
            $
            (12,958
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            25,916
            
            
            
            9,848Non-cash
                compensation expense
            
            
            10
            
            
            
            15Equity
                in losses of Hines-Sumisei U.S. Core Office Fund,
                L.P.
            
            
            1,894
            
            
            
            913Income
                (loss) allocated to minority interests
            
            
            395
            
            
            
            (254
            )Accrual
                of organizational and offering expenses
            
            
            3,501
            
            
            
            1,660Gain
                on foreign currency transactions
            
            
            (134
            )
            
            
            —Gain
                on derivative instruments, net
            
            
            (15,847
            )
            
            
            (1,356
            )Net
                change in operating accounts
            
            
            (2,278
            )
            
            
            7,105Net
                cash provided by operating activities
            
            
            7,160
            
            
            
            4,973**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Investment
                in unconsolidated entities
            
            
            (28,896
            )
            
            
            (50,640
            )Distributions
                received from Hines-Sumisei U.S. Core Office Fund, L.P. in excess of
                equity in earnings
            
            
            11,836
            
            
            
            6,713Investments
                in property
            
            
            (467,953
            )
            
            
            (300,652
            )Investments
                in master leases
            
            
            (4,520
            )
            
            
            —Master
                lease rent receipts
            
            
            2,220
            
            
            
            —Settlement
                of foreign currency hedge
            
            
            939
            
            
            
            —Additions
                to other assets
            
            
            (64,955
            )
            
            
            (10,000
            )Increase
                in restricted cash
            
            
            (4,848
            )
            
            
            (3,771
            )Increase
                (decrease) in acquired out-of-market lease assets, net
            
            
            19,905
            
            
            
            (10,335
            )Net
                cash used in investing activities
            
            
            (536,272
            )
            
            
            (368,685
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Decrease
                in unaccepted subscriptions for common shares
            
            
            (1,341
            )
            
            
            (1,158
            )Proceeds
                from issuance of common stock
            
            
            573,903
            
            
            
            295,134Redemption
                of common shares
            
            
            (2,160
            )
            
            
            (281
            )Payments
                of selling commissions and dealer manager fees
            
            
            (48,563
            )
            
            
            (23,876
            )Payments
                of organizational and offering expenses
            
            
            (11,352
            )
            
            
            (9,800
            )Proceeds
                from advances from affiliate
            
            
            —
            
            
            
            1,667Payments
                on advances from affiliate
            
            
            —
            
            
            
            (1,095
            )Distributions
                paid to shareholders and minority interests
            
            
            (10,659
            )
            
            
            (3,239
            )Proceeds
                from notes payable
            
            
            493,415
            
            
            
            393,500Payments
                on notes payable
            
            
            (274,664
            )
            
            
            (281,400
            )Decrease
                in security deposit liability, net
            
            
            (18
            )
            
            
            —Additions
                to deferred financing costs
            
            
            (1,093
            )
            
            
            (2,371
            )Payments
                related to interest rate swap contracts
            
            
            (731
            )
            
            
            (522
            )Net
                cash provided by financing activities
            
            
            716,737
            
            
            
            366,559Effect
                of exchange rate changes on cash
            
            
            306
            
            
            
            —**Net
                change in cash and cash equivalents**
            
            
            187,931
            
            
            
            2,847**Cash
                and cash equivalents, beginning of period**
            
            
            23,022
            
            
            
            6,156**Cash
                and cash equivalents, end of period**
            
            $
            210,953
            
            
            $
            9,003





See
      notes
      to the condensed consolidated financial statements





5


**HINES
      REAL ESTATE INVESTMENT TRUST, INC.**


**NOTES TO
      CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**


**For
      the Three and Six Months Ended June 30, 2007 and 2006**


**(UNAUDITED)**





**1.  Organization**





*The
      accompanying interim unaudited condensed consolidated financial information
      has
      been prepared according to the rules and regulations of the Securities and
      Exchange Commission. Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America (“GAAP”) have been
      condensed or omitted according to such rules and regulations. For further
      information, refer to the financial statements and footnotes for the year ended
      December 31, 2006 included in Hines Real Estate Investment Trust, Inc.’s
      Annual Report on Form 10-K. In the opinion of management, all adjustments
      and eliminations, consisting only of normal recurring adjustments, necessary
      to
      present fairly and in conformity with GAAP the financial position of Hines
      Real
      Estate Investment Trust, Inc. as of June 30, 2007 and December 31, 2006,
      the results of operations and cash flows for the three and six months ended
      June
      30, 2007 and 2006 have been included. The results of operations for such interim
      periods are not necessarily indicative of the results for the full
      year.*





Hines
      Real Estate Investment Trust, Inc., a Maryland corporation (“Hines REIT” and,
      together with its consolidated subsidiaries, the “Company”), was formed on
      August 5, 2003 under the General Corporation Law of the state of Maryland
      for the purpose of engaging in the business of investing in and owning interests
      in real estate. The Company operates and intends to continue to operate in
      a
      manner to qualify as a real estate investment trust (“REIT”) for federal income
      tax purposes. The Company is structured as an umbrella partnership REIT under
      which substantially all of the Company’s current and future business is and will
      be conducted through a majority-owned subsidiary, Hines REIT Properties, L.P.
      (the “Operating Partnership”). Hines REIT is the sole general partner of the
      Operating Partnership. Subject to certain restrictions and limitations, the
      business of the Company is managed by Hines Advisors Limited Partnership (the
      “Advisor”), an affiliate of Hines Interests Limited Partnership (“Hines”),
      pursuant to the advisory agreement the Company entered into with the Advisor
      (the “Advisory Agreement”).





*Public
      Offerings*





On
      June 18, 2004, Hines REIT commenced its initial public offering, pursuant
      to which it offered a maximum of 220 million common shares for sale to the
      public (the “Initial Offering”). The Initial Offering expired on
      June 18, 2006. On June 19, 2006, the Company commenced its
      current public offering (the “Current Offering”), pursuant to which it is
      offering a maximum of $2.2 billion in common shares.





The
      following table summarizes the activity from Hines REIT’s offerings for the
      years ended December 31, 2006, 2005 and 2004 and the six months ended
      June 30, 2007 (in millions):





****
            
            **Initial
                Public Offering**
            
            
            **Current
                Public Offering**
            
            
            **All
                Offerings****Period**
            
            **#
                of Shares**
            
            
            **Proceeds**
            
            
            **#
                of Shares**
            
            
            **Proceeds**
            
            
            **#
                of Shares**
            
            
            **Proceeds**Year
                Ended December 31, 2004
            
            
            2.1
            
            
            $
            20.6
            
            
            
            —
            
            
            $
            —
            
            
            
            2.1
            
            
            $
            20.6Year
                Ended December 31, 2005
            
            
            21.0
            (a)
            
            
            207.7
            (a)
            
            
            —
            
            
            
            —
            
            
            
            21.0
            
            
            
            207.7Year
                Ended December 31, 2006
            
            
            30.1
            (b)
            
            
            299.2
            (b)
            
            
            27.3
            (b)
            
            
            282.7
            (b)
            
            
            57.4
            
            
            
            581.9Six
                Months Ended June 30, 2007
            
            
            —
            
            
            
            —
            
            
            
            57.2
            (c)
            
            
            592.0
            (c)
            
            
            57.2
            
            
            
            592.0**Total**
            
            
            53.2
            
            
            $
            527.5
            
            
            
            84.5
            
            
            $
            874.7
            
            
            
            137.7
            
            
            $
            1,402.2


__________





(a)
            Amounts
                include $2.1 million of gross proceeds relating to approximately
                223,000 shares issued under the Company’s dividend reinvestment
                plan.(b)
            Amounts
                include $13.5 million of gross proceeds relating to approximately
                1.4 million shares issued under the Company’s dividend reinvestment
                plan.(c)
            Amounts
                include $14.6 million of gross proceeds relating to approximately 1.5
                million shares issued under the Company’s dividend reinvestment
                plan.





6


As
      of
      June 30, 2007, approximately $1,149.3 million in common shares remained
      available for sale pursuant to the Current Offering, exclusive of approximately
      $176.0 million in common shares available under the Company’s dividend
      reinvestment plan.





Hines
      REIT contributes all net proceeds from its public offerings to the Operating
      Partnership in exchange for partnership units in the Operating Partnership.
      As
      of June 30, 2007 and December 31, 2006, Hines REIT owned a 98.0% and 97.4%,
      respectively, general partner interest in the Operating
      Partnership.





From
      July
      1 through August 7, 2007, Hines REIT received gross offering proceeds of
      approximately $58.2 million from the sale of 5.6 million common
      shares, including approximately $10.2 million relating to 1.0
      million shares sold under Hines REIT’s dividend reinvestment plan. As of
      August 7, 2007, $1,101.3 million in common shares remained available for sale
      to
      the public pursuant to the Current Offering, exclusive of $165.8 million in
      common shares available under the dividend reinvestment plan.





*Minority
      Interests*





Hines
      2005 VS I LP, an affiliate of Hines, owned a 0.8% and 1.3% interest in the
      Operating Partnership as of June 30, 2007 and December 31, 2006,
      respectively. As a result of HALP Associates Limited Partnership’s (“HALP”)
      ownership of the Participation Interest (see Note 6), HALP’s percentage
      ownership in the Operating Partnership was 1.2% and 1.3% as of June 30, 2007
      and
      December 31, 2006, respectively.





*Investment
      Property*





As
      of
      June 30, 2007, the Company held direct and indirect investments in 33 office
      properties located throughout the United States and one property in Toronto,
      Canada. The Company’s interests in 22 of these properties are owned indirectly
      through the Company’s investment in Hines-Sumisei U.S. Core Office Fund,
      L.P. (the “Core Fund”). As of June 30, 2007 and December 31, 2006, the
      Company owned an approximate 29.8% and 34.0% non-managing general partner
      interest in the Core Fund, respectively.  See Note 3 for further
      discussion.





***2.  Summary
      of Significant Accounting Policies***





*Basis
      of Presentation*





The
      consolidated financial statements of the Company included in this quarterly
      report include the accounts of Hines REIT, the Operating Partnership (over
      which
      Hines REIT exercises financial and operating control) and the Operating
      Partnership’s wholly-owned subsidiaries (see Note 3), as well as the
      related amounts of minority interest. All intercompany balances and transactions
      have been eliminated in consolidation.





The
      Company evaluates the need to consolidate joint ventures based on standards
      set
      forth in Financial Accounting Standards Board (“FASB”) Interpretation
      No. 46R, *Consolidation of Variable Interest Entities*
      (“FIN 46”) and American Institute of Certified Public Accountants’
Statement of Position 78-9, *Accounting for Investments in Real Estate
      Ventures (“SOP 78-9”)*, as amended by Emerging Issues Task Force Issue
      No. 04-5, *Investor’s Accounting for an Investment**in a Limited
      Partnership When the Investor Is the Sole General Partner and the**Limited Partners Have Certain Rights.*  In accordance with this
      accounting literature, the Company will consolidate joint ventures that are
      determined to be variable interest entities for which it is the primary
      beneficiary. The Company will also consolidate joint ventures that are not
      determined to be variable interest entities, but for which it exercises control
      over major operating decisions through substantive participation rights, such
      as
      approval of budgets, selection of property managers, asset management,
      investment activity and changes in financing.





On
      June
      28, 2007, the Company invested $28.9 million into HCB River II, LLC, a joint
      venture it created with HCB Interests II LP (“HCB”). HCB is an investment
      vehicle organized by Hines and the California Public Employees’ Retirement
      System (“CalPERS”). The joint venture is in the form of a Delaware limited
      liability company governed by an Amended and Restated Limited Liability Company
      Agreement. The Company and HCB each own a 50% interest in the joint venture,
      which was organized to acquire properties in Brazil. HCB is responsible for
      managing the day-to-day operations of the joint venture, however, the Company
      has various approval rights and must approve certain major decisions related
      to
      the joint venture.





7


The
      Company concluded that the joint venture does not meet the definition of a
      variable interest entity under FIN 46. Further, as neither the Company nor
      HCB
      has a controlling interest in the joint venture or any special or
      disproportionate voting or participation rights, consolidation is not required
      under SOP 78-9. Therefore, the Company will account for its interest in the
      joint venture as an equity method investment. See Note 3 for additional details
      regarding the joint venture.





*Reportable
      Segments*





The
      FASB
      issued Statement of Financial Accounting Standards (“SFAS”) No. 131,
*Disclosures about Segments of an Enterprise and Related Information*,
      which establishes standards for reporting financial and descriptive information
      about an enterprise’s reportable segments. The Company has determined that it
      has one reportable segment, with activities related to investing in office
      properties. The Company’s investments in real estate generate rental revenue and
      other income through the leasing of office properties, which constituted 100%
      of
      the Company’s total consolidated revenues for the six months ended June 30,
      2007. The Company’s investments in real estate are geographically diversified
      and management evaluates operating performance on an individual property level.
      However, as each of the Company’s office properties has similar economic
      characteristics, tenants, and products and services, the Company’s office
      properties have been aggregated into one reportable segment for the six months
      ended June 30, 2007 and 2006.





*Comprehensive
      Loss*





The
      Company reports comprehensive loss in its condensed consolidated statements
      of
      shareholders’ equity. Comprehensive loss was approximately $986,000 for the six
      months ended June 30, 2007 resulting from the Company’s net loss of
      $6.3 million offset by its foreign currency translation adjustment of $5.3
      million. See “International Operations” below for additional
      information.





*International
      Operations*





The
      Canadian dollar is the functional currency for the Company’s subsidiaries
      operating in Toronto, Canada. The Company’s subsidiaries have translated their
      financial statements into U.S. dollars for reporting purposes. Assets and
      liabilities are translated at the exchange rate in effect as of the financial
      statement date. The Company translates income statement accounts using the
      average exchange rate for the period and significant nonrecurring transactions
      using the rate on the transaction date. These translation gains or losses are
      included in accumulated other comprehensive income as a separate component
      of
      shareholders’ equity.





The
      Company’s international subsidiaries may have transactions denominated in
      currencies other than their functional currency. In these instances,
      non-monetary assets and liabilities are reflected at the historical exchange
      rate, monetary assets and liabilities are remeasured into the functional
      currency at the exchange rate in effect at the end of the period, and income
      statement accounts are remeasured at the average exchange rate for the period.
      These gains or losses are included in the Company’s results of
      operations.





The
      Company also records gains or losses in the income statement when a transaction
      with a third party, denominated in a currency other than the entity’s functional
      currency, is settled and the functional currency cash flows realized are more
      or
      less than expected based upon the exchange rate in effect when the transaction
      was initiated.





*Investment
      Property*





Real
      estate assets the Company owns directly are stated at cost less accumulated
      depreciation. Depreciation is computed using the straight-line method. The
      estimated useful lives for computing depreciation are generally 10 years
      for furniture and fixtures, 15-20 years for electrical and mechanical
      installations and 40 years for buildings. Major replacements that extend
      the useful life of the assets are capitalized. Maintenance and repair costs
      are
      expensed as incurred.





Real
      estate assets are reviewed for impairment if events or changes in circumstances
      indicate that the carrying amount of the individual property may not be
      recoverable. In such an event, a comparison will be made of the current and
      projected operating cash flows of each property on an undiscounted basis to
      the
      carrying amount of such property. Such carrying amount would be adjusted, if
      necessary, to estimated fair values to reflect impairment in the value of the
      asset. At June 30, 2007, management believes no such impairment has
      occurred.





8


Acquisitions
      of properties are accounted for utilizing the purchase method and, accordingly,
      the results of operations of acquired properties are included in the Company’s
      results of operations from their respective dates of acquisition. Estimates
      of
      future cash flows and other valuation techniques that the Company believes
      are
      similar to those used by independent appraisers are used to allocate the
      purchase price of acquired property between land, buildings and improvements,
      equipment and identifiable intangible assets and liabilities such as amounts
      related to in-place leases, acquired above- and below-market leases, tenant
      relationships, asset retirement obligations and mortgage notes payable. Initial
      valuations are subject to change until such information is finalized, no later
      than 12 months from the acquisition date.





The
      estimated fair value of acquired in-place leases are the costs the Company
      would
      have incurred to lease the properties to the occupancy level of the properties
      at the date of acquisition. Such estimates include the fair value of leasing
      commissions, legal costs and other direct costs that would be incurred to lease
      the properties to such occupancy levels. Additionally, the Company evaluates
      the
      time period over which such occupancy levels would be achieved and includes
      an
      estimate of the net market-based rental revenues and net operating costs
      (primarily consisting of real estate taxes, insurance and utilities) that would
      be incurred during the lease-up period. Acquired in-place leases as of the
      date
      of acquisition are amortized over the remaining lease terms.





Acquired
      above-and below-market lease values are recorded based on the present value
      (using an interest rate that reflects the risks associated with the lease
      acquired) of the difference between the contractual amounts to be paid pursuant
      to the in-place leases and management’s estimate of fair market value lease
      rates for the corresponding in-place leases. The capitalized above- and
      below-market lease values are amortized as adjustments to rental revenue over
      the remaining non-cancelable terms of the respective leases. Should a tenant
      terminate its lease, the unamortized portion of the in-place lease value is
      charged to amortization expense and the unamortized portion of out-of-market
      lease value is charged to rental revenue.





Acquired
        above- and below-market ground lease values are recorded based on the difference
        between the present value (using an interest rate that reflects the risks
        associated with the lease acquired) of the contractual amounts to be paid
        pursuant to the ground leases and management’s estimate of fair market value of
        land under the ground leases. The capitalized above- and below-market lease
        values are amortized as adjustments to ground lease expense over the lease
        term.





Management
      estimates the fair value of assumed mortgage notes payable based upon
      indications of current market pricing for similar types of debt with similar
      maturities. Assumed mortgage notes payable are initially recorded at their
      estimated fair value as of the assumption date, and the difference between
      such
      estimated fair value and the note’s outstanding principal balance is amortized
      over the life of the mortgage note payable.





*Cash
      and Cash Equivalents*





The
      Company considers all short-term, highly liquid investments that are readily
      convertible to cash with an original maturity of three months or less at the
      time of purchase to be cash equivalents.





*Restricted
      Cash*





As
      of
      June 30, 2007 and December 31, 2006, the Company had restricted cash of
      approximately $7.5 million and $2.5 million, respectively, related to
      escrow accounts required by certain of the Company’s mortgage and purchase and
      sale agreements.





*Deferred
      Leasing Costs*





Direct
      leasing costs, primarily consisting of third-party leasing commissions and
      tenant inducements, are capitalized and amortized over the life of the related
      lease. Tenant inducement amortization is recorded as an offset to rental revenue
      and the amortization of other direct leasing costs is recorded in amortization
      expense.





The
      Company considers a number of different factors to evaluate whether it or the
      lessee is the owner of the tenant improvements for accounting purposes. These
      factors include: 1) whether the lease stipulates how and on what a tenant
      improvement allowance may be spent; 2) whether the tenant or landlord
      retains legal title to the improvements; 3) the uniqueness of the
      improvements; 4) the expected economic life of the tenant improvements
      relative to the term of the lease; and 5) who constructs or directs the
      construction of the improvements.





9


The
      determination of who owns the tenant improvements for accounting purposes is
      subject to significant judgment. In making that determination, the Company
      considers all of the above factors. No one factor is determinative.





Tenant
      inducement amortization was approximately $868,000 and $274,000 for the six
      months ended June 30, 2007 and 2006, respectively, and was recorded as an offset
      to rental revenue. In addition, the Company recorded approximately $280,000
      and
      $27,000 as amortization expense related to other direct leasing costs for the
      six months ended June 30, 2007 and 2006, respectively.





Tenant
      inducement amortization was approximately $447,000 and $143,000 for the three
      months ended June 30, 2007 and 2006, respectively, and was recorded as an offset
      to rental revenue. In addition, the Company recorded approximately $146,000
      and
      $19,000 as amortization expense related to other direct leasing costs for the
      three months ended June 30, 2007 and 2006, respectively.





*Derivative
      Instruments*





The
      gain
      on derivative instruments recorded in the Company’s condensed consolidated
      statements of operations for the three and six months ended June 30, 2007 is
      the
      result of the following (additional details provided below):





•
            the
                increase in the fair value of the interest rate swaps during the
                period
                resulted in gains of $15.6 million for the three and six months ended
                June
                30, 2007;





•
            transaction
                fees incurred upon entering into the swaps of approximately $365,000
                and
                $731,000 for the three and six months ended June 30, 2007, respectively;
                and





•
            a
                gain of approximately $939,000 for the six months ended June 30,
                2007
                resulting from the settlement of a foreign currency contract in February
                2007. There were no similar transactions during the three months
                ended
                June 30, 2007.





The
      Company recorded a gain of $1.4 million on an interest rate swap for the three
      and six months ended June 30, 2006. This gain resulted from the increase in
      the
      fair value of an interest rate swap and was net of fees of approximately
      $552,000 incurred upon entering into the swap transaction.





In
      June
      2006 and December 2006, the Company entered into two forward interest rate
      swap
      transactions with HSH Nordbank AG, New York Branch (“HSH Nordbank”). Both swap
      transactions were entered into as economic hedges against the variability of
      future interest rates on the Company’s variable interest rate borrowings with
      HSH Nordbank.





On
      June
      25, 2007, the Company entered into a forward interest rate swap contract with
      HSH Nordbank with a notional amount of $48.0 million, a 10-year term, and
      an effective date of July 17, 2007. This agreement has effectively fixed the
      interest rate at 5.98% for the $48.0 million borrowing under the Company’s
      pooled mortgage facility with HSH Nordbank (the “HSH Credit Facility”) entered
      into on July 19, 2007. See Note 10 for additional information.





Also,
      on
      June 25, 2007, the Company entered into a forward interest rate swap contract
      with HSH Nordbank with a notional amount of $70.0 million, a 10-year term,
      and an effective date of July 24, 2007. This agreement has effectively fixed
      the
      interest rate at 5.98% for the $70.0 million borrowing under the HSH Credit
      Facility the Company expects to enter into during August 2007.





The
      Company has not designated any of these contracts as cash flow hedges for
      accounting purposes. The interest rate swaps have been recorded at their
      estimated fair value in the accompanying condensed consolidated balance sheets
      as of June 30, 2007 and December 31, 2006. The Company will continue to
      mark the interest rate swap contracts to their estimated fair value as of each
      balance sheet date and the changes in fair value will be reflected in the
      condensed consolidated statements of operations.





In
      addition, on February 8, 2007, the Company entered into a foreign currency
      contract related to the acquisition of Atrium on Bay, an office property located
      in Toronto, Canada. The contract was entered into as an economic hedge against
      the variability of the foreign currency exchange rate related to the Company’s
      equity investment and was settled at the close of this acquisition on
      February 26, 2007, as described above.





10


*Deferred
      Financing Costs*





Deferred
      financing costs as of June 30, 2007 and December 31, 2006 consist of direct
      costs incurred in obtaining debt financing (see Note 4). These costs are
      being amortized into interest expense on a straight-line basis, which
      approximates the effective interest method, over the terms of the obligations.
      For the six months ended June 30, 2007 and 2006, approximately $563,000 and
      $432,000, respectively, was amortized and recorded in interest expense in the
      accompanying condensed consolidated statements of operations. For the three
      months ended June 30, 2007 and 2006, approximately $267,000 and $323,000,
      respectively, was amortized and recorded in interest expense in the accompanying
      condensed consolidated statements of operations.





*Other
      Assets*





Other
      assets primarily consists of a prepaid contribution to the Core Fund (see Note
      10), prepaid insurance and earnest money deposits paid in connection with future
      property acquisitions. Other assets includes the following (in
      thousands):





**June
                30,****2007**
            
            
            **December 31,****2006**Property
                acquisition deposit
            
            $
            7,000
            
            
            $
            8,858Prepaid
                insurance
            
            
            1,177
            
            
            
            353Prepaid
                contribution
            
            
            57,955
            
            
            
            —Mortgage
                loan deposits
            
            
            928
            
            
            
            924Other
            
            
            406
            
            
            
            584Total
            
            $
            67,466
            
            
            $
            10,719





*Due
      to Affiliates*





Due
      to
      affiliates includes the following (in thousands):





**June
                30,****2007**
            
            
            **December 31,****2006**Organizational
                and offering costs related to the Current Offering
            
            $
            1,773
            
            
            $
            4,992Dealer
                manager fees and selling commissions
            
            
            3,575
            
            
            
            885Asset
                management, acquisition fees and property-level fees and
                reimbursements
            
            
            3,106
            
            
            
            3,077Other
            
            
            80
            
            
            
            —Total
            
            $
            8,534
            
            
            $
            8,954





*Organizational
      and Offering Costs*





***Initial
      Offering***





Certain
      organizational and offering costs associated with the Initial Offering were
      paid
      by the Advisor on behalf of the Company. Pursuant to the Advisory Agreement
      among Hines REIT, the Operating Partnership and the Advisor during the Initial
      Offering, the Company was obligated to reimburse the Advisor in an amount equal
      to the lesser of actual organizational and offering costs incurred related
      to
      the Initial Offering or 3.0% of the gross proceeds raised from the Initial
      Offering.





As
      of
      December 31, 2006, the Advisor had incurred on behalf of the Company
      organizational and offering costs related to the Initial Offering of
      approximately $43.3 million (of which approximately $23.0 million
      relates to the Advisor or its affiliates). This amount includes approximately
      $24.2 million of organizational and internal offering costs, and
      approximately $19.1 million of third-party offering costs, such as legal
      and accounting fees and printing costs. No such amounts were incurred subsequent
      to December 31, 2006.





As
      described above, the Company’s obligation to reimburse the Advisor for
      organizational and offering costs related to the Initial Offering was limited
      by
      the amount of gross proceeds raised from the sale of the Company’s common shares
      in the Initial Offering. Amounts of organizational and offering costs recorded
      in the Company’s financial statements in periods prior to the quarter ended
      June 30, 2006 were based on estimates of gross proceeds to be raised
      through the end of the Initial Offering period. Such estimates were based on
      highly subjective factors including the number of retail broker-dealers signing
      selling agreements with the Company’s Dealer Manager, Hines Real Estate
      Securities, Inc. (“HRES” or the “Dealer Manager”), anticipated market share
      penetration in the retail broker-dealer network and the Dealer Manager’s best
      estimate of the growth rate in sales.





11


Based
        on
        actual gross proceeds raised in the Initial Offering, the total amount of
        organizational and offering costs for which the Company was obligated to
        reimburse the Advisor related to the Initial Offering was $16.0 million. As
        a result of amounts recorded in prior periods, during the six months ended
        June 30, 2006, organizational and internal offering costs related to the
        Initial Offering totaling $1.0 million incurred by the Advisor were
        expensed and included in the accompanying condensed consolidated statement
        of
        operations and third-party offering costs related to the Initial Offering
        of
        $2.0 million were offset against additional paid-in capital. During the six
        months ended June 30, 2006, organizational and internal offering costs
        related to the Initial Offering totaling $1.9 million and third-party
        offering costs related to the Initial Offering of $1.5 million were
        incurred by the Advisor but were not recorded in the consolidated condensed
        financial statements because the Company was not obligated to reimburse the
        Advisor for these costs.
  ***Current
      Offering***





The
      Company commenced the Current Offering on June 19, 2006. Certain
      organizational and offering costs associated with the Current Offering have
      been
      paid by the Advisor on the Company’s behalf. Pursuant to the terms of the
      Advisory Agreement, the Company is obligated to reimburse the Advisor in an
      amount equal to the amount of actual organizational and offering costs incurred,
      so long as such costs, together with selling commissions and dealer-manager
      fees, do not exceed 15% of gross proceeds from the Current Offering. As of
      June
      30, 2007 and December 31, 2006, the Advisor had incurred on the Company’s
      behalf organizational and offering costs in connection with the Current Offering
      of $20.7 million and $12.6 million, respectively (of which
      $8.1 million and $4.7 million, respectively, relates to the Advisor or
      its affiliates).





During
      the six months ended June 30, 2007 and 2006, the Advisor incurred
      $3.5 million and $613,000, respectively, of internal offering costs, which
      have been expensed in the accompanying condensed consolidated statements of
      operations. In addition, $4.6 million of third-party offering costs for the
      six months ended June 30, 2007 have been offset against net proceeds of the
      Current Offering within additional paid-in capital. Approximately $1.9 million
      of third-party offering costs for the six months ended June 30, 2006 were offset
      against net proceeds of the Current Offering within additional paid-in capital
      in future periods.





During
      the three months ended June 30, 2007 and 2006, the Advisor incurred
      approximately $1.1 million and $480,000, respectively, of internal offering
      costs, which have been expensed in the accompanying condensed consolidated
      statements of operations. In addition, $2.9 million of third-party offering
      costs for the three months ended June 30, 2007 have been offset against net
      proceeds of the Current Offering within additional paid-in capital.
      Approximately $1.6 million of third-party offering costs for the three months
      ended June 30, 2006 were offset against net proceeds of the Current Offering
      within additional paid-in capital in future periods.





*Revenue
      Recognition*





The
      Company recognizes rental revenue on a straight-line basis over the life of
      the
      lease including rent holidays, if any. Straight-line rent receivable in the
      amount of $6.7 million and $3.4 million as of June 30, 2007 and
      December 31, 2006, respectively, consisted of the difference between the
      tenants’ rents calculated on a straight-line basis from the date of acquisition
      or lease commencement over the remaining terms of the related leases and the
      tenants’ actual rents due under the lease agreements and is included in tenant
      and other receivables in the accompanying condensed consolidated balance sheets.
      Revenues associated with tenant reimbursements are recognized in the period
      in
      which the expenses are incurred based upon the tenant lease provision. Revenues
      relating to lease termination fees are recognized at the time that a tenant’s
      right to occupy the space is terminated and when the Company has satisfied
      all
      obligations under the agreement.





The
      Company commences revenue recognition on its leases based on a number of
      factors. In most cases, revenue recognition under a lease begins when the lessee
      takes possession of or controls the physical use of the leased asset. The
      determination of who is the owner of the tenant improvements for accounting
      purposes determines the nature of the leased asset and when revenue recognition
      under a lease begins. If the Company is the owner of the tenant improvements
      for
      accounting purposes, then the leased asset is the finished space and revenue
      recognition begins when the lessee takes possession of the finished space,
      typically when the improvements are substantially complete. If the Company
      concludes the lessee is the owner of the tenant improvements for accounting
      purposes, then the leased asset is the unimproved space and any tenant
      improvement allowances funded under the lease are treated as lease incentives
      which reduce revenue recognized over the term of the lease. In these
      circumstances, the Company begins revenue recognition when the lessee takes
      possession of the unimproved space to construct their own
      improvements.





12


*Stock-based
      Compensation*





Under
      the
      terms of the Employee and Director Incentive Share Plan, the Company grants
      each
      independent member of its board of directors 1,000 restricted shares of common
      stock annually. The restricted shares granted each year fully vest upon
      completion of each director’s annual term. In accordance with the provisions of
      SFAS No. 123(R), *Share-Based Payment*, the Company recognizes the
      expense related to these shares over the vesting period. The Company granted
      1,000 restricted common shares to each of its independent board members in
      November 2004, June 2005, June 2006 and July 2007. For the six months ended
      June
      30, 2007 and 2006, the Company amortized approximately $10,000 and $15,000,
      respectively, of related compensation expense. For the three months ended June
      30, 2007 and 2006, the Company amortized approximately $3,000 and $7,000,
      respectively, of related compensation expense. Such amounts are included in
      general and administrative expenses in the accompanying condensed consolidated
      statements of operations.





*Income
      Taxes*





Hines
      REIT made an election to be taxed as a REIT under Sections 856 through 860
      of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with
      its taxable year ended December 31, 2004. In addition, as of June 30, 2007
      and 2006 the Company owned an investment in the Core Fund, which has invested
      in
      properties through other entities that have elected to be taxed as REITs. Hines
      REIT’s management believes that the Company and the applicable entities in the
      Core Fund are organized and operate in such a manner as to qualify for treatment
      as REITs and intend to operate in the foreseeable future in such a manner so
      that they will remain qualified as REITs for federal income tax purposes.
      Accordingly, no provision has been made for U.S. federal income taxes for
      the six months ended June 30, 2007 and 2006 in the accompanying condensed
      consolidated financial statements.





During
      2006, the state of Texas enacted new tax legislation that restructures the
      state
      business tax in Texas by replacing the taxable capital and earned surplus
      components of the then-current franchise tax with a new “margin tax,” which for
      financial reporting purposes is considered an income tax under SFAS 109,
*Accounting for Income Taxes.*  This legislation had an
      immaterial impact on the Company’s financial statements.





Due
      to
      the acquisition of Atrium on Bay, an office property located in Toronto, Canada,
      the Company has recorded a provision for Canadian income taxes of approximately
      $250,000 and $316,000 for the three and six months ended June 30, 2007,
      respectively, in accordance with Canadian tax laws and regulations.





In
      June
      2006, the FASB issued FIN 48, *Accounting for Uncertainty in Income
      Taxes**— an Interpretation of FASB Statement No. 109*,
      which clarifies the accounting for uncertainty in tax positions. FIN 48
      requires companies to recognize uncertain tax positions in the financial
      statements if management believes it is more likely than not that the position
      will be sustained on examination by the taxing authorities, based on the
      technical merits of the positions. The Company reviewed its current tax
      positions and believes its positions will be sustained on examination. The
      adoption of the provisions of FIN 48 on January 1, 2007 did not have a
      material impact on the Company’s financial statements.





As
      of
      June 30, 2007, the Company had no significant temporary differences, tax
      credits, or net operating loss carry-forwards.





*Per
      Share Data*





Income
      (loss) per common share is calculated by dividing the net income (loss) for
      each
      period by the weighted average number of common shares outstanding during such
      period. Income (loss) per common share on a basic and diluted basis is the
      same
      because the Company has no potentially dilutive common shares
      outstanding.





*Recent
      Accounting Pronouncements*





In
      June
      2007, the American Institute of Certified Public Accountants (“AICPA”) issued
      Statement of Position 07-1, *Clarification of the Scope of the Audit and
      Accounting Guide**Investment Companies**and Accounting for Parent
      Companies and Equity Method Investors for Investments in Investment Companies*(“SOP 07-1”).**SOP 07-1 provides guidance for determining
      whether an entity is within the scope of the AICPA Audit and Accounting Guide
      for Investment Companies (the “Guide”).  Entities that are within the
      scope of the Guide are required, among other things, to carry their investments
      at fair value, with changes in fair value included in earnings. The provisions
      of SOP 07-1 are effective for the Company on January 1, 2008. The Company is
      currently evaluating this new guidance and has not determined whether it will
      be
      required to apply the provisions of the Guide in presenting its financial
      statements.





13


***3.  Real
      Estate Investments***





Investment
      property consists of the following as of June 30, 2007 and December 31, 2006
      (in
      thousands):





**June
                30, 2007**
            
            
            **December
                31, 2006**Buildings
                and improvements, net
            
            $
            848,865
            
            
            $
            511,961In-place
                leases, net
            
            
            169,615
            
            
            
            120,765Land
            
            
            263,252
            
            
            
            165,603Investment
                property, net
            
            $
            1,281,732
            
            
            $
            798,329





*Direct
      Investments*





Properties
      that are wholly owned by the Operating Partnership are referred to as “direct
      investments.” As of December 31, 2006, the Company owned direct investments
      in eight office properties through its interest in the Operating Partnership
      and
      acquired the following office properties during the six months ended June 30,
      2007 (amounts in millions):





**City**
            
            **Property**
            
            **Date
                Acquired**
            
            **Acquisition****Cost****(in
                millions)**Redmond,
                Washington
            
            The
                Laguna Buildings
            
            January
                2007
            
            $
            118.0Toronto,
                Canada
            
            Atrium
                on Bay
            
            February
                2007
            
            $
            215.6
            (1)Seattle,
                Washington
            
            Seattle
                Design Center
            
            June
                2007
            
            $
            56.8Seattle,
                Washington
            
            5th
                and
                Bell
            
            June
                2007
            
            $
            72.2





(1)
      This
      amount was translated from the $250.0 million CAD acquisition cost as of the
      date of this acquisition.





As
      of
      June 30, 2007, accumulated depreciation and amortization related to direct
      investments in real estate assets and related lease intangibles were as follows
      (in thousands):





**Buildings
                and**
              **Improvements**
            
            
            **In-Place**
              **Leases**
            
            
            **Out-of
                Market**
              **Lease
                Assets**
            
            
            **Out-of-Market**
              **Lease
                Liabilities**Cost
            
            $
            865,781
            
            
            $
            198,897
            
            
            $
            47,638
            
            
            $
            47,024Less:
                accumulated depreciation and amortization
            
            
            (16,916
            )
            
            
            (29,282
            )
            
            
            (6,356
            )
            
            
            (5,569
            )Net
            
            $
            848,865
            
            
            $
            169,615
            
            
            $
            41,282
            
            
            $
            41,455








As
      of
      December 31, 2006, accumulated depreciation and amortization related to
      direct investments in real estate assets and related lease intangibles were
      as
      follows (in thousands):





**Buildings
                and**
              **Improvements**
            
            
            **In-Place**
              **Leases**
            
            
            **Out-of-Market**
              **Lease
                Assets**
            
            
            **Out-of-Market**
              **Lease
                Liabilities**Cost
            
            $
            519,843
            
            
            $
            137,344
            
            
            $
            40,267
            
            
            $
            19,046Less:
                accumulated depreciation and amortization
            
            
            (7,882
            )
            
            
            (16,579
            )
            
            
            (3,853
            )
            
            
            (3,232
            )Net
            
            $
            511,961
            
            
            $
            120,765
            
            
            $
            36,414
            
            
            $
            15,814





Amortization
      expense was $15.4 million and $6.0 million for in-place leases for the
      six months ended June 30, 2007 and 2006, respectively, and amortization of
      out-of-market leases, net, was an increase to rental revenue of approximately
      $723,000 and $18,000, respectively. Amortization expense was $8.0 million
      and $3.9 million for in-place leases for the three months ended June 30,
      2007 and 2006, respectively. Amortization of out-of-market leases, net, was
      an
      increase to rental revenue of approximately $571,000 for the three months ended
      June 30, 2007 and a decrease to rental revenue of approximately $63,000 for
      the
      three months ended June 30, 2006.








14


Anticipated
      amortization of in-place and out-of-market leases, net, for the period from
      July 1 through December 31, 2007 and for each of the following four
      years ended December 31 is as follows (in thousands):


**In-place**
              **Leases**
            
            
            **Out-of-Market**
              **Leases,
                net**July 1
                through December 31, 2007
            
            $
            17,815
            
            
            $
            (1,173
            )2008
            
            
            33,502
            
            
            
            (1,994
            )2009
            
            
            29,885
            
            
            
            (1,077
            )2010
            
            
            22,591
            
            
            
            (1,023
            )2011
            
            
            20,100
            
            
            
            (1,096
            )





In
      connection with its direct investments, the Company has entered into
      non-cancelable lease agreements with tenants for office and retail space. As
      of
      June 30, 2007, the approximate fixed future minimum rentals for the period
      from
      July 1 through December 31, 2007, and each of the years ending
      December 31, 2008 through 2011 and thereafter are as follows
      (in thousands):





**Fixed
                Future**
              **Minimum**
              **Rentals**July 1
                through December 31, 2007
            
            $
            50,4972008
            
            
            99,6592009
            
            
            93,6612010
            
            
            75,0332011
            
            
            67,938Thereafter
            
            
            191,130Total
            
            $
            577,918





Approximately
      10% of the rental revenue recognized during the six months ended June 30, 2007
      was earned from a tenant in the software industry, whose lease expires in 2013.
      No other tenant provided more than 10% of the Company’s total rental revenues
      for the six months ended June 30, 2007.





Of
      the
      total rental revenue earned by the Company for the six months ended June 30,
      2006, approximately 10% was earned from a government agency, whose leases
      representing approximately 10% of its space expire in October 2012 and whose
      remaining lease expires in April 2013. No other tenant provided more than 10%
      of
      the Company’s total rental revenues for the six months ended June 30,
      2006.





***Investments
      in Unconsolidated Entities***





The
      Company owns indirect interests in real estate through its investments in
      Hines-Sumisei U.S. Core Office Fund, L.P. and HCB II River LLC. The
      carrying values of its investments in these entities as of June 30, 2007 and
      December 31, 2006 are as follows (in thousands):





**June
                30, 2007**
            
            
            **December
                31, 2007**Investment
                in Hines-Sumisei U.S. Core Office Fund, L.P.
            
            $
            293,637
            
            
            $
            307,553Investment
                in HCB II River LLC
            
            
            28,916
            
            
            
            -Total
                investments in unconsolidated entities
            
            $
            322,553
            
            
            $
            307,553





*Investment
      in Hines-Sumisei U.S. Core Office Fund, L.P.*





The
      Core
      Fund is a partnership organized in August 2003 by Hines to invest in existing
      office properties in the United States that Hines believes are desirable
      long-term holdings. The Core Fund owns interests in real estate assets through
      certain limited liability companies and limited partnerships which have mortgage
      financing in place.





15


As
      of
      June 30, 2007, the Company owned a 29.8% non-managing general partnership
      interest in the Core Fund, which held ownership interests in 22 properties
      across the United States. As of December 31, 2006, the Company owned a 34.0%
      non-managing general partnership interest in the Core Fund, which held ownership
      interests in 15 properties across the United States.





On
      May 1,
      2007, the Core Fund acquired a portfolio of office buildings in Sacramento,
      California (the "Sacramento Properties") on behalf of an indirect subsidiary
      of
      the Core Fund. The Sacramento Properties are comprised of six office properties,
      which include 15 office buildings located in and around the Sacramento
      metropolitan area. The Sacramento Properties contain an aggregate of
      approximately 1.4 million square feet and were purchased for approximately
      $490.2 million, exclusive of transaction costs, financing fees and working
      capital reserves.





On
        June 20, 2007, an indirect subsidiary of the Core Fund acquired Charlotte
        Plaza, a 27-story office building located at 201 South College Street in
        downtown Charlotte, North Carolina. The contract purchase price for Charlotte
        Plaza was approximately $175.5 million, exclusive of transaction costs,
        financing fees and working capital reserves. Charlotte Plaza was constructed
        in
        1981 and contains 625,026 square feet of rentable area that is
        approximately 98% leased.





Condensed
      consolidated financial information of the Core Fund as of June 30, 2007 and
      December 31, 2006 and for the six months ended June 30, 2007 and 2006 is
      summarized below (in thousands):





**ASSETS**





**June
                30,****2007**
            
            
            **December 31,****2006**Cash
            
            $
            224,502
            
            
            $
            67,557Property,
                net
            
            
            3,150,195
            
            
            
            2,520,278Other
                assets
            
            
            352,771
            
            
            
            305,027Total
                Assets
            
            $
            3,727,468
            
            
            $
            2,892,862





**LIABILITIES
      AND PARTNERS’ CAPITAL**





Debt
            
            $
            2,055,749
            
            
            $
            1,571,290Other
                liabilities
            
            
            345,326
            
            
            
            157,248Minority
                interest
            
            
            405,167
            
            
            
            341,667Partners’
                capital
            
            
            921,226
            
            
            
            822,657Total
                Liabilities and Partners’ Capital
            
            $
            3,727,468
            
            
            $
            2,892,862





**OPERATIONS**





**Six
                Months Ended**
              **June
                30,****2007**
            
            
            **Six
                Months Ended**
              **June
                30,****2006**Revenues
                and other income
            
            $
            202,696
            
            
            $
            121,301Operating
                expenses
            
            
            (86,778
            )
            
            
            (56,256
            )Interest
                expense
            
            
            (47,183
            )
            
            
            (28,313
            )Depreciation
                and amortization
            
            
            (68,162
            )
            
            
            (36,190
            )Minority
                interest
            
            
            (6,151
            )
            
            
            (3,508
            )Net
                Loss
            
            $
            (5,578
            )
            
            $
            (2,966
            )





Of
      the
      total rental revenue of the Core Fund for the six months ended June 30, 2007,
      approximately 26% was earned from several tenants in the legal services
      industry, whose leases expire at various times during the years 2007 through
      2027. No tenant provided more than 10% of the Core Fund’s total rental revenues
      for the six months ended June 30, 2007.





Of
      the
      total rental revenue of the Core Fund for the six months ended June 30, 2006,
      approximately 13% was earned from two affiliated tenants in the oil and gas
      industry, whose leases expire on December 31, 2015. In addition, 38% was
      earned from several tenants in the legal services industry, whose leases expire
      at various times during the years 2007 through 2027. No other tenant provided
      more than 10% of the Core Fund’s total rental revenues for the six months ended
      June 30, 2006.





16


*Investment
      in HCB River II LLC*





As
      described in Note 2, the Company invested $28.9 million into HCB River II LLC,
      a
      joint venture it created with HCB on June 28, 2007. On July 2, 2007, the joint
      venture acquired Cargo Center Dutra II (“CCDII”), an industrial property located
      in Rio de Janeiro, Brazil. The Property consists of four industrial buildings
      that were constructed in 2001-2007. The buildings contain 693,116 square feet
      of
      rentable area that is 97% leased. The Company owns a 50% indirect interest
      in
      CCDII through its investment in the joint venture.





HCB
        is
        the managing member responsible for day-to-day operations of the joint venture.
        However, the Company has various approval rights and must approve certain
        major
        decisions of the joint venture including, but not limited to: the direct
        or
        indirect sale of any interest in CCDII; any financing or other indebtedness
        incurred by the joint venture and the creation of any lien or encumbrance
        on
        CCDII; annual plans and budgets for the joint venture and
        CCDII; and any new leases at CCDII.




**4.  Debt
      Financing**





The
      following table includes all of the Company’s outstanding notes payable as of
      June 30, 2007 and December 31, 2006 (in thousands, except interest
      rates):





**Description**
            **Origination
                Date**
            **Maturity
                Date**
            
            **Interest
                Rate**
            
            **Principal
                Outstanding**
              **June
                30,****2007**
            
            
            **Principal
                Outstanding December 31,****2006**Key
                Bank National Association — Revolving Credit Facility
            9/9/2005
            10/31/2009
            
            Variable
            (1)
            
            $
            —
            
            
            $
            162,000**SECURED
                MORTGAGE DEBT**Wells
                Fargo Bank, N.A. — Airport Corporate Center
            1/31/2006
            3/11/2009
            
            
            4.775
            %
            
            
            89,635
            (6)
            
            
            89,233Metropolitan
                Life Insurance Company — 1515 S. Street
            4/18/2006
            5/1/2011
            
            
            5.680
            %
            
            
            45,000
            
            
            
            45,000Capmark
                Finance, Inc. — Atrium on Bay
            2/26/2007
            2/26/2017
            
            
            5.330
            %
            
            
            179,417
            (4)
            
            
            —**HSH
                POOLED MORTGAGE FACILITY**HSH
                Nordbank — Citymark, 321 North Clark, 1900 and 2000
                Alameda
            8/1/2006
            8/1/2016
            
            
            5.8575
            %(2)
            
            
            185,000
            
            
            
            185,000HSH
                Nordbank — 3400 Data Drive, Watergate Tower IV
            1/23/2007
            1/12/2017
            
            
            5.2505
            %(3)
            
            
            98,000
            
            
            
            —HSH
                Nordbank — Daytona and Laguna Buildings
            5/2/2007
            5/2/2017
            
            
            5.3550
            %(5)
            
            
            119,000
            
            
            
            —$
            716,052
            
            
            $
            481,233


__________





(1)
            The
                revolving credit facility with KeyBank National Association (“KeyBank”)
                provides a maximum aggregate borrowing capacity of $250.0 million,
                which may be increased to $350.0 million upon the Company’s election.
                Borrowings under the revolving credit facility are at variable interest
                rates based on LIBOR plus 125 to 200 basis points based on prescribed
                leverage ratios. The weighted average interest rate on outstanding
                borrowings under this facility was 6.73% as of December 31,
                2006.(2)
            Borrowings
                under the HSH Credit Facility have variable interest rates equal
                to
                one-month LIBOR plus 0.40%. However, the Company entered into an
                interest
                rate swap agreement which effectively fixed the interest rate of
                this
                borrowing at 5.8575%.(3)
            Borrowings
                under the HSH Credit Facility have variable interest rates equal
                to
                one-month LIBOR plus 0.40%. However, the Company entered into an
                interest
                rate swap agreement which effectively fixed the interest rate of
                this
                borrowing at 5.2505%.(4)
            This
                amount was translated to U.S. dollars at a rate of $0.9443 as of June
                30, 2007. The outstanding principal under the mortgage agreement
                was
                $190.0 million CAD as of June 30, 2007.(5)
            Borrowings
                under the HSH Credit Facility have variable interest rates equal
                to
                one-month LIBOR plus 0.40%. However, the Company entered into an
                interest
                rate swap agreement which effectively fixed the interest rate of
                this
                borrowing at 5.355%.(6)
            This
                mortgage is an interest-only loan in the principal amount of $91.0
                million, which the Company assumed in connection with its acquisition
                of
                Airport Corporate Center. At the time of acquisition, the fair value
                of
                this mortgage was estimated to be $88.5 million, resulting in a premium
                of
                $2.5 million. The premium is being amortized over the term of the
                mortgage.





17


***5.  Distributions***





The
      Company began declaring distributions (as authorized by its board of directors)
      in November 2004, after the Company commenced business operations. The Company
      has declared distributions monthly and aggregated and paid such distributions
      quarterly. The Company intends to continue this distribution policy for so
      long
      as its board of directors decides this policy is in the best interests of its
      shareholders. The Company has made the following quarterly distributions to
      its
      shareholders and minority interests for the year ended December 31, 2006
      and the six months ended June 30, 2007 (in thousands):





**Distribution
                for the Quarter Ended**
            
            **Date
                Paid**
            
            **Total**
              **Distribution**June
                30, 2007
            
            July
                20, 2007
            
            $
            18,418March
                31, 2007
            
            April 16,
                2007
            
            $
            14,012December 31,
                2006
            
            January 16,
                2007
            
            $
            11,281September 30,
                2006
            
            October 13,
                2006
            
            $
            9,056June 30,
                2006
            
            July 14,
                2006
            
            $
            6,405March
                31, 2006
            
            April 13,
                2006
            
            $
            4,212





***6.  Related
      Party Transactions***





*Advisory
      Agreement*





Pursuant
      to the Advisory Agreement, the Company is required to pay the following fees
      and
      expense reimbursements:





*Acquisition
      Fees* — The Company pays an acquisition fee to the Advisor for services
      related to the due diligence, selection and acquisition of direct or indirect
      real estate investments. The acquisition fee is payable following the closing
      of
      each acquisition in an amount equal to 0.50% of (i) the purchase price of
      real estate investments acquired directly by the Company, including any debt
      attributable to such investments, or (ii) when the Company makes an
      investment indirectly through another entity, such investment’s pro rata share
      of the gross asset value of the real estate investments held by that entity.
      The
      Advisor earned cash acquisition fees totaling $2.3 million and
      $2.6 million for the six months ended June 30, 2007 and 2006, respectively,
      which have been recorded as an expense in the accompanying condensed
      consolidated statements of operations. The Advisor earned cash acquisition
      fees
      totaling $626,000 and $1.6 million for the three months ended June 30, 2007
      and 2006, respectively, which have been recorded as an expense in the
      accompanying condensed consolidated statements of operations. See discussion
      of
      the Participation Interest below for additional information concerning
      acquisition fees.





*Asset
      Management Fees* — The Company pays asset management fees to the
      Advisor for services related to managing, operating, directing and supervising
      the operations and administration of the Company and its assets. The asset
      management fee is earned by the Advisor monthly in an amount equal to 0.0625%
      multiplied by the net equity capital the Company has invested in real estate
      investments as of the end of the applicable month. The Advisor earned cash
      asset
      management fees totaling approximately $3.3 million and $1.2 million during
      the six months ended June 30, 2007 and 2006, respectively, which have been
      recorded as an expense in the accompanying condensed consolidated statements
      of
      operations. The Advisor earned cash asset management fees totaling approximately
      $1.8 million and $724,000 during the three months ended June 30, 2007 and
      2006, respectively, which have been recorded as an expense in the accompanying
      condensed consolidated statements of operations. See discussion of the
      Participation Interest below for additional information concerning acquisition
      fees.





*Expense
      Reimbursements* — In addition to reimbursement of organizational and
      offering costs (see Note 2), the Company reimburses the Advisor and its
      affiliates for certain other expenses incurred in connection with the Company’s
      administration and ongoing operations. For the year ended December 31,
      2006, the Advisor had advanced to or made payments on the Company’s behalf
      totaling $1.6 million and the Company made repayments totaling
      $2.7 million. No advances were received after June 30, 2006 and no
      amounts were owed to the Advisor as of June 30, 2007 or December 31, 2006
      related to these advances.





18


*Dealer
      Manager Agreement*





The
      Company has retained HRES, an affiliate of the Advisor, to serve as dealer
      manager for the Initial Offering and the Current Offering. The dealer manager
      agreement related to the Initial Offering provided that HRES would earn selling
      commissions equal to 6.0% of the gross proceeds from sales of common stock
      sold
      in the Company’s primary offering and 4.0% of gross proceeds from the sale of
      shares issued pursuant the Company’s dividend reinvestment plan, all of which
      was reallowed to participating broker dealers. On May 30, 2006, the Company
      executed a separate dealer manager agreement for the Current Offering providing
      that HRES earns selling commissions equal to 7.0% of the gross proceeds from
      sales of common stock, all of which is reallowed to participating broker
      dealers, and earns no selling commissions related to shares issued pursuant
      to
      the dividend reinvestment plan. Both agreements also provide that HRES earns
      a
      dealer manager fee equal to 2.2% of gross proceeds from the sales of common
      stock other than issuances pursuant to the dividend reinvestment plan, a portion
      of which may be reallowed to participating broker dealers. HRES earned selling
      commissions of $38.6 million and $16.2 million and earned dealer
      manager fees of $12.7 million and $6.5 million for the six months
      ended June 30, 2007 and 2006, respectively, which have been offset
      against additional paid-in capital in the accompanying condensed consolidated
      statements of shareholders’ equity.





*Property
      Management and Leasing Agreements*





The
      Company has entered into property management and leasing agreements with Hines
      to manage the leasing and operations of properties in which it directly invests.
      As compensation for its services, Hines receives the following:





•
            A
                property management fee equal to the lesser of 2.5% of the annual
                gross
                revenues received from the properties or the amount of property management
                fees recoverable from tenants of the property under the leases. The
                Company incurred property management fees of approximately $1.7 million
                and $600,000 for the six months ended June 30, 2007 and 2006,
                respectively, and approximately $958,000 and $390,000 for the three
                months
                ended June 30, 2007 and 2006, respectively. As of June 30, 2007 and
                December 31, 2006, the Company had liabilities for incurred and
                unpaid property management fees of approximately $98,000 and $233,000,
                respectively, which have been included in the accompanying condensed
                consolidated balance sheets.





•
            A
                leasing fee of 1.5% of gross revenues payable over the term of each
                executed lease, including any lease renewal, extension, expansion
                or
                similar event and certain construction management and re-development
                construction management fees, in the event Hines renders such services.
                The Company incurred leasing, construction management or redevelopment
                fees of approximately $618,000 and $22,000 during the six months
                ended
                June 30, 2007 and 2006, respectively, and approximately $556,000
                and
                $11,000 during the three months ended June 30, 2007 and 2006,
                respectively. As of June 30, 2007 the Company had a related liability
                of
                approximately $679,000, which was included in due to affiliates in
                the
                accompanying condensed consolidated balance sheet. No related liability
                existed as of December 31,
                2006.





•
            The
                Company generally will be required to reimburse Hines for certain
                operating costs incurred in providing property management and leasing
                services pursuant to the property management and leasing agreements.
                Included in this reimbursement of operating costs are the cost of
                personnel and overhead expenses related to such personnel who are
                located
                at the property as well as off-site personnel located in Hines’
                headquarters and regional offices, to the extent the same relate
                to or
                support the performance of Hines' duties under the agreement. However,
                the
                reimbursable cost of these off-site personnel and overhead expenses
                are
                limited to the lesser of the amount that is recovered from the tenants
                under their leases and/or a limit calculated based on the rentable
                square
                feet covered by the agreement. The Company incurred reimbursable
                expenses
                of approximately $3.6 million and $1.5 million for the six months
                ended June 30, 2007 and 2006, respectively, and approximately
                $2.3 million and $1.0 million for the three months ended June 30,
                2007 and 2006, respectively. As of June 30, 2007 and December 31,
                2006, the Company had related liabilities of approximately
                $1.6 million and $498,000, respectively, which were included in due
                to affiliates in the accompanying condensed consolidated balance
                sheets.





19


*The
      Participation Interest*





Pursuant
      to the Amended and Restated Agreement of Limited Partnership of the Operating
      Partnership, HALP owns a profits interest in the Operating Partnership (the
      “Participation Interest”). The percentage interest in the Operating Partnership
      attributable to the Participation Interest was 1.2% and 1.3% as of June 30,
      2007
      and December 31, 2006, respectively. The Participation Interest entitles
      HALP to receive distributions from the Operating Partnership based upon its
      percentage interest in the Operating Partnership at the time of
      distribution.





As
      the
      percentage interest of the Participation Interest is adjusted, the value
      attributable to such adjustment related to acquisition fees and asset management
      fees is charged against earnings and recorded as a liability until such time
      as
      the Participation Interest is repurchased for cash or converted into common
      shares of Hines REIT. This liability totaled $17.4 million and
      $11.8 million as of June 30, 2007 and December 31, 2006, respectively,
      and is included in the participation interest liability in the accompanying
      condensed consolidated balance sheets. The related expense for asset management
      and acquisition fees of $5.6 million and $3.8 million for the six
      months ended June 30, 2007 and 2006, respectively, is included in asset
      management and acquisition fees in the accompanying condensed consolidated
      statements of operations. The Company expensed asset management and acquisition
      fees of $2.5 million and $2.4 million for the three months ended June 30, 2007
      and 2006, respectively.





***7.  Changes
      in Assets and Liabilities***





The
      effect of changes in asset and liability accounts on cash flows from operating
      activities for the six months ended June 30, 2007 and 2006 is as follows
      (in thousands):





**2007**
            
            
            **2006**Changes
                in assets and liabilities:Increase
                in other assets
            
            $
            (414
            )
            
            $
            (278
            )Increase
                in straight-line rent receivable
            
            
            (3,225
            )
            
            
            (1,068
            )Increase
                in tenant and other receivables
            
            
            (2,897
            )
            
            
            (796
            )Additions
                to deferred lease costs
            
            
            (4,070
            )
            
            
            (562
            )Increase
                in accounts payable and accrued expenses
            
            
            588
            
            
            
            4,197Increase
                in participation interest liability
            
            
            5,566
            
            
            
            3,779Increase
                in other liabilities
            
            
            2,261
            
            
            
            695Increase
                (decrease) in due to affiliates
            
            
            (87
            )
            
            
            1,138Changes
                in assets and liabilities
            
            $
            (2,278
            )
            
            $
            7,105





***8.  Supplemental
      Cash Flow Disclosures***





Supplemental
      cash flow disclosures for the six months ended June 30, 2007 and 2006 are as
      follows (in thousands):





**2007**
            
            
            **2006**Cash
                paid for interest
            
            $
            19,678
            
            
            $
            6,739*Supplemental
                Schedule of Non-Cash Activities*Unpaid
                selling commissions and dealer manager fees
            
            $
            3,575
            
            
            $
            —Deferred
                offering costs offset against
                additional paid-in-capital
            
            $
            4,593
            
            
            $
            2,048Distributions
                declared and unpaid
            
            $
            18,418
            
            
            $
            6,404Distributions
                receivable
            
            $
            6,044
            
            
            $
            3,168Distributions
                reinvested
            
            $
            14,633
            
            
            $
            4,181Non-cash
                net liabilities acquired upon acquisition of property
            
            $
            8,620
            
            
            $
            5,349Accrual
                of deferred offering costs
            
            $
            —
            
            
            $
            3,029Accrual
                of deferred financing costs
            
            $
            53
            
            
            $
            14Assumption
                of mortgage upon acquisition of property
            
            $
            —
            
            
            $
            88,495Accrued
                additions to deferred leasing costs
            
            $
            8,425
            
            
            $
            —Accrued
                additions to investment property
            
            $
            273
            
            
            $
            2,246





20


***9.  Commitments
      and Contingencies***





On
      December 8, 2006, Norwegian Cruise Line (NCL) signed a lease renewal for
      its space in Airport Corporate Center, an office property located in Miami,
      Florida. In connection with this renewal, the Company committed to funding
      approximately $10.4 million of construction costs related to NCL’s
      expansion and refurbishment of its space, which will be paid in future periods.
      This amount has been recorded in accounts payable and accrued expenses in the
      accompanying condensed consolidated balance sheets as of December 31, 2006
      and June 30, 2007.





***10.  Subsequent
      Events***





On
      July 2, 2007, an indirect subsidiary of the Core Fund acquired the Carillon
      building, a 24-story office building located at 227 West Trade Street in
      downtown Charlotte, North Carolina and a one-half acre parcel of land adjacent
      to the building. The contract purchase price for the Carillon Building was
      approximately $140.0 million, exclusive of transaction costs, financing
      fees and working capital reserves. The Carillon building was constructed in
      1991
      and contains 469,226 square feet of rentable area that is approximately 99%
      leased.





Effective
      July 2, 2007, the Company made a capital contribution to the Core Fund of
      approximately $58.0 million pursuant to its right to contribute up to 40%
      of any capital call made by the Core Fund. This capital contribution was
      approved by the Company’s board of directors and its conflicts committee. This
      contribution was prepaid on June 29, 2007, and accordingly, is included in
      other
      assets in the accompanying condensed consolidated balance sheet. As a result
      of
      this contribution, the Company owned an approximate 32% non-managing general
      partner interest in the Core Fund as of July 2, 2007.





On
      July
      10, 2007, subject to the Company’s share redemption plan, the Company authorized
      requests for the redemption of approximately 228,000 common shares and made
      payments totaling $2.2 million related to these redemptions. The shares
      redeemed were cancelled and will have the status of authorized, but unissued
      shares.




On
      July
      19, 2007, the Company acquired 3 Huntington Quadrangle, a two-building office
      complex located on Long Island in Suffolk County, New York. 3 Huntington
      Quadrangle consists of two, four-story office buildings constructed in 1971.
      The
      buildings consist of 407,731 square feet of rentable area and are approximately
      83% leased. The contract purchase price for 3 Huntington Quadrangle was
      approximately $87.0 million, exclusive of transaction costs, financing fees
      and
      working capital reserves. The acquisition was funded using proceeds from the
      Company's Current Offering and mortgage financing described below.




On
      July
      19, 2007, the Company borrowed $48.0 million under its existing $500.0 million
      credit facility with HSH Nordbank to fund the acquisition of 3 Huntington
      Quadrangle. The $48.0 million borrowing is secured by a mortgage and related
      assignments and security interests on 3 Huntington Quadrangle. The borrowing
      matures on July 19, 2017 and bears interest at a variable rate based on
      one-month LIBOR plus a margin of 0.40%. The interest rate on such borrowing
      has
      been effectively fixed at 5.98% as a result of an interest rate swap agreement
      the Company entered into with HSH Nordbank.




On
      July
      31, 2007, the Company borrowed $115.0 million under the revolving credit
      facility with KeyBank in anticipation of its acquisition of One Wilshire, as
      described below. On August 7, 2007 the Company made payments totaling $20.0
      million on this credit facility.





On
        August
        1, 2007, the Company acquired One Wilshire, a thirty-story office building
        located in the central business district of Los Angeles, California. One
        Wilshire was constructed in 1966 and consists of 664,248 square feet of rentable
        area that is approximately 99% leased. The contract purchase price for One
        Wilshire was approximately $287.0 million, exclusive of transaction costs,
        financing fees and working capital reserves and was funded using proceeds
        from
        the Company’s Current Offering and borrowings under the KeyBank revolving
        credit facility as described above.





The
      Company has initiated a plan to sell Citymark, an office property in Dallas,
      Texas, in order to take advantage of favorable market conditions, and began
      distributing marketing materials regarding the sale of Citymark in July 2007.
      As
      of June 30, 2007, the carrying value of Citymark was approximately $20.8
      million. FASB Statement No. 144, *Accounting for the Impairment or Disposal
      of Long-Lived Assets* (“SFAS 144”) prescribes the accounting treatment for
      assets that are to be disposed of by sale. In accordance with SFAS 144,
      management believes Citymark should not be classified as an asset “held for
      sale” as of June 30, 2007 based on its evaluation of the facts and circumstances
      of this transaction.





21


**Item 2.*****Management’s
      Discussion and Analysis of Financial Condition and
      Results******of Operations.***





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our unaudited condensed
      consolidated financial statements, the notes thereto, and the other unaudited
      financial data included elsewhere in this Form 10-Q. The following
      discussion should also be read in conjunction with our audited consolidated
      financial statements and the notes thereto, and “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” included in our
      Annual Report on Form 10-K for the year ended December 31,
      2006.*





***Cautionary
      Note Regarding Forward-Looking Statements***





This
      Form 10-Q includes forward-looking statements within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities Exchange Act of 1934, as amended. Such statements include
      statements concerning future financial performance and distributions, future
      debt and financing levels, acquisitions and investment objectives, payments
      to
      our advisor, Hines Advisors Limited Partnership (the “Advisor”), and its
      affiliates and other plans and objectives of management for future operations
      or
      economic performance, or assumptions or forecasts related thereto as well as
      all
      other statements that are not historical statements. These statements are only
      predictions. We caution that forward-looking statements are not guarantees.
      Actual events or our investments and results of operations could differ
      materially from those expressed or implied in forward-looking statements.
      Forward-looking statements are typically identified by the use of terms such
      as
“may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,”
“believe,” “continue,” “predict,” “potential” or the negative of such terms and
      other comparable terminology.





The
      forward-looking statements included in this Form 10-Q are based on our
      current expectations, plans, estimates, assumptions and beliefs that involve
      numerous risks and uncertainties. Assumptions relating to the foregoing involve
      judgments with respect to, among other things, future economic, competitive
      and
      market conditions and future business decisions, all of which are difficult
      or
      impossible to predict accurately and many of which are beyond our control.
      Any
      of the assumptions underlying forward-looking statements could be inaccurate.
      To
      the extent that our assumptions differ from actual results, our ability to
      meet
      such forward-looking statements, including our ability to generate positive
      cash
      flow from operations, pay distributions to our shareholders and maintain the
      value of the real estate properties in which we hold an interest, may be
      significantly hindered.





The
      following are some of the risks and uncertainties, although not all of the
      risks
      and uncertainties, which could cause actual results to differ materially from
      those presented in certain forward-looking statements:





•
            Our
                ability to invest offering and dividend reinvestment plan proceeds
                to
                acquire properties or other investments in a timely manner and at
                appropriate amounts that provide acceptable
                returns;





•
            The
                potential need to fund tenant improvements, lease-up costs or other
                capital expenditures, as well as increases in property operating
                expenses
                and costs of compliance with environmental matters or discovery of
                previously undetected environmentally hazardous or other undetected
                adverse conditions at our
                properties;





•
            Risks
                associated with debt;





•
            Competition
                for tenants and real estate investment opportunities, including
                competition with affiliates of Hines Interests Limited Partnership
                (“Hines”);





•
            Risks
                associated with adverse changes in general economic or local market
                conditions, including terrorist attacks and other acts of violence,
                may
                affect the markets in which we and our tenants
                operate;





•
            Catastrophic
                events, such as hurricanes, earthquakes and terrorist attacks; and
                our
                ability to secure adequate insurance at reasonable and appropriate
                rates;





•
            Changes
                in governmental, tax, real estate and zoning laws and regulations
                and the
                related costs of compliance and increases in our administrative operating
                expenses, including expenses associated with operating as a public
                company;





•
            Risks
                relating to our investment in Hines-Sumisei U.S. Core Office Fund,
                L.P. (the “Core Fund”), such as its reliance on Hines for its operations
                and investments, and our potential liability for Core Fund
                obligations;





22


•
            The
                lack of liquidity associated with our
                assets;





•
            Our
                reliance on our Advisor, Hines and affiliates of Hines for our day-to-day
                operations and the selection of real estate investments, and our
                Advisor’s
                ability to attract and retain high-quality personnel who can provide
                service at a level acceptable to
                us;





•
            Risks
                associated with conflicts of interests that result from our relationship
                with our Advisor and Hines, as well as conflicts of interests certain
                of
                our officers and directors face relating to the positions they hold
                with
                other entities; and





•
            Our
                ability to continue to qualify as a real estate investment trust
                (“REIT”)
                for federal income tax purposes.





These
      risks are more fully discussed in, and all forward-looking statements should
      be
      read in light of, all of the factors discussed in Part I, “Item 1A.
      Risk Factors” in our Annual Report on Form 10-K for the year ended
      December 31, 2006.





You
      are
      cautioned not to place undue reliance on any forward-looking statements included
      in this Form 10-Q. All forward-looking statements are made as of the date
      of this Form 10-Q and the risk that actual results will differ materially
      from the expectations expressed in this Form 10-Q may increase with the
      passage of time. In light of the significant uncertainties inherent in the
      forward-looking statements included in this Form 10-Q, the inclusion of
      such forward-looking statements should not be regarded as a representation
      by us
      or any other person that the objectives and plans set forth in this
      Form 10-Q will be achieved. All subsequent written and oral forward-looking
      statements attributable to us or persons acting on our behalf are expressly
      qualified in their entirety by reference to these risks and uncertainties.
      Each
      forward-looking statement speaks only as of the date of the particular
      statement, and we do not undertake to update any forward-looking
      statement.





***Executive
      Summary***





Hines
      Real Estate Investment Trust, Inc. (“Hines REIT” and, together with its
      consolidated subsidiaries, “we”, “us” or the “Company”) and its subsidiary,
      Hines REIT Properties, L.P. (the “Operating Partnership”) were formed in August
      2003 for the purpose of investing in and owning interests in real estate. We
      have invested and continue to invest in real estate to satisfy our primary
      investment objectives of preserving invested capital, paying regular cash
      distributions and achieving modest capital appreciation of our assets over
      the
      long term. We make investments directly through entities wholly owned by the
      Operating Partnership, or indirectly through other entities, such as through
      our
      investment in the Core Fund. As of June 30, 2007, we had direct and indirect
      interests in 33 office properties located throughout the United States and
      one
      property in Toronto, Canada. In addition, we have and may make other real estate
      investments including, but not limited to, properties outside of the United
      States, non-office properties, mortgage loans and ground leases. Our principal
      targeted assets are office properties that have quality construction, desirable
      locations and quality tenants. We intend to invest in properties which will
      be
      diversified by location, lease expirations and tenant industries.





In
      order
      to provide capital for these investments, we sold shares to the public through
      our initial public offering (the “Initial Offering”), which commenced on
      June 18, 2004 and terminated on June 18, 2006, and we continue to sell
      common shares through our follow-on public offering of a maximum of
      $2.2 billion in common shares (the “Current Offering”). We commenced
      the Current Offering on June 19, 2006, and we intend to continue raising
      significant amounts of capital through our Current Offering and potential
      follow-on offerings, as well as through debt financings.





23


The
      following table provides summary information regarding the properties in which
      we owned interests as of June 30, 2007:





**Property**
            **City**
            
            **Leasable**
              **Square
                Feet**
            
            
            **Percent**
              **Leased**
            
            
            **Our
                Effective**
              **Ownership(1)**321
                North Clark
            Chicago,
                Illinois
            
            
            885,664
            
            
            
            99
            %
            
            
            100
            %Citymark
            Dallas,
                Texas
            
            
            218,096
            
            
            
            100
            %
            
            
            100
            %Watergate
                Tower IV
            Emeryville,
                California
            
            
            344,433
            
            
            
            100
            %
            
            
            100
            %Airport
                Corporate Center
            Miami,
                Florida
            
            
            1,018,627
            
            
            
            91
            %
            
            
            100
            %3400
                Data Drive
            Rancho
                Cordova, California
            
            
            149,703
            
            
            
            100
            %
            
            
            100
            %Daytona
                Buildings
            Redmond,
                Washington
            
            
            250,515
            
            
            
            100
            %
            
            
            100
            %Laguna
                Buildings
            Redmond,
                Washington
            
            
            464,701
            
            
            
            100
            %
            
            
            100
            %1515
                S Street
            Sacramento,
                California
            
            
            348,881
            
            
            
            100
            %
            
            
            100
            %1900
                and 2000 Alameda
            San Mateo,
                California
            
            
            253,377
            
            
            
            95
            %
            
            
            100
            %Seattle
                Design Center
            Seattle,
                Washington
            
            
            390,684
            
            
            
            90
            %
            
            
            100
            %5th
                and
                Bell
            Seattle,
                Washington
            
            
            197,048
            
            
            
            84
            %
            
            
            100
            %Atrium
                on Bay
            Toronto,
                Canada
            
            
            1,078,040
            
            
            
            85
            %
            
            
            100
            %Total
                for Directly-Owned Properties
            
            
            5,599,769
            
            
            
            94
            %One
                Atlantic Center
            Atlanta,
                Georgia
            
            
            1,100,312
            
            
            
            82
            %
            
            
            26.56
            %Charlotte
                Plaza
            Charlotte,
                North Carolina
            
            
            625,026
            
            
            
            98
            %
            
            
            26.56
            %Three
                First National Plaza
            Chicago,
                Illinois
            
            
            1,419,079
            
            
            
            93
            %
            
            
            21.24
            %333 West
                Wacker
            Chicago,
                Illinois
            
            
            842,009
            
            
            
            83
            %
            
            
            21.19
            %One
                Shell Plaza
            Houston,
                Texas
            
            
            1,228,160
            
            
            
            98
            %
            
            
            13.28
            %Two
                Shell Plaza
            Houston,
                Texas
            
            
            566,960
            
            
            
            94
            %
            
            
            13.28
            %425
                Lexington Avenue
            New
                York, New York
            
            
            700,034
            
            
            
            100
            %
            
            
            12.10
            %499
                Park Avenue
            New
                York, New York
            
            
            288,023
            
            
            
            100
            %
            
            
            12.10
            %600
                Lexington Avenue
            New
                York, New York
            
            
            281,072
            
            
            
            100
            %
            
            
            12.10
            %Riverfront
                Plaza
            Richmond,
                Virginia
            
            
            950,025
            
            
            
            99
            %
            
            
            26.56
            %Wells
                Fargo Center
            Sacramento,
                California
            
            
            502,365
            
            
            
            94
            %
            
            
            21.19
            %Johnson
                Ranch Corporate Center
            Roseville,
                California
            
            
            180,603
            
            
            
            85
            %
            
            
            21.19
            %Roseville
                Corporate Center
            Roseville,
                California
            
            
            111,418
            
            
            
            97
            %
            
            
            21.19
            %Summit
                at Douglas Ridge
            Roseville,
                California
            
            
            187,128
            
            
            
            79
            %
            
            
            21.19
            %Olympus
                Corporate Center
            Roseville,
                California
            
            
            191,494
            
            
            
            88
            %
            
            
            21.19
            %Douglas
                Corporate Center
            Roseville,
                California
            
            
            214,606
            
            
            
            83
            %
            
            
            21.19
            %525
                B Street
            San Diego,
                California
            
            
            447,159
            
            
            
            92
            %
            
            
            26.56
            %The
                KPMG Building
            San Francisco,
                California
            
            
            379,328
            
            
            
            100
            %
            
            
            26.56
            %101
                Second Street
            San Francisco,
                California
            
            
            388,370
            
            
            
            100
            %
            
            
            26.56
            %720
                Olive Way
            Seattle,
                Washington
            
            
            300,710
            
            
            
            92
            %
            
            
            21.19
            %1200
                19th Street
            Washington, D.C.
            
            
            235,404
            
            
            
            99
            %
            
            
            12.10
            %Warner
                Center
            Woodland
                Hills, California
            
            
            808,274
            
            
            
            97
            %
            
            
            21.19
            %Total
                for Core Fund Properties
            
            
            11,947,559
            
            
            
            94
            %Total
                for All Properties
            
            
            
            17,547,328
            
            
            
            94
            %


__________





(1)
            This
                percentage shows the effective ownership of the Operating Partnership
                in
                the properties listed. On June 30, 2007, Hines REIT owned a 98.0%
                interest
                in the Operating Partnership as its sole general partner. Affiliates
                of
                Hines owned the remaining 2.0% interest in the Operating Partnership.
                We
                own interests in all of the properties other than those identified
                above
                as being owned 100% by us through our interest in the Core Fund,
                in which
                we owned an approximate 29.8% non-managing general partner interest
                as of
                June 30, 2007. The Core Fund does not own 100% of these buildings;
                its
                ownership interest in its buildings ranges from 40.6% to
                89.1%.





As
      of
      June 30, 2007, we had primarily invested in institutional-quality office
      properties in the United States. These types of properties continue to attract
      significant capital, and competition to acquire such assets remains intense.
      However, we intend to continue to pursue institutional-quality office properties
      as well as other real estate investments that we believe will satisfy our
      long-term primary objectives of preserving invested capital and achieving modest
      capital appreciation over the long term, in addition to providing regular cash
      distributions to our shareholders.





24


We
      expect
      to continue to focus primarily on investments in institutional-quality office
      properties located in the United States (whether as direct investments or as
      indirect investments through the Core Fund). However, we have expanded our
      focus
      to include other real estate investments such as our recent international joint
      venture investment. In the future, our investments may include additional
      investments outside of the United States, investments in non-office properties,
      non-core or development investments, mortgage loans, ground leases and
      investments in joint ventures.





***Critical
      Accounting Policies***





Each
      of
      our critical accounting policies involves the use of estimates that require
      management to make assumptions that are subjective in nature. In addition to
      the
      policies set forth below, please see “Note 2 — Summary of Significant
      Accounting Policies” in our unaudited condensed consolidated financial
      statements included elsewhere in this Form 10-Q for a description of some
      of these policies. Management relies on its experience, collects historical
      and
      current market data, and analyzes these assumptions in order to arrive at what
      it believes to be reasonable estimates. Under different conditions or
      assumptions, materially different amounts could be reported related to the
      accounting policies described below. In addition, application of these
      accounting policies involves the exercise of judgments regarding assumptions
      as
      to future uncertainties. Actual results could materially differ from these
      estimates.





*Organizational
      and Offering Costs*





Certain
      organizational and offering costs related to our public offerings have been
      paid
      by our Advisor on our behalf. Organizational and offering costs incurred by
      our
      Advisor have been analyzed and segregated between those which are organizational
      in nature, those which are offering-related salaries and other general and
      administrative expenses of the Advisor and its affiliates, and those which
      qualify as offering expenses in accordance with Staff Accounting Bulletin
      (“SAB”) Topic 5.A, *Miscellaneous Accounting — Expenses of
      Offering*. Organizational costs are expensed as incurred in accordance with
      Statement of Position 98-5, *Reporting on**the Costs of Start-up
      Activities*. Offering-related salaries and other general and administrative
      expenses of the Advisor and its affiliates are expensed as incurred, and
      third-party offering expenses are taken as a reduction against the net proceeds
      of the offerings within additional paid-in capital in accordance with
      SAB Topic 5.A. In addition to the offering costs to be paid to the Advisor,
      selling commissions and dealer manager fees are paid to Hines Real Estate
      Securities, Inc. (“HRES” or the “Dealer Manager”). Such costs are netted against
      the net offering proceeds within additional paid-in capital as
      well.





Pursuant
      to an advisory agreement we entered into with the Advisor during the Initial
      Offering, we were obligated to reimburse the Advisor in an amount equal to
      the
      lesser of actual organizational and offering costs incurred or 3.0% of the
      gross
      proceeds raised from the Initial Offering. This agreement expired on
      June 18, 2006. Organizational and offering costs recorded in our financial
      statements in periods prior to the quarter ended June 30, 2006 were based
      on estimates of gross proceeds to be raised through the end of the Initial
      Offering. Such estimates were based on highly subjective factors, including
      the
      number of retail broker-dealers signing selling agreements with our Dealer
      Manager, anticipated market share penetration in the retail broker-dealer
      network and the Dealer Manager’s best estimate of the growth rate in sales. At
      each balance sheet date, management reviewed the actual gross offering proceeds
      raised to date and management’s estimate of future sales of our common shares
      through the end of the Initial Offering to determine how much of these costs
      were expected to be reimbursed to the Advisor, then adjusted the accruals of
      such costs accordingly. Based on the actual proceeds raised in the Initial
      Offering, the total amount of organizational and offering costs we were
      obligated to reimburse the Advisor related to the Initial Offering was settled
      in the 2nd quarter of 2006.




We
      commenced the Current Offering on June 19, 2006, and on June 26, 2006,
      we entered into a new advisory agreement with the Advisor (the “Advisory
      Agreement”). Certain organizational and offering costs associated with the
      Current Offering have been paid by the Advisor on our behalf. Pursuant to the
      terms of our current Advisory Agreement, we are obligated to reimburse the
      Advisor for the actual organizational and offering costs incurred, so long
      as
      such costs, together with selling commissions and dealer-manger fees, do not
      exceed 15% of gross proceeds from the Current Offering.





*Revenue
      Recognition and Valuation of Receivables*





We
      recognize minimum rent revenues on a straight-line basis over the terms of
      tenant leases, including rent holidays, if any. Revenues associated with tenant
      reimbursements are recognized in the period in which the expenses are incurred
      based upon the tenant’s lease provision. Revenues relating to lease termination
      fees are recognized at the time that the tenant’s right to occupy the space is
      terminated and when we have satisfied all obligations under the lease. To the
      extent our leases provide for rental increases at specified intervals, we will
      record a receivable for rent not yet due under the lease terms. Accordingly,
      our
      management must determine, in its judgment, to what extent the unbilled rent
      receivable applicable to each specific tenant is collectible. We review unbilled
      rent receivables on a quarterly basis and take into consideration the tenant’s
      payment history, the financial condition of the tenant, business conditions
      in
      the industry in which the tenant operates and economic conditions in the area
      in
      which the property is located. In the event that the collectability of unbilled
      rent with respect to any given tenant is in doubt, we would be required to
      record an increase in our allowance for doubtful accounts or record a direct
      write-off of the specific rent receivable, which would have an adverse effect
      on
      our net income for the year in which the reserve is increased or the direct
      writeoff is recorded and would decrease our total assets and shareholders’
equity.





25


*Derivative
      Instruments*





We
      have
      entered into interest rate swap transactions as economic hedges against the
      variability of future interest rates on certain variable interest rate debt.
      To
      date, we have not designated any such contracts as cash flow hedges for
      accounting purposes. The interest rate swaps have been recorded at their
      estimated fair value in the accompanying condensed consolidated balance sheets
      as of June 30, 2007 and December 31, 2006. Any changes in the fair value of
      the interest rate swaps have been recorded in the accompanying condensed
      consolidated statement of operations for the three and six months ended June
      30,
      2007.





We
      will
      mark the interest rate swaps to their estimated fair value as of each balance
      sheet date, and the changes in fair value will be reflected in our condensed
      consolidated statements of operations.





On
      February 8, 2007, we entered into a foreign currency contract related to
      the acquisition of Atrium on Bay, an office property located in Toronto, Canada.
      The contract was entered into as an economic hedge against the variability
      of
      the foreign currency exchange rate related to our equity investment and was
      settled at the close of this acquisition on February 26, 2007. The gain
      that resulted upon settlement was recorded in gain on derivative instruments,
      net, in the accompanying condensed consolidated statement of operations for
      the
      six months ended June 30, 2007.





*Treatment
      of Management Compensation, Expense Reimbursements and Operating
      Partnership**Participation Interest*





We
      outsource management of our operations to the Advisor and certain other
      affiliates of Hines. Fees related to these services are accounted for based
      on
      the nature of the service and the relevant accounting literature. Fees for
      services performed that represent period costs of the Company are expensed
      as
      incurred. Such fees include acquisition fees and asset management fees paid
      to
      the Advisor and property management fees paid to Hines. In addition to cash
      payments for acquisition fees and asset management fees paid to the Advisor,
      an
      affiliate of the Advisor has received a participation interest, which represents
      a profits interest in the Operating Partnership related to these services.
      As
      the percentage interest of the participation interest is adjusted, the value
      attributable to such adjustment is charged against earnings, and the
      participation interest will be recorded as a liability until it is repurchased
      for cash or converted into common shares of the Company. The conversion and
      redemption features of the participation interest are accounted for in
      accordance with the guidance in Emerging Issues Task Force (“EITF”) publication
      95-7, *Implementation Issues Related to the Treatment of Minority**Interests in Certain Real Estate Investment Trusts*. Redemptions for cash
      will be accounted for as a reduction to the liability discussed above to the
      extent of such liability, with any additional amounts recorded as a reduction
      to
      equity. Conversions into common shares of the Company will be recorded as an
      increase to the outstanding common shares and additional paid-in capital
      accounts and a corresponding reduction in the liability discussed above.
      Redemptions and conversions of the participation interest will result in a
      corresponding reduction in the percentage attributable to the participation
      interest and will have no impact on the calculation of subsequent increases
      in
      the participation interest.





Hines
      may
      perform construction management services for us for both re-development
      activities and tenant construction. These fees are considered incremental to
      the
      construction effort and will be capitalized as incurred in accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 67, *Accounting
      for Costs and Initial**Rental Operations of Real Estate
      Projects.*  These costs will be capitalized to the associated real
      estate project as incurred. Costs related to tenant construction will be
      depreciated over the estimated useful life. Costs related to redevelopment
      activities will be depreciated over the estimated useful life of the associated
      project. Leasing activities are generally performed by Hines on our behalf.
      Leasing fees are capitalized and amortized over the life of the related lease
      in
      accordance with the provisions of SFAS No. 91, *Accounting for
      Nonrefundable**Fees and Costs Associated with Originating or Acquiring
      Loans and Initial**Direct Costs of Leases.*





26


*Income
      Taxes*





We
      elected to be taxed as a REIT under Sections 856 through 860 of the
      Internal Revenue Code beginning with our taxable year ended December 31, 2004.
      In addition, we hold an investment in the Core Fund, which has invested in
      properties through a structure that includes entities that have elected to
      be
      taxed as REITs. In order to qualify as a REIT, an entity must meet certain
      organizational and operational requirements, including a requirement to
      distribute at least 90% of its annual ordinary taxable income to shareholders.
      REITs are generally not subject to federal income tax on taxable income that
      they distribute to their shareholders. It is our intention to adhere to these
      requirements and maintain our REIT status, as well as to ensure that the
      applicable entities in the Core Fund structure also maintain their REIT status.
      As such, no provision for U.S. federal income taxes has been included in
      the accompanying consolidated financial statements. As a REIT and indirectly
      through our investment in the Core Fund, we still may be subject to certain
      state, local and foreign taxes on our income and property and to federal income
      and excise taxes on our undistributed taxable income. In addition, we are and
      will indirectly be required to pay federal and state income tax on the net
      taxable income, if any, from the activities conducted through the taxable REIT
      subsidiary of the Core Fund.





During
      2006, the state of Texas enacted new tax legislation that restructures the
      state
      business tax in Texas by replacing the taxable capital and earned surplus
      components of the then-current franchise tax with a new “margin tax,” which for
      financial reporting purposes is considered an income tax under SFAS 109,
*Accounting for Income**Taxes.*  This legislation had
      an immaterial impact on our financial statements.




Due
      to
      the acquisition of Atrium on Bay, an office property located in Toronto, Canada,
      we have recorded a provision for Canadian income taxes of approximately $250,000
      and $316,000, respectively, for the three and six months ended June 30, 2007
      in
      accordance with Canadian tax laws and regulations.





In
      June
      2006, the FASB issued FIN 48, *Accounting for Uncertainty in Income
      Taxes**— an Interpretation of FASB Statement No. 109*,
      which clarifies the accounting for uncertainty in tax positions. FIN 48
      requires companies to recognize uncertain tax positions in the financial
      statements if management believes it is more likely than not that the position
      will be sustained on examination by the taxing authorities, based on the
      technical merits of the position. We have reviewed our current tax positions
      and
      believe our positions will be sustained on examination. The adoption of the
      provisions of FIN 48 on January 1, 2007 did not have a material impact
      on our financial statements.





As
      of
      June 30, 2007, we had no significant temporary differences, tax credits, or
      net
      operating loss carry-forwards.





*Comprehensive
      Loss*





We
      report
      comprehensive loss in our condensed consolidated statements of shareholders’
equity. Comprehensive loss was approximately $986,000 for the six months ended
      June 30, 2007 resulting from our net loss and offset by our foreign currency
      translation adjustment. See “International Operations” below for additional
      information.





*International
      Operations*





The
      Canadian dollar is the functional currency for our subsidiaries operating in
      Toronto, Canada. Our subsidiaries have translated their financial statements
      into U.S. dollars for reporting purposes. Assets and liabilities are
      translated at the exchange rate in effect as of the financial statement date.
      We
      translate income statement accounts using the average exchange rate for the
      period and significant nonrecurring transactions using the rate on the
      transaction date. These gains or losses are included in accumulated other
      comprehensive income as a separate component of shareholders’
equity.





Our
      international subsidiaries may have transactions denominated in currencies
      other
      than their functional currency. In these instances, non-monetary assets and
      liabilities are reflected at the historical exchange rate, monetary assets
      and
      liabilities are remeasured into the functional currency at the exchange rate
      in
      effect at the end of the period, and income statement accounts are remeasured
      at
      the average exchange rate for the period. These gains or losses are included
      in
      our results of operations.





We
      also
      record gains or losses in the income statement when a transaction with a third
      party, denominated in a currency other than the entity’s functional currency, is
      settled and the functional currency cash flows realized are more or less than
      expected based upon the exchange rate in effect when the transaction was
      initiated.





27


*Recent
      Accounting Pronouncements*





In
      June
      2007, the American Institute of Certified Public Accountants (“AICPA”) issued
      Statement of Position 07-1, *Clarification of the Scope of the Audit and
      Accounting Guide**Investment Companies and Accounting for Parent
      Companies and Equity Method Investors for Investments in Investment Companies*(“SOP 07-1”).**SOP 07-1 provides guidance for determining
      whether an entity is within the scope of the AICPA Audit and Accounting Guide
      for Investment Companies (the “Guide”).  Entities that are within the
      scope of the Guide are required, among other things, to carry their investments
      at fair value, with changes in fair value included in earnings. The provisions
      of SOP 07-1 are effective for our fiscal year beginning on January 1, 2008.
      We
      are currently evaluating this new guidance and have not determined whether
      we
      will be required to apply the provisions of the Guide in presenting our
      financial statements.





***Financial
      Condition, Liquidity and Capital Resources***





*General*





Our
      principal cash requirements are for property acquisitions, property-level
      operating expenses, capital improvements, debt service, organizational and
      offering expenses, corporate-level general and administrative expenses and
      distributions. We have three primary sources of capital for meeting our cash
      requirements:





•
            proceeds
                from our public offerings, including our dividend reinvestment
                plan;





•
            debt
                financings, including secured or unsecured
                facilities; and





•
            cash
                flow generated by our real estate investments and
                operations.





For
      the
      six months ended June 30, 2007, our cash needs for acquisitions have been met
      primarily by proceeds from our public equity offerings and debt financing while
      our operating cash needs have been met through cash flow generated by our
      properties and investments. We believe that our current capital resources and
      cash flow from operations are sufficient to meet our liquidity needs for the
      foreseeable future.





We
      raised
      significant funds from our Current Offering during the first six months of
      2007
      (see discussion below), and we expect to continue to raise significant funds
      from our Current Offering and other potential follow-on offerings. We intend
      to
      continue making real estate investments with these funds and funds available
      to
      us under our credit facilities and other permanent debt. We also intend to
      continue to pay distributions to our shareholders on a quarterly basis. As
      noted
      above, we are currently looking for investment opportunities in an intensely
      competitive environment, and acquisitions in such an environment may put
      downward pressure on our distribution payments as a result of potentially lower
      yields on new investments. Additionally, we have experienced, and expect to
      continue to experience, delays between raising capital and acquiring real estate
      investments. We temporarily invest unused proceeds from our public offering
      in
      investments that typically yield lower returns when compared to our real estate
      investments. We may need to use short-term borrowings or advances from
      affiliates in order to maintain our current per-share distribution levels in
      future periods. However, we will continue to make investment and financing
      decisions, and decisions regarding distribution payments, with a long-term
      view.
      We will also continually monitor our cash flow and market conditions when making
      such decisions. In this environment, we may decide to lower our per-share
      distribution amount rather than take actions we believe may compromise our
      long-term objectives.





*Cash
      Flows from Operating Activities*





Our
      direct investments in real estate assets generate cash flow in the form of
      rental revenues, which are reduced by debt service, direct leasing costs and
      property-level operating expenses. Property-level operating expenses consist
      primarily of salaries and wages of property management personnel, utilities,
      cleaning, insurance, security and building maintenance costs, property
      management and leasing fees, and property taxes. Additionally, we have incurred
      corporate-level debt service, general and administrative expenses, asset
      management and acquisition fees. Results of operations are not directly
      comparable for the three and six months ended June 30, 2007 and 2006 as a result
      of our acquisition activity.





28


Net
      cash
      flow provided by operating activities was $7.2 million and $5.0 million for
      the six months ended June 30, 2007 and 2006, respectively. Our operating net
      cash flows are primarily the result of the net loss for the period offset by
      non-cash components of our net loss such as depreciation and amortization,
      equity in losses of the Core Fund, accrued costs of our Current Offering, gain
      on derivative instruments, and changes in other asset and liability
      accounts.





*Cash
      Flows from Investing Activities*





During
      the six months ended June 30, 2007, we made payments of $477.3 million related
      to our acquisitions of four properties, including our investment in an
      unconsolidated joint venture. During the six months ended June 30, 2006, we
      made
      payments of $311.0 million related to our acquisitions of four
      properties.





During
      the six months ended June 30, 2007 and 2006, we received distributions related
      to our interest in the Core Fund of approximately $11.8 million and
      $6.7 million, respectively. The increases in distributions are attributable
      to our interest in the Core fund following additional capital contributions
      we
      made to the Core Fund since June 30, 2006, as well as the increased cash flow
      at
      the Core Fund resulting from the additional properties it has acquired since
      June 30, 2006. The Core Fund owned interests in 22 properties as of June 30,
      2007, up from 12 properties as of June 30, 2006.





On
      June
      29, 2007, we prepaid a $58.0 million capital contribution to the Core Fund
      that
      was effective on July 2, 2007, which has been included in additions to other
      assets in the accompanying condensed consolidated statement of cash flows.
      Additionally, during the six months ended June 30, 2007, we made a deposit
      of
      $7.0 million related to the acquisition of 3 Huntington Quadrangle in July
      2007.
      During the six months ended June 30, 2006, we made a deposit of
      $10.0 million related to the acquisition of a forward interest rate swap
      transaction.





During
      the six months ended June 30, 2006, we made capital contributions to the Core
      Fund totaling $50.6 million.





During
      the six months ended June 30, 2007 and 2006, we had increases in restricted
      cash
      of approximately $4.8 million and $3.8 million, respectively, related
      to certain escrows required by our mortgage agreements.





During
      the six months ended June 30, 2007, we had cash outflows of $2.0 million,
      net of receipts, for master leases entered into in connection with our
      acquisitions of the Laguna Buildings, Atrium on Bay and 5th and
      Bell.





*Cash
      Flows from Financing Activities*





***Equity
      Offerings***





We
      offer
      shares of our common stock for sale to the public, which provides us with the
      ability to raise capital on a continual basis. The Initial Offering commenced
      on
      June 18, 2004 and terminated on June 18, 2006. On
      June 19, 2006, we commenced our Current Offering, pursuant to which we
      are offering a maximum of $2.2 billion in common shares.





The
      following table summarizes the activity from our offerings for the years ended
      December 31, 2006, 2005 and 2004 and the six months ended June 30, 2007 (in
      millions):





**Initial
                Public Offering**
            
            
            **Current
                Public Offering**
            
            
            **All
                Offerings****Period**
            
            **#
                of Shares**
            
            
            **Proceeds**
            
            
            **#
                of Shares**
            
            
            **Proceeds**
            
            
            **#
                of Shares**
            
            
            **Proceeds**Year
                Ended December 31, 2004
            
            
            2.1
            
            
            $
            20.6
            
            
            
            —
            
            
            $
            —
            
            
            
            2.1
            
            
            $
            20.6Year
                Ended December 31, 2005
            
            
            21.0
            (a)
            
            
            207.7
            (a)
            
            
            —
            
            
            
            —
            
            
            
            21.0
            
            
            
            207.7Year
                Ended December 31, 2006
            
            
            30.1
            (b)
            
            
            299.2
            (b)
            
            
            27.3
            (b)
            
            
            282.7
            (b)
            
            
            57.4
            
            
            
            581.9Six
                Months Ended June 30, 2007
            
            
            —
            
            
            
            —
            
            
            
            57.2
            (c)
            
            
            592.0
            (c)
            
            
            57.2
            
            
            
            592.0**Total**
            
            
            53.2
            
            
            $
            527.5
            
            
            
            84.5
            
            
            $
            874.7
            
            
            
            137.7
            
            
            $
            1,402.2


__________





(a)
            Amounts
                include $2.1 million of gross proceeds relating to approximately
                223,000 shares issued under our dividend reinvestment
                plan.(b)
            Amounts
                include $13.5 million of gross proceeds relating to approximately
                1.4 million shares issued under our dividend reinvestment
                plan.(c)
            Amounts
                include $14.6 million of gross proceeds relating to approximately 1.5
                million shares issued under our dividend reinvestment
                plan.





29





As
      of
      June 30, 2007, $1,149.3 million in common shares remained available for
      sale pursuant to our Current Offering, exclusive of $176.0 million in
      common shares available under our dividend reinvestment plan. From July 1
      through August 7, 2007, we received gross offering proceeds of approximately
      $58.2 million from the sale of 5.6 million common shares, including
      approximately $10.2 million relating to 1.0 million shares sold under
      our dividend reinvestment plan. As of August 7, 2007, $1,101.3 million in
      common shares remained available for sale to the public pursuant to the Current
      Offering, exclusive of $165.8 million in common shares available under our
      dividend reinvestment plan.





***Payment
      of Offering and Other Costs and Expenses***





In
      addition to making investments in accordance with our investment objectives,
      we
      use our capital resources to pay our Dealer Manager and our Advisor for services
      they provide to us during the various phases of our organization and operations.
      During the offering stage, we pay the Dealer Manager selling commissions and
      dealer manager fees, and we reimburse the Advisor for organizational and
      offering costs.





For
      the
      six months ended June 30, 2007 and 2006, we paid the Dealer Manager selling
      commissions of $36.2 million and $7.5 million, respectively, and we
      paid dealer manager fees of $12.4 million and $16.4 million,
      respectively. All such selling commissions and a portion of such dealer manager
      fees were reallowed by HRES to participating broker dealers for their services
      in selling our shares.





During
      the six months ended June 30, 2006, the Advisor incurred organizational and
      internal offering costs related to the Initial Offering totaling
      $3.0 million and third-party offering costs of $3.5 million. During
      the six months ended June 30, 2006, we made payments totaling $9.8 million
      to our Advisor for the reimbursement of previously incurred Initial Offering
      organizational and offering costs. No such costs were incurred or paid during
      the six months ended June 30, 2007 because the Initial Offering had
      concluded.





During
      the six months ended June 30, 2007 and 2006, the Advisor incurred organizational
      and internal offering costs related to the Current Offering totaling
      approximately $3.5 million and $613,000, respectively, and third-party
      offering costs of approximately $4.6 million and $1.9 million,
      respectively. During the six months ended June 30, 2007, we made payments
      totaling $11.1 million to our Advisor for reimbursement of Current Offering
      organizational and offering costs. No such payments were made during the six
      months ended June 30, 2006.





See
      “Critical Accounting Policies — Organizational and Offering Costs” above
      for additional information.





***Debt
      Financings***





We
      use
      debt financing from time to time for acquisitions and investments as well as
      for
      property improvements, tenant improvements, leasing commissions and other
      working capital needs. We may obtain financing at the time an asset is acquired
      or an investment is made or at such later time as determined to be appropriate,
      depending on market conditions and other factors.





Subject
      to market conditions and other factors we may consider, we expect that our
      debt
      financing will generally be in the range of approximately 40 – 60% of
      management’s estimate of the aggregate value of our real estate investments. The
      amount of debt we place on an individual property, or the amount of debt
      incurred by an individual entity in which we invest, however, may be less than
      40% or more than 60% of the value of such property or the value of the assets
      owed by such entity, depending on market conditions and other factors. In
      addition, depending on market conditions and other factors, we may choose not
      to
      use debt financing for our operations or to acquire properties. Our articles
      of
      incorporation limit our borrowing to 300% of our net assets (equivalent to
      75%
      of the cost of our assets) unless any excess borrowing is approved by a majority
      of our independent directors and is disclosed to our shareholders in our next
      quarterly report. As of June 30, 2007 and December 31, 2006, our debt
      financing was approximately 50% and 53%, respectively, of the aggregate value
      of
      our real estate investments (including our pro rata share of the Core Fund’s
      real estate assets and related debt).





30


The
      following table includes all of our outstanding notes payable as of June 30,
      2007 and December 31, 2006 (in thousands, except interest
      rates):


**Description**
            **Origination
                Date**
            **Maturity
                Date**
            
            **Interest
                Rate**
            
            **Principal****Outstanding**
              **June
                30,****2007**
            
            
            **Principal****Outstanding****December 31,****2006**Key
                Bank National Association — Revolving Credit Facility
            9/9/2005
            10/31/2009
            
            Variable
            (1)
            
            $
            —
            
            
            $
            162,000**SECURED
                MORTGAGE DEBT**Wells
                Fargo Bank, N.A. — Airport Corporate Center
            1/31/2006
            3/11/2009
            
            
            4.775
            %
            
            
            89,635
            (6)
            
            
            89,233Metropolitan
                Life Insurance Company — 1515 S. Street
            4/18/2006
            5/1/2011
            
            
            5.680
            %
            
            
            45,000
            
            
            
            45,000Capmark
                Finance, Inc. — Atrium on Bay
            2/26/2007
            2/26/2017
            
            
            5.330
            %
            
            
            179,417
            (4)
            
            
            —**HSH
                POOLED MORTGAGE FACILITY**HSH
                Nordbank — Citymark, 321 North Clark, 1900 and 2000
                Alameda
            8/1/2006
            8/1/2016
            
            
            5.8575
            %(2)
            
            
            185,000
            
            
            
            185,000HSH
                Nordbank — 3400 Data Drive, Watergate Tower IV
            1/23/2007
            1/12/2017
            
            
            5.2505
            %(3)
            
            
            98,000
            
            
            
            —HSH
                Nordbank — Daytona and Laguna Buildings
            5/2/2007
            5/2/2017
            
            
            5.3550
            %(5)
            
            
            119,000
            
            
            
            —$
            716,052
            
            
            $
            481,233





­­_________





(1)
            The
                revolving credit facility with KeyBank National Association (“KeyBank”)
                provides a maximum aggregate borrowing capacity of $250.0 million,
                which may be increased to $350.0 million upon our election.
                Borrowings under the revolving credit facility are at variable interest
                rates based on LIBOR plus 125 to 200 basis points based on prescribed
                leverage ratios. The weighted average interest rate on outstanding
                borrowings under this facility was 6.73% as of December 31,
                2006.(2)
            Borrowings
                under the pooled mortgage facility with HSH Nordbank (“HSH Credit
                Facility”) have variable interest rates equal to one-month LIBOR plus
                0.40%. However, we entered into an interest rate swap agreement which
                effectively fixed the interest rate of this borrowing at
                5.8575%.(3)
            Borrowings
                under the HSH Credit Facility have variable interest rates equal
                to
                one-month LIBOR plus 0.40%. However, we entered into an interest
                rate swap
                agreement which effectively fixed the interest rate of this borrowing
                at
                5.2505%.(4)
            This
                amount was translated to U.S. dollars at a rate of $0.9443 as of June
                30, 2007. The mortgage agreement provided for a principal amount
                of
                $190.0 million CAD.(5)
            Borrowings
                under the HSH Credit Facility have variable interest rates equal
                to
                one-month LIBOR plus 0.40%. However, we entered into an interest
                rate swap
                agreement which effectively fixed the interest rate of this borrowing
                at
                5.355%.(6)
            This
                mortgage is an interest-only loan in the principal amount of $91.0
                million, which we assumed in connection with our acquisition of Airport
                Corporate Center. At the time of acquisition, the fair value of this
                mortgage was estimated to be $88.5 million, resulting in a premium
                of $2.5
                million. The premium is being amortized over the term of the
                mortgage.








***Advances
      from affiliates***





Certain
      costs and expenses associated with our organization and public offerings have
      been paid by our Advisor on our behalf. See “Financial Condition, Liquidity and
      Capital Resources — Payment of Offering Costs and Other Expenses” above for
      a discussion of these advances and our repayment of the same.





During
      the six months ended June 30, 2006, our Advisor had advanced to us or made
      payments on our behalf totaling approximately $1.7 million for certain expenses
      incurred in connection with the Company’s administration and ongoing operations.
      We did not receive any advances from our Advisor after June 30, 2006, and
      as of December 31, 2006, we had repaid our Advisor all amounts related to
      these advances.





To
      the
      extent that our operating expenses in any four consecutive fiscal quarters
      exceed the greater of 2% of average invested assets or 25% of Net Income (as
      defined in our Articles of Incorporation), our Advisor is required to reimburse
      us the amount by which the total operating expenses paid or incurred exceed
      the
      greater of the 2% or 25% threshold, unless our independent directors determine
      that such excess was justified. For the four quarters ended June 30, 2007,
      we
      did not exceed this limitation.





31


***Distributions***





In
      order
      to meet the requirements for being treated as a REIT under the Internal Revenue
      Code of 1986 and to pay regular cash distributions to our shareholders, which
      is
      one of our investment objectives, we have and intend to continue to declare
      distributions to shareholders as of daily record dates and aggregate and pay
      such distributions quarterly.





From
      January 1, 2006 through June 30, 2006, we declared distributions (as
      authorized by our board of directors) equal to $0.00164384 per share, per
      day. From July 1, 2006 through June 30, 2007, wedeclared distributions
      equal to $0.00170959 per share, per day. Additionally, we have declared
      distributions equal to $0.00170959 per share, per day through August 30,
      2007. The distributions declared were set by our board of directors at a level
      the board believed to be appropriate based upon the board’s evaluation of our
      assets, historical and projected levels of cash flow and results of operations,
      additional capital and debt anticipated to be raised or incurred and invested
      in
      the future, the historical and projected timing between receiving offering
      proceeds and investing such proceeds in real estate investments, and general
      market conditions and trends.





Aggregate
      distributions declared to our shareholders and minority interests related to
      the
      six months ended June 30, 2007 were approximately $32.4 million. Our two
      primary sources of funding for our distributions are cash flows from operating
      activities and distributions from the Core Fund. When analyzing the amount
      of
      cash flow available to pay distributions, we also consider the impact of certain
      other factors, including our practice of financing acquisition fees and other
      acquisition-related cash flows, which reduce cash flows from operating
      activities in our statements of cash flows. The following table summarizes
      the
      primary sources and other factors we considered in our analysis of cash flows
      available to fund distributions to shareholders and minority interests (amounts
      are in thousands for the six months ended June 30, 2007 and are
      approximate):





Cash
                flow from operating activities
            
            $
            7,160Distributions
                from the Core Fund (1)
            
            $
            12,022Cash
                acquisition fees (2)
            
            $
            3,445Acquisition-related
                items (3)
            
            $
            5,916Master
                lease rent receipts (4)
            
            $
            2,220


__________





(1)
            Cash
                distributions earned during the six months ended June 30, 2007 related
                to
                our investment in the Core Fund.(2)
            In
                accordance with GAAP, acquisition fees paid to our Advisor reduce
                cash
                flows from operating activities in our condensed consolidated statements
                of cash flows. However, we fund such payments with offering proceeds
                and
                related acquisition indebtedness as such payments are transaction
                costs
                associated with our acquisitions of real estate investments. As a
                result,
                we considered the payment of acquisition fees in our analysis of
                cash flow
                available to pay distributions.(3)
            Acquisition-related
                items include cash payments to settle net liabilities assumed upon
                acquisition of properties. In accordance with GAAP, these payments
                reduce
                cash flows from operating activities in our condensed consolidated
                statements of cash flows. However, these payments are related to
                the
                acquisition, as opposed to the operations, of these properties, and
                we
                fund such payments with offering proceeds and acquisition-related
                indebtedness. As a result, we considered the payment of these items
                in our
                analysis of cash flow available to pay distributions. For the six
                months
                ended June 30, 2007, these amounts consisted primarily of property
                tax
                liabilities assumed upon the acquisition of 321 North Clark and
                liabilities incurred upon the acquisition of Atrium on
                Bay.(4)
            Master
                lease rent receipts include rent payments received related to master
                leases entered into in conjunction with previous asset acquisitions.
                In
                accordance with GAAP, these payments are recorded in cash flows from
                investing activities in our condensed consolidated statement of cash
                flows. However, we consider these cash receipts in our analysis of
                cash
                flow available to pay
                distributions.





Additionally,
      we typically use cash flows from financing activities such as offering proceeds
      or borrowings, rather than operating cash flows, to pay for deferred leasing
      costs, such as tenant incentive payments, leasing commissions and tenant
      improvements as we consider these costs to be additional capital investments
      in
      our properties. For the six months ended June 30, 2007, we paid
      $4.1 million for deferred leasing costs, which were reflected as a
      reduction of cash flows from operating activities in our condensed consolidated
      financial statements included elsewhere in this Form 10-Q.





32


As
      noted
      above in “— General”, we are currently making real estate investments in an
      intensely competitive environment. Significant U.S. and foreign investment
      capital continues to flow into real estate capital markets, creating increased
      competition for acquisitions and continued upward pressure on prices of real
      estate investments, including high-quality office properties. Should this trend
      continue, which we expect it may, it will likely cause downward pressure on
      rates of return from our future real estate investments, and consequently,
      could
      cause downward pressure on the distributions payable to our
      shareholders.





To
      the
      extent our distributions exceed our tax-basis earnings and profits, a portion
      of
      these distributions will constitute a return of capital for federal income
      tax
      purposes. Approximately 23% of our distributions declared during the year ended
      December 31, 2006 were taxable to shareholders as ordinary taxable income
      and the remaining portion was treated as return of capital. We expect that
      a
      portion of distributions paid in future years will also constitute a return
      of
      capital for federal income tax purposes, primarily as a result of non-cash
      depreciation deductions.





***Results
      of Operations***





We
      owned
      12 office properties directly and 22 office properties indirectly through our
      investment in the Core Fund as of June 30, 2007. By comparison, we owned five
      office properties directly and 12 office properties indirectly through our
      investment in the Core Fund as of June 30, 2006. As a result of the significant
      new investments made between June 30, 2006 and June 30, 2007, as well as the
      number of our direct properties owned for the three and six month periods then
      ended, our results of operations for the three months ended June 30, 2007 and
      2006 are not directly comparable.





Our
      results of operations are also not indicative of what we expect our results
      of
      operations will be in future periods as we expect that our operating revenues
      and expenses will continue to increase as a result of (i) owning the real
      estate investments we recently acquired for an entire period, and (ii) our
      future real estate investments, which we expect to be substantial.





*Direct
      Investments*





Total
      revenues for the six months ended June 30, 2007 and 2006 were $68.0 million
      and $24.9 million, respectively. Property-level expenses, property taxes
      and property management fees for the six months ended June 30, 2007 and 2006
      were $29.2 million and $11.4 million, respectively. Depreciation and
      amortization expense for the six months ended June 30, 2007 and 2006 was
      $24.6 million and $8.8 million, respectively.





Total
      revenues for the three months ended June 30, 2007 and 2006 were
      $37.3 million and $16.5 million, respectively. Property-level
      expenses, property taxes and property management fees for the three months
      ended
      June 30, 2007 and 2006 were $16.6 million and $7.6 million,
      respectively. Depreciation and amortization expense for the three months ended
      June 30, 2007 and 2006 was $13.1 million and $5.8 million,
      respectively.





*Our
      Interest in the Core Fund*





As
      of
      June 30, 2007, we had invested a total of approximately $337.6 million and
      owned a 29.8% non-managing general partner interest in the Core Fund, compared
      to $178.9 million invested as of June 30, 2006, representing a 29.3%
      interest.





Our
      equity in losses related to our investment in the Core Fund for the six months
      ended June 30, 2007 and 2006 was approximately $1.9 million and $913,000,
      respectively. For the six months ended June 30, 2007 and 2006, the Core Fund
      had
      net losses of approximately $5.6 million and $3.0 million, respectively, on
      revenues of $201.2 million and $120.6 million, respectively. The Core
      Fund’s net losses for the six months ended June 30, 2007 and 2006 included
      $68.2 million and $36.2 million, respectively, of non-cash
      depreciation and amortization expenses.





Our
      equity in losses related to our investment in the Core Fund for the three months
      ended June 30, 2007 and 2006 was approximately $757,000 and $812,000,
      respectively. For the three months ended June 30, 2007 and 2006, the Core Fund
      had net losses of approximately $2.4 million and $2.7 million,
      respectively, on revenues of $110.0 million and $63.9 million,
      respectively. The Core Fund’s net losses for the three months ended June
      30, 2007 and 2006 included $39.0 million and $20.6 million,
      respectively, of non-cash depreciation and amortization expenses.





33


*Asset
      Management and Acquisition Fees*





Asset
      management fees for the six months ended June 30, 2007 and 2006 were
      approximately $6.6 million and $2.4 million, respectively. The increase in
      asset management fees reflects the fact that we have a larger portfolio of
      assets under management. Acquisition fees for the six months ended June 30,
      2007
      and 2006 were $4.5 million and $5.2 million,
      respectively.





Asset
      management fees for the three months ended June 30, 2007 and 2006 were
      approximately $3.7 million and $1.4 million, respectively. The increase in
      asset management fees reflects the fact that we have a larger portfolio of
      assets under management. Acquisition fees for the three months ended June 30,
      2007 and 2006 were $1.2 million and $3.2 million,
      respectively.





These
      amounts include both the cash portion of the fees payable to our Advisor as
      well
      as the corresponding increase in the Participation Interest. See
“Note 6 — Related Party Transactions” in our unaudited condensed
      consolidated financial statements included elsewhere in this Form 10-Q for
      a description of the Participation Interest.





*General
      and Administrative Expenses*





General
      and administrative expenses were approximately $2.2 million and $1.5 million,
      respectively, for the six months ended June 30, 2007 and 2006 and approximately
      $1.3 million and $918,000, respectively, for the three months ended June 30,
      2007 and 2006. These costs include legal and accounting fees, insurance costs,
      costs and expenses associated with our board of directors and other
      administrative expenses. Certain of these costs are variable and may increase
      in
      the future as we continue to raise capital and make additional real estate
      investments. The increases in general and administrative expenses during the
      periods are primarily due to increased costs of shareholder communications
      and
      audit fees as the Company’s activities and shareholder base continue to
      grow.





*Gain
      on Derivative Instruments*





We
      entered into interest rate swap contracts with HSH Nordbank in June 2006,
      December 2006, February 2007 and June 2007.





The
      gain
      on derivative instruments recorded in our condensed consolidated statements
      of
      operations for the three and six months ended June 30, 2007 is the result of
      the
      following (additional details provided below):





•
            the
                increase in the fair value of the interest rate swaps during the
                period
                resulted in gains of $15.6 million for the three and six months ended
                June
                30, 2007;





•
            transaction
                fees incurred upon entering into the swaps of approximately $365,000
                and
                $731,000 for the three and six months ended June 30, 2007, respectively;
                and





•
            a
                gain of approximately $939,000 for the six months ended June 30,
                2007
                resulting from the settlement of a foreign currency contract in February
                2007. There were no such transactions during the three months ended
                June
                30, 2007.





We
      recorded a gain of $1.4 million on an interest rate swap for the three and
      six
      months ended June 30, 2006. This gain resulted from the increase in the fair
      value of an interest rate swap and was net of fees of approximately $552,000
      incurred upon entering into the swap transaction.





We
      have
      not designated our foreign currency contract or any of our interest rate swap
      contracts as cash flow hedges for accounting purposes. The interest rate
      swap contracts have been recorded at their estimated fair value in the
      accompanying condensed consolidated balance sheets as of June 30, 2007 and
      December 31, 2006.





34


*Gain
      on Foreign Currency Transaction*





During
      the six months ended June 30, 2007, certain of our subsidiaries which own Atrium
      on Bay, our property located in Toronto, Canada, had transactions denominated
      in
      currencies other than their functional currency (CAD). In these instances,
      non-monetary assets and liabilities are reflected at the historical exchange
      rate, monetary assets and liabilities are remeasured into the functional
      currency at the exchange rate in effect at the end of the period, and income
      statement accounts are remeasured at the average exchange rate for the period.
      We recorded a gain of approximately $134,000 in the accompanying condensed
      consolidated statement of operations for the six months ended June 30, 2007
      as a
      result of such foreign currency transactions.





*Interest
      Expense*





Interest
      expense was $19.8 million and $7.8 million, respectively, for the six
      months ended June 30, 2007 and 2006 and $10.4 million and $5.3 million,
      respectively, for the three months ended June 30, 2007 and 2006. The increases
      in interest expense during the periods are primarily due to increased borrowings
      used to fund our acquisitions of directly-owned properties.





*Interest
      Income*





Interest
      income was $2.9 million and $233,000, respectively, for the six months
      ended June 30, 2007 and 2006 and $2.5 million and $149,000, respectively,
      for the three months ended June 30, 2007 and 2006. The increases in interest
      income are primarily due to increased cash we held in short-term investments
      during delays between raising capital and acquiring real estate
      investments.





*Income /
      Loss Allocated to Minority Interests*





As
      of
      June 30, 2007 and 2006, Hines REIT owned a 98.0% and a 96.7% interest,
      respectively, in the Operating Partnership, and affiliates of Hines owned the
      remaining 2.0% and 3.3% interests, respectively. We allocated income of
      approximately $395,000 to minority interests for the six months ended June
      30,
      2007 and losses of $254,000 to minority interests for the six months ended
      June
      30, 2006. In addition, we allocated income of approximately $326,000 to minority
      interests for the three months ended June 30, 2007 and losses of $131,000 to
      minority interests for the three months ended June 30, 2006.




***Related-Party
      Transactions and Agreements***





We
      have
      entered into agreements with the Advisor, Dealer Manager and Hines or its
      affiliates, whereby we pay certain fees and reimbursements to these entities,
      including acquisition fees, selling commissions, dealer-manager fees, asset
      and
      property management fees, construction management fees, reimbursement of
      organizational and offering costs, and reimbursement of certain operating costs.
      See “Note 6 — Related Party Transactions” in our unaudited condensed
      consolidated financial statements included elsewhere in this Form 10-Q for
      a discussion of the various related-party transactions, agreements and
      fees.





***Off-Balance
      Sheet Arrangements***





As
      of
      June 30, 2007 and December 31, 2006, we had no off-balance sheet
      arrangements that have or are reasonably likely to have a current or future
      effect on our financial condition, changes in financial condition, revenues
      or
      expenses, results of operations, liquidity, capital expenditures or capital
      resources.





***Subsequent
      Events***





On
      July 2, 2007, an indirect subsidiary of the Core Fund acquired the Carillon
      building, a 24-story office building located at 227 West Trade Street in
      downtown Charlotte, North Carolina and a one-half acre parcel of land adjacent
      to the building. The contract purchase price for the Carillon Building was
      approximately $140.0 million, exclusive of transaction costs, financing
      fees and working capital reserves. The Carillon building was constructed in
      1991
      and contains 469,226 square feet of rentable area that is approximately 99%
      leased.





Effective
      July 2, 2007, we made a capital contribution to the Core Fund of
      approximately $58.0 million pursuant to our right to contribute up to 40%
      of any capital call made by the Core Fund. This capital contribution was
      approved by our board of directors and its conflicts committee. As a result
      of
      this contribution, we owned an approximate 32% non-managing general partner
      interest in the Core Fund.





35


On
      July
      10, 2007, subject to our share redemption plan, we authorized requests for
      the
      redemption of approximately 228,000 common shares and made payments totaling
      $2.2 million related to these redemptions. The shares redeemed were cancelled
      and will have the status of authorized, but unissued shares.





On
      July
      19, 2007, we acquired 3 Huntington Quadrangle, a two-building office complex
      located on Long Island in Suffolk County, New York. 3 Huntington Quadrangle
      consists of two, four-story office buildings constructed in 1971. The buildings
      consist of 407,731 square feet of rentable area and are approximately 83%
      leased. The contract purchase price for 3 Huntington Quadrangle was
      approximately $87.0 million, exclusive of transaction costs, financing fees
      and
      working capital reserves. The acquisition was funded using proceeds from our
      current public offering and mortgage financing described below.




On
      July
      19, 2007, we borrowed $48.0 million under our existing $500.0 million credit
      facility with HSH Nordbank to fund the acquisition of 3 Huntington
      Quadrangle. The $48.0 million borrowing is secured by a mortgage and related
      assignments and security interests on 3 Huntington Quadrangle. The borrowing
      matures on July 19, 2017 and bears interest at a variable rate based on
      one-month LIBOR plus a margin of 0.40%. The interest rate on such borrowing
      has
      been effectively fixed at 5.98% as a result of an interest rate swap agreement
      we entered into with HSH Nordbank.




On
      July
      31, 2007, we borrowed $115.0 million under our revolving credit facility with
      KeyBank in anticipation of our acquisition of One Wilshire, as described below.
      On August 7, 2007 we made payments totaling $20.0 million on this credit
      facility.





On
        August
        1, 2007, we acquired One Wilshire, a thirty-story office building located
        in the
        central business district of Los Angeles, California. One Wilshire was
        constructed in 1966 and consists of 664,248 square feet of rentable area
        that is
        approximately 99% leased. The contract purchase price for One Wilshire was
        approximately $287.0 million, exclusive of transaction costs, financing
        fees and working capital reserves and was funded using proceeds from our
        current
        public offering and borrowings under our revolving credit facility as described
        above.





We
      initiated a plan to sell Citymark, an office property in Dallas, Texas, in
      order
      to take advantage of favorable market conditions, and began distributing
      marketing materials regarding the sale of Citymark in July 2007. As of June
      30,
      2007, the carrying value of Citymark was approximately $20.8
      million.





**Item 3.*Quantitative
      and Qualitative
      Disclosures About Market Risk.***





Market
      risk includes risks relating to changes in interest rates, foreign currency
      exchange rates, commodity prices, equity prices and other market changes that
      affect market sensitive instruments. We are exposed to both interest rate risk
      and foreign currency exchange rate risk.





The
        commercial real estate debt markets are currently experiencing volatility
        as a
        result of certain factors including the tightening of underwriting standards
        by
        lenders and credit rating agencies and the significant inventory of unsold
        Collateralized Mortgage Backed Securities in the market.  This is
        resulting in lenders increasing the cost for debt financing.  As our
        existing debt is either fixed rate debt or floating rate debt with a fixed
        spread over LIBOR, we do not believe that our current portfolio is materially
        impacted by the current debt market environment.  However, should the
        overall cost of borrowings increase, either by increases in the index rates
        or
        by increases in lender spreads, we will need to factor such increases into
        the
        economics of future acquisitions.  This may result in future
        acquisitions generating lower overall economic returns and potentially reducing
        future cash flow available for distribution.
 
 In
        addition, the state of the debt markets could have an impact on the overall
        amount of capital investing in real estate which may result in price or value
        decreases of real estate assets.  Although this may benefit us for
        future acquisitions, it could negatively impact the current value of our
        existing assets.
  We
      are exposed to the
      effects of interest rate changes primarily through variable-rate debt, which
      we
      use to maintain liquidity and fund expansion of our real estate investment
      portfolio and operations. Our interest rate risk management objectives are
      to
      monitor and manage the impact of interest rate changes on earnings and cash
      flows, and to use derivative financial instruments such as interest rate swaps
      and caps in order to mitigate our interest rate risk on variable rate debt.
      We
      do not enter into derivative or interest rate transactions for speculative
      purposes. Please see “Debt Financings” above for more information concerning the
      Company’s outstanding debt.





As
      of
      June 30, 2007, we had $402.0 million of debt outstanding under our HSH
      Credit Facility, which is a variable-rate pooled mortgage facility. However,
      as
      a result of the interest rate swap agreements entered into with HSH Nordbank,
      these borrowings effectively bear interest at fixed rates. We had no other
      variable-rate debt outstanding as of June 30, 2007.





We
      are
      exposed to foreign currency exchange rate variations resulting from the
      remeasurement and translation of the financial statements of our subsidiaries
      located in Toronto, Canada. As of June 30, 2007 and for the six months then
      ended, we recorded a gain on foreign currency transactions of approximately
      $134,000 in our condensed consolidated statement of operations and approximately
      $5.3 million of accumulated other comprehensive income included in our condensed
      consolidated statement of shareholders’ equity related to our Toronto
      subsidiaries. Management does not believe that variations in the foreign
      currency exchange rates pose a significant risk to our consolidated results
      of
      operations or financial position.





36


**Item 4T.*Controls
      and
      Procedures.***





In
      accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of
      1934, as amended (the”Exchange Act”), we, under the supervision and with the
      participation of our Chief Executive Officer and Chief Financial Officer,
      carried out an evaluation of the effectiveness of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of
      the end of the period covered by this report. Based on that evaluation, our
      Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and procedures were effective as of June 30, 2007, to
      provide reasonable assurance that information required to be disclosed in our
      reports filed or submitted under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms.





Other
      than those described below, no change occurred in our internal controls over
      financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)
      during the three months ended June 30, 2007 that has materially affected, or
      is
      reasonably likely to materially affect, our internal controls over financial
      reporting.





During
      the three months ended June 30, 2007, we continued the implementation of an
      upgrade to our financial and accounting systems with the implementation of
      a new
      enterprise-wide accounting and lease management system for Hines. We anticipate
      this implementation will be completed by mid-2008. This new software affects
      many aspects of our accounting and financial systems and procedures and results
      in a significant change to our internal controls. We continue to review the
      controls affected by the implementation. Appropriate modifications have been
      or
      will be made to any affected internal controls during the implementation.
      Further, we will test all significant modified controls resulting from the
      implementation to ensure they are functioning effectively.





**PART II – OTHER
      INFORMATION**





**Item 2.*Unregistered
      Sales of Equity
      Securities and Use of Proceeds.***





During
      the six months ended June 30, 2007, we did not sell any equity securities that
      were not registered under the Securities Act of 1933.





The
      following table lists shares we redeemed under our share redemption plan during
      the period covered by this report.





**Period**
            
            **Total****Number
                of****Shares****Purchased**
            
            
            **Average
                Price****Paid**
              **per
                Share****(or
                Unit)**
            
            
            **Total
                Number of****Shares
                Purchased as**
              **Part
                of Publicly**
              **Announced
                Plans or****Programs**
            
            
            **Maximum
                Number (or**
              **Approximate
                Dollar**
              **Value)
                of
                Shares**
              **that
                May Yet
                be**
              **Purchased
                Under the****Plans
                or****Programs(1)**April
                1, 2007 to April 30, 2007
            
            
            121,997
            
            
            
            9.36
            
            
            
            121,997
            
            
            
            2,768,150May
                1, 2007 to May 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,768,150June 1,
                2007 to June 30, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,993,045**Total**
            
            
            121,997
            
            
            ****
            **9.36**
            
            
            
            121,997


__________





(1)
            We
                may redeem shares under the program so long as the total number of
                shares
                redeemed during the calendar year does not exceed, as of the date
                of the
                redemption, 10% of our shares outstanding on the same date during
                the
                prior year.





**Item 6.*Exhibits.***





The
      exhibits required by this item are set forth on the Exhibit Index attached
      hereto.





37


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





HINES
      REAL ESTATE INVESTMENT TRUST,
      INC.





August
      14,
      2007                                                                           By:           /s/ CharlesM.
      Baughn


Charles
      M. Baughn


Chief
      Executive Officer








August
      14,
      2007                                                                           By:           /s/ SherriW.
      Schugart


Sherri
      W. Schugart


Chief
      Financial Officer








38


**EXHIBIT INDEX**





**Exhibit
                No.**
            
            **Description**3.1
            —
            Second
              Amended and Restated Articles of Incorporation of Hines Real Estate
              Investment Trust, Inc. (filed as Exhibit 3.1 to the registrant's Current
              Report on Form 8-K on July 13, 2007 and incorporated herein by
              reference).3.2
            —
            Second
                Amended and Restated Bylaws of Hines Real Estate Investment Trust,
                Inc.
                (filed as Exhibit 3.1 Amendment No. 5 to the registrant’s
                Registration Statement on Form S-11, File No. 333-130114 (the "Second
                Registration Statement"), on July 16, 2007 and incorporated herein
                by
                reference).****10.1
            —
            Purchase
                and Sale Agreement, dated as of May 11, 2007, by and between Touchstone
                Venture II and Hines REIT Properties, L.P. (filed as Exhibit 10.79 to
                Amendment No. 5 to the registrant’s Second Registration Statement and
                incorporated herein by reference).10.2
            —
            Purchase
                and Sale Agreement and Joint Escrow Instructions, dated as of July
                11,
                2007, by and between Carlyle One Wilshire II, L.P. and Hines REIT
                Properties, L.P. (filed as Exhibit 10.80 to Amendment No. 5 to the
                registrant’s Second Registration Statement and incorporated herein by
                reference).10.3
            —
            Purchase
                and Sale Agreement, dated as of June 4, 2007, by and between 3 Huntington
                Quadrangle, LLC, and Hines REIT Properties, L.P. (filed as
                Exhibit 10.81 to Amendment No. 5 to the registrant’s Second
                Registration Statement and incorporated herein by
                reference).10.4
            —
            Advisory
              Agreement, dated June 26, 2006, by and among Hines Real Estate Investment
              Trust, Inc., Hines REIT Properties, L.P., and Hines Advisors Limited
              Partnership (filed as Exhibit 10.8 to the registrant’s Quarterly Report on
              Form 10-Q for the quarter ended June 30, 2006 and incorporated herein
              by
              reference), as renewed on identical terms for an additional one-year
              term,
              pursuant to a verbal agreement by and among the parties
              thereto.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 and Chief Financial Officer Pursuant to
                18 U.S.C., Section 1350, as adopted pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551
                this
                Exhibit is furnished to the SEC and shall not be deemed to be
                “filed.”


__________





*
            Filed
                herewith





39