##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | for the Fiscal Year Ended December 31,
    2003.                                                
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | for the Transition Period
    from           to                                                 

Commission File Number 1-12514

Keystone Property Trust


(Exact name of registrant as specified in its
charter)


|                                                                                                          |  |                                         
|--------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|MARYLAND                                                                                                  |  | 84-1246585                              
|(State or other jurisdiction of
    incorporation or organization)                                        |  | (IRS Employer
    Identification Number)
|                                                                                                         
|200 Four Falls, Suite 208
    West Conshohocken, Pennsylvania(Address of principal executive
    offices) |  | 19428(Zip code)                         



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(Registrants telephone number, including
area code):

(484) 530-1800


Securities registered under Section 12(b)
of the Securities Exchange Act of 1934:

Title of each Class:

|                                                                    |  |                                           
|------------------------------------------------------------------- |  | ------------------------------------------
|Title of Each Class                                                 |  | Name of each Exchange on which Registered:
|                                                                    |  |                                           
|Common Shares of Beneficial Interest, $.001 Par
    Value           |  | New York Stock Exchange                   
|Series D Cumulative Redeemable Preferred
    Stock, $.001 Par Value |  | New York Stock Exchange                   

Securities registered under Section 12(g)
of the Securities Exchange Act of 1934:

None


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 þ          No o

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

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

The aggregate
market value of the voting and non-voting common equity held by
non-affiliates of the Registrant (based upon the closing price
on the New York Stock Exchange) on June 30, 2003 was
approximately $370.6 million. As of March 8, 2004,
there were 30,507,712 common shares of beneficial interest,
$.001 par value, outstanding.

Portions of the
proxy statement for the annual meeting of the shareholders of
Keystone Property Trust to be held on June 3, 2004 and to
be filed within 120 days after the close of the
Registrants fiscal year are incorporated by reference into
Part III of this Form 10-K.



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TABLE OF CONTENTS

FORM 10-K

|                                                |  |                                                                                           |      |      |    | 
|----------------------------------------------- |  | ----------------------------------------------------------------------------------------- | ---- | ---- | -- | 
|                                                |  |                                                                                           |      | Page
|                                                |  |                                                                                           |      |     
|PART I                                         
|Item 1.                                         |  | Business                                                                                  |      |      | 2  | 
|Item 2.                                         |  | Properties                                                                                |      |      | 15 | 
|Item 3.                                         |  | Legal Proceedings                                                                         |      |      | 19 | 
|Item 4.                                         |  | Submission of Matters to a
    Vote of Security Holders                                   |      |      | 19 | 
|PART II                                        
|Item 5.                                         |  | Market for Registrants
    Common Equity and Related Shareholder Matters                 |      |      | 20 | 
|Item 6.                                         |  | Selected and Summary
    Financial Data                                                   |      |      | 21 | 
|Item 7.                                         |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |      |      | 23 | 
|Item 7A.                                        |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |      |      | 37 | 
|Item 8.                                         |  | Financial Statements and
    Supplementary Data                                           |      |      | 38 | 
|Item 9.                                         |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |      |      | 38 | 
|Item 9A.                                        |  | Controls and Procedures                                                                   |      |      | 38 | 
|PART III                                       
|Item 10.                                        |  | Trustees and Executive
    Officers of the Registrant                                     |      |      | 39 | 
|Item 11.                                        |  | Executive Compensation                                                                    |      |      | 39 | 
|Item 12.                                        |  | Security Ownership of
    Certain Beneficial Owners and Management                        |      |      | 39 | 
|Item 13.                                        |  | Certain Relationships and
    Related Transactions                                        |      |      | 39 | 
|Item 14.                                        |  | Principal Accountant Fees
    and Services                                                |      |      | 39 | 
|PART IV                                        
|Item 15.                                        |  | Exhibits, Financial
    Statements, Schedules and Reports on Form 8-K                     |      |      | 39 | 
|Signatures                                      |  |                                                                                           | II-1 |     
|AMENDMENT TO KEYSTONE PROPERTY BYLAWS          
|SECOND AMENDMENT TO 1993 OMNIBUS INCENTIVE PLAN
|TERM LOAN AGREEMENT                            
|SUBSIDIARIES OF THE REGISTRANT                 
|CONSENT OF KPMG LLP                            
|SECTION 302 CERTIFICATION OF PEO               
|SECTION 302 CERTIFICATION OF PFO               
|SECTION 906 CERTIFICATION OF THE PEO           
|SECTION 902 CERTIFICATION OF THE PFO           
|SECTION 906 CERTIFICATION OF THE CAO           



1



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PART I.




Item 1.     Business.

Keystone Property Trust (together with its
subsidiaries, the Company) is a fully integrated
real estate investment trust, or REIT, and one of
the largest owners, managers and developers of industrial
properties in the Eastern United States. The Company specializes
in the investment, development and operation of state-of-the-art
distribution facilities servicing the population concentrated
within the Eastern United States.

The Companys goal is to create, through
acquisition, disposition, development and asset management, a
dominant ownership position in certain primary markets in the
Eastern United States. As of December 31, 2003, the Company
owned interests in a portfolio of 135 properties (the
Properties) which aggregated approximately
30.1 million square feet. Our portfolio is comprised almost
exclusively of bulk/warehouse distribution facilities, the
majority of which are state-of-the-art. The Company considers
state-of-the-art distribution facilities to have the following
characteristics: at least 200,000 square feet
(SF)building sizes (big box properties);
24 to 36 foot clear ceiling heights; 58 by 42 foot
column spacing; ESFR (early suppression, fast response)
sprinkler systems; flow through loading dock configurations;
150 foot minimum truck courts; and drop-lot trailer parking.

The Company currently operates in five major
markets: Central/Northern New Jersey; Central/Eastern
Pennsylvania; Indianapolis, Indiana, Greenville, South Carolina
and Southern Florida. The Companys investment focus will
be on new markets as well as on the Companys four primary
markets: New Jersey, Pennsylvania, Indianapolis, Indiana and
Southern Florida. The Company believes it can create significant
value in these four primary markets where we have a significant
ownership presence by building out our sizeable development
pipeline, completing value-added acquisitions and enhancing the
operating performance of our existing properties. The Company
will also continue to build market-leading positions by forming
joint ventures with leading institutional investors. The Company
believes joint ventures enable it to increase its overall return
on invested capital, help expand into new areas and increase its
access to capital for growth. As of December 31, 2003, the
Company controls land that it believes will support the
development of approximately 8.6 million square feet of
industrial properties. The Company intends to prudently develop
on a speculative basis as market conditions warrant and also
take advantage of build-to-suit opportunities. In addition to
the properties in the Companys five major markets, the
Company owns properties in New York, Ohio and South Carolina.
The Company intends to continue to seek to expand its operations
into additional new markets other than its primary markets. In
determining whether to enter into a new market the Company will
consider, among other factors, demographics, job growth,
employment, real estate fundamentals, competition and other
related matters.

The Company believes its primary markets exhibit
very favorable distribution characteristics. The Northern New
Jersey region is one of the busiest cargo areas in the United
States. The developed highway infrastructure and the combination
of JFK, LaGuardia and Newark Airports, the Port of Newark and
the Port of Elizabeth places this region among the most active
and advanced transportation hubs. Central/Northern Pennsylvania
is the central hub of the northeast corridor serving both New
England and the Mid-Atlantic region. Its highway and rail
systems and strong labor pool make Central/Eastern Pennsylvania
an increasingly popular location for lower cost super-regional
operations. Indianapolis is a superior distribution location
because of its interstate highway network and has a strong rail
system as well. By virtue of this infrastructure, Indianapolis
serves as a national distribution hub. Miami is a major
distribution hub driven by international and domestic trade with
significant constraints to new supply and the fastest growing
metropolitan area which is among the ten largest in the United
States. Miami/Dade County is a center for global trade and has
become one of the most dynamic industrial markets in the nation
driven largely by the presence of Miami International Airport
(MIA). MIA is ranked #1 in the United States for
international freight and ranked #3 in the United States
for total freight and is served by more airlines than any other
airport in the Western Hemisphere.

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During the year ended December 31, 2003, the
Company increased its industrial real estate portfolio in its
New Jersey, Pennsylvania and Indiana markets by approximately
54%, from approximately 15.7 million square feet as of
December 31, 2002, to 24.2 million square feet at
December 31, 2003. In the fourth quarter of 2003, the
Company entered into the Southern Florida market with the
acquisition of a 13 building, 1.7 million square foot
portfolio. The Company acquired interests in 10.1 million
square feet or $427.2 million of industrial assets during
2003 including 2.4 million square feet valued at
$83.7 million acquired through joint ventures with CalEast
Industrial Investors, LLC (a joint venture between LaSalle
Investment Management, Inc. and California Public Employees
Retirement System) (the CalEast JV) and the
Mercantile Safe Deposit and Trust Company as Trustee for the
AFL-CIO Building Investment Trust (the BIT JV). The
focus of the CalEast JV is the acquisition of bulk warehouse and
distribution facilities in New Jersey. The expected size of this
joint venture is $300 million and it currently owns
approximately $170 million of industrial assets located in
New Jersey. The BIT JV is also focused on the bulk warehouse and
distribution facilities markets within the Companys
primary geographic markets and other neighboring states. This
joint venture has an expected size of $208.3 million and
was seeded with $90.3 million of industrial assets from the
Company located in Indiana, Pennsylvania and New Jersey. This
joint venture subsequently acquired an additional
$75 million of industrial assets since its formation in
February 2003 and now owns 4.1 million square feet of
industrial assets at December 31, 2003.

Recent Developments

Development Activities

The Company believes it can create value in its
primary markets where it has an established presence by building
out the Companys development pipeline, completing
value-added acquisitions and enhancing the operating performance
of its existing properties. In these primary markets, the
Company as of December 31, 2003 controls land that it
believes will support the development of approximately
8.6 million square feet of industrial properties. The
Company intends to prudently develop these assets on a
speculative basis as market conditions warrant and also take
advantage of build-to-suit opportunities.

In July 2003, the Company acquired a 50% interest
in 5 Points Associates, LLC (5 Points), a
joint venture with Browning Investments, Inc.
(Browning), and started the construction of a
speculative 813,054 square foot distribution facility at
AirTech Park in Indianapolis, Indiana (AirTech),
which was completed in the first quarter of 2004. AirTech can
accommodate an additional 4.2 million square feet of
industrial development. This joint venture is part of a
strategic alliance that the Company formed with Browning, a
developer located in Indianapolis, Indiana, in December 1998.
The terms of this alliance give the Company an option until
December 31, 2008 and rights of first offer until
December 31, 2008, to develop distinct land parcels in
AirTech through joint ventures in which the Company will have a
50% non-controlling ownership interest. 5 Points obtained a
$16.4 million construction loan at a rate equal to LIBOR
plus 2% which matures in 2005. In connection with the
development in AirTech, the Company also guaranteed a
$3.2 million development loan to a Browning affiliate for
certain site improvements to AirTech. The Company does not
anticipate that any amounts will need to be funded by the
Company as a result of this loan guarantee. This guarantee would
only be funded if the borrowing entity defaulted and was not
able to cure its default.

The Company also owns interests in or controls
approximately 268 acres of land in New Jersey. During 2003, the
Company continued construction on 26 acres located in Jersey
City, New Jersey of two speculative distribution centers
totaling approximately 522,000 square feet. In September 2003,
the Company began construction of an approximately
772,000 square foot distribution center to be leased to
Home Depot USA, Inc. on 87 acres that it acquired at
Station Road in Cranbury, New Jersey. The costs for this project
are estimated to be approximately $40 million. The initial
term of the lease with Home Depot USA, Inc., is for
12 years and occupancy is scheduled for the fourth quarter
of 2004. The Company will retain ownership of the asset. During
the fourth quarter of 2003, construction began on a
500,000 square foot expansion of an existing
500,000 square foot facility, at a cost of approximately
$24 million, located in Cranbury, New Jersey. This project
is 100% leased, as a lease was signed for the remaining vacancy
of 781,000 square feet in February 2004. The project is slated
for completion in the second quarter of 2004. Taking into
account the previously mentioned projects, the Company has 118
acres of land remaining for development in New Jersey.

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The Company also owns several industrial
facilities located in Pennsylvania which have adjacent land
parcels that allow for the expansion of the existing facilities
and controls another 215 acres of land in Central
Pennsylvania. In the fourth quarter of 2003, the Company signed
a build-to-suit lease for 15 acres in Allentown, Pennsylvania.
This property will have a 265,535 square foot facility, of
which 211,535 square feet will be leased to KIA Motors
America, Inc. Construction began in the first quarter of 2004
with occupancy expected for the end of the year. The project
costs are estimated to be approximately $9 million.

Corporate Structure

The Company conducts substantially all of its
activities through, and substantially all of the Properties are
held directly or indirectly by, Keystone Operating Partnership,
L.P. (the Operating Partnership). The Company is the
sole general partner of the Operating Partnership and owned, at
December 31, 2003, approximately 79% of the limited
partnership interests (the OP Units) in the
Operating Partnership. The remaining OP Units are owned by
limited partners of the Operating Partnership. The officers and
the trustees of the Company currently own approximately 7.2% of
the outstanding OP Units, assuming the conversion of all
outstanding convertible preferred units of limited partnership
of the Operating Partnership (Convertible Preferred
Units) into OP Units. The officers and the trustees of the
Company currently own approximately 6.9% of the outstanding
Common Shares of Beneficial Interest of the Company
(Common Shares), assuming the conversion to Common
Shares of all outstanding OP Units and shares of convertible
preferred stock (Convertible Preferred Stock) and
Convertible Preferred Units. Each OP Unit may be redeemed by the
holder for the cash value of one Common Share or, at the
Companys option, one Common Share. With each such
exchange, the Companys ownership interest in the Operating
Partnership will increase.

The Company was originally incorporated in
Delaware in 1993 and was re-incorporated in Maryland in 1994. In
October 1999, the Company reorganized from a Maryland
corporation to a Maryland real estate investment trust
(REIT) and changed its name from American Real
Estate Investment Corporation to Keystone Property Trust.
Simultaneously, the name of the Operating Partnership was
changed from American Real Estate Investment, L.P. to Keystone
Operating Partnership, L.P. The Companys executive offices
are located at 200 Four Falls, Suite 208, West
Conshohocken, Pennsylvania 19428 and its telephone number is
484-530-1800 and its facsimile number is 484-530-0130. The
Company also maintains regional offices in Allentown and
Harrisburg, Pennsylvania; New York, New York; Jersey City, New
Jersey; Greenville, South Carolina; and Indianapolis, Indiana.

Registrants Website Address

A copy of this Annual Report on Form 10-K,
as well as our Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all amendments to such reports as
well as the Companys corporate governance guidelines,
board committee charters, and code of business conduct and
ethics are available, free of charge, on the Internet on our
website www.keystoneproperty.com. All required reports
are made available on the website as soon as reasonably
practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission
(SEC). The public may read and copy the
Companys filings at the SECs Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference
Room by calling SEC at 1-800-SEC-0330. The SEC maintains an
internet web site that contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the SEC and the address of that site is
(http://www.sec.gov). The reference to our website
address does not constitute incorporation by reference of the
information contained in the website and therefore information
available on the Companys website should not be considered
part of this document.

Management and Employees

The Company conducts real estate management
activities through the Operating Partnership and Keystone Realty
Services, Inc. (the Management Company). The Company
manages all of its Properties and, through the Management
Company, other properties on behalf of its joint ventures and
other third parties. At December 31, 2003, the Management
Company managed properties containing an aggregate of
approximately 8.6 million square feet, which includes
3.2 million square feet owned by the CalEast JV and

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4.3 million square feet owned by the
BIT JV. Approximately 458,000 square feet was managed for a
market rate management fee, for a limited partnership in which
the Companys Chief Executive Officer is a general partner.
Through its ownership of 100% of the nonvoting preferred stock
of the Management Company, the Operating Partnership is entitled
to receive 95% of amounts paid as dividends by the Management
Company. The Management Companys voting stock is owned by
the Companys Chairman and certain of his family members,
the Companys President and Chief Executive Officer and
another investor in the Company.


At December 31, 2003, the Operating
Partnership and the Management Company had 72 full-time
employees, including the Companys executive officers.

Business Strategy and Operating Plan

The Companys primary business objective is
to maximize return on invested capital, thereby generating
growth in cash flow per share and net asset value per share. The
Company believes that this will enable the Company to maximize
its total return to its shareholders over the long term. The
Company is primarily focused on the industrial real estate
business as the Company believes it offers the opportunity to
generate excellent current returns on invested capital through a
stable cash flow and attractive total returns on a risk-adjusted
basis through the preservation of capital. In order to
accomplish this objective, the Company is executing the
following strategy:



| |   |                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on markets serving primarily the Eastern
    United States and be recognized as one of the leading owners and
    developers in our current markets and any new markets where the
    Company may make investments.                                                                                                        
|
| |  | Select submarkets within those markets where
    there are barriers to the creation of new supply as a result of
    difficult zoning and/or other regulatory requirements,
    topographical constraints, and a lack of developable land.                                                                                       
|
| |  | Maintain a stable platform of operating cash flow
    through proactive portfolio management that emphasizes the
    on-going mitigation of exposure to expiring leases, maintenance
    of tenant diversification, and minimizing recurring costs
    associated with re-tenancy as well as repairs and maintenance.            
|
| |  | Opportunistically acquire assets which increase
    its penetration in the markets in which it has chosen to
    concentrate and which exhibit an opportunity to improve returns
    through repositioning and re-leasing as existing leases
    terminate.                                                                      
|
| |  | Concentrate on the development of high-quality,
    well-located state-of-the-art big box warehouse and distribution
    facilities located in proximity to skilled labor pools,
    interstate and regional road systems, airports and ports that
    are designed to meet the demands of todays
    efficiency-driven tenants.
|
| |  | Increase exposure in current and new markets by
    creating strategic joint ventures to leverage the Companys
    resources.                                                                                                                                                                                                   

The Company believes that it is positioned to
create value through the redeployment of capital currently
invested in properties that do not fit its business strategy or
from which it can realize imbedded value. In 2001, the Company
identified $300 million of office and non-core industrial
assets which would be subject to its capital redeployment plan.
From January 1, 2001 through December 31, 2003, an
aggregate of approximately $586 million of assets were sold
aggregating 10.8 million square feet, of which
$194 million was sold or contributed to the CalEast JV and
the BIT JV. Over that same time period, $638 million,
including acquisitions through joint ventures, was redeployed
into 17.4 million square feet of big-box state-of-the-art
distribution facilities in Central/Northern New Jersey,
Central/Eastern Pennsylvania, Indianapolis, Indiana and Southern
Florida where the Company has focused its primary investment
activities. The Company believes each of these markets exhibit
the unique characteristics of distribution hubs: access to
highways, airports, railways and seaports as well as proximity
to major population centers. The Company believes these
characteristics will continue to drive demand for the most
efficient state-of-the-art properties.

Development.The
Companys development pipeline is a key element in creating
value under its operating plan. The Company has projects in
various stages of construction totaling approximately
2.9 million square feet and representing over
$62 million in invested capital. This development strategy
calls for the

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prudent delivery of state-of-the-art products,
built to the highest user specifications. The Company is
primarily constructing distribution facilities with large
footprints (in excess of 250,000 square feet) that are designed
to capitalize on national distribution trends, which are moving
away from smaller warehouse facilities toward larger regional
facilities. Due to land constraints in its primary markets,
these big-box properties are often unique in their size and
therefore the Company believes they are impacted less by
competition from more conventional industrial buildings. This
development activity may involve joint venture partners similar
to the Companys Indianapolis development activity.


Acquisitions.As a
complement to its development activities, the Company intends to
acquire select properties in Central/Northern New Jersey,
Indianapolis, Indiana, Central/Eastern Pennsylvania and Southern
Florida as well as select new markets. The Company is targeting
value-added acquisition opportunities, which are total return
oriented and offer additional upside potential through leasing
rollover or property repositioning. In Central and Eastern
Pennsylvania, the Company intends to acquire properties that
complement its dominant market position and increase the overall
value and desirability of its industrial portfolio. In Southern
Florida, the Company will focus on acquisitions of the highest
quality product tailored to more sophisticated users in the
bigger footprint, high cube distribution centers market. Also,
the Company may acquire properties through the Cal East JV or
the BIT JV in other markets.

Asset Management.The Company believes that
opportunities exist to increase cash flow from its existing
properties because they are generally newer (average age of
approximately ten years), high quality and in desirable
locations in markets that, in general, continue to experience
rising rents, low vacancy rates and stable demand. The Company
continually evaluates leasing strategies in light of changing
market conditions in order to maximize its long-term return on
invested capital. The Company intends to increase the value of
its portfolio through the disposition of properties that do not
fit the business strategy outlined above and the reallocation of
capital to investments that allow it to maximize risk adjusted
returns.

Policies with Respect to Certain
Activities

The following is a discussion of the
Companys current investment and financing policies. The
Companys policies with respect to these activities have
been determined by the Companys Board of Trustees and may
be amended or revised from time to time at the discretion of the
Trustees without a vote of the shareholders of the Company.



| |                    
| | -------------------
| | Investment Policies

The Company has not adopted any policy as to the
amount or percentage of its assets that can be invested in a
single property. The key criterion for new investments is that
they offer total returns likely to enhance shareholder value and
the opportunity for growth in cash flow and net asset value.

The Company may purchase or develop properties
for long-term investment, expand, renovate and improve its
properties or sell any of its existing or acquired properties,
in whole or in part, when circumstances warrant. The Company has
contractual commitments, with expiration dates ranging from 2004
to 2007, with certain limited partners of the Operating
Partnership not to sell in taxable transactions certain real
estate assets, which aggregated approximately $80 million
of gross book value after certain unitholders in the Operating
Partnership converted their OP Units and Convertible
Preferred Units into Common Shares in connection with a public
offering of such shares by these individuals (see Note 15
to the Companys financial statements). The contractual
commitments which expire in 2004 aggregate approximately
$30 million in gross book value of the Companys
assets after the offering in February 2004. At December 31,
2003, prior to the unitholders conversions in February 2004, the
Companys commitments were $276 million of gross book
value in total and $110 million that expire in 2004.
Accordingly, if sold, the proceeds from the sales of the assets
subject to these commitments will need to be reinvested by the
Company in other real estate assets through the utilization of
Section 1031 exchange transactions in accordance with the
Internal Revenue Code, as amended (the Code). The
Company may also participate with other entities in property
ownership through joint ventures or other types of shared
ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority
over the equity interest of

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the Company. Future investments are not limited
(as to percentage of assets or otherwise) to any geographic area
or any specified type of property; however, the Company intends
to maintain its primary focus on industrial assets in its
primary markets.


While the Company intends to emphasize equity
real estate investments, it may, in its discretion, invest in
mortgages and other real estate interests including preferred
equity interests in entities which own real estate. As of
December 31, 2003, the Company held a $27 million
preferred equity investment in Nocha LLC (Nocha
LLC), the entity which acquired 34 of the Companys
office and other industrial assets in a transaction which closed
in December 2002 (the New York Office Portfolio).
Mortgage investments may include participating or convertible
mortgages. The Companys investment in mortgages may
include investments as a strategy for ultimately acquiring a
property, and might also include the purchase of non-performing
loans at a discounted price. Subject to the percentage of
ownership limitations and gross income and asset tests necessary
for REIT qualification, the Company may also invest in
securities of entities engaged in real estate activities or
securities of other issuers. In the future, the Company may
acquire all or substantially all of the securities or assets of
other REITs or similar entities where such investments are
consistent with the Companys investment policies. In any
event, the Company does not intend that its investments in
securities will require the Company to register as an
investment company under the Investment Company Act
of 1940, as amended, and the Company intends to divest
securities before any such registration would be required.



| |                   
| | ------------------
| | Financing Policies

The Company has not adopted any policy to limit
the amount or percentage of debt the Company may incur or to
maintain any maximum debt-to-total market capitalization ratio
or debt to undepreciated assets ratio. At December 31,
2003, the Company had a debt-to-total market capitalization
ratio of approximately 39.2% (based on the closing price of
$22.09 per Common Share on December 31, 2003) and a
debt to undepreciated assets ratio of 49.6%. The term
total market capitalization means the sum of the
aggregate market value of the Companys outstanding Common
Shares and Common OP Units, the total Cumulative Redeemable
Preferred Stock, debt of the Company and the liquidation value
of the Convertible Preferred Stock and Convertible Preferred
Units on the date thereof. The debt-to-total market
capitalization ratio, which is based upon the market value of
the Companys equity and, accordingly, fluctuates with
changes in the price of the Common Shares, differs from a
debt-to-book capitalization ratio. To the extent the Company
incurs or assumes indebtedness with respect to properties in
connection with pending or future acquisitions or development,
the Companys debt-to-total market capitalization and debt
to undepreciated assets ratios may change. The Company believes
that debt-to-total market capitalization and debt to
undepreciated assets ratios provide a more appropriate
indication of leverage for a company whose assets are primarily
operating real estate. The Company also considers its interest
coverage and fixed charge coverage ratios to be indicative of
its level of leverage and ability to service its debt and fixed
charges. Additionally, under certain instruments of
indebtedness, the Company is obligated to maintain certain
financial ratios. As of December 31, 2003, the Company was
in compliance with all such financial ratios.

The Company may in the future adopt a debt policy
in light of then current economic conditions, relative costs of
debt and equity capital, market values of properties, growth and
acquisition opportunities and other factors, and may modify any
debt financing policy from time to time. If the Board of
Trustees determines that additional funding is required, the
Company may raise such funds through additional equity offerings
(including offerings of senior securities), debt financing or
retention of cash flow (subject to provisions in the Code
concerning taxability of undistributed REIT income), or a
combination of these methods. The Company has agreed as a result
of certain acquisitions closed since December 1997 to use all
commercially reasonable efforts to maintain a certain level of
indebtedness and to permit certain limited partners in the
Operating Partnership to guarantee such level of indebtedness.
At December 31, 2003, approximately $30 million, in
the aggregate, of the Companys outstanding indebtedness is
guaranteed by these limited partners under these agreements.

In the event the Board of Trustees determines to
raise additional equity capital, the Board of Trustees has the
authority, without shareholder approval, to issue additional
Common Shares up to the maximum number authorized, or other
capital stock, on such terms and for such consideration it deems
appropriate, including in

7



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##### Table of Contents



exchange for property. Any such offerings might
cause a dilution of a shareholders investment in the
Company.


To the extent that the Board of Trustees
determines to obtain additional debt financing, the Company
intends to do so generally through loans secured by mortgages on
its properties and lines of credit. These mortgage loans may be
recourse, non-recourse or cross-collateralized and may contain
cross-default provisions. The Company does not have a policy
limiting the number of mortgages that may be placed on any
particular property or the amount of the loans secured by such
mortgages, but mortgage financing instruments usually limit
additional indebtedness on such properties. Indebtedness
incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt
instruments. Such indebtedness may be with recourse to all or
any part of the properties of the Company, or may be limited to
the particular property to which the indebtedness relates. The
proceeds from any borrowings by the Company may be used for the
payment of distributions, for working capital, to refinance
existing indebtedness or to finance acquisitions of new
properties or expansions of existing or new properties.

The Company will acquire additional real estate
assets using Common Shares or OP Units to pay all or a portion
of the purchase price when the Company believes that such
issuance would be accretive to its intrinsic value on a per
share basis. The Company may also issue senior equity securities
or shares of preferred stock for this purpose. There can be no
assurance that such issuances will not be dilutive to the
Companys existing shareholders. In addition, Common Shares
may be issued on terms which grant the recipient the right to
require the Company to register the shares under the Securities
Act of 1933, as amended (the Securities Act). Sales
of those shares may adversely affect the market price of the
Companys outstanding Common Shares.

8



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##### Table of Contents



Summary of Indebtedness

The following table sets forth the Companys
indebtedness outstanding, excluding debt premiums, at
December 31, 2003.

|                                                             |  |           |         |            |  |          |     |            |  |                 |      |            |  |  |       |  |  |   |        |  |  |                             
|------------------------------------------------------------ |  | --------- | ------- | ---------- |  | -------- | --- | ---------- |  | --------------- | ---- | ---------- |  |  | ----- |  |  | - | ------ |  |  | ----------------------------
|                                                             |  |           |         |            |  |          |     |            |  | Annual          |      |           
|                                                             |  |           |         |            |  |          |     |            |  | Principal       |      |           
|                                                             |  |           |         |            |  |          |     | Maturity   |  | and/or Interest |      |           
|                                                             |  | Principal |         |            |  | Interest |     | Date       |  | Payments        |      |           
|Lender                                                       |  | Balance   |         | Recourse % |  | Rate     |     | (Month/Yr) |  | (in 000s)      |      | Collateral
|                                                             |  |           |         |            |  |          |     |            |  |                 |      |           
|GE Capital                                                   |  | $         | 7,023   |            |  |          |     |            |  |                 | 7.03 | %          |  |  | 1/08  |  |  | $ | 601    |  |  | One Philips                 
|Wachovia National Bank(1)                                    |  |           | 6,466   |            |  |          | 100 | %          |  |                 | 2.66 | %          |  |  | 1/05  |  |  |   | 172    |  |  | Various                     
|Bank of New York(2)                                          |  |           | 16,000  |            |  |          | 75  | %          |  |                 | 3.07 | %          |  |  | 4/05  |  |  |   | 491    |  |  | 257 Prospect Plains Road    
|Key Commercial Mortgage(3)                                   |  |           | 8,326   |            |  |          |     |            |  |                 | 8.22 | %          |  |  | 7/10  |  |  |   | 769    |  |  | Various                     
|Key Commercial Mortgage(3)                                   |  |           | 9,110   |            |  |          |     |            |  |                 | 8.29 | %          |  |  | 7/10  |  |  |   | 846    |  |  | Various                     
|LaSalle Bank(4)                                              |  |           | 10,773  |            |  |          | 100 | %          |  |                 | 3.09 | %          |  |  | 12/04 |  |  |   | 333    |  |  | 19 Colony Road              
|Nationwide Life Insurance                                    |  |           | 2,857   |            |  |          |     |            |  |                 | 8.41 | %          |  |  | 4/06  |  |  |   | 240    |  |  | 6402 Corporate Drive  A    
|Nationwide Life Insurance                                    |  |           | 458     |            |  |          |     |            |  |                 | 7.91 | %          |  |  | 4/06  |  |  |   | 36     |  |  | 6402 Corporate Drive  B    
|New York Life                                                |  |           | 4,877   |            |  |          |     |            |  |                 | 8.41 | %          |  |  | 1/10  |  |  |   | 461    |  |  | 9905 NW 17th Street/Bldg 1  
|New York Life                                                |  |           | 4,806   |            |  |          |     |            |  |                 | 8.41 | %          |  |  | 3/10  |  |  |   | 454    |  |  | 1665 NW 102nd Street/Bldg 2 
|New York Life                                                |  |           | 7,367   |            |  |          |     |            |  |                 | 7.06 | %          |  |  | 4/08  |  |  |   | 635    |  |  | 10200 NW21st Street/Bdlg 5  
|New York Life                                                |  |           | 10,351  |            |  |          |     |            |  |                 | 7.06 | %          |  |  | 4/08  |  |  |   | 892    |  |  | 10205 NW 19th Street/Bldg 6 
|New York Life                                                |  |           | 10,408  |            |  |          |     |            |  |                 | 7.50 | %          |  |  | 4/12  |  |  |   | 907    |  |  | 10300 NW 19th Street/Bldg 15
|New York Life                                                |  |           | 4,188   |            |  |          |     |            |  |                 | 7.50 | %          |  |  | 4/12  |  |  |   | 365    |  |  | 10400 NW 21st Street/Bldg 16
|New York Life                                                |  |           | 5,870   |            |  |          |     |            |  |                 | 7.77 | %          |  |  | 1/11  |  |  |   | 520    |  |  | 1530 NW 98th Court/Bldg 18  
|New York Life                                                |  |           | 5,727   |            |  |          |     |            |  |                 | 7.77 | %          |  |  | 1/11  |  |  |   | 507    |  |  | 9835 NW 14th Street/Bldg 19 
|Prudential Insurance Company (5)                             |  |           | 3,849   |            |  |          | 100 | %          |  |                 | 8.14 | %          |  |  | 12/05 |  |  |   | 382    |  |  | 21 Roadway                  
|Prudential Insurance Company                                 |  |           | 9,671   |            |  |          |     |            |  |                 | 6.89 | %          |  |  | 5/06  |  |  |   | 848    |  |  | 420 Salem Church            
|Prudential Insurance Company                                 |  |           | 11,276  |            |  |          |     |            |  |                 | 7.87 | %          |  |  | 12/05 |  |  |   | 1,099  |  |  | 21 Roadway                  
|Prudential Mortgage Capital                                  |  |           | 18,229  |            |  |          |     |            |  |                 | 7.66 | %          |  |  | 10/04 |  |  |   | 1,754  |  |  | 221 South 10th Street       
|Prudential Mortgage Capital                                  |  |           | 11,964  |            |  |          |     |            |  |                 | 8.11 | %          |  |  | 9/07  |  |  |   | 1,243  |  |  | 2040 N. Union Street        
|Prudential Mortgage Capital                                  |  |           | 13,976  |            |  |          |     |            |  |                 | 8.07 | %          |  |  | 12/10 |  |  |   | 1,513  |  |  | 201 Fulling Mill Road       
|Royal Bank of Canada (6)                                     |  |           | 25,000  |            |  |          | 100 | %          |  |                 | 3.03 | %          |  |  | 10/04 |  |  |   | 757    |  |  | Investment in Nocha LLC     
|State Farm                                                   |  |           | 2,581   |            |  |          |     |            |  |                 | 7.50 | %          |  |  | 5/07  |  |  |   | 259    |  |  | 10000 NW 17th Street/Bldg 3 
|State Farm                                                   |  |           | 5,636   |            |  |          |     |            |  |                 | 8.25 | %          |  |  | 2/07  |  |  |   | 615    |  |  | 9950 NW 17th Street/Bldg 4  
|State Farm                                                   |  |           | 5,694   |            |  |          |     |            |  |                 | 7.35 | %          |  |  | 5/11  |  |  |   | 575    |  |  | 10000 NW 21st Street/Bldg 13
|Teachers Annuity and Assurance Association of
    America(7) |  |           | 88,313  |            |  |          |     |            |  |                 | 7.82 | %          |  |  | 4/07  |  |  |   | 7,999  |  |  | Various                     
|Unsecured Term Loan  Wells Fargo(8)                         |  |           | 75,000  |            |  |          |     |            |  |                 | 2.79 | %          |  |  | 9/08  |  |  |   | 2,093  |  |  |                            
|Unsecured Credit Facility(9)                                 |  |           | 135,400 |            |  |          |     |            |  |                 | 2.88 | %          |  |  | 12/04 |  |  |   | 3,900  |  |  |                            
|                                                             |  |           |         |            |  |          |     |            |  |                 |      |            |  |  |       |  |  |   |        |  |  |                             
|TOTAL DEBT                                                   |  | $         | 521,196 |            |  |          |     |            |  |                 |      |            |  |  |       |  |  | $ | 31,266 |  |  |                             
|                                                             |  |           |         |            |  |          |     |            |  |                 |      |            |  |  |       |  |  |   |        |  |  |                             



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Debt service is interest only, which is payable
    monthly, at LIBOR plus 1.75% or the prime rate, at the
    Companys option. The interest rate spread is based on a
    sliding scale, which is based on the value of the collateral.
    The scale ranges from LIBOR plus 1.50% to LIBOR plus 1.75%.
    Annual payment is based on annual interest payments at 2.66%,
    which was the rate at December 31, 2003. Secured by a first
    lien on four properties (see Schedule III  Real
    Estate and Accumulated Depreciation) and a lease assignment on
    another property subject to certain permitted release provisions.
|   
|(2) | This recourse loan is collateralized by a 500,000
    square foot property in New Jersey. This loan requires interest
    at LIBOR plus 1.90%. Annual payment is based on annual interest
    payments at 3.07%, which was the rate at December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | Secured by a first lien on seven properties (see
    Schedule III  Real Estate and Accumulated
    Depreciation) subject to certain permitted release provisions.
    The loan contains covenants and agreements customary in such
    borrowings.                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | This indebtedness is for a $24.1 million
    loan to construct two industrial facilities aggregating
    522,000 square feet in Jersey City, New Jersey. This
    recourse loan is collateralized by this property and requires
    interest at LIBOR plus 1.95%. Annual payment is based on annual
    interest payments at 3.09%, which was the rate at
    December 31, 2003.                                                                                                                                                                                                                                               
|   
|(5) | This indebtedness is for a $4.0 million
    recourse loan for a 150,000 square foot expansion of an
    existing 407,100 square foot industrial facility in Harrisburg,
    Pennsylvania.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(6) | Debt service is interest only, which is payable
    monthly, at LIBOR plus 1.875%. This loan is a senior secured
    loan that matures in October 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) | Secured by a first lien on six properties (see
    Schedule III  Real Estate and Accumulated
    Depreciation) subject to certain permitted release provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(8) | Debt service is interest only, which is payable
    monthly, at LIBOR plus 1.625% or the prime rate, at the
    Companys option. The interest rate is based on a sliding
    scale, which is based on the Companys leverage. The scale
    ranges from LIBOR plus 1.35% to LIBOR plus 1.75%. Annual payment
    is based on annual interest payments at 2.79%, which was the
    rate at December 31, 2003. This unsecured term loan
    contains covenants and agreements similar to the Companys
    Credit Facility.                                                                                                     
|   
|(9) | Debt service is interest only, which is payable
    monthly, at LIBOR plus 1.625% or the prime rate, at the
    Companys option. The interest rate is based on a sliding
    scale, which is based on the Companys leverage. The scale
    ranges from LIBOR plus 1.35% to LIBOR plus 1.875%. Annual
    payment is based on annual interest payments at 2.88%, which was
    the rate at December 31, 2003. This unsecured term loan
    contains covenants and agreements customary in such borrowings.
    Wells Fargo Bank is the lead agent and lender and seven other
    commercial banks participate in the facility.

Competition

The Companys portfolio is primarily located
in the Eastern United States. There are numerous other
industrial properties and real estate companies within the
market area of each of the properties which compete with the
Company for tenants and development and acquisition
opportunities. The number of competitive properties and real
estate companies in such areas could have a material adverse
effect on the Companys (i) future operations,
(ii) ability to rent its properties and the rents charged,
and (iii) development and acquisition opportunities. The
Company will compete for tenants and acquisitions with others
who may have greater resources. The Companys competitive
position for tenants is strongly influenced by economic
conditions in its market areas. However, the Company believes
that its responsiveness to tenant needs will enable it to
attract and maintain high quality tenants in the markets in
which the properties are located.

The Companys financial performance and its
ability to make distributions to shareholders continues to be
particularly sensitive to the economic conditions in Northern
and Central New Jersey, Central and Eastern Pennsylvania,
Indianapolis, Indiana, Ohio, the Greenville/Spartanburg region
of South Carolina and Southern Florida. Like other real estate
markets, these markets have experienced economic downturns in
the past, and future declines in any of these economies or real
estate markets could adversely affect the Companys
operations or cash available for distributions. The
Companys revenues and the value of the portfolio may be
affected by a number of factors, including the local economic
climate (which may be adversely impacted by business layoffs or
downsizing, industry slowdowns, changing demographics and other
factors) and local real estate conditions (such as oversupply of
or reduced demand for industrial and other competing commercial
properties). These factors, when and if they occur in an area in
which any of the properties are located, could adversely affect
the Companys ability to make distributions to its
shareholders.

Environmental and Other Regulatory
Matters

Under various federal, state and local laws and
regulations, an owner of real estate is liable for the costs of
removal or remediation of certain hazardous or toxic substances
on such property. Such laws often impose such liability without
regard to whether the owner knew of, or was responsible for, the
presence of such hazardous or toxic substances. The costs of
remediation or removal of such substances may be substantial, and

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##### Table of Contents



the presence of such substances, or the failure
to promptly remediate such substances, may adversely affect the
owners ability to sell such real estate or to borrow using
such real estate as collateral. In connection with its ownership
and operation of the portfolio, the Company or the Operating
Partnership, as the case may be, may be potentially liable for
such costs.


All of the properties in the portfolio have been
subject to Phase I or similar environmental assessments,
which are intended to discover information regarding, and to
evaluate the environmental condition of, the surveyed properties
and surrounding properties. The Phase I assessments
included a historical review, a public records review, a
preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos,
polychlorinated biphenyls and underground storage tanks and the
preparation and issuance of a written report, but do not include
soil sampling or subsurface investigations. Where Phase I
assessments resulted in specific recommendations for remedial
actions, the recommended actions have been taken.

The Phase I assessments have not revealed
any environmental liability that the Company believes would have
a material adverse effect on the Companys business, assets
or results of operations, nor is the Company aware of any such
liability. Nevertheless, it is possible that these assessments
do not reveal all environmental liabilities. Moreover, no
assurance can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability
or (ii) the current environmental condition of its
properties will not be affected by tenants and occupants of its
properties, by the condition of properties in the vicinity of
the properties in the portfolio (such as the presence of
underground storage tanks) or by third parties unrelated to the
Operating Partnership or the Company.

Environmental inspections indicate that there are
minor amounts of asbestos containing materials
(ACMs) in certain of the properties in the
portfolio, primarily in the form of floor tiles and ceiling
materials, which are generally in good condition. The presence
of such amounts of ACMs is in compliance with current law, in
all material respects.

The Company believes that the properties in the
portfolio are in compliance, in all material respects, with all
federal, state and local ordinances and regulations regarding
hazardous or toxic substances. Neither the Company nor the
Operating Partnership has been notified by any governmental
authority, or is otherwise aware, of any material noncompliance,
liability or claim related to hazardous or toxic substances in
connection with any of its present properties.

From time to time legislation is proposed which,
if enacted, would require installation of various items of
safety equipment, such as smoke alarms and sprinkler equipment.
If such legislation should be enacted and be applicable to the
properties in the portfolio, the Company could be required to
expend material sums in fulfilling these requirements.

Depreciation

See Schedule III  Real
Estate and Accumulated Depreciation herein.

Segment Information

See Part IV  Note 14 to the
consolidated financial statements herein.

Insurance

In the opinion of management, the properties in
the portfolio are adequately covered by insurance. The Company
has no plans to make any material renovations or improvements to
any of the properties in the portfolio.

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##### Table of Contents



Executive Officers

The following table sets forth certain
information regarding executive officers of the Company as of
December 31, 2003.

|                       |  |     |    |          |  |                                                                 
|---------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Jeffrey E. Kelter*     |  |     | 49 |          |  | President and Chief Executive Officer                           
|Robert F. Savage, Jr.* |  |     | 35 |          |  | Executive Vice President and Chief Operating
    Officer        
|John B. Begier         |  |     | 38 |          |  | Executive Vice President  Chief
    Investment Officer         
|Timothy E. McKenna     |  |     | 40 |          |  | Senior Vice President  Chief Financial
    Officer             
|Saul A. Behar          |  |     | 42 |          |  | Senior Vice President  General Counsel
    and Secretary       
|Stephen J. Butte       |  |     | 43 |          |  | Senior Vice President  Asset Management                        
|Charles C. Lee, Jr.    |  |     | 40 |          |  | Senior Vice President  Leasing                                 
|Francis K. Ryan        |  |     | 44 |          |  | Senior Vice President  Construction
    and Property Operations
|John P. DiCola         |  |     | 36 |          |  | Senior Vice President  Investments                             
|A. Donald Chase, Jr.   |  |     | 36 |          |  | Senior Vice President  Investments                             
|Jennifer A. Pancoast   |  |     | 40 |          |  | Senior Vice President  Marketing                               
|J. Peter Lloyd         |  |     | 33 |          |  | Senior Vice President and Chief Accounting Officer              



---



|  |                                            
|- | -------------------------------------------
|* | This executive is a trustee of the Company.

Jeffrey E. Kelter has been President and a
Trustee of the Company since December 1997 and was appointed
Chief Executive Officer in December 1998. He has over
20 years of experience in all phases of commercial real
estate including development and third-party management.
Mr. Kelter began his career in 1976 at Bankers Trust
Corporation where he was an assistant treasurer in the Corporate
Finance division. In 1982 Mr. Kelter founded Penn Square
Properties, Inc. (Penn Square) in Philadelphia and
served as Chief Executive Officer and President. At Penn Square
he developed, owned, managed and leased more than
4.5 million square feet of office and warehouse projects
throughout the Pennsylvania and New Jersey markets.
Mr. Kelter received a B.A. from Trinity College.

Robert F. Savage, Jr. has been Executive Vice
President and Chief Operating Officer of the Company since
December 2000 and was appointed a Trustee of the Company in
April 2003. Prior to joining the Company, he spent three years
as a partner at Hudson Bay Partners, L.P., a private equity firm
where he was responsible for the execution of the Companys
formation transactions in December 1997. Prior to
Mr. Savages position at Hudson Bay, he worked from
January 1994 to May 1997 in the Investment Banking Division at
Merrill Lynch & Co. where he specialized in corporate
finance and strategic advisory services for REITs, real estate
investment funds and lodging companies. He started his career at
Arthur Andersen LLP and then worked at Jones Lang LaSalle in a
variety of project finance and portfolio management positions.
Mr. Savage received an A.B. in Urban Studies and Business
Economics from Brown University and is a member of the Urban
Land Institute.

John B. Begier has served as Chief Investment
Officer of the Company since February 2001 with primary
responsibility for the Companys investment activity. In
this role he oversees all acquisitions and development projects
as well as dispositions, including all transactions related to
the Companys capital recycling initiatives. He served as
Senior Vice President from December 1997 until January 2000,
when he was appointed Executive Vice President. Mr. Begier
joined Penn Square in 1995. Prior to working for Penn Square he
worked for eight years as a real estate broker with the
Pennsylvania office of Cushman & Wakefield where he was
responsible for leasing, sales and acquisition of commercial and
industrial properties. Mr. Begier received a B.A. from the
University of Virginia and is a member of the Council of
Logistics Management.

Timothy E. McKenna has served as the
Companys Senior Vice President and Chief Financial Officer
since February 2002. He was previously Senior Vice
President-Finance and Chief Accounting Officer since June 1999.
Prior to that he was the Companys Vice President of
Finance and Corporate Controller since

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##### Table of Contents



joining the Company in January 1998.
Mr. McKenna was previously employed as a senior manager in
the Real Estate Services Group of Arthur Andersen LLPs
Philadelphia office. Prior to joining the Company, he worked for
over 12 years providing consulting and accounting services
to publicly and privately-owned real estate companies; over
11 years of his experience was obtained as an employee of
Arthur Andersen LLP. Mr. McKenna is a graduate of the
University of Scranton with a B.S. in Accounting and is a
Certified Public Accountant.


Saul A. Behar served as Vice President, General
Counsel and Secretary of the Company from May 2000 to December
2000, when he was promoted to Senior Vice President, General
Counsel and Secretary. Prior to joining the Company, Mr. Behar
served for seven years as Senior Counsel at Pep Boys in
Philadelphia, where he handled numerous corporate and real
estate matters. Before that, he practiced law at Dechert LLP in
Philadelphia. He received an A.B. from Cornell University and a
J.D. from The University of Chicago Law School. He is a member
of the American Corporate Counsel Association.

Stephen J. Butte has served as Senior Vice
President  Asset Management of the Company since
December 1997. He served as Chief Investment Officer from March
1999 until February 2001 and Secretary from September 1999 until
May 2000. In January 2001 he was appointed Senior Vice President
of Asset Management with primary responsibility for overseeing
all portfolio and property level analysis for the Companys
existing properties as well as proposed investments. As head of
the Asset Management Department, Mr. Butte works closely
with and supports the functions of the operating departments
including Investments, Leasing, Property Operations and
Construction. Prior to joining Penn Square in 1988, he spent
five years in public accounting as a manager in the audit
department of Asher & Company, specializing in providing
financial and accounting services to companies in the real
estate industry. Mr. Butte received a B.S. in Accounting
and a Masters of Taxation from Villanova University and is a
Certified Public Accountant.

Charles C. Lee, Jr. has served as Senior Vice
President  Leasing of the Company since March 1998
and has primary responsibility for the Companys leasing
activities. Mr. Lee joined Penn Square in 1987 where he was
responsible for leasing activities for various commercial
properties. From September 1997 until March 1998, when he
re-joined the Company, Mr. Lee was the regional leasing
director for the Philadelphia region of Equity Office Properties
Trust. Prior to working for Penn Square, he was an Assistant
Portfolio Manager in the Private Banking Division of the Boston
Safe Deposit and Trust Company. Mr. Lee received a B.A.
from Tufts University and has a Pennsylvania real estate
brokerage license.

Francis K. Ryan has served as Senior Vice
President  Construction and Property Operations of
the Company since December 1997 with primary responsibility for
the Companys property operations, property management
activities and tenant-related and third-party construction. In
February 2001 he was named head of Property Operations and
Construction. In this expanded role, Mr. Ryans
primary responsibilities include the construction of the
Companys development projects in addition to directing
property management. Mr. Ryan joined Penn Square in 1991
where he was responsible for the management of various
commercial and industrial properties. Prior to working for Penn
Square, Mr. Ryan worked for four years as a senior property
manager for Cushman & Wakefields Pennsylvania
office and as a project manager for American Building
Maintenance from 1984 through 1986. Mr. Ryan is certified
as a Real Property Administrator by the BOMI Institute. He is a
member of the Building Owners and Managers Association and the
Institute of Real Estate Management (IREM).

A. Donald Chase Jr. has served as Senior
Vice President-Investments since September 2002 with primary
responsibility for overseeing acquisitions and development in
the Pennsylvania and Mid-West markets, including Indianapolis.
Mr. Chase was formerly the Director of Development at TIG Real
Estate Services, Inc. where he focused on industrial and
suburban office projects on a speculative, build-to-suit and fee
development basis, working with both institutional and private
capital sources. Prior to his five years at TIG, Mr. Chase
was an investment manager at AEW Capital Management and Copley
Real Estate Advisors for seven years. Mr. Chase has twelve
years of real estate experience in industrial development,
acquisitions/dispositions, asset management and construction.
Mr. Chase holds a A.B. in Business Economics/
Organizational Behavior and Management from Brown University.

13



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##### Table of Contents



John P. DiCola was appointed Senior Vice
President-Investments in September 2002, responsible for
overseeing acquisitions and development in the New Jersey
market. Prior to joining the Company, Mr. DiCola was most
recently principal and co-founder of Triad Partners, LLC, a firm
specializing in development opportunities in the New York City
metropolitan area. Prior to founding Triad, Mr. DiCola
spent ten years with Jones Lang LaSalle, most recently as Senior
Vice President, responsible for the firms land investment
and development activities in the Eastern portion of the United
States. Mr. DiCola has negotiated and completed acquisition and
development deals in commercial and residential real estate in
numerous markets. Mr. DiCola holds an A.B. in Urban Studies
and a B.S. in Civil Engineering from Brown University.

Jennifer A. Pancoast has served as Senior Vice
President-Marketing since September 2002. Her responsibilities
include the management and execution of the Companys
corporate and property marketing. Prior to September 2002, Ms.
Pancoast was Vice President of Leasing responsible for all
aspects of leasing the Companys office portfolio in
Pennsylvania, New Jersey and New York. Ms. Pancoast rejoined the
Company in 1996 after spending three years with Bell Atlantic
Properties, the real estate subsidiary of Bell Atlantic, where
she was Director of Portfolio Management responsible for over
600,000 square feet of office properties in the
Philadelphia region. From September 1990 until September 1993
she was responsible for leasing the Philadelphia office
portfolio for Penn Square. Ms. Pancoast started her career
in 1986 as a real estate broker for The Flynn Company, a manager
and developer of office and industrial properties in the
Philadelphia region. Ms. Pancoast earned a B.S. in
Marketing from the University of Massachusetts.

J. Peter Lloyd has served as Senior Vice
President and Chief Accounting Officer since December 2003.
Mr. Lloyd was appointed the Companys Vice President
and Chief Accounting Officer in January 2003. He was previously
the Vice President and Corporate Controller since joining the
Company in September 2001. Mr. Lloyd is responsible for the
accounting, human resources and information technology
departments within the Company. Prior to joining the Company, he
held controllership positions in a venture capital firm and a
manufacturing company. From 1996 to 2000, Mr. Lloyd worked
at Morgan Stanley as Vice President  Controller for
the institutional investment management business where he earned
the Series 6, 27 and 63 licenses. He began his career
in 1992 with Arthur Andersen LLPs Philadelphia office
focusing on a wide range of industries. Mr. Lloyd is a
graduate of Villanova University with a B.S. in Accountancy and
is a Certified Public Accountant.

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|        |            
|------- | -----------
|Item 2. | Properties.

Summary Property Table

The following table sets forth certain
information with respect to each of the Properties in our
portfolio (including properties owned through joint ventures) at
December 31, 2003.

|                           |  |       |    |          |  |             |                   |        |  |           |           |        |  |            |           |            |  |        |       |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |       |  |  |                                     |           | 
|-------------------------- |  | ----- | -- | -------- |  | ----------- | ----------------- | ------ |  | --------- | --------- | ------ |  | ---------- | --------- | ---------- |  | ------ | ----- | ---------- |  | ------------ | ------ |  |  |  | ---------- |  |  |  | ------ |  |  |  | -- |  |  | - | ----- |  |  | ----------------------------------- | --------- | 
|                           |  |       |    |          |  |             |                   |        |  | % of      |           |        |  |            |           |            |  |        |       | Annualized |  |             
|                           |  |       |    |          |  |             |                   |        |  | Portfolio |           |        |  |            |           | % of       |  |        |       | Rent per   |  |             
|                           |  |       |    |          |  |             |                   |        |  | Rentable  |           |        |  |            |           | Portfolio  |  |        |       | Leased     |  |             
|                           |  | # of  |    |          |  | Year Built/ |                   | Square |  | Square    |           | %      |  | Annualized |           | Annualized |  | # of   |       | Square     |  |             
|Building                   |  | Bldgs |    | Location |  | Renovated   |                   | Feet   |  | Feet      |           | Leased |  | Rent(1)    |           | Rent       |  | Leases |       | Foot(2)    |  | Major Tenant
|                           |  |       |    |          |  |             |                   |        |  |           |           |        |  |            |           |            |  |        |       |            |  |             
|9905 N.W. 17th Street      |  |       | 1  |          |  |             | Miami             |        |  |           | 1995      |        |  |            | 116,200   |            |  |        | 0.39% |            |  |              | 75.0%  |  |  |  | 611,363    |  |  |  | 0.52%  |  |  |  | 1  |  |  |   | 7.01  |  |  | Bax Global                         
|1665 N.W. 102nd Avenue     |  |       | 1  |          |  |             | Miami             |        |  |           | 1996      |        |  |            | 115,200   |            |  |        | 0.38% |            |  |              | 100.0% |  |  |  | 768,000    |  |  |  | 0.65%  |  |  |  | 4  |  |  |   | 6.67  |  |  | Associated Farms                   
|10000 N.W. 17th Street     |  |       | 1  |          |  |             | Miami             |        |  |           | 1996      |        |  |            | 73,600    |            |  |        | 0.24% |            |  |              | 100.0% |  |  |  | 535,440    |  |  |  | 0.45%  |  |  |  | 2  |  |  |   | 7.28  |  |  | Federal Express Corp.              
|9950 N.W. 17th Street      |  |       | 1  |          |  |             | Miami             |        |  |           | 1996      |        |  |            | 148,750   |            |  |        | 0.49% |            |  |              | 100.0% |  |  |  | 986,208    |  |  |  | 0.83%  |  |  |  | 1  |  |  |   | 6.63  |  |  | Harper Group                       
|10200 N.W. 21st Street     |  |       | 1  |          |  |             | Miami             |        |  |           | 1997      |        |  |            | 189,090   |            |  |        | 0.63% |            |  |              | 100.0% |  |  |  | 1,100,184  |  |  |  | 0.93%  |  |  |  | 3  |  |  |   | 5.82  |  |  | Yusen Air & Sea Service, (USA) Inc.
|10205 N.W. 19th Street     |  |       | 1  |          |  |             | Miami             |        |  |           | 1997      |        |  |            | 262,992   |            |  |        | 0.87% |            |  |              | 93.8%  |  |  |  | 1,808,388  |  |  |  | 1.53%  |  |  |  | 2  |  |  |   | 7.33  |  |  | Expeditors International           
|10000 N.W. 21st Street     |  |       | 1  |          |  |             | Miami             |        |  |           | 1997      |        |  |            | 107,659   |            |  |        | 0.36% |            |  |              | 100.0% |  |  |  | 781,440    |  |  |  | 0.66%  |  |  |  | 1  |  |  |   | 7.26  |  |  | Federal Express Corp.              
|10300 N.W. 19th Street     |  |       | 1  |          |  |             | Miami             |        |  |           | 1998      |        |  |            | 247,800   |            |  |        | 0.82% |            |  |              | 100.0% |  |  |  | 1,838,568  |  |  |  | 1.56%  |  |  |  | 4  |  |  |   | 7.42  |  |  | Air Express International/Lucent   
|10400 N.W. 21st Street     |  |       | 1  |          |  |             | Miami             |        |  |           | 1999      |        |  |            | 100,800   |            |  |        | 0.33% |            |  |              | 100.0% |  |  |  | 712,524    |  |  |  | 0.60%  |  |  |  | 1  |  |  |   | 7.07  |  |  | Almar, International/Schenker      
|9825 N.W. 17th Street      |  |       | 1  |          |  |             | Miami             |        |  |           | 1999      |        |  |            | 44,981    |            |  |        | 0.15% |            |  |              | 100.0% |  |  |  | 335,892    |  |  |  | 0.28%  |  |  |  | 1  |  |  |   | 7.47  |  |  |                                     | Arrowmail | 
|1530 N.W. 98th Court       |  |       | 1  |          |  |             | Miami             |        |  |           | 1998      |        |  |            | 147,581   |            |  |        | 0.49% |            |  |              | 100.0% |  |  |  | 1,116,276  |  |  |  | 0.94%  |  |  |  | 2  |  |  |   | 7.56  |  |  | Union Transport Corp.              
|9835 N.W. 14th Street      |  |       | 1  |          |  |             | Miami             |        |  |           | 1998      |        |  |            | 147,581   |            |  |        | 0.49% |            |  |              | 100.0% |  |  |  | 996,396    |  |  |  | 0.84%  |  |  |  | 1  |  |  |   | 6.75  |  |  | Software Brokers of America        
|1600 N.W. 102nd Avenue     |  |       | 1  |          |  |             | Miami             |        |  |           | 2003      |        |  |            | 30,465    |            |  |        | 0.10% |            |  |              | 100.0% |  |  |  | 407,616    |  |  |  | 0.35%  |  |  |  | 1  |  |  |   | 13.38 |  |  | Nestle Waters North America        
|                           |  |       |    |          |  |             |                   |        |  |           |           |        |  |            |           |            |  |        |       |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |       |  |  |                                     |           | 
|Subtotal/ Weighted Average |  |       | 13 |          |  |             |                   |        |  |           |           |        |  |            | 1,732,699 |            |  |        | 5.74% |            |  |              | 97.4%  |  |  |  | 11,998,295 |  |  |  | 10.14% |  |  |  | 24 |  |  | $ | 7.11  |  |  |                                     |           | 
|                           |  |       |    |          |  |             |                   |        |  |           |           |        |  |            |           |            |  |        |       |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |       |  |  |                                     |           | 
|2 Volvo Drive              |  |       | 1  |          |  |             | Rockleigh         |        |  |           | 1966/1995 |        |  |            | 67,460    |            |  |        | 0.22% |            |  |              | 0.0%   |  |  |  |           |  |  |  | 0.00%  |  |  |  |   |  |  |   |      |  |  |                                     | Vacant    | 
|21 Cranbury Road           |  |       | 1  |          |  |             | Cranbury          |        |  |           | 1998      |        |  |            | 845,835   |            |  |        | 2.81% |            |  |              | 100.0% |  |  |  | 3,421,436  |  |  |  | 2.90%  |  |  |  | 4  |  |  |   | 4.05  |  |  | Cosmetic Essence                   
|24 Abeel Drive             |  |       | 1  |          |  |             | Cranbury          |        |  |           | 1978      |        |  |            | 40,000    |            |  |        | 0.13% |            |  |              | 100.0% |  |  |  | 220,000    |  |  |  | 0.19%  |  |  |  | 1  |  |  |   | 5.50  |  |  | KAR Products                       
|301-321 Herrod Boulevard   |  |       | 1  |          |  |             | South Brunswick   |        |  |           | 1989      |        |  |            | 610,949   |            |  |        | 2.03% |            |  |              | 100.0% |  |  |  | 2,608,752  |  |  |  | 2.21%  |  |  |  | 1  |  |  |   | 4.27  |  |  | Herrod Dist.                       
|400 Cabot Drive            |  |       | 1  |          |  |             | Hamilton Township |        |  |           | 1990      |        |  |            | 585,510   |            |  |        | 1.94% |            |  |              | 100.0% |  |  |  | 2,634,795  |  |  |  | 2.23%  |  |  |  | 1  |  |  |   | 4.50  |  |  | APL Logistics Warehouse            
|Four Applegate Drive       |  |       | 1  |          |  |             | Washington        |        |  |           | 1998      |        |  |            | 265,000   |            |  |        | 0.88% |            |  |              | 100.0% |  |  |  | 1,364,750  |  |  |  | 1.16%  |  |  |  | 1  |  |  |   | 5.15  |  |  | Direct Fulfillment LP              
|5 Henderson Drive          |  |       | 1  |          |  |             | West Caldwell     |        |  |           | 1967/1990 |        |  |            | 210,530   |            |  |        | 0.70% |            |  |              | 100.0% |  |  |  | 1,324,234  |  |  |  | 1.12%  |  |  |  | 1  |  |  |   | 6.29  |  |  |                                     | Vestcom   | 
|30 Stults Road             |  |       | 1  |          |  |             | South Brunswick   |        |  |           | 1974      |        |  |            | 64,285    |            |  |        | 0.21% |            |  |              | 100.0% |  |  |  | 343,282    |  |  |  | 0.29%  |  |  |  | 1  |  |  |   | 5.34  |  |  |                                     | Medicia   | 
|257 Prospect Plains Road   |  |       | 1  |          |  |             | Cranbury          |        |  |           | 2002      |        |  |            | 500,000   |            |  |        | 1.66% |            |  |              | 43.7%  |  |  |  | 885,735    |  |  |  | 0.75%  |  |  |  | 1  |  |  |   | 4.05  |  |  | La Jobi Industries                 
|283 Prospect Plains Road   |  |       | 1  |          |  |             | Cranbury          |        |  |           | 2002      |        |  |            | 473,148   |            |  |        | 1.57% |            |  |              | 100.0% |  |  |  | 2,084,900  |  |  |  | 1.76%  |  |  |  | 4  |  |  |   | 4.41  |  |  | LVMH Perfumes and Cosmetics        
|585 Industrial Boulevard   |  |       | 1  |          |  |             | Carlstadt         |        |  |           | 1972      |        |  |            | 52,161    |            |  |        | 0.17% |            |  |              | 44.1%  |  |  |  | 123,050    |  |  |  | 0.10%  |  |  |  | 1  |  |  |   | 5.35  |  |  | Tick Tock , Inc.                   
|1120 Rt. 22 East           |  |       | 1  |          |  |             | Bridgewater       |        |  |           | 1961      |        |  |            | 539,117   |            |  |        | 1.79% |            |  |              | 93.8%  |  |  |  | 2,866,696  |  |  |  | 2.43%  |  |  |  | 6  |  |  |   | 5.67  |  |  | Baker & Taylor                     
|25 Eastmans Road           |  |       | 1  |          |  |             | Hanover           |        |  |           | 1970      |        |  |            | 45,700    |            |  |        | 0.15% |            |  |              | 100.0% |  |  |  | 411,300    |  |  |  | 0.35%  |  |  |  | 2  |  |  |   | 9.00  |  |  | Boonton Electronics                
|55 Webro Road              |  |       | 1  |          |  |             | Clifton           |        |  |           | 1970      |        |  |            | 93,250    |            |  |        | 0.31% |            |  |              | 100.0% |  |  |  | 373,000    |  |  |  | 0.32%  |  |  |  | 1  |  |  |   | 4.00  |  |  | Munire Furniture                   
|One Apollo Drive           |  |       | 1  |          |  |             | Whippany          |        |  |           | 1975      |        |  |            | 120,000   |            |  |        | 0.40% |            |  |              | 75.2%  |  |  |  | 854,646    |  |  |  | 0.72%  |  |  |  | 7  |  |  |   | 9.47  |  |  | State of NJ                        
|110 Triangle Boulevard     |  |       | 1  |          |  |             | Carlstadt         |        |  |           | 1965      |        |  |            | 35,350    |            |  |        | 0.12% |            |  |              | 100.0% |  |  |  | 300,475    |  |  |  | 0.25%  |  |  |  | 1  |  |  |   | 8.50  |  |  | OSullivan Menu                    
|121 Fieldcrest Avenue      |  |       | 1  |          |  |             | Edison            |        |  |           | 1982      |        |  |            | 92,532    |            |  |        | 0.31% |            |  |              | 100.0% |  |  |  | 628,970    |  |  |  | 0.53%  |  |  |  | 4  |  |  |   | 6.80  |  |  | Caswell- Massey Co.                
|200 Middlesex Avenue       |  |       | 1  |          |  |             | Cateret           |        |  |           | 1986      |        |  |            | 406,000   |            |  |        | 1.35% |            |  |              | 100.0% |  |  |  | 1,985,650  |  |  |  | 1.68%  |  |  |  | 2  |  |  |   | 4.89  |  |  | Logistic Concepts                  
|203 Kuller Road            |  |       | 1  |          |  |             | Clifton           |        |  |           | 1960/1970 |        |  |            | 335,000   |            |  |        | 1.11% |            |  |              | 100.0% |  |  |  | 1,934,250  |  |  |  | 1.64%  |  |  |  | 2  |  |  |   | 5.77  |  |  | Benjamin Moore Paints              
|16 Thornton Road           |  |       | 1  |          |  |             | Oakland           |        |  |           | 1979      |        |  |            | 44,500    |            |  |        | 0.15% |            |  |              | 100.0% |  |  |  | 450,000    |  |  |  | 0.38%  |  |  |  | 2  |  |  |   | 10.11 |  |  |                                     | Mikron    | 
|191 Talmadge Road          |  |       | 1  |          |  |             | Edison            |        |  |           | 1957      |        |  |            | 120,000   |            |  |        | 0.40% |            |  |              | 87.4%  |  |  |  | 861,660    |  |  |  | 0.73%  |  |  |  | 7  |  |  |   | 8.22  |  |  | American Bindery                   
|587 Industrial Blvd        |  |       | 1  |          |  |             | Carlstadt         |        |  |           | 1972      |        |  |            | 57,000    |            |  |        | 0.19% |            |  |              | 100.0% |  |  |  | 270,750    |  |  |  | 0.23%  |  |  |  | 1  |  |  |   | 4.75  |  |  | Improved Packaging                 
|34 Englehard Drive(3)      |  |       | 1  |          |  |             | Cranbury          |        |  |           | 1982      |        |  |            | 203,404   |            |  |        | 0.68% |            |  |              | 100.0% |  |  |  | 986,508    |  |  |  | 0.84%  |  |  |  | 1  |  |  |   | 4.85  |  |  | Kerr Acquisition                   
|100-400 Nixon Lane(4)      |  |       | 1  |          |  |             | Edison            |        |  |           | 2000      |        |  |            | 851,907   |            |  |        | 2.83% |            |  |              | 100.0% |  |  |  | 4,079,230  |  |  |  | 3.45%  |  |  |  | 4  |  |  |   | 4.79  |  |  | Parcel Direct                      
|118 Moonachie Avenue(4)    |  |       | 1  |          |  |             | Carlstadt         |        |  |           | 1989      |        |  |            | 243,751   |            |  |        | 0.81% |            |  |              | 100.0% |  |  |  | 1,950,000  |  |  |  | 1.65%  |  |  |  | 1  |  |  |   | 8.00  |  |  | Coca Cola                          
|409 Kennedy Drive(4)       |  |       | 1  |          |  |             | Sayerville        |        |  |           | 1996      |        |  |            | 225,831   |            |  |        | 0.75% |            |  |              | 100.0% |  |  |  | 1,061,406  |  |  |  | 0.90%  |  |  |  | 1  |  |  |   | 4.70  |  |  | Guest Supply                       
|309 Kennedy Drive(4)       |  |       | 1  |          |  |             | Sayerville        |        |  |           | 1996      |        |  |            | 202,000   |            |  |        | 0.67% |            |  |              | 100.0% |  |  |  | 909,000    |  |  |  | 0.77%  |  |  |  | 1  |  |  |   | 4.50  |  |  | Nippon Express                     
|One Nixon Lane(4)          |  |       | 1  |          |  |             | Edison            |        |  |           | 1987      |        |  |            | 192,829   |            |  |        | 0.64% |            |  |              | 100.0% |  |  |  | 839,635    |  |  |  | 0.71%  |  |  |  | 1  |  |  |   | 4.35  |  |  | Ultimate Distribution              

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##### Table of Contents



|                               |  |       |    |          |  |             |               |        |  |           |            |        |  |            |           |            |  |        |        |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |      |  |  |                                 |                 | 
|------------------------------ |  | ----- | -- | -------- |  | ----------- | ------------- | ------ |  | --------- | ---------- | ------ |  | ---------- | --------- | ---------- |  | ------ | ------ | ---------- |  | ------------ | ------ |  |  |  | ---------- |  |  |  | ------ |  |  |  | -- |  |  | - | ---- |  |  | ------------------------------- | --------------- | 
|                               |  |       |    |          |  |             |               |        |  | % of      |            |        |  |            |           |            |  |        |        | Annualized |  |             
|                               |  |       |    |          |  |             |               |        |  | Portfolio |            |        |  |            |           | % of       |  |        |        | Rent per   |  |             
|                               |  |       |    |          |  |             |               |        |  | Rentable  |            |        |  |            |           | Portfolio  |  |        |        | Leased     |  |             
|                               |  | # of  |    |          |  | Year Built/ |               | Square |  | Square    |            | %      |  | Annualized |           | Annualized |  | # of   |        | Square     |  |             
|Building                       |  | Bldgs |    | Location |  | Renovated   |               | Feet   |  | Feet      |            | Leased |  | Rent(1)    |           | Rent       |  | Leases |        | Foot(2)    |  | Major Tenant
|                               |  |       |    |          |  |             |               |        |  |           |            |        |  |            |           |            |  |        |        |            |  |             
|200-250 Kennedy Drive(4)       |  |       | 1  |          |  |             | Sayerville    |        |  |           | 1988       |        |  |            | 164,267   |            |  |        | 0.55%  |            |  |              | 100.0% |  |  |  | 739,202    |  |  |  | 0.63%  |  |  |  | 1  |  |  |   | 4.50 |  |  | Garden Bolt                    
|300-350 Kennedy Drive(4)       |  |       | 1  |          |  |             | Sayerville    |        |  |           | 1988       |        |  |            | 161,987   |            |  |        | 0.54%  |            |  |              | 90.6%  |  |  |  | 693,362    |  |  |  | 0.59%  |  |  |  | 3  |  |  |   | 4.72 |  |  | Pro-Fit Piping                 
|66 Station Road(4)             |  |       | 1  |          |  |             | Cranbury      |        |  |           | 1973       |        |  |            | 812,739   |            |  |        | 2.70%  |            |  |              | 100.0% |  |  |  | 3,576,052  |  |  |  | 3.03%  |  |  |  | 1  |  |  |   | 4.40 |  |  | Home Depot                     
|1275 Valley Brook Avenue(4)    |  |       | 1  |          |  |             | Cranbury      |        |  |           | 1974       |        |  |            | 142,580   |            |  |        | 0.47%  |            |  |              | 100.0% |  |  |  | 1,005,214  |  |  |  | 0.85%  |  |  |  | 9  |  |  |   | 7.05 |  |  | Import & Storage Service       
|510 Commercial Drive(4)        |  |       | 1  |          |  |             | Cranbury      |        |  |           | 1966       |        |  |            | 79,765    |            |  |        | 0.26%  |            |  |              | 0.0%   |  |  |  |           |  |  |  | 0.00%  |  |  |  |   |  |  |   |     |  |  |                                 | Vacant          | 
|1250 Valley Brook Avenue(4)    |  |       | 1  |          |  |             | Cranbury      |        |  |           | 1976       |        |  |            | 130,752   |            |  |        | 0.43%  |            |  |              | 100.0% |  |  |  | 892,799    |  |  |  | 0.76%  |  |  |  | 3  |  |  |   | 6.83 |  |  | Canon Business Solutions       
|230 Brighton Road(4)           |  |       | 1  |          |  |             | Clifton       |        |  |           | 1957       |        |  |            | 160,843   |            |  |        | 0.53%  |            |  |              | 100.0% |  |  |  | 1,135,000  |  |  |  | 0.96%  |  |  |  | 2  |  |  |   | 7.06 |  |  | Waitex International           
|                               |  |       |    |          |  |             |               |        |  |           |            |        |  |            |           |            |  |        |        |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |      |  |  |                                 |                 | 
|Subtotal/ Weighted Average     |  |       | 35 |          |  |             |               |        |  |           |            |        |  |            | 9,175,982 |            |  |        | 30.46% |            |  |              | 94.0%  |  |  |  | 43,815,739 |  |  |  | 37.11% |  |  |  | 79 |  |  | $ | 5.08 |  |  |                                 |                 | 
|                               |  |       |    |          |  |             |               |        |  |           |            |        |  |            |           |            |  |        |        |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |      |  |  |                                 |                 | 
|1221 South Batesville Road     |  |       | 1  |          |  |             | Greer         |        |  |           | 1970/1985  |        |  |            | 434,798   |            |  |        | 1.44%  |            |  |              | 99.2%  |  |  |  | 1,215,040  |  |  |  | 1.03%  |  |  |  | 2  |  |  |   | 2.82 |  |  |                                 | BMW             | 
|Augusta Road Industrial Park   |  |       | 2  |          |  |             | Greenville    |        |  |           | 1996       |        |  |            | 360,000   |            |  |        | 1.20%  |            |  |              | 0.0%   |  |  |  |           |  |  |  | 0.00%  |  |  |  |   |  |  |   |     |  |  |                                 | Vacant          | 
|Buncombe Road Industrial Park  |  |       | 4  |          |  |             | Greer         |        |  |           | 1988/1995  |        |  |            | 290,000   |            |  |        | 0.96%  |            |  |              | 51.7%  |  |  |  | 465,000    |  |  |  | 0.39%  |  |  |  | 1  |  |  |   | 3.10 |  |  | Springs Industries             
|South Highway 14               |  |       | 3  |          |  |             | Greenville    |        |  |           | 1994/1997  |        |  |            | 302,000   |            |  |        | 1.00%  |            |  |              | 66.2%  |  |  |  | 555,000    |  |  |  | 0.47%  |  |  |  | 2  |  |  |   | 2.78 |  |  | Cliffstar Corporation          
|Piedmont Highway Industrial Pk |  |       | 3  |          |  |             | Piedmont      |        |  |           | 1995/1997  |        |  |            | 400,000   |            |  |        | 1.33%  |            |  |              | 100.0% |  |  |  | 1,025,000  |  |  |  | 0.87%  |  |  |  | 3  |  |  |   | 2.56 |  |  | Fabri-Kal Corp.                
|Rocky Creek Business Park      |  |       | 4  |          |  |             | Greenville    |        |  |           | 1997       |        |  |            | 99,400    |            |  |        | 0.33%  |            |  |              | 79.9%  |  |  |  | 249,180    |  |  |  | 0.21%  |  |  |  | 3  |  |  |   | 3.14 |  |  | Sheridan Australia             
|White Horse Industrial Park    |  |       | 7  |          |  |             | Greenville    |        |  |           | 1989/1997  |        |  |            | 390,000   |            |  |        | 1.29%  |            |  |              | 84.6%  |  |  |  | 884,296    |  |  |  | 0.75%  |  |  |  | 7  |  |  |   | 2.68 |  |  | Innovative Container           
|120 Hidden Lake Circle         |  |       | 1  |          |  |             | Duncan        |        |  |           | 1998       |        |  |            | 303,091   |            |  |        | 1.01%  |            |  |              | 100.0% |  |  |  | 1,000,178  |  |  |  | 0.85%  |  |  |  | 1  |  |  |   | 3.30 |  |  | BMG Music                      
|104 Hidden Lake Circle         |  |       | 1  |          |  |             | Duncan        |        |  |           | 1986/1992  |        |  |            | 142,500   |            |  |        | 0.47%  |            |  |              | 100.0% |  |  |  | 407,453    |  |  |  | 0.34%  |  |  |  | 1  |  |  |   | 2.86 |  |  | Warehouse Services No. 4       
|                               |  |       |    |          |  |             |               |        |  |           |            |        |  |            |           |            |  |        |        |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |      |  |  |                                 |                 | 
|Subtotal/ Weighted Average     |  |       | 26 |          |  |             |               |        |  |           |            |        |  |            | 2,721,789 |            |  |        | 9.03%  |            |  |              | 74.8%  |  |  |  | 5,801,147  |  |  |  | 4.91%  |  |  |  | 20 |  |  | $ | 2.85 |  |  |                                 |                 | 
|                               |  |       |    |          |  |             |               |        |  |           |            |        |  |            |           |            |  |        |        |            |  |              |        |  |  |  |            |  |  |  |        |  |  |  |    |  |  |   |      |  |  |                                 |                 | 
|1440 Sheffler Drive            |  |       | 1  |          |  |             | Chambersburg  |        |  |           | 1996       |        |  |            | 355,200   |            |  |        | 1.18%  |            |  |              | 50.0%  |  |  |  | 728,160    |  |  |  | 0.62%  |  |  |  | 1  |  |  |   | 4.10 |  |  | Tri State Electrical           
|1465 Nitterhouse Drive         |  |       | 1  |          |  |             | Chambersburg  |        |  |           | 1995       |        |  |            | 420,000   |            |  |        | 1.39%  |            |  |              | 100.0% |  |  |  | 1,785,000  |  |  |  | 1.51%  |  |  |  | 1  |  |  |   | 4.25 |  |  |                                 | Amazon.com      | 
|221 South 10th Street          |  |       | 1  |          |  |             | Lemoyne       |        |  |           | 1997       |        |  |            | 885,802   |            |  |        | 2.94%  |            |  |              | 100.0% |  |  |  | 3,267,600  |  |  |  | 2.77%  |  |  |  | 4  |  |  |   | 3.69 |  |  | International Paper            
|21 Roadway Drive               |  |       | 1  |          |  |             | Harrisburg    |        |  |           | 1988       |        |  |            | 558,700   |            |  |        | 1.85%  |            |  |              | 100.0% |  |  |  | 2,206,865  |  |  |  | 1.87%  |  |  |  | 1  |  |  |   | 3.95 |  |  | Proctor & Gamble               
|420 Salem Church Road          |  |       | 1  |          |  |             | Mechanicsburg |        |  |           | 1973/1975  |        |  |            | 504,321   |            |  |        | 1.67%  |            |  |              | 100.0% |  |  |  | 1,636,103  |  |  |  | 1.38%  |  |  |  | 1  |  |  |   | 3.24 |  |  | Exel Logistics                 
|75 Pleasant View Drive         |  |       | 1  |          |  |             | Mechanicsburg |        |  |           | 1977       |        |  |            | 132,548   |            |  |        | 0.44%  |            |  |              | 100.0% |  |  |  | 510,310    |  |  |  | 0.43%  |  |  |  | 1  |  |  |   | 3.85 |  |  | Exel Logistics                 
|811 Spangler Road              |  |       | 1  |          |  |             | Mechanicsburg |        |  |           | 1968       |        |  |            | 145,640   |            |  |        | 0.48%  |            |  |              | 48.1%  |  |  |  | 415,800    |  |  |  | 0.35%  |  |  |  | 1  |  |  |   | 5.94 |  |  | Genco Distribution             
|2404 Gettysburg Road           |  |       | 1  |          |  |             | Camp Hill     |        |  |           | 1952/93    |        |  |            | 124,859   |            |  |        | 0.41%  |            |  |              | 41.6%  |  |  |  | 251,160    |  |  |  | 0.21%  |  |  |  | 1  |  |  |   | 4.83 |  |  | Purina Mills                   
|2410 Gettysburg Road           |  |       | 1  |          |  |             | Camp Hill     |        |  |           | 1952/93    |        |  |            | 33,600    |            |  |        | 0.11%  |            |  |              | 100.0% |  |  |  | 106,848    |  |  |  | 0.09%  |  |  |  | 1  |  |  |   | 3.18 |  |  |                                 | Containerbright | 
|2400 Gettysburg Road           |  |       | 1  |          |  |             | Camp Hill     |        |  |           | 1952/93    |        |  |            | 24,311    |            |  |        | 0.08%  |            |  |              | 100.0% |  |  |  | 97,248     |  |  |  | 0.08%  |  |  |  | 1  |  |  |   | 4.00 |  |  | Hersha Hotel Supply, Inc.      
|7663 Industrial Boulevard      |  |       | 1  |          |  |             | Allentown     |        |  |           | 1988       |        |  |            | 65,000    |            |  |        | 0.22%  |            |  |              | 100.0% |  |  |  | 264,453    |  |  |  | 0.22%  |  |  |  | 1  |  |  |   | 4.07 |  |  | GE Polymershapes, Inc.         
|6813 Ruppsville Road           |  |       | 1  |          |  |             | Allentown     |        |  |           | 1986       |        |  |            | 57,600    |            |  |        | 0.19%  |            |  |              | 100.0% |  |  |  | 237,752    |  |  |  | 0.20%  |  |  |  | 3  |  |  |   | 4.13 |  |  | American Racing Equipment, Inc.
|7542 Morris Court              |  |       | 1  |          |  |             | Allentown     |        |  |           | 1997       |        |  |            | 168,967   |            |  |        | 0.56%  |            |  |              | 100.0% |  |  |  | 692,765    |  |  |  | 0.59%  |  |  |  | 1  |  |  |   | 4.10 |  |  | KIA Motors America Inc.        
|7584 Morris Court              |  |       | 1  |          |  |             | Allentown     |        |  |           | 1990       |        |  |            | 53,907    |            |  |        | 0.18%  |            |  |              | 100.0% |  |  |  | 337,985    |  |  |  | 0.29%  |  |  |  | 8  |  |  |   | 6.27 |  |  |                                 | Biomed          | 
|7529 Morris Court              |  |       | 1  |          |  |             | Allentown     |        |  |           | 1998       |        |  |            | 320,482   |            |  |        | 1.06%  |            |  |              | 100.0% |  |  |  | 1,394,097  |  |  |  | 1.18%  |  |  |  | 1  |  |  |   | 4.35 |  |  | Behr Process Corp              
|7220 Schantz Court             |  |       | 1  |          |  |             | Allentown     |        |  |           | 1995       |        |  |            | 60,000    |            |  |        | 0.20%  |            |  |              | 100.0% |  |  |  | 252,000    |  |  |  | 0.21%  |  |  |  | 1  |  |  |   | 4.20 |  |  |                                 | Laminations     | 
|7485 Industrial Boulevard      |  |       | 1  |          |  |             | Allentown     |        |  |           | 1991       |        |  |            | 203,704   |            |  |        | 0.68%  |            |  |              | 100.0% |  |  |  | 892,224    |  |  |  | 0.76%  |  |  |  | 1  |  |  |   | 4.38 |  |  | LMB Distribution               
|355 Independence Avenue        |  |       | 1  |          |  |             | Harrisburg    |        |  |           | 1999       |        |  |            | 262,500   |            |  |        | 0.87%  |            |  |              | 0.0%   |  |  |  |           |  |  |  | 0.00%  |  |  |  |   |  |  |   |     |  |  |                                 | Vacant          | 
|80 S. Middlesex Road           |  |       | 1  |          |  |             | Harrisburg    |        |  |           | 2001       |        |  |            | 500,000   |            |  |        | 1.55%  |            |  |              | 93.6%  |  |  |  | 1,519,596  |  |  |  | 1.29%  |  |  |  | 3  |  |  |   | 3.25 |  |  | The Wiremold Company           
|201 Fulling Mill Road          |  |       | 1  |          |  |             | Middletown    |        |  |           | 2001       |        |  |            | 500,671   |            |  |        | 1.66%  |            |  |              | 100.0% |  |  |  | 2,012,697  |  |  |  | 1.70%  |  |  |  | 1  |  |  |   | 4.02 |  |  | Quaker Sales and Distribution  
|301 Oak Street                 |  |       | 1  |          |  |             | Harrisburg    |        |  |           | 1990/92/96 |        |  |            | 289,242   |            |  |        | 0.96%  |            |  |              | 100.0% |  |  |  | 1,049,375  |  |  |  | 0.89%  |  |  |  | 3  |  |  |   | 3.63 |  |  | Maytag Corporation             
|400 First Street               |  |       | 1  |          |  |             | Middletown    |        |  |           | 1959/1998  |        |  |            | 167,500   |            |  |        | 0.56%  |            |  |              | 100.0% |  |  |  | 513,888    |  |  |  | 0.43%  |  |  |  | 1  |  |  |   | 3.07 |  |  | Exel Logistics                 
|400 First Street (Expansion)   |  |       | 1  |          |  |             | Middletown    |        |  |           | 1998       |        |  |            | 242,824   |            |  |        | 0.81%  |            |  |              | 100.0% |  |  |  | 1,157,733  |  |  |  | 0.98%  |  |  |  | 3  |  |  |   | 4.77 |  |  | Fresenius USA                  
|401 First Street               |  |       | 1  |          |  |             | Middletown    |        |  |           | 1963/1996  |        |  |            | 490,140   |            |  |        | 1.63%  |            |  |              | 100.0% |  |  |  | 1,504,730  |  |  |  | 1.27%  |  |  |  | 1  |  |  |   | 3.07 |  |  | Exel Logistics                 
|500 Industrial Lane            |  |       | 1  |          |  |             | Middletown    |        |  |           | 1970/1996  |        |  |            | 115,890   |            |  |        | 0.38%  |            |  |              | 100.0% |  |  |  | 351,147    |  |  |  | 0.30%  |  |  |  | 1  |  |  |   | 3.03 |  |  | Exel Logistics                 
|300 Hunter Lane                |  |       | 1  |          |  |             | Middletown    |        |  |           | 1996       |        |  |            | 321,333   |            |  |        | 1.07%  |            |  |              | 100.0% |  |  |  | 1,112,908  |  |  |  | 0.94%  |  |  |  | 2  |  |  |   | 3.46 |  |  | Electrolux Home Products, Inc  
|600 Hunter Lane                |  |       | 1  |          |  |             | Middletown    |        |  |           | 1996       |        |  |            | 216,387   |            |  |        | 0.72%  |            |  |              | 100.0% |  |  |  | 824,770    |  |  |  | 0.70%  |  |  |  | 2  |  |  |   | 3.81 |  |  | Menlo Logistics, Inc.          
|2040 North Union Street        |  |       | 1  |          |  |             | Harrisburg    |        |  |           | 1997       |        |  |            | 507,000   |            |  |        | 1.68%  |            |  |              | 100.0% |  |  |  | 2,040,675  |  |  |  | 1.73%  |  |  |  | 1  |  |  |   | 4.03 |  |  | Sears Logistic Services, Inc.  
|3500 Industrial Road           |  |       | 1  |          |  |             | Harrisburg    |        |  |           | 1970       |        |  |            | 677,548   |            |  |        | 2.25%  |            |  |              | 99.0%  |  |  |  | 2,302,788  |  |  |  | 1.95%  |  |  |  | 7  |  |  |   | 3.43 |  |  | Richfood Holdings, Inc.        
|1091 Arnold Road               |  |       | 1  |          |  |             | Reading       |        |  |           | 1996       |        |  |            | 133,055   |            |  |        | 0.44%  |            |  |              | 100.0% |  |  |  | 485,651    |  |  |  | 0.41%  |  |  |  | 1  |  |  |   | 3.65 |  |  |                                 | Landis          | 
|1157 Arnold Road               |  |       | 1  |          |  |             | Reading       |        |  |           | 1995       |        |  |            | 219,120   |            |  |        | 0.73%  |            |  |              | 51.3%  |  |  |  | 409,762    |  |  |  | 0.35%  |  |  |  | 3  |  |  |   | 3.65 |  |  | XO Pennsylvania                

16



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##### Table of Contents



|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             |  | 
|---------------------------- | ---------------------- | ----- | -- | -------- |  | ----------- | ------------- | ------ |  | --------- | ---------- | ------ |  | ---------- | ---------- | ---------- |  | ------ | ------ | ---------- |  | ------------ | ------ | ----- |  | - | ---------- | ----------- |  |  | ------ | ------ |  |  | -- | --- |  | - | ----- | ---- |  | ----------------------------- | ----------- |  | 
|                             |                        |       |    |          |  |             |               |        |  | % of      |            |        |  |            |            |            |  |        |        | Annualized |  |             
|                             |                        |       |    |          |  |             |               |        |  | Portfolio |            |        |  |            |            | % of       |  |        |        | Rent per   |  |             
|                             |                        |       |    |          |  |             |               |        |  | Rentable  |            |        |  |            |            | Portfolio  |  |        |        | Leased     |  |             
|                             |                        | # of  |    |          |  | Year Built/ |               | Square |  | Square    |            | %      |  | Annualized |            | Annualized |  | # of   |        | Square     |  |             
|Building                     |                        | Bldgs |    | Location |  | Renovated   |               | Feet   |  | Feet      |            | Leased |  | Rent(1)    |            | Rent       |  | Leases |        | Foot(2)    |  | Major Tenant
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |             
|100 Oakhill Road             |                        |       | 1  |          |  |             | Mountaintop   |        |  |           | 1996       |        |  |            | 105,000    |            |  |        | 0.35%  |            |  |              | 100.0% |       |  |   | 406,356    |             |  |  | 0.34%  |        |  |  | 1  |     |  |   | 3.87  |      |  | Dana Perfumes Corp.          
|1 Philips Drive              |                        |       | 1  |          |  |             | Mountaintop   |        |  |           | 1991/1993  |        |  |            | 400,000    |            |  |        | 1.33%  |            |  |              | 100.0% |       |  |   | 1,188,000  |             |  |  | 1.01%  |        |  |  | 1  |     |  |   | 2.97  |      |  | Philips Lighting Co.         
|4900 Ritter Road             |                        |       | 1  |          |  |             | Mechanicsburg |        |  |           | 1979       |        |  |            | 55,574     |            |  |        | 0.18%  |            |  |              | 100.0% |       |  |   | 886,854    |             |  |  | 0.75%  |        |  |  | 10 |     |  |   | 15.96 |      |  | Acordia- Northeast           
|7520 Morris Court(3)         |                        |       | 1  |          |  |             | Allentown     |        |  |           | 1995       |        |  |            | 154,156    |            |  |        | 0.51%  |            |  |              | 83.9%  |       |  |   | 573,447    |             |  |  | 0.49%  |        |  |  | 3  |     |  |   | 4.44  |      |  |                               | JCPenney    | 
|7566 Morris Court(3)         |                        |       | 1  |          |  |             | Allentown     |        |  |           | 1990       |        |  |            | 111,300    |            |  |        | 0.37%  |            |  |              | 100.0% |       |  |   | 482,141    |             |  |  | 0.41%  |        |  |  | 4  |     |  |   | 4.33  |      |  | G & T Industries Inc         
|6829-6831 Ruppsville Road(3) |                        |       | 2  |          |  |             | Allentown     |        |  |           | 1988       |        |  |            | 180,000    |            |  |        | 0.60%  |            |  |              | 100.0% |       |  |   | 710,396    |             |  |  | 0.60%  |        |  |  | 4  |     |  |   | 3.95  |      |  | Consolidated Container Co.   
|861 Nestle Way(3)            |                        |       | 1  |          |  |             | Breinigsville |        |  |           | 2000       |        |  |            | 822,500    |            |  |        | 2.73%  |            |  |              | 81.4%  |       |  |   | 2,920,395  |             |  |  | 2.47%  |        |  |  | 2  |     |  |   | 4.36  |      |  | Proctor & Gamble             
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 
|Subtotal/Weighted Average    |                        |       | 39 |          |  |             |               |        |  |           |            |        |  |            | 10,586,381 |            |  |        | 35.02% |            |  |              | 91.4%  |       |  |   | 37,529,679 |             |  |  | 31.77% |        |  |  | 83 |     |  | $ | 3.88  |      |  |                               |             | 
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 
|6402 Corporate Drive         |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1996       |        |  |            | 162,608    |            |  |        | 0.54%  |            |  |              | 100.0% |       |  |   |           |             |  |  | 0.00%  |        |  |  | 1  |     |  |   |      |      |  |                               | Fortune     | 
|8677 Logo Court              |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1993       |        |  |            | 599,152    |            |  |        | 1.99%  |            |  |              | 100.0% |       |  |   | 1,527,838  |             |  |  | 1.29%  |        |  |  | 1  |     |  |   | 2.55  |      |  |                               | Reebok      | 
|700 Airtech Parkway          |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 2001       |        |  |            | 799,344    |            |  |        | 2.65%  |            |  |              | 100.0% |       |  |   | 2,286,764  |             |  |  | 1.94%  |        |  |  | 2  |     |  |   | 2.86  |      |  | USCO R.E., LLC               
|501 Airtech Parkway(3)       |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 2000       |        |  |            | 495,740    |            |  |        | 1.65%  |            |  |              | 100.0% |       |  |   | 2,782,600  |             |  |  | 2.36%  |        |  |  | 1  |     |  |   | 5.61  |      |  | Brightpoint, Inc.            
|558 Airtech Parkway(3)       |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 2001       |        |  |            | 798,096    |            |  |        | 2.65%  |            |  |              | 100.0% |       |  |   | 2,290,536  |             |  |  | 1.94%  |        |  |  | 1  |     |  |   | 2.87  |      |  | Belkin Components            
|4400 West 96th Street(3)     |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1998       |        |  |            | 100,000    |            |  |        | 0.33%  |            |  |              | 100.0% |       |  |   | 1,010,000  |             |  |  | 0.85%  |        |  |  | 1  |     |  |   | 10.10 |      |  | Support Net                  
|595 Perry Road(3)            |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 2000       |        |  |            | 444,600    |            |  |        | 1.48%  |            |  |              | 100.0% |       |  |   | 1,243,600  |             |  |  | 1.05%  |        |  |  | 2  |     |  |   | 2.80  |      |  |                               | Nice-Pak    | 
|849 Whitaker Road(3)         |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1999       |        |  |            | 381,472    |            |  |        | 1.27%  |            |  |              | 100.0% |       |  |   | 1,082,040  |             |  |  | 0.92%  |        |  |  | 2  |     |  |   | 2.84  |      |  | Meritor Heavy Vehicle        
|909 Whitaker Road(3)         |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1998       |        |  |            | 381,493    |            |  |        | 1.27%  |            |  |              | 100.0% |       |  |   | 1,131,363  |             |  |  | 0.96%  |        |  |  | 3  |     |  |   | 2.97  |      |  | Murphy Consulting            
|923 Whitaker Road(3)         |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1997       |        |  |            | 123,200    |            |  |        | 0.41%  |            |  |              | 91.2%  |       |  |   | 472,720    |             |  |  | 0.40%  |        |  |  | 5  |     |  |   | 4.21  |      |  |                               | Point2Point | 
|5252 Decatur Blvd(3)         |                        |       | 1  |          |  |             | Indianapolis  |        |  |           | 1997       |        |  |            | 119,000    |            |  |        | 0.40%  |            |  |              | 59.7%  |       |  |   | 357,222    |             |  |  | 0.30%  |        |  |  | 2  |     |  |   | 5.03  |      |  | State of Indiana             
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 
|Subtotal/Weighted Average    |                        |       | 11 |          |  |             |               |        |  |           |            |        |  |            | 4,404,705  |            |  |        | 14.64% |            |  |              | 98.7%  |       |  |   | 14,184,683 |             |  |  | 12.01% |        |  |  | 21 |     |  | $ | 3.26  |      |  |                               |             | 
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 
|1030 South Edgewood Drive    |                        |       | 1  |          |  |             | Urbana        |        |  |           | 1988       |        |  |            | 200,000    |            |  |        | 0.66%  |            |  |              | 100.0% |       |  |   | 490,000    |             |  |  | 0.41%  |        |  |  | 1  |     |  |   | 2.45  |      |  | ODW Logistics, Inc.          
|5555 Massillon Road          |                        |       | 1  |          |  |             | Green         |        |  |           | 1996       |        |  |            | 255,000    |            |  |        | 0.85%  |            |  |              | 58.8%  |       |  |   | 534,000    |             |  |  | 0.45%  |        |  |  | 1  |     |  |   | 3.56  |      |  |                               | GE          | 
|1411 Majestic Drive          |                        |       | 1  |          |  |             | Fremont       |        |  |           | 1995       |        |  |            | 181,350    |            |  |        | 0.60%  |            |  |              | 100.0% |       |  |   | 498,713    |             |  |  | 0.42%  |        |  |  | 1  |     |  |   | 2.75  |      |  | Poly-Foam International, Inc.
|600 Hagerty Drive            |                        |       | 1  |          |  |             | Fremont       |        |  |           | 1980/86/87 |        |  |            | 126,250    |            |  |        | 0.42%  |            |  |              | 100.0% |       |  |   | 347,187    |             |  |  | 0.29%  |        |  |  | 1  |     |  |   | 2.75  |      |  | Poly-Foam International, Inc.
|605 Hagerty Drive            |                        |       | 1  |          |  |             | Fremont       |        |  |           | 1991       |        |  |            | 76,464     |            |  |        | 0.25%  |            |  |              | 100.0% |       |  |   | 210,276    |             |  |  | 0.18%  |        |  |  | 1  |     |  |   | 2.75  |      |  | Poly-Foam International, Inc.
|670 Hagerty Drive            |                        |       | 1  |          |  |             | Fremont       |        |  |           | 1980/88/90 |        |  |            | 100,272    |            |  |        | 0.33%  |            |  |              | 100.0% |       |  |   | 300,816    |             |  |  | 0.25%  |        |  |  | 1  |     |  |   | 3.00  |      |  | Poly-Foam International, Inc.
|800 Hagerty Drive            |                        |       | 1  |          |  |             | Fremont       |        |  |           | 1987       |        |  |            | 30,150     |            |  |        | 0.10%  |            |  |              | 0.0%   |       |  |   |           |             |  |  | 0.00%  |        |  |  |   |     |  |   |      |      |  |                               | Vacant      | 
|1311 Majestic Drive          |                        |       | 1  |          |  |             | Fremont       |        |  |           | 1993       |        |  |            | 143,400    |            |  |        | 0.48%  |            |  |              | 100.0% |       |  |   | 394,350    |             |  |  | 0.33%  |        |  |  | 1  |     |  |   | 2.75  |      |  | Poly-Foam International, Inc.
|300 Enterprise Drive         |                        |       | 1  |          |  |             | Bellevue      |        |  |           | 1998       |        |  |            | 181,838    |            |  |        | 0.60%  |            |  |              | 100.0% |       |  |   | 551,013    |             |  |  | 0.47%  |        |  |  | 2  |     |  |   | 3.03  |      |  | American Can                 
|Mount Ebo Corporate Park     |                        |       | 1  |          |  |             | Mt. Ebo       |        |  |           | 1992       |        |  |            | 93,948     |            |  |        | 0.31%  |            |  |              | 100.0% |       |  |   | 957,632    |             |  |  | 0.81%  |        |  |  | 1  |     |  |   | 10.19 |      |  | Schien Pharmaceutical        
|88 Mary Street               |                        |       | 1  |          |  |             | Paterson      |        |  |           | 1976       |        |  |            | 114,000    |            |  |        | 0.38%  |            |  |              | 100.0% |       |  |   | 525,000    |             |  |  | 0.44%  |        |  |  | 1  |     |  |   | 4.61  |      |  | St. Josephs Hospital        
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 
|Subtotal/Weighted Average    |                        |       | 11 |          |  |             |               |        |  |           |            |        |  |            | 1,502,672  |            |  |        | 4.98%  |            |  |              | 91.0%  |       |  | $ | 4,808,987  |             |  |  | 4.05%  |        |  |  | 11 |     |  | $ | 3.52  |      |  |                               |             | 
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 
|                             | TOTAL/Weighted Average |       |    | 135      |  |             |               |        |  |           |            |        |  |            |            | 30,124,228 |  |        |        | 100.0%     |  |              |        | 92.1% |  |   | $          | 118,138,530 |  |  |        | 100.0% |  |  |    | 238 |  |   | $     | 4.26 |  |                               |             |  | 
|                             |                        |       |    |          |  |             |               |        |  |           |            |        |  |            |            |            |  |        |        |            |  |              |        |       |  |   |            |             |  |  |        |        |  |  |    |     |  |   |       |      |  |                               |             | 



---



|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Annualized rent represents the total contractual
    base rent under existing leases for the month ended
    December 31, 2003, before any abatements and excluding any
    expense reimbursements, multiplied by 12.
|   
|(2) | Annualized rent per leased square foot, as used
    throughout this report, represents annualized rent, as described
    in footnote (1) above, divided by the leased square footage
    of the property.            
|   
|(3) | These properties are owned by the BIT JV.                                                                                                                                                                            
|   
|(4) | These properties are owned by the CalEast Joint
    Venture.                                                                                                                                                         

17



---



##### Table of Contents



Principal Tenants

The following table sets forth information
regarding the leases with respect to the current ten (10)
largest tenants at the properties in our portfolio (including
joint ventures), based on the Annualized Rent from such tenants
as of December 31, 2003.

|                                                        |  |                                                                                                                                                                                |  |           |      |          |  |             |           |            |  |            |      |   |  |   |        |  |  |  |      |  
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | ---- | -------- |  | ----------- | --------- | ---------- |  | ---------- | ---- | - |  | - | ------ |  |  |  | ---- | -
|                                                        |  |                                                                                                                                                                                |  |           |      |          |  |             |           |            |  | % of Total
|                                                        |  |                                                                                                                                                                                |  | Term      |      | Rentable |  | % of Total  |           | Annualized |  | Portfolio 
|                                                        |  |                                                                                                                                                                                |  | Remaining |      | Square   |  | Portfolio   |           | Rent       |  | Annualized
|Tenant(1)                                               |  | Property                                                                                                                                                                       |  | in Months |      | Feet     |  | Square Feet |           | (in 000s) |  | Rent      
|                                                        |  |                                                                                                                                                                                |  |           |      |          |  |             |           |            |  |           
|Exel Logistics, Inc.                                    |  | 420 Salem Church Road
    75 Pleasant View
    401 First Street
    400 First Street (Expansion)
    500 Industrial Lane
    10200 N.W. 21st Street
    10205 N.W. 19th Street |  |           | 2-47 |          |  |             | 1,662,293 |            |  |            | 5.5  | % |  | $ | 6,031  |  |  |  | 5.1  | %
|The Home Depot, Inc.(2)                                 |  | 66 Station Road                                                                                                                                                                |  |           | 25   |          |  |             | 812,739   |            |  |            | 2.7  | % |  |   | 3,576  |  |  |  | 3.0  | %
|Procter & Gamble(3)                                     |  | 21 Roadway Drive
    861 Nestle Way                                                                                                                                            |  |           | 8-20 |          |  |             | 912,605   |            |  |            | 3.0  | % |  |   | 3,148  |  |  |  | 2.7  | %
|Brightpoint, Inc.(3)                                    |  | 501 AirTech Parkway                                                                                                                                                            |  |           | 192  |          |  |             | 495,740   |            |  |            | 1.6  | % |  |   | 2,783  |  |  |  | 2.4  | %
|Electrolux Home Products                                |  | 221 South 10th Street
    300 Hunter Lane
    700 AirTech Parkway                                                                                                              |  |           | 6-57 |          |  |             | 875,738   |            |  |            | 2.9  | % |  |   | 2,649  |  |  |  | 2.2  | %
|APL Logistics, Inc. (Formerly GATX Logistics,
    Inc.) |  | 400 Cabot                                                                                                                                                                      |  |           | 25   |          |  |             | 585,510   |            |  |            | 1.9  | % |  |   | 2,635  |  |  |  | 2.2  | %
|Herrod Distribution                                     |  | 301-321 Herrod Blvd                                                                                                                                                            |  |           | 38   |          |  |             | 610,949   |            |  |            | 2.0  | % |  |   | 2,609  |  |  |  | 2.2  | %
|Baker & Taylor                                          |  | 1120 Route 22 East                                                                                                                                                             |  |           | 132  |          |  |             | 421,200   |            |  |            | 1.4  | % |  |   | 2,350  |  |  |  | 2.0  | %
|Belkin Electronics, Inc.(3)                             |  | 558 AirTech Parkway                                                                                                                                                            |  |           | 88   |          |  |             | 798,096   |            |  |            | 2.6  | % |  |   | 2,291  |  |  |  | 1.9  | %
|Sears Logistic Services, Inc.                           |  | 2040 North Union Street                                                                                                                                                        |  |           | 36   |          |  |             | 507,000   |            |  |            | 1.7  | % |  |   | 2,041  |  |  |  | 1.7  | %
|                                                        |  |                                                                                                                                                                                |  |           |      |          |  |             |           |            |  |            |      |   |  |   |        |  |  |  |      |  
|Total/ Weighted Average                                 |  |                                                                                                                                                                                |  |           | 54   |          |  |             | 7,681,870 |            |  |            | 25.3 | % |  | $ | 30,113 |  |  |  | 25.4 | %
|                                                        |  |                                                                                                                                                                                |  |           |      |          |  |             |           |            |  |            |      |   |  |   |        |  |  |  |      |  



---



|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(1) | This list is not intended to be representative of
    the Companys tenants as a whole.              
|   
|(2) | Tenant leases a property owned by CalEast JV in
    which the Company holds a 20% ownership interest.
|   
|(3) | Tenant leases a property owned by the BIT JV in
    which the Company holds a 20% ownership interest.

18



---



##### Table of Contents



Lease Expirations

The following table sets forth the annual lease
expirations and certain other information for leases existing at
the properties in our portfolio (including joint ventures),as of
December 31, 2003 (assuming that no tenants exercise
renewal or cancellation options and that there are no tenant
bankruptcies or other tenant defaults):

Portfolio

|                 |  |                 |     |                   |  |               |            |                    |  |                       |        |   |  |   |             |  |  |   |       | 
|---------------- |  | --------------- | --- | ----------------- |  | ------------- | ---------- | ------------------ |  | --------------------- | ------ | - |  | - | ----------- |  |  | - | ----- | 
|                 |  |                 |     |                   |  | Percentage of |            |                    |  | Annualized Rent Per  
|Year of          |  | Number of       |     | Square Footage of |  | Annualized    |            | Annualized Rent of |  | Leased Square Foot of
|Lease Expiration |  | Leases Expiring |     | Expiring Leases   |  | Rent          |            | Expiring Leases    |  | Expiring Leases      
|                 |  |                 |     |                   |  |               |            |                    |  |                      
|2004             |  |                 | 48  |                   |  |               | 4,264,133  |                    |  |                       | 13.69  | % |  | $ | 16,175,444  |  |  | $ | 3.79  | 
|2005             |  |                 | 45  |                   |  |               | 4,956,797  |                    |  |                       | 18.97  | % |  |   | 22,414,376  |  |  |   | 4.52  | 
|2006             |  |                 | 28  |                   |  |               | 4,286,902  |                    |  |                       | 16.22  | % |  |   | 19,157,167  |  |  |   | 4.47  | 
|2007             |  |                 | 28  |                   |  |               | 3,392,478  |                    |  |                       | 12.24  | % |  |   | 14,460,395  |  |  |   | 4.26  | 
|2008             |  |                 | 33  |                   |  |               | 3,578,714  |                    |  |                       | 11.77  | % |  |   | 13,900,237  |  |  |   | 3.88  | 
|2009             |  |                 | 16  |                   |  |               | 1,959,843  |                    |  |                       | 7.62   | % |  |   | 9,005,629   |  |  |   | 4.60  | 
|2010             |  |                 | 8   |                   |  |               | 961,978    |                    |  |                       | 3.12   | % |  |   | 3,691,035   |  |  |   | 3.84  | 
|2011             |  |                 | 11  |                   |  |               | 1,630,713  |                    |  |                       | 4.82   | % |  |   | 5,693,939   |  |  |   | 3.49  | 
|2012             |  |                 | 5   |                   |  |               | 802,145    |                    |  |                       | 2.75   | % |  |   | 3,244,030   |  |  |   | 4.04  | 
|2013             |  |                 | 5   |                   |  |               | 164,448    |                    |  |                       | 0.94   | % |  |   | 1,106,784   |  |  |   | 6.73  | 
|2014             |  |                 | 5   |                   |  |               | 879,481    |                    |  |                       | 3.80   | % |  |   | 4,495,814   |  |  |   | 5.11  | 
|2015             |  |                 | 3   |                   |  |               | 192,860    |                    |  |                       | 0.98   | % |  |   | 1,162,000   |  |  |   | 6.03  | 
|2017             |  |                 | 1   |                   |  |               | 30,465     |                    |  |                       | 0.35   | % |  |   | 407,616     |  |  |   | 13.38 | 
|2018             |  |                 | 1   |                   |  |               | 139,703    |                    |  |                       | 0.37   | % |  |   | 441,462     |  |  |   | 3.16  | 
|2019             |  |                 | 1   |                   |  |               | 495,740    |                    |  |                       | 2.36   | % |  |   | 2,782,602   |  |  |   | 5.61  | 
|                 |  |                 |     |                   |  |               |            |                    |  |                       |        |   |  |   |             |  |  |   |       | 
|Grand Total      |  |                 | 238 |                   |  |               | 27,736,400 |                    |  |                       | 100.00 | % |  | $ | 118,138,530 |  |  | $ | 4.26  | 
|                 |  |                 |     |                   |  |               |            |                    |  |                       |        |   |  |   |             |  |  |   |       | 






|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.

Neither the Company nor the Properties are
presently subject to any litigation, nor is the Company aware of
any threatened litigation, which the Company believes will
result in any liability that will be material to the Company,
other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered
by liability insurance.






|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.

No matters were submitted to a vote of our
shareholders during the fourth quarter ended December 31,
2003.

19



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##### Table of Contents






PART II.






|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters.

The high and low last sales prices of the
Companys common shares of beneficial interest (the
Common Shares) as reported by the New York Stock
Exchange (NYSE) for each calendar quarter from
January 1, 2002 to December 31, 2003 and the dividends
with respect to the Companys operations for each such
calendar quarter were as follows:

|             |  |             |       |               |  |       |       |  |  |   |       | 
|------------ |  | ----------- | ----- | ------------- |  | ----- | ----- |  |  | - | ----- | 
|             |  |             |       |              
|             |  | Sales Price |       | Dividends Per
|             |  |             |       | Common       
|Year/Quarter |  | High        |       | Low           |  | Share
|             |  |             |       |               |  |      
|2003:        |  |             |       |               |  |       |       |  |  |   |       | 
|1st Quarter  |  | $           | 17.50 |               |  | $     | 15.65 |  |  | $ | 0.325 | 
|2nd Quarter  |  | $           | 19.36 |               |  | $     | 16.98 |  |  | $ | 0.325 | 
|3rd Quarter  |  | $           | 20.83 |               |  | $     | 18.35 |  |  | $ | 0.330 | 
|4th Quarter  |  | $           | 22.65 |               |  | $     | 19.34 |  |  | $ | 0.330 | 
|2002:        |  |             |       |               |  |       |       |  |  |   |       | 
|1st Quarter  |  | $           | 14.28 |               |  | $     | 13.05 |  |  | $ | 0.320 | 
|2nd Quarter  |  | $           | 15.94 |               |  | $     | 13.91 |  |  | $ | 0.320 | 
|3rd Quarter  |  | $           | 16.75 |               |  | $     | 13.45 |  |  | $ | 0.325 | 
|4th Quarter  |  | $           | 17.28 |               |  | $     | 15.30 |  |  | $ | 0.325 | 

As of December 31, 2003, the Company had 165
shareholders of record and believes that it has in excess of
4,700 beneficial shareholders.

The Company currently anticipates that comparable
cash dividends will continue to be paid in the future; however,
the payment and the amount of the dividends is at the discretion
of the Board of Trustees and will depend on numerous factors
including the Companys cash flow and its capital and
annual distribution requirements under the REIT provisions of
the Code and other factors that the Board of Trustees deems
relevant.

The Company recorded expense for 17,330, 18,206
and 14,592 Common Shares issued to trustees during 2001, 2002
and 2003, respectively. These 50,128 Common Shares were issued,
in aggregate, to its trustees as compensation for services
provided to the Company in their capacity as members of the
Board of Trustees during the period from the first quarter of
2001 through the fourth quarter of 2003.



| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized for Issuance Under
    Equity Compensation Plans

This information is incorporated by reference
from our definitive proxy statement for our annual meeting of
stockholders to be held on June 3, 2004.

20



---



##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following table sets forth selected financial
data for the Company for each of the five years in the period
ended December 31, 2003. The information set forth below
should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and notes, including
Note 2  Summary of Significant Accounting
Policies and Note 3  Acquisitions and
Dispositions of Real Estate Investments, which refers to the
Companys acquisition and disposition activity, thereto
appearing elsewhere in this annual report.

|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ----------------------------------------------- |  | ------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                       |  |                         
|                                                                                       |  | Years Ended December 31,
|                                                                                       |  |                         
|                                                                                       |  | 2003                     |        | 2002(1), (2)                                    |  | 2001(2) |         | 2000 |  | 1999
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |     
|                                                                                       |  |                          |        |                                                 |  |        
|                                                                                       |  |                          |        | (In 000s, except for share and per share data) |  |        
|OPERATING DATA                                                                         |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Total revenue                                                                          |  | $                        | 91,552 |                                                 |  | $       | 96,501  |      |  | $    | 106,570 |   |  | $ | 119,987 |   |  | $ | 81,659 |  
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Property operating expenses                                                            |  |                          | 5,083  |                                                 |  |         | 7,739   |      |  |      | 8,653   |   |  |   | 10,388  |   |  |   | 8,421  |  
|Real estate taxes                                                                      |  |                          | 9,536  |                                                 |  |         | 9,989   |      |  |      | 9,567   |   |  |   | 10,779  |   |  |   | 6,246  |  
|General and administrative expenses                                                    |  |                          | 11,449 |                                                 |  |         | 10,024  |      |  |      | 8,660   |   |  |   | 8,001   |   |  |   | 6,697  |  
|Provision for asset impairment                                                         |  |                          |       |                                                 |  |         | 30,200  |      |  |      |        |   |  |   | 11,300  |   |  |   |       |  
|Depreciation and amortization                                                          |  |                          | 22,512 |                                                 |  |         | 19,978  |      |  |      | 23,938  |   |  |   | 20,526  |   |  |   | 15,784 |  
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Total operating expenses                                                               |  |                          | 48,580 |                                                 |  |         | 77,930  |      |  |      | 50,818  |   |  |   | 60,994  |   |  |   | 37,148 |  
|Equity in income (losses) from equity method
    investments                           |  |                          | 5,746  |                                                 |  |         | 899     |      |  |      | 1,123   |   |  |   | (73     | ) |  |   | (62    | )
|Gains (losses) on sales                                                                |  |                          | 3,221  |                                                 |  |         | (1,122  | )    |  |      | 9,142   |   |  |   | 106     |   |  |   | 1,284  |  
|Interest expense                                                                       |  |                          | 19,304 |                                                 |  |         | 25,115  |      |  |      | 35,647  |   |  |   | 45,237  |   |  |   | 29,315 |  
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) before minority interest, and
    distributions to preferred unitholders |  |                          | 32,635 |                                                 |  |         | (6,767  | )    |  |      | 30,370  |   |  |   | 13,789  |   |  |   | 16,418 |  
|Distributions to preferred unitholders                                                 |  |                          | (5,072 | )                                               |  |         | (5,585  | )    |  |      | (7,057  | ) |  |   | (6,875  | ) |  |   | (2,040 | )
|Minority interest                                                                      |  |                          | (4,040 | )                                               |  |         | 3,492   |      |  |      | (5,062  | ) |  |   | (251    | ) |  |   | (5,177 | )
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations                                               |  |                          | 23,523 |                                                 |  |         | (8,860  | )    |  |      | 18,251  |   |  |   | 6,663   |   |  |   | 9,201  |  
|Discontinued operations                                                                |  |                          |       |                                                 |  |         | 900     |      |  |      | 658     |   |  |   | 277     |   |  |   | 455    |  
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net income (loss)                                                                      |  | $                        | 23,523 |                                                 |  | $       | (7,960  | )    |  | $    | 18,909  |   |  | $ | 6,940   |   |  | $ | 9,656  |  
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income allocated to preferred shareholders                                             |  | $                        | (6,820 | )                                               |  | $       | (3,449  | )    |  | $    | (5,035  | ) |  | $ | (6,373  | ) |  | $ | (3,328 | )
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net income (loss) allocated to common
    shareholders                                 |  | $                        | 16,703 |                                                 |  | $       | (11,409 | )    |  | $    | 13,874  |   |  | $ | 567     |   |  | $ | 6,328  |  
|                                                                                       |  |                          |        |                                                 |  |         |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Distributions paid on Common Shares                                                    |  | $                        | 28,477 |                                                 |  | $       | 24,851  |      |  | $    | 16,781  |   |  | $ | 14,345  |   |  | $ | 8,375  |  

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|                                                                           |                      |                          |            |                                                 |   |         |            |         |   |      |            |         |   |   |            |         |   |   |            |          |  
|-------------------------------------------------------------------------- | -------------------- | ------------------------ | ---------- | ----------------------------------------------- | - | ------- | ---------- | ------- | - | ---- | ---------- | ------- | - | - | ---------- | ------- | - | - | ---------- | -------- | -
|                                                                           |                      |                         
|                                                                           |                      | Years Ended December 31,
|                                                                           |                      |                         
|                                                                           |                      | 2003                     |            | 2002(1), (2)                                    |   | 2001(2) |            | 2000    |   | 1999
|                                                                           |                      |                          |            |                                                 |   |         |            |         |   |     
|                                                                           |                      |                          |            |                                                 |   |        
|                                                                           |                      |                          |            | (In 000s, except for share and per share data) |   |        
|PER SHARE DATA                                                             |                      |                          |            |                                                 |   |         |            |         |   |      |            |         |   |   |            |         |   |   |            |         
|Income (loss) from continuing operations per
    Common Share-basic        |                      | $                        | 0.74       |                                                 |   | $       | (0.63      | )       |   | $    | 0.91       |         |   | $ | 0.03       |         |   | $ | 0.77       |         
|Income (loss) allocated to Common
    Shareholders per share-basic         |                      | $                        | 0.74       |                                                 |   | $       | (0.59      | )       |   | $    | 0.96       |         |   | $ | 0.06       |         |   | $ | 0.83       |         
|Income (loss) from continuing operations per
    Common Share-diluted      |                      | $                        | 0.73       |                                                 |   | $       | (0.63      | )       |   | $    | 0.87       |         |   | $ | 0.03       |         |   | $ | 0.77       |         
|Income (loss) allocated to Common
    Shareholders per share basic-diluted |                      | $                        | 0.73       |                                                 |   | $       | (0.59      | )       |   | $    | 0.90       |         |   | $ | 0.06       |         |   | $ | 0.80       |         
|Distributions paid per Common Share                                        |                      | $                        | 1.31       |                                                 |   | $       | 1.29       |         |   | $    | 1.26       |         |   | $ | 1.21       |         |   | $ | 1.12       |         
|Weighted average number of shares
    outstanding-basic EPS(3)             |                      |                          | 22,204,857 |                                                 |   |         | 19,467,656 |         |   |      | 14,518,099 |         |   |   | 9,239,591  |         |   |   | 7,622,010  |         
|Weighted average number of shares
    outstanding-diluted EPS              |                      |                          | 27,943,101 |                                                 |   |         | 19,467,656 |         |   |      | 21,410,023 |         |   |   | 9,244,356  |         |   |   | 14,810,817 |         
|OTHER DATA                                                                 |                      |                          |            |                                                 |   |         |            |         |   |      |            |         |   |   |            |         |   |   |            |         
|Funds from Operations(4)                                                   |                      | $                        | 48,301     |                                                 |   | $       | 15,415     |         |   | $    | 47,638     |         |   | $ | 35,515     |         |   | $ | 32,533     |         
|Cash flow provided from (used in):                                         |                      |                          |            |                                                 |   |         |            |         |   |      |            |         |   |   |            |         |   |   |            |         
|                                                                           | Operating activities |                          |            | 41,119                                          |   |         |            | 43,550  |   |      |            | 46,758  |   |   |            | 43,087  |   |   |            | 35,902   |  
|                                                                           | Investing activities |                          |            | (264,713                                        | ) |         |            | 2,039   |   |      |            | 15,785  |   |   |            | (62,646 | ) |   |            | (200,444 | )
|                                                                           | Financing activities |                          |            | 222,130                                         |   |         |            | (45,673 | ) |      |            | (64,236 | ) |   |            | 19,083  |   |   |            | 165,439  |  
|BALANCE SHEET DATA AT PERIOD END                                           |                      |                          |            |                                                 |   |         |            |         |   |      |            |         |   |   |            |         |   |   |            |         
|Undepreciated investment in real estate                                    |                      | $                        | 1,023,720  |                                                 |   | $       | 677,127    |         |   | $    | 833,335    |         |   | $ | 959,714    |         |   | $ | 861,318    |         
|Net investment in real estate                                              |                      |                          | 971,151    |                                                 |   |         | 637,695    |         |   |      | 786,143    |         |   |   | 919,156    |         |   |   | 838,922    |         
|Total assets                                                               |                      |                          | 1,023,315  |                                                 |   |         | 671,654    |         |   |      | 826,807    |         |   |   | 962,480    |         |   |   | 875,076    |         
|Total indebtedness                                                         |                      |                          | 533,717    |                                                 |   |         | 325,796    |         |   |      | 435,136    |         |   |   | 616,569    |         |   |   | 522,112    |         
|Total liabilities                                                          |                      |                          | 565,559    |                                                 |   |         | 346,021    |         |   |      | 455,133    |         |   |   | 638,753    |         |   |   | 543,415    |         
|Total minority interest                                                    |                      |                          | 88,607     |                                                 |   |         | 84,550     |         |   |      | 108,695    |         |   |   | 156,868    |         |   |   | 145,931    |         
|Total shareholders equity                                                 |                      |                          | 369,149    |                                                 |   |         | 241,083    |         |   |      | 262,979    |         |   |   | 166,859    |         |   |   | 185,730    |         
|OTHER DATA AT PERIOD END                                                   |                      |                          |            |                                                 |   |         |            |         |   |      |            |         |   |   |            |         |   |   |            |         
|Total leaseable square footage of properties                               |                      |                          | 30,124,228 |                                                 |   |         | 19,915,038 |         |   |      | 21,802,930 |         |   |   | 20,397,410 |         |   |   | 18,652,284 |         
|Number of properties                                                       |                      |                          | 135        |                                                 |   |         | 93         |         |   |      | 125        |         |   |   | 129        |         |   |   | 133        |         
|Percentage leased                                                          |                      |                          | 92         | %                                               |   |         | 93         | %       |   |      | 94         | %       |   |   | 95         | %       |   |   | 99         | %       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Note 2 to the Companys
    financial statements, the Company has restated its previous
    accounting treatment for $411,000 of offering costs related to
    $25 million of Convertible Preferred Stock which was
    redeemed in the third quarter of 2002, in accordance with recent
    SEC guidance which was effective in 2003. These costs were
    recorded as a distribution to the preferred shareholders, and
    were not added back to net income in order to calculate FFO for
    the year ended December 31, 2002.                                                        
|   
|(2) | FFO has been restated for 2002 and 2001 to
    eliminate the add back to net income in order to calculate FFO
    of $863,000 and $2.3 million, respectively, of charges
    related to the early retirement of debt. These charges had
    previously been accounted for as extraordinary items. However,
    as discussed in Note 2 to the Companys financial
    statements, the Companys adoption of SFAS No. 145 in
    2003 no longer permits these charges to be accounted for as
    extraordinary items and these changes have been reclassified to
    interest expense in the respective year.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Basic weighted average number of shares includes
    only Common Shares outstanding during the year and excludes OP
    Units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(4) | The Company uses Funds from Operations
    (FFO) as a non-GAAP performance measure in addition
    to net income determined in accordance with GAAP. FFO is a
    widely used measurement by investors for evaluating the
    operating performance of an equity REIT. Management believes the
    use of FFO as a performance measure allows investors and
    management to compare the Companys results to the results
    of other REITs. However, the Companys FFO is computed in
    accordance with the standards established by the National
    Association of Real Estate Investment Trusts
    (NAREIT) and as a result may not necessarily be
    comparable to similarly titled measures of operating performance
    for other REITs which do not compute FFO in accordance with the
    NAREIT definition which is described below.

Management believes that FFO is a useful
disclosure as a non-GAAP performance measure as historical cost
accounting for real estate assets, as required in accordance
with GAAP, implicitly assumes that the value of real estate
assets diminishes predictably over time as reflected through
depreciation and amortization expenses. The Company believes
that the value of real estate assets does not diminish
predictably over time, as is assumed in GAAP accounting, and
instead fluctuates due to market and other conditions.
Accordingly, the Company believes FFO provides investors with
useful supplemental information about the Companys
operating performance because it excludes real estate
depreciation and amortization expense and also gains and losses
from the sale of depreciated real estate assets. However, FFO
does not represent cash generated from operating activities in
accordance with GAAP and it also does not consider the costs
associated with capital expenditures related to the
Companys real estate assets. Also, it is not necessarily
indicative of cash available to fund cash needs and should not
be considered as an alternative to net income (as determined in
accordance with GAAP) as an indicator of the Companys
operating performance or as an alternative to cash flow from
operating activities (determined in accordance with GAAP) as a
measure of liquidity.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NAREIT defines FFO as net income/(loss) computed
    in accordance with GAAP, excluding gains (or losses) from sales
    of property, plus depreciation and amortization, and after
    adjustments for unconsolidated partnerships and joint ventures.
    Adjustments for unconsolidated partnerships and joint ventures
    are calculated to reflect FFO on the same basis. Since 2000,
    NAREIT has clarified the definition of FFO to include
    non-recurring events (except for those that are defined as
    extraordinary items or cumulative effects of
    accounting changes under GAAP) and the results of discontinued
    operations. The Company presents FFO in accordance with the
    NAREIT definition and has presented FFO on a consistent basis
    for all periods presented.
|
| | FFO has been restated for 2002 and 2000 to
    eliminate the add-back of the $31.6 million and $11.3
    million in provisions for asset impairment recorded in 2002 and
    2000, respectively, and the employee termination costs of
    $930,000 in 2002 related to the New York Office Portfolio sale.
    This restatement was required as NAREIT and the SEC issued
    guidance during 2003 that impairment changes should no longer be
    added back to net income in order to calculate FFO.                                                                                                                                                                                                                                                                                                     






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

The following discussion and analysis should be
read in conjunction with the consolidated financial statements
appearing elsewhere herein. This annual report contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 as amended (the
Securities Act) and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange
Act). The words believe, expect,
anticipate, intend, estimate
and other expressions which are predictions of or indicate
future events and trends which do not relate to historical
matters identify forward-looking statements. Although the
Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable
assumptions, there can be no assurance that these expectations
will be realized. As a result, the Companys actual results
could materially differ from those set forth in the
forward-looking statements. Certain factors that might cause
such a difference include but are not limited to the following:
real estate investment considerations, such as the effect of
economic and other conditions in the market area on cash flows
and values; the need to renew leases or relet space upon the
expiration of current leases; the risks associated with

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the construction and development of properties;
the ability of a property to generate revenues sufficient to
make principal payments on outstanding debt; outstanding debt
may be refinanced at higher interest rates or otherwise on terms
less favorable to the Company, interest rates under the
Companys $185,000,000 senior unsecured revolving credit
facility (the Credit Facility) and other variable
rate debt may increase and changes in: economic conditions
generally and the real estate market specifically,
legislative/regulatory matters (including changes to laws
governing the taxation of REITs), availability of capital (debt
and equity), interest rates, competition, future terrorist
attacks in the United States, defaults on or non-renewal of
leases by tenants, decreased rental rates or increased vacancy
rates, financial market fluctuations, environmental
uncertainties, supply and demand for properties in our current
and proposed market areas, general accounting principles and
policies and guidelines applicable to REITs.


Executive Summary

The Company is a fully integrated real estate
investment trust focused on the acquisition, development and
management of bulk warehouse distributions facilities in the
Eastern United States. At December 31, 2003, the Company
owned interests in a portfolio of 135 properties
(133 distribution facilities, one office building and an
investment in a direct financing lease (the
Properties)) which aggregated 30.1 million
square feet with 7.7 million square feet, or
26 properties, owned in two joint ventures and
2.6 million square feet, or four properties under
construction, including one property in a joint venture.

The Company operates in the following states as
listed below:

|                                           |  |    |           |    |  |    |            |    |  |    |           |       |  |       |           |   |  |   |           |   |  |   |           |   |  |   |            |  
|------------------------------------------ |  | -- | --------- | -- |  | -- | ---------- | -- |  | -- | --------- | ----- |  | ----- | --------- | - |  | - | --------- | - |  | - | --------- | - |  | - | ---------- | -
|December 31, 2003                          |  | NJ |           | PA |  | IN |            | FL |  | SC |           | Other |  | Total
|                                           |  |    |           |    |  |    |            |    |  |    |           |       |  |      
|SF Owned                                   |  |    | 9,175,982 |    |  |    | 10,586,381 |    |  |    | 4,404,705 |       |  |       | 1,732,699 |   |  |   | 2,721,789 |   |  |   | 1,502,692 |   |  |   | 30,124,228 |  
|% of SF                                    |  |    | 30.5      | %  |  |    | 35.1       | %  |  |    | 14.6      | %     |  |       | 5.8       | % |  |   | 9.0       | % |  |   | 5.0       | % |  |   | 100.0      | %
|No. of Properties                          |  |    | 35        |    |  |    | 39         |    |  |    | 11        |       |  |       | 13        |   |  |   | 26        |   |  |   | 11        |   |  |   | 135        |  
|Occupancy                                  |  |    | 94.0      | %  |  |    | 91.4       | %  |  |    | 98.7      | %     |  |       | 97.4      | % |  |   | 74.8      | % |  |   | 91.0      | % |  |   | 92.1       | %
|Annualized Base Rent (ABR)               |  | $  | 43,816    |    |  | $  | 37,530     |    |  | $  | 14,185    |       |  | $     | 11,998    |   |  | $ | 5,801     |   |  | $ | 4,809     |   |  | $ | 118,139    |  
|ABR/ SF                                    |  | $  | 5.08      |    |  | $  | 3.88       |    |  | $  | 3.26      |       |  | $     | 7.11      |   |  | $ | 2.85      |   |  | $ | 3.52      |   |  | $ | 4.26       |  
|Investment in real estate, at cost: (000s) |  | $  | 341,468   |    |  | $  | 328,236    |    |  | $  | 50,386    |       |  | $     | 123,447   |   |  | $ | 64,334    |   |  | $ | 43,677    |   |  | $ | 951,558    |  
|December 31, 2002                          |  |    |           |    |  |    |            |    |  |    |           |       |  |       |           |   |  |   |           |   |  |   |           |   |  |   |            |  
|                                           |  |    |           |    |  |    |            |    |  |    |           |       |  |       |           |   |  |   |           |   |  |   |           |   |  |   |            |  
|SF Owned                                   |  |    | 6,574,529 |    |  |    | 6,524,588  |    |  |    | 2,591,460 |       |  |       |          |   |  |   | 2,721,789 |   |  |   | 1,502,672 |   |  |   | 19,915,038 |  
|% of SF                                    |  |    | 33.0      | %  |  |    | 32.8       | %  |  |    | 13.0      | %     |  |       |          |   |  |   | 13.7      | % |  |   | 7.5       | % |  |   | 100.0      | %
|No. of Properties                          |  |    | 21        |    |  |    | 29         |    |  |    | 6         |       |  |       |          |   |  |   | 26        |   |  |   | 11        |   |  |   | 93         |  
|Occupancy                                  |  |    | 94.9      | %  |  |    | 92.7       | %  |  |    | 93.7      | %     |  |       |          |   |  |   | 85.8      | % |  |   | 98.0      | % |  |   | 93.0       | %
|ABR                                        |  | $  | 29,702    |    |  | $  | 23,688     |    |  | $  | 8,627     |       |  | $     |          |   |  | $ | 6,636     |   |  | $ | 5,183     |   |  | $ | 73,836     |  
|ABR/ SF                                    |  | $  | 4.76      |    |  | $  | 3.92       |    |  | $  | 3.55      |       |  | $     |          |   |  | $ | 3.52      |   |  | $ | 3.99      |   |  | $ | 3.99       |  
|Investment in real estate, at cost (000s)  |  | $  | 209,241   |    |  |    | 229,780    |    |  | $  | 84,048    |       |  | $     |          |   |  | $ | 63,783    |   |  | $ | 42,551    |   |  | $ | 629,403    |  

The Properties can be categorized as follows to
understand our operating results for 2003:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 93 properties aggregating 19.9 million
    square feet were owned for all of 2003, including
    12 properties aggregating 3.6 million square feet in
    joint ventures.                       
|
| |  | 52 properties aggregating 10.1 million
    square feet were acquired in 2003 of which 7 properties
    aggregating 2.4 million square feet were acquired through
    joint ventures.            
|
| |  | 8 properties aggregating 2.0 million square
    feet were sold in February 2003 to the BIT JV.                                                                                                  
|
| |  | 2 properties aggregating 1.3 million square
    feet of completed construction were placed into service in 2003,
    including one property in a joint venture that was 799,344
    square feet.

24



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##### Table of Contents



The Companys results of operations for the
three years ended December 31, 2003 were affected by a
significant level of acquisition, disposition and development
activity which is shown below (in thousands):

|     |  |              |    |                 |  |              |         |                    |  |            |    |   |  |            |        |   |  |  |    |  |  |   |         |  |  |  |   |  |  |   |        | 
|---- |  | ------------ | -- | --------------- |  | ------------ | ------- | ------------------ |  | ---------- | -- | - |  | ---------- | ------ | - |  |  | -- |  |  | - | ------- |  |  |  | - |  |  | - | ------ | 
|     |  |              |    |                 |  |              |         |                    |  |            |    |   |  |           
|     |  |              |    |                 |  |              |         | Development Placed
|     |  | Acquisitions |    | JV Acquisitions |  | Dispositions |         | in Service        
|     |  |              |    |                 |  |              |         |                   
|     |  | Properties   |    | $               |  | Properties   |         | $                  |  | Properties |    | $ |  | Properties |        | $
|     |  |              |    |                 |  |              |         |                    |  |            |    |   |  |            |        |  
|2003 |  |              | 36 |                 |  | $            | 351,811 |                    |  |            | 16 |   |  | $          | 87,045 |   |  |  | 8  |  |  | $ | 90,300  |  |  |  | 2 |  |  | $ | 45,035 | 
|2002 |  |              | 5  |                 |  | $            | 44,260  |                    |  |            | 3  |   |  | $          | 20,958 |   |  |  | 40 |  |  | $ | 207,900 |  |  |  | 2 |  |  | $ | 29,112 | 
|2001 |  |              | 16 |                 |  | $            | 102,089 |                    |  |            | 8  |   |  | $          | 32,300 |   |  |  | 27 |  |  | $ | 288,000 |  |  |  | 1 |  |  | $ | 20,100 | 

The Companys disposition activity during
the three years ended December 31, 2003 consisted of the
sale of 34 office properties and 41 non-core
industrial assets as the Company refined its focus solely on
bulk warehouse and distribution facilities.

Results of Operations

2003 Highlights



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acquired approximately $427 million of
    industrial properties totaling 10.1 million square feet and
    acquired approximately 143 acres of land during the year,
    including a 13 building portfolio with 1.7 million
    square feet of industrial assets in Miami, Florida.                                                                                                                                                                                 
|
| |  | Achieved portfolio physical occupancy of 92.1% at
    year-end 2003 versus 93.0% at year-end 2002.                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Leased 7.5 million square feet during the
    year comprised of 2.9 million square feet of renewals and
    4.6 million square feet of new leases.                                                                                                                                                                                                                                                                                                                  
|
| |  | Same-Store property level net operating income
    for the total portfolio declined 1.4% on a Cash basis. For
    further discussion of property level net operating income on a
    cash basis, see the discussion of Same Store
    Properties.                                                                                                                                                                                                                 
|
| |  | Contributed $90 million of properties and
    acquired an additional $75 million of properties to a new
    $210 million joint venture with the BIT JV.                                                                                                                                                                                                                                                                                                             
|
| |  | Signed three build-to-suit projects 
    772,000 square feet for Home Depot in Cranbury, New Jersey,
    where construction has begun, 211,535 square feet for KIA Motors
    America, Inc. in Allentown, Pennsylvania, (representing a total
    investment of $49 million for the two properties when
    finished), and completed a 523,295 square foot distribution
    facility, the Companys first fee build-to-suit project, in
    Hazleton, Pennsylvania.
|
| |  | Issued approximately 2.8 million shares of
    Cumulative Redeemable Preferred Stock, resulting in gross
    proceeds of $69 million.                                                                                                                                                                                                                                                                                                                               
|
| |  | Issued 4.0 million Common Shares, resulting
    in gross proceeds of approximately $78 million.                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Expanded existing unsecured Credit Facility from
    $125 million to $185 million. The Credit Facility matures
    in December 2004 and can be extended through December 2005 at
    the Companys option.                                                                                                                                                                                                                                                          
|
| |  | Closed on a $75 million unsecured term loan
    with a five-year term. The proceeds of the financing were
    utilized to pay down our Credit Facility.                                                                                                                                                                                                                                                                                                             
|
| |  | Increased dividend on Common Shares to
    $0.33 per quarter, representing a 1.5% increase over 2002.                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Started development on 1.3 million SF of
    speculative construction that is currently 38% leased.                                                                                                                                                                                                                                                                                                                                                                 



| |                                                                             
| | ----------------------------------------------------------------------------
| | Year Ended December 31, 2003 as
    Compared to Year Ended December 31, 2002

The Company reported net income allocated to
common shareholders for the year ended December 31, 2003 of
$16.7 million, or $0.73 per diluted share, as compared with
net loss allocated to common shareholders of $11.4 million,
or $0.59 per diluted share, for 2002. The significant
increase in earnings per share in 2003 is primarily the result
of the $32.8 million in losses from asset sales, provisions
for asset impairments and employee termination costs incurred in
2002 primarily related to the December 2002 disposition of
34 office and industrial properties located primarily in
New York (the New York Office Portfolio). Excluding
the impact of gains and losses from asset sales and asset
impairment provisions, net income allocated to common

25



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##### Table of Contents



shareholders would have been $13.8 million,
or $0.61 per diluted share, in 2003 as compared to
$12.6 million, or $0.64 per diluted share, in 2002.
This decrease in net income per share, after these items are
excluded, is primarily the result of a delay in reinvestment of
the proceeds from the sale of the New York Office Portfolio and
lower economic occupancy levels (as discussed below) which were
slightly offset by lower interest expense due to lower variable
interest rates and a decrease in the Companys overall
blended interest rate in 2003 due to an increase in variable
rate debt.


Revenues decreased by $4.9 million, or 5.1%,
to $91.6 million in 2003 as compared to $96.5 million
in 2002, primarily as a result of the New York Office Portfolio
sale in 2002, the $90.3 million in assets sold or
contributed to the BIT JV in 2003 and $1.2 million from an
increase in vacancy as economic occupancy declined from 94.3% in
2002 to 91.7% in 2003.

Property operating expenses and real estate tax
expense in the aggregate decreased by approximately
$3.1 million, or 17.5%, as compared to 2002 primarily as a
result of property dispositions and the sale of the New York
Office Portfolio as office assets have higher operating
expenses. Operating margins (revenue less property operating
expenses and real estate tax expense) for 2003 were 84.0% as
compared to an operating margin of 81.6% in 2002

General and administrative expenses increased by
approximately $1.4 million or 14.0%, to $11.4 million
in 2003 from $10.0 million in 2002. This increase was a
result of higher non-cash compensation charges associated with
restricted stock awards and the adoption of the expense
provisions of SFAS No. 123 related to stock option awards,
increases in director and officer insurance costs and
professional fees associated with compliance with the new
Sarbanes-Oxley regulations. In addition, the Company incurred
$930,000 of costs related to the termination of the employment
of certain employees in 2002 as a result of the New York Office
Portfolio transaction.

Depreciation and amortization increased by
$2.5 million, or 12.7%, to $22.5 million in 2003 as
compared to $20.0 million in 2002, primarily as a result of
amortization of intangible assets related to leases in 2003.

Interest expense decreased $5.8 million in
2003 as compared to 2002 as a result of a reduction in overall
debt levels from asset sales, a decrease in interest rates for
the Companys Credit Facility and other variable rate debt
and a decrease in the overall blended interest rate on the
Companys borrowings in 2003 due to an increase in the
amount of variable rate debt. The decrease in preferred
unitholder distributions in 2003 is a result of the repurchase
of $32.5 million of Convertible Preferred Stock and
Convertible Preferred Units in September 2002 from the proceeds
of the Companys 2002 common share offering. The Company
also reclassified $863,000 to interest expense in 2002 that was
originally reported as an extraordinary item from the early
retirement of debt in accordance with SFAS No. 145
which was adopted effective January 1, 2003.

Equity in income from the Companys equity
method investments was approximately $5.7 million in 2003
as compared to $900,000 in 2002. This increase in earnings from
equity method investments is a result of the formation of the
BIT JV in February 2003, an increase in income from the
Management Company due to additional management fees from the
BIT JV, increased equity in income related to the AirTech joint
venture as a result of the property being placed in service
fully leased in 2003, and the preferred equity interest in
Nocha, LLC retained by the Company in connection with the New
York Office Portfolio transaction.

In 2003, the Company recorded a net gain on asset
sales of approximately $3.2 million as compared to a net
loss of $251,000 in 2002. The gain recorded in 2003 is related
to the sale of assets to the BIT JV, from which the Company
recorded a gain related to their portion of the assets sold.



| |         
| | --------
| | Segments

Revenue for all of the Companys properties
decreased by approximately $4.9 million while property
level net operating income on a GAAP basis (NOI),
which is defined as total revenue less property operating
expenses and real estate taxes, decreased by approximately
$1.8 million as compared to the same period in 2002 (for a
reconciliation of NOI to net income, see Same Store
Properties and Note 14 to the Companys
financial statements. Revenue and NOI decreased in the Indiana
and Other segment as a result of property dispositions in 2002
and as a result of asset sales in February 2003 to the BIT JV.
Revenue and NOI increased

26



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##### Table of Contents



in the Pennsylvania and New Jersey markets as a
result of property acquisitions in the fourth quarter of 2002
and approximately $195 million of acquisitions which
occurred primarily in the first quarter of 2003.




| |                      
| | ---------------------
| | Same Store Properties

The Same Store Properties, which are properties
owned since September 30, 2002, consist of 85 properties
aggregating approximately 17.6 million square feet. NOI
from the Same Store Properties represented approximately 61.2%
of the Companys overall NOI for the year ended
December 31, 2003.

Set forth below is a schedule comparing the cash
basis property level net operating income (defined as NOI
without straight line rental income, lease termination income
and amortization of deferred revenue related to acquired leases)
for the Same Store Properties for the years ended
December 31, 2003 and 2002 (dollars in thousands):

|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |     |  
|----------------------------------------------------------------- | ------------- | ---------------------------------------------- | ------ | ------ |  | ------ | ------ | -------- |  | - | ----- | --- |  |  | ---- | --- | -
|                                                                  |               |                                               
|                                                                  |               | Cash Basis Property Level Net Operating Income
|                                                                  |               | Year Ended December 31,                       
|                                                                  |               |                                               
|                                                                  |               | 2003                                           |        | 2002   |  | Change |        | % Change
|                                                                  |               |                                                |        |        |  |        |        |         
|Revenue                                                           |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Rental Revenue                                                    |               |                                                | 47,233 |        |  |        | 47,645 |          |  |   | (412  | )   |  |  | (0.9 | )% 
|Tenant Reimbursement                                              |               |                                                | 7,151  |        |  |        | 6,297  |          |  |   | 854   |     |  |  | 13.6 | %  
|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|                                                                  | Total Revenue |                                                | $      | 54,384 |  |        | $      | 53,942   |  |   | $     | 442 |  |  |      | 0.8 | %
|Operating Expenses                                                |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Property Operating Expenses                                       |               | $                                              | 2,787  |        |  | $      | 1,866  |          |  | $ | 921   |     |  |  | 49.4 | %  
|Real Estate Taxes                                                 |               |                                                | 6,076  |        |  |        | 5,931  |          |  |   | 145   |     |  |  | 2.4  | %  
|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Operating Expenses                                                |               |                                                | 8,863  |        |  |        | 7,797  |          |  |   | 1,066 |     |  |  | 13.7 | %  
|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Net Operating Income (Cash basis)                                 |               | $                                              | 45,521 |        |  | $      | 46,145 |          |  | $ | (624  | )   |  |  | (1.4 | )% 
|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Same Store NOI From Above                                         |               | $                                              | 45,521 |        |  | $      | 46,145 |          |  |   |       |     |  |  |      |    
|Non Same Store Property NOI                                       |               |                                                | 35,951 |        |  |        | 36,438 |          |  |   |       |     |  |  |      |    
|Straight-Line Rental Income for Same Store
    properties         |               |                                                | 1,217  |        |  |        | 1,821  |          |  |   |       |     |  |  |      |    
|Less: Unconsolidated NOI related to Equity Method
    Investments |               |                                                | (5,756 | )      |  |        | (5,631 | )        |  |   |       |     |  |  |      |    
|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Property Level Net Operating
    Income(1)                        |               | $                                              | 76,933 |        |  | $      | 78,773 |          |  |   |       |     |  |  |      |    
|                                                                  |               |                                                |        |        |  |        |        |          |  |   |       |     |  |  |      |    
|Physical Occupancy                                                |               |                                                | 92.7   | %      |  |        | 94.9   | %        |  |   | (2.2  | )%  |  |  |      |    
|Economic Occupancy                                                |               |                                                | 91.2   | %      |  |        | 93.1   | %        |  |   | (1.9  | )%  |  |  |      |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Property level net operating income equals total
    revenue less property operating expenses and real estate taxes.
    NOI on a cash basis is defined as NOI without straight line
    rental income, lease termination income and amortization of
    deferred revenue related to acquired leases. Management believes
    that NOI measures are useful disclosure as non-GAAP performance
    measurements as the Company believes these measurements describe
    the unleveraged performance of the Properties. Accordingly, the
    Company believes NOI provides investors with useful supplemental
    information about a specific propertys operating
    performance because it excludes real estate depreciation and
    amortization, interest expense and costs not associated with the
    operation of the property. However, NOI does not represent cash
    generated from operating activities in accordance with GAAP and
    should not be considered as an alternative to net income
    (computed in accordance with GAAP) as an indicator of operating
    performance or an alternative to cash flow from operating
    activities as a measure of liquidity.

NOI for the year ended December 31, 2003 for
the Same Store Properties decreased to approximately
$45.5 million from $46.1 million for 2002. This
decrease of approximately $624,000 or 1.4% is primarily due to a
decrease in reimbursed expenses as economic occupancy declined,
from 93.1% in 2002 to 91.2% in 2003.

27



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##### Table of Contents



This decrease in economic occupancy is primarily
related to four Pennsylvania properties and two properties in
South Carolina. Operating expenses for the Same Store Properties
increased by approximately $1.1 million or 13.7%. This
increase was primarily related to increases in utility expenses,
snow removal and insurance expenses at certain properties.




| |                                                                                 
| | --------------------------------------------------------------------------------
| | Year Ended December 31, 2002 as
    Compared to the Year Ended December 31, 2001

The Company reported a net loss allocated to
common shareholders for the year ended December 31, 2002 of
$11.4 million, or $0.59 per diluted share, as compared with
net income allocated to common shareholders of
$13.9 million, or $0.90 per diluted share, for 2001. The
significant decrease in earnings per share is primarily the
result of the $31.6 million asset impairment provisions and
$930,000 of employee termination costs related to the December
2002 New York Office Portfolio transaction. In 2001, the Company
recorded $9.1 million in gains, primarily from the sale of
a building in New Jersey and a $2.7 million cumulative
catch-up adjustment for depreciation expense (as a result of the
assets held for sale placed back into service as assets held for
investment). In 2002, the Company incurred lower interest
expense as a result of the reduction in overall leverage during
2001 and lower interest rates on the variable rate Credit
Facility as well as $1.4 million less of interest costs
associated with early debt retirements. Excluding the impact of
gains and losses from asset sales, extraordinary items, employee
termination costs, asset impairment provisions and the 2001
cumulative depreciation adjustment, net income allocated to
common shareholders would have been $15.1 million, or $0.76
per diluted share, in 2002 as compared to $10.9 million, or
$0.70 per diluted share, in 2001. This increase in net income
after these items are excluded is primarily the result of lower
interest rates on the Credit Facility.

Revenues decreased by $10.1 million, or
9.5%, to $96.5 million in 2002 as compared to
$106.6 million in 2001, primarily as a result of
$207.9 million of property dispositions in 2002, and
$1.2 million from an increase in vacancy which was offset
by the impact of the acquisition of approximately
$37.0 million of assets.

Property operating expenses and real estate tax
expense in the aggregate decreased by approximately $492,000, or
2.7%, as compared to 2001 primarily as a result of property
dispositions. Operating margins (revenue less property operating
expenses and real estate tax expense) for 2002 were 81.6% as
compared to operating margins of 82.9% in 2001.

General and administrative expenses increased by
approximately $1.3 million, or 14.9%, to $10.0 million
in 2002 from $8.7 million in 2001. This increase was
primarily a result of increases in compensation expenses. In
addition, the Company incurred $930,000 of costs related to the
termination of the employment of certain employees as a result
of the New York Office Portfolio transaction.

Depreciation and amortization decreased by
$3.9 million, or 16.3%, to $20.0 million in 2002 as
compared to $23.9 million in 2001, primarily as a result of
the asset sales in 2002. In 2001, the Company recorded a
cumulative catch up depreciation adjustment of $2.7 million
for assets held for sale which were placed back in service as
operating assets in the first quarter of 2001.

Interest expense decreased $10.5 million in
2002 as compared to 2001 as a result of asset sales, the
decrease in interest rates for the Companys Credit
Facility, the decrease of $1.4 million in interest costs
associated with early debt retirements and the impact of the
April 2001 Common Share offering which resulted in the Company
repaying $56.7 million in debt. The decrease in preferred
unitholder and preferred shareholder distributions in 2002 is a
result of the repurchase of $32.5 million and
$35.7 million of Convertible Preferred Stock and
Convertible Preferred Units in 2002 and 2001, respectively, from
the proceeds of the 2002 and 2001 Common Share offerings.

Equity in income from the Companys equity
method investments was approximately $900,000 in 2002 as
compared to $1.1 million in 2001. This decrease in earnings
from equity method investments is a result of a decrease in
income from the Management Company due to reduced leasing
commission revenue and reduced equity in income related to the
AirTech joint ventures, net of increases in income related to
the CalEast JV as a result of acquisitions in 2002 and the
preferred equity interest in Nocha, LLC retained by the Company
following the New York Office Portfolio transaction.

28



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##### Table of Contents



In 2002 the Company recorded a net loss on asset
sales of approximately $1.1 million as compared to a net
gain of $9.1 million in 2001. The loss recorded in 2002 is
primarily related to the New York Office Portfolio transaction.
The loss on the sale of these assets was the result of the
Companys decision to dispose of the New York office
properties on an accelerated basis as a portfolio and not on an
individual asset basis in addition to a general decline in
interest from investors in office properties in the Upstate New
York market. The gain recorded in 2001 is primarily the result
of the sale of the 200 Industrial Avenue facility located in
Teterboro, New Jersey in September 2001 which resulted in a gain
of $9.6 million.

Pursuant to Financial Accounting Standards Board
(FASB) EITF Topic D-42 The Effect on the
Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock, the Company has changed its
accounting treatment of the offering costs paid with the
issuance of its convertible preferred stock, of which
$25 million was redeemed in September 2002. Accordingly,
$411,000 of such costs have been recorded as a preferred
dividend.



| |         
| | --------
| | Segments

Revenue and NOI for the industrial segment
decreased by approximately $618,000 and $1.7 million,
respectively as compared to 2001. These decreases are primarily
a result of asset sales of certain New Jersey properties in
2001, which were partially offset by acquisitions in
Pennsylvania, the acquisition of an 800,000 square foot
industrial building in Indiana in November 2001 and increased
occupancy in the South Carolina properties in 2002.

Revenue and NOI for the office segment decreased
by approximately $9.8 million and $8.0 million,
respectively as compared to 2001. These decreases are primarily
a result of the sale of the New Jersey office properties and
several Pennsylvania office properties in 2001, the sale of Two
Meridian Boulevard in Pennsylvania in January 2002 and the New
York Office Portfolio transaction in December 2002.

Liquidity and Capital Resources



| |           
| | ----------
| | Cash Flows



| |     
| | ----
| | 2003

Net cash provided by operating activities was
$41.1 million in 2003 as compared to $43.6 million in
2002. This decrease is a result of delays in reinvestment of
proceeds from asset sales in 2002 and timing of cash collections
in 2003. This represents the Companys primary source of
liquidity to fund distributions to shareholders and unitholders
in the Operating Partnership and to a certain extent, recurring
costs associated with the re-leasing and renovation of the
Companys properties.

Net cash used in investing activities was
$264.7 million in 2003 as compared to net cash provided in
2002 of $2.0 million. The increase in cash used is
primarily the result of an increase in acquisition activity in
2003. Cash used in property acquisitions increased from
$45.2 million in 2002 to $230.2 million in 2003. The
total purchase price including assumed debt was
$427 million in 2003 as compared to $58 million in
2002.

Net cash provided by financing activities in 2003
was $222.1 million as compared to net cash used in
financing activities in 2002 of $45.7 million. The increase
in net cash provided in 2003 as compared to 2002 is a result of
higher debt borrowings in 2003 to finance a portion of
$427 million in acquisitions and as a result of Common
Share and Preferred Stock offerings in 2003.



| |     
| | ----
| | 2002

Net cash provided by operating activities was
$43.6 million in 2002 as compared to $46.8 million in
2001, a decrease of 6.8%. This represents the Companys
primary source of liquidity to fund distributions to
shareholders and unitholders in the Operating Partnership and,
to a certain extent, recurring costs associated with the
re-leasing and renovation of the Companys properties.

Net cash provided by investing activities was
$2.0 million in 2002 as compared to net cash provided by in
2001 of $15.8 million. The decrease in cash provided is
primarily the result of a decrease in proceeds from

29



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##### Table of Contents



sales of assets in 2002 as compared to 2001,
partially offset by decreased acquisition activity in 2002. Net
cash proceeds from asset sales in 2002 and 2001 were
$67.9 million and $157.8 million, respectively. Cash
used in property acquisitions decreased from $102.5 million
in 2001 to $45.2 million in 2002.


Net cash used in financing activities in 2002 was
$45.7 million as compared to net cash used in financing
activities in 2001 of $64.2 million. The increase in net
cash used in 2002 as compared to 2001 is a result of higher debt
repayments in 2001 as a result of asset sales and the Common
Share offerings in 2001.

Capitalization



| |                                                                 
| | ----------------------------------------------------------------
| | Equity Issuances and Convertible Preferred
    Stock Repurchases

On November 7, 2003, the Company issued
4,000,000 Common Shares at $19.60 per share before the
underwriters discount. The Company initially used the net
proceeds of $77.5 million from this offering to repay
certain amounts outstanding under its Credit Facility and to
fund the acquisition of 13 properties in Miami, Florida.

On February 18, 2003, the Company issued
2,400,000 shares of 9.125% Series D Cumulative Redeemable
Preferred Stock at $25.00 per share. This preferred stock may be
redeemed at par at the election of the Company on or after
February 18, 2008. These securities have no stated
maturity, sinking fund or mandatory redemption and are not
convertible into any other securities of the Company. The
Company granted the underwriters an overallotment option to
purchase up to an additional 360,000 shares of its
Series D Cumulative Redeemable Preferred Stock, which was
exercised within 30 days. The shares are traded on the NYSE
under the symbol KTRPrD. The net proceeds of the
offering of approximately $67 million were initially used
to repay existing indebtedness outstanding under the
Companys Credit Facility as well as for general corporate
purposes, including funding acquisitions and the Companys
development activities.

In September 2002, the Company sold 2,000,000
Common Shares at a price of $16.415 per share. The Company used
the net proceeds of approximately $31.5 million, after
underwriters discount and offering expenses, to repurchase
all 800,000 shares of its Series A Convertible
Preferred Stock, with a $20.0 million liquidation
preference, which required a 9.00% preferred dividend, and
200,000 shares of its Series C Convertible Preferred
Stock, with a $5.0 million liquidation preference, which
required a 9.75% preferred dividend, from AEW Targeted
Securities Fund, L.P., and all of its Series B Convertible
Preferred Units, with a $7.5 million liquidation
preference, which required a 9.50% preferred return, from
Hopewell Properties, Inc.



| |                                   
| | ----------------------------------
| | Credit Facility and Other
    Debt

In December 2001, the Company entered into a
three-year $125 million unsecured credit facility (the
Credit Facility) with a group of commercial lenders
led by Wells Fargo Bank, N.A. On March 31, 2003, the Credit
Facility was increased to $185 million. This Credit
Facility can be used to fund acquisitions, capital improvements,
development activities and working capital needs. The Credit
Facility bears interest at a variable rate at the Companys
option of either LIBOR plus a spread based on a sliding scale
based on the Company leverage or the prime rate. The scale
ranges from LIBOR + 1.35% to LIBOR + 1.875%. Based on the
Companys current leverage, the facility is priced at LIBOR
plus 1.875%. The Companys outstanding borrowings under
this Credit Facility were $135.4 million at
December 31, 2003 at an interest rate of 2.88%. The Credit
Facility has certain debt covenants, which are typical in
facilities of this type, including but not limited to debt
service and fixed charge coverage and overall leverage. The
Company was in compliance with these debt covenants as of
December 31, 2003.

On September 11, 2003, the Company obtained
a $75 million unsecured term loan (the Term
Loan), which matures in September 2008. Interest is
calculated based on a grid, which is based on the Companys
leverage ranging from LIBOR plus 1.35% to LIBOR plus 1.75%.
Based on the Companys current leverage, the Term Loan is
priced at LIBOR plus 1.75%. The Company had $75 million
outstanding on the Term Loan as of December 31, 2003. The
weighted average interest rate for the year ended
December 31, 2003 was 2.75%. The Term Loan has certain
financial covenants, which are identical to the Credit Facility
covenants. The Company has utilized forward starting interest
rate swaps, effective at various dates in 2004 and 2005, to

30



---



##### Table of Contents



hedge interest rate risk associated with the Term
Loan. See Note 2 to the Companys financial statements
for further discussion of these swaps.


The Company has other variable rate loans
outstanding aggregating $58.2 million and
$33.2 million at December 31, 2003 and 2002
respectively. As of December 31, 2003 and 2002, interest
rates on these loans ranged from 2.66% to 3.09% and 2.87% to
4.50%, respectively. The weighted average interest rates for
these loans were 3.01% and 4.17% at December 31, 2003 and
2002, respectively. The maturities for these loans range from
October 2004 through April 2005.

As of December 31, 2003, the Company had
approximately $252.6 million of fixed rate mortgage notes
outstanding, excluding debt premiums, at a weighted average
interest rate of 7.8% and at a weighted average maturity of
4.1 years. Approximately $18.2 million of this
mortgage debt is scheduled to mature in 2004. At
December 31, 2003, the Companys total market
capitalization was approximately $1.4 billion as compared
to $851.5 million at December 31, 2002 and the
Companys debt to market capitalization ratio was 39.2% as
compared to 38.3% at December 31, 2002. The Companys
consolidated debt to undepreciated assets ratio (calculated as
mortgage notes payable and unsecured debt divided by total
assets plus total accumulated depreciation) was 49.6% as
compared to 45.8% at December 31, 2002.



| |                              
| | -----------------------------
| | Short and Long-term Liquidity

Cash flow from operating activities is the
Companys principal source of funds to pay its short term
liquidity requirements including debt service, common and
preferred distributions, recurring capital expenditures and
certain upfront costs associated with the Companys
development activities. The Company expects to fund
approximately $6.1 million of additional equity to the
CalEast JV and $2.3 million to the BIT JV. This equity will
be funded as the joint ventures acquire additional properties.
The Company has also guaranteed 50% of a $16.4 million
recourse construction loan for 5 Points Associates, LLC, a
joint venture with Browning, which is constructing a
813,054 square foot facility in AirTech. In connection with
the development of AirTech, the Company has also guaranteed a
$3.2 million land development loan to a Browning affiliate
for certain site improvements to AirTech. The Company does not
anticipate that any amounts will need to be funded by the
Company as a result of these loan guarantees. For further
discussion of guarantees, see Note 12 to the Companys
financial statements. The Company expects to meet its short-term
(one year or less) liquidity requirements generally through
working capital, net cash provided by operating activities,
availability under the Credit Facility and through proceeds from
future asset sales. In 2003 and 2002, the Company consummated
the sale of 48 properties for an aggregate selling price of
$298.2 million. The Company believes all of the sources
discussed above will be available in 2004 in order to fund
short-term liquidity needs.

During 2003 and 2002, the Company paid
distributions to common shareholders and unitholders totaling
$1.31 and $1.29 per Common Share or OP Unit, respectively, which
aggregated $35.7 million and $32.8 million,
respectively.

The Companys long-term liquidity needs
generally include the funding of existing and future development
activity, asset acquisitions and the retirement and payment of
principal of secured and unsecured debt. The Company expects to
meet its long-term liquidity needs through a combination of the
following: (i) the issuance of equity and debt securities
by the Company and its Operating Partnership, (ii) the
selective disposition of certain properties, and (iii) the
sale or contribution of certain of its wholly-owned properties
to strategic joint ventures to be formed, which could allow the
Company to generate additional capital. Finally, the Company
expects that certain of the sources described above regarding
short-term liquidity will be an additional source of capital for
long-term liquidity. In July 1998, the Company filed with the
Securities and Exchange Commission a Form S-3 Shelf
Registration Statement under which the Company from time to time
may issue Common Shares, or preferred stock and depository
shares representing preferred stock, with an aggregate value of
up to $500 million. As of December 31, 2003, the
Company has issued approximately $330.9 million of
securities under this Registration Statement. In February 2003,
the Company issued 2,760,000 shares of 9.125% Series D
Cumulative Redeemable Preferred Stock at $25 per share in a
public offering and used the proceeds to fund acquisition
activity. In November 2003, the Company issued

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4,000,000 Common Shares at $19.60 per share
in a public offering and used the proceeds to fund acquisitions
and repay its Credit Facility.


The Company believes that its available cash and
cash equivalents and cash flows from operating activities,
together with cash available from borrowings and ability to
access other sources of capital, will be adequate to meet its
capital and liquidity needs in both the short and the long-term.

The following is a summary of the Companys
obligations and commitments as of December 31, 2003
(dollars in thousands):

|                                                          |                             |       |         |           |  |           |         |           |  |           |        |     |  |   |         |     |  |   |        |       | 
|--------------------------------------------------------- | --------------------------- | ----- | ------- | --------- |  | --------- | ------- | --------- |  | --------- | ------ | --- |  | - | ------- | --- |  | - | ------ | ----- | 
|                                                          |                             |       |         | Less Than |  |           |         |           |  | More Than
|Contractual Obligations                                   |                             | Total |         | 1 Year    |  | 1-3 Years |         | 3-5 years |  | 5 Years  
|                                                          |                             |       |         |           |  |           |         |           |  |          
|Fixed and Variable Rate Debt, excluding debt
    premiums |                             | $     | 521,196 |           |  | $         | 192,937 |           |  | $         | 57,208 |     |  | $ | 204,709 |     |  | $ | 66,342 |      
|Other Long Term Obligations Guarantees                    |                             |       | 13,400  |           |  |           |        |           |  |           | 10,200 | (1) |  |   | 3,200   | (2) |  |   |       |      
|                                                          | Operating and Ground Leases |       |         | 5,248     |  |           |         | 652       |  |           |        | 693 |  |   |         | 345 |  |   |        | 3,559 | 
|                                                          |                             |       |         |           |  |           |         |           |  |           |        |     |  |   |         |     |  |   |        |      
|Total                                                     |                             | $     | 530,387 |           |  | $         | 193,599 |           |  | $         | 58,932 |     |  | $ | 208,269 |     |  | $ | 69,587 |      
|                                                          |                             |       |         |           |  |           |         |           |  |           |        |     |  |   |         |     |  |   |        |      



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The Company along with its joint venture partner,
    Browning, have each guaranteed 50% of a $16.4 million
    construction loan related to a 813,054 square feet warehouse
    building being constructed by 5 Points Associates, LLC, a
    joint venture between Browning and the Company. This guarantee
    is required by the lender during the construction and lease-up
    period and is reduced to 25% on an aggregate basis once certain
    leasing levels are obtained. The Company will share pro rata in
    the net income of the joint venture upon placing the property in
    service. The Company also has guaranteed $2 million of
    mortgage debt of Nocha, LLC, the entity which acquired the New
    York Office Portfolio in 2002, in which the Company has retained
    an investment. This guarantee expires in phases in 2005 and 2006
    and was required by the lender in conjunction with the original
    financing of the property.
|
| | (2) | As the result of an agreement with Browning, the
    Company has agreed to guarantee $3.2 million of a land
    development loan obtained by Browning related to the AirTech
    Park land. The Company has an option agreement related to this
    land and has the right to develop this land in a joint venture
    with Browning. The Company has the opportunity to receive its
    pro rata share of income from any additional properties that are
    constructed on the AirTech Park land as a result of additional
    development joint ventures to be formed.                                                                                                                                                                                                                                                                                                                                                                                               

Off-Balance Sheet Arrangements

We have a number of off-balance sheet
investments, including joint ventures and structured finance
investments. These investments all have varying ownership
structures. Substantially all of our joint venture arrangements
are accounted for under the equity method of accounting as we
have the ability to exercise significant influence, but not
control over the operating and financial decisions of these
joint venture arrangements.

The Companys off-balance sheet arrangements
are discussed in Note 4 to the Companys financial
statements. Additional information about the debt of our
unconsolidated joint ventures and related guarantees are
included in the Contractual Obligations table above.

Funds from Operations
(FFO)

The Company uses Funds from Operations
(FFO) as a non-GAAP performance measure in addition
to net income determined in accordance with GAAP. FFO is a
widely used measurement by investors for evaluating the
operating performance of an equity REIT. Management believes the
use of FFO as a performance measure allows investors and
management to compare the Companys results to the results
of other REITs. However, the Companys FFO is computed in
accordance with the standards established by

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NAREIT and as a result may not necessarily be
comparable to similarly titled measures of operating performance
for other REITs which do not compute FFO in accordance with the
NAREIT definition which is described below.


Management believes that FFO is a useful
disclosure as a non-GAAP performance measure as historical cost
accounting for real estate assets, as required in accordance
with GAAP, implicitly assumes that the value of real estate
assets diminishes predictably over time as reflected through
depreciation and amortization expenses. The Company believes
that the value of real estate assets does not diminish
predictably over time, as is assumed in GAAP accounting, and
instead fluctuates due to market and other conditions.
Accordingly, the Company believes FFO provides investors with
useful supplemental information about the Companys
operating performance because it excludes real estate
depreciation and amortization expense and also gains and losses
from the sale of depreciated real estate assets. However, FFO
does not represent cash generated from operating activities in
accordance with GAAP and it also does not consider the costs
associated with capital expenditures related to the
Companys real estate assets. Also, it is not necessarily
indicative of cash available to fund cash needs and should not
be considered as an alternative to net income (as determined in
accordance with GAAP) as an indicator of the Companys
operating performance or as an alternative to cash flow from
operating activities (determined in accordance with GAAP) as a
measure of liquidity.

NAREIT defines FFO as net income/(loss) computed
in accordance with GAAP, excluding gains (or losses) from sales
of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures
are calculated to reflect FFO on the same basis. Since 2000,
NAREIT has clarified the definition of FFO to include
non-recurring events (except for those that are defined as
extraordinary items or cumulative effects of
accounting changes under GAAP) and the results of discontinued
operations. The Company presents FFO in accordance with the
NAREIT definition and has presented FFO on a consistent basis
for all periods presented.

FFO and cash flow information for each of the
three years in the period ended December 31, 2003, are
summarized in the following tables (in 000s):

|                                                         |                                                               |      |          |            |   |         |         |        |   |   |         |        |  
|-------------------------------------------------------- | ------------------------------------------------------------- | ---- | -------- | ---------- | - | ------- | ------- | ------ | - | - | ------- | ------ | -
|                                                         |                                                               | 2003 |          | 2002(1)(2) |   | 2001(2)
|                                                         |                                                               |      |          |            |   |        
|Funds from Operations:                                   |                                                               |      |          |            |   |         |         |        |   |   |         |       
|Net Income (Loss) Allocated to Common Shareholders       |                                                               | $    | 16,703   |            |   | $       | (11,409 | )      |   | $ | 13,874  |       
|                                                         | Income Allocated to Preferred Shareholders                    |      |          | 6,820      |   |         |         | 3,038  |   |   |         | 5,035  |  
|                                                         | Redeemable Preferred Stock Dividends                          |      |          | (5,457     | ) |         |         |       |   |   |         |       |  
|                                                         | Minority Interest of Unitholders in Operating
    Partnership |      |          | 4,040      |   |         |         | (3,198 | ) |   |         | 5,393  |  
|                                                         | Distributions to Preferred Unitholders                        |      |          | 5,072      |   |         |         | 5,585  |   |   |         | 7,057  |  
|                                                         | (Gains) Losses on Sales of Assets                             |      |          | (3,221     | ) |         |         | 251    |   |   |         | (9,142 | )
|                                                         | Depreciation and Amortization Related to Real
    Estate      |      |          | 22,512     |   |         |         | 20,367 |   |   |         | 24,520 |  
|                                                         | Depreciation and Amortization Related to Joint
    Ventures   |      |          | 1,832      |   |         |         | 781    |   |   |         | 901    |  
|                                                         |                                                               |      |          |            |   |         |         |        |   |   |         |       
|                                                         | Funds from Operations                                         |      | $        | 48,301     |   |         | $       | 15,415 |   |   | $       | 47,638 |  
|                                                         |                                                               |      |          |            |   |         |         |        |   |   |         |       
|Cash Flow Information:                                   |                                                               |      |          |            |   |         |         |        |   |   |         |       
|Cash flow provided by operating activities               |                                                               | $    | 41,119   |            |   | $       | 43,550  |        |   | $ | 46,758  |       
|Cash flow (used in) provided by investing
    activities |                                                               |      | (264,713 | )          |   |         | 2,039   |        |   |   | 15,785  |       
|Cash flow provided by (used in) financing
    activities |                                                               |      | 222,130  |            |   |         | (45,673 | )      |   |   | (64,236 | )     
|                                                         |                                                               |      |          |            |   |         |         |        |   |   |         |       
|Net decrease in cash and cash equivalents                |                                                               | $    | (1,464   | )          |   | $       | (84     | )      |   | $ | (1,693  | )     
|                                                         |                                                               |      |          |            |   |         |         |        |   |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | FFO has been restated for 2002 to eliminate the
    add-back of provisions for asset impairment of
    $31.6 million recorded in 2002 and the employee termination
    costs of $930,000 related to the New York Office Portfolio sale.
    NAREIT and the SEC issued guidance during 2003 that impairment
    charges should no longer be added back to net income in order to
    calculate FFO. In addition, as discussed in

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Note 2 to the Companys financial
    statements, the Company has amended its previous accounting
    treatment for $411,000 of offering costs related to
    $25 million of Convertible Preferred Stock which was
    redeemed in 2002, in accordance with recent SEC guidance which
    was effective in 2003. These costs were recorded as a
    distribution to the preferred shareholders, and were not added
    back to net income in order to calculate FFO for the year ended
    December 31, 2002.                                                                                           
|   
|(2) | FFO has been restated for 2002 and 2001 to
    eliminate the add back to net income in order to calculate FFO
    of $863,000 and $2.3 million, respectively of charges
    related to the early retirement of debt. These charges had
    previously been accounted for as extraordinary items. However,
    as discussed in Note 2 to the Companys financial
    statements, the Companys adoption of
    SFAS No. 145 in 2003 no longer permits these charges
    to be accounted for as extraordinary items and the charges have
    been reclassified to interest expense in the respective year.

Inflation

The Companys leases generally require
tenants to pay either their share of operating expenses,
including common area maintenance, real estate taxes and
insurance or pay 100% of these costs directly (for triple net
leases): as a result, the Companys exposure to increases
in costs and operating expenses is reduced. The Company does not
anticipate that inflation will have a significant impact on its
operating results in the near future.

Critical Accounting Policies

In the ordinary course of business, the Company
has made a number of estimates and assumptions relating to the
reporting of results of operations and financial condition in
the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States.
Actual results could differ significantly from those estimates
under different assumptions and conditions. The Company has
identified the policies below, which are critical to our
business operations and the understanding of our results of
operations. The Company believes that the following discussion
addresses the Companys most critical accounting policies,
which are those that are most important to the portrayal of the
Companys financial condition and operating results and
require managements most difficult and subjective
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain.



| |                  
| | -----------------
| | Long-Lived Assets

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company assesses its assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of a respective asset that the Company expects
to hold and use may not be recoverable. In performing the review
for recoverability, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual
disposition to determine if an impairment loss should be
recognized. While the Company believes that its estimates of
future cash flows are reasonable, different assumptions
regarding such cash flows could materially affect its
evaluations. Estimates of fair value are based on quoted market
prices in active markets or, if quoted market prices are not
available, the best information available in the circumstances,
such as the present value of estimated expected future cash
flows. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment
charges for these assets. In addition, the Company reports
properties that have been disposed of or which are held for
sale, for which the Company will not have continuing
involvement, as discontinued operations.

The Company accounts for properties as assets
held for sale when a commitment has been made to a formal plan
of disposition and the assets are available for sale in their
present condition subject only to terms that are usual and
customary for sales of such assets. Management also evaluates
the applicable criteria to determine when actions required to
complete the plan are reasonable and that a sale within one year
is probable. The Company reports its assets held for sale at the
lower of carrying value or fair value less the cost to sell the
related asset.

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As real estate assets are acquired, the costs of
these assets are allocated to the components of the property,
including any intangible assets related to the leases acquired,
based on the Companys judgment and historical experience
with similar assets. These assumptions and estimates affect the
amount of costs allocated to land, land improvements and the
components of the building and accordingly depreciation expense
and any gains or losses on the ultimate sale of these assets.

In accordance with SFAS No. 141,
Business Combinations (SFAS 141),
the Company allocates purchase price for properties to the net
tangible and the identified intangible assets acquired based on
fair values. Above-market and below-market in place lease values
for acquired properties are recorded based on the present value
(using an interest rate which reflect the risks associated with
the leases acquired) of the difference between the contractual
amounts to be paid under the in-place leases and the
Companys estimate of the fair market lease rates for the
in-place leases measured over a period equal to the remaining
non-cancelable term of the lease. The Company performs this
analysis on a lease-by-lease basis. The capitalized above-market
lease values are amortized as a reduction of rental income over
the remaining non-cancelable terms of the respective leases. The
capitalized below-market lease values are amortized as an
increase of rental income over the remaining non-cancelable
terms, including any fixed rate renewal periods, of the
respective leases.

The aggregate value of other intangibles acquired
is measured based on the difference between the property valued
with in-place leases adjusted to market rates and the property
valued as if vacant. Intangible assets associated with the
origination value of the in-place leases are amortized over the
life of the related lease to amortization expense. The Company
allocates purchase price to the intangible asset related to the
contract value of the in-place leases which is the value
associated with the carrying costs during the expected lease-up
periods considering market conditions and the estimates of lost
rental revenues at market rates during the expected lease-up
periods. This intangible is also amortized over the life of the
related leases to amortization expense. The value of tenant
relationship intangibles is amortized over the remaining initial
lease term and renewals, but in no event longer than the
remaining depreciable life of the building. Based on the
Companys evaluation, the Company has not allocated any
value to the customer relationship intangibles related to
property acquisitions since July 1, 2001, the effective
date of SFAS 141.



| |                    
| | -------------------
| | Revenue Recognition

The Companys revenue is derived from rental
income under leases that are classified as operating leases.
Revenue is recognized on the accrual basis of accounting in
accordance with SFAS No. 13, Accounting for
Leases. If the rental income under the lease is in excess
of one year in length, it is recognized using the straight-line
method under which contractual rent increases are recognized
evenly over the lease term. Reimbursements from tenants for
expenses are accrued as revenue in the same period the related
expenses are incurred by the Company. Deferred rent revenue
represents rent collected from tenants in advance, which is
generally for periods not longer than one year. Deferred revenue
is recognized as revenue when amounts are earned under the terms
of the Companys leases with its tenants.



| |                                                 
| | ------------------------------------------------
| | Investments in Unconsolidated Joint
    Ventures

The Company accounts for its investments in
unconsolidated joint ventures under the equity method of
accounting as the Company exercises significant influence but
does not control these entities. These investments are recorded
initially at cost, as equity method investments, and
subsequently adjusted for equity in income (losses) from
equity method investments and cash contributions and
distributions.

On a periodic basis, management assesses whether
there are any indicators that the value of the Companys
investments in unconsolidated joint ventures may be impaired. An
investment is impaired only if managements estimate of the
value of the investment is less than the carrying value of the
investment. To the extent impairment has occurred, the loss
shall be measured as the excess of the carrying amount of the
investment over the value of the investment.

35



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##### Table of Contents





| |                    
| | -------------------
| | Cost Capitalization

Expenditures directly or indirectly related to
the acquisition or improvement of real estate, including
interest and other costs capitalized on development projects and
land being readied for development, are included in the cost of
the related real estate and are stated at cost. The capitalized
costs include pre-construction costs related to the development
of the property, construction costs, interest costs, real estate
taxes, salaries and other costs incurred during the period of
development. These costs are capitalized until the related asset
is substantially complete and is placed in service. The
Companys capitalization policy is in accordance with SFAS
No. 34, Capitalization of Interest Cost, and
SFAS No. 67, Accounting for Costs and the
Initial Rental Operations of Real Estate Properties.



| |                                     
| | ------------------------------------
| | Income Taxes and REIT
    Compliance

The Company has elected to be taxed as a real
estate investment trust under Sections 856 through 860 of
the Internal Revenue Code. In order to qualify as a real estate
investment trust, the Company must derive at least 95% of gross
income in any year from qualifying sources and must pay
dividends to stockholders aggregating annually at least 90% of
the REITs taxable income (determined without regard to the
dividends paid deduction and by excluding capital gains) and
must satisfy specified asset tests on a quarterly basis. It is
the Companys intention to adhere to these requirements and
maintain its REIT status. As a REIT, the Company generally will
not be subject to corporate level federal income tax on net
income that is distributed currently to the stockholders. As
such, no provision for federal income taxes has been included in
the accompanying consolidated financial statements. As a REIT,
the Company still may be subject to certain state and local
taxes on income and property and to federal income and excise
taxes on any undistributed taxable income. In addition, the
Company will be required to pay federal and state income tax on
the net taxable income, if any, from the activities conducted
through our taxable REIT subsidiary.



| |                                                  
| | -------------------------------------------------
| | Derivative Instruments and Hedging
    Activities

SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS 133), as amended and interpreted,
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. As required by
SFAS 133, the Company records all derivatives on the
balance sheet at fair value. The accounting for changes in the
fair value of derivatives depends on the intended use of the
derivative and the resulting designation. The Company assesses
the effectiveness of each hedging relationship by comparing the
changes in fair value or cash flows of the derivative hedging
instrument with the changes in fair value or cash flows of the
designated hedged item or transaction. For derivatives not
designated as hedges, changes in fair value are recognized in
earnings.

The Companys objective in using derivatives
is to manage its exposure to interest rate movements or other
identified risks. To accomplish this objective, the Company
primarily uses interest rate swaps as part of its cash flow
hedging strategy. Interest rate swaps designated as cash flow
hedges involve the receipt of variable interest rate amounts in
exchange for fixed rate payments over the life of the agreements
without exchange of the underlying principal amount.
Additionally, the Company does not use derivatives for trading
or speculative purposes and does not currently have any
derivatives that are not designated as hedges.

The Company uses derivative financial instruments
in the normal course of managing its interest costs. As of
December 31, 2003, the Company had two forward starting
interest rate swap agreements with a notional value aggregating
$50 million, which are used to fix the LIBOR interest rates
beginning on July 10, 2004 on a portion of the
$75 million Term Loan which matures in September 2008. In
addition, subsequent to December 31, 2003, the Company
hedged an additional $25 million of notional value related
to the Term Loan effective January 10, 2005 and as a result
has fixed the LIBOR interest rate at 3.8% plus the applicable
spread on the Term Loan. These derivatives qualify for hedge
accounting as discussed in Note 2 to the Companys
financial statements.

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##### Table of Contents



Impact of Recent Accounting
Standards

See Note 2 to the Companys financial
statements.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

The Companys primary exposure to market
risk is to changes in interest rates. The Company is exposed to
market risk related to its Credit Facility and other variable
rate debt obligations as interest on these obligations is
subject to fluctuations in the market. The amount outstanding
under the Credit Facility and other consolidated variable rate
debt obligations of the Company, excluding debt obligations from
the Companys equity method investments in real estate
joint ventures, represented approximately 41.0% of the
Companys consolidated debt outstanding as of
December 31, 2003, after consideration of the interest rate
swaps discussed above. The Company also utilizes mortgage debt
with fixed rates as a source of capital. The weighted average
interest rate and maturity for fixed rate debt was 7.8% and
4.1 years, respectively, at December 31, 2003. As
these debt instruments mature, the Company typically refinances
such debt at then existing market interest rates, which may be
more or less than the interest rates on the maturing debt.

If the interest rate for the Credit Facility and
other variable rate debt was 100 basis points higher or
lower during the year ended December 31, 2003, the
Companys interest expense for the year ended
December 31, 2003 would have been increased or decreased by
approximately $2.0 million. Approximately
$189.4 million of the Companys debt, which has a
weighted average interest rate of 3.37%, matures over the next
twelve months. Approximately $146.2 million of these debt
maturities can be extended for an additional year at the
Companys option. The Company currently intends to
refinance or extend the maturities of these maturing obligations.

A change in market interest rates on the fixed
portion of the debt portfolio impacts the fair value, but it has
no impact on interest incurred or cash flows. Fair values of
non-real estate assets and payables approximate their carrying
amount due to their short-term nature. The estimated fair value
of our fixed rate mortgages payable at December 31, 2003
and 2002 was approximately $277.0 million and
$201.0 million, respectively. The sensitivity analysis
related to the fixed debt portfolio assumes an immediate
100 basis point move in interest rates from their actual
December 31, 2003 levels, with all other variables held
constant. A 100 basis point increase in market interest
rates would result in a decrease in the Companys net
financial instrument position of $9.1 million at
December 31, 2003. A 100 basis point decrease in
market interest rates would result in an increase in the
Companys net financial instrument position of
$9.5 million at December 31, 2003.

The following table outlines the Companys
debt maturities as of December 31, 2003 (in thousands):

|                                                        |               |                    |         |         |  |           |         |           |  |            |        |        |  |   |         |         |  |   |        |        | 
|------------------------------------------------------- | ------------- | ------------------ | ------- | ------- |  | --------- | ------- | --------- |  | ---------- | ------ | ------ |  | - | ------- | ------- |  | - | ------ | ------ | 
|                                                        |               |                   
|                                                        |               | Payments by Period
|                                                        |               |                   
|                                                        |               | Total              |         | 2004    |  | 2005-2006 |         | 2007-2008 |  | Thereafter
|                                                        |               |                    |         |         |  |           |         |           |  |           
|Mortgage Notes Payable:                                 |               |                    |         |         |  |           |         |           |  |            |        |        |  |   |         |         |  |   |        |       
|                                                        | Fixed Rate    |                    | $       | 252,556 |  |           | $       | 21,763    |  |            | $      | 34,742 |  |   | $       | 129,709 |  |   | $      | 66,342 | 
|                                                        | Variable rate |                    |         | 58,240  |  |           |         | 35,774    |  |            |        | 22,466 |  |   |         |        |  |   |        |       | 
|                                                        |               |                    |         |         |  |           |         |           |  |            |        |        |  |   |         |         |  |   |        |       
|                                                        |               |                    | 310,796 |         |  |           | 57,537  |           |  |            | 57,208 |        |  |   | 129,709 |         |  |   | 66,342 |       
|Revolving Credit Facility and Term
    Loan  Unsecured |               |                    | 210,400 |         |  |           | 135,400 |           |  |            |       |        |  |   | 75,000  |         |  |   |       |       
|                                                        | Debt Premiums |                    |         | 12,521  |  |           |         | 2,256     |  |            |        | 4,485  |  |   |         | 3,043   |  |   |        | 2,737  | 
|                                                        |               |                    |         |         |  |           |         |           |  |            |        |        |  |   |         |         |  |   |        |       
|                                                        |               | $                  | 533,717 |         |  | $         | 195,193 |           |  | $          | 61,693 |        |  | $ | 207,752 |         |  | $ | 69,079 |       

Due to the uncertainty of fluctuations in
interest rates, the specific actions that might be taken by
management to mitigate the impact of such fluctuations and their
possible effects, this sensitivity analysis assumes no changes
in the Companys financial structure.

37



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##### Table of Contents








|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

The response to this Item 8 is included as a
separate section of this Annual Report on Form 10-K. See
pages F-1 through F-36.






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

On May 23, 2002, upon the recommendation of
its Audit Committee, the Board of Trustees of the Company
dismissed Arthur Andersen LLP as the Companys independent
auditor. KPMG LLP was appointed to serve as the Companys
independent auditor for the fiscal year ended December 31,
2002.

Arthur Andersen LLPs reports on the
Companys consolidated financial statements for each of the
past two fiscal years did not contain an adverse opinion or
disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended December 31,
2001 and 2000, and the subsequent interim period through
May 31, 2002, (i) there were no disagreements with
Arthur Andersen LLP on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Arthur Andersen LLPs
satisfaction, would have caused them to make reference to the
subject matter in connection with their report on our
consolidated their report on our consolidated financial
statements for such years; and (ii) there were no
reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.

We have provided Arthur Andersen LLP with a
copy of the foregoing disclosures. During the fiscal years ended
December 31, 2001 and 2000, and the subsequent interim
period through May 31, 2002, the company did not consult
KPMG LLP with respect to the application of accounting
principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and
(ii) of Regulation S-K.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

The Company maintains disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in the Companys Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the
definition of disclosure controls and procedures in
Rule 13a-15(c). In designing and evaluating the disclosure
controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Also, the Company has
investments in certain unconsolidated entities. As the Company
does not control these entities, its disclosure controls and
procedures with respect to such entities are necessarily
substantially more limited than those it maintains with respect
to its consolidated subsidiaries.

Within 90 days prior to the date of this
report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and the Companys Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective as of the end of the period
covered by this report.

There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect the internal controls subsequent to the
date the Company completed its evaluation.

38



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##### Table of Contents






PART III.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Trustees and Executive Officers of the
    Registrant.

This item is incorporated by reference from the
proxy statement for the 2004 Annual Meeting of Shareholders.






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

This item is incorporated by reference from the
proxy statement for the 2004 Annual Meeting of Shareholders.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

This item is incorporated by reference from the
proxy statement for the 2004 Annual Meeting of Shareholders.






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

This item is incorporated by reference from the
proxy statement for the 2004 Annual Meeting of Shareholders.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services.

This item is incorporated by reference from the
proxy statement for the 2004 Annual Meeting of Shareholders.




PART IV.






|         |                                                                        
|-------- | -----------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statements, Schedules,
    and Reports on Form 8-K.

The following consolidated financial statements
of Keystone Property Trust are included in Item 8.

(a) 1.     Independent
Auditors Report.

Consolidated Balance Sheets as of
December 31, 2003 and 2002.

Consolidated Statements of Operations for the
years ended December 31, 2003, 2002 and 2001.

Consolidated Statements of Shareholders
Equity and Comprehensive Income for the years ended
December 31, 2003, 2002 and 2001.

Consolidated Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001.

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules.



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Schedule II  Valuation and
    Qualifying Accounts as of December 31, 2003 for Keystone
    Property Trust.                                          
|
| |  | Schedule III  Real Estate and
    Accumulated Depreciation for the three years in the period ended
    December 31, 2003 for Keystone Property Trust.

(b) Reports on Form 8-K or 10K/A:



| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A Current Report on Form 8-K dated
    October 28, 2003 (reporting under Item 7) regarding
    financial information, including pro formas, in connection with
    the Companys acquisition of six industrial buildings
    located near Harrisburg, PA.

39



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A Current Report on Form 8-K dated
    November 6, 2003 (reporting under Items 5 and 7)
    regarding the Consent of Ernst and Young, LLP as
    incorporated by reference to the Companys registration
    statement on Form S-3.                         
|
| |  | A Current Report on Form 8-K dated
    November 10, 2003 (reporting under Items 5 and 7)
    regarding the underwriting and purchase agreements for the sale
    of 4.6 million shares of the Companys common stock.                                       
|
| |  | A Current Report on Form 8-K dated
    November 13, 2003 (reporting under Items 2 and 7)
    regarding the Companys acquisition of International
    Corporate Park in Miami, Florida.                                                                     
|
| |  | A Current Report on Form 8-K dated
    February 11, 2004 (reporting under Items 2 and 7)
    regarding the Companys acquisition of an industrial
    property in Indianapolis, Indiana from the Companys joint
    venture with Browning Investments, Inc.
|
| |  | A Current Report on Form 8-K/A dated
    February 11, 2004 (reporting under Items 2 and 7)
    regarding amended financial information and pro formas related
    to the Companys Miami portfolio acquisition.                                             
|
| |  | A Current Report on Form 8-K dated
    February 23, 2004 (reporting under Items 5 and 7)
    filed the consent of the Companys independent auditors,
    Ernst & Young, LLP, related to the registration
    statements on Form S-3.                       
|
| |  | A Current Report on Form 8-K dated
    February 23, 2004 (reporting under Items 5 and 7)
    regarding the public offering of approximately 4.0 million
    shares by two affiliated groups and the Citigroup Global Markets
    Inc. purchase agreement.   
|
| |  | A current report on Form 10-K/ A dated
    February 19, 2004 (reporting under Item 15) regarding
    the naming of KPMG LLP as the Companys expert in
    accounting and auditing.                                                                         

(c) Exhibits

| |   |   |  |                                                                                                                                                                                                                                                                                                                                                                           
| | - | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3 | . |  | (a) Declaration of Trust (Incorporated by
    reference to Exhibit 3(a) filed with the Registrants
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 1999).                                                                                                                                                                                      
| |   |   |  | (b) Certificate of Correction to Declaration
    of Trust (Incorporated by reference to Exhibit 3(k) filed
    with the Registrants Annual Report on Form 10-K for
    the fiscal year ended December 31, 2000).                                                                                                                                                         
| |   |   |  | (c) Articles of Amendment of Declaration of
    Trust (Incorporated by reference to Exhibit 10.1 filed with
    the Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended June 30, 2002).                                                                                                                                                           
| |   |   |  | (d) Articles Supplementary Classifying and
    Designating a Series of Preferred Shares as Series C
    Convertible Preferred Stock and Fixing Distribution and Other
    Preferences and Right of Such Series (Incorporated by reference
    to Exhibit 3(f) filed with the Registrants Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2000).
| |   |   |  | (e) Articles Supplementary Establishing and
    Fixing the Rights and Preferences of a Series of Shares of
    Preferred Stock as 9.125% Series D Cumulative Redeemable
    Preferred Stock (Incorporated by reference to Exhibit 4.1
    filed with the Registrants Current Report on Form 8-K
    filed with the Commission on February 18, 2003).                     
| |   |   |  | (f) Partnership Unit Designation of
    Series D Convertible Preferred Units (Incorporated by
    reference to Exhibit 3(k) filed with the Registrants
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 1999).                                                                                                                                  
| |   |   |  | (g) Partnership Unit Designation of
    Series F Convertible Preferred Units (Incorporated by
    reference to Exhibit 10.13 filed with the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    September 30, 1999).                                                                                                                          
| |   |   |  | (h) Partnership Unit Designation of 9.125%
    Series G Cumulative Redeemable Preferred Units
    (Incorporated by reference to Exhibit 4.3 filed with the
    Registrants Current Report on Form 8-K filed with the
    Commission on February 18, 2003).                                                                                                               
| |   |   |  | (i) By-laws (Incorporated by reference to
    Exhibit 3(b) filed with the Registrants Annual Report
    on Form 10-K for the fiscal year ended December 31,
    1999).                                                                                                                                                                                                   

40



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##### Table of Contents



| |    |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |   |  | (j) Amendment to By-Laws, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 4  | . |  | (a) Specimen Certificate for Common Shares
    (Incorporated by reference to Exhibit 4(a) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1999).                                                                                                                                                                                                                                                                                                                                             
| |    |   |  | (b) Specimen Certificate for the
    Series C Convertible Preferred Stock (Incorporated by
    reference to Exhibit 4(b) filed with the Registrants
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 1999).                                                                                                                                                                                                                                                                                                              
| |    |   |  | (c) Specimen Certificate for 9.125%
    Series D Cumulative Redeemable Preferred Stock
    (Incorporated by reference to Exhibit 4.2 filed with the
    Registrants Current Report on Form 8-K filed with the
    Commission on February 18, 2003).                                                                                                                                                                                                                                                                                               
| | 10 | . |  | (a) Amended and Restated Agreement of
    Limited Partnership of Keystone Operating Partnership, L.P.
    (Incorporated by reference to Exhibit 10(a) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1999).                                                                                                                                                                                                                                                                                 
| |    |   |  | (b) Keystone Property Trust Amended and
    Restated 1993 Omnibus Incentive Plan (Incorporated by reference
    to Exhibit A of the Registrants Proxy Statement filed
    with the Commission on November 24, 1999).                                                                                                                                                                                                                                                                                                                              
| |    |   |  | (c) Amendment to Keystone Property Trust
    Amended and Restated 1993 Omnibus Incentive Plan (Incorporated
    by reference to Exhibit 10.1 filed with the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                       
| |    |   |  | (d) Second Amendment to Keystone Property
    Trust Amended and Restated 1993 Omnibus Incentive Plan, filed
    herewith.                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |   |  | (e) Keystone Property Trust Amended and
    Restated 1994 Non-Employee Stock Incentive Plan (Incorporated by
    reference to Appendix B of the Registrants Proxy
    Statement filed with the Commission on April 30, 2003).                                                                                                                                                                                                                                                                                                                     
| |    |   |  | (f) McBride Contribution Agreement dated as
    of August 20, 1997 between American Real Estate Investment
    Corporation, American Real Estate Investment, L.P, and The Other
    Parties Listed on the Signature Pages of the Agreement
    (Incorporated by reference to Exhibit 10.4 filed with the
    Registrants Current Report on Form 8-K/ A filed with
    the Commission on August 20, 1997).                                                                                                                                         
| |    |   |  | (g) Contribution Agreement dated as of
    February 4, 1998 between American Real Estate Investment,
    L.P. and Northeastern Industrial Park, Inc. and Guilderland
    Ventures, Inc. (Incorporated by reference to Exhibit 10.1
    filed with the Registrants Current Report on
    Form 8-K/ A filed with the Commission on July 14,
    1998).                                                                                                                                                                                              
| |    |   |  | (h) Contribution Agreement dated as of
    February 4, 1998 between American Real Estate Investment,
    L.P., and Columbia Executive I Associates, Columbia
    Executive II Associates, Columbia Executive III
    Associates, Columbia Executive V Associates, Columbia
    Executive VI Associates, Columbia Executive VII
    Associates, and Columbia Executive VIII Associates
    (Incorporated by reference to Exhibit 10.2 filed with the
    Registrants Current Report on Form 8-K/ A filed with
    the Commission on July 14, 1998).
| |    |   |  | (i) Contribution Agreement dated as of
    December 4, 1998, as amended,by and between American Real
    Estate Investment, L.P. and MPSN, L.L.C., Corporate Drive
    Associates, LLC, Post 70 Building 7 Partners, and COB
    Associates, LLC (Incorporated by reference to Exhibit 10.1
    filed with the Registrants Current Report on Form 8-K
    filed with the Commission on December 18, 1998).                                                                                                                                        
| |    |   |  | (j) Agreement of Transfer and Contribution
    of Partnership Interest in 21 Roadway, L.P. dated as of
    November 10, 1999 by and among PSPI, Inc. and
    Jeffrey E. Kelter, John B. Begier, Charles C.
    Lee, J. Harold Shannon, Stephen J. Butte and Keystone
    Operating Partnership, L.P. (Incorporated by reference to
    Exhibit 10.1 filed with the Registrants Current
    Report on Form 8-K filed with the Commission on
    December 20, 1999).                                                                                
| |    |   |  | (k) Employment Agreement dated as of
    July 1, 2003 between Keystone Property Trust and
    Jeffrey E. Kelter (Incorporated by reference to
    Exhibit 99.1 filed with the Registrants Annual Report
    on Form 10-Q for the quarter ended September 30, 2003).                                                                                                                                                                                                                                                                               
| |    |   |  | (l) Employment Agreement dated as of
    October 1, 2003 between Keystone Property Trust and Robert
    F. Savage, Jr. (Incorporated by reference to
    Exhibit 99.1 filed with the Registrants Quarterly
    Report on Form 10-Q for the fiscal year ended
    September 30, 2003).                                                                                                                                                                                                                                                             

41



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##### Table of Contents



| |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  | (m) Employment Agreement dated July 1,
    2000 between Keystone Property Trust and John B. Begier
    (Incorporated by reference to Exhibit 10.1 filed with the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended March 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  |  | (n) Limited Liability Company Agreement of
    Keystone New Jersey Associates, LLC dated as of January 31,
    2001, by and between Keystone Operating Partnership, L.P. and
    CalEast Industrial Investors, LLC (Incorporated by
    reference to Exhibit 10.1 filed with the Registrants
    Current Report on Form 8-K filed with the Commission on
    April 5, 2001).                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  |  | (o) Credit Agreement dated as of
    December 21, 2001, as amended, by and among Keystone
    Operating Partnership, L.P., Keystone Property Trust, Chevy
    Chase Bank, Key Bank, LaSalle Bank, Mellon Bank, U.S. Bank,
    First Union National Bank as syndication agent, The Bank of New
    York as documentation agent, and Wells Fargo Bank, National
    Association, as agent. (Incorporated by reference to
    Exhibit 10.1 filed with the Registrants Current
    Report on Form 8-K filed with the Commission on
    January 4, 2002).                                                                                                                                                                                                                          
| |  |  |  | (p) Operating Agreement for Nocha, LLC dated
    as of December 13, 2002 among Landmark Tri-State, Inc.,
    Tri-State Landmark, LLC, Keystone Nocha Investor LLC
    and Keystone Operating Partnership, L.P. (Incorporated by
    reference to Exhibit 10.2 filed with the Registrants
    Current Report on Form 8-K filed with the Commission on
    December 27, 2002).                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  |  | (q) Purchase and Sale Agreement between
    Capital Lane Property Holding, L.P. and Capital Lane Property
    Holding II, L.P. and Keystone Operating Partnership, L.P.
    (Incorporated by reference to Exhibit 10.2 filed with the
    Registrants Current Report on Form 8-K filed with the
    Commission on February 10, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |  | (r) Limited Liability Partnership Agreement
    of KPJV, LLP, dated as of February 14, 2003, between BIT
    Investment Twenty Limited Partnership and Keystone KPJV, LP
    (Incorporated by reference to Exhibit 10.1 filed with the
    Registrants Current Report on Form 8-K filed with the
    Commission on February 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  |  | (s) Agreement of Sale, dated as of
    March 1, 2002, between Interstate 78 Office Park,
    Ltd., Fin Associates Limited Partnership, New York Distribution
    Center, L.P., Raritan Building Associates Limited Partnership,
    191 Talmadge Road Realty Holdings, L.P., Wedgewood Plaza,
    L.P., Carlstadt Building Realty Holdings, L.P. Carlstadt
    Associates, Ltd., and Keystone New Jersey Associates, LLC,
    subsequently assigned to certain wholly-owned affiliates of
    Keystone Operating Partnership, L.P. (Incorporated by
    reference to Exhibit 10.1 filed with the Registrants
    Current Report on Form 8-K filed on March 27, 2003.)                                                                                                         
| |  |  |  | (t) Reinstatement and First Amendment to
    Agreement of Sale, dated as of August 28, 2002, between
    Interstate 78 Office Park, Ltd., Fin Associates Limited
    Partnership, New York Distribution Center, L.P., Raritan
    Building Associates Limited Partnership, 191 Talmadge Road
    Realty Holdings, L.P., Wedgewood Plaza, L.P., Carlstadt Building
    Realty Holdings, L.P., Carlstadt Associates, Ltd., and Keystone
    New Jersey Associates, LLC, subsequently assigned to
    certain wholly-owned affiliates of Keystone Operating
    Partnership, L.P. (Incorporated by reference to
    Exhibit 10.2 filed with the Registrants Current
    Report on Form 8-K filed on March 27, 2003.)                                                             
| |  |  |  | (u) Reinstatement and Second Amendment to
    Agreement of Sale, dated as of March 11, 2003, between
    Interstate 78 Office Park, Ltd., New York Distribution
    Center, L.P., Raritan Building Associates Limited Partnership,
    191 Talmadge Road Realty Holdings, L.P., Carlstadt Building
    Realty Holdings, L.P., Carlstadt Associates, Ltd., Apollo
    Associates, Ltd., Eastmans Road Associates, Ltd., Webro
    Associates, Ltd., Oakland Building Associates, Ltd., and
    Keystone New Jersey Associates, LLC, subsequently assigned to
    certain wholly-owned affiliates of Keystone Operating
    Partnership, L.P. (Incorporated by reference to
    Exhibit 10.3 filed with the Registrants Current
    Report on Form 8-K filed on March 27, 2003.)
| |  |  |  | (v) Agreement of Sale dated as of
    August 28, 2003, between Kuller Road Realty
    Holdings, LLC and Keystone Operating Partnership, L.P.
    (Incorporated by reference to Exhibit 10.4 filed with the
    Registrants Current Report on Form 8-K filed on
    March 27, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  |  | (w) Reinstatement and First Amendment to
    Agreement of Sale, dated as of March 11, 2003, between
    Kuller Road Realty Holdings, LLC and Keystone Operating
    Partnership, L.P. (Incorporated by reference to
    Exhibit 10.5 filed with the Registrants Current
    Report on Form 8-K filed on March 27, 2003.)                                                                                                                                                                                                                                                                                                                                                                                                                                                      

42



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##### Table of Contents



| |    |    |  |                                                                                                                                                                                                                                                                                     
| | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |    |  | (x) Term Loan Agreement dated as of
    September 11, 2003, by and among Keystone Operating
    Partnership, L.P., Keystone Property Trust, and Wells Fargo
    Bank, National Association, filed herewith.                                                                         
| |    |    |  | (y) Purchase and Sale Agreement, dated
    October 9, 2003, between International Corporate Park and
    Keystone Operating Partnership, L.P. (Incorporated by reference
    to Exhibit 10.1 filed with the Registrants Current
    Report on Form 8-K filed on November 13, 2003).
| | 11 | .1 |  | Statement Regarding Computation of Per Share
    Earnings See Note 11 to the Financial Statements.                                                                                                                                                                                  
| | 16 | .1 |  | Arthur Andersen letter (Incorporated by reference
    to Exhibit 16.1 filed with the Registrants Current
    Report on Form 8-K filed with the Commission on
    May 30, 2002).                                                                                                    
| | 21 | .1 |  | Subsidiaries of the Registrant, filed herewith.                                                                                                                                                                                                                                     
| | 23 | .1 |  | Consent of KPMG LLP, filed herewith.                                                                                                                                                                                                                                                
| | 31 | .1 |  | Chief Executive Officer Certification Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002, filed
    herewith.                                                                                                         
| | 31 | .2 |  | Chief Financial Officer Certification Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002, filed
    herewith.                                                                                                         
| | 32 | .1 |  | Chief Executive Officer Certification Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, filed
    herewith.                                                                                                         
| | 32 | .2 |  | Chief Financial Officer Certification Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, filed
    herewith.                                                                                                         
| | 32 | .3 |  | Chief Accounting Officer Certification Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, filed
    herewith.                                                                                                        

43



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Trustees and Shareholders of

Keystone Property Trust:


We have audited the consolidated financial
statements of Keystone Property Trust (a Maryland real estate
investment trust) and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated
financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Keystone Property Trust and
subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related
financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.

As discussed in Note 2, the Company adopted
Statement of Financial Accounting Standards
(SFAS) No. 145, Rescission of FASB Statements Nos.
4, 44 and 64, Amendment of FASB Statements No. 13 and
Technical Correctionsand SFAS No. 123, Accounting
for Stock-Based Compensation, as of January 1, 2003 and
SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, as of January 1, 2002. Also as
discussed in Note 2, the Company implemented the clarifying
guidance of EITF Abstract, Topic D-42, The Effect on the
Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock, as of September 30, 2003
and restated its 2002 financial statements.



| |              
| | -------------
| | /s/ KPMG, LLP

Philadelphia, Pennsylvania

February 19, 2004


F-1



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##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |         |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------ | ------- | ------- | --------- | - | ------- | ------- | ------- | -
|                                                                                                                                                                                                                      |                                                              |                                     
|                                                                                                                                                                                                                      |                                                              | December 31,                        
|                                                                                                                                                                                                                      |                                                              |                                     
|                                                                                                                                                                                                                      |                                                              | 2003                                 |         | 2002   
|                                                                                                                                                                                                                      |                                                              |                                      |         |        
|                                                                                                                                                                                                                      |                                                              |                                     
|                                                                                                                                                                                                                      |                                                              | (Dollars in thousands)              
|ASSETS                                                                                                                                                                                                               
|INVESTMENTS IN REAL ESTATE:                                                                                                                                                                                           |                                                              |                                      |         |         |           |   |         |        
|                                                                                                                                                                                                                      | Land and land improvements                                   |                                      | $       | 135,801 |           |   | $       | 77,776  |        
|                                                                                                                                                                                                                      | Buildings and improvements                                   |                                      |         | 757,064 |           |   |         | 411,396 |        
|                                                                                                                                                                                                                      | Assets held for sale                                         |                                      |         |        |           |   |         | 85,622  |        
|                                                                                                                                                                                                                      | Development and construction-in-progress                     |                                      |         | 58,658  |           |   |         | 54,123  |        
|                                                                                                                                                                                                                      | Investment in direct financing lease                         |                                      |         | 35      |           |   |         | 486     |        
|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |        
|                                                                                                                                                                                                                      |                                                              |                                      | 951,558 |         |           |   | 629,403 |        
|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |        
|                                                                                                                                                                                                                      | Less Accumulated depreciation                                |                                      |         | (52,569 | )         |   |         | (34,513 | )      
|                                                                                                                                                                                                                      | Accumulated depreciation assets held for sale                |                                      |         |        |           |   |         | (4,919  | )      
|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |        
|                                                                                                                                                                                                                      |                                                              | Total accumulated depreciation       |         |         | (52,569   | ) |         |         | (39,432 | )
|                                                                                                                                                                                                                      | Equity method investments and other real estate
    ventures |                                      |         | 72,162  |           |   |         | 47,724  |        
|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |        
|                                                                                                                                                                                                                      |                                                              | Total investment in real estate, net |         |         | 971,151   |   |         |         | 637,695 |  
|CASH AND CASH EQUIVALENTS                                                                                                                                                                                             |                                                              |                                      | 427     |         |           |   | 1,891   |        
|RESTRICTED CASH AND CASH ESCROWS                                                                                                                                                                                      |                                                              |                                      | 975     |         |           |   | 886     |        
|NOTES AND ACCOUNTS RECEIVABLE,including straight-line rent
    receivable of $7,601 and $4,674 in 2003 and 2002, respectively,
    net of allowance for bad debts of $621 and $471 in 2003 and
    2002, respectively |                                                              |                                      | 15,936  |         |           |   | 8,104   |        
|DEFERRED FINANCING COSTS,net of accumulated amortization of
    $1,774 and $1,135 in 2003 and 2002, respectively                                                                                                      |                                                              |                                      | 2,703   |         |           |   | 1,667   |        
|DEFERRED LEASING COSTS,net of accumulated amortization of
    $7,214 and $2,518 in 2003 and 2002, respectively                                                                                                        |                                                              |                                      | 18,838  |         |           |   | 4,813   |        
|EQUITY METHOD INVESTMENT IN MANAGEMENT
    COMPANY                                                                                                                                                                    |                                                              |                                      | 5,808   |         |           |   | 5,900   |        
|OTHER ASSETS                                                                                                                                                                                                          |                                                              |                                      | 7,477   |         |           |   | 5,139   |        
|OTHER ASSETS HELD FOR
    SALE, including $3,155 of
    straight-line rent receivable                                                                                                                                 |                                                              |                                      |        |         |           |   | 5,559   |        
|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |        
|                                                                                                                                                                                                                      |                                                              | Total Assets                         |         | $       | 1,023,315 |   |         | $       | 671,654 |  
|                                                                                                                                                                                                                      |                                                              |                                      |         |         |           |   |         |        

F-2



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##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED BALANCE SHEETS 
(Continued)

|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |          |           |  |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | -------- | --------- |  | ------- | ------- | ------- | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                           
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              | December 31,                              
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                           
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              | 2003                                       |         | 2002    
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |         
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                           
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              | (Dollars in thousands)                    
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                                                                                                                          
|LIABILITIES:                                                                                                                                                                                                                                                       |                                                                                                                                                              |                                            |         |          |           |  |         |        
|                                                                                                                                                                                                                                                                   | Mortgage notes payable and unsecured debt,
    including unamortized premiums on assumed indebtedness of
    $12,521 and $154 in 2003 and 2002, respectively |                                            |         | 533,717  |           |  |         | 286,100 |        
|                                                                                                                                                                                                                                                                   | Liabilities related to assets held for sale,
    including mortgage notes payable of $39,696 in 2002                                                         |                                            |         |         |           |  |         | 40,813  |        
|                                                                                                                                                                                                                                                                   | Accounts payable                                                                                                                                             |                                            |         | 2,897    |           |  |         | 5,219   |        
|                                                                                                                                                                                                                                                                   | Dividends and distributions payable                                                                                                                          |                                            |         | 2,098    |           |  |         | 1,079   |        
|                                                                                                                                                                                                                                                                   | Accrued interest payable                                                                                                                                     |                                            |         | 1,163    |           |  |         | 995     |        
|                                                                                                                                                                                                                                                                   | Acquired lease obligations net of accumulated
    amortization of $2,930 in 2003 and none in 2002                                                            |                                            |         | 11,632   |           |  |         | 639     |        
|                                                                                                                                                                                                                                                                   | Accrued expenses and other liabilities                                                                                                                       |                                            |         | 11,413   |           |  |         | 8,768   |        
|                                                                                                                                                                                                                                                                   | Deferred rent revenue                                                                                                                                        |                                            |         | 2,639    |           |  |         | 2,408   |        
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |          |           |  |         |        
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              | Total liabilities                          |         |          | 565,559   |  |         |         | 346,021 | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |          |           |  |         |        
|MINORITY INTEREST,5,096,401 and 5,621,308 units
    outstanding in 2003 and 2002, respectively                                                                                                                                                                     |                                                                                                                                                              |                                            | 35,715  |          |           |  | 31,658  |        
|CONVERTIBLE PREFERRED UNITS                                                                                                                                                                                                                                        |                                                                                                                                                              |                                            | 52,892  |          |           |  | 52,892  |        
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                      |                                                                                                                                                              |                                            |        |          |           |  |        |        
|SHAREHOLDERS EQUITY:                                                                                                                                                                                                                                              |                                                                                                                                                              |                                            |         |          |           |  |         |        
|Convertible Preferred Stock, Series C; $.001
    par value; 800,000 shares authorized, 500,000 issued and
    outstanding in 2003 and 600,000 issued and outstanding in 2002;
    liquidation preference of $12,500 and $15,000 in 2003 and 2002,
    respectively |                                                                                                                                                              |                                            | 1       |          |           |  | 1       |        
|Redeemable Preferred Stock, Series D; $.001
    par value; 2,760,000 shares authorized and outstanding in 2003
    and none issued and outstanding in 2002, liquidation preference
    of $69,000 in 2003                                                          |                                                                                                                                                              |                                            | 3       |          |           |  |        |        
|Common Shares, $.001 par value; 59,200,000
    authorized; 26,354,369 and 21,355,609 shares issued and
    outstanding in 2003 and 2002, respectively                                                                                                              |                                                                                                                                                              |                                            | 26      |          |           |  | 21      |        
|Additional paid-in capital                                                                                                                                                                                                                                         |                                                                                                                                                              |                                            | 440,062 |          |           |  | 298,368 |        
|                                                                                                                                                                                                                                                                   | Loans to executives and employees to purchase
    Common Shares                                                                                              |                                            |         | (3,602   | )         |  |         | (4,521  | )      
|                                                                                                                                                                                                                                                                   | Deferred compensation                                                                                                                                        |                                            |         | (4,843   | )         |  |         | (2,173  | )      
|                                                                                                                                                                                                                                                                   | Cumulative net income                                                                                                                                        |                                            |         | 40,359   |           |  |         | 23,656  |        
|                                                                                                                                                                                                                                                                   | Cumulative distributions                                                                                                                                     |                                            |         | (102,746 | )         |  |         | (74,269 | )      
|                                                                                                                                                                                                                                                                   | Accumulated other comprehensive income                                                                                                                       |                                            |         | (111     | )         |  |         |        |        
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |          |           |  |         |        
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              | Total shareholders equity                 |         |          | 369,149   |  |         |         | 241,083 | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |          |           |  |         |        
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              | Total liabilities and shareholders equity |         | $        | 1,023,315 |  |         | $       | 671,654 | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                              |                                            |         |          |           |  |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



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##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |        |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------- | 
|                                                                                                                                                            |                                                |                         
|                                                                                                                                                            |                                                | Years Ended December 31,
|                                                                                                                                                            |                                                |                         
|                                                                                                                                                            |                                                | 2003                     |        | 2002   |        | 2001
|                                                                                                                                                            |                                                |                          |        |        |        |     
|                                                                                                                                                            |                                                |                         
|                                                                                                                                                            |                                                | (Dollars in thousands,  
|                                                                                                                                                            |                                                | except per share data)  
|REVENUE:                                                                                                                                                    |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Rents                                          |                          | $      | 76,427 |        |      | $       | 83,067 |        |   | $      | 92,370 |        
|                                                                                                                                                            | Reimbursement revenue and other income         |                          |        | 15,125 |        |      |         | 13,434 |        |   |        | 14,200 |        
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            |                                                | Total revenue            |        |        | 91,552 |      |         |        | 96,501 |   |        |        | 106,570 | 
|OPERATING EXPENSES:                                                                                                                                         |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Property operating expenses                    |                          |        | 5,083  |        |      |         | 7,739  |        |   |        | 8,653  |        
|                                                                                                                                                            | Real estate taxes                              |                          |        | 9,536  |        |      |         | 9,989  |        |   |        | 9,567  |        
|                                                                                                                                                            | General and administrative                     |                          |        | 11,449 |        |      |         | 10,024 |        |   |        | 8,660  |        
|                                                                                                                                                            | Depreciation and amortization                  |                          |        | 22,512 |        |      |         | 19,978 |        |   |        | 23,938 |        
|                                                                                                                                                            | Provision for asset impairment                 |                          |        |       |        |      |         | 30,200 |        |   |        |       |        
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            |                                                | Total operating expenses |        |        | 48,580 |      |         |        | 77,930 |   |        |        | 50,818  | 
|Income before interest expense, equity in income
    from equity method investment, gains (losses) on sales of
    assets and discontinued operations       |                                                |                          | 42,972 |        |        |      | 18,571  |        |        |   | 55,752 |       
|Interest expense                                                                                                                                            |                                                |                          | 19,304 |        |        |      | 25,115  |        |        |   | 35,647 |       
|Equity in income from equity method investments
    and other real estate ventures                                                                          |                                                |                          | 5,746  |        |        |      | 899     |        |        |   | 1,123  |       
|Gains (losses) on sales of assets                                                                                                                           |                                                |                          | 3,221  |        |        |      | (1,122  | )      |        |   | 9,142  |       
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|Income (loss) before distributions to
    preferred unitholders, minority interest of unitholders in
    Operating Partnership, and discontinued operations |                                                |                          | 32,635 |        |        |      | (6,767  | )      |        |   | 30,370 |       
|Distributions to preferred unitholders                                                                                                                      |                                                |                          | (5,072 | )      |        |      | (5,585  | )      |        |   | (7,057 | )     
|Minority interest of unitholders in Operating
    Partnership                                                                                               |                                                |                          | (4,040 | )      |        |      | 3,492   |        |        |   | (5,062 | )     
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|Income (loss) from continuing operations                                                                                                                    |                                                |                          | 23,523 |        |        |      | (8,860  | )      |        |   | 18,251 |       
|Discontinued operations:                                                                                                                                    |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Income from discontinued operations            |                          |        |       |        |      |         | 1,723  |        |   |        | 989    |        
|                                                                                                                                                            | Gain on disposition of discontinued operations |                          |        |       |        |      |         | 871    |        |   |        |       |        
|                                                                                                                                                            | Provision for asset impairment                 |                          |        |       |        |      |         | (1,400 | )      |   |        |       |        
|                                                                                                                                                            | Minority interest                              |                          |        |       |        |      |         | (294   | )      |   |        | (331   | )      
|Total discontinued operations                                                                                                                               |                                                |                          |       |        |        |      | 900     |        |        |   | 658    |       
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|NET INCOME (LOSS)                                                                                                                                           |                                                |                          | 23,523 |        |        |      | (7,960  | )      |        |   | 18,909 |       
|INCOME ALLOCATED TO PREFERRED SHAREHOLDERS                                                                                                                  |                                                |                          | (6,820 | )      |        |      | (3,449  | )      |        |   | (5,035 | )     
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|NET INCOME (LOSS) ALLOCATED TO COMMON
    SHAREHOLDERS                                                                                                      |                                                | $                        | 16,703 |        |        | $    | (11,409 | )      |        | $ | 13,874 |       
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|EARNINGS (LOSS) PER COMMON SHARE 
    BASIC:                                                                                                               |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Income (loss) from continuing operations       |                          | $      | 0.74   |        |      | $       | (0.63  | )      |   | $      | 0.91   |        
|                                                                                                                                                            | Discontinued operations                        |                          |        |       |        |      |         | 0.04   |        |   |        | 0.05   |        
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Income (loss) per Common Share 
    Basic     |                          | $      | 0.74   |        |      | $       | (0.59  | )      |   | $      | 0.96   |        
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|EARNINGS (LOSS) PER COMMON SHARE 
    DILUTED:                                                                                                             |                                                |                          |        |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Income (loss) from continuing operations       |                          | $      | 0.73   |        |      | $       | (0.63  | )      |   | $      | 0.87   |        
|                                                                                                                                                            | Discontinued operations                        |                          |        |       |        |      |         | 0.04   |        |   |        | 0.03   |        
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       
|Income (loss) per Common Share Diluted                                                                                                                      |                                                | $                        | 0.73   |        |        | $    | (0.59   | )      |        | $ | 0.90   |       
|                                                                                                                                                            |                                                |                          |        |        |        |      |         |        |        |   |        |       

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



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##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |          |        |         |  
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------- | -------- | ------ | -------- | ----- | ------- | ------ | ------- | ------ | -------- | ------ | ------- | -
|                                                      |                                                                                                                                   |                                                                         
|                                                      |                                                                                                                                   | Years Ended December 31,                                                
|                                                      |                                                                                                                                   |                                                                         
|                                                      |                                                                                                                                   | 2003                                                                     |                                                         | 2002     |        | 2001    
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |         
|                                                      |                                                                                                                                   |                                                                         
|                                                      |                                                                                                                                   | (Dollars in thousands)                                                  
|OPERATING ACTIVITIES:                                 |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      | Net income (loss) allocated to common shareholders                                                                                |                                                                          | $                                                       | 16,703   |        |          | $     | (11,409 | )      |         | $      | 13,874   |       
|                                                      | Adjustments to reconcile net income
    (loss) allocated to common shareholders to net cash
    provided by operating activities: |                                                                          |                                                         |          |        |          |       |         |        |         |        |          |       
|                                                      |                                                                                                                                   | Depreciation and amortization                                            |                                                         |          | 19,920 |          |       |         | 20,135 |         |        |          | 24,520 |        
|                                                      |                                                                                                                                   | Amortization of deferred financing costs                                 |                                                         |          | 756    |          |       |         | 1,071  |         |        |          | 1,789  |        
|                                                      |                                                                                                                                   | Amortization of debt premiums                                            |                                                         |          | (947   | )        |       |         | (606   | )       |        |          | (864   | )      
|                                                      |                                                                                                                                   | Amortization of acquired lease assets                                    |                                                         |          | 2,592  |          |       |         | 251    |         |        |          |       |        
|                                                      |                                                                                                                                   | Amortization of acquired lease obligation to
    revenue                 |                                                         |          | (2,295 | )        |       |         | (23    | )       |        |          |       |        
|                                                      |                                                                                                                                   | Non-cash compensation costs                                              |                                                         |          | 1,589  |          |       |         | 1,467  |         |        |          | 940    |        
|                                                      |                                                                                                                                   | (Gain) loss on sales of assets                                           |                                                         |          | (3,221 | )        |       |         | 256    |         |        |          | (9,142 | )      
|                                                      |                                                                                                                                   | Provision for asset impairment                                           |                                                         |          |       |          |       |         | 31,600 |         |        |          |       |        
|                                                      |                                                                                                                                   | Bad debt provision                                                       |                                                         |          | 150    |          |       |         |       |         |        |          | 232    |        
|                                                      |                                                                                                                                   | Straight-line rental income                                              |                                                         |          | (2,520 | )        |       |         | (3,476 | )       |        |          | (2,881 | )      
|                                                      |                                                                                                                                   | Decrease in investment in direct financing lease                         |                                                         |          | 451    |          |       |         | 354    |         |        |          | 374    |        
|                                                      |                                                                                                                                   | Equity in income from equity method investments                          |                                                         |          | (5,746 | )        |       |         | (899   | )       |        |          | (1,123 | )      
|                                                      |                                                                                                                                   | Distributions from equity method investments                             |                                                         |          | 4,685  |          |       |         | 899    |         |        |          | 1,123  |        
|                                                      |                                                                                                                                   | Income allocated to preferred shareholders and
    preferred unitholders |                                                         |          | 11,892 |          |       |         | 9,034  |         |        |          | 12,091 |        
|                                                      |                                                                                                                                   | Minority interest                                                        |                                                         |          | 4,040  |          |       |         | (3,198 | )       |        |          | 5,395  |        
|                                                      | Cash provided by (used in):                                                                                                       |                                                                          |                                                         |          |        |          |       |         |        |         |        |          |       
|                                                      |                                                                                                                                   | Accounts receivable                                                      |                                                         |          | (5,126 | )        |       |         | 634    |         |        |          | 40     |        
|                                                      |                                                                                                                                   | Other assets                                                             |                                                         |          | (1,455 | )        |       |         | (2,207 | )       |        |          | 1,928  |        
|                                                      |                                                                                                                                   | Accounts payable, accrued expenses and other
    liabilities             |                                                         |          | (6     | )        |       |         | 474    |         |        |          | (2,911 | )      
|                                                      |                                                                                                                                   | Deferred rent revenue                                                    |                                                         |          | (343   | )        |       |         | (807   | )       |        |          | 1,373  |        
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      |                                                                                                                                   |                                                                          | Net cash provided by operating activities               |          |        | 41,119   |       |         |        | 43,550  |        |          |        | 46,758  |  
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|INVESTING ACTIVITIES:                                 |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      | Properties and joint venture interests acquired                                                                                   |                                                                          |                                                         | (230,229 | )      |          |       | (45,234 | )      |         |        | (102,493 | )     
|                                                      | Restricted cash                                                                                                                   |                                                                          |                                                         | (89      | )      |          |       | 4,365   |        |         |        | 1,730    |       
|                                                      | Advances and capital contributions to equity
    method investments                                                               |                                                                          |                                                         | (18,382  | )      |          |       | (6,072  | )      |         |        | (8,897   | )     
|                                                      | Distributions from equity method investments in
    excess of income                                                              |                                                                          |                                                         | 11,487   |        |          |       | 1,042   |        |         |        | 740      |       
|                                                      | Development and construction in progress
    expenditures                                                                         |                                                                          |                                                         | (31,541  | )      |          |       | (10,316 | )      |         |        | (25,283  | )     
|                                                      | Capital expenditures and tenant improvements                                                                                      |                                                                          |                                                         | (7,211   | )      |          |       | (3,026  | )      |         |        | (3,707   | )     
|                                                      | Payment of leasing commissions                                                                                                    |                                                                          |                                                         | (3,060   | )      |          |       | (6,613  | )      |         |        | (4,075   | )     
|                                                      | Proceeds from sales of assets, net                                                                                                |                                                                          |                                                         | 14,312   |        |          |       | 67,893  |        |         |        | 157,770  |       
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      |                                                                                                                                   |                                                                          | Net cash (used in) provided by investing
    activities |          |        | (264,713 | )     |         |        | 2,039   |        |          |        | 15,785  |  
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|FINANCING ACTIVITIES:                                 |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      | Issuances of Common Shares and Convertible
    Preferred Stock, net of issuance costs                                             |                                                                          |                                                         | 77,317   |        |          |       | 31,498  |        |         |        | 122,722  |       
|                                                      | Issuances of Common Shares due to options
    exercised                                                                           |                                                                          |                                                         | 682      |        |          |       | 352     |        |         |        |         |       
|                                                      | Issuances of Redeemable preferred stock, net of
    issuance costs                                                                |                                                                          |                                                         | 66,152   |        |          |       |        |        |         |        |         |       
|                                                      | Dividends paid on Common Shares                                                                                                   |                                                                          |                                                         | (28,477  | )      |          |       | (24,851 | )      |         |        | (16,781  | )     
|                                                      | Distributions paid on Redeemable and Convertible
    Preferred Stock and Convertible Preferred Units                              |                                                                          |                                                         | (10,871  | )      |          |       | (9,193  | )      |         |        | (12,742  | )     
|                                                      | Distributions paid on OP Units                                                                                                    |                                                                          |                                                         | (7,206   | )      |          |       | (7,958  | )      |         |        | (8,866   | )     
|                                                      | Proceeds from mortgage notes payable and other
    unsecured borrowings                                                           |                                                                          |                                                         | 29,994   |        |          |       | 14,772  |        |         |        | 34,975   |       
|                                                      | Repayment of mortgage notes payable                                                                                               |                                                                          |                                                         | (41,576  | )      |          |       | (21,510 | )      |         |        | (78,952  | )     
|                                                      | Net borrowings (repayments) under Credit
    Facility                                                                             |                                                                          |                                                         | 137,900  |        |          |       | 4,500   |        |         |        | (31,928  | )     
|                                                      | Payments of deferred financing costs and costs
    associated with early debt extinguishment                                      |                                                                          |                                                         | (1,785   | )      |          |       | (283    | )      |         |        | (2,819   | )     
|                                                      | Repurchase of Common Shares, OP Units, Preferred
    Shares and Preferred Units                                                   |                                                                          |                                                         |         |        |          |       | (33,000 | )      |         |        | (69,845  | )     
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      |                                                                                                                                   |                                                                          | Net cash provided by (used in) financing
    activities |          |        | 222,130  |       |         |        | (45,673 | )      |          |        | (64,236 | )
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|NET (DECREASE) IN CASH AND CASH
    EQUIVALENTS       |                                                                                                                                   |                                                                          | (1,464                                                  | )        |        |          | (84   | )       |        |         | (1,693 | )       
|CASH AND CASH EQUIVALENTS, beginning of
    year      |                                                                                                                                   |                                                                          | 1,891                                                   |          |        |          | 1,975 |         |        |         | 3,668  |         
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|CASH AND CASH EQUIVALENTS, end of
    year            |                                                                                                                                   | $                                                                        | 427                                                     |          |        | $        | 1,891 |         |        | $       | 1,975  |         
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION: |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         
|                                                      | Cash paid for interest (net of capitalized
    interest)                                                                          |                                                                          | $                                                       | 18,475   |        |          | $     | 22,010  |        |         | $      | 34,392   |       
|                                                      |                                                                                                                                   |                                                                          |                                                         |          |        |          |       |         |        |         |        |         

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



---



##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | ------------- |  | ---------- | -- | -------- |  | -------- | ---------- | ------------ |  | ------------- | -- | ------------- |  | ------ | ------- | ------ |  | - | ------ | - |  | - | - |  |  | - | ------- | - |  | - | - |  |  | - | ------- | -
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            | Loans to     |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            | Executives   |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            | and          |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            | Employees    |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |           |               |  |            |    | to       |  |          |            | Retained     |  |               |    |              
|                                                                                                              |  | Preferred Stock        |           | Common Shares |  | Additional |    | Purchase |  |          |            | Earnings/    |  | Other         |    | Total        
|                                                                                                              |  |                        |           |               |  | Paid-in    |    | Common   |  | Deferred |            | (Accumulated |  | Comprehensive |    | Shareholders
|                                                                                                              |  | Shares                 |           | Amount        |  | Shares     |    | Amount   |  | Capital  |            | Shares       |  | Compensation  |    | Deficit)      |  | Income |         | Equity
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            |              |  |               |    |               |  |        |         |       
|                                                                                                              |  |                       
|                                                                                                              |  | (Dollars in thousands)
|BALANCES, JANUARY 1, 2001                                                                                     |  |                        | 2,403,871 |               |  | $          | 3  |          |  |          | 9,321,296  |              |  | $             | 9  |               |  | $      | 182,067 |        |  | $ | (3,774 | ) |  | $ |  |  |  | $ | (11,446 | ) |  | $ |  |  |  | $ | 166,859 |  
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |         |  
|Net income                                                                                                    |  |                        |          |               |  |            |   |          |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |  |  |  |   | 18,909  |   |  |   |   |  |  |   | 18,909  |  
|Distributions to preferred stockholders                                                                       |  |                        |          |               |  |            |   |          |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |  |  |  |   | (5,035  | ) |  |   |  |  |  |   | (5,035  | )
|Distributions paid ($1.26 per share)                                                                          |  |                        |          |               |  |            |   |          |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |  |  |  |   | (16,781 | ) |  |   |  |  |  |   | (16,781 | )
|Common Shares issued, net of $7,753 of issuance
    costs                                                     |  |                        |          |               |  |            |   |          |  |          | 10,375,000 |              |  |               | 10 |               |  |        | 122,722 |        |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 122,732 |  
|Preferred Stock redeemed for Common Shares                                                                    |  |                        | (803,871  | )             |  |            | (1 | )        |  |          | 1,256,048  |              |  |               | 1  |               |  |        |        |        |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   |        |  
|Preferred OP Units redeemed for Common Shares                                                                 |  |                        |          |               |  |            |   |          |  |          | 1,243,952  |              |  |               | 1  |               |  |        |        |        |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 1       |  
|Common Shares issued for OP Unit conversions                                                                  |  |                        |          |               |  |            |   |          |  |          | 595,129    |              |  |               | 1  |               |  |        | 7,848   |        |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 7,849   |  
|Loans to executive officers and employees to
    purchase Common Shares                                       |  |                        |          |               |  |            |   |          |  |          | 156,256    |              |  |               |   |               |  |        | 2,004   |        |  |   | (2,004 | ) |  |   |  |  |  |   |        |   |  |   |  |  |  |   |        |  
|Adjustment for minority interest of unitholders
    in Operating Partnership at dates of capital transactions |  |                        |          |               |  |            |   |          |  |          |           |              |  |               |   |               |  |        | 8,431   |        |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 8,431   |  
|Amortization of restricted share grants and
    forgiveness of executive loans                                |  |                        |          |               |  |            |   |          |  |          |           |              |  |               |   |               |  |        |        |        |  |   | 587    |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 587     |  
|Common Shares issued as compensation to trustees                                                              |  |                        |          |               |  |            |   |          |  |          | 18,415     |              |  |               |   |               |  |        | 230     |        |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 230     |  
|Repurchase of Common Shares                                                                                   |  |                        |          |               |  |            |   |          |  |          | (4,568,471 | )            |  |               | (4 | )             |  |        | (40,799 | )      |  |   |       |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | (40,803 | )
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |         |  
|BALANCES, DECEMBER 31, 2001                                                                                   |  |                        | 1,600,000 |               |  | $          | 2  |          |  |          | 18,397,625 |              |  | $             | 18 |               |  | $      | 282,503 |        |  | $ | (5,191 | ) |  | $ |  |  |  | $ | (14,353 | ) |  | $ |  |  |  | $ | 262,979 |  
|                                                                                                              |  |                        |           |               |  |            |    |          |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |         |  

F-6



---



##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |   |  |   |   |  |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ------------- |  | ---------- | -- | ----------- |  | -------- | ---------- | ------------ |  | ------------- | -- | ------------- |  | ------ | ------- | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | - |  |  | - | ------- | -
|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            | Loans to     |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            | Executives   |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            | and          |  |               |    |               |  |        |         |       
|                                                                                                              |  |                        |            |               |  |            |    | Employees   |  |          |            | Retained     |  |               |    |              
|                                                                                                              |  | Preferred Stock        |            | Common Shares |  | Additional |    | to Purchase |  |          |            | Earnings/    |  | Other         |    | Total        
|                                                                                                              |  |                        |            |               |  | Paid in    |    | Common      |  | Deferred |            | (Accumulated |  | Comprehensive |    | Shareholders
|                                                                                                              |  | Shares                 |            | Amount        |  | Shares     |    | Amount      |  | Capital  |            | Shares       |  | Compensation  |    | Deficit)      |  | Income |         | Equity
|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            |              |  |               |    |               |  |        |         |       
|                                                                                                              |  |                       
|                                                                                                              |  | (Dollars in thousands)
|Net loss                                                                                                      |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |       |   |  |   | (7,960  | ) |  |   |  |  |  |   | (7,960  | )
|Distributions to preferred stockholders                                                                       |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |       |   |  |   | (3,449  | ) |  |   |  |  |  |   | (3,449  | )
|Distributions paid ($1.29 per share)                                                                          |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |       |   |  |   | (24,851 | ) |  |   |  |  |  |   | (24,851 | )
|Common Shares issued, net of $1,331 of issuance
    costs                                                     |  |                        |           |               |  |            |   |             |  |          | 2,000,000  |              |  |               | 2  |               |  |        | 31,498  |        |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 31,500  |  
|Common Shares issued for OP Unit conversions                                                                  |  |                        |           |               |  |            |   |             |  |          | 735,575    |              |  |               | 1  |               |  |        | 11,672  |        |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 11,673  |  
|Loans to executive officers and employees to
    purchase Common Shares                                       |  |                        |           |               |  |            |   |             |  |          | 7,503      |              |  |               |   |               |  |        | 100     |        |  |   | (100   | ) |  |   |       |   |  |   |        |   |  |   |  |  |  |   |        |  
|Adjustment for minority interest of unitholders
    in Operating Partnership at dates of capital transactions |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        | (4,728  | )      |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | (4,728  | )
|Amortization of restricted share grants and
    forgiveness of executive loans                                |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   | 586    |   |  |   | 347    |   |  |   |        |   |  |   |  |  |  |   | 933     |  
|Common Shares issued as compensation to trustees                                                              |  |                        |           |               |  |            |   |             |  |          | 17,121     |              |  |               |   |               |  |        | 232     |        |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 232     |  
|Repurchase of Common Shares                                                                                   |  |                        |           |               |  |            |   |             |  |          | (173,423   | )            |  |               |   |               |  |        | (2,861  | )      |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | (2,861  | )
|Options exercised                                                                                             |  |                        |           |               |  |            |   |             |  |          | 188,414    |              |  |               |   |               |  |        | 2,585   |        |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 2,585   |  
|Issuances of restricted share grants                                                                          |  |                        |           |               |  |            |   |             |  |          | 205,288    |              |  |               |   |               |  |        | 2,755   |        |  |   |       |   |  |   | (2,755 | ) |  |   |        |   |  |   |  |  |  |   |        |  
|Forfeiture of restricted share grants                                                                         |  |                        |           |               |  |            |   |             |  |          | (16,793    | )            |  |               |   |               |  |        | (220    | )      |  |   |       |   |  |   | 220    |   |  |   |        |   |  |   |  |  |  |   |        |  
|Repurchase of unvested restricted shares                                                                      |  |                        |           |               |  |            |   |             |  |          | (5,701     | )            |  |               |   |               |  |        | (80     | )      |  |   |       |   |  |   | 15     |   |  |   |        |   |  |   |  |  |  |   | (65     | )
|Loans from executive officers and employees                                                                   |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   | 875    |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 875     |  
|Repurchase of loans to executive officers                                                                     |  |                        |           |               |  |            |   |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   | (691   | ) |  |   |       |   |  |   |        |   |  |   |  |  |  |   | (691    | )
|Repurchase of Preferred Shares                                                                                |  |                        | (1,000,000 | )             |  |            | (1 | )           |  |          |           |              |  |               |   |               |  |        | (25,088 | )      |  |   |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | (25,089 | )
|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |   |  |   |   |  |  |   |         |  
|BALANCES, DECEMBER 31, 2002                                                                                   |  |                        | 600,000    |               |  | $          | 1  |             |  |          | 21,355,609 |              |  | $             | 21 |               |  | $      | 298,368 |        |  | $ | (4,521 | ) |  | $ | (2,173 | ) |  | $ | (50,613 | ) |  | $ |  |  |  | $ | 241,083 |  
|                                                                                                              |  |                        |            |               |  |            |    |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |   |  |   |   |  |  |   |         |  

F-7



---



##### Table of Contents



KEYSTONE PROPERTY TRUST

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |        |  |   |      |      |   |   |         |        |  
|------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------- | --------- | ------------- |  | ---------- | - | ----------- |  | -------- | ---------- | ------------ |  | ------------- | -- | ------------- |  | ------ | ------- | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------- | ------ |  | - | ---- | ---- | - | - | ------- | ------ | -
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            | Loans to     |  |               |    |               |  |        |         |       
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            | Executives   |  |               |    |               |  |        |         |       
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            | and          |  |               |    |               |  |        |         |       
|                                                                                                              |                                                         |                        |           |               |  |            |   | Employees   |  |          |            | Retained     |  |               |    |              
|                                                                                                              |                                                         | Preferred Stock        |           | Common Shares |  | Additional |   | to Purchase |  |          |            | Earnings/    |  | Other         |    | Total        
|                                                                                                              |                                                         |                        |           |               |  | Paid in    |   | Common      |  | Deferred |            | (Accumulated |  | Comprehensive |    | Shareholders
|                                                                                                              |                                                         | Shares                 |           | Amount        |  | Shares     |   | Amount      |  | Capital  |            | Shares       |  | Compensation  |    | Deficit)      |  | Income |         | Equity
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |       
|                                                                                                              |                                                         |                       
|                                                                                                              |                                                         | (Dollars in thousands)
|Comprehensive income:                                                                                         |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |        |  |   |      |      |   |   |         |       
|                                                                                                              | Net income                                              |                        |           |              |  |            |   |            |  |          |            |             |  |               |    |              |  |        |         |       |  |   |        |  |  |   |        |  |  |   |         | 23,523 |  |   |      |     |   |   |         | 23,523 |  
|                                                                                                              | Unrealized loss on derivative financial
    instruments |                        |           |              |  |            |   |            |  |          |            |             |  |               |    |              |  |        |         |       |  |   |        |  |  |   |        |  |  |   |         |       |  |   |      | (111 | ) |   |         | (111   | )
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |        |  |   |      |      |   |   |         |       
|Total Comprehensive Income                                                                                    |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   | 23,523  |        |  |   | (111 | )    |   |   | 23,412  |       
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |        |  |   |      |      |   |   |         |       
|Distributions to preferred stockholders                                                                       |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |       |   |  |   | (6,820  | )      |  |   |     |      |   |   | (6,820  | )     
|Distributions paid ($1.31 per share)                                                                          |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |       |   |  |   | (28,477 | )      |  |   |     |      |   |   | (28,477 | )     
|Common Shares issued, net of $204 of issuance
    costs                                                       |                                                         |                        |          |               |  |            |  |             |  |          | 4,000,000  |              |  |               | 4  |               |  |        | 77,313  |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 77,317  |       
|Common Shares issued for OP Unit conversions                                                                  |                                                         |                        |          |               |  |            |  |             |  |          | 575,518    |              |  |               | 1  |               |  |        | 10,963  |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 10,964  |       
|Adjustment for minority interest of unitholders
    in Operating Partnership at dates of capital transactions |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        | (17,350 | )      |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | (17,350 | )     
|Amortization of restricted share grants and
    forgiveness of executive loans                                |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   | 839    |   |  |   | 990    |   |  |   |        |        |  |   |     |      |   |   | 1,829   |       
|Common Shares issued as compensation to trustees                                                              |                                                         |                        |          |               |  |            |  |             |  |          | 14,592     |              |  |               |   |               |  |        | 232     |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 232     |       
|Options issued as compensation to trustees                                                                    |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        | 120     |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 120     |       
|Options exercised                                                                                             |                                                         |                        |          |               |  |            |  |             |  |          | 43,966     |              |  |               |   |               |  |        | 602     |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 602     |       
|Options issued                                                                                                |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        | 5       |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 5       |       
|Issuances of restricted share grants                                                                          |                                                         |                        |          |               |  |            |  |             |  |          | 205,954    |              |  |               |   |               |  |        | 3,660   |        |  |   |       |   |  |   | (3,660 | ) |  |   |        |        |  |   |     |      |   |   |        |       
|Repayment of loans from executive officers and
    employees                                                  |                                                         |                        |          |               |  |            |  |             |  |          |           |              |  |               |   |               |  |        |        |        |  |   | 80     |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 80      |       
|Preferred Shares issued, net of $675 of issuance
    costs                                                    |                                                         |                        | 2,760,000 |               |  |            | 3 |             |  |          |           |              |  |               |   |               |  |        | 66,149  |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   | 66,152  |       
|Preferred shares converted to common shares                                                                   |                                                         |                        | (100,000  | )             |  |            |   |             |  |          | 158,730    |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |       |   |  |   |        |        |  |   |     |      |   |   |        |       
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |        |  |   |      |      |   |   |         |       
|BALANCES, DECEMBER 31, 2003                                                                                   |                                                         |                        | 3,260,000 |               |  | $          | 4 |             |  |          | 26,354,369 |              |  | $             | 26 |               |  | $      | 440,062 |        |  | $ | (3,602 | ) |  | $ | (4,843 | ) |  | $ | (62,387 | )      |  | $ | (111 | )    |   | $ | 369,149 |       
|                                                                                                              |                                                         |                        |           |               |  |            |   |             |  |          |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |        |   |  |   |         |        |  |   |      |      |   |   |         |       

F-8



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##### Table of Contents



KEYSTONE PROPERTY TRUST

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Operations

Keystone Property Trust (the Company)
is a self-administered and self-managed real estate investment
trust (REIT) which was organized as a Delaware
corporation in 1993 under the name of American Real Estate
Investment Corporation (the Predecessor). On
October 13, 1999, the Company reorganized as a Maryland
REIT through the merger of the Predecessor with and into
Keystone Property Trust. Simultaneously, the name of its
operating partnership, American Real Estate Investment, L.P. was
changed to Keystone Operating Partnership, L.P. (the
Operating Partnership), and the name of its
management company was changed to Keystone Realty Services, Inc.
(the Management Company) from American Real Estate
Management, Inc.

The majority of the Companys properties are
owned by Keystone Operating Partnership, L.P. (the
Operating Partnership). The Operating Partnership
owns 100% of the preferred stock of Keystone Realty Services,
Inc. (the Management Company), which entitles the
Operating Partnership to receive 95% of the amounts paid as
dividends by the Management Company. As of December 31,
2003, the Company owned interests in 133 industrial properties
and one office property aggregating approximately
30.1 million square feet and an investment in a direct
financing lease (the Properties), with 26 of the
Properties being owned through joint venture entities. The
Properties are located in Central and Eastern Pennsylvania;
Northern and Central New Jersey; Indianapolis, Indiana; New York
State; Ohio, Greenville, South Carolina and Southern Florida and
had an overall physical occupancy of 92.1% as of
December 31, 2003.

2.     Summary of
Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The Company consolidates all subsidiaries in
which it has a majority of voting control of the operations of
the subsidiary. The Company has consolidated the results of
Keystone Operating Partnership, L.P. (the Operating
Partnership), as it owned a majority of the voting
interests in this limited partnership (79% and 74% as of
December 31, 2003 and December 31, 2002, respectively)
and it serves as the sole general partner of the Operating
Partnership. Other consolidated subsidiaries are either
controlled by the Operating Partnership, as managing member, or
are wholly owned by the Company. As general partner of the
Operating Partnership, the Company has sole decision making
authority over major decisions including but not limited to
sales and acquisitions of assets and the Operating
Partnerships financing activities.



| |                 
| | ----------------
| | Use of Estimates

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



| |                          
| | -------------------------
| | Investment in Real Estate

Investment in real estate is recorded at cost and
depreciated over the estimated useful lives of the related
assets. Expenditures for additions, renewals and betterments
which extend the useful life of the properties are

F-9



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

capitalized. Routine maintenance and repairs are
charged to expense as incurred. The estimated useful lives of
the assets are as follows:

|                                                        |  |       |                       | 
|------------------------------------------------------- |  | ----- | --------------------- | 
|                                                        |  | Years
|                                                        |  |      
|Buildings and improvements                              |  |       | 10-35                 | 
|Land improvements                                       |  |       | 15                    | 
|Tenant improvements and intangible leasehold
    assets |  |       | Applicable Lease Term | 

Depreciation expense for the years ended
December 31, 2003, 2002 and 2001 was $18.3 million,
$17.6 million, and $22.3 million, respectively.

The Company has an investment in a direct
financing lease. The net investment in this lease was $35,000
and $486,000 for 2003 and 2002, respectively, which consists of
the gross book value of this investment of $35,000 and $525,000,
net of unearned income of $0 and $39,000, respectively. The
unearned income is amortized over the lease term as annual rent
payments are collected in order to produce a constant periodic
rate of return on the net investment in this lease.

On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). This Statement addresses
financial accounting and reporting for the impairment or
disposal of long-lived assets, including discontinued
operations. SFAS 144 maintains fundamental provisions for the
recognition and measurement of impairment of long-lived assets
to be held and used and the measurement of long-lived assets to
be disposed of by sale. This Statement requires that, subsequent
to January 1, 2002, the operations related to properties
that have been sold or classified as held for sale be presented
as discontinued operations in the statement of operations for
all periods presented except for properties in which the Company
will have significant continuing involvement.

In accordance with SFAS No. 141,
Business Combinations, (SFAS 141) the
Company allocates purchase price for properties to the tangible
and identified intangible assets acquired based on fair values.
Above-market and below-market in place lease values for acquired
properties are recorded based on the present value (using an
interest rate which reflects the risks associated with the
leases acquired) of the difference between the contractual
amounts to be paid under the in-place leases and the
Companys estimate of the fair market lease rates for the
in-place leases measured over a period equal to the remaining
non-cancelable term of the lease. The Company performs this
analysis on a lease-by-lease basis. The capitalized above-market
lease values are amortized as a reduction of rental income over
the remaining non-cancelable terms of the respective leases. The
capitalized below-market lease values are amortized as an
increase of rental income over the remaining non-cancelable
terms, including any fixed rate renewal periods, of the
respective leases. The net amount of amortization to rental
income for above and below market leases was $2.3 million and
$23,000 for years ended December 31, 2003 and 2002,
respectively. The amortization in 2003 included
$1.1 million related to a lease which was terminated in
2003. The aggregate value of other intangibles acquired is
measured based on the difference between the property valued
with in-place leases adjusted to market rates and the property
valued as if vacant. Intangible assets associated with the
origination and contract value of the in-place leases are
amortized over the life of the related lease to amortization
expense. The Company allocates purchase price to the intangible
assets related to the contract value of the in-place leases
which is the value associated with the carrying costs during the
expected lease-up periods considering market conditions and the
estimates of lost rental revenues at market rates during the
expected lease-up periods. This intangible is also amortized
over the life of the related leases to amortization expense. The
net amount of amortization expense for these lease intangibles
was $2.6 million and $251,000 for the years ended
December 31, 2003 and 2002, respectively.

The Company allocates value to tenant
relationships, if any, based on the Companys evaluation of
the overall relationship with the respective tenant. The value
of tenant relationship intangibles is amortized over

F-10



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

the remaining initial lease term and renewals,
but in no event longer than the remaining depreciable life of
the building. Based on the Companys evaluation, the
Company has not allocated any value to the customer relationship
intangibles related to property acquisitions since July 1,
2001.

The Company recorded a $1.4 million
provision for asset impairment for one of its New York office
properties in the second quarter of 2002. This property was sold
in July 2002 for approximately $7.0 million and the
$1.4 million charge (see Note 3) was reported in
discontinued operations. During the third quarter of 2002, the
Company recorded a $30.2 million provision for asset
impairment for 19 office properties and 15 industrial properties
totaling 3.9 million square feet located in New York, Ohio
and Pennsylvania (the New York Office Portfolio)
which were disposed of during the fourth quarter of 2002. The
Company recognized an additional loss of approximately $946,000.
The New York Office Portfolio was not reported as discontinued
operations due to the Company retaining a preferred equity
investment in the entity, which acquired these assets. The
Company will report its continuing investment in accordance with
the equity method of accounting.



| |                      
| | ---------------------
| | Capitalization Policy

The Company capitalizes direct and indirect
costs, including interest costs and payroll costs, directly
associated with real estate assets under construction and land
under development by the Company or in joint ventures. During
2003, 2002 and 2001, the Company capitalized $2.8 million,
$4.0 million, and $3.3 million, of interest costs for
construction and development in progress, respectively. In 2003,
2002 and 2001, the Company capitalized $2.7 million,
$2.5 million and $2.4 million, respectively, of
payroll costs for construction and development in progress.



| |                          
| | -------------------------
| | Equity Method Investments

The equity method of accounting is used to
account for the Companys non-controlling interest in 100%
of the non-voting preferred stock of the Management Company, the
preferred equity investment in Nocha, LLC, the Companys
50% non-controlling interest in 5 Points Associates, LLC
(5 Points), which was formed to develop and own a
813,054 square foot distribution facility in Indianapolis,
Indiana, the Companys 20% non-controlling investment in
Keystone New Jersey Associates, LLC, a joint venture with
CalEast Industrial Investors LLC (the CalEast JV)
and the Companys 20% non-controlling investment in KPJV,
LLP, a joint venture with the Mercantile Safe Deposit &
Trust Company as Trustee for the AFL-CIO Building Investment
Trust (the BIT JV).



| |                                                  
| | -------------------------------------------------
| | Cash and Cash Equivalents and Restricted
    Cash

For purposes of reporting cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. Restricted cash represents amounts in escrow for
payment of property taxes, insurance or capital improvements, as
required by the Companys lenders, and amounts held in
escrow for 1031 exchange transactions not yet consummated.



| |                                         
| | ----------------------------------------
| | Deferred Financing and Leasing
    Costs

Deferred financing costs are amortized on a
straight-line basis over the life of the related mortgage loans
which approximates the effective interest method. Amortization
of deferred financing costs is included in interest expense in
the accompanying statements of operations and was $756,000, $1.1
million and $1.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Deferred
leasing costs associated with the rental of the Companys
properties, are amortized on a straight-line basis over the term
of the related leases. Amortization expense for deferred leasing
costs was $1.6 million, $2.2 million and $2.0 million
for the years ended December 31, 2003, 2002 and 2001,
respectively.

F-11



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

Fair values of non-real estate assets and
payables approximate their carrying amount due to their
short-term nature. The estimated fair value of our fixed rate
mortgages payable at December 31, 2003 and 2002 was
approximately $277.0 million and $201.0 million,
respectively. The estimated fair value is based on the borrowing
rates available to the Company for fixed rate mortgages payable
with similar terms and average maturities. The Companys
variable rate debt has an estimated fair value that is
approximately the same as the recorded amounts in the balance
sheets. Although management is not aware of any factors that
would significantly affect these fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since that date and current estimates
of fair value may differ significantly from the amounts
presented herein.



| |                                     
| | ------------------------------------
| | Allocations of Income and
    Losses

Net income and losses of the Operating
Partnership after distributions to preferred unitholders are
allocated to the Company and limited partners in accordance with
their respective ownership interests in accordance with the
terms of the amended and restated limited partnership agreement.
The Companys ownership interest in the Operating
Partnership was approximately 79%, 74% and 70% and the limited
partners ownership interest was approximately 21%, 26% and
30% at December 31, 2003, 2002 and 2001, respectively.



| |                    
| | -------------------
| | Revenue Recognition

Rental income under leases in excess of one year
in length is recognized using the straight-line method under
which contractual rents are recognized evenly over the lease
term. Tenant reimbursements are accrued as revenue in the same
period the related expenses are incurred by the Company.
Deferred rent revenue represents rent collected from tenants in
advance.



| |                                                  
| | -------------------------------------------------
| | Derivative Instruments and Hedging
    Activities

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

For derivatives designated as fair value hedges,
changes in the fair value of the derivative and the hedged item
related to the hedged risk are recognized in earnings. For
derivatives designated as cash flow hedges, the effective
portion of changes in the fair value of the derivative is
initially reported in other comprehensive income (outside of
earnings) and subsequently reclassified to earnings when the
hedged transaction affects earnings, and the ineffective portion
of changes in the fair value of the derivative is recognized
directly in earnings. The Company assesses the effectiveness of
each hedging relationship by comparing the changes in fair value
or cash flows of the derivative hedging instrument with the
changes in fair value or cash flows of the designated hedged
item or transaction. For derivatives not designated as hedges,
changes in fair value are recognized in earnings.

The Companys objective in using derivatives
is to add stability to interest expense and to manage its
exposure to interest rate movements or other identified risks.
To accomplish this objective, the Company

F-12



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

primarily uses interest rate swaps as part of its
cash flow hedging strategy. Interest rate swaps designated as
cash flow hedges involve the receipt of variable-rate amounts in
exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount. As of
December 31, 2003, the Company has two forward starting
fixed rate swaps with an aggregate notional principal amount of
$50 million, which begin in July 2004 and expire in
September 2008. The Company will pay a fixed rate of
approximately 3.8% plus the interest rate spread over this
period and will receive a floating rate equal to the variable
interest rate on the Term Loan. The swaps have been designated
as hedges of the variability of cash flows relating to
forecasted interest payments associated with the borrowings
under the Term Loan. At December 31, 2003, this derivative
had a fair value of $111,000 included in other liabilities. The
change in net unrealized gains/losses of $111,000 in 2003 is
also recorded in the statement of changes in shareholders
equity and comprehensive income. The amount recorded in
accumulated other comprehensive income (loss) will be
reclassified into earnings over the forecast period. No hedge
ineffectiveness was recognized during 2003.

As of December 31, 2003, no derivatives were
designated as fair value hedges or hedges of net investments in
foreign operations. Additionally, the Company does not use
derivatives for trading or speculative purposes and currently
does not have any derivatives that are not designated as hedges.

Amounts reported in accumulated other
comprehensive income related to derivatives will be reclassified
to interest expense as interest payments are made on the
Companys variable-rate debt. During 2004, the Company
estimates that $508,000 will be reclassified from other
comprehensive income/loss to interest expense.



| |                       
| | ----------------------
| | Income Taxes and Other

The Company elected to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code as of
1986, as amended (the Code) and applicable Treasury
Regulations, commencing with its taxable year ended
December 31, 1993. The Company believes that it has been
organized and operated and will continue to be organized and
operate in such a manner as to qualify for taxation as a REIT
under the Code.

A REIT is generally not subject to federal income
taxes on that portion of its ordinary income or capital gain
that is currently distributed to shareholders as the REIT
provisions of the Code generally allow a REIT to deduct
dividends paid to its shareholders to the extent it distributes
annually at least 90% of its taxable income and satisfies
certain other requirements. Accordingly, no provision has been
made for federal income taxes in the accompanying consolidated
financial statements. If the Company fails to qualify as a REIT
in any taxable year, the Company will be subject to federal
income tax at regular corporate rates on its taxable income. The
Company and certain of its subsidiaries are subject to certain
state and local taxes. The provision for these taxes has been
reflected in general and administrative expense in the
accompanying financial statements. The Management Company is
subject to federal, state and local taxes on its income as it is
organized as a C corporation reporting as a taxable
REIT subsidiary.

F-13



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

A summary of the tax characteristics of the
Companys distributions for the three years ended
December 31, 2003, 2002 and 2001 is as follows:

|                                                           |  |                                  |        |      |  |      |       |   |  |   |        |  
|---------------------------------------------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                           |  |                                 
|                                                           |  | For the Years Ended December 31,
|                                                           |  |                                 
|                                                           |  | 2003                             |        | 2002 |  | 2001
|                                                           |  |                                  |        |      |  |     
|Common Share Distributions                                 |  |                                  |        |      |  |      |       |   |  |   |        |  
|Total distributions paid per share                         |  | $                                | 1.31   |      |  | $    | 1.29  |   |  | $ | 1.26   |  
|Percent taxable as ordinary income                         |  |                                  | 56.65  | %    |  |      | 41.89 | % |  |   | 59.21  | %
|Percent non-taxable return of capital                      |  |                                  | 34.89  | %    |  |      | 55.37 | % |  |   | 15.60  | %
|Percent taxable as long term capital gain(1)               |  |                                  | 0.00   | %    |  |      | 0.21  | % |  |   | 4.41   | %
|Percent taxable as unrecaptured Section 1250
    gain      |  |                                  | 8.46   | %    |  |      | 2.53  | % |  |   | 20.78  | %
|Classified as ordinary income-per share                    |  | $                                | 0.7421 |      |  | $    | 0.540 |   |  | $ | 0.746  |  
|Classified as return of capital-per share                  |  | $                                | 0.4570 |      |  | $    | 0.714 |   |  | $ | 0.196  |  
|Classified as long term capital gain-per share             |  | $                                | 0.0000 |      |  | $    | 0.004 |   |  | $ | 0.056  |  
|Classified as unrecaptured Section 1250
    gain-per share |  | $                                | 0.1109 |      |  | $    | 0.320 |   |  | $ | 0.262  |  
|Preferred Share and Preferred Unit
    Distributions       |  |                                  |        |      |  |      |       |   |  |   |        |  
|Distributions declared (in 000s)                          |  | $                                | 11,892 |      |  | $    | 8,623 |   |  | $ | 12,092 |  

The following reconciles net income
(loss) allocated to common shareholders to taxable income
allocated to common shareholders for the years ended
December 31, 2003, 2002 and 2001 (in 000s):

|                                                   |  |         |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------- |  | ------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                   |  | 2003(2) |         | 2002 |  | 2001
|                                                   |  |         |         |      |  |     
|Net income (loss) allocated to common shareholders |  | $       | 16,703  |      |  | $    | (11,409 | ) |  | $ | 13,874  |  
|Book/Tax Income Differences                        |  |         |         |      |  |      |         |   |  |   |         |  
|Book depreciation and amortization                 |  |         | 17,762  |      |  |      | 15,050  |   |  |   | 16,330  |  
|Tax depreciation and amortization                  |  |         | (11,942 | )    |  |      | (13,859 | ) |  |   | (13,227 | )
|Income (loss) from equity method investments       |  |         | 476     |      |  |      | 84      |   |  |   | (282    | )
|Gain (loss) on asset sales                         |  |         | 3,172   |      |  |      | 22,305  |   |  |   | (2,840  | )
|Compensation expense                               |  |         | 1,254   |      |  |      | 702     |   |  |   | 265     |  
|Straight line rent income                          |  |         | (1,988  | )    |  |      | (2,570  | ) |  |   | (1,918  | )
|Preferred Stock distributions                      |  |         | 174     |      |  |      | 163     |   |  |   | (888    | )
|Other(3)                                           |  |         | (1,216  | )    |  |      | 3,393   |   |  |   | 1,562   |  
|                                                   |  |         |         |      |  |      |         |   |  |   |         |  
|Taxable income allocated to common shareholders    |  | $       | 24,395  |      |  | $    | 13,859  |   |  | $ | 12,876  |  
|                                                   |  |         |         |      |  |      |         |   |  |   |         |  



---



|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | The Company reported that 100% of the long-term
    capital gain for 2001 is a qualified five-year gain.
|   
|(2) | Amounts are estimated.                                                                                  
|   
|(3) | Primarily due to differences in rental income.                                                          

There are differences in the Companys bases
of assets and liabilities, specifically relating to minority
interests, between those used in financial reporting and the tax
basis used for annual federal and state income tax returns. The
net federal tax basis of the Companys real estate
investments at December 31, 2003 and 2002 was approximately
$733.3 million and $479.5 million, respectively.



| |                         
| | ------------------------
| | Stock-Based Compensation

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123
(SFAS 148). The Company

F-14



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

adopted SFAS 148 and has modified the
disclosures for stock-based compensation to reflect the
additional requirements of this statement. On January 1,
2003, the Company adopted the fair value recognition provision
of FASB Statement No. 123, Accounting for Stock-Based
Compensation, utilizing the prospective transition method
for all employee awards granted, modified or settled after
January 1, 2003. Compensation cost for stock options, if
any, is recognized ratably over the vesting period. The
Companys policy is to grant options with an exercise price
equal to or in excess of the market price of the underlying
Common Shares on the date of grant. Awards of stock and
restricted stock are expensed as compensation on a current basis
over the benefit period. Compensation costs of $122,000 have
been recognized in 2003 for the Companys stock option
plans.

For the periods prior to January 1, 2003,
the Company accounted for this plan under the recognition and
measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. With respect to options granted under
the Companys Amended and Restated 1993 Omnibus Incentive
Plan (the Plan) prior to January 1, 2003, no
stock-based employee compensation expense is reflected in the
accompanying consolidated statements of operations, as all
options granted under those plans had an exercise price equal to
or in excess of the market price of the underlying Common Shares
on the date of grant. For further discussion of stock based
compensation, see Note 10 to the Companys financial
statements. The following table illustrates the effect on net
income and earnings per share if the fair value based method had
been applied to all outstanding and unvested awards in each
period.

|                                                                                                                                              |  |                                  |        |      |  |      |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                                                                              |  |                                 
|                                                                                                                                              |  | For the Years Ended December 31,
|                                                                                                                                              |  |                                 
|                                                                                                                                              |  | 2003                             |        | 2002 |  | 2001
|                                                                                                                                              |  |                                  |        |      |  |     
|Net income (loss) allocated to common
    shareholders as reported                                                                            |  | $                                | 16,703 |      |  | $    | (11,409 | ) |  | $ | 13,874 |  
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                |  |                                  | 1,238  |      |  |      | 933     |   |  |   | 587    |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value method for all awards, net
    of related tax effects |  |                                  | (1,578 | )    |  |      | (1,365  | ) |  |   | (918   | )
|Minority interest of Unitholders in Operating
    Partnership                                                                                 |  |                                  | 66     |      |  |      | 101     |   |  |   | 93     |  
|                                                                                                                                              |  |                                  |        |      |  |      |         |   |  |   |        |  
|Pro forma net income (loss) allocated to common
    shareholders                                                                              |  | $                                | 16,429 |      |  | $    | (11,740 | ) |  | $ | 13,636 |  
|                                                                                                                                              |  |                                  |        |      |  |      |         |   |  |   |        |  
|Earnings per share:                                                                                                                           |  |                                  |        |      |  |      |         |   |  |   |        |  
|Basic  as reported                                                                                                                           |  | $                                | 0.74   |      |  | $    | (0.59   | ) |  | $ | 0.96   |  
|Basic  pro forma                                                                                                                             |  | $                                | 0.73   |      |  | $    | (0.60   | ) |  | $ | 0.94   |  
|Diluted  as reported                                                                                                                         |  | $                                | 0.73   |      |  | $    | (0.59   | ) |  | $ | 0.90   |  
|Diluted  pro forma                                                                                                                           |  | $                                | 0.72   |      |  | $    | (0.60   | ) |  | $ | 0.89   |  

The pro forma amounts above were calculated
using the Black-Scholes model, using the following assumptions:

|                                         |  |      |            |      |  |      |            |   |  |  |            |  
|---------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                         |  | 2003 |            | 2002 |  | 2001
|                                         |  |      |            |      |  |     
|Weighted average risk-free interest rate |  |      | 5.7        | %    |  |      | 5.4        | % |  |  | 5.8        | %
|Weighted average dividend yield          |  |      | 9.0        | %    |  |      | 8.7        | % |  |  | 9.0        | %
|Weighted average volatility              |  |      | 29.1       | %    |  |      | 29.2       | % |  |  | 29.0       | %
|Weighted average expected option life    |  |      | 6.9  years |      |  |      | 5.0  years |   |  |  | 7.0  years |  

F-15



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the December 31, 2002 and
2001 consolidated financial statements have been reclassified in
order to conform with the presentation in the December 31
2003 consolidated financial statements. The Company has adopted
SFAS No. 145, Rescission of FASB Statements
Nos. 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections, effective January 1, 2003,
and reclassified its previously reported extraordinary items
related to early debt extinguishment as interest expense.

The following table summarizes the
reclassification of extraordinary items:

|                                           |  |                                  |        |      |  |      |        |  |  |   |        | 
|------------------------------------------ |  | -------------------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                           |  |                                 
|                                           |  | For the Years Ended December 31,
|                                           |  |                                 
|                                           |  | 2003                             |        | 2002 |  | 2001
|                                           |  |                                  |        |      |  |     
|Interest expense, as previously reported   |  | $                                | 19,304 |      |  | $    | 24,252 |  |  | $ | 33,373 | 
|Extraordinary item, as previously reported |  |                                  |       |      |  |      | 863    |  |  |   | 2,274  | 
|                                           |  |                                  |        |      |  |      |        |  |  |   |        | 
|Interest expense, as reported              |  | $                                | 19,304 |      |  | $    | 25,115 |  |  | $ | 35,647 | 



| |                                            
| | -------------------------------------------
| | Impact of New Accounting
    Pronouncements

During 2003, the FASB issued FASB Interpretation
No. 46 (FIN 46) (revised December 2003),
Consolidation of Variable Interest Entities
(FIN 46R), which addressed how a business
enterprise should evaluate whether it has a controlling
financial interest in any entity through means other than voting
rights and accordingly should consolidate the entity. During the
third quarter of 2003, implementation of FIN 46 was
deferred for all entities except those created after January 31,
2003. FIN 46R replaces FIN 46, Consolidation of
Variable Interest Entities, which was originally issued in
January 2003. The Company will be required to apply FIN 46R
to its variable interests entities (VIEs) created
after December 31, 2003. FIN 46 is still applicable
for all entities created after January 31, 2003. For
variable interests in VIEs created before January 31, 2003,
FIN 46R will be applied beginning on January 1, 2004.
For any VIEs that must be consolidated under FIN 46R that
were created before January 1, 2004, the assets,
liabilities and noncontrolling interests of the VIE initially
would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any
previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE.

The Company is evaluating the impact of applying
FIN 46R to existing VIEs in which it has variable interests
and has not yet completed this analysis. See Note 4 for
additional information required by FIN 46R. As the Company
continues to evaluate the impact of applying FIN 46R,
additional entities may be identified that would need to be
consolidated by the Company.

In July 2003, the SEC clarified its
interpretation of EITF Abstract, Topic No. D-42, The
Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock
(Topic D-42) which establishes standards for
how to calculate the effect on the calculation of earnings per
share for the redemption or induced conversion of preferred
stock. In September 2002, the Company redeemed its Series A
Convertible Preferred Stock with a liquidation value of
$20 million, and $15 million of its Series C
Convertible Preferred Stock. This clarification of
Topic D-42 was required to be reflected retroactively in
the first fiscal period ending after September 15, 2003 by
restating the financial statements of prior periods.
Accordingly, the Company recorded $411,000 in the third quarter
of 2002, as a distribution to preferred shareholders, related to
the offering costs for this redeemed convertible preferred stock.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150), which establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity.

F-16



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003.
SFAS 150 is to be implemented by reporting a cumulative
effect of a change in accounting principle for financial
instruments created before the issuance date and still existing
at the beginning of the interim period of adoption. The impact
of adopting SFAS 150 was not material to the Companys
financial statements. Certain of the provisions of SFAS 150
require that the minority interest ownership of consolidated
finite-life entities be shown as a liability and at their fair
value. On October 29, 2003, these provisions were
indefinitely deferred by the Financial Accounting Standards
Board for entities created before November 5, 2003. The
Company currently has certain non-wholly owned, consolidated
finite-life entities however, in the event these provisions were
effective, the impact to the Companys financial statements
would not be material as of December 31, 2003.



|   |                                                             
|-- | ------------------------------------------------------------
|3. | Acquisitions and Dispositions of Real Estate
    Investments



| |                  
| | -----------------
| | 2003 Transactions



| |             
| | ------------
| | Acquisitions

During the year ended December 31, 2003, the
Company acquired the following properties (in 000s, except
square footage):

|                             |  |       |    |             |  |         |            |      |  |              |           |                   |  |        |        |        |  |          |         |         |  |   |        |  |  |   |       |  |  |   |        |  |  |   |         |  |  |   |        | 
|---------------------------- |  | ----- | -- | ----------- |  | ------- | ---------- | ---- |  | ------------ | --------- | ----------------- |  | ------ | ------ | ------ |  | -------- | ------- | ------- |  | - | ------ |  |  | - | ----- |  |  | - | ------ |  |  | - | ------- |  |  | - | ------ | 
|                             |  |       |    |             |  |         |            |      |  |              |           |                   |  |        |        |       
|                             |  |       |    |             |  |         |            |      |  |              |           | Intangible Assets |  |        |        |       
|                             |  |       |    |             |  |         |            |      |  |              |           |                   |  |        |        |       
|                             |  |       |    |             |  |         |            |      |  |              |           | Value of          |  | Above  |        | Below  |  | Total    |         |        
|                             |  |       |    | Acquisition |  | Square  |            |      |  | Building and |           | In-Place          |  | Mkt    |        | Mkt    |  | Purchase |         | Assumed
|Seller/Property              |  | State |    | Date        |  | Footage |            | Land |  | Improvements |           | Leases            |  | Leases |        | Leases |  | Price(1) |         | Debt   
|                             |  |       |    |             |  |         |            |      |  |              |           |                   |  |        |        |        |  |          |         |        
|2040 N. Union Road           |  |       | PA |             |  |         | 1/3/2003   |      |  |              | 507,000   |                   |  | $      | 3,276  |        |  | $        | 18,574  |         |  | $ | 911    |  |  | $ |      |  |  | $ | 350    |  |  | $ | 22,411  |  |  | $ | 12,226 | 
|Capital Business Centers     |  |       | PA |             |  |         | 2/7/2003   |      |  |              | 1,600,000 |                   |  |        | 7,130  |        |  |          | 40,432  |         |  |   | 2,247  |  |  |   | 192   |  |  |   | 2,061  |  |  |   | 47,940  |  |  |   |       | 
|201 Fulling Mill Road        |  |       | PA |             |  |         | 2/26/2003  |      |  |              | 500,671   |                   |  |        | 3,569  |        |  |          | 20,333  |         |  |   | 897    |  |  |   |      |  |  |   | 957    |  |  |   | 23,842  |  |  |   | 14,285 | 
|Berger Portfolio             |  |       | NJ |             |  |         | 3/12/2003  |      |  |              | 1,900,000 |                   |  |        | 16,627 |        |  |          | 94,256  |         |  |   | 4,046  |  |  |   | 1,365 |  |  |   | 7,325  |  |  |   | 108,969 |  |  |   |       | 
|3500 Industrial Road         |  |       | PA |             |  |         | 11/3/2003  |      |  |              | 677,548   |                   |  |        | 3,265  |        |  |          | 18,505  |         |  |   | 406    |  |  |   | 28    |  |  |   | 430    |  |  |   | 21,774  |  |  |   |       | 
|International Corporate Park |  |       | FL |             |  |         | 11/10/2003 |      |  |              | 1,732,699 |                   |  |        | 18,462 |        |  |          | 104,636 |         |  |   | 2,733  |  |  |   | 671   |  |  |   | 2,649  |  |  |   | 123,853 |  |  |   | 67,591 | 
|700 AirTech Parkway(2)       |  |       | IN |             |  |         | 12/22/2003 |      |  |              | 799,344   |                   |  |        | 2,218  |        |  |          | 21,581  |         |  |   | 479    |  |  |   | 25    |  |  |   | 66     |  |  |   | 24,237  |  |  |   |       | 
|                             |  |       |    |             |  |         |            |      |  |              |           |                   |  |        |        |        |  |          |         |         |  |   |        |  |  |   |       |  |  |   |        |  |  |   |         |  |  |   |        | 
|Total                        |  |       |    |             |  |         |            |      |  |              | 7,717,262 |                   |  | $      | 54,547 |        |  | $        | 318,317 |         |  | $ | 11,719 |  |  | $ | 2,281 |  |  | $ | 13,838 |  |  | $ | 373,026 |  |  | $ | 94,102 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amount includes increase from debt premiums for
    201 Fulling Mill Road, 2040 North Union Street and International
    Corporate Park.                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | The property was part of a joint venture with
    Browning Investments, in which the Company maintained 50%
    ownership. On December 22, 2003, the Company acquired the
    building from the joint venture. The costs of the acquired
    property are allocated to the individual property and intangible
    assets based on their respective fair values to the extent of
    outside interests acquired and on a historical cost basis for
    interests already owned.

In September 2003, the Company acquired
87 acres of land in Cranbury, New Jersey for approximately
$8.2 million on which the Company is constructing a 772,000
square feet distribution facility which will be leased to Home
Depot U.S.A., Inc. under a 12-year lease. Construction on this
project commenced in September 2003.



| |             
| | ------------
| | Dispositions

In the fourth quarter of 2002, the Company had
negotiated, and its Board of Trustees had approved, the joint
venture with the BIT JV. Accordingly, the Company
classified these assets as held for sale in accordance with
SFAS 144 as of December 31, 2002.

In February 2003, the Company entered into a
joint venture agreement with the AFL-CIO forming the
BIT JV, to own industrial warehouse properties. The Company
sold six properties and contributed two properties located in
New Jersey, Indiana and Pennsylvania consisting of approximately
2.0 million square feet

F-17



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

to the joint venture at a price of
$90.3 million which resulted in a gain of approximately
$3.2 million related to the ownership interests sold by the
Company. In addition to its retained 20% equity interest, the
Management Company is the exclusive acquisition and management
agent of the properties owned by the BIT JV. While the
assets sold were classified as held for sale in accordance with
SFAS 144 as of December 31, 2002, this disposition did
not qualify for discontinued operations accounting treatment as
the Company retained a 20% equity investment.



| |                         
| | ------------------------
| | Construction-In-Progress

During 2002, the Company purchased 26 acres
of land in Jersey City, NJ, and commenced construction on two
industrial buildings, which are expected to aggregate
approximately 522,000 square feet at an expected cost of
approximately $33 million. In September 2003, the Company
began to develop an approximately 772,000 square foot
distribution center for Home Depot USA, Inc. on 87 acres
that it acquired at Station Road in Cranbury, NJ. The project
costs are estimated to be approximately $40 million. In
October 2003, the Company began construction of a 500,000 square
foot facility on 37 acres at its Cranbury East site with
estimated project costs of $24 million. The Company also
owns several industrial facilities located in Pennsylvania which
have adjacent land parcels that allow for the expansion of the
existing facilities and controls another 215 acres of land
in Central Pennsylvania. In the fourth quarter of 2003, the
Company signed an agreement for 15 of those acres to be used in
a build-to-suit arrangement in Allentown, PA. This property will
have a 265,535 square foot facility, of which 211,535 square
feet will be leased to KIA Motors America, Inc. At
December 31, 2003, approximately $58.7 million is
included in development and construction-in-progress related to
these construction projects and other development projects.

The following unaudited pro forma financial
information of the Company for the years ended December 31,
2003 and 2002 gives effect to the properties acquired and sold
through December 21, 2003 as if these purchases and sales
had occurred in January 1, 2002.

|                                                           |  |                           |         |      |  |   |        |  
|---------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | - | ------ | -
|                                                           |  |                          
|                                                           |  | Years Ended              
|                                                           |  | December 31,             
|                                                           |  |                          
|                                                           |  | 2003                      |         | 2002
|                                                           |  |                           |         |     
|                                                           |  |                          
|                                                           |  | (Unaudited)              
|                                                           |  | (In 000s, except for per
|                                                           |  | share data)              
|Pro forma total revenue                                    |  | $                         | 107,363 |      |  | $ | 97,670 |  
|Pro forma net income (loss) allocated to Common
    Shares |  | $                         | 17,302  |      |  | $ | (4,733 | )
|Pro forma net income (loss) per Common
    Share  Basic   |  | $                         | 0.77    |      |  | $ | (0.22  | )
|Pro forma net income (loss) per Common
    Share  Diluted |  | $                         | 0.76    |      |  | $ | (0.22  | )



| |                  
| | -----------------
| | 2002 Transactions



| |             
| | ------------
| | Acquisitions

During 2002, the Company acquired three
industrial properties located in Pennsylvania aggregating
1.1 million square feet and 34 acres of land in New
Jersey and Pennsylvania for an aggregate purchase price of
approximately $44.3 million.



| |             
| | ------------
| | Dispositions

On December 13, 2002, the Company disposed
of its New York office and industrial portfolio and other
industrial properties for $178.3 million in a sale to
Nocha, LLC and recorded a $31.1 million loss on this
transaction. The disposition consisted of 34 properties
totaling 3.9 million square feet, which included
19 office properties (1.3 million square feet) and 15
industrial properties (2.6 million square feet). Of the
3.9 million square feet disposed, over 2.5 million
square feet consisted of 29 non-core office and industrial
properties

F-18



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

located in the Albany, Syracuse, and Rochester
markets of New York State. Additionally, five other industrial
assets were disposed of as part of the portfolio including
433,500 square feet in Central Ohio and 906,062 square feet in
Pennsylvania. Total consideration for this disposition was
approximately $178.3 million, of which Nocha LLC assumed
approximately $106 million of fixed rate mortgage debt with
an average interest rate of 7.68%, which included
$92 million of conduit financing, and approximately
$7.8 million of mortgage debt which was repaid by Nocha,
LLC simultaneously with the closing of the sale. The Company
also repaid approximately $17.5 million of variable rate
debt under the Companys $125 million unsecured
revolving credit facility with the proceeds of the disposition.
Approximately $17.2 million of net proceeds were deposited
into 1031 exchange cash accounts to fund future acquisitions.
The remaining net proceeds were used to pay closing costs of the
transaction. The Company retained a $27 million preferred
equity investment in the portfolio, which earns an 11% preferred
return, and accounts for this investment on the equity method.

In the third quarter of 2002, the Company sold
four industrial properties and one office property which
aggregated 399,279 square feet and 66,000 square feet,
respectively, for an aggregate selling price of
$23.7 million for a net gain of $1.1 million. As a
result of these sales, these properties were reported as
discontinued operations in the Statement of Operations for all
periods presented.



| |                     
| | --------------------
| | Assets Held for Sale

The Company accounts for properties as assets
held for sale when a commitment has been made to a formal plan
of distribution and the assets are available for sale in their
present condition subject only to terms that are usual and
customary for sales of such assets. Management also evaluates
the applicable criteria to determine when actions required to
complete the plan are reasonable and that a sale within one year
is probable. The Company reports its assets held for sale at the
lower of carrying value or fair value less the cost to sell the
related asset.

As of December 31, 2002, the Company had
negotiated, and its Board of Trustees had approved, a joint
venture agreement with the AFL-CIO to form the BIT JV. The
Company expected to sell six properties and contribute two
properties at a fair value of approximately $90.3 million
to the BIT JV in 2003. Accordingly, the Company classified
these assets as held for sale in the fourth quarter of 2002, in
accordance with SFAS 144. These assets are not reported as
discontinued operations since the Company retained an equity
method investment in the BIT JV. This transaction closed in
February 2003.

The following are the assets and liabilities of
properties held for sale as of December 31, 2002 (dollars
in thousands):

|                                                  |  |                   |   |                   |  |   |        | 
|------------------------------------------------- |  | ----------------- | - | ----------------- |  | - | ------ | 
|                                                  |  | December 31, 2003 |   | December 31, 2002
|                                                  |  |                   |   |                  
|Real estate assets held for sale, at cost         |  | $                 |  |                   |  | $ | 85,622 | 
|Accumulated depreciation assets held for sale     |  |                   |  |                   |  |   | 4,919  | 
|                                                  |  |                   |   |                   |  |   |        | 
|Total real estate held for sale, net              |  |                   |  |                   |  |   | 80,703 | 
|                                                  |  |                   |   |                   |  |   |        | 
|Accounts receivable, net                          |  |                   |  |                   |  |   | 3,216  | 
|Other assets                                      |  |                   |  |                   |  |   | 2,343  | 
|                                                  |  |                   |   |                   |  |   |        | 
|Total other assets held for sale                  |  |                   |  |                   |  |   | 5,559  | 
|                                                  |  |                   |   |                   |  |   |        | 
|Total assets held for sale                        |  |                   |  |                   |  | $ | 86,262 | 
|                                                  |  |                   |   |                   |  |   |        | 
|Secured debt, including unamortized debt premiums |  |                   |  |                   |  | $ | 39,696 | 
|Other liabilities                                 |  |                   |   |                   |  |   | 1,117  | 
|                                                  |  |                   |   |                   |  |   |        | 
|Total liabilities related to assets held for sale |  | $                 |  |                   |  | $ | 40,813 | 
|                                                  |  |                   |   |                   |  |   |        | 

F-19



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued



| |                        
| | -----------------------
| | Discontinued Operations

The Company reported income from discontinued
operations relating to five properties that were sold in 2002.
Income from discontinued operations includes interest expense
directly related to the debt assumed by the buyer or debt repaid
by the Company as a result of the properties sold and excludes
any other consolidated interest expense. The following table
summarizes information for the properties sold in 2002.

|                                               |  |                    |   |      |  |      |        |   |  |   |       |  
|---------------------------------------------- |  | ------------------ | - | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                               |  |                   
|                                               |  | For the Year Ended
|                                               |  | December 31,      
|                                               |  |                   
|                                               |  | 2003               |   | 2002 |  | 2001
|                                               |  |                    |   |      |  |     
|Revenue                                        |  | $                  |  |      |  | $    | 2,898  |   |  | $ | 3,135 |  
|Property operating expenses                    |  |                    |  |      |  |      | (331   | ) |  |   | (598  | )
|Interest expense                               |  |                    |  |      |  |      | (456   | ) |  |   | (967  | )
|Depreciation and amortization expense          |  |                    |  |      |  |      | (388   | ) |  |   | (581  | )
|Gain on disposition of discontinued operations |  |                    |  |      |  |      | 871    |   |  |   |      |  
|Provision for asset impairment                 |  |                    |  |      |  |      | (1,400 | ) |  |   |      |  
|Minority interest                              |  |                    |  |      |  |      | (294   | ) |  |   | (331  | )
|                                               |  |                    |   |      |  |      |        |   |  |   |       |  
|Income from discontinued operations            |  | $                  |  |      |  | $    | 900    |   |  | $ | 658   |  
|                                               |  |                    |   |      |  |      |        |   |  |   |       |  

The following unaudited pro forma financial
information of the Company for the years ended December 31,
2002 and 2001 gives effect to the properties acquired and sold
through December 31, 2002 as if these purchases and sales
had occurred on January 1, 2001.

|                                                    |  |                       |        |      |  |   |        | 
|--------------------------------------------------- |  | --------------------- | ------ | ---- |  | - | ------ | 
|                                                    |  |                      
|                                                    |  | Years Ended          
|                                                    |  | December 31,         
|                                                    |  |                      
|                                                    |  | 2002                  |        | 2001
|                                                    |  |                       |        |     
|                                                    |  |                      
|                                                    |  | (In 000s, except for
|                                                    |  | per share data)      
|Pro forma total revenue                             |  | $                     | 67,994 |      |  | $ | 75,005 | 
|Pro forma net income allocated to Common Shares     |  | $                     | 10,135 |      |  | $ | 5,531  | 
|Pro forma net income per Common Share 
    Basic   |  | $                     | 0.52   |      |  | $ | 0.38   | 
|Pro forma net income per Common Share 
    Diluted |  | $                     | 0.52   |      |  | $ | 0.36   | 



| |                  
| | -----------------
| | 2001 Transactions

During 2001, the Company acquired 14 industrial
properties in Pennsylvania, 50 acres of land in New Jersey, and
a joint venture partners 50% interest in a
796,224 square foot industrial property in Indianapolis,
Indiana (see Note 4 to the Companys financial
statements), which aggregated 2.9 million square feet, for
an aggregate cash purchase price of $102.5 million, which
was funded through $53.6 million of mortgage financing and
$48.9 million of cash generated primarily from property
sales.

In 2001, the Company disposed of 27 industrial
and office properties located in New Jersey, Pennsylvania, and
South Carolina totaling approximately 4.3 million square
feet, including seven industrial properties aggregating
2.1 million square feet sold or contributed to the
CalEast JV (see Note 4 to the Companys financial
statements), for an aggregate net amount of approximately
$269.7 million which resulted in an aggregate gain of
$11.0 million and aggregate losses of $1.9 million and
a net aggregate gain of $9.1 million. The consideration for
these dispositions consisted of $158.0 million in cash
payments, $104.6 million in debt which was assumed by the
purchasers and, in connection with one of the dispositions
during 2001, the Company received as partial consideration a
$2.0 million note which accrues interest at 10%, matures in
2004 and is outstanding at December 31, 2003.

F-20



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued



|   |                                    
|-- | -----------------------------------
|4. | Equity Method and Other Investments



| |                                   
| | ----------------------------------
| | Keystone Realty Services,
    Inc.

The Company accounts for its investments in 100%
of the non-voting preferred stock of the Management Company in
accordance with the equity method of accounting. The Company is
entitled to receive 95% of the amounts paid as dividends by the
Management Company. The Management Company is responsible for
various activities related to the management, leasing and
development of properties owned by third parties (including the
CalEast JV and the BIT JV), as well as providing other
real estate related services for third parties.



| |                            
| | ---------------------------
| | Indianapolis Joint Ventures

In December 1998, the Company entered into an
agreement with Browning Investments, Inc. (Browning)
to develop 491 acres of land located in AirTech Park outside
Indianapolis, Indiana. The terms of the agreement give the
Company an option until December 31, 2008 to develop
distinct land parcels in AirTech Park through joint ventures in
which the Company will have a 50% non-controlling interest. For
60 days following either (a) January 1, 2004 and
each January thereafter through and including January 1,
2009, (b) a change in control of the Company; or
(c) the date the Company acquires a 50% interest in at
least 75% of the AirTech Park land, Browning has an option to
put a 50% interest in the remaining undeveloped AirTech land to
the Company at a price to be determined in accordance with the
option agreement. In June 2001, the Company acquired a 50%
interest in 4 Points Associates, LLC, a joint venture with
Browning (4 Points), which is an entity formed
to develop and construct a speculative distribution facility
totaling 799,344 square feet located in AirTech Park.
4 Points commenced the construction of this facility in
June 2001 and construction was completed in the first quarter of
2002. The distribution facility is 100% leased as of
December 31, 2003. On December 22, 2003, the Company
acquired the distribution facility from 4 Points for a purchase
price of approximately $26.4 million. The joint venture
received the full consideration of $26.4 million, which was
allocated 50% to the Company and 50% to Browning.

In July 2003, the Company acquired a 50% interest
in 5 Points Associates, LLC, a joint venture with Browning
(5 Points), which is an entity formed to
develop and construct a speculative distribution facility
totaling 813,054 square feet located in AirTech Park.
5 Points obtained a $16.4 million construction loan at
a rate equal to LIBOR plus 2% which matures in 2005. The Company
has guaranteed 50% of this loan. In connection with the
development in AirTech Park, the Company also guaranteed a
$3.2 million development loan to a Browning affiliate for
certain site improvements to AirTech Park. The Company does not
anticipate that any amounts will need to be funded by the
Company as a result of these loan guarantees as these guarantees
would only be funded if the borrowing entity defaulted and was
not able to cure its default.



| |                                        
| | ---------------------------------------
| | Keystone New Jersey Associates,
    LLC

In March 2001, the Company sold six industrial
properties and contributed another industrial property located
in northern New Jersey, which aggregated approximately
2.1 million square feet, to a joint venture between the
Company and CalEast Industrial Investors, LLC (a joint venture
between LaSalle Investment Management, Inc. and the California
Public Employees Retirement System) at a value of approximately
$103.8 million. The joint venture assumed a
$62.3 million mortgage loan on these properties. This
mortgage is collateralized by these properties, matures in April
2007 and bears a fixed interest rate of 7.91%. This joint
venture was formed to own, operate and develop industrial
property and is 80% owned by CalEast Industrial Investors, LLC
and 20% owned by the Company. The Operating Partnership acts as
the joint ventures exclusive acquisition, management and
leasing agent. Since its formation in March 2001, this joint
venture has acquired industrial properties totaling
1.3 million square feet and 62 acres of land for
approximately $63 million, including the acquisition of
230 Brighton Road, a 160,843 square foot industrial
property located

F-21



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

in New Jersey for a purchase price of
approximately $9.1 million in September 2003. The Company
has a commitment to fund approximately $6.1 million of
additional equity to this joint venture.



| |           
| | ----------
| | Nocha, LLC

In December 2002, the Company disposed of its New
York Office Portfolio for $178.3 million to Nocha, LLC. The
Company retained a $27 million preferred equity investment
in this entity which earns an 11% preferred return. The Company
may be entitled to receive additional amount from the sale of
certain assets by this entity.



| |       
| | ------
| | BIT JV

In February 2003, the Company sold six properties
and contributed two properties located in Indiana, Pennsylvania
and New Jersey which aggregated approximately 2.0 million
square feet to the BIT JV at a value of approximately
$90.3 million. This joint venture was formed to own,
operate and develop industrial properties and is 80% owned by
AFL-CIO and 20% owned by the Company. The Management Company is
the exclusive acquisition and management agent for the joint
venture. The venture assumed $20.9 million of mortgage
loans on two properties which mature in 2004 and 2013 and bear
fixed interest rates of 6.88% and 6.92%, respectively. In March
2003, the joint venture acquired five properties located in
Indiana aggregating 1.6 million square feet for
approximately $40.4 million. In October 2003, the BIT JV
acquired a 822,500 square foot property in Allentown, PA for
$34.2 million. The Company has a commitment to fund
approximately $2.3 million of additional equity to this
joint venture.

In accordance with FIN 46R, the CalEast JV,
5 Points venture, the Nocha, LLC investment and the
Management Company were reviewed to determine if the entities
were variable interest entities. The Company owns 20% interest
in the CalEast JV and does not have decision-making authority
over the venture. Also, the CalEast JV has sufficient amounts of
equity to not be considered a variable interest entity. The
5 Points joint venture has sufficient amounts of equity to
not be considered a variable interest entity and the Company has
a 50% ownership stake in the entity. The Company does not have
sole decision-making authority in 5 Points as all major
decisions are jointly made by its members. The Company has a
$27 million preferred equity investment in Nocha, LLC. The
Company does not have control over major decisions related to
its operations and the entity is sufficiently capitalized. The
Company is continuing its review of the structure of these
investments in order to determine whether these investments are
variable interest entities which would be required to be
consolidated on March 31, 2004. It is likely that the
Management Company will be consolidated as a result of
FIN 46R in 2004.

F-22



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

The following tables summarizes unaudited
financial information for the equity method and other
investments of the Company as of December 31, 2003 and 2002
and for each of the years in the three year period ended
December 31, 2003 (dollars in thousands):

|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |         |        | 
|---------------------------------------------------------------------- | ---------------------------- | -------------- | -- | ----------- | - | ----------- | ------ | --------------- | ----- | --------- | ------ | ------------------- | ----- | ------ | ----- | ----- | ----- | - | ------- | ------- | ----- | - | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                                                       |                              | 3 Points       |    | 4 Points    |   | 5 Points    |        |                 |       |           |        |                     |       |        |       |      
|                                                                       |                              | Associates,    |    | Associates, |   | Associates, |        | Keystone Realty |       |           |        | Keystone New Jersey |       | Nocha  |       |      
|                                                                       |                              | LLC(1)         |    | LLC(2)      |   | LLC(3)      |        | Services, Inc.  |       | KPJV, LLP |        | Associates, LLC(4)  |       | LLC(5) |       | Total
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |      
|2003                                                                   |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Balance Sheet                                                          |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Investment property, net                                               |                              | $              |   |             |   | $           |       |                 |       | $         | 14,877 |                     |       | $      |      |       |       | $ | 158,188 |         |       | $ | 160,220 |         |        | $ | 183,272 |         |        | $ | 516,557 |        
|Other Assets                                                           |                              |                |   |             |   |             |       |                 |       |           | 2,084  |                     |       |        | 2,843 |       |       |   | 10,626  |         |       |   | 4,690   |         |        |   | 11,683  |         |        |   | 31,926  |        
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|                                                                       | Total Assets                 |                | $  |            |   |             | $      |                |       |           | $      | 16,961              |       |        | $     | 2,843 |       |   | $       | 168,814 |       |   | $       | 164,910 |        |   | $       | 194,955 |        |   | $       | 548,483 |       
|Mortgage Debt                                                          |                              | $              |   |             |   | $           |       |                 |       | $         | 13,116 |                     |       | $      |      |       |       | $ | 53,389  |         |       | $ | 75,028  |         |        | $ | 145,945 |         |        | $ | 287,478 |        
|Other Liabilities                                                      |                              |                |   |             |   |             |       |                 |       |           | 2,089  |                     |       |        | 352   |       |       |   | 1,859   |         |       |   | 2,557   |         |        |   | 2,930   |         |        |   | 9,787   |        
|Shareholders and members equity                                        |                              |                |   |             |   |             |       |                 |       |           | 1,756  |                     |       |        | 2,491 |       |       |   | 113,566 |         |       |   | 87,325  |         |        |   | 46,080  |         |        |   | 251,218 |        
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|                                                                       | Total Liabilities and equity |                | $  |            |   |             | $      |                |       |           | $      | 16,961              |       |        | $     | 2,843 |       |   | $       | 168,814 |       |   | $       | 164,910 |        |   | $       | 194,955 |        |   | $       | 548,483 |       
|Companys Ownership %                                                  |                              |                | 50 | %           |   |             | 50     | %               |       |           | 50%    |                     |       |        | 95    | %     |       |   | 20      | %       |       |   | 20      | %       |        |   | 0       | %       |        |   |         |        
|Companys Investment at December 31,
    2003                          |                              | $              |   |             |   | $           |       |                 |       | $         | 1,636  |                     |       | $      | 5,808 |       |       | $ | 23,789  |         |       | $ | 19,175  |         |        | $ | 27,562  |         |        | $ | 77,970  |        
|2003                                                                   |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Income Statement                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Revenue                                                                |                              | $              |   |             |   | $           | 2,165  |                 |       | $         |       |                     |       | $      | 3,428 |       |       | $ | 13,738  |         |       | $ | 19,645  |         |        | $ | 29,553  |         |        | $ | 68,529  |        
|Expenses:                                                              |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|                                                                       | Operating Expenses           |                |    |            |   |             |        | 349             |       |           |        |                    |       |        |       | 2,926 |       |   |         | 2,509   |       |   |         | 4,679   |        |   |         | 9,359   |        |   |         | 19,822  |       
|                                                                       | Other Expenses               |                |    |            |   |             |        | 8               |       |           |        |                    |       |        |       |      |       |   |         | 7       |       |   |         | 48      |        |   |         | 5,177   |        |   |         | 5,240   |       
|                                                                       | Depreciation & Amortization  |                |    |            |   |             |        | 550             |       |           |        | 1,237               |       |        |       | 381   |       |   |         | 3,583   |       |   |         | 4,321   |        |   |         | 4,688   |        |   |         | 14,760  |       
|                                                                       | Interest                     |                |    |            |   |             |        | 469             |       |           |        | 4                   |       |        |       | 6     |       |   |         | 1,517   |       |   |         | 5,399   |        |   |         | 10,350  |        |   |         | 17,745  |       
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|                                                                       |                              | Total Expenses |    | $           |  |             |        | $               | 1,376 |           |        | $                   | 1,241 |        |       | $     | 3,313 |   |         | $       | 7,616 |   |         | $       | 14,447 |   |         | $       | 29,574 |   |         | $       | 57,567 | 
|Net Income (Loss)                                                      |                              | $              |   |             |   | $           | 789    |                 |       | $         | (1,241 | )                   |       | $      | 115   |       |       | $ | 6,122   |         |       | $ | 5,198   |         |        | $ | (21     | )       |        | $ | 10,962  |        
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Equity in income (losses) from equity method and
    other investments |                              | $              |   |             |   | $           | 394    |                 |       | $         |       |                     |       | $      | 112   |       |       | $ | 1,224   |         |       | $ | 1,047   |         |        | $ | 2,969   |         |        | $ | 5,746   |        
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|2002                                                                   |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Balance Sheet                                                          |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|Investment property, net                                               |                              | $              |   |             |   | $           | 19,180 |                 |       | $         |       |                     |       | $      |      |       |       | $ |        |         |       | $ | 154,232 |         |        | $ | 187,748 |         |        | $ | 361,160 |        
|Other Assets                                                           |                              |                |   |             |   |             |       |                 |       |           |       |                     |       |        | 5,985 |       |       |   |        |         |       |   | 4,483   |         |        |   | 9,999   |         |        |   | 20,467  |        
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|                                                                       | Total Assets                 |                | $  |            |   |             | $      | 19,180          |       |           | $      |                    |       |        | $     | 5,985 |       |   | $       |        |       |   | $       | 158,715 |        |   | $       | 197,747 |        |   | $       | 381,627 |       
|Mortgage Debt                                                          |                              | $              |   |             |   | $           | 16,180 |                 |       | $         |       |                     |       | $      |      |       |       |   |         |         |       | $ | 75,985  |         |        | $ | 147,726 |         |        | $ | 239,891 |        
|Other Liabilities                                                      |                              |                |   |             |   |             | 326    |                 |       |           |       |                     |       |        | 462   |       |       |   |         |         |       |   | 2,116   |         |        |   | 1,260   |         |        |   | 4,164   |        
|Shareholders and members equity                                        |                              |                |   |             |   |             | 2,674  |                 |       |           |       |                     |       |        | 5,523 |       |       |   |         |         |       |   | 80,614  |         |        |   | 48,761  |         |        |   | 137,572 |        
|                                                                       |                              |                |    |             |   |             |        |                 |       |           |        |                     |       |        |       |       |       |   |         |         |       |   |         |         |        |   |         |         |        |   |         |        
|                                                                       | Total Liabilities and equity |                | $  |            |   |             | $      | 19,180          |       |           | $      |                    |       |        | $     | 5,985 |       |   | $       |        |       |   | $       | 158,715 |        |   | $       | 197,747 |        |   | $       | 381,627 |       
|Companys Ownership %                                                  |                              |                | 50 | %           |   |             | 50     | %               |       |           | 0%     |                     |       |        | 95    | %     |       |   | 20      | %       |       |   | 20      | %       |        |   | 0       | %       |        |   |         |        
|Companys Investment at December 31,
    2002                          |                              | $              |   |             |   | $           | 2,744  |                 |       | $         |       |                     |       | $      | 5,900 |       |       | $ |        |         |       | $ | 17,826  | (3)     |        | $ | 27,154  |         |        | $ | 53,624  |        

F-23



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |       |        | 
|---------------------------------------------------------------------- | --------------------------- | -------------- | ----- | ----------- | ----- | ----------- | --- | --------------- | --- | --------- | - | ------------------- | - | ------ | ----- | ----- | ----- | - | - | - | - | - | ------ | ----- | ------ | - | ----- | --- | ----- | - | ------ | ----- | ------ | 
|                                                                       |                             | 3 Points       |       | 4 Points    |       | 5 Points    |     |                 |     |           |   |                     |   |        |       |      
|                                                                       |                             | Associates,    |       | Associates, |       | Associates, |     | Keystone Realty |     |           |   | Keystone New Jersey |   | Nocha  |       |      
|                                                                       |                             | LLC(1)         |       | LLC(2)      |       | LLC(3)      |     | Services, Inc.  |     | KPJV, LLP |   | Associates, LLC(4)  |   | LLC(5) |       | Total
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |      
|2002                                                                   |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|Income Statement                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|Revenue                                                                |                             | $              |      |             |       | $           | 764 |                 |     | $         |  |                     |   | $      | 2,570 |       |       | $ |  |   |   | $ | 17,178 |       |        | $ | 1,550 |     |       | $ | 22,062 |      
|Expenses:                                                              |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|                                                                       | Operating Expenses          |                |       |            |       |             |     | 70              |     |           |   |                    |   |        |       | 2,570 |       |   |   |  |   |   |        | 3,447 |        |   |       | 440 |       |   |        | 6,527 |       
|                                                                       | Other Expenses              |                |       |            |       |             |     |                |     |           |   |                    |   |        |       |      |       |   |   |  |   |   |        | 44    |        |   |       | 94  |       |   |        | 138   |       
|                                                                       | Depreciation & Amortization |                |       |            |       |             |     | 107             |     |           |   |                    |   |        |       | 380   |       |   |   |  |   |   |        | 3,638 |        |   |       |    |       |   |        | 4,125 |       
|                                                                       | Interest                    |                |       |            |       |             |     | 151             |     |           |   |                    |   |        |       | 20    |       |   |   |  |   |   |        | 5,508 |        |   |       | 583 |       |   |        | 6,262 |       
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|                                                                       |                             | Total Expenses |       | $           |      |             |     | $               | 328 |           |   | $                   |  |        |       | $     | 2,970 |   |   | $ |  |   |        | $     | 12,637 |   |       | $   | 1,117 |   |        | $     | 17,052 | 
|Net Income (Loss)                                                      |                             | $              |      |             |       | $           | 436 |                 |     | $         |  |                     |   | $      | (400  | )     |       | $ |  |   |   | $ | 4,541  |       |        | $ | 433   |     |       | $ | 5,010  |      
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|Equity in income (losses) from equity method and
    other investments |                             | $              |      |             |       | $           | 218 |                 |     | $         |  |                     |   | $      | (381  | )     |       | $ |  |   |   | $ | 908    |       |        | $ | 154   |     |       | $ | 899    |      
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|2001                                                                   |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|Income Statement                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|Revenue                                                                |                             | $              | 2,270 |             |       | $           |    |                 |     | $         |  |                     |   | $      | 3,561 |       |       | $ |  |   |   | $ | 12,600 |       |        | $ |      |     |       | $ | 18,431 |      
|Expenses:                                                              |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|                                                                       | Operating Expenses          |                |       | 106         |       |             |     |                |     |           |   |                    |   |        |       | 3,197 |       |   |   |  |   |   |        | 2,452 |        |   |       |    |       |   |        | 5,755 |       
|                                                                       | Other Expenses              |                |       |            |       |             |     |                |     |           |   |                    |   |        |       |      |       |   |   |  |   |   |        | 54    |        |   |       |    |       |   |        | 54    |       
|                                                                       | Depreciation & Amortization |                |       | 448         |       |             |     |                |     |           |   |                    |   |        |       | 225   |       |   |   |  |   |   |        | 2,539 |        |   |       |    |       |   |        | 3,212 |       
|                                                                       | Interest                    |                |       | 700         |       |             |     |                |     |           |   |                    |   |        |       | 169   |       |   |   |  |   |   |        | 4,319 |        |   |       |    |       |   |        | 5,188 |       
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|                                                                       |                             | Total Expenses |       | $           | 1,254 |             |     | $               |    |           |   | $                   |  |        |       | $     | 3,591 |   |   | $ |  |   |        | $     | 9,364  |   |       | $   |      |   |        | $     | 14,209 | 
|Net Income (Loss)                                                      |                             | $              | 1,016 |             |       | $           |    |                 |     | $         |  |                     |   | $      | (30   | )     |       | $ |  |   |   | $ | 3,236  |       |        | $ |      |     |       | $ | 4,222  |      
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      
|Equity in income (losses) from equity method
    investments           |                             | $              | 508   |             |       | $           |    |                 |     | $         |  |                     |   | $      | (29   | )     |       | $ |  |   |   | $ | 644    |       |        | $ |      |     |       | $ | 1,123  |      
|                                                                       |                             |                |       |             |       |             |     |                 |     |           |   |                     |   |        |       |       |       |   |   |   |   |   |        |       |        |   |       |     |       |   |        |      



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company acquired the property owned by this
    joint venture in November 2001 and, accordingly, has
    consolidated the operating results of this asset since that date.
|   
|(2) | The Company acquired the property owned by this
    joint venture in December 2003 and, accordingly, has
    consolidated the operating results of this asset since that date.
|   
|(3) | The Company has a joint and several guarantee of
    the $16.4 million recourse construction loan of this
    venture which matures in June 2004.                             
|   
|(4) | The Companys investment in this venture
    includes approximately $2.0 million in outside basis which
    is being amortized over the seven year life of the venture.       
|   
|(5) | The Company earns an 11% return on a
    $27 million preferred equity investment.                                                                                             





|   |             
|-- | ------------
|5. | Indebtedness



| |                           
| | --------------------------
| | Variable Rate Indebtedness

In March 2003, the Companys
$125 million unsecured revolving credit facility (the
Credit Facility) was increased to $185 million.
Borrowings under the Credit Facility may be used by the Company
to fund acquisition and development of real estate, as well as
providing working capital to the Company. The Credit Facility,
which was originated in December 2001, has a term of three years
with a one year extension available at the option of the
Company. Interest is calculated based on a grid which is based
on the Companys leverage ranging from LIBOR plus 1.35% to
LIBOR plus 1.875%. Based on the Companys current leverage,
the facility is priced at LIBOR plus 1.875%. The interest rate
on this facility was 2.88% at December 31, 2003. At
December 31, 2003 and 2002, the Company had
$135.4 million and $97.5 million, respectively,
outstanding on the Credit Facility. The weighted average balance
outstanding and weighted average interest rate for the years

F-24



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

ended December 31, 2003, 2002, and 2001 were
$142.7 million, $84.9 million and $85.3 million,
and 3.16%, 3.45% and 6.27%, respectively. The Credit Facility
requires the Company to meet certain financial covenants,
including certain leverage and coverage ratios, on a quarterly,
annual and ongoing basis. The Company is in compliance with
these debt covenants as of December 31, 2003.

In September 2003, the Company obtained a
$75 million unsecured term credit facility (the Term
Loan) which matures in September 2008. Interest is
calculated based on a grid which is based on the Companys
leverage ranging from LIBOR plus 1.35% to LIBOR plus 1.75%.
Based on the Companys current leverage, the Term Loan is
priced at LIBOR plus 1.75%. The weighted average interest rate
for the year ended December 31, 2003 was 2.75%. The Term
Loan requires the Company to meet certain financial covenants,
which are identical to the Credit Facility covenants.

The Company has other variable rate loans
outstanding aggregating $58.2 million and
$33.2 million at December 31, 2003 and 2002
respectively. As of December 31, 2003 and 2002, interest
rates on these loans ranged from 2.66% to 3.09%, and 2.87% to
4.50%, respectively. The weighted average interest rates for
these loans were 3.01% and 4.17% at December 31, 2003 and
2002, respectively. The maturities for these loans range from
October 2004 through April 2005.



| |                        
| | -----------------------
| | Fixed Rate Indebtedness

Mortgage notes payable of $252.6 million and
$186.1 million, excluding debt premiums, encumbered 31 and
21 of the properties at December 31, 2003 and 2002,
respectively. At December 31, 2003, interest rates on the
mortgage loans ranged from fixed rates of 6.89% to 8.41%. These
mortgage notes had weighted average interest rates of 7.77%,
7.66% and 7.75% at December 31, 2003, 2002 and 2001,
respectively. The maturities for these notes range from October
2004 through April 2012.

See Notes 8 and 12 for discussion of the
Companys loan guarantees.

Maturities of debt, excluding debt premiums as of
December 31, 2003, over the next five years are as follows
(in 000s):

|                    |  |              |       |               |  |       |         |     |  |   |         | 
|------------------- |  | ------------ | ----- | ------------- |  | ----- | ------- | --- |  | - | ------- | 
|                    |  | Principal    |       | Amount due at |  |      
|                    |  | Amortization |       | Maturity      |  | Total
|                    |  |              |       |               |  |      
|2004                |  |              | 3,841 |               |  |       | 189,096 | (1) |  |   | 192,937 | 
|2005                |  |              | 3,933 |               |  |       | 36,984  |     |  |   | 40,917  | 
|2006                |  |              | 3,782 |               |  |       | 12,509  |     |  |   | 16,291  | 
|2007                |  |              | 1,751 |               |  |       | 103,448 |     |  |   | 105,199 | 
|2008                |  |              | 1,703 |               |  |       | 97,807  |     |  |   | 99,510  | 
|2009 and thereafter |  |              | 3,558 |               |  |       | 62,784  |     |  |   | 66,342  | 
|                    |  |              |       |               |  |       |         |     |  |   |         | 
|TOTAL               |  |              |       |               |  |       |         |     |  | $ | 521,196 | 
|                    |  |              |       |               |  |       |         |     |  |   |         | 



---



|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the Companys Credit Facility,
    which has an outstanding balance of approximately
    $135.4 million at December 31, 2003. The Company has
    an option to extend the maturity date for an additional year to
    December 2005.

The Company has a total net carrying amount of
$448.1 million of assets mortgaged, pledged or otherwise
collateralized for approximately $310.8 million of debt
obligations as of December 31, 2003.

6.     Preferred and
Common Share Offerings

On February 18, 2003, the Company issued
2,400,000 shares of 9.125% Series D Cumulative
Redeemable Preferred Stock (Series D Preferred
Shares) at $25.00 per share. This preferred stock can
be redeemed

F-25



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

for cash at par at the election of the Company on
or after February 19, 2008. These securities have no stated
maturity, sinking fund or mandatory redemption requirements and
are not convertible into any other securities of the Company.
The Company granted the underwriters an over-allotment option to
purchase up to an additional 360,000 shares of its
Series D Preferred Shares, and this option was exercised in
full on February 21, 2003. The shares are traded on the New
York Stock Exchange under the symbol KTRPrD. The net
proceeds of the offering of approximately $67 million were
initially used to repay existing indebtedness outstanding under
the Credit Facility, as well as for general corporate purposes,
including funding property acquisitions and the Companys
development activities.

On November 7, 2003, the Company issued
4,000,000 Common Shares at $19.60 per share before the
underwriters discount. The Company initially used the net
proceeds of $77.5 million from this offering to repay
certain amounts outstanding under its Credit Facility and to
fund the acquisition of the Easton Portfolio.

In September 2002, the Company sold 2,000,000
Common Shares at a price of $16.415 per share. The Company
used the net proceeds of approximately $31.5 million to
repurchase all 800,000 shares of its Series A
Convertible Preferred Stock, with a $20.0 million
liquidation preference, which required a 9.00% preferred
dividend, and 200,000 shares of its Series C
Convertible Preferred Stock, with a $5.0 million
liquidation preference, which required a 9.75% preferred
dividend, from AEW Targeted Securities Fund, L.P., and all of
its Series B Convertible Preferred Units, with a
$7.5 million liquidation preference, which required a 9.50%
preferred return, from Hopewell Properties, Inc.

F-26



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

7.     Shareholders
Equity

The following table summarizes the Companys
Common Share and Convertible Preferred Stock activity in 2003,
2002 and 2001:

|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|----------------------------------------------------------------------- |  | ---------- | ---------- | --------------- |  | --------- | ---------- | ----------- |  | ---------------- | ---------- | ------------------ |  | - | ------------ |  |  | - | ------------ |  |  | - | ------- | -
|                                                                        |  |            |            | Number of       |  |           |            |             |  |                  |            | Net Cash          
|                                                                        |  | Date of    |            | Shares          |  | Number of |            |             |  |                  |            | Proceeds/         
|                                                                        |  | Issuance/  |            | Convertible     |  | Common    |            |             |  | Exercise or      |            | (Repurchase Costs)
|Type of Issuance                                                        |  | Repurchase |            | Preferred Stock |  | Shares    |            | Share Price |  | Conversion Price |            | (in 000s)        
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                   
|2003 Activity                                                           |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|Common Shares issuance(1)                                               |  |            | 11/7/2003  |                 |  |           |           |             |  |                  | 4,000,000  |                    |  | $ | 19.60        |  |  |   |             |  |  | $ | 77,317  |  
|Preferred Shares issuance(2)                                            |  |            | 2/18/2003  |                 |  |           | 2,760,000  |             |  |                  |           |                    |  | $ | 25.00        |  |  |   |             |  |  |   | 66,152  |  
|Series C Convertible Preferred Stock
    conversion to Common Shares(3) |  |            | 10/16/2003 |                 |  |           | (100,000   | )           |  |                  | 158,730    |                    |  |   |             |  |  | $ | 15.75        |  |  |   |        |  
|Stock options exercised                                                 |  |            | Various    |                 |  |           |           |             |  |                  | 43,966     |                    |  |   |             |  |  | $ | 12.31-$16.50 |  |  |   |        |  
|Common Shares issued as compensation(4)                                 |  |            | 1/17/2003  |                 |  |           |           |             |  |                  | 14,592     |                    |  | $ | 15.90        |  |  |   |             |  |  |   |        |  
|Executive and employee stock issuance(5)                                |  |            | 4/15/2003  |                 |  |           |           |             |  |                  | 205,954    |                    |  | $ | 15.90        |  |  |   |             |  |  |   |        |  
|OP Unit conversions(6)                                                  |  |            | Various    |                 |  |           |           |             |  |                  | 575,518    |                    |  |   |             |  |  |   |             |  |  |   |        |  
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|                                                                        |  |            |            |                 |  |           | 2,660,000  |             |  |                  | 4,998,760  |                    |  |   |              |  |  |   |              |  |  |   | 143,469 |  
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|2002 Activity                                                           |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|Common Shares issuance(7)                                               |  |            | 9/4/2002   |                 |  |           |           |             |  |                  | 2,000,000  |                    |  | $ | 16.42        |  |  | $ |             |  |  | $ | 31,498  |  
|Series A Convertible Preferred Stock
    repurchase(7)                  |  |            | 9/9/2002   |                 |  |           | (800,000   | )           |  |                  |           |                    |  |   |             |  |  |   |             |  |  |   | (20,400 | )
|Series C Convertible Preferred Stock
    repurchase(7)                  |  |            | 9/9/2002   |                 |  |           | (200,000   | )           |  |                  |           |                    |  |   |             |  |  |   |             |  |  |   | (5,100  | )
|Stock options exercised                                                 |  |            | Various    |                 |  |           |           |             |  |                  | 188,414    |                    |  |   |             |  |  | $ | 10.00-$15.75 |  |  |   |        |  
|Common Shares issued as compensation(4)                                 |  |            | Various    |                 |  |           |           |             |  |                  | 17,121     |                    |  | $ | 11.93-$13.10 |  |  |   |             |  |  |   |        |  
|Executive and employee stock issuance(5)                                |  |            | Various    |                 |  |           |           |             |  |                  | 212,791    |                    |  | $ | 13.10-$15.39 |  |  |   |             |  |  |   |        |  
|Executive and employee stock
    repurchase/forfeiture(8)               |  |            | Various    |                 |  |           |           |             |  |                  | (195,917   | )                  |  |   |             |  |  |   |             |  |  |   |        |  
|OP Unit conversions(6)                                                  |  |            | Various    |                 |  |           |           |             |  |                  | 735,575    |                    |  |   |             |  |  |   |             |  |  |   |        |  
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|                                                                        |  |            |            |                 |  |           | (1,000,000 | )           |  |                  | 2,957,984  |                    |  |   |              |  |  |   |              |  |  | $ | 5,998   |  
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|2001 Activity                                                           |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|Common Shares issuance(9)                                               |  |            | 9/7/2001   |                 |  |           |           |             |  |                  | 375,000    |                    |  | $ | 13.65        |  |  | $ |             |  |  | $ | 4,851   |  
|Common Shares repurchase(9)                                             |  |            | 9/7/2001   |                 |  |           |           |             |  |                  | (375,000   | )                  |  | $ | 12.75        |  |  |   |             |  |  |   | (4,781  | )
|Common Shares issuance(10)                                              |  |            | 8/27/2001  |                 |  |           |           |             |  |                  | 2,500,000  |                    |  | $ | 13.65        |  |  |   |             |  |  |   | 32,161  |  
|Series B Convertible Preferred Stock
    converted to Common Shares(10) |  |            | 8/27/2001  |                 |  |           | (803,871   | )           |  |                  | 1,256,048  |                    |  |   |              |  |  | $ | 16.00        |  |  |   |        |  
|Common Shares repurchase(10)                                            |  |            | 8/27/2001  |                 |  |           |           |             |  |                  | (2,500,000 | )                  |  | $ | 14.28        |  |  |   |             |  |  |   | (35,700 | )
|Common Shares repurchase(11)                                            |  |            | 5/1/2001   |                 |  |           |           |             |  |                  | (1,693,471 | )                  |  | $ | 11.94        |  |  |   |             |  |  |   | (20,220 | )
|Common Shares issuance(11)                                              |  |            | 4/30/2001  |                 |  |           |           |             |  |                  | 7,500,000  |                    |  | $ | 12.20        |  |  |   |             |  |  |   | 85,710  |  
|Common Shares issued as compensation(4)                                 |  |            | Various    |                 |  |           |           |             |  |                  | 18,415     |                    |  | $ | 13.04-$13.29 |  |  |   |             |  |  |   |        |  
|Executive and employee stock issuance(5)                                |  |            | Various    |                 |  |           |           |             |  |                  | 156,256    |                    |  | $ | 12.83        |  |  |   |             |  |  |   |        |  
|OP Unit conversions(6)                                                  |  |            | Various    |                 |  |           |           |             |  |                  | 1,839,081  |                    |  |   |             |  |  |   |             |  |  |   |        |  
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  
|                                                                        |  |            |            |                 |  |           | (803,871   | )           |  |                  | 9,076,329  |                    |  |   |              |  |  |   |              |  |  | $ | 62,021  |  
|                                                                        |  |            |            |                 |  |           |            |             |  |                  |            |                    |  |   |              |  |  |   |              |  |  |   |         |  

F-27



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | These Common Shares were issued in a public
    offering by the Company for aggregate net proceeds of
    $77.3 million. Net proceeds from this offering were used to
    repay certain amounts of outstanding under its Credit Facility
    and to fund the acquisition of 13 properties in Miami, Florida.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (2) | These Preferred Shares were issued in a public
    offering by the Company for aggregate net proceeds of
    $66.1 million. Net proceeds from this offering were used to
    repay existing indebtedness outstanding under the Companys
    Credit Facility as well as for general corporate purposes,
    including funding acquisitions and the Companys
    development activities.                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (3) | In October 2003, 100,000 of the Companys
    Series C Convertible Preferred Shares were converted to
    158,730 Common Shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (4) | Shares issued to trustees as compensation in lieu
    of cash for trustee fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (5) | As part of the Companys Omnibus Incentive
    Plan (Note 10), during 2002 and 2001 the Company issued
    Common Shares to certain executives and employees in
    consideration for non-interest bearing and interest bearing
    notes. In 2003 and 2002, the Company issued Common Shares for
    restricted stock awards (Note 10).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (6) | Represents Common Shares issued upon conversion
    of OP Units at the request of the respective unitholders. In
    2001, affiliates of Reckson Associates Realty Corp.
    (Reckson) converted 796,129 shares of
    Series C Convertible Preferred Units to 1,243,952 Common
    Shares which were simultaneously repurchased along with an
    additional 1,256,048 Common Shares (as discussed in 10 below).                                                                                                                                                                                                                                                                                                                                                                          
|
| | (7) | These Common Shares were issued in a public
    offering by the Company for aggregate net proceeds of
    $31.5 million. Net proceeds from his offering were used to
    repurchase all of the Companys 800,000 outstanding shares
    of its Series A Convertible Preferred Stock, with a
    $20.0 million liquidation preference, which required a
    9.00% preferred dividend, and 200,000 shares of its
    Series C Convertible Preferred Stock, with a
    $5.0 million liquidation preference, which required a 9.75%
    preferred dividend, from AEW Targeted Securities Fund, L.P., and
    all of its 300,000 Series B Convertible Preferred Units,
    with a $7.5 million liquidation preference, which required
    a 9.50% preferred return, from Hopewell Properties, Inc.
|
| | (8) | As a result of certain employee terminations,
    16,793 Common Shares were forfeited and 179,124 Common Shares
    were repurchased during 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (9) | These Common Shares were issued as the
    underwriter of the August 27, 2001 offering (see
    (10) below) exercised its over-allotment option for 375,000
    Common Shares for aggregate net proceeds of $4.8 million.
    The net proceeds from this offering were used to repurchase
    375,000 Common Shares at a cost of $12.75 per share from
    affiliates of Francesco Galesi, a former trustee of the Company.
    These shares were obtained as a result of the conversions of OP
    Units.                                                                                                                                                                                                                                                                                   



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | These Common Shares were issued in a public
    offering by the Company for aggregate net proceeds of
    $32.2 million. Net proceeds from this offering were used to
    repurchase 2,500,000 Common Shares from affiliates of Reckson,
    who converted 803,871 shares of Series B Convertible
    Preferred Stock into 1,256,048 Common Shares and 796,129
    Series C Convertible Preferred Units into 1,243,952 Common
    Shares. All of these Common Shares were repurchased by the
    Company for $35.7 million, a discount of 11% from their
    liquidation value.
|    
|(11) | These Common Shares were issued in a public
    offering by the Company for aggregate net proceeds of
    $85.7 million. Net proceeds from this offering were used to
    repurchase 1,693,471 Common Shares and 765,807 OP Units from
    Crescent Real Estate Equities, Inc. for an aggregate cost of
    $29.4 million. The remaining proceeds of $56 million
    were used to repay borrowings under the Companys
    $150 million secured revolving credit facility and other
    debt.                                                                                  

F-28



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued



| |                                                      
| | -----------------------------------------------------
| | Minority Interest and Convertible Preferred
    Units

Minority interest represents interests in the
Operating Partnership owned by its limited partners. Income
allocated to the minority interest is based on the ownership of
the limited partners throughout the year. Pursuant to the
amended and restated limited partnership agreement, the limited
partners of the Operating Partnership have a conversion right,
which enables each limited partner to convert their interests in
the Operating Partnership into Common Shares or cash, at the
election of the Company, at any time on a one for one basis. The
number of shares relating to the conversion right remains stable
irrespective of the market price of the Companys Common
Shares. The limited partners, in the aggregate, excluding
2.1 million of Convertible Preferred Units outstanding,
could convert their partnership interests in the Operating
Partnership into 5.1 million, 5.6 million, and
6.4 million Common Shares as of December 31, 2003,
2002 and 2001, respectively. OP Units totaling 575,518, 735,575
and 595,129, were converted into Common Shares in 2003, 2002 and
2001, respectively.

The Company has two series of non-voting
Convertible Preferred Units outstanding all of which have a
liquidation value of $25 per unit. The 1,664,965
Series C Convertible Preferred Units have a conversion
price of $16.00 and require a preferred return of 9.75%. The
450,700 Series D Convertible Preferred Units have a
conversion price of $16.50 and require a preferred return of
9.0%. The preferential return on the Series C Convertible
Preferred Units is subject to increase in the event that the
annual distribution on common OP Units exceeds $1.56. On
September 20, 2002, the Company redeemed $7.5 million
of 300,000 Series B Convertible Preferred Units
outstanding, which had a conversion price of $16.50 and required
a preferred return of 9.5%. The Series C and Series D
Convertible Preferred Units are not redeemable by the Company
prior to September 27, 2004 and July 21, 2004,
respectively. The redemption price for the Series C
Convertible Preferred Units subsequent to September 27,
2004 through September 27, 2009 includes a defined premium
as specified in the amended and restated limited partnership
agreement.

In February 2004, the holders of 1,664,965 of the
Series C Convertible Preferred Units, 239,555 of the
Series D Convertible Preferred Units and 1,076,668 Common
OP Units converted these units into Common Shares and sold the
Common Shares in a public offering. The Company did not receive
any proceeds from this offering. See Note 15 for additional
discussion on these conversions.

8.     Related Party
Transactions



| |                                           
| | ------------------------------------------
| | Transactions Among Officers &
    Trustees

The Company had leases with companies in which
Francesco Galesi, Michael J. Falcone and Joseph D.
Morris, former trustees of the Company, are officers and
shareholders. The annual aggregate base rental revenue under
these leases was approximately $729,000 and $724,000 for the
years ended December 31, 2002 and 2001, respectively.

The Company incurred costs during 2003, 2002 and
2001 related to construction, capital and tenant improvements of
approximately $0, $243,000 and $361,000, respectively, leasing
commissions of $54,000, $348,000 and $208,000, respectively, and
repairs, maintenance and other costs of $1,000, $282,000 and
$315,000, respectively, which were earned by companies in which
David F. McBride, the Companys Chairman and
Messrs. Galesi, Falcone and Morris are officers and
shareholders.

Certain limited partners of the Operating
Partnership, which include Messrs. Kelter, Falcone and
Morris and entities in which these have an ownership interest,
have guaranteed mortgage loans aggregating approximately
$30 million at December 31, 2003.

The Management Company has earned $324,000,
$566,000 and $738,000 in 2003, 2002 and 2001, respectively,
related to management fees, leasing commissions and other fees
for an entity that owns an office

F-29



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

property located in Philadelphia, PA in which
Mr. Kelter, the Companys President and Chief
Executive Officer and trustee, has a general partnership
interest.

Certain executive officers of the Company,
including Jeffrey E. Kelter, have an aggregate 11% limited
partnership interest in 21 Roadway, LP, a partnership which is
89% owned by the Company.

The Company was obligated to pay an affiliate of
Mr. Morris, a former Trustee of the Company, additional
purchase price related to the RMIT transaction in an amount
equal to 1.5% of the monthly rent collected from the tenants in
the acquired buildings. These payments were required to be made
monthly during the period from October 1999 until October 2002.
In 2002 and 2001, the Company incurred approximately $334,000,
and $444,000, respectively, related to this obligation. The
Company had also loaned an affiliate of Mr. Morris $787,000
as part of the closing of the RMIT transaction in 1999. This
loan required monthly interest payments at prime plus 1% and had
an original maturity date of October 2001. In September 2001,
the terms of this loan were amended to provide for forgiveness
of a portion of this loan by the Company. During 2001, Morris
Realty, L.P. repaid $287,000 of this loan and the remaining
principal balance of $500,000 will be forgiven and reduced by
approximately $167,000 annually over a three year period.

Certain affiliates of Mr. Morris have
received equity interests in certain entities which are
controlled by the Company as consideration for development fees
which the Company is required to pay in accordance with the
terms of the RMIT transaction. In 2001, the Company paid a fee
of approximately $3.0 million to an affiliate of Joseph
Morris and certain unitholders of the Operating Partnership for
services provided in connection with the sale of a property
owned by the Company.

As discussed in Note 6, in 2001, the Company
acquired 375,000 Common Shares from affiliates of
Mr. Galesi, a trustee of the Company until June 2002, for
an aggregate price of $4.8 million. The Company also
repurchased 2.5 million Common Shares from affiliates of
Reckson for an aggregate price of $35.7 million. Scott
Rechler, a former trustee of the Company, is Co-Chief Executive
Officer of Reckson.

The Company and affiliates of Mr. Galesi,
each guarantee $2 million of an $11.8 million mortgage
loan related to two office properties which were sold to Nocha,
LLC in 2002.

In 2002, in a transaction that was approved by
the shareholders of the Company at the Companys 2002
annual meeting of shareholders, the Company received 390,735 OP
Units from an affiliate of Mr. McBride, in exchange for the
issuance of 390,735 Common Shares to him and certain members of
his family in a transaction intended to qualify as a
reorganization under Section 368(a) of the Code. Pursuant
to the contribution agreement for the transaction,
Mr. McBride and certain affiliates and family members
released the Company from certain contractual commitments
relating to the requirement for the Company to reinvest proceeds
from any sale of certain of the Companys properties in
accordance with Section 1031 of the Code.

As further discussed in Notes 10 and 12, certain
executives and other employees have recourse loans from the
Company related to Common Share issuances and purchases from the
Company.

The Company is a co-defendant in an action
entitled McBride Corporate Real Estate v. Keystone
Properties Trust, Kushner Companies and CK Bergen Associates,
L.L.C., filed in 2003 in the Superior Court of Bergen
County, New Jersey. David F. McBride, the Companys
Chairman, is an officer and shareholder of the plaintiff. In the
complaint, the plaintiff alleges that it is entitled to payment
of approximately $665,000 in leasing commissions under a
brokerage agreement (the McBride Commission
Agreement) relating to an office lease at a property in
Oakland, New Jersey. The plaintiff is seeking, among other
things, compensatory damages, consequential damages, interest
and equitable relief. The Company believes that the claim is
without merit for the reasons set forth below. The plaintiff
alleges that the breach of contract occurred in October 2002,
when a commission of approximately $320,000 became due and
payable under the McBride Commission Agreement. The Company sold
the property in question in November 2001 (i.e., 11 months
prior to the commission due date) to an affiliate of the other
defendants in the action. The agreement of sale

F-30



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

between the Company and the purchaser
specifically provided that the purchaser would be responsible
for payment of all leasing commissions under the McBride
Commission Agreement which became due and payable after the
closing date. Accordingly, the Company intends to pursue a claim
against the co-defendants and otherwise vigorously defend this
action.

Through the Operating Partnerships 100%
ownership of the preferred stock of the Management Company, the
Operating Partnership is entitled to receive 95% of the amounts
paid as dividends by the Management Company. The remaining
amounts paid as dividends by the Management Company are paid to
the holders of common stock of the Management Company.
Mr. Kelter, another investor in the Company and
Mr. McBride and certain members of his family own 40%, 30%
and 30%, respectively, of the common stock of the Management
Company. No dividends were paid by the Management Company in
2003, 2002 or 2001.

The Management Company, an affiliate of the
Company, receives management fees and other fee compensation for
services provided to the CalEast JV and the BIT JV. In
2003, 2002 and 2001, the Company received approximately
$814,000, $157,000 and $240,000, respectively in fees as a
result of services provided to the CalEast JV and BIT JV for
acquisition services.

An aggregate of 50,128 common shares were issued
in 2003, 2002 and 2001 to our non-employee trustees, as
compensation for their service as trustees, in lieu of cash fees.

The Company has $269,000 in receivables for
insurance premiums due from affiliates at December 31, 2003.

9.     Operating
Leases and Other Tenant Matters

The Companys properties are leased to
tenants generally under operating leases with expiration dates
extending through 2019. As of December 31, 2003, future
minimum rentals under 133 noncancellable operating leases,
excluding tenant reimbursements of operating expenses, are as
follows:

|           |  |            |        | 
|---------- |  | ---------- | ------ | 
|           |  | (In 000s)
|           |  |           
|2004       |  | $          | 79,258 | 
|2005       |  | $          | 64,730 | 
|2006       |  | $          | 52,465 | 
|2007       |  | $          | 43,316 | 
|2008       |  | $          | 32,906 | 
|Thereafter |  | $          | 82,298 | 

The revenue resulting from straight-line rental
income adjustments for the years ended December 31, 2003,
2002, and 2001 was $2.5 million, $3.5 million, and
$2.9 million, respectively. No tenant represented more than
10% of the minimum rental revenues for 2003, 2002, and 2001. At
December 31, 2003, no single tenant exceeds 6% of the
Companys annualized base rent.

10.     Stock Based
Compensation Arrangements



| |                                                            
| | -----------------------------------------------------------
| | Stock Options, Restricted Stock Awards, and
    Stock Loans

The Companys Omnibus Incentive Plan (the
Plan), as amended in 1998, has authorized the grant
of compensatory awards to employees consisting of stock options,
stock awards, stock appreciation rights and other stock-based
awards representing up to 10% of the combined number of Common
Shares and OP Units of the Operating Partnership. Incentive
stock options are to be granted at not less than the fair market
value of the Companys stock on the date of the grant and
the term cannot exceed ten years. The vesting period of each
grant varies and is determined at the date of grant. Any award
issued under the plans which is forfeited,

F-31



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

expires or terminates prior to vesting or
exercise is available for future award under the plans. The
Company has not made any modifications to these awards that
would alter the accounting treatment for the awards.

In connection with the Plan, the Company issued
7,503 and 156,256 Common Shares to certain executives and
employees in consideration for recourse interest bearing and
non-interest bearing notes aggregating $100,000 and $2.0 million
in (prior to July 30, 2002) 2002 and 2001, respectively.
These notes mature at various dates ranging from 2009 to 2012.
These Common Shares carry dividend and voting rights and also
secure the notes. The Company has the ability and intent to
fully enforce the collection of these notes under the recourse
provisions. These notes will be forgiven annually over a period
ranging from five to nine years beginning in 2003 only in the
event the respective individual is still an employee of the
Company at the end of each respective year. In 1998, an officer
of the Company was issued a $392,000 non-interest bearing
recourse note which the executive used to acquire 25,000 Common
Shares. Under the terms of his employment agreement, $33,333 of
this note was forgiven annually over a three year period and in
2002, the officer repaid the outstanding balance of this note
upon leaving the employment of the Company. These notes have
been reflected in the accompanying financial statements as a
reduction in shareholders equity. The Company records
compensation expense related to the forgiveness provisions of
these notes on a straight line basis over the related loan term.
The Company has recorded approximately $498,000, $603,000 and
$710,000 as compensation expense for these notes in 2003, 2002
and 2001, respectively.

In 2003 and 2002, the Company granted a total of
205,954 and 205,288, respectively, restricted Common Shares to
certain executives and employees under the Plan. These shares
carry dividend and voting rights and vest over a five to seven
year period. The shares issued under this Plan were recorded at
their fair market value on the date of grant with a
corresponding total charge of approximately $6.4 million to
shareholders equity, which was recorded as unearned
compensation. The unearned portion is being amortized to
compensation expense over the vesting period. During 2003 and
2002, the Company amortized $1.0 million and $347,000,
respectively of compensation expense relating to these
restricted shares.

In 1994, the Company adopted and authorized the
Non-Employee Stock Option Plan (the Non-Employee
Plan) and 300,000 shares were authorized thereunder in the
form of non-qualified stock options and restricted shares for
issuance to certain trustees or consultants. The Non-Employee
Plan was amended and restated in 2003 and adopted by the
Companys shareholders at the 2003 Annual Meeting. The
exercise price for each option granted under the Non-Employee
Plan cannot be less than the fair market value of the
Companys Common Shares underlying the option at the date
of grant. The term of each option is ten years and each option
is exercisable upon the date of grant, provided that the option
holder remains a trustee or consultant to the Company during the
exercise period. For further information regarding stock based
compensation, see Note 2 to the Companys financial
statements.

F-32



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

The following table summarizes the activity and
balance outstanding for each plan for 2003, 2002, and 2001:

|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|------------------------------------------------------------------------------- |  | ------- | --------- | -------- |  | ------- | ----- | -------- |  | ------- | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                                                                |  |         |           |          |  |        
|                                                                                |  | 2003    |           | 2002     |  | 2001   
|                                                                                |  |         |           |          |  |        
|                                                                                |  |         |           | Weighted |  |         |       | Weighted |  |         |           | Weighted
|                                                                                |  |         |           | Average  |  |         |       | Average  |  |         |           | Average 
|                                                                                |  |         |           | Exercise |  |         |       | Exercise |  |         |           | Exercise
|                                                                                |  | Options |           | Price    |  | Options |       | Price    |  | Options |           | Price   
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |         
|Omnibus Incentive Plan                                                          |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding, beginning of year                                                  |  |         | 1,140,373 |          |  | $       | 13.83 |          |  |         | 1,303,387 |          |  | $ | 13.84 |  |  |  | 563,750   |   |  | $ | 15.19 | 
|Granted                                                                         |  |         | 24,000    |          |  |         | 17.03 |          |  |         | 35,000    |          |  |   | 13.50 |  |  |  | 750,137   |   |  |   | 12.83 | 
|Exercised                                                                       |  |         | (33,966   | )        |  |         | 14.10 |          |  |         | (172,614  | )        |  |   | 14.06 |  |  |  |          |   |  |   |      | 
|Forfeited                                                                       |  |         | (19,674   | )        |  |         | 14.55 |          |  |         | (25,400   | )        |  |   | 13.86 |  |  |  | (10,500   | ) |  |   | 14.50 | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding, end of year                                                        |  |         | 1,110,733 |          |  | $       | 13.83 |          |  |         | 1,140,373 |          |  | $ | 13.83 |  |  |  | 1,303,387 |   |  | $ | 13.84 | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Weighted-average fair value of options granted
    during the year              |  |         |           |          |  | $       | 1.75  |          |  |         |           |          |  | $ | 1.73  |  |  |  |           |   |  | $ | 1.52  | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Non-Employee Plan                                                               |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding, beginning of year                                                  |  |         | 10,000    |          |  | $       | 12.54 |          |  |         | 25,800    |          |  | $ | 10.98 |  |  |  | 15,800    |   |  | $ | 10.00 | 
|Granted                                                                         |  |         | 60,000    |          |  |         | 14.38 |          |  |         |          |          |  |   |      |  |  |  | 20,000    |   |  |   | 12.54 | 
|Exercised                                                                       |  |         | (10,000   | )        |  |         | 12.31 |          |  |         | (15,800   | )        |  |   | 10.00 |  |  |  |          |   |  |   |      | 
|Forfeited                                                                       |  |         |          |          |  |         |       |          |  |         |          |          |  |   |      |  |  |  | (10,000   | ) |  |   | 12.54 | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding, end of year                                                        |  |         | 60,000    |          |  | $       | 14.41 |          |  |         | 10,000    |          |  | $ | 12.54 |  |  |  | 25,800    |   |  | $ | 10.98 | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Weighted-average fair value of options granted
    during the year              |  |         |           |          |  | $       | 2.27  |          |  |         |           |          |  | $ |      |  |  |  |           |   |  | $ | 1.52  | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Total options outstanding and weighted average
    exercise price for all plans |  |         | 1,170,733 |          |  | $       | 13.90 |          |  |         | 1,150,373 |          |  | $ | 13.79 |  |  |  | 1,329,187 |   |  | $ | 13.78 | 
|                                                                                |  |         |           |          |  |         |       |          |  |         |           |          |  |   |       |  |  |  |           |   |  |   |       | 

The following table summarizes information about
stock options outstanding at December 31, 2003:

Omnibus Incentive Plan

|               |  |                     |           |                     |  |           |     |                |  |           |       |  |  |  |         |  |  |   |       | 
|-------------- |  | ------------------- | --------- | ------------------- |  | --------- | --- | -------------- |  | --------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|               |  |                     |           |                    
|               |  | Options Outstanding |           | Options Exercisable
|               |  |                     |           |                    
|               |  |                     |           | Weighted-           |  |           |     |               
|               |  |                     |           | Average             |  | Weighted- |     |                |  | Weighted-
|               |  | Number              |           | Remaining           |  | Average   |     | Number         |  | Average  
|               |  | Outstanding at      |           | Contractual         |  | Exercise  |     | Exercisable at |  | Exercise 
|Exercise Price |  | 12/31/03            |           | Life                |  | Price     |     | 12/31/03       |  | Price    
|               |  |                     |           |                     |  |           |     |                |  |          
|$12.83-$17.03  |  |                     | 1,110,733 |                     |  |           | 6.3 |                |  | $         | 13.83 |  |  |  | 866,461 |  |  | $ | 14.03 | 

Non-Employee Plan

|               |  |                     |        |                     |  |           |     |                |  |           |       |  |  |  |        |  |  |   |       | 
|-------------- |  | ------------------- | ------ | ------------------- |  | --------- | --- | -------------- |  | --------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|               |  |                     |        |                    
|               |  | Options Outstanding |        | Options Exercisable
|               |  |                     |        |                    
|               |  |                     |        | Weighted-           |  |           |     |               
|               |  |                     |        | Average             |  | Weighted- |     |                |  | Weighted-
|               |  | Number              |        | Remaining           |  | Average   |     | Number         |  | Average  
|               |  | Outstanding at      |        | Contractual         |  | Exercise  |     | Exercisable at |  | Exercise 
|Exercise Price |  | 12/31/03            |        | Life                |  | Price     |     | 12/31/03       |  | Price    
|               |  |                     |        |                     |  |           |     |                |  |          
|$12.31-$15.79  |  |                     | 50,000 |                     |  |           | 7.9 |                |  | $         | 13.58 |  |  |  | 50,000 |  |  | $ | 13.58 | 
|$18.58         |  |                     | 10,000 |                     |  |           | 9.4 |                |  | $         | 18.58 |  |  |  | 10,000 |  |  | $ | 18.58 | 

F-33



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

The table below summarizes information about
stock options exercisable at December 31 for each of the
past three years:

|                  |  |           |         |                  |  |                 |       |  |  |   |              | 
|----------------- |  | --------- | ------- | ---------------- |  | --------------- | ----- |  |  | - | ------------ | 
|                  |  | Number of |         | Weighted Average |  | Range of       
|Year              |  | Options   |         | Exercise Price   |  | Exercise Prices
|                  |  |           |         |                  |  |                
|December 31, 2001 |  |           | 549,883 |                  |  | $               | 14.72 |  |  | $ | 12.83-$16.50 | 
|December 21, 2002 |  |           | 714,624 |                  |  | $               | 14.34 |  |  | $ | 12.83-$16.50 | 
|December 31, 2003 |  |           | 926,461 |                  |  | $               | 14.76 |  |  | $ | 12.31-$18.58 | 

11.     Earnings Per
Share

The Company discloses earnings per share
(EPS) in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per
Share, (SFAS No. 128). It requires the
dual presentation of basic and diluted EPS on the income
statement and requires a reconciliation of the numerator and
denominator of basic EPS to diluted EPS.

The following is a reconciliation of the
numerators and denominators of the basic and diluted EPS
computations:

|                                                              |  |                                  |            |         |  |       |            |         |  |       |            |         |  |   |            |   |  |   |            |   |  |   |            |  
|------------------------------------------------------------- |  | -------------------------------- | ---------- | ------- |  | ----- | ---------- | ------- |  | ----- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                              |  |                                 
|                                                              |  | For the Years Ended December 31,
|                                                              |  |                                 
|                                                              |  |                                  |            |         |  |      
|                                                              |  | 2003                             |            | 2002    |  | 2001 
|                                                              |  |                                  |            |         |  |      
|                                                              |  | Basic                            |            | Diluted |  | Basic |            | Diluted |  | Basic |            | Diluted
|                                                              |  |                                  |            |         |  |       |            |         |  |       |            |        
|Loss (income) from continuing operations                      |  | $                                | 23,523     |         |  | $     | 23,523     |         |  | $     | (8,860     | )       |  | $ | (8,860     | ) |  | $ | 18,251     |   |  | $ | 18,251     |  
|Income from discontinued operations                           |  |                                  |           |         |  |       |           |         |  |       | 900        |         |  |   | 900        |   |  |   | 658        |   |  |   | 658        |  
|Dividends on unvested restricted shares                       |  |                                  | (325       | )       |  |       | (325       | )       |  |       |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|Income allocated to preferred shareholders                    |  |                                  | (6,820     | )       |  |       | (6,820     | )       |  |       | (3,449     | )       |  |   | (3,449     | ) |  |   | (5,035     | ) |  |   | (5,035     | )
|Minority interest of Unitholders in Operating
    Partnership |  |                                  |           |         |  |       | 4,040      |         |  |       |           |         |  |   |           |   |  |   |           |   |  |   | 5,393      |  
|Net (loss) income allocated to common shareholders            |  | $                                | 16,378     |         |  | $     | 20,418     |         |  | $     | (11,409    | )       |  | $ | (11,409    | ) |  | $ | 13,874     |   |  | $ | 19,267     |  
|                                                              |  |                                  |            |         |  |       |            |         |  |       |            |         |  |   |            |   |  |   |            |   |  |   |            |  
|Weighted average number of common shares
    outstanding      |  |                                  | 22,204,857 |         |  |       | 22,204,857 |         |  |       | 19,467,656 |         |  |   | 19,467,656 |   |  |   | 14,518,099 |   |  |   | 14,518,099 |  
|Weighted average OP Units outstanding                         |  |                                  |           |         |  |       | 5,445,701  |         |  |       |           |         |  |   |           |   |  |   |           |   |  |   | 6,888,858  |  
|Options and warrants outstanding                              |  |                                  |           |         |  |       | 292,543    |         |  |       |           |         |  |   |           |   |  |   |           |   |  |   | 3,066      |  
|Total weighted average shares outstanding                     |  |                                  | 22,204,857 |         |  |       | 27,943,101 |         |  |       | 19,467,656 |         |  |   | 19,467,656 |   |  |   | 14,518,099 |   |  |   | 21,410,023 |  
|                                                              |  |                                  |            |         |  |       |            |         |  |       |            |         |  |   |            |   |  |   |            |   |  |   |            |  
|Earnings (loss) per Common Share:                             |  |                                  |            |         |  |       |            |         |  |       |            |         |  |   |            |   |  |   |            |   |  |   |            |  
|Continuing operations                                         |  | $                                | 0.74       |         |  | $     | 0.73       |         |  | $     | (0.63      | )       |  | $ | (0.63      | ) |  | $ | 0.91       |   |  | $ | 0.85       |  
|Discontinued operations                                       |  |                                  |           |         |  |       |           |         |  |       | 0.04       |         |  |   | 0.04       |   |  |   | 0.05       |   |  |   | 0.05       |  
|Earnings (loss) per share                                     |  | $                                | 0.74       |         |  | $     | 0.73       |         |  | $     | (0.59      | )       |  | $ | (0.59      | ) |  | $ | 0.96       |   |  | $ | 0.90       |  
|                                                              |  |                                  |            |         |  |       |            |         |  |       |            |         |  |   |            |   |  |   |            |   |  |   |            |  

F-34



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

The Companys weighted average stock
equivalents consisted of the following:

|                     |  |      |           |      |  |      |   |  |  |  |           | 
|-------------------- |  | ---- | --------- | ---- |  | ---- | - |  |  |  | --------- | 
|                     |  | 2003 |           | 2002 |  | 2001
|                     |  |      |           |      |  |     
|Options and warrants |  |      | 292,543   |      |  |      |  |  |  |  | 3,066     | 
|OP Units             |  |      | 5,445,701 |      |  |      |  |  |  |  | 6,888,858 | 
|                     |  |      |           |      |  |      |   |  |  |  |           | 
|                     |  |      | 5,738,244 |      |  |      |  |  |  |  | 6,891,924 | 
|                     |  |      |           |      |  |      |   |  |  |  |           | 

12.     Commitments
and Contingencies

As of December 31, 2003, three executive
officers of the Company have employment agreements that provide
for aggregate initial base compensation of $880,000 subject to
increases as approved by the Compensation Committee, among other
incentive compensation.

The Company had $17.7 million and
$2.8 million in outstanding letters of credit at
December 31, 2003 and 2002, respectively. Approximately
$17.6 million and $2.7 million of the letters of
credit obligations outstanding at December 31, 2003 and
2002, respectively, secure existing debt obligations of the
Company.

As discussed in Note 5, the Company has
guaranteed approximately $58.1 million of outstanding
construction loans of consolidated subsidiaries as of
December 31, 2003. The maximum borrowing amount of these
loans aggregate $74.9 million as of December 31, 2003.

As discussed in Note 4, the Company has
guaranteed 50% of a $16.4 million recourse construction
loan, which matures in June 2004, outstanding to the 5 Points
joint venture. In addition, the Company has guaranteed a
$3.2 million land development loan made to a Browning
affiliate related to the development of AirTech Park.

As discussed in Note 7, the Company
guarantees $2 million of an $11.8 million mortgage loan
related to two office properties, which were sold to Nocha, LLC
in 2002 as part of the sale of the New York Office Portfolio.

The Company has leases for office space, which
require aggregate monthly payments of approximately $51,000,
under leases, which expire between August 2003 and April 2007.
Additionally, the Company has various ground lease commitments
for certain of the properties in its portfolio. Future minimum
lease payments under these non-cancelable operating leases are
payable as follows:

|           |       |            |       |       | 
|---------- | ----- | ---------- | ----- | ----- | 
|           |       | (In 000s)
|           |       |           
|2004       |       |            | 652   |      
|2005       |       |            | 346   |      
|2006       |       |            | 347   |      
|2007       |       |            | 207   |      
|2008       |       |            | 138   |      
|Thereafter |       |            | 3,559 |      
|           |       |            |       |      
|           | Total |            | $     | 5,249 | 
|           |       |            |       |      

Rental expense for the above operating leases
during 2003, 2002 and 2001 was $764,000, $906,000, and $963,000,
respectively.

The Company has contractual commitments, with
expiration dates ranging from 2004 to 2007, with certain limited
partners of the Operating Partnership not to sell certain real
estate assets, which aggregated approximately $276 million
of gross book value at December 31, 2003 in taxable
transactions, which include $110 million of gross book
value related to contractual commitments which expire in 2004.
As a result of the

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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

selling shareholder offering in February 2004
(see Note 15), the Companys commitments decreased to
$80 million of gross book value including $30 million
that expire in 2004. Accordingly, if sold, the proceeds from the
sales of the assets subject to these commitments will need to be
reinvested by the Company in other real estate assets through
the utilization of Section 1031 exchange transactions in
accordance with the Code.



| |           
| | ----------
| | Litigation

In the normal course of business, the Company is
involved in legal actions relating to the ownership and
operation of its properties. In managements opinion, the
liabilities, if any, that may ultimately result from such legal
actions are not expected to have a materially adverse effect on
the consolidated financial position, results of operations, or
cash flows of the Company.



| |                      
| | ---------------------
| | Environmental Matters

All of the Companys properties in its
portfolio have been subject to Phase I environmental
assessments (and, in certain instances, Phase II
environmental assessments). Such assessments have not revealed,
nor is management aware of, any environmental liability that
management believes would have a material adverse effect on the
accompanying consolidated financial statements.

13.     Interim
Results (Unaudited)

The following presents a summary of the unaudited
quarterly financial information for the years ended
December 31, 2003 and 2002. The amounts presented below
have been restated for discontinued operations identified by the
Company related to 2002 (dollars in 000s, except per share
amounts):

|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                    |  |                         
|                                                                                                                    |  | 2003                    
|                                                                                                                    |  |                         
|                                                                                                                    |  |                         
|                                                                                                                    |  | Three Month Period Ended
|                                                                                                                    |  |                         
|                                                                                                                    |  | March 31                 |        | June 30 |  | September 30 |        | December 31
|                                                                                                                    |  |                          |        |         |  |              |        |            
|Revenue                                                                                                             |  | $                        | 19,331 |         |  | $            | 22,605 |             |  | $ | 22,632 |   |  | $ | 26,984 |  
|Income before income from equity method
    investments, gains (losses) on sales of assets and interest
    expense |  |                          | 9,247  |         |  |              | 10,453 |             |  |   | 11,021 |   |  |   | 12,251 |  
|Equity in income from equity method investments                                                                     |  |                          | 1,233  |         |  |              | 1,631  |             |  |   | 1,621  |   |  |   | 1,260  |  
|Interest expense                                                                                                    |  |                          | (4,238 | )       |  |              | (4,972 | )           |  |   | (4,736 | ) |  |   | (5,267 | )
|Gains on sales of assets                                                                                            |  |                          | 3,221  |         |  |              |       |             |  |   |       |   |  |   |       |  
|Distributions to preferred unitholders                                                                              |  |                          | (1,268 | )       |  |              | (1,268 | )           |  |   | (1,268 | ) |  |   | (1,268 | )
|Minority interest of unitholders in Operating
    Partnership                                                       |  |                          | (1,439 | )       |  |              | (780   | )           |  |   | (945   | ) |  |   | (877   | )
|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|Net income                                                                                                          |  |                          | 6,666  |         |  |              | 5,064  |             |  |   | 5,693  |   |  |   | 6,099  |  
|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|Income allocated to preferred shareholders                                                                          |  |                          | (1,061 | )       |  |              | (1,979 | )           |  |   | (1,940 | ) |  |   | (1,840 | )
|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|Net income available to common shareholders                                                                         |  | $                        | 5,605  |         |  | $            | 3,085  |             |  | $ | 3,753  |   |  | $ | 4,259  |  
|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|Basic earnings per Common Share                                                                                     |  | $                        | 0.26   |         |  | $            | 0.14   |             |  | $ | 0.17   |   |  | $ | 0.16   |  
|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|Diluted earnings per Common Share                                                                                   |  | $                        | 0.26   |         |  | $            | 0.14   |             |  | $ | 0.17   |   |  | $ | 0.16   |  
|                                                                                                                    |  |                          |        |         |  |              |        |             |  |   |        |   |  |   |        |  

F-36



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

|                                                                                              |  |                          |        |            |  |              |        |             |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---------- |  | ------------ | ------ | ----------- |  | - | ------- | - |  | - | ------ | -
|                                                                                              |  |                         
|                                                                                              |  | 2002                    
|                                                                                              |  |                         
|                                                                                              |  |                         
|                                                                                              |  | Three Month Period Ended
|                                                                                              |  |                         
|                                                                                              |  | March 31(1)              |        | June 30(1) |  | September 30 |        | December 31
|                                                                                              |  |                          |        |            |  |              |        |            
|Revenue                                                                                       |  | $                        | 23,615 |            |  | $            | 24,722 |             |  | $ | 24,942  |   |  | $ | 23,222 |  
|Income before income from equity method
    investments and gains (losses) on sales of assets |  |                          | 6,215  |            |  |              | 7,087  |             |  |   | 6,164   |   |  |   | 5,053  |  
|Equity in income from equity method investments                                               |  |                          | 62     |            |  |              | 255    |             |  |   | 266     |   |  |   | 316    |  
|Provision for asset impairment                                                                |  |                          |       |            |  |              |       |             |  |   | (30,200 | ) |  |   |       |  
|(Losses) gains on sales of assets                                                             |  |                          | (425   | )          |  |              |       |             |  |   |        |   |  |   | (697   | )
|Distributions to preferred unitholders                                                        |  |                          | (1,447 | )          |  |              | (1,446 | )           |  |   | (1,424  | ) |  |   | (1,268 | )
|Minority interest of unitholders in Operating
    Partnership                                 |  |                          | (845   | )          |  |              | (1,260 | )           |  |   | 6,092   |   |  |   | (495   | )
|Discontinued operations, net of minority interest                                             |  |                          | 1,080  |            |  |              | (902   | )           |  |   | 722     |   |  |   |       |  
|                                                                                              |  |                          |        |            |  |              |        |             |  |   |         |   |  |   |        |  
|Net income (loss)                                                                             |  |                          | 4,462  |            |  |              | 3,734  |             |  |   | (18,380 | ) |  |   | 2,224  |  
|Income (loss) allocated to preferred
    shareholders                                         |  |                          | (938   | )          |  |              | (937   | )           |  |   | (1,209  | ) |  |   | (365   | )
|                                                                                              |  |                          |        |            |  |              |        |             |  |   |         |   |  |   |        |  
|Net income (loss) available to common
    shareholders                                        |  | $                        | 3,524  |            |  | $            | 2,797  |             |  | $ | (19,589 | ) |  | $ | 1,859  |  
|                                                                                              |  |                          |        |            |  |              |        |             |  |   |         |   |  |   |        |  
|Basic earnings (loss) per Common Share                                                        |  | $                        | 0.19   |            |  | $            | 0.15   |             |  | $ | (1.01   | ) |  | $ | 0.09   |  
|                                                                                              |  |                          |        |            |  |              |        |             |  |   |         |   |  |   |        |  
|Diluted earnings (loss) per Common Share                                                      |  | $                        | 0.19   |            |  | $            | 0.15   |             |  | $ | (1.01   | ) |  | $ | 0.09   |  
|                                                                                              |  |                          |        |            |  |              |        |             |  |   |         |   |  |   |        |  



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the first two quarters of 2002, the interim
    results related to discontinued operations have been adjusted as
    shown below.

|                                                                                             |  |              |        |         |  |   |       |  
|-------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------- |  | - | ----- | -
|                                                                                             |  |             
|                                                                                             |  | 2002        
|                                                                                             |  |             
|                                                                                             |  |             
|                                                                                             |  | Three Month 
|                                                                                             |  | Period Ended
|                                                                                             |  |             
|                                                                                             |  | March 31     |        | June 30
|                                                                                             |  |              |        |        
|Revenue                                                                                      |  | $            | (1,904 | )       |  | $ | (766  | )
|Income before gains (losses) from equity method
    investments and gains on sales of assets |  |              | (1,449 | )       |  |   | 1,212 |  
|Minority interest of unitholders in Operating
    Partnership                                |  |              | 369    |         |  |   | (310  | )
|Discontinued operations, net of minority interest                                            |  |              | 1,080  |         |  |   | (902  | )

F-37



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##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

14.     Segments

The Company reports segment information in
accordance with Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise
and Related Information.

The Companys Chief Executive Officer and
management assess and measure operating results based upon
property level operating income within each of the
Companys business segments. The Company considers its
reportable segments to be based on geographic regions. The
accounting policies of the reportable segments are consistent
with those described in Note 2. Summarized financial
information, including those of the properties shown as
discontinued operations, for the Companys reportable
segments is shown in the following table (in 000s):

|                                   |  |                              |        |                         |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|---------------------------------- |  | ---------------------------- | ------ | ----------------------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | -
|                                   |  |                              |        |                         |  |      |        |     
|                                   |  |                              |        | Property Level         
|                                   |  | Real Estate Related Revenues |        | Net Operating Income(1)
|                                   |  | Year Ended December 31,      |        | Year Ended December 31,
|                                   |  |                              |        |                        
|                                   |  | 2003                         |        | 2002                    |  | 2001 |        | 2003 |  | 2002 |         | 2001
|                                   |  |                              |        |                         |  |      |        |      |  |      |         |     
|New Jersey                         |  | $                            | 32,675 |                         |  | $    | 18,229 |      |  | $    | 25,827  |      |  | $ | 26,562 |  |  | $ | 15,041 |   |  | $ | 21,684 |  
|Pennsylvania                       |  |                              | 39,135 |                         |  |      | 27,141 |      |  |      | 22,513  |      |  |   | 33,022 |  |  |   | 23,445 |   |  |   | 19,791 |  
|Indiana                            |  |                              | 2,693  |                         |  |      | 10,021 |      |  |      | 9,270   |      |  |   | 2,406  |  |  |   | 9,651  |   |  |   | 9,269  |  
|Florida                            |  |                              | 2,005  |                         |  |      |       |      |  |      |        |      |  |   | 1,580  |  |  |   |       |   |  |   |       |  
|South Carolina                     |  |                              | 7,215  |                         |  |      | 7,753  |      |  |      | 7,199   |      |  |   | 6,266  |  |  |   | 6,845  |   |  |   | 6,310  |  
|Other                              |  |                              | 7,829  |                         |  |      | 36,255 |      |  |      | 44,896  |      |  |   | 7,097  |  |  |   | 26,359 |   |  |   | 31,977 |  
|                                   |  |                              |        |                         |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|Total                              |  | $                            | 91,552 |                         |  | $    | 99,399 |      |  | $    | 109,705 |      |  | $ | 76,933 |  |  | $ | 81,341 |   |  | $ | 89,031 |  
|                                   |  |                              |        |                         |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|Discontinued Operations            |  |                              |       |                         |  |      | (2,898 | )    |  |      | (3,135  | )    |  |   |       |  |  |   | (2,568 | ) |  |   | (681   | )
|                                   |  |                              |        |                         |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|Total Less Discontinued Operations |  | $                            | 91,552 |                         |  | $    | 96,501 |      |  | $    | 106,570 |      |  | $ | 76,933 |  |  | $ | 78,773 |   |  | $ | 88,350 |  
|                                   |  |                              |        |                         |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  

|                                   |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|---------------------------------- |  | ---------------------------------- | ------- | ----------------------- |  | ---- | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | -
|                                   |  |                                    |         |                         |  |      |         |                 
|                                   |  |                                    |         |                         |  |      |         | Depreciation and
|                                   |  |                                    |         | Amortization Expense   
|                                   |  | Investment in Real Estate, at Cost |         | Year Ended December 31,
|                                   |  |                                    |         |                        
|                                   |  | 2003                               |         | 2002                    |  | 2001 |         | 2003             |  | 2002 |         | 2001
|                                   |  |                                    |         |                         |  |      |         |                  |  |      |         |     
|New Jersey                         |  | $                                  | 341,468 |                         |  | $    | 209,241 |                  |  | $    | 188,473 |      |  | $ | 7,697  |  |  | $ | 4,330  |   |  | $ | 6,783  |  
|Pennsylvania                       |  |                                    | 328,236 |                         |  |      | 229,780 |                  |  |      | 237,781 |      |  |   | 9,683  |  |  |   | 5,885  |   |  |   | 4,650  |  
|Indiana                            |  |                                    | 50,396  |                         |  |      | 84,048  |                  |  |      | 88,207  |      |  |   | 910    |  |  |   | 2,563  |   |  |   | 1,769  |  
|Florida                            |  |                                    | 123,447 |                         |  |      |        |                  |  |      |        |      |  |   | 503    |  |  |   |       |   |  |   |       |  
|South Carolina                     |  |                                    | 64,334  |                         |  |      | 63,783  |                  |  |      | 64,759  |      |  |   | 1,921  |  |  |   | 2,046  |   |  |   | 1,883  |  
|Other                              |  |                                    | 43,677  |                         |  |      | 42,551  |                  |  |      | 238,405 |      |  |   | 1,798  |  |  |   | 5,544  |   |  |   | 9,435  |  
|                                   |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|Total                              |  | $                                  | 951,558 |                         |  | $    | 629,403 |                  |  | $    | 817,625 |      |  | $ | 22,512 |  |  | $ | 20,368 |   |  | $ | 24,520 |  
|                                   |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|Discontinued Operations            |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  |   |       |  |  |   | (390   | ) |  |   | (582   | )
|                                   |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  
|Total Less Discontinued Operations |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  | $ | 22,512 |  |  | $ | 19,978 |   |  | $ | 23,938 |  
|                                   |  |                                    |         |                         |  |      |         |                  |  |      |         |      |  |   |        |  |  |   |        |   |  |   |        |  

F-38



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

|               |  |                         |       |                         |  |      |       |      |  |      |       |      |  |  |       |  |  |  |       |  |  |  |        | 
|-------------- |  | ----------------------- | ----- | ----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- |  |  |  | ------ | 
|               |  |                         |       |                        
|               |  | Capital Expenditures    |       | Physical Occupancy     
|               |  | Year Ended December 31, |       | Year Ended December 31,
|               |  |                         |       |                        
|               |  | 2003                    |       | 2002                    |  | 2001 |       | 2003 |  | 2002 |       | 2001
|               |  |                         |       |                         |  |      |       |      |  |      |       |     
|New Jersey     |  | $                       | 3,682 |                         |  | $    | 1,057 |      |  | $    | 1,002 |      |  |  | 94.0% |  |  |  | 94.9% |  |  |  | 99.2%  | 
|Pennsylvania   |  |                         | 2,565 |                         |  |      | 1,424 |      |  |      | 841   |      |  |  | 91.4% |  |  |  | 92.7% |  |  |  | 95.1%  | 
|Indiana        |  |                         | 148   |                         |  |      | 14    |      |  |      |      |      |  |  | 98.7% |  |  |  | 93.7% |  |  |  | 100.0% | 
|Florida        |  |                         |      |                         |  |      |      |      |  |      |      |      |  |  | 97.4% |  |  |  | N/A   |  |  |  | N/A    | 
|South Carolina |  |                         | 612   |                         |  |      | 216   |      |  |      | 298   |      |  |  | 74.8% |  |  |  | 85.8% |  |  |  | 88.7%  | 
|Other          |  |                         | 204   |                         |  |      | 2,622 |      |  |      | 1,566 |      |  |  | 91.0% |  |  |  | 98.0% |  |  |  | 85.6%  | 
|               |  |                         |       |                         |  |      |       |      |  |      |       |      |  |  |       |  |  |  |       |  |  |  |        | 
|Total          |  | $                       | 7,211 |                         |  | $    | 5,333 |      |  | $    | 3,707 |      |  |  | 92.1% |  |  |  | 93.0% |  |  |  | 93.9%  | 
|               |  |                         |       |                         |  |      |       |      |  |      |       |      |  |  |       |  |  |  |       |  |  |  |        | 

|                                                              |                                                |      |         |      |  |      |         |      |   |   |         |      |  
|------------------------------------------------------------- | ---------------------------------------------- | ---- | ------- | ---- |  | ---- | ------- | ---- | - | - | ------- | ---- | -
|Reconciliation of NOI to Net Income                           |                                                | 2003 |         | 2002 |  | 2001
|                                                              |                                                |      |         |      |  |     
|Segment property level net operating income                   |                                                | $    | 76,933  |      |  | $    | 78,773  |      |   | $ | 88,350  |     
|Depreciation and amortization expense                         |                                                |      | (22,512 | )    |  |      | (19,978 | )    |   |   | (23,938 | )   
|General and administrative expense                            |                                                |      | (11,449 | )    |  |      | (10,024 | )    |   |   | (8,660  | )   
|Interest expense                                              |                                                |      | (19,304 | )    |  |      | (25,115 | )    |   |   | (35,647 | )   
|Provision for asset impairment                                |                                                |      |        |      |  |      | (30,200 | )    |   |   |         |     
|Equity in income from equity method investments               |                                                |      | 5,746   |      |  |      | 899     |      |   |   | 1,123   |     
|Gains (losses) on sales of assets                             |                                                |      | 3,221   |      |  |      | (1,122  | )    |   |   | 9,142   |     
|Distributions to preferred unitholders                        |                                                |      | (5,072  | )    |  |      | (5,585  | )    |   |   | (7,057  | )   
|Minority interest of unitholders in Operating
    Partnership |                                                |      | (4,040  | )    |  |      | 3,492   |      |   |   | (5,062  | )   
|                                                              | Income from discontinued operations            |      |         |     |  |      |         | 323  |   |   |         | 989  |  
|                                                              | Gain on disposition of discontinued operations |      |         |     |  |      |         | 871  |   |   |         |     |  
|                                                              | Minority interest from discontinued operations |      |         |     |  |      |         | (294 | ) |   |         | (331 | )
|Income allocated to preferred shareholders                    |                                                |      | (6,820  | )    |  |      | (3,449  | )    |   |   | (5,035  | )   
|                                                              |                                                |      |         |      |  |      |         |      |   |   |         |     
|Net Income allocated to common shareholders                   |                                                | $    | 16,703  |      |  | $    | (11,409 | )    |   | $ | 13,874  |     
|                                                              |                                                |      |         |      |  |      |         |      |   |   |         |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Property level net operating income equals total
    revenue less property operating expenses and real estate taxes.
    Management believes that NOI measures are useful disclosure as
    non-GAAP performance measurements as the Company believes these
    measurements describe the unleveraged performance of the
    Properties. Accordingly, the Company believes NOI provides
    investors with useful supplemental information about a specific
    propertys operating performance because it excludes real
    estate depreciation and amortization, interest expense and costs
    not associated with the operation of the property. However, NOI
    does not represent cash generated from operating activities in
    accordance with GAAP and should not be considered as an
    alternative to net income (computed in accordance with GAAP) as
    an indicator of operating performance or an alternative to cash
    flow from operating activities as a measure of liquidity.

15.     Subsequent
Events

In January 2004, the Company declared a dividend
of $0.33 per Common Share for the fourth quarter of 2003,
which was paid on January 30, 2004 to all shareholders of
record on January 16, 2004. In January 2004, the Company
declared a dividend of $0.5703125 per share of
Series D Cumulative Redeemable Preferred Stock for the
fourth quarter of 2003, which was paid on January 30, 2004
to shareholders of record on January 16, 2004.

F-39



---



##### Table of Contents



KEYSTONE PROPERTY TRUST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

In February 2004, the Company sold two properties
located in Indiana and South Carolina totaling 183,000 square
feet for approximately $5.7 million, excluding closing
costs.

In February 2004, the Company issued
4,041,137 Common Shares as unitholders of the Operating
Partnership converted 1,664,965 Series C Convertible
Preferred OP Units, 239,555 Series D Convertible
Preferred OP Units and 1,076,668 common OP Units
into Common Shares. This issuance involved OP Units held by
Michael J. Falcone, Robert Morris, Joseph D. Morris and
certain of their respective affiliates. The 4,041,137 Common
Shares were subsequently sold by such shareholders in a public
offering. The Company did not receive any proceeds from this
offering.

F-40



---



##### Table of Contents



SCHEDULE II:

KEYSTONE PROPERTY TRUST


Valuation and Qualifying Accounts

As of December 31, 2003


(in 000s)


|                                  |                                 |           |   |            |  |            |   |            |  |         |   |   |  |  |   |    |  |  |   |     | 
|--------------------------------- | ------------------------------- | --------- | - | ---------- |  | ---------- | - | ---------- |  | ------- | - | - |  |  | - | -- |  |  | - | --- | 
|                                  |                                 |           |   | Charges to |  |            |   |            |  |        
|                                  |                                 | Beginning |   | Costs and  |  |            |   |            |  | Ending 
|Description                       |                                 | Balance   |   | Expenses   |  | Recoveries |   | Deductions |  | Balance
|                                  |                                 |           |   |            |  |            |   |            |  |        
|For year ended December 31, 2003: |                                 |           |   |            |  |            |   |            |  |         |   |   |  |  |   |    |  |  |   |    
|                                  | Allowance for doubtful accounts |           | $ | 471        |  |            | $ | 150        |  |         | $ |  |  |  | $ |   |  |  | $ | 621 | 
|For year ended December 31, 2002: |                                 |           |   |            |  |            |   |            |  |         |   |   |  |  |   |    |  |  |   |    
|                                  | Allowance for doubtful accounts |           | $ | 482        |  |            | $ |           |  |         | $ |  |  |  | $ | 11 |  |  | $ | 471 | 
|For year ended December 31, 2001: |                                 |           |   |            |  |            |   |            |  |         |   |   |  |  |   |    |  |  |   |    
|                                  | Allowance for doubtful accounts |           | $ | 250        |  |            | $ | 232        |  |         | $ |  |  |  | $ |   |  |  | $ | 482 | 

S-1



---



##### Table of Contents



SCHEDULE III:

REAL ESTATE AND ACCUMULATED
DEPRECIATION

As of December 31, 2003


(in 000s)


|                             |  |              |                     |             |  |               |        |            |  |             |  |             |         |  |  |   |      |   |  |   |        | 
|---------------------------- |  | ------------ | ------------------- | ----------- |  | ------------- | ------ | ---------- |  | ----------- |  | ----------- | ------- |  |  | - | ---- | - |  | - | ------ | 
|                             |  |              |                     |             |  |               |        |            |  |             |  | Costs      
|                             |  |              |                     |             |  |               |        |            |  |             |  | Capitalized
|                             |  |              |                     |             |  |               |        |            |  |             |  | Subsequent 
|                             |  |              |                     |             |  |               |        |            |  | to         
|                             |  |              |                     |             |  | Initial Costs |        |            |  | Acquisition
|                             |  | Location     |                     | (a)         |  |               |        | Transfers/ |  | or         
|Name                         |  | (City/State) |                     | Encumbrance |  | Land          |        | Buildings  |  | Reserves    |  | Completion 
|                             |  |              |                     |             |  |               |        |            |  |             |  |            
|1440 Sheffler Drive          |  |              | Chambersburg, PA    |             |  | $             |       |            |  | $2,253      |  | $           | 10,116  |  |  | $ |     |   |  | $ | 696    | 
|1465 Nitterhouse Drive       |  |              | Chambersburg, PA    |             |  |               |       |            |  | 3,191       |  |             | 11,944  |  |  |   |     |   |  |   | 666    | 
|221 South 10th Street        |  |              | Lemoyne, PA         |             |  |               | 18,229 |            |  | 4,498       |  |             | 25,486  |  |  |   |     |   |  |   | 316    | 
|21 Roadway Drive             |  |              | Harrisburg, PA      |             |  |               | 15,125 |            |  | 2,332       |  |             | 13,217  |  |  |   |     |   |  |   | 5,773  | 
|420 Salem Church Road        |  |              | Mechanicsburg, PA   |             |  |               | 9,671  |            |  | 1,854       |  |             | 10,537  |  |  |   |     |   |  |   | 23     | 
|75 Pleasant View Drive       |  |              | Mechanicsburg, PA   |             |  |               |       |            |  | 641         |  |             | 3,643   |  |  |   |     |   |  |   | 12     | 
|811 Spangler Road            |  |              | Camp Hill, PA       |             |  |               |       |            |  | 531         |  |             | 3,026   |  |  |   |     |   |  |   | 43     | 
|2404 Gettysburg Road         |  |              | Camp Hill, PA       |             |  |               |       |            |  | 892         |  |             | 2,796   |  |  |   |     |   |  |   | 147    | 
|2410 Gettysburg Road         |  |              | Camp Hill, PA       |             |  |               |       |            |  | 297         |  |             | 932     |  |  |   |     |   |  |   | 61     | 
|2400 Gettysburg Road         |  |              | Camp Hill, PA       |             |  |               |       |            |  | 162         |  |             | 508     |  |  |   |     |   |  |   | 86     | 
|7663 Industrial Boulevard    |  |              | Allentown, PA       |             |  |               |       |            |  | 272         |  |             | 1,535   |  |  |   |     |   |  |   | 846    | 
|6813 Ruppsville Road         |  |              | Allentown, PA       |             |  |               |       |            |  | 274         |  |             | 1,554   |  |  |   |     |   |  |   | 63     | 
|7542 Morris Court            |  |              | Allentown, PA       |             |  |               |       |            |  | 1,001       |  |             | 5,673   |  |  |   |     |   |  |   |       | 
|7584 Morris Court            |  |              | Allentown, PA       |             |  |               |       |            |  | 415         |  |             | 2,353   |  |  |   |     |   |  |   | 148    | 
|7529 Morris Court            |  |              | Allentown, PA       |             |  |               |       |            |  | 1,945       |  |             | 12,070  |  |  |   |     |   |  |   | 13     | 
|7220 Schantz Court           |  |              | Allentown, PA       |             |  |               |       |            |  | 332         |  |             | 1,885   |  |  |   |     |   |  |   | 39     | 
|7485 Industrial Boulevard    |  |              | Allentown, PA       |             |  |               |       |            |  | 1,030       |  |             | 5,836   |  |  |   |     |   |  |   | 19     | 
|355 Independence Avenue      |  |              | Upper Allentown, PA |             |  |               |       |            |  | 1,514       |  |             | 8,579   |  |  |   |     |   |  |   | 20     | 
|80 South Middlesex Road      |  |              | Middlesex, PA       |             |  |               |       |            |  | 2,788       |  |             | 15,798  |  |  |   |     |   |  |   | 36     | 
|201 Fulling Mill Road        |  |              | Middletown, PA      |             |  |               | 13,976 |            |  | 3,569       |  |             | 20,222  |  |  |   |     |   |  |   | 106    | 
|301-305 Oak Street           |  |              | Pittston, PA        |             |  |               |       |            |  | 1,208       |  |             | 6,845   |  |  |   |     |   |  |   | 52     | 
|400 First Street             |  |              | Middletown, PA      |             |  |               |       |            |  | 640         |  |             | 3,625   |  |  |   |     |   |  |   | 139    | 
|400 First Street (Expansion) |  |              | Middletown, PA      |             |  |               |       |            |  | 1,365       |  |             | 7,732   |  |  |   |     |   |  |   | 36     | 
|401 First Street             |  |              | Middletown, PA      |             |  |               |       |            |  | 1,882       |  |             | 10,664  |  |  |   |     |   |  |   | 51     | 
|500 Industrial Lane          |  |              | Middletown, PA      |             |  |               |       |            |  | 442         |  |             | 2,505   |  |  |   |     |   |  |   | 24     | 
|300 Hunter Lane              |  |              | Middletown, PA      |             |  |               |       |            |  | 1,647       |  |             | 9,336   |  |  |   |     |   |  |   | 56     | 
|600 Hunter Lane              |  |              | Middletown, PA      |             |  |               |       |            |  | 1,098       |  |             | 6,224   |  |  |   |     |   |  |   | 48     | 
|2040 North Union Street      |  |              | Middletown, PA      |             |  |               | 11,964 |            |  | 3,276       |  |             | 18,562  |  |  |   |     |   |  |   | 17     | 
|3500 Industrial Road         |  |              | Harrisburg, PA      |             |  |               |       |            |  | 3,265       |  |             | 18,499  |  |  |   |     |   |  |   | 56     | 
|1091 Arnold Road             |  |              | Reading, PA         |             |  |               |       |            |  | 768         |  |             | 3,206   |  |  |   |     |   |  |   | 129    | 
|1157 Arnold Road             |  |              | Reading, PA         |             |  |               |       |            |  | 1,152       |  |             | 4,750   |  |  |   |     |   |  |   | 114    | 
|100 Oakhill Road             |  |              | Mountaintop, PA     |             |  |               |       |            |  | 546         |  |             | 2,274   |  |  |   |     |   |  |   | 4      | 
|1 Philips Drive              |  |              | Mountaintop, PA     |             |  |               | 7,023  |            |  | 2,213       |  |             | 8,855   |  |  |   |     |   |  |   | 53     | 
|4900 Ritter Road             |  |              | Mechanicsburg, PA   |             |  |               |       |            |  | 1,226       |  |             | 3,810   |  |  |   | (540 | ) |  |   | 909    | 
|                             |  |              |                     |             |  |               |        |            |  |             |  |             |         |  |  |   |      |   |  |   |        | 
|Subtotal Pennsylvania        |  |              |                     |             |  | $             | 75,988 |            |  | $50,519     |  | $           | 264,597 |  |  | $ | (540 | ) |  | $ | 10,801 | 
|                             |  |              |                     |             |  |               |        |            |  |             |  |             |         |  |  |   |      |   |  |   |        | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                             |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |              |  |  |     | 
|---------------------------- |  | ----------------------------- |  | ------------- | ------- | ----- |  | --------------- |  | -------- | ------- | --------- |  | ----------- | ------ |  |  | ------------ |  |  | --- | 
|                             |  |                               |  |               |         |       |  |                 |  |         
|                             |  | Gross Amount Carried at Close |  |               |         |       |  |                 |  |         
|                             |  | of Period                     |  |               |         |       |  |                 |  |         
|                             |  |                               |  |               |         |       |  |                 |  |         
|                             |  |                               |  | Accumulated   |         |       |  | Year            |  |         
|                             |  |                               |  | Buildings and |         |       |  | Depreciation at |  | Year     |         | Built/    |  | Depreciable
|Name                         |  | Land                          |  | Improvements  |         | Total |  | 12/31/03        |  | Acquired |         | Renovated |  | Year(s)    
|                             |  |                               |  |               |         |       |  |                 |  |          |         |           |  |            
|1440 Sheffler Drive          |  | $2,253                        |  | $             | 10,811  |       |  | $13,064         |  | $        | (1,577  | )         |  |             | Oct-98 |  |  | 1996         |  |  | (c) | 
|1465 Nitterhouse Drive       |  | 3,191                         |  |               | 12,610  |       |  | 15,801          |  |          | (1,901  | )         |  |             | Oct-98 |  |  | 1995         |  |  | (c) | 
|221 South 10th Street        |  | 4,518                         |  |               | 25,783  |       |  | 30,301          |  |          | (3,061  | )         |  |             | Oct-99 |  |  | 1955, 96, 97 |  |  | (c) | 
|21 Roadway Drive             |  | 3,024                         |  |               | 18,297  |       |  | 21,321          |  |          | (1,764  | )         |  |             | Dec-99 |  |  | 1988         |  |  | (c) | 
|420 Salem Church Road        |  | 1,854                         |  |               | 10,560  |       |  | 12,414          |  |          | (904    | )         |  |             | Jan-01 |  |  | 1973, 75     |  |  | (c) | 
|75 Pleasant View Drive       |  | 641                           |  |               | 3,654   |       |  | 4,295           |  |          | (304    | )         |  |             | Feb-01 |  |  | 1977         |  |  | (c) | 
|811 Spangler Road            |  | 531                           |  |               | 3,069   |       |  | 3,600           |  |          | (239    | )         |  |             | Mar-01 |  |  | 1968         |  |  | (c) | 
|2404 Gettysburg Road         |  | 923                           |  |               | 2,912   |       |  | 3,835           |  |          | (484    | )         |  |             | Mar-98 |  |  | 1950, 60, 93 |  |  | (c) | 
|2410 Gettysburg Road         |  | 248                           |  |               | 1,042   |       |  | 1,290           |  |          | (142    | )         |  |             | Mar-98 |  |  | 1960         |  |  | (c) | 
|2400 Gettysburg Road         |  | 180                           |  |               | 577     |       |  | 757             |  |          | (104    | )         |  |             | Mar-98 |  |  | 1975         |  |  | (c) | 
|7663 Industrial Boulevard    |  | 272                           |  |               | 2,382   |       |  | 2,654           |  |          | (146    | )         |  |             | Dec-01 |  |  | 1988         |  |  | (c) | 
|6813 Ruppsville Road         |  | 274                           |  |               | 1,617   |       |  | 1,891           |  |          | (92     | )         |  |             | Dec-01 |  |  | 1984         |  |  | (c) | 
|7542 Morris Court            |  | 1,001                         |  |               | 5,673   |       |  | 6,674           |  |          | (324    | )         |  |             | Dec-01 |  |  | 1997         |  |  | (c) | 
|7584 Morris Court            |  | 415                           |  |               | 2,501   |       |  | 2,916           |  |          | (174    | )         |  |             | Dec-01 |  |  | 1990         |  |  | (c) | 
|7529 Morris Court            |  | 1,945                         |  |               | 12,083  |       |  | 14,028          |  |          | (688    | )         |  |             | Dec-01 |  |  | 1998         |  |  | (c) | 
|7220 Schantz Court           |  | 332                           |  |               | 1,923   |       |  | 2,255           |  |          | (109    | )         |  |             | Dec-01 |  |  | 1995         |  |  | (c) | 
|7485 Industrial Boulevard    |  | 1,030                         |  |               | 5,855   |       |  | 6,885           |  |          | (334    | )         |  |             | Dec-01 |  |  | 1990         |  |  | (c) | 
|355 Independence Avenue      |  | 1,514                         |  |               | 8,600   |       |  | 10,114          |  |          | (288    | )         |  |             | Nov-02 |  |  | 1999         |  |  | (c) | 
|80 South Middlesex Road      |  | 2,788                         |  |               | 15,834  |       |  | 18,622          |  |          | (491    | )         |  |             | Dec-02 |  |  | 2001         |  |  | (c) | 
|201 Fulling Mill Road        |  | 3,569                         |  |               | 20,328  |       |  | 23,897          |  |          | (502    | )         |  |             | Feb-03 |  |  | 2000         |  |  | (c) | 
|301-305 Oak Street           |  | 1,208                         |  |               | 6,897   |       |  | 8,105           |  |          | (218    | )         |  |             | Dec-02 |  |  | 1990,92,96   |  |  | (c) | 
|400 First Street             |  | 640                           |  |               | 3,764   |       |  | 4,404           |  |          | (87     | )         |  |             | Feb-03 |  |  | 1959, 1998   |  |  | (c) | 
|400 First Street (Expansion) |  | 1,365                         |  |               | 7,768   |       |  | 9,133           |  |          | (183    | )         |  |             | Feb-03 |  |  | 1998         |  |  | (c) | 
|401 First Street             |  | 1,882                         |  |               | 10,714  |       |  | 12,596          |  |          | (252    | )         |  |             | Feb-03 |  |  | 1963, 1996   |  |  | (c) | 
|500 Industrial Lane          |  | 442                           |  |               | 2,529   |       |  | 2,971           |  |          | (60     | )         |  |             | Feb-03 |  |  | 1970n 1996   |  |  | (c) | 
|300 Hunter Lane              |  | 1,647                         |  |               | 9,392   |       |  | 11,039          |  |          | (225    | )         |  |             | Feb-03 |  |  | 1996         |  |  | (c) | 
|600 Hunter Lane              |  | 1,098                         |  |               | 6,272   |       |  | 7,370           |  |          | (149    | )         |  |             | Feb-03 |  |  | 1996         |  |  | (c) | 
|2040 North Union Street      |  | 3,276                         |  |               | 18,579  |       |  | 21,855          |  |          | (506    | )         |  |             | Jan-03 |  |  | 1997         |  |  | (c) | 
|3500 Industrial Road         |  | 3,265                         |  |               | 18,555  |       |  | 21,820          |  |          | (88     | )         |  |             | Nov-03 |  |  | 1970         |  |  | (c) | 
|1091 Arnold Road             |  | 768                           |  |               | 3,335   |       |  | 4,103           |  |          | (565    | )         |  |             | Dec-97 |  |  | 1996         |  |  | (c) | 
|1157 Arnold Road             |  | 1,152                         |  |               | 4,864   |       |  | 6,016           |  |          | (828    | )         |  |             | Dec-97 |  |  | 1995         |  |  | (c) | 
|100 Oakhill Road             |  | 546                           |  |               | 2,278   |       |  | 2,824           |  |          | (375    | )         |  |             | Dec-97 |  |  | 1996         |  |  | (c) | 
|1 Philips Drive              |  | 2,213                         |  |               | 8,908   |       |  | 11,121          |  |          | (1,521  | )         |  |             | Jan-98 |  |  | 1990-91, 94  |  |  | (c) | 
|4900 Ritter Road             |  | 1,226                         |  |               | 4,178   |       |  | 5,404           |  |          | (1,041  | )         |  |             | Jul-98 |  |  | 1988         |  |  | (c) | 
|                             |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |              |  |  |     | 
|Subtotal Pennsylvania        |  | $51,231                       |  | $             | 274,144 |       |  | $325,375        |  | $        | (19,726 | )         |  |             |        |  |  |              |  |  |     | 
|                             |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |              |  |  |     | 

S-2



---



##### Table of Contents



SCHEDULE III:

REAL ESTATE AND ACCUMULATED
DEPRECIATION

As of December 31, 2003


(in 000s)


|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 
|------------------------------ |  | ------------ | ------------------- | ----------- |  | ------------- | ------ | ---------- |  | ----------------- |  | ---------- | ------- |  |  | - | --- |  |  | - | ----- | 
|                               |  |              |                     |             |  |               |        |            |  | Costs Capitalized
|                               |  |              |                     |             |  | Initial Costs |        |            |  | Subsequent to    
|                               |  | Location     |                     | (a)         |  |               |        | Transfers/ |  | Acquisition or   
|Name                           |  | (City/State) |                     | Encumbrance |  | Land          |        | Buildings  |  | Reserves          |  | Completion
|                               |  |              |                     |             |  |               |        |            |  |                   |  |           
|2 Volvo Drive                  |  |              | Rockleigh, NJ       |             |  |               | (d     | )          |  | $994              |  | $          | 4,192   |  |  | $ |    |  |  | $ | 157   | 
|21 Cranbury Road               |  |              | Cranbury, NJ        |             |  |               | 27,082 |            |  | 5,856             |  |            | 31,688  |  |  |   | 72  |  |  |   | 725   | 
|24 Abeel Road                  |  |              | Cranbury, NJ        |             |  |               |       |            |  | 292               |  |            | 1,435   |  |  |   | 3   |  |  |   | 10    | 
|301-321 Herrod Boulevard       |  |              | S. Brunswick, NJ    |             |  |               | 16,346 |            |  | 3,777             |  |            | 21,376  |  |  |   | 47  |  |  |   | 172   | 
|400 Cabot                      |  |              | Hamilton Twp., NJ   |             |  |               | 18,215 |            |  | 3,468             |  |            | 19,653  |  |  |   | 44  |  |  |   | 102   | 
|Four Applegate                 |  |              | Washington Twp., NJ |             |  |               | 9,510  |            |  | 2,243             |  |            | 12,713  |  |  |   | 30  |  |  |   | 25    | 
|5 Henderson Drive              |  |              | West Caldwell, NJ   |             |  |               | (d     | )          |  | 1,684             |  |            | 9,545   |  |  |   | 22  |  |  |   | 861   | 
|30 Stults Road                 |  |              | S. Brunswick, NJ    |             |  |               | 2,548  |            |  | 395               |  |            | 2,469   |  |  |   | 7   |  |  |   | 651   | 
|257 Prospect Plains Road       |  |              | Cranbury, NJ        |             |  |               | 16,000 |            |  | 3,609             |  |            | 20,811  |  |  |   |    |  |  |   | 1,221 | 
|283 Prospect Plains Road       |  |              | Cranbury, NJ        |             |  |               |       |            |  | 4,627             |  |            | 17,976  |  |  |   |    |  |  |   | 814   | 
|585 Industrial Road            |  |              | Carlstadt, NJ       |             |  |               |       |            |  | 413               |  |            | 2,338   |  |  |   |    |  |  |   | 111   | 
|1120 Route 22 East             |  |              | Bridgewater, NJ     |             |  |               |       |            |  | 4,612             |  |            | 26,136  |  |  |   |    |  |  |   | 492   | 
|25 Eastmans Road               |  |              | Hanover, NJ         |             |  |               |       |            |  | 584               |  |            | 3,310   |  |  |   |    |  |  |   | 88    | 
|55 Webro Road                  |  |              | Clifton, NJ         |             |  |               |       |            |  | 541               |  |            | 3,067   |  |  |   |    |  |  |   | 195   | 
|One Apollo Drive               |  |              | Whippany, NJ        |             |  |               |       |            |  | 1,353             |  |            | 7,667   |  |  |   |    |  |  |   | 159   | 
|110 Triangle Boulevard         |  |              | Carlstadt, NJ       |             |  |               |       |            |  | 351               |  |            | 1,991   |  |  |   |    |  |  |   | 16    | 
|121 Fieldcrest Avenue          |  |              | Edison, NJ          |             |  |               |       |            |  | 764               |  |            | 4,327   |  |  |   |    |  |  |   | 83    | 
|200 Middlesex Avenue           |  |              | carteret, NJ        |             |  |               |       |            |  | 2,925             |  |            | 16,574  |  |  |   |    |  |  |   | 84    | 
|203 Kuller Road                |  |              | Clifton, NJ         |             |  |               |       |            |  | 3,372             |  |            | 19,108  |  |  |   |    |  |  |   | 270   | 
|16 Thornton Road               |  |              | Oakland, NJ         |             |  |               |       |            |  | 446               |  |            | 2,530   |  |  |   |    |  |  |   | 9     | 
|191 Talmadge Road              |  |              | Edison, NJ          |             |  |               |       |            |  | 828               |  |            | 4,690   |  |  |   |    |  |  |   | 290   | 
|587 Industrial Road            |  |              | Carlstadt, NJ       |             |  |               |       |            |  | 437               |  |            | 2,478   |  |  |   |    |  |  |   | 132   | 
|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 
|Subtotal New Jersey            |  |              |                     |             |  | $             | 89,701 |            |  | $43,571           |  | $          | 236,074 |  |  | $ | 225 |  |  | $ | 6,667 | 
|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 
|6402 Corporate Drive           |  |              | Indianapolis, IN    |             |  | $             | 3,315  |            |  | $1,250            |  | $          | 7,424   |  |  | $ |    |  |  | $ | 46    | 
|8677 Logo Court                |  |              | Indianapolis, IN    |             |  |               |       |            |  | 2,547             |  |            | 15,109  |  |  |   |    |  |  |   | 204   | 
|700 Airtech Parkway            |  |              |                     |             |  |               |       |            |  | 2,218             |  |            | 20,344  |  |  |   |    |  |  |   | 1,236 | 
|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 
|Subtotal Indiana               |  |              |                     |             |  | $             | 3,315  |            |  | $6,015            |  | $          | 42,877  |  |  | $ |    |  |  | $ | 1,486 | 
|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 
|1221 South Batesville Road     |  |              | Greer. SC           |             |  | $             |       |            |  | $1,497            |  | $          | 8,498   |  |  | $ |    |  |  | $ | 536   | 
|Augusta Road Industrial Park   |  |              | Greenville, SC      |             |  |               |       |            |  | 1,129             |  |            | 6,405   |  |  |   |    |  |  |   | 62    | 
|Buncombe Road Industrial Park  |  |              | Greer. SC           |             |  |               |       |            |  | 838               |  |            | 4,772   |  |  |   |    |  |  |   | 177   | 
|South Highway 14               |  |              | Greer. SC           |             |  |               |       |            |  | 790               |  |            | 4,483   |  |  |   |    |  |  |   | 446   | 
|Piedmont Highway Industrial Pk |  |              | Piedmont, SC        |             |  |               |       |            |  | 1,310             |  |            | 7,433   |  |  |   |    |  |  |   | 157   | 
|Rocky Creek Business Park      |  |              | Greenville, SC      |             |  |               |       |            |  | 283               |  |            | 1,604   |  |  |   |    |  |  |   | 771   | 
|White Horse Rd.Industrial Park |  |              | Greenville, SC      |             |  |               |       |            |  | 1,272             |  |            | 7,218   |  |  |   |    |  |  |   | 212   | 
|120 Hidden Lake Circle         |  |              | Duncan, SC          |             |  |               |       |            |  | 1,463             |  |            | 8,292   |  |  |   |    |  |  |   |      | 
|104 Hidden Lake Circle         |  |              | Duncan, SC          |             |  |               | (d     | )          |  | 697               |  |            | 3,947   |  |  |   |    |  |  |   | 43    | 
|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 
|Subtotal South Carolina        |  |              |                     |             |  | $             |       |            |  | $9,279            |  | $          | 52,652  |  |  | $ |    |  |  | $ | 2,404 | 
|                               |  |              |                     |             |  |               |        |            |  |                   |  |            |         |  |  |   |     |  |  |   |       | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  
|------------------------------ |  | ----------------------------- |  | ------------- | ------- | ----- |  | --------------- |  | -------- | ------- | ----------- |  | ----------- | ------ |  |  |  | --------------- |  |  |  | -- | -
|                               |  |                               |  |               |         |       |  |                 |  |         
|                               |  | Gross Amount Carried at Close |  |               |         |       |  |                 |  |         
|                               |  | of Period                     |  |               |         |       |  |                 |  |         
|                               |  |                               |  |               |         |       |  |                 |  |         
|                               |  |                               |  | Accumulated   |         |       |  |                 |  |         
|                               |  |                               |  | Buildings and |         |       |  | Depreciation at |  | Year     |         | Year Built/ |  | Depreciable
|Name                           |  | Land                          |  | Improvements  |         | Total |  | 12/31/03        |  | Acquired |         | Renovated   |  | Year(s)    
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |            
|2 Volvo Drive                  |  | $994                          |  | $             | 4,349   |       |  | $5,343          |  | $        | (724    | )           |  |             | Dec-97 |  |  |  | 1966/1992       |  |  |  | (c | )
|21 Cranbury Road               |  | 5,913                         |  |               | 32,428  |       |  | 38,341          |  |          | (3,922  | )           |  |             | Sep-99 |  |  |  | 1998            |  |  |  | (c | )
|24 Abeel Road                  |  | 292                           |  |               | 1,448   |       |  | 1,740           |  |          | (175    | )           |  |             | Sep-99 |  |  |  | 1979            |  |  |  | (c | )
|301-321 Herrod Boulevard       |  | 3,777                         |  |               | 21,595  |       |  | 25,372          |  |          | (2,607  | )           |  |             | Sep-99 |  |  |  | 1988-89         |  |  |  | (c | )
|400 Cabot                      |  | 3,468                         |  |               | 19,799  |       |  | 23,267          |  |          | (2,084  | )           |  |             | May-00 |  |  |  | 1989            |  |  |  | (c | )
|Four Applegate                 |  | 2,243                         |  |               | 12,768  |       |  | 15,011          |  |          | (1,336  | )           |  |             | May-00 |  |  |  | 1998            |  |  |  | (c | )
|5 Henderson Drive              |  | 1,684                         |  |               | 10,428  |       |  | 12,112          |  |          | (1,145  | )           |  |             | May-00 |  |  |  | 1967, 72, 80,91 |  |  |  | (c | )
|30 Stults Road                 |  | 395                           |  |               | 3,127   |       |  | 3,522           |  |          | (613    | )           |  |             | Oct-00 |  |  |  | 1974            |  |  |  | (c | )
|257 Prospect Plains Road       |  | 3,609                         |  |               | 22,033  |       |  | 25,642          |  |          | (499    | )           |  |             | Apr-03 |  |  |  | 2003            |  |  |  | (c | )
|283 Prospect Plains Road       |  | 4,627                         |  |               | 18,790  |       |  | 23,417          |  |          | (1,076  | )           |  |             | Jun-02 |  |  |  | 2001            |  |  |  | (c | )
|585 Industrial Road            |  | 413                           |  |               | 2,449   |       |  | 2,862           |  |          | (63     | )           |  |             | Mar-03 |  |  |  | 1972            |  |  |  | (c | )
|1120 Route 22 East             |  | 4,612                         |  |               | 26,628  |       |  | 31,240          |  |          | (629    | )           |  |             | Mar-03 |  |  |  | 1961            |  |  |  | (c | )
|25 Eastmans Road               |  | 584                           |  |               | 3,398   |       |  | 3,982           |  |          | (79     | )           |  |             | Mar-03 |  |  |  | 1970            |  |  |  | (c | )
|55 Webro Road                  |  | 541                           |  |               | 3,262   |       |  | 3,803           |  |          | (75     | )           |  |             | Mar-03 |  |  |  | 1970            |  |  |  | (c | )
|One Apollo Drive               |  | 1,353                         |  |               | 7,827   |       |  | 9,180           |  |          | (182    | )           |  |             | Mar-03 |  |  |  | 1975            |  |  |  | (c | )
|110 Triangle Boulevard         |  | 351                           |  |               | 2,008   |       |  | 2,359           |  |          | (48     | )           |  |             | Mar-03 |  |  |  | 1965            |  |  |  | (c | )
|121 Fieldcrest Avenue          |  | 764                           |  |               | 4,410   |       |  | 5,174           |  |          | (109    | )           |  |             | Mar-03 |  |  |  | 1982            |  |  |  | (c | )
|200 Middlesex Avenue           |  | 2,925                         |  |               | 16,657  |       |  | 19,582          |  |          | (397    | )           |  |             | Mar-03 |  |  |  | 1986            |  |  |  | (c | )
|203 Kuller Road                |  | 3,372                         |  |               | 19,378  |       |  | 22,750          |  |          | (459    | )           |  |             | Mar-03 |  |  |  | 1960/1970       |  |  |  | (c | )
|16 Thornton Road               |  | 446                           |  |               | 2,538   |       |  | 2,984           |  |          | (61     | )           |  |             | Mar-03 |  |  |  | 1979            |  |  |  | (c | )
|191 Talmadge Road              |  | 828                           |  |               | 4,980   |       |  | 5,808           |  |          | (117    | )           |  |             | Mar-03 |  |  |  | 1957            |  |  |  | (c | )
|587 Industrial Road            |  | 437                           |  |               | 2,610   |       |  | 3,047           |  |          | (59     | )           |  |             | Mar-03 |  |  |  | 1972            |  |  |  | (c | )
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  
|Subtotal New Jersey            |  | $43,628                       |  | $             | 242,910 |       |  | $286,538        |  | $        | (16,459 | )           |  |             |        |  |  |  |                 |  |  |  |    |  
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  
|6402 Corporate Drive           |  | $1,256                        |  | $             | 7,464   |       |  | $8,720          |  | $        | (1,083  | )           |  |             | Dec-98 |  |  |  | 1995-96         |  |  |  | (c | )
|8677 Logo Court                |  | 2,559                         |  |               | 15,301  |       |  | 17,860          |  |          | (2,206  | )           |  |             | Dec-98 |  |  |  | 1991            |  |  |  | (c | )
|700 Airtech Parkway            |  | 2,218                         |  |               | 21,581  |       |  | 23,799          |  |          | (17     | )           |  |             | Jul-03 |  |  |  | 2001            |  |  |  | (c | )
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  
|Subtotal Indiana               |  | $6,033                        |  | $             | 44,346  |       |  | $50,379         |  | $        | (3,306  | )           |  |             |        |  |  |  |                 |  |  |  |    |  
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  
|1221 South Batesville Road     |  | $1,499                        |  | $             | 9,032   |       |  | $10,531         |  | $        | (1,291  | )           |  |             | Dec-98 |  |  |  | 1968, 80, 84    |  |  |  | (c | )
|Augusta Road Industrial Park   |  | 1,130                         |  |               | 6,466   |       |  | 7,596           |  |          | (924    | )           |  |             | Dec-98 |  |  |  | 1995-96         |  |  |  | (c | )
|Buncombe Road Industrial Park  |  | 838                           |  |               | 4,949   |       |  | 5,787           |  |          | (711    | )           |  |             | Dec-98 |  |  |  | 1985            |  |  |  | (c | )
|South Highway 14               |  | 791                           |  |               | 4,927   |       |  | 5,718           |  |          | (664    | )           |  |             | Dec-98 |  |  |  | 1970            |  |  |  | (c | )
|Piedmont Highway Industrial Pk |  | 1,236                         |  |               | 7,663   |       |  | 8,899           |  |          | (1,095  | )           |  |             | Dec-98 |  |  |  | 1994            |  |  |  | (c | )
|Rocky Creek Business Park      |  | 385                           |  |               | 2,273   |       |  | 2,658           |  |          | (369    | )           |  |             | Dec-98 |  |  |  | 1996            |  |  |  | (c | )
|White Horse Rd.Industrial Park |  | 1,273                         |  |               | 7,428   |       |  | 8,701           |  |          | (1,067  | )           |  |             | Dec-98 |  |  |  | 1987            |  |  |  | (c | )
|120 Hidden Lake Circle         |  | 1,463                         |  |               | 8,292   |       |  | 9,755           |  |          | (1,125  | )           |  |             | Mar-99 |  |  |  | 1998            |  |  |  | (c | )
|104 Hidden Lake Circle         |  | 697                           |  |               | 3,991   |       |  | 4,688           |  |          | (461    | )           |  |             | Nov-99 |  |  |  | 1986, 92        |  |  |  | (c | )
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  
|Subtotal South Carolina        |  | $9,312                        |  | $             | 55,021  |       |  | $64,333         |  | $        | (7,707  | )           |  |             |        |  |  |  |                 |  |  |  |    |  
|                               |  |                               |  |               |         |       |  |                 |  |          |         |             |  |             |        |  |  |  |                 |  |  |  |    |  

S-3



---



##### Table of Contents



SCHEDULE III:

REAL ESTATE AND ACCUMULATED
DEPRECIATION

As of December 31, 2003


(in 000s)


|                               |  |              |               |             |  |               |         |            |  |                   |  |            |         |  |  |   |      |   |  |   |        | 
|------------------------------ |  | ------------ | ------------- | ----------- |  | ------------- | ------- | ---------- |  | ----------------- |  | ---------- | ------- |  |  | - | ---- | - |  | - | ------ | 
|                               |  |              |               |             |  |               |         |            |  | Costs Capitalized
|                               |  |              |               |             |  | Initial Costs |         |            |  | Subsequent to    
|                               |  | Location     |               | (a)         |  |               |         | Transfers/ |  | Acquisition or   
|Name                           |  | (City/State) |               | Encumbrance |  | Land          |         | Buildings  |  | Reserves          |  | Completion
|                               |  |              |               |             |  |               |         |            |  |                   |  |           
|9905 NW 17th Street            |  |              | Miami, FL     |             |  | $             | 4,877   |            |  | $1,272            |  | $          | 7,204   |  |  | $ |     |   |  | $ |       | 
|1665 NW 102nd Street           |  |              | Miami, FL     |             |  |               | 4,806   |            |  | 1,315             |  |            | 7,452   |  |  |   |     |   |  |   |       | 
|10000 NW 17th Street           |  |              | Miami, FL     |             |  |               | 2,581   |            |  | 764               |  |            | 4,327   |  |  |   |     |   |  |   |       | 
|9950 NW 17th Street            |  |              | Miami, FL     |             |  |               | 5,636   |            |  | 1,543             |  |            | 8,741   |  |  |   |     |   |  |   |       | 
|10200 NW 21st Street           |  |              | Miami, FL     |             |  |               | 7,367   |            |  | 1,964             |  |            | 11,132  |  |  |   |     |   |  |   |       | 
|10205 NW 19th Street           |  |              | Miami, FL     |             |  |               | 10,351  |            |  | 2,661             |  |            | 15,080  |  |  |   |     |   |  |   |       | 
|10000 NW 21st Street           |  |              | Miami, FL     |             |  |               | 5,694   |            |  | 1,173             |  |            | 6,649   |  |  |   |     |   |  |   |       | 
|10300 NW 19th Street           |  |              | Miami, FL     |             |  |               | 10,408  |            |  | 2,641             |  |            | 14,967  |  |  |   |     |   |  |   |       | 
|10400 NW 21st Street           |  |              | Miami, FL     |             |  |               | 4,188   |            |  | 1,199             |  |            | 6,797   |  |  |   |     |   |  |   |       | 
|9825 NW 17th Street            |  |              | Miami, FL     |             |  |               |        |            |  | 404               |  |            | 2,291   |  |  |   |     |   |  |   |       | 
|1530 NW 98th Court             |  |              | Miami, FL     |             |  |               | 5,870   |            |  | 1,437             |  |            | 8,141   |  |  |   |     |   |  |   |       | 
|9835 NW 14th Street            |  |              | Miami, FL     |             |  |               | 5,727   |            |  | 1,587             |  |            | 8,992   |  |  |   |     |   |  |   |       | 
|1600 NW 102nd Street           |  |              | Miami, FL     |             |  |               |        |            |  | 557               |  |            | 3,157   |  |  |   |     |   |  |   |       | 
|                               |  |              |               |             |  |               |         |            |  |                   |  |            |         |  |  |   |      |   |  |   |        | 
|Subtotal Florida               |  |              |               |             |  | $             | 67,505  |            |  | $18,517           |  | $          | 104,930 |  |  | $ |     |   |  | $ |       | 
|                               |  |              |               |             |  |               |         |            |  |                   |  |            |         |  |  |   |      |   |  |   |        | 
|Mount Ebo                      |  |              | Mount Ebo, NY |             |  |               | (d)     |            |  | $1,495            |  | $          | 6,990   |  |  | $ |     |   |  | $ |       | 
|1030 South Edgewood            |  |              | Urbana, OH    |             |  |               |        |            |  | 782               |  |            | 2,293   |  |  |   |     |   |  |   | 782    | 
|5555 Massillon Road            |  |              | Green, OH     |             |  |               |        |            |  | 1,572             |  |            | 6,310   |  |  |   |     |   |  |   |       | 
|1411 Majestic Drive            |  |              | Fremont, OH   |             |  |               | 3,610   |            |  | 671               |  |            | 3,803   |  |  |   |     |   |  |   |       | 
|600 Hagerty Drive              |  |              | Fremont, OH   |             |  |               | 2,579   |            |  | 467               |  |            | 2,648   |  |  |   |     |   |  |   | 8      | 
|605 Hagerty Drive              |  |              | Fremont, OH   |             |  |               | 1,608   |            |  | 283               |  |            | 1,604   |  |  |   |     |   |  |   | 5      | 
|670 Hagerty Drive              |  |              | Fremont, OH   |             |  |               | 2,137   |            |  | 405               |  |            | 2,294   |  |  |   |     |   |  |   | 5      | 
|800 Hagerty Drive              |  |              | Fremont, OH   |             |  |               | 766     |            |  | 128               |  |            | 724     |  |  |   |     |   |  |   | 5      | 
|1311 Majestic Drive            |  |              | Fremont, OH   |             |  |               | 2,909   |            |  | 528               |  |            | 2,991   |  |  |   |     |   |  |   |       | 
|300 Enterprise Drive           |  |              | Bellevue, OH  |             |  |               | 3,828   |            |  | 746               |  |            | 4,226   |  |  |   |     |   |  |   | 1      | 
|Keystone Operating Partnership |  |              |               |             |  |               | 267,250 |            |  |                  |  |            |        |  |  |   |     |   |  |   | 1,025  | 
|                               |  |              |               |             |  |               |         |            |  |                   |  |            |         |  |  |   |      |   |  |   |        | 
|Subtotal Other                 |  |              |               |             |  | $             | 284,687 |            |  | $7,077            |  | $          | 33,883  |  |  | $ |     |   |  | $ | 1,831  | 
|                               |  |              |               |             |  |               |         |            |  |                   |  |            |         |  |  |   |      |   |  |   |        | 
|Total All Properties           |  |              |               |             |  | $             | 521,196 | (b)        |  | $134,978          |  | $          | 735,013 |  |  | $ | (315 | ) |  | $ | 23,189 | 
|                               |  |              |               |             |  |               |         |            |  |                   |  |            |         |  |  |   |      |   |  |   |        | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |  |              |  |  |  |     | 
|------------------------------ |  | ----------------------------- |  | ------------- | ------- | ----- |  | --------------- |  | -------- | ------- | --------- |  | ----------- | ------ |  |  |  | ------------ |  |  |  | --- | 
|                               |  |                               |  |               |         |       |  |                 |  |         
|                               |  | Gross Amount Carried at Close |  |               |         |       |  |                 |  |         
|                               |  | of Period                     |  |               |         |       |  |                 |  |         
|                               |  |                               |  |               |         |       |  |                 |  |         
|                               |  |                               |  | Accumulated   |         |       |  | Year            |  |         
|                               |  |                               |  | Buildings and |         |       |  | Depreciation at |  | Year     |         | Built/    |  | Depreciable
|Name                           |  | Land                          |  | Improvements  |         | Total |  | 12/31/03        |  | Acquired |         | Renovated |  | Year(s)    
|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |            
|9905 NW 17th Street            |  | $1,272                        |  | $             | 7,204   |       |  | $8,476          |  | $        | (28     | )         |  |             | Nov-03 |  |  |  | 1995         |  |  |  | (c) | 
|1665 NW 102nd Street           |  | 1,315                         |  |               | 7,452   |       |  | 8,767           |  |          | (29     | )         |  |             | Nov-03 |  |  |  | 1996         |  |  |  | (c) | 
|10000 NW 17th Street           |  | 764                           |  |               | 4,327   |       |  | 5,091           |  |          | (17     | )         |  |             | Nov-03 |  |  |  | 1996         |  |  |  | (c) | 
|9950 NW 17th Street            |  | 1,543                         |  |               | 8,741   |       |  | 10,284          |  |          | (35     | )         |  |             | Nov-03 |  |  |  | 1996         |  |  |  | (c) | 
|10200 NW 21st Street           |  | 1,964                         |  |               | 11,132  |       |  | 13,096          |  |          | (44     | )         |  |             | Nov-03 |  |  |  | 1997         |  |  |  | (c) | 
|10205 NW 19th Street           |  | 2,661                         |  |               | 15,080  |       |  | 17,741          |  |          | (61     | )         |  |             | Nov-03 |  |  |  | 1997         |  |  |  | (c) | 
|10000 NW 21st Street           |  | 1,173                         |  |               | 6,649   |       |  | 7,822           |  |          | (26     | )         |  |             | Nov-03 |  |  |  | 1997         |  |  |  | (c) | 
|10300 NW 19th Street           |  | 2,641                         |  |               | 14,967  |       |  | 17,608          |  |          | (59     | )         |  |             | Nov-03 |  |  |  | 1998         |  |  |  | (c) | 
|10400 NW 21st Street           |  | 1,199                         |  |               | 6,797   |       |  | 7,996           |  |          | (26     | )         |  |             | Nov-03 |  |  |  | 1999         |  |  |  | (c) | 
|9825 NW 17th Street            |  | 404                           |  |               | 2,291   |       |  | 2,695           |  |          | (10     | )         |  |             | Nov-03 |  |  |  | 1999         |  |  |  | (c) | 
|1530 NW 98th Court             |  | 1,437                         |  |               | 8,141   |       |  | 9,578           |  |          | (32     | )         |  |             | Nov-03 |  |  |  | 1998         |  |  |  | (c) | 
|9835 NW 14th Street            |  | 1,587                         |  |               | 8,992   |       |  | 10,578          |  |          | (33     | )         |  |             | Nov-03 |  |  |  | 1998         |  |  |  | (c) | 
|1600 NW 102nd Street           |  | 557                           |  |               | 3,157   |       |  | 3,714           |  |          | (13     | )         |  |             | Nov-03 |  |  |  | 2003         |  |  |  | (c) | 
|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |  |              |  |  |  |     | 
|Subtotal Florida               |  | $18,517                       |  | $             | 104,930 |       |  | $123,447        |  | $        | (411    | )         |  |             |        |  |  |  |              |  |  |  |     | 
|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |  |              |  |  |  |     | 
|Mount Ebo                      |  | $1,495                        |  | $             | 6,990   |       |  | $8,485          |  | $        | (849    | )         |  |             | Sep-99 |  |  |  | 1992         |  |  |  | (c) | 
|1030 South Edgewood            |  | 782                           |  |               | 3,075   |       |  | 3,857           |  |          | (485    | )         |  |             | Jun-98 |  |  |  | 1991         |  |  |  | (c) | 
|5555 Massillon Road            |  | 1,569                         |  |               | 6,314   |       |  | 7,883           |  |          | (986    | )         |  |             | Aug-98 |  |  |  | 1996         |  |  |  | (c) | 
|1411 Majestic Drive            |  | 671                           |  |               | 3,803   |       |  | 4,474           |  |          | (516    | )         |  |             | Apr-99 |  |  |  | 1995         |  |  |  | (c) | 
|600 Hagerty Drive              |  | 467                           |  |               | 2,656   |       |  | 3,123           |  |          | (360    | )         |  |             | Apr-99 |  |  |  | 1980, 86, 97 |  |  |  | (c) | 
|605 Hagerty Drive              |  | 283                           |  |               | 1,609   |       |  | 1,892           |  |          | (218    | )         |  |             | Apr-99 |  |  |  | 1991         |  |  |  | (c) | 
|670 Hagerty Drive              |  | 405                           |  |               | 2,299   |       |  | 2,704           |  |          | (312    | )         |  |             | Apr-99 |  |  |  | 1980, 88, 90 |  |  |  | (c) | 
|800 Hagerty Drive              |  | 128                           |  |               | 729     |       |  | 857             |  |          | (99     | )         |  |             | Apr-99 |  |  |  | 1987-88      |  |  |  | (c) | 
|1311 Majestic Drive            |  | 528                           |  |               | 2,992   |       |  | 3,520           |  |          | (363    | )         |  |             | Sep-99 |  |  |  | 1993         |  |  |  | (c) | 
|300 Enterprise Drive           |  | 746                           |  |               | 4,227   |       |  | 4,973           |  |          | (513    | )         |  |             | Sep-99 |  |  |  | 1998         |  |  |  | (c) | 
|Keystone Operating Partnership |  | 6                             |  |               | 1,019   |       |  | 1,025           |  |          | (257    | )         |  |             |        |  |  |  |              |  |  |  |     | 
|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |  |              |  |  |  |     | 
|Subtotal Other                 |  | $7,080                        |  | $             | 35,713  |       |  | $42,793         |  | $        | (4,958  | )         |  |             |        |  |  |  |              |  |  |  |     | 
|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |  |              |  |  |  |     | 
|Total All Properties           |  | $135,801                      |  | $             | 757,064 |       |  | $892,865        |  | $        | (52,569 | )         |  |             |        |  |  |  |              |  |  |  |     | 
|                               |  |                               |  |               |         |       |  |                 |  |          |         |           |  |             |        |  |  |  |              |  |  |  |     | 

S-4



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##### Table of Contents



NOTES:

(a) See description of encumbrances in
Item 1-Summary of Indebtedness

(b) Amount excludes unamortized debt
premiums of $12,521,000 at December 31, 2003.

(c) Depreciation is computed based on the
following estimated lives:

|                                  |  |  |               | 
|--------------------------------- |  |  | ------------- | 
|Buildings and Improvements        |  |  | 10-35 years   | 
|Tenant/ Leasehold Improvements    |  |  | Life of Lease | 
|Furniture, Fixtures and Equipment |  |  | 5 to 10 years | 

(d) These properties collateralize a
$10.0 million working capital facility, of which
$6.5 million is outstanding at December 31, 2003.

At December 31, 2003, the aggregate net
carrying amount for land and buildings and improvements for
federal income tax reporting was approximately $733.3 million.

Summary of Real Estate and Accumulated
Depreciation Activity:

|                                                                   |  |         |         |              |  |         |        |              |  |         |          |              |  |   |         |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------ |  | ------- | ------- | ------------ |  | ------- | ------ | ------------ |  | ------- | -------- | ------------ |  | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                                                   |  |         |         |              |  |        
|                                                                   |  | 2003    |         | 2002         |  | 2001   
|                                                                   |  |         |         |              |  |        
|                                                                   |  |         |         | Accumulated  |  |         |        | Accumulated  |  |         |          | Accumulated 
|                                                                   |  | Cost(1) |         | Depreciation |  | Cost(1) |        | Depreciation |  | Cost(1) |          | Depreciation
|                                                                   |  |         |         |              |  |         |        |              |  |         |          |             
|Balance at beginning of year                                       |  | $       | 574,794 |              |  | $       | 39,432 |              |  | $       | 754,819  |              |  | $ | 47,192  |   |  | $ | 928,037  |   |  | $ | 40,558  |  
|Property acquisitions and development assets
    placed in service |  |         | 400,755 |              |  |         |       |              |  |         | 60,407   |              |  |   |        |   |  |   | 102,493  |   |  |   |        |  
|Capital improvements                                               |  |         | 2,916   |              |  |         |       |              |  |         | 5,333    |              |  |   |        |   |  |   | 4,341    |   |  |   |        |  
|Transfers                                                          |  |         |        |              |  |         |       |              |  |         | (1,179   | )            |  |   |        |   |  |   | (1,314   | ) |  |   |        |  
|Properties sold                                                    |  |         | (85,600 | )            |  |         | (5,204 | )            |  |         | (244,586 | )            |  |   | (25,389 | ) |  |   | (278,738 | ) |  |   | (15,633 | )
|Depreciation expense                                               |  |         |        |              |  |         | 18,341 |              |  |         |         |              |  |   | 17,629  |   |  |   |         |   |  |   | 22,267  |  
|                                                                   |  |         |         |              |  |         |        |              |  |         |          |              |  |   |         |   |  |   |          |   |  |   |         |  
|Balance at end of year                                             |  | $       | 892,865 |              |  | $       | 52,569 |              |  | $       | 574,794  |              |  | $ | 39,432  |   |  | $ | 754,819  |   |  | $ | 47,192  |  
|                                                                   |  |         |         |              |  |         |        |              |  |         |          |              |  |   |         |   |  |   |          |   |  |   |         |  



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | These balances exclude development and
    construction-in-progress and the Companys investment in a
    direct financing lease.

S-5



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities and Exchange Act of 11034, the
Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |                        
| | -----------------------
| | KEYSTONE PROPERTY TRUST



| |     |                      
| | --- | ---------------------
| | By: | /s/ JEFFREY E. KELTER

| |                                          
| | -----------------------------------------
| |                                          
| | Jeffrey E. Kelter                        
| | President and Chief Executive
    Officer

Date: March 10, 2004

Pursuant to the requirements of the Securities
Exchange Act of 11034, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                   |  |                |  | 
|---------------------------------------------- |  | ----------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                                   |  |               
|Signature                                      |  | Title                                                             |  | Date          
|                                               |  |                                                                   |  |               
|                                              
|/s/ DAVID F. MCBRIDEDavid F. McBride           |  | Chairman and Trustee                                              |  | March 10, 2004
|                                              
|/s/ JEFFREY E. KELTERJeffrey E. Kelter         |  | President, Chief Executive Officer and Trustee                    |  | March 10, 2004
|                                              
|/s/ ROBERT F. SAVAGE, JR.Robert F. Savage, Jr. |  | Executive Vice President, Chief Operating Officer
    and Trustee |  | March 10, 2004
|                                              
|/s/ TIMOTHY E. MCKENNATimothy E. McKenna       |  | Senior Vice President and Chief Financial Officer                 |  | March 10, 2004
|                                              
|/s/ J. PETER LLOYDJ. Peter Lloyd               |  | Senior Vice President and Chief Accounting Officer                |  | March 10, 2004
|                                              
|/s/ RODNEY B. BERENSRodney B. Berens           |  | Trustee                                                           |  | March 10, 2004
|                                              
|/s/ DONALD E. CALLAGHANDonald E. Callaghan     |  | Trustee                                                           |  | March 10, 2004
|                                              
|/s/ JONATHAN D. EILIANJonathan D. Eilian       |  | Trustee                                                           |  | March 10, 2004
|                                              
|/s/ RICHARD M. CUMMINSRichard M. Cummins       |  | Trustee                                                           |  | March 10, 2004
|                                              
|/s/ JOHN S. MOODYJohn S. Moody                 |  | Trustee                                                           |  | March 10, 2004

II-1



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##### Table of Contents



|                                     |  |         |  |                |  | 
|------------------------------------ |  | ------- |  | -------------- |  | 
|                                     |  |         |  |               
|Signature                            |  | Title   |  | Date          
|                                     |  |         |  |               
|                                    
|/s/ RUSSELL C. PLATTRussell C. Platt |  | Trustee |  | March 10, 2004
|                                    
|/s/ DAVID M. SHERMANDavid M. Sherman |  | Trustee |  | March 10, 2004

II-2