**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

| **(Mark One)**                                       | ** ** | ** **                                                                                                   |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|
| x                                                    | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended December 31, 2006** |
| **OR**                                               |
| o                                                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                      to                      **

**Commissionfile number 0-6201**

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**BRESLER &REINER, INC.**

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

| **Delaware**                              |   | **52-0903424**          |
|-------------------------------------------|--------|-------------------------|
| (State or Other  Jurisdiction of          |   | (I.R.S. Employer        |
| Incorporation or  Organization)           |   | Identification  Number) |
| **11200 Rockville Pike, Suite 502**  |   | ** **              |
| **Rockville,  Maryland**                  |   | **20852**               |
| (Address of  Principal Executive Offices) |   | (Zip Code)              |

 

**Registrant’stelephone number, including area code: (301) 945-4300**

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**Securitiesregistered pursuant to Section 12(b) of the Act: Common Stock, $0.01par value**

**Securitiesregistered pursuant to Section 12(g) of the Act: None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No  x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes  x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler o    Acceleratedfiler o   Non-acceleratedfiler  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No  x

The aggregate market valueof the voting stock held by non-affiliates (1,319,840 shares) was $38,407,344as of June 30, 2006. The aggregate market value was computed by referenceto the last sale of the Common Stock of the Registrant at $29.10 per share. Forpurposes of this computation, directors, officers and holders of 5% or more ofthe Registrant’s Common Stock are considered affiliates of the Registrant atthat date.

The number of shares of theregistrant’s Common Stock outstanding as of March 29, 2007 was 5,477,212.

**DOCUMENTSINCORPORATED BY REFERENCE**

Part III ofthis Report incorporates by reference information from the definitive ProxyStatement for the registrant’s 2007 Annual Meeting of Stockholders to be heldon June 13, 2007.

 

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**BRESLER &REINER, INC.**

**ANNUAL REPORT ONFORM 10-K**

**Forthe Fiscal Year Ended December 31, 2006**

**TABLE OF CONTENTS**

 

|              | ** ** | ** ** | ** ** | ** **                                                                                       | ** ** | **Page** | ** ** |
|--------------|------------|------------|------------|--------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |       |       |                                                                                             |       |     |       |
|         |       | Item 1     |       | Business                                                                                         |       |     | 1          |   |   |
|         |       | Item 1A    |       | Risk  Factors                                                                                    |       |     | 5          |   |   |
|         |       | Item 1B    |       | Unresolved Staff Comments                                                                        |       |     | 9          |   |   |
|         |       | Item 2     |       | Properties                                                                                       |       |     | 10         |   |   |
|         |       | Item  3    |       | Legal  Proceedings                                                                               |       |     | 14         |   |   |
|         |       | Item 4     |       | Submission of Matters to a Vote of Security Holders                                              |       |     | 14         |   |   |
| **PART II**  |       |       |       |                                                                                             |       |     |       |
|         |       | Item 5     |       | Market for Registrant’s Common Equity, Related  Stockholder Matters                         |       |     | 15         |   |   |
|         |       | Item  6    |       | Selected  Financial Data                                                                         |       |     | 16         |   |   |
|         |       | Item 7     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations      |       |     | 17         |   |   |
|         |       | Item 7A    |       | Quantitative and Qualitative Disclosures About Market  Risk                                      |       |     | 28         |   |   |
|         |       | Item 8     |       | Financial Statements and Supplementary Data                                                      |       |     | 28         |   |   |
|         |       | Item 9     |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure            |       |     | 28         |   |   |
|         |       | Item 9A    |       | Controls and Procedures                                                                          |       |     | 29         |   |   |
|         |       | Item  9B   |       | Other  Information                                                                               |       |     | 29         |   |   |
| **PART III** |       |       |       |                                                                                             |       |     |       |
|         |       | Item 10    |       | Directors, Executive Officers of the Registrant and  Corporate Governance                        |       |     | 30         |   |   |
|         |       | Item 11    |       | Executive Compensation                                                                           |       |     | 30         |   |   |
|         |       | Item 12    |       | Security Ownership of Certain Beneficial Owners and  Management, and Related Stockholder Matters |       |     | 30         |   |   |
|         |       | Item 13    |       | Certain Relationships, Related Transactions and  Director Independence                           |       |     | 30         |   |   |
|         |       | Item 14    |       | Principal Accounting Fees and Services                                                           |       |     | 30         |   |   |
| **PART IV**  |       |       |       |                                                                                             |       |     |       |
|         |       | Item 15    |       | Exhibits and Financial Statement Schedules                                                       |       |     | 31         |   |   |
|         |       |       |       | Signatures                                                                                       |       |     | 34         |   |   |

 

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**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

This report, together with other statements andinformation publicly disseminated by the Company, contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. The Company intends such forward-looking statements to becovered by the safe harbor provisions for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995 and includesthis statement for purposes of complying with these safe harbor provisions.Forward-looking statements, which are based on certain assumptions anddescribe the Company’s future plans, strategies and expectations, are generallyidentifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”“project” or similar expressions. You should not rely on forward-lookingstatements since they involve known and unknown risks, uncertainties and otherfactors that are, in some cases, beyond the Company’s control and which couldmaterially affect actual results, performances or achievements. Factors thatmay cause actual results to differ materially from current expectationsinclude, but are not limited to the risk factors discussed in this AnnualReport on Form 10-K. Accordingly, there is no assurance that theCompany’s expectations will be realized. Except as otherwise required by thefederal securities laws, the Company disclaims any obligations or undertakingto publicly release any updates or revisions to any forward-lookingstatement contained herein (or elsewhere) to reflect any change in the Company’sexpectations with regard thereto or any change in events, conditions orcircumstances on which any such statement is based.

The “Company” meansBresler & Reiner, Inc., a Delaware corporation, and one or moreof its subsidiaries and affiliates, and, as the context may require, Bresler &Reiner, Inc. only.

**ITEM 1. BUSINESS**

**Our Company**

Bresler & Reiner, Inc. is a Delawarecorporation that for over 40 years has been primarily engaged in the ownershipof commercial, residential and hospitality properties and in the development ofcommercial and residential buildings and land.

We engage in real estateactivities in the Philadelphia, Pennsylvania; Houston, Texas; Washington, D.C.;Wilmington, Delaware; Baltimore, Maryland; Maryland and Delaware Eastern Shore;and Orlando and Tampa, Florida, metropolitan areas. We are not involved in anyoperations outside of the United States of America.

**Our Strategy**

Our goal is to generateattractive risk-adjusted investment returns through ownership of operatingproperties and participation in development projects.

*Operating Properties*

To achieve our goal with regards to operating properties,we employ the following strategy:

·       ***Target Properties that Have StableCash Flows and Present Upside Potential.  ***We seek toacquire well located properties that have stable cash flows and also presentupside potential that may result from valued added improvements, enhancedtenant services and strong management. We view existing vacancies or near-termlease expirations as opportunities to increase rental revenue.

·       ***Employ Successful Bidding and DueDiligence Techniques.  ***Our strong local relationships andeffective due diligence allows us to make an informed offer based on a thoroughevaluation of the property and its potential. We consider such factors as:

·       economicand demographic conditions in the property’s local and regional market;

·       thelocation, age, occupancy and rental rates of competing properties;

·       thelocation, age, construction quality and design of the property;

·       thecurrent and projected cash flow of the property in its current condition;

·       thepotential to increase cash flow through moderate renovation and enhanced tenantservice;

·       theterms of existing debt on the property and the availability of new financing onfavorable terms;

·       theterms of tenant leases, including the relationship between the property’scurrent rents and market rents and the ability to increase rents upon leaserollover;

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·       theproperty’s current expense structure and the potential to increase operatingmargins;

·       accessto experienced local property managers and leasing agents; and

·       whetherwe have or can achieve a sufficient concentration of properties in a sub-marketto achieve economies of scale and enhanced service levels from local serviceproviders.

·       ***Engage Third Party Property Managersand Leasing Agents.  ***We use third-party propertymanagers and leasing agents who have a strong presence in the applicable localmarket to handle day-to-day operations and leasing activity of the properties.We believe property management and leasing is local in nature and that managersand leasing agents are an integral part of the property’s success. We hireproperty managers and leasing agents who embrace the idea of building acollaborative relationship with us, are highly motivated, offer value-addedservices and have solid relationships with high quality, cost-effective vendors.By clustering our properties, we are able to provide onsite property maintenanceservices that are both cost effective and better suited to respond to tenantrequests in a timely manner, thereby increasing tenant loyalty and loweringtenant turnover costs.

·       ***Employ Asset Management andOversight.  ***We engage in rigorous oversight and assetmanagement of our properties. We make regular on-site visits, touring theproperties and meeting with the property managers and leasing agents. We workwith our property managers to identify revenue generation and expense reductionopportunities. We establish internal controls to ensure compliance with ouroperating, accounting and reporting requirements and test these controls duringperiodic site visits conducted by our internal audit department. We approveeach property’s long and short-term capital replacement plans and annual operatingbudgets and review monthly operating and leasing reports for each property.

*Development Properties*

We employ the following strategy to achieve our goalswith respect to development projects:

·       ***Due Diligence Techniques.  ***Wethoroughly evaluate a development project’s potential for generating strongrisk-adjusted returns by considering such factors as:

·       thehighest and best use for the project;

·       theeconomic and demographic conditions in the project’s local and regional market;

·       competitionfrom comparable projects;

·       theprojected cash flow of the project;

·       potentialrisk-adjusted returns on our investment;

·       developmentrisks including cost overruns and delays; and

·       interest-raterisk.

·       ***Partner with Developers.  ***Wepartner with reputable local, regional and national developers who have expertknowledge of their markets and strong relationships with general contractorsand service providers. The agreements with our joint venture partners generallyprovide for a distribution waterfall that provides us with a preferred returnon our investment as well as incentives to our partners to maximize returns onthe project.

*Selling Properties*

We acquire operatingproperties as a long term investment, and we pursue our development propertiesto complete the development process. However, we continually evaluate whetherwe should continue to hold properties or to dispose of them. In evaluatingwhether to dispose of a property we consider the amount of control we exertover the ownership entity, whether the property fits with our overall strategy,and whether re-deployment opportunities for the sale proceeds offer greaterreturns than can be achieved through continuing to own and operate the existingproperty.

*Prudent Financing*

We maintain a strongliquidity position that allows us to effectively compete for acquisitions wherethe seller may require the buyer to rapidly close on the purchase of aproperty. We employ mortgage debt in order to enhance our returns on investedcapital. In certain instances we enter into master lease agreements or provideloan guarantees in order to maximize the benefits of leverage. At other timeswe prepay existing mortgage debt in order to place more favorable debt. While 

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under accountingprinciples generally accepted in the United States of America (“GAAP”) the costand other penalties associated with such prepayments adversely affect ourearnings in the year in which they occur, we proceed with such prepaymentsafter considering among other things, whether the benefits to be gained overthe course of the loan from the new leverage outweigh the costs incurred in thecurrent year on a net present value basis.

**Our CompetitiveStrengths**

To employ our strategy we utilize our competitivestrengths which include:

·       **Experienced Management.*  ***Our management team has extensiveexperience acquiring, financing, developing, repositioning and selling realestate. The co-founders of the Company are active members of the Board.

·       **Network of Industry Contacts and CollaborativeRelationships.  **Our management team has developed a broadnetwork of contacts that include property owners, developers, lenders, brokers,property managers and leasing agents.

·       **Growth Oriented Capital Structure.*  ***Ourstrong liquidity position provides us with flexibility in structuringtransactions and allows us to react quickly to investment opportunities.

**FinancialInformation about Business Segments**

We operate in sixreportable business segments: Commercial Rental Property; Residential RentalProperty; Hospitality Property; Developed and Undeveloped Land sales;Commercial and Residential Condominiums; and Commercial Building andResidential Apartment Development. For additional information about thesesegments see Note 17 of Notes to Consolidated Financial Statements inItem 15 of this report and Managements’ Discussion and Analysis ofFinancial Condition and Results of Operations included in Item 7 of Part IIof this report.

**NarrativeDescription of the Business**

The following is a briefdescription of each of our reportable business segments:

*Commercial Rental Property*

This segment includes the rental income derived bycommercial properties from the leasing of office and industrial space and otherrelated revenue sources. Commercial leases generally provide for a fixedmonthly rental over terms that range from three to 10 years. At December 31,2006 we owned, or had an ownership interest in, 47 commercial office and flexwarehouse buildings containing approximately 3,749,000 square feet of space.The properties are located in the Philadelphia, Pennsylvania; Houston, Texas;Washington, D.C. and Wilmington, Delaware metropolitan areas.

Also included in thissegment is income generated from management and leasing activities associatedwith our 50% ownership interest in Redwood Commercial Management, LLC(Redwood), a commercial management company. Redwood manages approximately1,050,000 square feet of commercial office space, approximately 559,000 squarefeet of which are owned by entities which we control.

*Residential Rental Property*

This segment includes the rental income derived byresidential properties from the leasing of apartment units and other relatedrevenue sources. Apartment leases generally provide for a fixed monthly rentalover a one-year term. At December 31, 2006, we owned, or had an ownershipinterest in, four residential properties containing a total of 1,136 apartmentunits. The properties are located in the Orlando, Florida and Washington, D.C.metropolitan areas.

Included in this segmentfor 2004 are fees generated from a wholly-owned subsidiary that formerlymanaged a residential property owned by affiliated third parties. Thismanagement contract was terminated during the year ended December 31,2004.

*Hospitality Property*

This segment includesrevenue and income generated from services provided at our two hotelproperties. The properties bear the Doubletree and Holiday Inn Express brandsand are both managed by third party managers. The properties are located inBaltimore, Maryland and Camp Springs, Maryland. In February 2007, we sold theDoubletree brand hotel.

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*Developed and Undeveloped Land*

This segment includes therevenues and costs associated with the development and sale of land parcels andlots as part of residential subdivisions and undeveloped commercial land sales.The residential subdivisions are located on the Maryland and Delaware EasternShore, and the undeveloped commercial land is located in the Washington, DCmetropolitan area.

*Commercial and ResidentialCondominiums*

This segment primarilyincludes the revenues and costs associated with the development and sale ofcommercial and residential condominiums. This activity is conducted in theWashington, DC; Philadelphia, Pennsylvania and Baltimore, Maryland metropolitanmarkets.

*Development of Rental Properties*

This segment primarilyincludes the development and construction of commercial and residentialbuildings that will be leased to tenants upon completion. Costs associated withthis segment are capitalized until completion, at which time the assets areplaced in service and transferred to either the residential or commercialrental property segment. This activity is conducted in the Washington, DC andPhiladelphia, Pennsylvania metropolitan markets.

**Other Information**

*Competition*

We operate in highly competitive marketplaces invirtually all aspects of our real estate activities:

·       Duringthe acquisition process we compete against other buyers of real estate;including both public and private real estate investment trusts, real estatedevelopment companies, investment firms, investment funds and financialinstitutions. We compete primarily based on offer prices and the ability tofund the acquisition and close the transaction in a timely manner. Thiscompetition may reduce the availability of properties at prices that meet ourtargeted rates of return on invested capital or may require us to reduce ourtargeted rates of return.

·       Wecompete for tenants and guests at our operating commercial, residential andhospitality properties primarily based on price, location and amenitiesoffered. An oversupply of real property created by other developers and ownerscould hinder our ability to maintain high occupancy levels or could requirethat we reduce rents or offer significant concessions. Such situations couldmaterially and adversely affect our results of operations and cash flows.

·       We compete for developmentprojects with other developers of similar projects as well as existingprojects. Increased supply of condominium units and developed land could affectthe prices at which we can sell these projects, thereby adversely affecting ourresults of operations and cash flows.

*Employees*

On December 31, 2006,we had 28 full-time employees, all but one of whom were located at ourcorporate offices in Rockville, Maryland, working in such areas as finance,accounting, asset management and internal audit. We believe that our relationswith our employees are good. The on-site personnel engaged in the day-to-dayoperations and the development activities of properties are employees orsub-contactors of the management companies or developers contracted to operateor develop such properties.

*Market Concentrations*

The commercial propertieswe owned at December 31, 2006 are concentrated in both the Mid-Atlanticregion of the country, and the Houston, Texas metropolitan market. Ourresidential apartment properties are concentrated in the Central Florida area.Our hospitality properties are located in the Baltimore, Maryland andWashington, D.C. metropolitan areas. Our development projects are located inthe Washington, D.C., Maryland and Delaware Eastern Shore, and Philadelphia,Pennsylvania metropolitan areas. No single tenant represents more than 10% ofour total revenues.

*Seasonality*

Our commercial propertiesare unaffected by seasonality. There are limited seasonal impacts on results atresidential properties with slightly lower occupancy during the months of December andJanuary. Our hospitality properties are affected to a larger extent byseasonality; however, the impact is minimal to our overall results ofoperations. Sales of 

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residential condominiumsare affected by seasonality with fewer sales in the winter months. Sales ofdeveloped land are not affected by seasonality since the sales contracts withthe homebuilders incorporate structured take-down of lots.

*Access to Company Information*

We electronically file our Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-Kand all exhibits and amendments to these reports, with the Securities andExchange Commission (the SEC). The public may read and copy any of the reportsthat are filed with the SEC at the SEC’s Public Reference Room at 450Fifth Street, N.W., Washington, D.C. 20549. The public may obtain informationon the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.The SEC maintains an internet site *(http://www.sec.gov)*that contains reports, proxy and information statements and other informationregarding issuers that file electronically.

We make available, free ofcharge, by responding to requests addressed to our investor relationsdepartment, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and all exhibits and amendments to thesereports. These reports are available as soon as reasonably practicable aftersuch material is electronically filed with or furnished to the SEC. Thesereports can also be accessed on our website (*http://www.breslerandreiner.com*).Information on our website, however is not part of this report.

**ITEM 1A. RISKFACTORS**

**Risk Factors That May AffectOur Future Business Results**

We face a number of material risks and uncertaintiesin our business, which could materially and adversely affect our business,financial condition and results of operations and, as a result, the tradingprice of our common stock. We believe that the risks and uncertaintiesdescribed below are the material risks that we face. Any investor in oursecurities should carefully consider the risks described below.

**We are subject to risksassociated with investments in real estate.****  **The value of and our income from ourproperties may decline due to factors that adversely affect real estategenerally and those that are specific to our properties. General factors thatmay adversely affect our real estate portfolios include:

·       increasesin interest rates;

·       ageneral tightening of the availability of credit;

·       adecline in the economic conditions in one or more of our primary markets;

·       anincrease in competition for tenants and customers or a decrease in demand bytenants and customers;

·       anincrease in supply of our property types in our primary markets;

·       acontinuation of terrorist activities or other acts of violence, war in theUnited States or abroad or the occurrence of such activities or acts thatimpact properties in our real estate portfolios or that may impact the generaleconomy; and

·       theadoption on the national, state or local level of more restrictive laws andgovernmental regulations, including more restrictive zoning, land use orenvironmental regulations and increased real estate taxes.

In addition, there are factors that may adverselyaffect the value of, and our income from, specific properties, including:

·       adversechanges in the perceptions of prospective tenants or purchasers of theattractiveness of the property;

·       oppositionfrom local community or political groups with respect to development orconstruction at a particular site;

·       ourinability to provide adequate management and maintenance or to obtain adequateinsurance;

·       ourinability to collect rent or other receivables;

·       anincrease in operating costs;

·       introductionof a competitor’s property in or in close proximity to one of our currentmarkets; and

·       earthquakes,floods or underinsured or uninsured natural disasters.

The occurrence of one or more of the above risks couldresult in a significant reduction in the net operating income generated bythese properties and we could lose some or all of our investments in thoseproperties.

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**Wemay not be able to recover increased property maintenance costs through rentincreases.****  **Ourproperties are subject to increases in operating expenses. Certain commercialtenants are obligated to pay a portion of the escalating operating costs. Inaddition, certain tenants are subject to rent escalations for cost of livingincreases. However, we may not be able to increase revenues enough to offsetthese increased expenses.

**Various factors couldadversely affect development of new projects or the repositioning of existingprojects.****  **Ourdevelopment projects are subject to significant risks relating to our abilityto complete our projects on time and on budget. Factors that may result in adevelopment project exceeding budget or being prevented from completioninclude:

·       aninability to secure sufficient financing on favorable terms, including aninability to refinance construction loans;

·       constructiondelays or cost overruns, either of which may increase project developmentcosts;

·       anincrease in commodity costs;

·       aninability to obtain zoning, occupancy and other required governmental permitsand authorizations;

·       aninability to secure tenants or anchors necessary to support the project; and

·       failureto achieve or sustain anticipated occupancy or sales levels.

If any of these occur, we may not achieve ourprojected returns on properties under development and we could lose some or allof our investments in those properties. In the past, we have elected not toproceed with specific development projects, and we anticipate that this mayoccur again from time to time in the future.

The construction of real estate projects entailsunique risks, including risks that the project will fail to conform to buildingplans, specifications and timetables. These failures could be caused bystrikes, weather, government regulations and other conditions beyond ourcontrol. In addition, we may become liable for injuries and accidents occurringduring the construction process that are not insured.

In the construction of new projects, we may guaranteethe lender of the construction loan the lien-free completion of the project.This guaranty is recourse to us and places the risk of construction delays andcost overruns on us. This type of guaranty is released upon completion of theproject. Furthermore, we typically guarantee a portion of project indebtedness.We may have to make significant expenditures in the future in order to complywith our guaranty obligations.

**We face risks associatedwith property acquisitions.****  **We have in the past acquired, and intend in the futureto acquire, properties and portfolios of properties, including large portfoliosthat would increase our size and potentially alter our capital structure.Although we believe that the acquisitions that we have completed in the pastand that we expect to undertake in the future have and will enhance our futurefinancial performance, the success of such transactions is subject to a numberof factors, including the risk that:

·       wemay not be able to obtain financing for acquisitions on favorable terms;

·       acquiredproperties may fail to perform as expected;

·       theactual costs of repositioning or redeveloping acquired properties may be higherthan our estimates; and

·       wemay not be able to efficiently integrate acquired properties, particularlyportfolios of properties, into our organization and to manage new properties ina way that allows us to realize cost savings and synergies.

**Wemay be unable to sell properties at fair value to avoid losses or to repositionour portfolio.****  **Becausereal estate investments are relatively illiquid, we may be unable to dispose ofunderperforming properties and may be unable to reposition our portfolio inresponse to changes in regional or local real estate markets. As a result, wemay incur operating losses from some of our properties and may have to writedown the value of some properties due to impairment. In addition, we may beforced to sell properties during unfavorable market conditions and thereforenot realize their fair market value.

**Weface significant competition from other real estate developers.****  **We compete with real estatedevelopers, operators and institutions for tenants and acquisition anddevelopment opportunities. Some of these competitors have significantly greaterfinancial resources than we do. Such competition may reduce the number of suitableinvestment opportunities offered to us, may interfere with our ability toattract and retain tenants and may increase vacancies, which could result inincreased supply and lower market rental rates. In addition, some of ourcompetitors may be willing to make space available at lower prices thanavailable space in our properties.

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**Wemay be unable to renew expiring leases, lease vacant space or re-lease space ona timely basis or on comparable or better terms.**   Leases for commercial properties, representing 25%of our annualized commercial base rent at December 31, 2006, expire on orbefore December 31, 2007. Current tenants may not renew their leases uponthe expiration of their terms; or we may not be able to locate qualifiedreplacement tenants under acceptable terms.

We cannot assure you that our tenants will not defaulton their leases and fail to make rental payments to us. Moreover, we may beunable to locate a replacement tenant in a timely manner or on comparable orbetter terms if a tenant defaults on its lease. The loss of rental revenuesfrom a number of our tenants and our inability to replace such tenants mayadversely affect our profitability and our ability to meet our financialobligations.

**Increasedinterest rates would raise our cost of capital and could affect our ability toobtain new mortgage debt or refinance existing mortgage debt.**   An increase in interest rates would increase ourcost of capital, which may affect our ability to obtain new mortgage debt or torefinance existing mortgage debt and would limit our ability to make futureacquisitions. Higher interest rates upon refinancing mortgage debt woulddecrease cash flow from operations, negatively impacting our earnings andlowering our cash returns as a percentage of our invested equity. In addition,a rise in interest rates could raise the cost of our variable rate debt inexcess of increased earnings on our short-term investments, thereby negativelyimpacting our earnings. In addition, an increase in interest rates coulddecrease the amounts that third parties are willing to pay for our assets,thereby limiting our ability to alter our portfolio promptly in relation toeconomic or other conditions.

**Wemay have difficulty obtaining financing in weak markets.****  **Weak real estate markets not onlyaffect the prices for which real estate properties can be purchased or sold,and rental revenues, but also affect the availability of financing. Under suchconditions we may have difficulty refinancing existing acquisition andconstruction financing with long-term financing, which could result in ourhaving to accept less favorable financing terms or use our cash resources torepay indebtedness that otherwise would be refinanced. If principal paymentsdue at maturity cannot be refinanced, extended or repaid with proceeds fromother sources, such as the proceeds of sales of assets or new equitysecurities, cash flow will not be sufficient to repay all maturing debt inyears when significant “balloon” payments come due.

**Our debt level may impairour ability to pursue our business plan.****  **As of December 31, 2006, ourindebtedness totaled $610,681,000, of which $533,104,000 are mortgage andconstruction loans. We are likely to incur significant additional debt tofinance future acquisition and development activities. Our level of debt andthe limitations imposed on us by our debt agreements creates risks, includingthe following:

·       ourcash flow may be insufficient to make required payments of principal andinterest;

·       wemay be unable to borrow additional funds as needed or on favorable terms;

·       wemay be unable to refinance some or all of our indebtedness, including mortgagedebt, or any refinancing may not be on terms as favorable as those of theexisting indebtedness;

·       wemay be forced to dispose of one or more of our properties, possibly ondisadvantageous terms;

·       anydefault in payment of our indebtedness or violation of any covenants in ourloan documents could result in acceleration of those obligations and possibleloss of property to foreclosure; and

·       ourdefault under any one of our mortgage loans with cross default provisions couldresult in a default on other indebtedness and loss of properties securing theindebtedness.

If the economic performance of any of our propertiesdeclines, our ability to make debt service payments could be adverselyaffected. If a property is mortgaged to secure payment of indebtedness and weare unable to meet mortgage payments, we may lose that property to lenderforeclosure.

The mortgage debt we have incurred for properties weacquired during the last three years has ranged between 80% and 90% of thepurchase price of these properties. We do not have a policy limiting the amountof debt that we may incur. Furthermore, our  bylaws do not limit the amount or percentage of indebtedness that we mayincur. Accordingly, our management and board of directors have discretion toincrease the amount of our outstanding debt at any time without approval by ourstockholders. Changes in our debt policies could expose us to greater creditrisk, interest rate risk or result in a more leveraged balance sheet. If webecome highly leveraged, then the resulting increase in debt service couldadversely affect our ability to make payments on our outstanding indebtednessand may harm our financial condition.

**Weakereconomic conditions in the markets in which our properties are located couldadversely affect our financial condition.****  **Our properties are located in the Philadelphia, Pennsylvania; Houston,Texas; Washington, D.C.; Wilmington, Delaware; Baltimore, Maryland; Marylandand Delaware Eastern Shore; and Orlando, and Tampa, Florida, metropolitan 

7

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areas.   Adecline in the economies of one or more of our core real estate markets, or inthe U.S. economy as a whole, could adversely affect our financial position,results of operations, cash flow and ability to pay dividends to shareholders.

**We areinvesting in properties in real estate markets that are outside our core geographicmarkets.  **Over the course of the last year we have madeacquisitions outside of our core geographic areas.  We may not be able to operate effectivelyoutside of our core markets. We may continue to make investments in new markets,which may expose us to a variety of risks including:

·       alack of market knowledge and understanding of the local economies; and 

·       unfamiliaritywith local government and permitting procedures.

**Ourinsurance may not be adequate to cover losses, including those that result fromenvironmental damage or terrorist acts.****  **We carry comprehensive generalliability, property, flood, earthquake and rental loss insurance with respectto our properties within insured limits and policy specifications that webelieve are customary for similar properties. There are specific types oflosses, generally of a catastrophic nature, such as losses from wars,biological, chemical or radioactive contamination, terrorism or earthquakes,for which we may not have adequate insurance coverage or, in our judgment, forwhich we cannot obtain insurance at a reasonable cost.

Should an uninsured lossor a loss in excess of insured limits occur, including any loss resulting fromfloods or other natural disasters, we could lose all or a portion of thecapital we have invested in a property, as well as the anticipated futurerevenue from the property. Any such loss could materially and adversely affectour results of operations, cash flows and financial position. Nevertheless, wemight remain obligated for any mortgage debt or other financial obligations relatedto the property, even if the property is irreparably damaged. We are alsosubject to additional wind damage underwriting premiums for certain properties.It is also possible that third-party insurance carriers will not be ableto maintain reinsurance sufficient to cover any losses that may be incurred.

**The costs of compliance with orliabilities under environmental laws may adversely affect our operating results.  **Ouroperating expenses could be higher than anticipated due to the cost ofcomplying with existing or future environmental laws and regulations. As anowner of real property, we can be liable for environmental contaminationcreated by the presence or discharge of hazardous substances on the property,regardless of:

·       ourlack of knowledge of the contamination; 

·       thetiming of the contamination; 

·       thecause of the contamination; or 

·       theparty responsible for the contamination of the property.

**Theremay be environmental problems associated with our properties of which we areunaware.****  **Wecould be held liable for the environmental costs associated with the release ofregulated substances or related claims, whether by us, our tenants, formerowners or tenants of the affected property or others. The presence of hazardoussubstances on a property could result in personal injury or other claims byprivate parties. Such claims could result in costs or liabilities that couldexceed the value of that property. If we become aware of any environmental problems,we take steps to remediate them.

Although our leases generally require our tenants tooperate in compliance with all applicable laws and to indemnify us against anyenvironmental liabilities arising from a tenant’s activities on the property,we could nonetheless be subject to strict liability by virtue of our ownershipinterest for environmental liabilities created by our tenants and we cannot besure that our tenants would satisfy their indemnification obligations under theapplicable lease.

**Weare controlled by the Bresler and Reiner families, whose interests may differfrom those of other shareholders.****  **As of March 30, 2007, membersof the Bresler and Reiner families, which include members of our current boardof directors and executive officers, owned over 70% of our common stock. As aresult of their ownership, these family members have the ability to elect ourboard of directors and to control our management and policies. Generally, theymay also determine, without the consent of our other shareholders, the outcomeof any corporate transaction or other matters submitted to our shareholders forapproval, including mergers, consolidations and the sale of all orsubstantially all of our assets and prevent or cause a change in control.

**Weexpect to experience significant growth in the future and may not be able toadapt our management and operational systems to integrate additional propertieswithout unanticipated significant disruption or expense.**   During the three year period ended December 31,2006, the total size of our commercial office portfolio increased by 2,174,000square feet. We intend to continue to make a significant number of additionalacquisitions and cannot assure you that we will be able to adapt 

8

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our management, administrative,accounting and operational systems to integrate the properties into ourportfolio, or that we will be able to manage any future acquisitions ofadditional properties without operating disruptions or unanticipated costs. Inaddition, acquisitions will require substantial attention from our management,and may cause disruptions in our operations and divert management’s attentionaway from day-to-day operations. Our failure to successfully integrateadditional property acquisitions into our portfolio could have a materialadverse effect on our results of operations and financial condition.

**Ifour property managers or leasing agents default on their obligations, operatingresults from affected properties could suffer and we may have difficultyfinding replacements.**   Weoutsource property management and leasing of our properties to local propertymanagers and leasing agents, who perform all day-to-day property management andleasing functions for our properties. Although we oversee our property managersand leasing agents, they may not satisfy their obligations under ouragreements. If they fail to do so, our relationships with our tenants could bedamaged or we could incur liabilities from loss or injury at a property. Ineither case our operating results and financial condition could be negativelyaffected. If a property manager or leasing agent breaches its agreement withus, we will seek to replace them. However, we may not be able to obtainsuitable replacements within the relevant market. In addition, as we enter anew market we will seek to engage local third-party property managers,leasing agents and other service providers. However, we may not be able toidentify such service providers who meet our standards and who are capable ofcomplying with our property management and leasing guidelines.

**Propertyownership through joint ventures may limit our ability to act exclusively inour interests.****  **Severalof our properties are owned through joint ventures with third parties. We couldbecome engaged in a dispute with one or more of our joint venture partners thatmight affect our ability to operate a jointly-owned property. Moreover,our joint venture partners may have business objectives that are inconsistentwith ours or may have competing interests that could create conflicts ofinterest. If the objectives of our joint venture partners are inconsistent withours, we may not be able to act exclusively in our interests.

**Compliance with theAmericans with Disabilities Act and fire, safety and other regulations mayrequire us to make unanticipated expenditures that adversely affect ourfinancial condition.**   Underthe Americans with Disabilities Act of 1990, or the ADA, all publicaccommodations must meet federal requirements related to access and use bydisabled persons. We believe our properties substantially comply with presentrequirements of the ADA. However, if found non-compliant we would have to incuradditional costs to bring the property into compliance.

**ITEM 1B. UNRESOLVEDSTAFF COMMENTS**

None.

9

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**ITEM 2. PROPERTIES**

**Commercial RentalProperties**

Weowned or held an ownership interest in the following commercial officeproperties at December 31, 2006:
| **Consolidated  Properties (1)**             | ** ** | ** **            | ** ** | **Location** | ** ** | **Date of  Acquisition/  Opening** | ** ** | **Number of  Buildings** | ** ** | **Square  Feet** | ** ** | **Occupancy  at 12/31/06** | ** ** | **B&R  Ownership**   | ** ** | **Loan  Balance at  12/31/06 (7)** | ** ** | **Purchase  Price/  Development  Cost (2)** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|--------------|------------|-----------------------------------------|------------|-------------------------------|------------|------------------|------------|---------------------------------|------------|--------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **   | ** ** | ** **                              | ** ** | **(in 000’s)**      | ** ** | ** **       | ** ** | ** **                      | ** ** | **(in 000’s)** | ** ** | **(in 000’s)**                     | ** ** |
| **Philadelphia, Pennsylvania metropolitan area:** |       |                  |       |         |       |                                    |       |                          |       |             |       |                            |       |                     |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fort Washington  Executive Center                 |       | Ft.  Washington, PA   |       |         | 2004       |                                    |       |                          | 3          |             |       |                            | 393        |                     |       |                                         | 100.0%     |                                             |       |   | 97.5% | (3) |   |   | $ | 47,249 |   |   |   | $ | 52,664 |   |   |
| Mearns Park                                       |       | Warminster,  PA       |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 300        |                     |       |                                         | 98.7%      |                                             |       |   | 97.0% | (4) |   |   | 16,500 |   |   |   | 19,000 |   |   |
| Valley Square                                     |       | Plymouth  Meeting, PA |       |         | 2006       |                                    |       |                          | 5          |             |       |                            | 294        |                     |       |                                         | 87.3%      |                                             |       |   | 97.0% | (4) |   |   | 37,500 |   |   |   | 42,500 |   |   |
| Blue Bell Plaza                                   |       | Plymouth  Meeting, PA |       |         | 2006       |                                    |       |                          | 2          |             |       |                            | 155        |                     |       |                                         | 100.0%     |                                             |       |   | 100.0% | (4) |   |   | 29,800 |   |   |   | 32,000 |   |   |
| West Germantown  Pike                             |       | Plymouth  Meeting, PA |       |         | 2004       |                                    |       |                          | 2          |             |       |                            | 115        |                     |       |                                         | 100.0%     |                                             |       |   | 98.0% | (3) |   |   | 15,626 |   |   |   | 20,500 |   |   |
| One Northbrook                                    |       | Trevose,  PA          |       |         | 2004       |                                    |       |                          | 1          |             |       |                            | 95         |                     |       |                                         | 78.9%      |                                             |       |   | 100.0% | (4) |   |   | 14,770 |   |   |   | 16,900 |   |   |
| 510 Township Road                                 |       | Plymouth  Meeting, PA |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 87         |                     |       |                                         | 59.2%      |                                             |       |   | 100.0% | (4) |   |   | 10,760 |   |   |   | 13,500 |   |   |
| Cross Keys                                        |       | Doylestown,  PA       |       |         | 2005       |                                    |       |                          | 1          |             |       |                            | 82         |                     |       |                                         | 90.9%      |                                             |       |   | 100.0% | (4) |   |   | 14,500 |   |   |   | 17,792 |   |   |
| 102 Pickering Way                                 |       | Exton,  PA            |       |         | 2005       |                                    |       |                          | 1          |             |       |                            | 80         |                     |       |                                         | 97.9%      |                                             |       |   | 100.0% | (4) |   |   | 9,940 |   |   |   | 15,275 |   |   |
| 900 Northbrook                                    |       | Trevose,  PA          |       |         | 2003       |                                    |       |                          | 1          |             |       |                            | 66         |                     |       |                                         | 94.0%      |                                             |       |   | 90.0% | (3) |   |   | 10,792 |   |   |   | 12,050 |   |   |
| **Houston, Texas  metropolitan area:**            |       |                  |       |         |       |                                    |       |                          |       |             |       |                            |       |                     |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerce Park  North                              |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 2          |             |       |                            | 164        |                     |       |                                         | 91.2%      |                                             |       |   | 100.0% | (4) |   |   | 9,400 |   |   |   | 11,750 |   |   |
| 10333 Harwin Drive                                |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 148        |                     |       |                                         | 55.0%      |                                             |       |   | 100.0% | (4) |   |   | 10,532 |   |   |   | 12,585 |   |   |
| 9950 Westpark                                     |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 111        |                     |       |                                         | 70.6%      |                                             |       |   | 100.0% | (4) |   |   | 6,342 |   |   |   | 7,818 |   |   |
| 17043-49 El Camino                                |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 4          |             |       |                            | 82         |                     |       |                                         | 81.9%      |                                             |       |   | 100.0% | (4) |   |   | 5,024 |   |   |   | 6,052 |   |   |
| 1120 NASA Road                                    |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 80         |                     |       |                                         | 83.6%      |                                             |       |   | 100.0% | (4) |   |   | 5,208 |   |   |   | 6,642 |   |   |
| 8700 Commerce Drive                               |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 77         |                     |       |                                         | 76.8%      |                                             |       |   | 100.0% | (4) |   |   | 3,809 |   |   |   | 4,979 |   |   |
| 1717 Portway Plaza                                |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 67         |                     |       |                                         | 78.7%      |                                             |       |   | 100.0% | (4) |   |   | 2,711 |   |   |   | 4,858 |   |   |
| 1110 NASA Road                                    |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 60         |                     |       |                                         | 90.0%      |                                             |       |   | 100.0% | (4) |   |   | 3,408 |   |   |   | 4,978 |   |   |
| 950 Threadneedle                                  |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 59         |                     |       |                                         | 100.0%     |                                             |       |   | 100.0% | (4) |   |   | — |   |   |   | 5,250 |   |   |
| 1100 NASA Road                                    |       | Houston,  TX          |       |         | 2006       |                                    |       |                          | 1          |             |       |                            | 57         |                     |       |                                         | 90.1%      |                                             |       |   | 100.0% | (4) |   |   | 2,830 |   |   |   | 4,502 |   |   |
| **Washington, DC  metropolitan area:**            |       |                  |       |         |       |                                    |       |                          |       |             |       |                            |       |                     |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Versar Center                                     |       | Springfield,  VA      |       |         | 2002       |                                    |       |                          | 2          |             |       |                            | 217        |                     |       |                                         | 88.1%      |                                             |       |   | 100.0% |   |   |   | 17,626 |   |   |   | 20,000 |   |   |
| Sudley North  (Buildings A, B & C)            |       | Manassas,  VA         |       |         | 1987       |                                    |       |                          | 3          |             |       |                            | 116        |                     |       |                                         | 89.8%      |                                             |       |   | 100.0% |   |   |   | 10,161 |   |   |   | 9,848 |   |   |
| Wynwood                                           |       | Chantilly,  VA        |       |         | 2005       |                                    |       |                          | 2          |             |       |                            | 88         |                     |       |                                         | 100.0%     |                                             |       |   | 100.0% |   |   |   | 11,800 |   |   |   | 13,000 |   |   |
| Sudley North  (Building D)                        |       | Manassas,  VA         |       |         | 1987       |                                    |       |                          | 1          |             |       |                            | 69         |                     |       |                                         | 100.0%     |                                             |       |   | 50.0% |   |   |   | 6,114 |   |   |   | 4,729 |   |   |
| Fort Hill                                         |       | Centreville,  VA      |       |         | 2000       |                                    |       |                          | 1          |             |       |                            | 66         |                     |       |                                         | 100.0%     |                                             |       |   | 80.0% |   |   |   | 5,428 |   |   |   | 7,050 |   |   |
| Bank Building                                     |       | Manassas,  VA         |       |         | 1991       |                                    |       |                          | 1          |             |       |                            | 3          |                     |       |                                         | 100.0%     |                                             |       |   | 100.0% |   |   |   | 947 |   |   |   | 876 |   |   |
| **Wilmington, Delaware metropolitan area:**       |       |                  |       |         |       |                                    |       |                          |       |             |       |                            |       |                     |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 919 Market Street                                 |       | Wilmington,  DE       |       |         | 2005       |                                    |       |                          | 1          |             |       |                            | 223        |                     |       |                                         | 92.1%      |                                             |       |   | 100.0% | (4) |   |   | 35,600 |   |   |   | 40,525 |   |   |
| 1105 Market Street  (5)                           |       | Wilmington,  DE       |       |         | 2005       |                                    |       |                          | 1          |             |       |                            | 173        |                     |       |                                         | 58.4%      |                                             |       |   | 100.0% | (4) |   |   | 19,000 |   |   |   | 20,700 |   |   |
| Total consolidated  properties                    |       |                  |       |         |       |                                    |       |                          | 44         |             |       |                            | 3,527      |                     |       |                                         | 86.5%      |                                             |       |   |   |   |   |   | $ | 363,377 |   |   |   | $ | 428,323 |   |   |
| **Unconsolidated Properties (1)**                 |       |                  |       |         |       |                                    |       |                          |       |             |       |                            |       |                     |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Devon Square                                      |       | Devon,  PA            |       |         | 2002       |                                    |       |                          | 2          |             |       |                            | 140        |                     |       |                                         | 38.1%      |                                             |       |   | 5.5% |   |   |   | $ | 16,557 |   |   |   | $ | 17,109 |   |   |
| Madison Building  (6)                             |       | McLean,  VA           |       |         | 2002       |                                    |       |                          | 1          |             |       |                            | 82         |                     |       |                                         | 100.0%     |                                             |       |   | 24.9% |   |   |   | 13,869 |   |   |   | 22,000 |   |   |
| Total  unconsolidated properties                  |       |                  |       |         |       |                                    |       |                          | 3          |             |       |                            | 222        |                     |       |                                         |       |                                             |       |   |   |   |   |   | $ | 30,426 |   |   |   | $ | 39,109 |   |   |
| Total consolidated and  unconsolidated properties |       |                  |       |         |       |                                    |       |                          | 47         |             |       |                            | 3,749      |                     |       |                                         |       |                                             |       |   |   |   |   |   | $ | 393,803 |   |   |   | $ | 467,432 |   |   |

 

**NOTES:**

----

(1)             Consolidatedproperties represent properties whose assets, liabilities and results ofoperations are consolidated into our consolidated financial statements.Unconsolidated properties represent properties that are accounted for under theequity method of accounting, in accordance with GAAP.

(2)             Includesintangible in-place lease assets and liabilities for purchased properties.

(3)             Representsour share of the Class A voting membership interest in the entity. Anunrelated third party owns a Class B membership interest in the jointventure that entitles this party to 15% of cash available from operations afterthe Class A members have received a cumulative annual 12% 

10

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return on their investment in the property and 15% of cash availablefrom a refinancing or sale of the property after the Class A members havereceived a full return of their investment along with a cumulative annual 12%return on their investment.

(4)             Wehave entered into asset supervision agreements with an unaffiliated third-partyfor  properties located  in Pennsylvania and an associate forproperties located in Texas that entitles these parties to 20% of cashavailable from operations after we have received a cumulative annual 12% returnon our investment in the property, and 20% of cash available from a refinancingor sale of the property after we have received a full return of our investmentalong with a cumulative annual 12% return on our investment.

(5)             Propertywas reported as held for sale at December 31, 2006 and was sold in February 2007

(6)             Ourinterest in this property was sold in February 2007.

(7)             Generally, newmortgage loans obtained for acquired properties have 10-year terms and 30-yearamortization schedules.

**ResidentialApartment Properties**

Weowned or held an ownership interest in the following residential apartmentproperties at December 31, 2006:
| **Consolidated Properties (1)**                  | ** ** | ** **         | ** ** | **Location** | ** ** | **Date of  Acquisition/  Opening** | ** ** | **Apt.  Units** | ** ** | **Occupancy  at 12/31/06** | ** ** | **B&R  Ownership**   | ** ** | **Loan  Balance at  12/31/06** | ** ** | **Purchase  Price  Development/  Cost **(2) | ** ** |
|--------------------------------------------------|------------|--------------------|------------|--------------|------------|-----------------------------------------|------------|-----------------|------------|---------------------------------|------------|--------------------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | ** **         | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **      | ** ** | ** **                      | ** ** | **(in 000’s)** | ** ** | **(in 000’s)**            | ** ** |
| The Fountains                                    |       | Orlando,  FL       |       |         | 2003       | ** **                              |       |            | 400        | ** **                      |       |                     | 91.8%      | ** **                          |       |                                             | 100.0%     | (3) |   |   | $ | 39,500 | ** ** |   |   | $ | 35,100 | ** ** |   |
| Victoria Place                                   |       | Orlando,  FL       |       |         | 2003       | ** **                              |       |            | 364        | ** **                      |       |                     | 89.0%      | ** **                          |       |                                             | 85.0%      |   |   |   | 32,341 | ** ** |   |   | 39,500 | ** ** |   |
| Huntington at Sundance                           |       | Lakeland,  FL      |       |         | 2006       | ** **                              |       |            | 292        | ** **                      |       |                     | 96.9%      | ** **                          |       |                                             | 100.0%     | (3) |   |   | 14,454 | ** ** |   |   | 24,650 | ** ** |   |
| Total consolidated  properties                   | ** ** | ** **         | ** ** |         | ** ** | ** **                              |       |            | 1,056      | ** **                      |       |                     | 92.2%      | ** **                          |       |                                             | ** ** |   |   |   | $ | 86,295 | ** ** |   |   | $ | 99,250 | ** ** |   |
| **Unconsolidated  Properties (1)**               | ** ** | ** **         | ** ** |         | ** ** | ** **                              |       |            | ** ** | ** **                      |       |                     | ** ** | ** **                          |       |                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Arbor Crest                                      |       | Silver  Spring, MD |       |         | 2004       | ** **                              |       |            | 80         | ** **                      |       |                     | 91.3%      | ** **                          |       |                                             | 33.3%      |   |   |   | $ | 9,000 | ** ** |   |   | $ | 8,455 | ** ** |   |
| Total consolidated and unconsolidated properties | ** ** | ** **         | ** ** |         | ** ** | ** **                              |       |            | 1,136      | ** **                      |       |                     | ** ** | ** **                          |       |                                             | ** ** |   |   |   | $ | 95,295 | ** ** |   |   | $ | 107,705 | ** ** |   |

 

**NOTES:**

----

(1)             Consolidatedproperties represent properties whose assets, liabilities and results ofoperations are consolidated into our consolidated financial statements.Unconsolidated property represents a property that is accounted for under theequity method of accounting, in accordance with GAAP.

(2)             Includesintangible assets and liabilities for purchased properties.

(3)             We have entered intoan asset supervision agreement with an unaffiliated third-party that entitlesthat party to 20% of cash available from operations after we have received acumulative annual 12% return on our investment in the property, and 20% of cashavailable from a refinancing or sale of the property after we have received afull return of our investment along with a cumulative annual 12% return on ourinvestment.

**HospitalityProperties**

Weowned the following hospitality properties at December 31, 2006 which areconsolidated into our consolidated financial statements:
|                          | ** ** | **Location**               | ** ** | **Rooms**  | ** ** | **Date of  Acquisition/  Opening** | ** ** | **Average  Room  Rate  for the  Year  Ended  12/31/06** | ** ** | **REVPAR  for the  Year  Ended  12/31/06** | ** ** | **Occupancy  for the  Year  Ended  12/31/06** | ** ** | **B&R  Ownership  %** | ** ** | **Loan  Balance at  12/31/06** | ** ** | **Purchase  Price/  Development  Cost** | ** ** |
|--------------------------|------------|----------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                              | ** ** | ** **                                                   | ** ** | ** **                                      | ** ** | ** **                                         | ** ** | ** **                | ** ** | **(in 000’s)**            | ** ** | **(in 000’s)**                | ** ** |
| Inn at the Colonnade (1) |       | Baltimore,  MD             |       |       | 125        |                                    |       |                                                         | 1993       |                                            |       |                                               | $          | 138.17                    |       |                                |       | $                                       | 95.50      |   |   |   | 69.1% |   |   |   | 100.0% |   |   |   | $ | 9,458 |   |   |   | $ | 7,368 |   |   |
| Holiday Inn Express      |       | Camp Springs, MD |       |       | 151        |                                    |       |                                                         | 1987       |                                            |       |                                               | $          | 102.75                    |       |                                |       | $                                       | 60.14      |   |   |   | 58.5% |   |   |   | 100.0% |   |   |   | 3,500 |   |   |   | 3,170 |   |   |
| Total                    |       |                       |       |       | 276        |                                    |       |                                                         |       |                                            |       |                                               |       |                      |       |                                |       |                                    |       |   |   |   |   |   |   |   |   |   | $ | 12,958 |   |   |   | $ | 10,538 |   |   |

----

(1)             Propertywas reported as held for sale at December 31, 2006 and was sold in February 2007.

11

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**Commercial,Residential and Land Development**

Weowned or had an ownership interest in the following development projects at December 31,2006:
| Project Name                                     | ** ** | **Location**     | ** ** | **Date of  Acquisition** | ** ** | **Development  Type** | ** ** | **Size (1)**                            | ** ** | **Number  sold (2)** | ** ** | **B&R  Ownership  %** | ** ** | **Loan  Balance at  12/31/06** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|-----------------------|------------|----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|-------------------------------------|------------|
| ** **                                            | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **            | ** ** | ** **                                   | ** ** | ** **                | ** ** | ** **                | ** ** | **(in 000s)**                  | ** ** |
| **Consolidated  Properties (3)**                 |       |             |       |                          |       |                  |       |                                         |       |                      |       |                      |       |                                |       |   |   |   |   |   |   |
| ***Commercial &  Residential Condominiums*** |       |             |       |                          |       |                  |       |                                         |       |                      |       |                      |       |                                |       |   |   |   |   |   |   |
| Laguna Vista                                          |       | Ocean  City, MD  |       |                          | 2003       |                  |       | Residential  Condominiums                    |       | 41  units                 |       | 25                        |       |                                | 100.0%     |   |   |   | $ | — |   |   |
| 400 S Philadelphia  Ave.                              |       | Ocean City, MD   |       |                          | 2004       |                  |       | Residential  Condominiums                    |       | 20 units                  |       | —                    |       |                                | 51.0%      |   |   |   | 6,400 |   |   |
| Sudley South  (Buildings I & III)            |       | Manassas, VA     |       |                          | 1991       |                  |       | Commercial  Office Condominiums              |       | 108,000 sq. ft.           |       | 45,000 sq. ft.            |       |                                | 100.0%     |   |   |   | 2,855 |   |   |
| ***Developed  and Undeveloped Land***                 |       |             |       |                          |       |                  |       |                                         |       |                      |       |                      |       |                                |       |   |   |   |   |   |   |
| Crisfield                                             |       | Crisfield,  MD   |       |                          | 2005       |                  |       | Residential Lots                        |       | 232  lots                 |       | 16                        |       |                                | 51.0%      |   |   |   | 11,700 |   |   |
| Red Mill Pond                                         |       | Lewes, DE        |       |                          | 2005       |                  |       | Residential Lots                             |       | 541 lots                  |       | —                    |       |                                | 51.0%      |   |   |   | 32,603 |   |   |
| Seaside                                               |       | Ocean City, MD   |       |                          | 2004       |                  |       | Residential Lots                             |       | 139 lots                  |       | 58                        |       |                                | 51.0%      |   |   |   | 12,813 |   |   |
| ***Rental  Properties Development***                  |       |             |       |                          |       |                  |       |                                         |       |                      |       |                      |       |                                |       |   |   |   |   |   |   |
| Waterfront                                            |       | Washington,  DC  |       |                          | 1964       |                  |       | Commercial  Office,  Residential  and Retail |       | 2,166,000  sq ft (4)      |       | —(5)                 |       |                                | 24.8%      |   |   |   | — |   |   |
| 1150 Northbrook                                       |       | Trevose, PA      |       |                          | 2003       |                  |       | Commercial  Office Building                  |       | 108,000 sq. ft.           |       | —(5)                 |       |                                | 100.0%     |   |   |   | $ | 4,103 |   |   |
| **Unconsolidated  Properties (3)**                    |       |             |       |                          |       |                  |       |                                         |       |                      |       |                      |       |                                |       |   |   |   |   |   |   |
| Guilford Properties                                   |       | Baltimore,  MD   |       |                          | 2006       |                  |       | (6)                                          |       | (6)                       |       | —                    |       |                                | 51.0%      |   |   |   | $ | 6,345 |   |   |
| Holliday Development                                  |       | Baltimore, MD    |       |                          | 2006       |                  |       | (6)                                          |       | (6)                       |       | —                    |       |                                | 51.0%      |   |   |   | 1,785 |   |   |
| Symphony House                                        |       | Philadelphia, PA |       |                          | 2005       |                  |       | Residential  Condominiums                    |       | 163 units (7)             |       | —                    |       |                                | 22.3%      |   |   |   | 63,286 |   |   |
| Venice Lofts                                          |       | Philadelphia, PA |       |                          | 2005       |                  |       | Residential  Condominiums                    |       | 128 units                 |       | 2                         |       |                                | 22.3%      |   |   |   | 26,639 |   |   |

 

**NOTES:**

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(1)             Representsthe actual or planned size of the project.

(2)             Representsnumber of sales that had closed as of December 31, 2006.

(3)             Consolidatedproperties represent properties whose assets, liabilities and results ofoperations are consolidated into our consolidated financial statements.Unconsolidated property represents a property that is accounted for under theequity method of accounting, in accordance with GAAP.

(4)             Representsthe anticipated size of the Waterfront Complex. See below for description ofthe Waterfront Complex

(5)             Uponcompletion, the space will be leased to tenants.

(6)             Thetype of development and size of the project has yet to be determined.

(7)             Project also includesa theatre containing 35,000 square feet of space, a parking garage and retailspace.

**Waterfront Complex**

Beginning in 1964, we developed a shopping-officecenter (“Waterfront Complex”) in Washington, D.C., containing approximately1,144,000 square feet of office, retail and storage space. These improvementswere constructed on ground leased from The District of Columbia RedevelopmentLand Agency (“RLA”) for a term expiring in 2058 with an option to extend for anadditional 20 years.

We assigned our interests in the Waterfront Complex toa joint venture entity, B&R Waterfront Properties, LLC (“BRW”). We are themanaging member and hold a 54% interest in BRW, which is consolidated into ourconsolidated financial statements.

Prior to 2002, the United States General ServicesAdministration (“GSA”) leased approximately 955,000 square feet of space in theWaterfront Complex under a thirty year lease agreement. In September 2002the GSA lease expired and was not subsequently renewed.

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In October 2002, BRW formed a joint venture,called Waterfront Associates LLC (“WALLC”), with K/FCE Investment LLC (“K/FCE”),a joint venture between The Kaempfer Company, Inc. and Forest CityEnterprises, Inc., to redevelop and reposition the Waterfront Complex. BRWcontributed the leasehold improvements relating to the Waterfront Complex toWALLC. Affiliates of K/FCE are marketing, leasing, redeveloping, and managingthe complex. Based on the terms of the agreement K/FCE committed to contributethe first $25,000,000 of redevelopment funds and has the right, subject tocertain conditions, to increase its ownership in the joint venture up to 50% bythe making of capital contributions or by causing the joint venture to makecapital distributions. K/FCE, as the managing member of WALLC, has soleresponsibility for the management, control, and operation of the WALLC, as wellas for the formulation and execution of its business and investment policy.

Between 2002 and December 31, 2006 WALLC expendedapproximately $18,000,000 in planning and development costs as it sought toobtain the necessary Planned Unit Development (“PUD”) approvals and find alarge tenant for the project. In 2006 WALLC entered into several transactionsthat will have a major impact on the repositioning and redevelopment of theWaterfront Complex.

In November 2006, WALLC entered into a LandDisposition and Development Agreement (“LDDA”) with RLA RevitalizationCorporation (“RLARC”), a subsidiary of the RLA. Based on the LDDA, the existingground lease will be extinguished and a fee simple ownership interest for mostof the site will be conveyed to WALLC. In return, RLARC will retain fee simpleownership in a portion of the site that is sufficient to develop a 400,000square foot mixed-use residential building. Based on the agreement, which issubject to several contingencies including obtaining the necessary PUDapprovals, WALLC has committed to develop 2,166,000 square feet of commercialoffice, retail and residential space at the Waterfront Complex.

In November 2006, WALLC entered into two leaseagreements with agencies of the District of Columbia for the lease of a totalof 500,000 square feet of office space in two new commercial office buildingsto be constructed by WALLC at the Waterfront Complex. The leases, which aresubject to several approval and development contingencies, have 15 year termsand include rental payments of $28.40 per square foot on a triple-net basis. Developmentof the office buildings is anticipated to commence in 2007.

In March 2007, inaccordance with an amended and restated operating agreement of WALLC enteredinto the same month, K/FCE exercised its right to increase its ownership interest in the joint venture to 50% by makinga $25,000,000 contribution to WALLC (the “equalization contribution”) with suchamount distributed to BRW. The equalization contribution is in addition to$23,000,000 that K/FCE has either contributed or has committed to contribute toWALLC.

**Major Tenants**

Thereare no tenants or recurring customers whose revenues are 10% or more of ourtotal operating revenues from continuing operations. The following is a tableof our three largest tenants:
| Tenant Name                 | ** ** | **Property Name  Location**                  | ** ** | **Lease  Maturity  Date** | ** ** | **Base Rental Income for  the 12 months ended  December 31, 2006** | ** ** | **Percent of  commercial  Rental Revenue  for the twelve  months ended  December 31,  2006** | ** ** | **Percent of  Total Operating  Revenue  for the twelve  months ended  December 31,  2006** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|---------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| Hartford Fire Insurance  Company |       | Ft  Washington Executive Ctr.,  Ft Washington, PA |       |                      | 2007       |                                                                                                       |       |                                                                                                                       | $          | 4,756,000                                                                                                                |       |   |   | 9.0 | % |   |   | 4.6 | % |   |
| Merck                            |       | Blue Bell Plaza,  Plymouth Meeting, PA            |       |                      | 2008       |                                                                                                       |       |                                                                                                                       | 2,951,000  |                                                                                                                     |       |   | 5.6 |   |   |   | 2.9 |   |   |
| Platinum Technology, Inc.   |       | W Germantown Pike,  Plymouth Meeting, PA          |       |                      | 2009       |                                                                                                       |       |                                                                                                                       | 2,260,000  |                                                                                                                     |       |   | 4.3 |   |   |   | 2.2 |   |   |

 

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**ITEM 3. LEGALPROCEEDINGS**

We are subject to variouslegal proceedings and claims that arise in the ordinary course of our business.Management believes that the final outcome of such matters will not have amaterial adverse effect on our financial position, results of operations orliquidity.

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submittedto the vote of the security holders during the fourth quarter of 2006.

**Executive Officersof the Registrant**

Executive Officers of Registrant (included pursuant toGeneral Instruction G to Form 10-K and instruction 3 toItem 401(b) of Regulation S-K).

The following list isincluded as an unnumbered Item in Part I of this Report in lieu of beingincluded in the Proxy Statement for the Annual Meeting of Shareholders to beheld on June 13, 2007.
| Name                | ** ** | ** ** | ** ** | **Age**                                                                       | ** ** | **Positions & Offices**                     | ** ** | **Date Elected to Office** |
|---------------------|------------|------------|------------|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------|
| Charles S. Bresler  |       | 79         |       | Chairman & Director                                                  |       | June 1970                                       |
| Sidney M. Bresler   |       | 52         |       | Chief Executive Officer, President, Director and  Assistant Secretary    |       | June 2002  August 2002  February 2003 |
| Jean S. Cafardi     |       | 60         |       | Corporate Secretary                                                           |       | November 2000                                   |
| Darryl M. Edelstein |       | 39         |       | Executive Vice President—Finance, Chief Financial  Officer and Treasurer |       | November 2006  August 2003  May 2004  |

 

In accordance with Article V of our By-Laws, eachofficer was elected to serve until his successor is chosen and shall havequalified or until his earlier resignation or removal.

Sidney M. Bresler is the son of  Charles S.Bresler.

Each officer has held the above positions as hisprincipal occupation for more than the past five years with the exception ofSidney M. Bresler and Darryl M. Edelstein.

Prior to June 2002 and during his seventeen yearsof employment with the Company, Sidney M. Bresler has served in variouscapacities.

Darryl M. Edelstein, who is a CPA,  joined us in August 2003, as our ChiefFinancial Officer. He was our Chief Operating Officer from March 2005 to November 2006.Between October 2005 and November 2006 he relinquished the positionof Chief Financial Officer. In November 2006 he became our Executive VicePresident-Finance and resumed the position of Chief Financial Officer and theposition of  Chief Operating Officer waseliminated.  During the previous fiveyears he worked at the Company and in various finance capacities for CrestlineCapital Corporation. During the eight years prior to that he worked in variousfinance and accounting capacities at Host Marriott Corporation, KraftFoods Inc. and Ernst & Young, LLP.

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**PART II**

**ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

**Stock PerformanceGraph**

The following graph showsa comparison of cumulative total shareholder returns for an investment in thecommon stock of the Company, the S&P 500 and the Dow Jones US Real EstateIndex. The comparison for each of the periods assumes that $100 was invested onDecember 31, 2001, in each of the Company’s common stock, the S&P 500Index and the Dow Jones US Real Estate Index. These indices, which reflectformulas for dividend reinvestment and weighting of individual stocks, do notnecessarily reflect returns that could be achieved by individual investors.

**COMPARISON OF 5YEAR CUMULATIVE TOTAL RETURN***AmongBresler & Reiner Inc., The S&P 500 IndexAnd The Dow Jones US Real Estate Index

****

*$100 invested on 12/31/01in stock or index-including reinvestment of dividends. Fiscal year endingDecember 31.
|                                     | ** ** | **12/01** | ** ** | **12/02** | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** |
|-------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Bresler &  Reiner Inc.** |       | 100.00    |       | 94.20     |       | 107.02    |       | 136.71    |       | 151.70    |       | 165.05    |       |
| **S &  P 500**             |       | 100.00    |       | 77.90     |       | 100.24    |       | 111.15    |       | 116.61    |       | 135.03    |       |
| **Dow Jones US Real Estate**        |       | 100.00    |       | 103.63    |       | 141.87    |       | 186.15    |       | 204.09    |       | 276.53    |       |

 

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OurCommon Stock is traded in the over-the-counter market. The following tablepresents the high and low bid quotations for the periods shown.
|                | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2006**       |       |     |       |    |       |
| First Quarter  |       | $        | 33.20      |    | $          | 32.50 |   |
| Second Quarter |       | 33.69    |       | 28.84   |       |
| Third Quarter  |       | 31.71    |       | 26.76   |       |
| Fourth Quarter |       | 39.84    |       | 26.71   |       |
| **2005**       |       |     |       |    |       |
| First Quarter  |       | $        | 30.00      |    | $          | 29.50 |   |
| Second Quarter |       | 33.50    |       | 28.75   |       |
| Third Quarter  |       | 39.00    |       | 31.00   |       |
| Fourth Quarter |       | 36.00    |       | 32.40   |       |

 

These quotations also represent prices between dealersand do not include retail markup, markdown or commissions and do not representactual transactions. As of March 15, 2007, there were 76 record holders ofCommon Stock.

In May 2006 and December 2006,our Board of Directors declared cash dividends each of $0.15 per share ofcommon stock. The dividends were paid on June 15, 2006 and December 15,2006, respectively. In May 2005 our Board of Directors declared a cashdividend of $0.28 per common share, $0.14 per share of which was paid on June 15,2005 and the remaining dividend payment of $0.14 was paid in December 15,2005.

**ITEM 6. SELECTEDFINANCIAL DATA**

Thefollowing table sets forth our selected consolidated financial data (inthousands, except weighted average number of common shares outstanding and pershare amounts). The historical financial data should be read in conjunctionwith the consolidated financial statements and accompanying notes and thediscussion set forth in the section entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” each includedelsewhere in this Form 10-K.
|                                                                               | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating  revenues                                                           |       | $                                           | 103,303    |   | $ | 103,053 |   | $ | 62,894 |   | $ | 17,930 |   | $ | 38,902 |   |
| Income (loss)  from continuing operations                                     |       | $                                           | 4,234      |   | $ | (1,394 | ) | $ | 3,542 |   | $ | 1,863 |   | $ | 4,190 |   |
| Net (loss) income                                                             |       | $                                           | 16,329     |   | $ | (2,249 | ) | $ | 4,419 |   | $ | 9,581 |   | $ | 6,086 |   |
| Income (loss)  from continuing operations per common share, basic and diluted |       | $                                           | 0.77       |   | $ | (0.25 | ) | $ | 0.65 |   | $ | 0.34 |   | $ | 0.76 |   |
| Earnings (loss)  per common share, basic and diluted                          |       | $                                           | 2.98       |   | $ | (0.41 | ) | $ | 0.81 |   | $ | 1.75 |   | $ | 1.11 |   |
| Total assets                                                                  |       | $                                           | 860,135    |   | $ | 763,998 |   | $ | 535,180 |   | $ | 348,249 |   | $ | 243,492 |   |
| Long-term  obligations (3)                                                    |       | $                                           | 582,435    |   | $ | 405,155 |   | $ | 249,112 |   | $ | 128,895 |   | $ | 45,797 |   |
| Cash dividends  per common share                                              |       | $                                           | 0.30       |   | $ | 0.28 |   | $ | 0.25 |   | (1 | ) | (1 | ) |
| Weighted average number  of common shares outstanding (2)                     |       | 5,477,212                                   |       | 5,477,212 |   | 5,477,212 |   | 5,477,212 |   | 5,477,502 |   |

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(1)             Nodividends were declared or paid.

(2)             Weightedaverage number of common shares outstanding has been restated to reflect the 2-for-1stock split, effected in the form of a stock dividend in 2004.

(3)             Excludeslong-term obligations related to assets held for sale.

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussionshould be read in conjunction with the Consolidated Financial Statements andthe related notes that appear elsewhere in this document.

**Overview**

We are a real estate owner and developer with aportfolio that includes commercial, residential and hospitality properties aswell as undeveloped and developed land. We earn our revenues and profitsprimarily from leasing commercial office space and residential apartment units;providing services at our hospitality properties; selling residential andcommercial properties and selling both developed and undeveloped land.

Beginning in 2003 we haveaggressively acquired real estate assets. In doing so we have applied a dualinvestment approach, investing in both operating commercial and residentialproperties that generate immediate returns that are relatively stable andpredictable and investing in development projects where returns are generallyhigher but are less immediate and predictable. Through diversifying our realestate holdings in this way we have reduced the risks associated with thecyclical nature of the real estate industry. Building a strong base ofcommercial and residential properties enables us to assume the higher risksassociated with investing in development projects.  Income generated from our income producingcommercial and residential properties, together with the ability to generatecapital through the sale or refinancing of these properties, reduces ourdependency on sales of development projects to fund payments on developmentloans. This allows us to better address the challenges associated withdownturns in the housing market and affords us the opportunity to wait for themarket to turn around. Our development investments, with their higher returnsand large contribution to earnings, complement our investments in operatingproperties which do not contribute significantly to earnings until sold due tolarge amounts of depreciation and amortization expense associated with theseinvestments.

*Acquisition andDisposition of Operating Commercial and Residential Properties*

Between 2003 and 2006 we acquired, through both wholly-ownedsubsidiaries and joint venture entities with unaffiliated third parties that weconsolidate into our consolidated financial statements, a total of 25commercial office buildings containing 3,605,000 square feet of office andindustrial space and three residential apartment properties containing 1,056apartment units. The total purchase price of these acquisitions was$517,230,000. In connection with these acquisitions, we obtained or assumedfixed-rate mortgage debt totaling $357,315,000 at an average interest rate of5.74% and obtained variable-rate mortgage debt of $57,130,000.

We continued our growth strategy in the first quarterof 2007, through the acquisition of two commercial office buildings containing130,000 square feet of space with purchase prices totaling $14,495,000 and oneresidential apartment property containing 366 apartment units with a purchaseprice of $42,050,000. In connection with these acquisitions we incurredmortgage debt totaling $48,400,000.

In 2006 we expanded our geographic footprint beyondthe East Coast to include Houston, Texas. We intend to continue to grow ourportfolio of commercial and residential properties and may continue to expandinto other geographic regions should properties in these regions meet ourcriteria as attractive investment opportunities.

We are focused on growing our portfolio of assets, andacquiring properties for long term investment. However, we evaluate the sale ofexisting properties and our investments in development projects afterconsidering among other things whether the property fits with our overallstrategy, the amount of control we exert over the ownership entity, and whetherwe can re-deploy the sales proceeds and achieve superior returns throughinvestments in a new property or development opportunity rather than continuingto own and operate the existing property.

During the three year period ended December 31,2006, we sold 18 commercial office and industrial buildings containing1,262,000 square feet of space, two residential apartment complexes containing434 apartment units, five commercial properties leased to convenience storeoperators, and our interest in four development projects. In the first quarterof 2007 we sold one commercial building containing 173,000 square feet, one ofour two hospitality properties and our 25% interest in a commercial officeproperty. Where possible, we structure the sales of our properties as part of atax free exchange under §1031 of the US Internal Revenue Code, which providesfor the deferral of the tax gain from the sale.

Challenges we will facethis year include an interest rate environment that may not be as accommodatingas it has been in recent years. Over the course of the last three years,interest rates have remained at historically low levels. A low interest rateenvironment has facilitated our growth plans through lowering our cost ofcapital. However, there is no assurance that 

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interest rates will notincrease over the course of the year. A higher interest rate environment wouldraise our cost of capital, thereby putting pressure on the returns on ourinvested equity and affecting our ability to acquire properties.

*Investment inDevelopment Projects*

Between 2003 and 2006 we have invested in 10development projects, including projects involving the development of lots aspart of residential subdivisions, development of residential and commercialcondominiums and development of residential apartment buildings and commercialbuildings for lease.

During 2006, due to a softer housing market, weexperienced slower than projected sales of both our residential lots and ourresidential condominiums located on the Maryland and Delaware Eastern Shore andas a result, our revenue from development projects decreased from the prioryear. At our three residential subdivisions, where we are developingresidential lots for sale to homebuilders, we restructured our sales contractswith the homebuilders to accommodate a slowdown in home sales, primarilydelaying the dates on which the takedowns occur. We met our obligations underthe loans secured by these projects by paying down $6,900,000 under these loansand amending the loans to adjust pay down schedules that more accuratelyreflect the slower takedowns of lots.

At our condominium projects in Ocean City, Maryland,the softer market resulted in fewer sales along with lower prices and higherconcessions offered on units sold. As a result, we recorded an impairmentcharge of $1,494,000 in 2006 to reduce the carrying amount of one of ourprojects to the net estimated fair value of the project.

Challenges we will faceover the course of the next year include a continued softening in the housingmarket that could continue to adversely affect sales of our residential lotsand condominium units. This risk has been mitigated through our receipt ofsignificant non-refundable deposits from homebuilders, along with therestructuring of the loans secured by our residential subdivisions. Anotherchallenge is a higher interest rate environment which adversely affects salesat our development projects, since higher potential mortgage payments couldlower the amount a buyer would be prepared to pay for a house or condominiumunit.

*FinancingActivities*

To provide the necessary funds to aid our growth plansand to build a strong cash position, we have completed during the three yearperiod ended December 31, 2006 two private placements of trust preferredsecurities, generating net proceeds of approximately $68,000,000. We have alsogenerated $79,857,000 of additional proceeds from asset sales and $32,643,000of proceeds through refinancing existing loans. Additionally, we have obtainedan unsecured line of credit with a $50,000,000 capacity. In the first quarterof 2007, we refinanced existing debt on six of our properties, generating netproceeds of $23,147,000. The refinancings reflect our strategy of realizingasset appreciation on our existing properties to provide funds for futureacquisitions.

The discussion that follows is based primarily on ourconsolidated balance sheets as of December 31, 2006 and 2005, and the resultsof operations for the years ended December 31, 2006, 2005 and 2004 andshould be read with our consolidated financial statements. The ability tocompare one period to another may be significantly affected by operatingproperties in the process of being repositioned, acquisitions and dispositionsof commercial and residential properties, development projects and theacquisition and subsequent partial sale of undeveloped commercial andresidential lots. Historical results set forth in our consolidated financialstatements are not necessarily indicative of our future financial position andresults of our operations.

**Applicationof Critical Accounting Policies.****  **Our accounting policies comply withaccounting principles generally accepted in the United States. The applicationof these accounting policies involves the exercise of judgment and use ofassumptions as to future uncertainties. We have made best estimates andjudgments of certain amounts included in the financial statements. However,actual results could differ from these estimates and a change in the facts andcircumstances of the underlying transactions could significantly change theapplication of an accounting policy and the resulting financial statementimpact. We have listed below those policies that we believe are critical andrequire the use of significant judgment in their application.

**RentalProperty and Equipment.****  **Rental property and equipment is stated at cost. We usejudgment in order to allocate the purchase price of all acquired assets andassumed liabilities and assign useful lives to those assets that have finitelives. Tenant allowances incurred at the origination of a lease are deferredand amortized on a straight-line basis over the term of the related lease.Depreciation expense is computed using the straight-line method applied overthe deemed useful life of depreciable assets, generally 39 years forbuildings and three to ten years for furniture, fixtures and equipment.Replacements and renovations that extend the useful life of an asset arecapitalized and depreciated over their estimated 

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useful lives. Repairs, maintenance and minorimprovements are expensed as incurred. The allocation of the purchase price toassets or assignment of useful lives will affect the amount of depreciationexpense recorded.

Upon acquisitions of real estate, we assess the fairvalue of the acquired assets (including land, buildings and improvements, andidentified intangibles such as above- and below-market leases andacquired in-place leases and tenant relationships) and assumed liabilities inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,*Business Combinations* (“SFAS 141”)and SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS 142”) and allocate purchase price based onthese assessments. We assess fair value based on estimated cash flowprojections that utilize appropriate discount and capitalization rates andavailable market information. Estimates of future cash flows are based on anumber of factors including the historical operating results, known trends, andmarket conditions that may affect the property.

In accordance with SFAS No. 141, we record on ourbalance sheet the fair value of debt assumed in connection with ouracquisitions. In order to calculate the fair value of assumed debt, we discountthe cash flows relating to the debt by an interest rate that is an estimate ofthe market rate of interest for a loan of that type, taking into account suchfactors as the cash flow generated by the property, any guarantees ofindebtedness, and the amount of debt relative to the property’s fair marketvalue. The estimate of fair value of the assumed debt will affect our interestexpense and the carrying amount of the assumed debt on our balance sheet.

In accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, we evaluate the recoverability of long-livedassets whenever events or changes in circumstances indicate that the carryingvalue of an asset may not be recoverable. Recoverability is measured based onnet, undiscounted expected cash flows. Assets are considered to be impaired ifthe undiscounted expected cash flows are less than the carrying amount of theassets. Impairment charges are recorded based upon the difference between thecarrying value of the asset and its fair value.

The use of different assumptions would result indifferent values at acquisition, initial allocations of purchase price andfuture impairment charges. The impact of our estimates in connection withacquisitions and future impairment analysis could be material to ourconsolidated financial statements.

In accordance with SFAS No. 143, *Accounting for Asset Retirement Obligations* and FASBInterpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations,* we recognize a liability for the fairvalue of a legal obligation to perform asset-retirement activities thatare conditional on a future event if the amount can be reasonably estimated.The asset cost is increased by the value of the cost of the future conditionalcosts and depreciated over the useful life of the respective asset. The amountrecorded on our books related to the recognition of this liability could varysignificantly depending on the assumptions used.

**Costof Real Estate Sales.****  **Homebuildingand land development costs are charged to the cost of the homes and landparcels sold under either the specific identification or relative sales valuebasis methods, based on what is deemed more appropriate for the project. Therelative sales value basis method requires us to estimate the total projectrevenue. An inaccurate projection of total revenue or total project costs wouldaffect the cost of sales recorded related to the sale of homes and developedland.

**Investmentsin Joint Ventures.****  **Forall investments not wholly-owned, we determine if the entity is avariable interest entity (“VIE”). Such a determination includes, among otherrequirements that we evaluate whether the equity investment at risk issufficient to allow the entity to finance its activities without additionalsubordinated support from others. If the equity at risk is not sufficient thenthe entity is considered a VIE and is subject to consolidation based on theguidelines of FASB Interpretation No. 46R, *Consolidation of Variable Interest Entities* (“FIN 46R”). Ifthe equity at risk is sufficient, and various other conditions are met, thenthe entity is not considered to be a VIE.

If an investee of ours is a VIE under FIN 46R, wedetermine whether we are the primary beneficiary through being subject to amajority of the potential variability in gains or losses of the VIE. If we arethe primary beneficiary, then we consolidate our investment in the jointventure. If we are not the primary beneficiary, then we do not consolidate ourinvestment.

Our evaluation of the sufficiency of equity at riskand our determination of the primary beneficiary is based on subjectiveassessments that involve our estimating a number of possible future outcomes ofcash flows for the entity as well as the probability of each outcome occurring.This process includes our estimating future operating income and losses, takinginto account industry trends, the impact of macro economic forces, as well asthe effects of demand, competition and other factors. The evaluation of thesufficiency of equity of an entity and the determination of the primarybeneficiary will affect the presentation of that entity in our consolidatedbalance sheet and results of operations.

**DeferredCharges and Other Assets.****  **Fees incurred in connection with obtaining financingare deferred and amortized as a part of interest expense over the term of therelated debt instrument on a straight-line basis, which approximates the 

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effective interest method. Lease commissions incurredto originate a lease are deferred and amortized on a straight-line basis overthe term of the related lease.

Included in Other Assets is the value of acquiredin-place leases for purchased properties. In accordance with SFAS No. 141and SFAS No. 142 we allocate a portion of the real estate acquisitionpurchase price to acquired in-place leases based on the relative fair values ofthe assets and liabilities acquired. In order to determine the amount of thepurchase price to be allocated to the acquired leases, we develop assumptionsregarding the relative value of the in-place leases when compared to thecurrent market. Some of the judgments required as part of this exercise include(1) determining the market rental rates of the acquired leases (2) estimatingthe market value of concessions (including rent concessions and tenantimprovement allowances) and leasing commissions to be paid on new leases (3) estimatingan appropriate lease-up period and (4) applying an estimated risk-adjusteddiscount rate to the existing tenant’s leases. The amount allocated to in-placeleases and the associated amortization of those leases could vary significantlydepending on the assumptions used.

**Other Liabilities.****  **The application of FASBInterpretation No. 45 (“FIN 45”), *Guarantor’s Accounting andDisclosure**Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others*,requires us to recognize, upon the issuance of a guarantee, a liability for thefair value of the obligation we assume. The calculation of the fair value ofthis obligation involves significant judgment. The liability recorded for suchobligation on our balance sheet could vary significantly depending on theassumptions used.

**Balance SheetOverview**

Thefollowing table reflects certain condensed balance sheet items as of the datespresented (in thousands):
|                                                | ** ** | **December 31,** | ** ** | **Increase** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|--------------|------------|
| ** **                                     | ** ** | **2006**              | ** ** | **2005**     | ** ** | **(decrease)** | ** ** |
| *Assets:*                                      |       |                  |       |         |       |   |   |
| Rental property and equipment, at cost         |       | $                     | 517,249    |         | $          | 312,536 |   | $ | 204,713 |   |
| Property and land development                  |       | 166,252               |       | 154,139      |       | 12,113 |   |
| Assets held for sale                           |       | 25,952                |       | 159,375      |       | (133,423 | ) |
| Cash, cash equivalents, and investments        |       | 55,020                |       | 73,848       |       | (18,828 | ) |
| Investments in joint ventures                  |       | 30,403                |       | 30,053       |       | 350 |   |
| Deferred charges and other assets, net         |       | 47,062                |       | 36,266       |       | 10,796 |   |
| Total assets                                   |       | 860,135               |       | 763,998      |       | 96,137 |   |
| *Liabilities and Shareholders’ Equity:*   |       |                  |       |         |       |   |   |
| Mortgage and construction loans and other debt |       | $                     | 582,435    |         | $          | 405,155 |   | $ | 177,280 |   |
| Total liabilities                              |       | 674,791               |       | 586,940      |       | 87,851 |   |
| Minority interest                              |       | 43,499                |       | 49,696       |       | (6,197 | ) |
| Shareholders’  equity                     |       | 141,845               |       | 127,362      |       | 14,483 |   |

 

Material changes in assets include:

·       Rentalproperty and equipment, at cost, increased primarily as a result of theacquisition of 14 commercial and industrial office properties and oneresidential property in 2006. The acquisitions increased our commercial officeportfolio by 1,741,000 square feet and added 292 apartment units to theresidential portfolio, at a total acquisition cost of $201,064,000.

·       Propertyand land development increased primarily as a result of development activity atthe Red Mill Pond, Crisfield, Seaside, 1150 Northbrook and the ParadiseDevelopers projects totaling approximately $35,936,000. This increase waspartially offset by sales of condominium units at Laguna Vista, sales ofresidential lots at Seaside and sales of commercial office condominiums at theParadise Developers projects that totaled $23,823,000.

·       Assets held for saledecreased due to the sale in 2006 of Washington Business Park, CharlestownNorth, four of the Historic Baltimore Portfolio buildings, the Divine Lorraine,the 7800 Building and our interest in 640 North Broad. (See Note 3 of ourconsolidated financial statements.)

·       Cash,cash equivalents and investments decreased in total primarily due to cash usedfor the previously mentioned commercial office and residential apartmentacquisitions, offset by cash proceeds received from the issuance of the TrustPreferred Securities and proceeds from the sale of certain properties.

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·       Theincrease in deferred charges and other assets, net, is primarily related todeferred financing fees and the allocation of the purchase price of propertiesacquired to in-place lease assets, partially offset by the amortization ofthese assets.

Material changes in liabilities and shareholders’equity include:

·       Mortgageand construction loans and other debt increased primarily as a result of themortgage loans obtained or assumed in connection with the acquisition ofcommercial office and industrial properties; the acquisition of the residentialapartment community; construction loans draws; and the issuance of TrustPreferred Securities. This increase was partially offset by loan repaymentsduring the period.

·       Minority interest decreasedprimarily as a result of our minority partner’s share of distributions from thesale of the remaining Historic Baltimore Portfolio Properties.

**Financial Overview**

**Results of Operations—Comparison of the results ofoperations for the year ended December 31, 2006 compared to 2005.**

| ** **                                                                   | ** ** | **Years Ended December 31,**                                                  | ** ** | **$ Change**                                                                            | ** ** | **% Change**            | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **2005 to 2006**   | ** ** | **2005 to 2006** | ** ** |
| ** **                                                                   | ** ** | ** **                                                                                   | ** ** | ** **                                                                                   | ** ** | **Increase (decrease)** | ** ** |
| **Operating revenues from:**                                                 |       |                                                                                         |       |                                                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Homebuilding,  residential lots and other development                        |       |                                                                                         | $          | 28,102                                                                                       |       |                         |       | $ | 55,364 |   |   |   | $ | (27,262 | ) |   |   | (49.2 | )% |   |
| Commercial rental  properties                                                |       |                                                                                         | 58,976     |                                                                                         |       |                         | 34,777     |   |   |   | 24,199 |   |   |   | 69.6 |   |   |
| Residential  rental properties                                               |       |                                                                                         | 10,693     |                                                                                         |       |                         | 9,384      |   |   |   | 1,309 |   |   |   | 13.9 |   |   |
| Hospitality  properties                                                      |       |                                                                                         | 3,408      |                                                                                         |       |                         | 3,189      |   |   |   | 219 |   |   |   | 6.9 |   |   |
| Other                                                                        |       |                                                                                         | 2,124      |                                                                                         |       |                         | 339        |   |   |   | 1,785 |   |   |   | 526.5 |   |   |
| Total operating  revenues                                                    |       |                                                                                         | 103,303    |                                                                                         |       |                         | 103,053    |   |   |   | 250 |   |   |   | 0.2 |   |   |
| Cost of homebuilding,  residential lots and other development                |       |                                                                                         | 23,823     |                                                                                         |       |                         | 43,679     |   |   |   | (19,856 | ) |   |   | (45.5 | ) |   |
| Commercial operating  expenses                                               |       |                                                                                         | 25,072     |                                                                                         |       |                         | 13,582     |   |   |   | 11,490 |   |   |   | 84.6 |   |   |
| Commercial depreciation  and amortization expense                            |       |                                                                                         | 22,863     |                                                                                         |       |                         | 9,483      |   |   |   | 13,380 |   |   |   | 141.1 |   |   |
| Residential operating  expenses                                              |       |                                                                                         | 4,908      |                                                                                         |       |                         | 3,821      |   |   |   | 1,087 |   |   |   | 28.4 |   |   |
| Residential depreciation  and amortization expense                           |       |                                                                                         | 2,592      |                                                                                         |       |                         | 2,199      |   |   |   | 393 |   |   |   | 17.9 |   |   |
| Hospitality operating  expenses                                              |       |                                                                                         | 2,360      |                                                                                         |       |                         | 2,316      |   |   |   | 44 |   |   |   | 1.9 |   |   |
| General and  administrative expense                                          |       |                                                                                         | 12,652     |                                                                                         |       |                         | 7,724      |   |   |   | 4,928 |   |   |   | 63.8 |   |   |
| Loss on impairment of  assets                                                |       |                                                                                         | 1,494      |                                                                                         |       |                         | —     |   |   |   | 1,494 |   |   |   | 100.0 |   |   |
| Interest income                                                              |       |                                                                                         | 2,112      |                                                                                         |       |                         | 1,100      |   |   |   | 1,012 |   |   |   | 92.0 |   |   |
| Interest expense                                                             |       |                                                                                         | 27,486     |                                                                                         |       |                         | 14,786     |   |   |   | 12,700 |   |   |   | 85.9 |   |   |
| Debt extinguishment  costs                                                   |       |                                                                                         | 1,047      |                                                                                         |       |                         | 3,171      |   |   |   | (2,124 | ) |   |   | (67.0 | ) |   |
| Gain on sale of  investments in joint ventures                               |       |                                                                                         | 24,417     |                                                                                         |       |                         | 1,551      |   |   |   | 22,866 |   |   |   | 1,474.3 |   |   |
| Minority interest                                                            |       |                                                                                         | 1,015      |                                                                                         |       |                         | 5,800      |   |   |   | (4,785 | ) |   |   | (82.5 | ) |   |
| Income(loss) from  discontinued operations, net of tax and minority interest |       |                                                                                         | 12,095     |                                                                                         |       |                         | (855       | ) |   |   | 12,950 |   |   |   | 1,514.6 |   |   |
| Net income (loss)                                                            |       |                                                                                         | 16,329     |                                                                                         |       |                         | (2,249     | ) |   |   | 18,578 |   |   |   | 826.1 |   |   |
|                                                                              |            |                                                                                              |            |                                                                                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Homebuilding,Residential Lots and Other Development.**   The$27,262,000 decrease in homebuilding, residential lots and other developmentrevenue in 2006 was primarily due to fewer sales of residential condominiumunits. Revenue in 2006 includes the sale of 40 residential lots at Seaside,45,000 square feet of condominium office space at Paradise Developers, sixcondominium units at Laguna Vista and a five acre parcel of land in Manassas,Virginia. Revenue in 2005 includes the sale of 137 condominium units atGolfview, 10 residential lots at Clarksburg, 19 condominium units at LagunaVista, 11 condominium units at Cigar Factory, 18 residential lots at Seasideand 16 residential lots at Crisfield. By December 31, 2005 there were nounits remaining at the Golfview and Clarksburg projects and we had sold ourinterest in the Cigar Factory.

The $19,856,000 decrease in cost of homebuilding,residential lots and other development in 2006 was due to the lower salesvolume described above.

**CommercialRental Properties.**   The $24,199,000 increase incommercial rental properties revenue in 2006 was primarily due to the operationof 19 commercial office properties acquired in 2006 and in 2005. Revenues fromproperties that we owned for the full year in both 2006 and 2005 werecomparable.

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Operating expenses consist of direct operating costsof the properties, including property taxes and insurance, and exclude interestexpense and depreciation expense. The $11,490,000 increase in operatingexpenses in 2006 was primarily due to the operation of commercial officeproperties acquired in 2006 and 2005. Operating expenses for properties that weowned for the full year in both 2006 and 2005 were comparable.

The $13,380,000 increase in depreciation andamortization expense in 2006 was primarily due to the depreciation andamortization related to properties acquired in 2006 and 2005.

**ResidentialRental Properties.**   The $1,309,000 increase inresidential revenue in 2006 was primarily due to $812,000 of revenue generatedby Huntington at Sundance, which was acquired in 2006, along with higher rentalrates at Victoria Place and The Fountains.

Operating expenses consist of direct operating costsof the properties including property taxes and insurance, and exclude interestexpense and depreciation expense. The $1,087,000 increase in operating expensesin 2006 was primarily due to $421,000 of operating expenses at Huntington atSundance along with costs associated with a change in management companiesduring the third quarter of 2006, higher insurance rates and improvedmaintenance activities in 2006.

The $393,000 increase in depreciation and amortizationexpense in 2006 was primarily due to the 2006 acquisition described above.

**HospitalityProperties.**   The $219,000 increase in hospitalityrevenues in 2006 was primarily due to an increase in revenue per available room(“REVPAR”) at the Holiday Inn. Operating expenses, which consist of directoperating costs of the properties including property taxes and insurance, andexcluding interest expense and depreciation expense, were comparable to theprior year.

**OtherRevenues.****  **The$1,785,000 increase in other revenues in 2006 was primarily due to a $1,702,000reduction in a reserve established for the removal of hazardous materials atthe Waterfront Complex.

**Generaland Administrative Expense.****  **The $4,928,000 increase in****general and administrative expense in 2006 includesthe recognition of $1,416,000 of compensation expense related to the stockappreciation rights granted in 2006 and an increase of $586,000 related tonon-consummated acquisition costs in 2006. The increase also includes anincrease of $1,410,000 in audit fees, (of which approximately $600,000 relatesto the 2005 audit fees that were in 2006), $500,000 in consulting fees and  $447,000 in salaries, wages and benefits, asa result of the growth in assets and operations of the company.

**Losson Impairment of Assets.****  **The$1,494,000 of costs incurred in 2006 relate to the reduction in carrying valueof our Laguna Vista development project to its estimated fair value.

**InterestIncome.****  **The $1,012,000 increase in****interest income in 2006 was primarily due to higherinterest rates and larger average balances outstanding during the year from theinvestment of proceeds received from the Trust Preferred Securities and salesof our investments in joint ventures.

**InterestExpense.****  **The $12,700,000 increase in interest expensein 2006 was primarily due to the additional interest on debt obtained orassumed in connection with properties acquired in 2006 and in 2005, along withinterest expense related to the Trust Preferred Securities issued in 2006 and2005. For the years ended December 31, 2006 and 2005, we capitalizedinterest of approximately $2,234,000 and $1,979,000 respectively, related toour investment in development projects.

**DebtExtinguishment Costs.****  **The$1,047,000 of costs incurred in 2006 relate to the defeasance of debt securedby Cross Keys. The $3,171,000 of costs incurred in 2005 relate to thedefeasance of debt secured by the Fountains and 919 Market Street.

**Gainon Sale of Investments in Joint Ventures.****  **The$22,866,000 increase in gain on sale of investments in joint ventures in2006 was due to the sale of 1925 K Street, our interest in Washington BusinessPark Undeveloped Land and our interest in five low-income residential housingprojects in 2006, which generated before tax gains of $18,285,000, $4,910,000and $1,222,000, respectively, compared to the sale of one low-incomeresidential housing project in 2005.

**MinorityInterest.****  **Minorityinterest reflects our minority partner’s share of profits in joint venturesthat we consolidate into our consolidated financial statements. The $4,785,000decrease in minority interest in 2006, was primarily due to fewer sales ofcondominiums by joint ventures with minority partners.

**Income from DiscontinuedOperations, Net of Tax and Minority Interest.****  **The $12,950,000 increase in income from discontinuedoperations, net of tax and minority interest in 2006 primarily reflects thegains on sale of Washington Business Park, Charlestown North, four buildings inour Historic Baltimore portfolio, the 7800 Building and the Divine Lorraine andadjacent ground, generating gains after taxes and minority interest of $3,187,000,$8,617,000, $1,540,000, $1,231,000 and 

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$1,079,000, respectively. Thesegains were partially offset by an asset impairment expense of $2,961,000 aftertaxes related to 1105 Market Street. In 2005 we recorded gains on sale, aftertaxes and minority interest totaling $538,000 related to the sale of fourbuildings in our Historic Baltimore Portfolio.

**Results of Operations—Comparison of the results ofoperations for the year ended December 31, 2005compared to 2004.**

| ** **                                        | ** ** | **Years Ended December 31,**                                      | ** ** | **$ Change**                                                                | ** ** | **% Change**            | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **2004 to 2005**   | ** ** | **2004 to 2005** | ** ** |
| ** **                                        | ** ** | ** **                                                                       | ** ** | ** **                                                                       | ** ** | **Increase (decrease)** | ** ** |
| **Operating  revenues from:**                     |       |                                                                             |       |                                                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Homebuilding and residential lots                 |       |                                                                             | $          | 55,364                                                                           |       |                         |       | $ | 24,605 |   |   |   | $ | 30,759 |   |   |   | 125.0 | % |   |
| Commercial rental properties                      |       |                                                                             | 34,777     |                                                                             |       |                         | 24,652     |   |   |   | 10,125 |   |   |   | 41.1 |   |   |
| Residential rental properties                     |       |                                                                             | 9,384      |                                                                             |       |                         | 8,705      |   |   |   | 679 |   |   |   | 7.8 |   |   |
| Hospitality properties                            |       |                                                                             | 3,189      |                                                                             |       |                         | 2,874      |   |   |   | 315 |   |   |   | 11.0 |   |   |
| Total operating revenues                          |       |                                                                             | 103,053    |                                                                             |       |                         | 62,894     |   |   |   | 40,159 |   |   |   | 63.9 |   |   |
| Cost of  homebuilding and residential lots        |       |                                                                             | 43,679     |                                                                             |       |                         | 21,071     |   |   |   | 22,608 |   |   |   | 107.3 |   |   |
| Commercial  operating expenses                    |       |                                                                             | 13,582     |                                                                             |       |                         | 9,925      |   |   |   | 3,657 |   |   |   | 36.8 |   |   |
| Residential  operating expenses                   |       |                                                                             | 3,821      |                                                                             |       |                         | 3,783      |   |   |   | 38 |   |   |   | 1.0 |   |   |
| Hospitality  operating expenses                   |       |                                                                             | 2,316      |                                                                             |       |                         | 2,198      |   |   |   | 118 |   |   |   | 5.4 |   |   |
| Commercial  depreciation and amortization expense |       |                                                                             | 9,483      |                                                                             |       |                         | 6,774      |   |   |   | 2,709 |   |   |   | 40.0 |   |   |
| General and  administrative expense               |       |                                                                             | 7,724      |                                                                             |       |                         | 3,973      |   |   |   | 3,751 |   |   |   | 94.4 |   |   |
| Withdrawn public  offering costs                  |       |                                                                             | 3,312      |                                                                             |       |                         | —     |   |   |   | 3,312 |   |   |   | 100.0 |   |   |
| Interest income                                   |       |                                                                             | 1,100      |                                                                             |       |                         | 1,869      |   |   |   | (769 | ) |   |   | (41.1 | ) |   |
| Interest expense                                  |       |                                                                             | 14,786     |                                                                             |       |                         | 9,655      |   |   |   | 5,131 |   |   |   | 53.1 |   |   |
| Debt  extinguishment costs                        |       |                                                                             | 3,171      |                                                                             |       |                         | —     |   |   |   | 3,171 |   |   |   | 100.0 |   |   |
| Gain on sale of  investments in joint ventures    |       |                                                                             | 1,551      |                                                                             |       |                         | 624        |   |   |   | 927 |   |   |   | 148.6 |   |   |
| Income from  investments in joint ventures        |       |                                                                             | 793        |                                                                             |       |                         | 1,360      |   |   |   | (567 | ) |   |   | (41.7 | ) |   |
| Minority interest                                 |       |                                                                             | 5,800      |                                                                             |       |                         | 1,966      |   |   |   | 3,834 |   |   |   | 195.0 |   |   |
| Net (loss) income                                 |       |                                                                             | (2,249     | )                                                                                |       |                         | 4,419      |   |   |   | (6,668 | ) |   |   | (150.9 | ) |   |
|                                                   |            |                                                                                  |            |                                                                                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Homebuildingand Residential Lots.****  **The$30,759,000 increase in homebuilding, residential lots and other developmentrevenue in 2005 was primarily due to the sale in 2005 of 10 developed lots atClarksburg Ridge, 11 condominium units at Cigar Factory, 137 condominium unitsat Golfview, 19 condominium units at Laguna Vista, 18 lots at Seaside and 16lots at Crisfield. In 2004, we sold 120 developed lots at Clarksburg Ridge, 13condominium units at Cigar factory and two condominium units at Golfview.

The $22,608,000 increase in the cost of homebuilding,residential lots and other development revenue in 2005 was a result ofincreased development sales described in the proceeding paragraph.

**CommercialRental Properties.****  **The$10,125,000 revenue increase in 2005 was primarily due to the operation of ninecommercial office properties acquired during 2005 and 2004. Revenues fromproperties that we owned for a full twelve months in 2005 and 2004 decreased by$600,000 from 2004 due to lower average occupancy in 2005 at WashingtonBusiness Park and Versar Center.

Operating expenses consist of direct operating costsof the properties including property taxes and insurance and excluding interestexpense and depreciation expense. The $3,657,000 increase in 2005 was primarilydue to the addition of operating expenses of properties acquired in 2005 and2004. Operating expenses from properties that we owned for a full twelve monthsin 2005 and 2004 were comparable.

The $2,709,000 increase in depreciation andamortization expense in 2005 was primarily due to 2005 and 2004 acquisitions.

**ResidentialRental Properties.****  **The$679,000 increase in revenue in 2005 compared to 2004 was primarily due tohigher occupancy and increased rental rates at all three of our properties.

Operating expenses consist of direct operating costsof the properties including property taxes and insurance and excluding interestexpense and depreciation expense. Operating expenses in 2005 were comparablewith 2004.

**HospitalityProperties.****  **The$315,000 increase in revenue for 2005 was due to an increase in REVPAR in 2005at the Holiday Inn.

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Operating expenses, which consist of direct operatingcosts of the properties including property taxes and insurance, and excludinginterest expense and depreciation expense, increased by $118,000 compared to2004. The increase can be primarily attributed to management fees incurred atthe Holiday Inn due to the termination of the management agreement with awholly-owned subsidiary and the signing of a new management agreementwith an unrelated third party management company in July 2004.

**Generaland Administrative Expense.****  **The $3,751,000 increase in general and administrativeexpense in 2005 was primarily due to retirement benefit expenses totaling$1,330,000 for Burton J Reiner, one of our co-founders. We have also hiredadditional personnel and incurred other additional administrative costs due tothe increased operations and moving to new premises.

**WithdrawnPublic Offering Costs.****  **The $3,312,000 of expense relates to costs incurred byus associated with the proposed Midlantic initial public offering, which wererecorded by us upon Midlantic’s decision to withdraw the offering. (See Note *3* in our consolidated financial statements.)

**InterestIncome.****  **The$769,000 decrease in interest income for 2005 was primarily due to therepayment of several notes receivable from unrelated parties during the fourthquarter of 2004.

**InterestExpense.****  **The$5,131,000 increase in interest expense in 2005 was primarily due to intereston debt obtained or assumed in connection with properties acquired in 2005 and2004. For the years ended December 31, 2005 and 2004, we capitalizedinterest of $1,979,000 and $1,738,000, respectively, related to our investmentin development projects.

**DebtExtinguishment Costs.****  **The$3,171,000 of expense in 2005 are costs incurred related to the defeasance ofdebt secured by The Fountains and by 919 Market Street both of which werefinanced.

**Gainon Sale of Investments in Joint Ventures.****  **The $927,000 increase in the gain onthe sale of investments in joint ventures was a result of our share of a gainon the sale of Foxchase Village, an unconsolidated low-income residentialhousing complex in the second quarter of 2005.

**Incomefrom Investments in Joint Ventures.****  **The $567,000 decrease income frominvestments in joint ventures in 2005, was primarily due to operating losses atArbor Crest and decreased income from 1925 K Street. These were partiallyoffset by operating income from Devon Square.

**Minority Interest.****  **Minority interest reflects ourminority partner’s share of profits in joint ventures that we consolidate intoour consolidated financial statements. The $3,834,000 increase in minorityinterest in 2005 was primarily due to sales of condominiums and lots at CigarFactory, Golfview, Seaside and Crisfield.

**Funds FromOperations**

We consider Funds From Operations (“FFO”) to be ameaningful measure of our performance and we evaluate management based on FFO.We provide FFO as a supplemental measure for reviewing our operatingperformance, although FFO should be reviewed in conjunction with net incomewhich remains the primary measure of performance. FFO is a recognized metricused extensively within the real estate industry by operators of rentalproperties. Accounting for real estate assets using historical cost accountingunder GAAP is based on the presumption of the value of real estate assetsdiminishing predictably over time. Since real estate values instead have risenor fallen with market conditions, many industry investors and analysts haveconsidered presentations of operating results that exclude historical cost depreciationto be useful in evaluating the operating performance of real estate companies.As a result, the National Association of Real Estate Investment Trusts (“NAREIT”)created the concept of FFO as a standard supplemental measure of operatingperformance that adjusts GAAP net income to exclude historical costdepreciation.

While we are not a real estate investment trust (“REIT”),our real estate operations include large amounts of depreciable and amortizablereal estate assets and we compete against REITS. Therefore, we believe FFO tobe a relevant measurement of our performance.

FFO as defined by the NAREIT is net income (computedin accordance with GAAP), excluding gains (or losses) from sales of depreciableproperty, plus depreciation and amortization, and after adjustments forunconsolidated partnerships and joint ventures. Adjustments for unconsolidatedpartnerships and joint ventures are calculated to reflect funds from operationson the same basis. Our FFO measure differs from NAREIT’s definition in that wealso exclude income tax expense related to property sales. The exclusion ofincome tax expense on property sales is consistent with the objective ofpresenting comparative period operating performance. FFO should not beconsidered an alternative to net income as an indicator of our operatingperformance, or as an alternative to cash flows from operating, investing orfinancing activities as 

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a measure of liquidity. Additionally, the FFO measurepresented by us is not calculated in the same manner as FFO measures of otherreal estate companies and therefore may not necessarily be comparable. Webelieve that FFO provides relevant information about our operations and isuseful, along with net income, for an understanding of our operating activities.

Our FFO was $17,876,000 for the year ended December 31,2006, compared to $12,012,000 for the year ended December 31, 2005, anincrease of $5,864,000. This increase is primarily due to FFO generated fromproperties we acquired in 2006 and 2005 and a gain on sale totaling $2,946,000after taxes, related to the sale of our interest in a joint venture that ownedundeveloped land. The increase was partially offset by FFO from properties soldin 2006 and 2005 and fewer condominium unit sales in 2006.

Our FFO was $12,012,000 for the year ended December 31,2005, compared to $15,953,000 for the year ended December 31, 2004, adecrease of $3,941,000. This decrease was primarily due to the recognition in2005 of expenses associated with the withdrawal of the Midlantic IPO, costsincurred related to the early extinguishment of debt; and retirement costsincurred related to the retirement of one of the company’s founders. Theafter-tax impact of these expenses totaled $4,782,000. This decrease waspartially offset by FFO generated from properties we acquired in 2005 and 2004and increased sales of condominium units and residential lots in 2005.

Thefollowing table reflects the calculation of FFO (in thousands):

| ** **                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                                 |       | $                                           | 16,329     |   | $ | (2,249 | ) | $ | 4,419 |   |
| Add: Depreciation and amortization including share  of unconsolidated  real estate joint ventures |       | 27,447                                      |       | 16,125 |   | 12,659 |   |
| Add: Income tax expense from property sales, net of  minority interest                            |       | 17,267                                      |       | 1,243 |   | 749 |   |
| Less: Gain on sale of properties, net of minority  interest                                       |       | (43,167                                     | )          | (3,107 | ) | (1,874 | ) |
| Funds from  operations                                                                            |       | $                                           | 17,876     |   | $ | 12,012 |   | $ | 15,953 |   |

 

**Liquidity andCapital Resources**

**General.****  **At December 31, 2006 ourconsolidated current cash and cash equivalents and investments that areprincipally short-term municipal obligations were $55,020,000. Of thisamount, approximately $22,000,000 is either maintained for working capital purposesor represents our joint venture partner’s share of cash at our consolidatedjoint ventures. The remaining amount is available, subject to certain debtcovenants requiring us to maintain a minimum liquidity of $30,000,000, forfunding future acquisitions, investments in development projects , capitalexpenditures, and required loan payments. In addition, under our line ofcredit, we have as of the time of this filing available borrowing capacity of$50,000,000, subject to certain restrictive covenants and sub-limits.

**Short-TermLiquidity.****  **Ourmost material short-term liquidity requirements for the year ended December 31,2007 relate to interest and scheduled principal payments on our outstandingmortgage debt that total approximately $56,000,000, based on existing debt andvariable interest rates as of December 31, 2006; capital improvements atour existing properties budgeted to total approximately $12,400,000, requiredpayments on our development loans scheduled to total $34,248,000, and our shareof additional contributions required for the Waterfront Complex development,estimated to total approximately $10,000,000. Other short-term liquidityrequirements include recurring repair and maintenance necessary to adequatelymaintain our properties; tenant improvement allowance payments, leasecommissions; and general and administrative expenses. In addition, we intend tomake additional acquisitions that will require the use of capital. Weanticipate meeting these short-term liquidity requirements from the cashprovided from operations, proceeds from loan refinancings and asset sales, andto the extent necessary, from our available cash on hand at December 31,2006.

A number of factors could affect our cash providedfrom operations, including a change in occupancy levels and leasing rates,caused by tenants’ perception about the attractiveness of the property relativeto competing properties; the physical deterioration of the property;competitive pressure caused by newly developed properties within the samegeographic market; and rent concessions offered by competitors. Furthermore, aneconomic downturn in the markets in which we operate could affect the abilityof tenants to meet their rental obligations, the likelihood that tenants willrenew their leases and our ability to lease the space on economically favorableterms.

**FutureCapital Requirements.****  **Ourfuture capital requirements include funds necessary to pay scheduled debtmaturities and capital improvements, additional investment that could berequired at our current development projects as a result of 

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cost overruns, and funds required for future propertyacquisitions and investments in development projects. Our fixed-rate mortgagedebt matures on average in 12.2 years, beginning in 2008 (see annualcontractual principal payments schedule in Note 8 of Notes to ConsolidatedFinancial Statements). We anticipate meeting these liquidity requirementsthrough debt refinancings, draws on our line of credit, asset dispositions andavailable cash on hand.

In the first quarter of 2007 we acquired twocommercial office buildings and one residential apartment community with anaggregate purchase price of $56,600,000. We placed or assumed mortgage debt onthese properties totaling $48,000,000. During this time period we also sold acommercial office building, a hospitality property and our 25% interest in ajoint venture that owns a commercial office building, generating net proceedsof $8,090,000. We also refinanced three mortgage loans and placed new financingon a previously unleveraged property, generating net proceeds to us of$26,685,000. Additionally, BRW, a 54% owned subsidiary of ours received a$25,000,000 distribution payment related to an equalization of partnershipinterests in WALLC (see description of the transaction in Item 2 “Properties”).

Several of our loans contain financial covenants,including requirements that we maintain a minimum liquidity of $30,000,000, aminimum net worth of $110,000,000 and minimum annual funds from operations, asdefined, of $15,000,000.

If we default on the payment of interest or principalin connection with an existing loan or violate any loan covenant, the lendermay accelerate the maturity of the debt, requiring us to repay all outstandingindebtedness along with any prepayment fees due. If we are unable to repay thedebt, the lender may foreclose on any assets pledged as collateral for thelender.

**OperatingActivities.****  **Forthe year ended December 31, 2006, net cash used in operating activitieswas $8,357,000. Operating activities includes funds used for homebuilding andland development totaling $5,868,000.

**InvestingActivities.****  **Forthe year ended December 31, 2006, net cash used in investing activitiestotaled $105,955,000 primarily due to the acquisition of 15 commercial officeand residential properties, development activity at five investment developmentprojects and increased restricted cash, and partially offset by proceeds fromasset sales and a decrease in investments in municipal obligations.

**FinancingActivities.****  **Forthe year ended December 31, 2006, net cash provided by financingactivities totaled $121,683,000. This primarily resulted from the placement ofmortgage debt related to the acquisition of commercial office and residentialproperties, the issuance of Trust Preferred Securities and mortgagerefinancings. This was partially offset by reductions in cash as a result ofloan principal payments and amounts distributed to our equity partners fromjoint venture entities that we consolidate into our consolidated financialstatements.

Excess cash flow generatedfrom our properties’ operations and from distributions from joint ventures istypically invested in municipal obligations that are short-term in nature.These investments are then liquidated as needed for our real estateacquisitions and investments in development projects.

**Off-Balance SheetCommitments.**

Together with our joint venture partner, we haveguarantied repayment of up to $39,240,000 under the $98,100,000 primaryconstruction loan for the Symphony House construction project. In addition, wehave guarantied repayment of the full amount outstanding under the $16,900,000mezzanine construction loan for the same project. The guarantied repaymentunder the primary loan was reduced to $24,525,000 in the first quarter of 2006upon the joint venture obtaining in excess of $83,500,000 in sales contractsand will be further reduced to $9,810,000 once net sales proceeds reach 110% ofthe outstanding principal balance of the loan. Both the primary construction loanand the mezzanine loan mature in 2008. Funding of the guaranty would increaseour equity participation in the venture.

We have provided a guarantee to the lender on a$8,500,000 mezzanine construction loan for Venice Lofts, that should theinterest rate on the project’s $30,000,000 variable-rate senior constructionloan exceed 6.5%, the difference between the interest due and a calculation ofinterest due based on 6.5% interest rate, will be kept current. The amountoutstanding under the senior loan totaled $16,852,000 at December 31, 2006and all the loan interest payments were current as of that date.

We have guarantied repayment of the entire loanbalance outstanding under a $21,350,000 acquisition and construction loanobtained by Devon Square. Our equity partner in the venture has provided thesame guaranty. Funding of the guaranty would increase our equity participationin the venture. The loan matures in August 2007. At December 31,2006, the balance outstanding under the loan totaled $16,557,000.

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We have guarantied repayment of the entire loanbalance outstanding under a $14,600,000 acquisition loan obtained by MadisonBuilding Associates, LLC (“Madison”). Our equity partner in the venture hasprovided the same guaranty. The loan matures in 2012. At December 31,2006, the balance outstanding under the loan totaled $13,919,000. In February 2007,we sold our interest in Madison and were released from the guaranty.

In conjunction with the sale of 640 North Broad weguarantied a $6,000,000 loan obtained by the buyer and secured in part by a$3,000,000 certificate of deposit that we purchased from the lender.

We have guarantied repayment of the entire loanbalance outstanding under a $7,480,000 acquisition and development loanobtained by Guilford Properties. Our equity partner in the venture has providedthe same guaranty. Funding of the guaranty would increase our equityparticipation in the venture. The loan matures in 2009. At December 31,2006, the balance outstanding under the loan totaled $5,883,000.

In support of certain consolidated entities’ mortgageloans we have entered into master lease agreements, and we have providedindemnification for certain environmental events. These agreements are enteredinto for the benefit of the mortgage lenders to facilitate more favorableterms.

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**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk is the risk of loss arising from adversechanges in interest rates. Our market risk arises from interest rate riskinherent in our investment assets and our variable rate debt. Interest raterisk is the possibility that changes in interest rates will cause unfavorablechanges in net income or in the value of interest rate-sensitive assets,liabilities and commitments.

We do not believe that we have any material exposuresto adverse changes in interest rates associated with our investment assets. Weinvest in investment grade state and local government issues with short-termmaturities and fixed rates of return. The short-term nature of the investmentsprovides opportunities for reinvestment at higher interest rates, as thoserates increase.

We do not currently use derivatives to manage interestrate risk. At December 31, 2006, $96,118,000 of our debt wasvariable-rate. Based on the total of this variable-rate debt outstanding at December 31,2006, a 1% increase in market interest rates would adversely impact our annualpre-tax earnings by approximately $961,000. While it is difficult to predictthe spread between interest rates of our variable-rate debt and rates of interestwe earn on our short-term investments, an increase in interest rates shouldincrease the yield on our investments, partially offsetting this adverse impacton earnings.

At December 31, 2006,$514,562,000 of our debt was fixed rate. Based upon requirements for assessingthe market value of debt instruments, we estimate the fair market value bydiscounting future cash payments at interest rates that approximate the currentmarket. Based on these parameters, at December 31, 2006, the estimated fairvalue of our fixed-rate debt was $495,888,000.

**ContractualObligations**

Thefollowing table summarizes our contractual obligations as of December 31,2006 (in thousands):

| ** **                      | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**  | ** ** | **Less than  1-Year**                | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5-Years** | ** ** |
| Long-term debt  obligations (1) |       | $          | 610,681    |                                      |       | $ | 42,484 |   |   | $ | 103,898 |   | $ | 22,826 |   |   | $ | 441,473 |   |   |
| Fixed interest payments         |       | 233,503    |       |                                      | 32,330     |   |   | 62,021 |   | 53,831 |   |   | 85,321 |   |   |
| Variable interest  payments (2) |       | 9,233      |       |                                      | 5,974      |   |   | 3,259 |   | — |   |   | — |   |   |
| Operating lease  obligations    |       | 8,342      |       |                                      | 388        |   |   | 800 |   | 833 |   |   | 6,321 |   |   |
| Outstanding letters of  credit  |       | 2,786      |       |                                      | 2,275      |   |   | 511 |   | — |   |   | — |   |   |
| Long-term purchase  contract    |       | 4,742      |       |                                      | 948        |   |   | 2,846 |   | 948 |   |   | — |   |   |
| Total                           |       | $          | 869,287    |                                      |       | $ | 84,399 |   |   | $ | 173,335 |   | $ | 78,438 |   |   | $ | 533,115 |   |   |

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(1)             Includedon balance sheet. Excludes debt on assets held for sale.

(2)             Basedon variable interest rates in effect on December 31, 2006.

Our assumed debt had afair value in excess of carrying amount of $213,000 as of December 31,2006.

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

Our audited financial statements are listed under Item15 in this annual report and are included therein.

No supplementary data aresupplied because none are required.

**ITEM 9. CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

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**ITEM 9A. CONTROLSAND PROCEDURES**

*Evaluationof Disclosure Controls and Procedures*—We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our reports under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures. Any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives. Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof the design and operation of our disclosure controls and procedures as of December 31,2006. Based upon that evaluation and subject to the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of disclosure control and procedures provided reasonable assurancethat the disclosure controls and procedures are effective to accomplish theirobjectives.

**ITEM 9B. OTHERINFORMATION**

No information is required to be disclosed under thisItem.

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**PART III**

**ITEM 10. DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERANCE**

The information requiredby this item will be incorporated by reference to a definitive proxy statementinvolving the election of directors, which is expected to be filed by uspursuant to Regulation 14A, within 120 days after the close of ourfiscal year.

**ITEM 11. EXECUTIVECOMPENSATION**

The information requiredby this item will be incorporated by reference to a definitive proxy statementinvolving the election of directors, which is expected to be filed by uspursuant to Regulation 14A, within 120 days after the close of ourfiscal year.

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS**

The information requiredby this item will be incorporated by reference to a definitive proxy statementinvolving the election of directors, which we expect to be filed pursuant toRegulation 14A, within 120 days after the close of our fiscal year.

**ITEM 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

The information requiredby this item will be incorporated by reference to a definitive proxy statementinvolving the election of directors, which we expect to be filed pursuant toRegulation 14A, within 120 days after the close of our fiscal year.

**ITEM 14. PRINCIPALACCOUNTING FEES AND SERVICES**

The information required by this item will be incorporated by referenceto a definitive proxy statement involving the election of directors, which weexpect to be filed pursuant to Regulation 14A, within 120 days afterthe close of our fiscal year.

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**PART IV**

**ITEM 15. EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

**A. Financial Statements**

|    |   | Report of Independent Registered Public Accounting  Firm                                                                                                                                                |   |       |   |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
|         |   | Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                                                                                                      |   |                      |   |
|         |   | Consolidated Statements of Operations for the years  ended December 31, 2006, 2005 and 2004                                                                                                        |   |                      |   |
|         |   | Consolidated Statements of Changes in Shareholders’  Equity for the years ended December 31, 2006,  2005 and 2004                                                                             |   |                      |   |
|         |   | Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004                                                                                                        |   |                      |   |
|         |   | Notes to the Consolidated Financial Statements                                                                                                                                                          |   |                      |   |
|         |   | Schedule III—Real Estate and Accumulated Depreciation  as of December 31, 2006                                                                                                                |   |                      |   |
|         |   | Schedules other than  those listed above have been omitted because they are not required, not  applicable, or the required information is set forth in the financial  statements or notes thereto. |   |                      |   |

 

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**B. Exhibits**

| Exhibit   Number | ** ** | ** ** | **Description of   Document** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------|------------|------------|-------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             | 3.1        |       |                          | Restated Certificate of  Incorporation of Registrant filed February 23, 1971, Amendment filed  August 12, 1987, and Amendment filed May 31, 1991. (Incorporated by  reference to Exhibit 3A of Registrant’s Quarterly Report on Form 10-Q  for the second quarter of 1991, filed August 14, 1991.)                                                                                                          |
|             | 3.2        |       |                          | Certificate of  Amendment to Certificate of Incorporation filed September 1, 2004  (incorporated by reference to Exhibit 3.1 of Registrant’s Quarterly  Report on Form 10-Q for the third quarter of 2004, filed  November 15, 2004.)                                                                                                                                                                                 |
|             | 3.3        |       |                          | Amended and  Restated By-laws of Registrant. (Incorporated by reference to  Exhibit 4 to Registrant’s Annual Report on Form 10-K for  2001, filed April 1, 2002.)                                                                                                                                                                                                                                                          |
|             | 3.4        |       |                          | First Amendment  to Bresler & Reiner, Inc. Amended and Restated Bylaws of  Registrant. (Incorporated by reference to Exhibit 3.3 of Registrant’s  Report on Form 10-K for 2002, filed March 31, 2003.)                                                                                                                                                                                                       |
|             | 3.5        |       |                          | Second Amendment  to Bresler & Reiner, Inc. Amended and Restated Bylaws of  Registrant. (Incorporated by reference to Exhibit 3.2 to Registrant’s  Current Report on Form 8-K filed February 26, 2003.)                                                                                                                                                                                                      |
|             | 9.1        |       |                          | First Amended and  Restated Shareholders Agreement, dated as of July 31, 2002, by and between  Bresler Family Investors, LLC, Burton J. Reiner and Anita O. Reiner, Joint  Tenants, Burton and Anita Reiner Charitable Remainder Unitrust and  Registrant. (Incorporated by reference to Exhibit 2.5 to Registrant’s  Current Report on Form 8-K, filed August 8, 2002.)                                              |
|             | 9.2        |       |                          | Second Amended  and Restated Shareholders Agreement, dated as of February 21, 2003, by  and among Bresler Family Investors, LLC, Burton J. Reiner and Anita O.  Reiner, husband and wife as joint tenants, Burton and Anita Reiner Charitable  Remainder Unitrust and Registrant. (Incorporated by reference to  Exhibit 10.1 to Registrant’s Current Report on Form 8-K,  filed February 26, 2003.)                  |
|             | 10.1       |       |                          | Bresler &  Reiner 2006 Stock Appreciation Rights Incentive Plan. (Incorporated by  reference to Exhibit 10.4 to Registrant’s Annual Report on Form 10-K  for 2005, filed March 31, 2006.)                                                                                                                                                                                                                         |
|             | 10.2       |       |                          | Amended and  Restated Trust Agreement of Bresler & Reiner Statutory Trust I,  dated November 23, 2005, by and among Bresler &  Reiner, Inc., JPMorgan Chase Bank, National Association, Chase Bank USA  and others named therein. (Incorporated by  reference to Exhibit 10.5 to Registrant’s Annual Report on Form 10-K  for 2005, filed March 31, 2006.)                                |
|             | 10.3       |       |                          | Junior  Subordinated Indenture dated November 29, 2005 by and between Bresler &  Reiner, Inc. and JPMorgan Chase Bank, National Association. (Incorporated by reference to Exhibit 10.6  to Registrant’s Annual Report on Form 10-K for 2005, filed  March 31, 2006.)                                                                                                                                   |
|             | 10.4       |       |                          | Common Securities  Subscription Agreement dated November 29, 2005 by and between  Bresler & Reiner, Inc. and Bresler & Reiner Statutory  Trust I. (Incorporated by reference to  Exhibit 10.7 to Registrant’s Annual Report on Form 10-K for  2005, filed March 31, 2006.)                                                                                                                     |
|             | 10.5       |       |                          | Purchase  Agreement dated November 23, 2005 by and among Bresler &  Reiner, Inc., Bresler & Reiner Statutory Trust I, and Merrill  Lynch International. (Incorporated by  reference to Exhibit 10.8 to Registrant’s Annual Report on Form 10-K  for 2005, filed March 31, 2006.)                                                                                                               |
|             | 10.6       |       |                          | Amended and  Restated Trust Agreement of Bresler & Reiner Statutory Trust I,  dated May 31, 2006, by and among Bresler &  Reiner, Inc., JPMorgan Chase Bank, National Association, Chase Bank USA  and others named therein. (Incorporated by  reference to Exhibit 10.9 to Registrant’s Quarterly Report on  Form 10-Q for the period ended June 30, 2006, filed  August 11, 2006.) |
|             | 10.7       |       |                          | Junior  Subordinated Indenture dated May 31, 2006 by and between  Bresler & Reiner, Inc. and JPMorgan Chase Bank, National  Association. (Incorporated by reference to  Exhibit 10.10 to Registrant’s Quarterly Report on Form 10-Q  for the period ended June 30, 2006, filed August 11, 2006.)                                                                                                   |
|             | 10.8       |       |                          | Common Securities  Subscription Agreement dated May 31, 2006 by and between  Bresler & Reiner, Inc. and Bresler & Reiner Statutory  Trust I. (Incorporated by reference to  Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q  for the period ended June 30, 2006, filed August 11, 2006.)                                                                                      |

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|        | 10.9                   |   |   | Purchase  Agreement dated May 31, 2006 by and among Bresler &  Reiner, Inc., Bresler & Reiner Statutory Trust II, and Bear,  Stearns & Co., Inc. (Incorporated  by reference to Exhibit 10.12 to Registrant’s Quarterly Report on  Form 10-Q for the period ended June 30, 2006, filed  August 11, 2006.) |
|--------|----------------------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.10                            |   |   | Purchase  Agreement dated May 31, 2006 by and among Bresler &  Reiner, Inc., Bresler & Reiner Statutory Trust II, and Merrill  Lynch International. (Incorporated by  reference to Exhibit 10.13 to Registrant’s Quarterly Report on  Form 10-Q for the period ended June 30, 2006, filed  August 11, 2006.)            |
|   | 21      |   |   | Subsidiaries of  the Registrant. (Filed herewith.)                                                                                                                                                                                                                                                                                                                           |
|   | 31.1                   |   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from  Sidney M. Bresler, Chief Executive Officer. (Filed herewith.)                                                                                                                                                                                                                       |
|   | 31.2                   |   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from  Darryl M. Edelstein, Executive Vice President-Finance and  Chief Financial Officer. (Filed herewith.)                                                                                                                                                                               |
|   | 32      |   |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 from Sidney M.  Bresler, Chief Executive Officer and Darryl M. Edelstein, Executive Vice  President-Finance and Chief Financial Officer. (Filed herewith.)                                                                                                                           |

 

Shareholders may obtain a copy of any financialstatement schedules and any exhibits filed with Form 10-K by writingto: Mr. Darryl M. Edelstein,  CFO,11200 Rockville Pike, Suite 502, Rockville, MD 20852. Mr. Edelsteinwill advise shareholders of the fee for any exhibit.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized on April 2, 2007.

|            |   | BRESLER &  REINER, INC. |
|------------|--------|---------------------------------------|
|       |   | By:                                   |   | **/**s/ SIDNEY M. BRESLER**** |
|       |   |                                  |   | **Sidney M. Bresler** |
|       |   |                                  |   | **Chief Executive Officer** |
| ** ** |   | By:                                   |   | /s/ DARRYL M. EDELSTEIN |
| ** ** |   |                                  |   | **Darryl M. Edelstein** |
| ** ** |   |                                  |   | **Chief Financial Officer** |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Company and in the capacities indicated on April 2, 2007.

| /s/ SIDNEY  M. BRESLER        |   | Chief Executive Officer, Director                                  |
|-------------------------------|--------|--------------------------------------------------------------------|
| **Sidney M. Bresler**         |   |                                                               |
| /s/ DARRYL M. EDELSTEIN       |   | Executive Vice  President—Finance and Chief Financial Officer |
| **Darryl M. Edelstein**       |   | (Principal  Financial & Accounting Officer)               |
| /s/ BENJAMIN C. AUGER         |   | Director                                                           |
| **Benjamin C. Auger**         |   |                                                               |
| /s/ CHARLES S. BRESLER        |   | Director                                                           |
| **Charles S. Bresler**        |   |                                                               |
| /s/ GARY F. BULMASH           |   | Director                                                           |
| **Gary F. Bulmash**           |   |                                                               |
| /s/ RALPH S. CHILDS, JR. |   | Director                                                           |
| **Ralph S. Childs, Jr.** |   |                                                               |
| /s/ MICHAEL W. MALAFRONTE     |   | Director                                                           |
| **Michael W. Malafronte**     |   |                                                               |
| /s/ BURTON J. REINER          |   | Director                                                           |
| **Burton J. Reiner**          |   |                                                               |
| /s/ RANDALL L. REINER         |   | Director                                                           |
| **Randall L. Reiner**         |   |                                                               |
| /s/ JOHN P. CASEY             |   | Director                                                           |
| **John P. Casey**             |   |                                                               |
| /s/ GRETCHEN DUDNEY           |   | Director                                                           |
| **Gretchen Dudney**           |   |                                                               |

 

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**BRESLER &REINER, INC.**

**FINANCIALSTATEMENTSYEARS ENDED DECEMBER 31, 2006 and 2005**

**CONTENTS**
| Report of Independent  Registered Public Accounting Firm         |   | F-2    |   |
|------------------------------------------------------------------|--------|--------|--------|
| Consolidated  Financial Statements                               |   |   |   |
| Consolidated  Balance Sheets                                     |   | F-3    |   |
| Consolidated Statements of Operations                            |   | F-4    |   |
| Consolidated Statements of Changes in Shareholders’  Equity |   | F-5    |   |
| Consolidated Statements of Cash Flows                            |   | F-6    |   |
| Notes to Consolidated Financial Statements                       |   | F-7    |   |

 

F-1

----

**Report of Independent Registered Public AccountingFirm**

To the Shareholders of Bresler & Reiner, Inc.

We have audited the accompanying consolidated balancesheets of Bresler & Reiner, Inc. (the “Company”) as of December 31,2006 and 2005 and the related consolidated statements of operations, changes inshareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006. Our audits also included the financial statementschedule included as part of this Annual Report on Form 10-K at Item15. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the financial statements and financial statement schedule based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Bresler & Reiner, Inc. at December 31,2006 and 2005, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

McLean, VirginiaMarch 31, 2007

F-2

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**BRESLER &REINER, INC.**

**CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2006 AND 2005**

| ** **                                                                                                                                             | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                                                                             |       |        |        |        |       |
| Real Estate:                                                                                                                                           |       |        |        |        |       |
| Rental property  and equipment                                                                                                                         |       | $           | 517,249,000 |        | $          | 312,536,000 |   |
| Property and land  development                                                                                                                         |       | 166,252,000 |        | 154,139,000 |       |
| Land held for  investment                                                                                                                              |       | 1,412,000   |        | 2,989,000   |       |
| Real estate, at cost                                                                                                                                   |       | 684,913,000 |        | 469,664,000 |       |
| Less: accumulated  depreciation and amortization                                                                                                       |       | (43,246,000 | )           | (28,744,000 | )          |
| Total real  estate, net                                                                                                                                |       | 641,667,000 |        | 440,920,000 |       |
| Assets held for  sale                                                                                                                                  |       | 25,952,000  |        | 159,375,000 |       |
| Receivables:                                                                                                                                           |       |        |        |        |       |
| Income taxes  receivable                                                                                                                               |       | 644,000     |        | 2,429,000   |       |
| Mortgage and  notes receivable, other                                                                                                                  |       | 5,438,000   |        | 834,000     |       |
| Other receivables                                                                                                                                      |       | 6,996,000   |        | 6,239,000   |       |
| Cash and cash  equivalents                                                                                                                             |       | 18,191,000  |        | 10,820,000  |       |
| Restricted cash and  deposits held in escrow                                                                                                           |       | 46,953,000  |        | 14,034,000  |       |
| Investments, principally  available-for-sale securities                                                                                                |       | 36,829,000  |        | 63,028,000  |       |
| Investment in and  advances to joint ventures                                                                                                          |       | 30,403,000  |        | 30,053,000  |       |
| Deferred charges and  other assets, net                                                                                                                |       | 47,062,000  |        | 36,266,000  |       |
| **Total  assets**                                                                                                                                      |       | $           | 860,135,000 |        | $          | 763,998,000 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                          | ** ** | ** **  | ** **  | ** **  | ** ** |
| **LIABILITIES**                                                                                                                                        |       |        |        |        |       |
| Mortgage and  construction loans and other debt                                                                                                        |       | $           | 582,435,000 |        | $          | 405,155,000 |   |
| Liabilities of assets  held for sale                                                                                                                   |       | 29,704,000  |        | 125,603,000 |       |
| Accounts payable, trade  and accrued expenses                                                                                                          |       | 19,358,000  |        | 18,662,000  |       |
| Deferred income taxes  payable                                                                                                                         |       | 11,534,000  |        | 11,453,000  |       |
| Other liabilities                                                                                                                                      |       | 31,760,000  |        | 26,067,000  |       |
| **Total  liabilities**                                                                                                                                 |       | 674,791,000 |        | 586,940,000 |       |
| Minority interest                                                                                                                                      |       | 43,499,000  |        | 49,696,000  |       |
| Commitments and  contingencies                                                                                                                         |       |        |        |        |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                          |       |        |        |        |       |
| Common shares,  $0.01 par value; 7,000,000 shares authorized, 5,477,212 shares  issued and outstanding as of December 31, 2006 and 2005 |       | 55,000      |        | 55,000      |       |
| Additional paid-in  capital                                                                                                                            |       | 5,721,000   |        | 5,721,000   |       |
| Retained earnings                                                                                                                                      |       | 136,272,000 |        | 121,586,000 |       |
| Accumulated other  comprehensive loss                                                                                                                  |       | (203,000    | )           | —-     |       |
| **Total  shareholders’ equity**                                                                                                                   |       | 141,845,000 |        | 127,362,000 |       |
| **Total liabilities and  shareholders’ equity**                                                                                                   |       | $           | 860,135,000 |        | $          | 763,998,000 |   |

 

See Notes to Consolidated Financial Statements

F-3

----

**BRESLER &REINER, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

| ** **                                                                                                                                | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| **OPERATING  REVENUES**                                                                                                                   |       |        |       |        |       |       |       |
| Homebuilding,  residential lots and other development                                                                                     |       | $           | 28,102,000 |        | $          | 55,364,000 |       | $ | 24,605,000 |   |
| Rentals—commercial                                                                                                                   |       | 58,976,000  |       | 34,777,000  |       | 24,652,000 |       |
| Rentals—residential                                                                                                                  |       | 10,693,000  |       | 9,384,000   |       | 8,705,000  |       |
| Hospitality                                                                                                                               |       | 3,408,000   |       | 3,189,000   |       | 2,874,000  |       |
| Other                                                                                                                                     |       | 2,124,000   |       | 339,000     |       | 2,058,000  |       |
| Total operating  revenues                                                                                                                 |       | 103,303,000 |       | 103,053,000 |       | 62,894,000 |       |
| **COSTS AND EXPENSES**                                                                                                                    |       |        |       |        |       |       |       |
| Cost of homebuilding,  residential lots and other development                                                                             |       | 23,823,000  |       | 43,679,000  |       | 21,071,000 |       |
| Rental  expense—commercial                                                                                                           |       |        |       |        |       |       |       |
| Operating  expenses                                                                                                                       |       | 25,072,000  |       | 13,582,000  |       | 9,925,000  |       |
| Depreciation and  amortization expense                                                                                                    |       | 22,863,000  |       | 9,483,000   |       | 6,774,000  |       |
| Rental  expense—residential                                                                                                          |       |        |       |        |       |       |       |
| Operating  expenses                                                                                                                       |       | 4,908,000   |       | 3,821,000   |       | 3,783,000  |       |
| Depreciation and  amortization expense                                                                                                    |       | 2,592,000   |       | 2,199,000   |       | 2,354,000  |       |
| Hospitality expense                                                                                                                       |       |        |       |        |       |       |       |
| Operating  expenses                                                                                                                       |       | 2,360,000   |       | 2,316,000   |       | 2,198,000  |       |
| Depreciation and  amortization expense                                                                                                    |       | 312,000     |       | 272,000     |       | 364,000    |       |
| General and  administrative expense                                                                                                       |       | 12,652,000  |       | 7,724,000   |       | 3,973,000  |       |
| Loss on impairment of  assets                                                                                                             |       | 1,494,000   |       | —      |       | —     |       |
| Withdrawn public  offering costs                                                                                                          |       | —      |       | 3,312,000   |       | —     |       |
| Other expenses                                                                                                                            |       | 24,000      |       | 121,000     |       | —     |       |
| Total operating  expenses                                                                                                                 |       | 96,100,000  |       | 86,509,000  |       | 50,442,000 |       |
| Total operating  income                                                                                                                   |       | 7,203,000   |       | 16,544,000  |       | 12,452,000 |       |
| **OTHER INCOME (EXPENSES)**                                                                                                               |       |        |       |        |       |       |       |
| Interest income                                                                                                                           |       | 2,112,000   |       | 1,100,000   |       | 1,869,000  |       |
| Interest expense                                                                                                                          |       | (27,486,000 | )          | (14,786,000 | )          | (9,655,000 | )          |
| Debt extinguishment  costs                                                                                                                |       | (1,047,000  | )          | (3,171,000  | )          | —     |       |
| Gain on sale of  investments in joint ventures                                                                                            |       | 24,417,000  |       | 1,551,000   |       | 624,000    |       |
| Income before income  taxes, income from investments in joint ventures, minority interest and  income (loss) from discontinued operations |       | 5,199,000   |       | 1,238,000   |       | 5,290,000  |       |
| Income from investments  in joint ventures                                                                                                |       | 996,000     |       | 793,000     |       | 1,360,000  |       |
| Minority interest                                                                                                                         |       | (1,015,000  | )          | (5,800,000  | )          | (1,966,000 | )          |
| Income (loss) before  income taxes and discontinued operations                                                                            |       | 5,180,000   |       | (3,769,000  | )          | 4,684,000  |       |
| (Provision) benefit for  income taxes                                                                                                     |       | (946,000    | )          | 2,375,000   |       | (1,142,000 | )          |
| Income (loss) from  continuing operations                                                                                                 |       | 4,234,000   |       | (1,394,000  | )          | 3,542,000  |       |
| Income (loss) from  discontinued operations, net of tax and minority interest                                                        |       | 12,095,000  |       | (855,000    | )          | 877,000    |       |
| Net income (loss)                                                                                                                         |       | $           | 16,329,000 |        | $          | (2,249,000 | )          | $ | 4,419,000 |   |
| **EARNINGS (LOSS) PER SHARE OF COMMON STOCK**                                                                                             |       |        |       |        |       |       |       |
| Basic and Diluted:                                                                                                                        |       |        |       |        |       |       |       |
| Income (loss)  from continuing operations                                                                                                 |       | $           | 0.77       |        | $          | (0.25      | )          | $ | 0.65 |   |
| Income (loss)  from discontinued operations, net of tax                                                                                   |       | 2.21        |       | (0.16       | )          | 0.16       |       |
| Net income (loss)                                                                                                                         |       | $           | 2.98       |        | $          | (0.41      | )          | $ | 0.81 |   |
| Weighted average number of common shares outstanding                                                                                      |       | 5,477,212   |       | 5,477,212   |       | 5,477,212  |       |

 

See Notes to Consolidated Financial Statements

F-4

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**BRESLER &REINER, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITYFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

| ** **                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Captial** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** **  | **Total  Shareholders’  Equity** | ** ** | **Comprehensive  Income (Loss)** | ** ** |
|-----------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|---------------------------------------------|-------------|---------------------------------------|------------|----------------------------------|------------|
| **Balance, January 1, 2004**       |       |              | $          | 28,000                           |       |                   | $          | 7,565,000           |       | $                                           | 122,319,000 |                                  | $          | (1,817,000                       | )          |   | — |   |   |   | $ | 128,095,000 |   |   |   |   |   |   |
| Stock split                             |       |              | 29,000     |                             |       | (29,000                | )          | —              |       | —                                      |        |                                  | —     |                             |       |   | — |   |   |   |   |   |   |
| Cash dividends paid                     |       |              | —     |                             |       | —                 |       | (1,369,000          | )          | —                                      |        |                                  | —     |                             |       |   | (1,369,000 | ) |   |   |   |   |   |
| Net income                              |       |              | —     |                             |       | —                 |       | 4,419,000           |       | —                                      |        |                                  | —     |                             |       |   | 4,419,000 |   |   |   | $ | 4,419,000 |   |   |
| **Balance, December 31, 2004**     |       |              | 57,000     |                             |       | 7,536,000              |       | 125,369,000         |       | (1,817,000                                  | )           |                                  | —     |                             |       |   | 131,145,000 |   |   |   |   |   |   |
| Cash dividends paid                     |       |              | —     |                             |       | —                 |       | (1,534,000          | )          | —                                      |        |                                  | —     |                             |       |   | (1,534,000 | ) |   |   |   |   |   |
| Cancellation of treasury  stock         |       |              | (2,000     | )                                |       | (1,815,000             | )          | —              |       | 1,817,000                                   |        |                                  | —     |                             |       |   | — |   |   |   |   |   |   |
| Net loss                                |       |              | —     |                             |       | —                 |       | (2,249,000          | )          | —                                      |        |                                  | —     |                             |       |   | (2,249,000 | ) |   |   | $ | (2,249,000 | ) |   |
| **Balance, December 31, 2005**     |       |              | 55,000     |                             |       | 5,721,000              |       | 121,586,000         |       | —                                      |        |                                  | —     |                             |       |   | 127,362,000 |   |   |   |   |   |   |
| Cash dividends paid                     |       |              | —     |                             |       | —                 |       | (1,643,000          | )          | —                                      |        |                                  | —     |                             |       |   | (1,643,000 | ) |   |   |   |   |   |
| Net income                              |       |              | —     |                             |       | —                 |       | 16,329,000          |       | —                                      |        |                                  | —     |                             |       |   | 16,329,000 |   |   |   | $ | 16,329,000 |   |   |
| Other comprehensive  income (loss) |       |              |       |                             |       |                   |       |                |       |                                        |        |                                  |       |                             |       |   |   |   |   |   |   |   |   |
| Minimum  pension liability              |       |              | —     |                             |       | —                 |       |                |       | —                                      |        |                                  | (203,000   | )                                |       |   | (203,000 | ) |   |   | (203,000 | ) |   |
| **Balance, December 31, 2006**     |       |              | $          | 55,000                           |       |                   | $          | 5,721,000           |       | $                                           | 136,272,000 |                                  | $          | —                           |       |   | (203,000 | ) |   |   | $ | 141,845,000 |   |   |   | $ | 16,126,000 |   |   |

 

See Notes to Consolidated Financial Statements

F-5

----

**BRESLER &REINER, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

| ** **                                                                                           | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| **OPERATING ACTIVITIES:**                                                                            |       |         |       |         |       |         |       |
| Net income (loss)                                                                                    |       | $            | 16,329,000 |         | $          | (2,249,000   | )          | $ | 4,419,000 |   |
| Adjustments  to reconcile net (loss) income to net cash used in operating activities:           |       |         |       |         |       |         |       |
| Depreciation and  amortization                                                                       |       | 25,776,000   |       | 15,398,000   |       | 12,482,000   |       |
| Gain on sale of  properties and investments in joint ventures                                        |       | (54,830,000  | )          | (4,300,000   | )          | (1,680,000   | )          |
| Income from investments in  joint ventures                                                           |       | (996,000     | )          | (793,000     | )          | (1,360,000   | )          |
| Minority interest expense  (including discontinued operations)                                       |       | 5,990,000    |       | 7,746,000    |       | 2,007,000    |       |
| Deferred income taxes                                                                                |       | 187,000      |       | 2,542,000    |       | (862,000     | )          |
| Loss on impairment of  assets (including discontinued operations)                                    |       | 6,301,000    |       | —       |       | —       |       |
| Amortization of finance  costs and capitalized interest                                              |       | (1,393,000   | )          | (670,000     | )          | (925,000     | )          |
| Homebuilding and land  development                                                                   |       | (5,868,000   | )          | (32,417,000  | )          | (45,741,000  | )          |
| Distribution of income  from investments in joint ventures                                           |       | 558,000      |       | 526,000      |       | 1,583,000    |       |
| Debt extinguishment costs                                                                            |       | 1,047,000    |       | 3,171,000    |       | —       |       |
| Changes in assets and  liabilities:                                                                  |       |         |       |         |       |         |       |
| Receivables                                                                                          |       | (6,297,000   | )          | (710,000     | )          | (318,000     | )          |
| Other assets                                                                                         |       | (2,099,000   | )          | (997,000     | )          | (4,933,000   | )          |
| Other liabilities                                                                                    |       | 6,938,000    |       | 4,771,000    |       | 8,018,000    |       |
| Total adjustments                                                                                    |       | (24,686,000  | )          | (5,733,000   | )          | (31,729,000  | )          |
| **Net cash  used in operating activities**                                                           |       | (8,357,000   | )          | (7,982,000   | )          | (27,310,000  | )          |
| **INVESTING ACTIVITIES:**                                                                            |       |         |       |         |       |         |       |
| Increase in cash due to  change in consolidation method                                              |       | —       |       | —       |       | 519,000      |       |
| Investments in joint  ventures                                                                       |       | (7,892,000   | )          | (20,611,000  | )          | (1,154,000   | )          |
| Distributions from joint  ventures in excess of income                                               |       | 939,000      |       | 416,000      |       | 7,278,000    |       |
| Deposits for property  acquisitions                                                                  |       | (1,603,000   | )          | (2,613,000   | )          | (3,610,000   | )          |
| (Increase) decrease in  restricted cash                                                              |       | (35,184,000  | )          | (3,494,000   | )          | 2,328,000    |       |
| Decrease (increase) in  investments principally available-for-sale securities                        |       | 26,199,000   |       | (22,999,000  | )          | 12,606,000   |       |
| Purchase of rental  property, equipment and other                                                    |       | (172,169,000 | )          | (73,938,000  | )          | (101,626,000 | )          |
| Net purchase of property  and land under development                                                 |       | (6,024,000   | )          | (40,549,000  | )          | (26,923,000  | )          |
| Decrease in notes  receivable                                                                        |       | 596,000      |       | 4,546,000    |       | 4,060,000    |       |
| Proceeds from sale of  properties and investments in joint ventures                                  |       | 89,183,000   |       | 6,708,000    |       | 535,000      |       |
| **Net cash  used in investing activities**                                                           |       | (105,955,000 | )          | (152,534,000 | )          | (105,987,000 | )          |
| **FINANCING  ACTIVITIES:**                                                                           |       |         |       |         |       |         |       |
| Proceeds from mortgage  and construction loans and other debt                                        |       | 202,149,000  |       | 255,494,000  |       | 129,234,000  |       |
| Repayment of mortgage and  construction loans and other debt                                         |       | (48,405,000  | )          | (52,191,000  | )          | (2,737,000   | )          |
| Purchase of marketable  securities in connection with the legal defeasance of mortgage notes payable |       | (23,562,000  | )          | (49,433,000  | )          | —       |       |
| (Distributions to)  contributions from minority partners                                             |       | (2,716,000   | )          | 11,150,000   |       | 6,489,000    |       |
| Debt financing charges                                                                               |       | (4,140,000   | )          | (2,064,000   | )          | (1,967,000   | )          |
| Dividends paid                                                                                       |       | (1,643,000   | )          | (1,534,000   | )          | (1,369,000   | )          |
| **Net cash  provided by financing activities**                                                       |       | 121,683,000  |       | 161,422,000  |       | 129,650,000  |       |
| **Net increase (decrease) in cash and cash  equivalents**                                            |       | 7,371,000    |       | 906,000      |       | (3,647,000   | )          |
| **Cash and cash equivalents, beginning of year**                                                     |       | 10,820,000   |       | 9,914,000    |       | 13,561,000   |       |
| **Cash and cash equivalents, end of year**                                                           |       | $            | 18,191,000 |         | $          | 10,820,000   |       | $ | 9,914,000 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**                                              |       |         |       |         |       |         |       |
| Cash paid during the year  for:                                                                      |       |         |       |         |       |         |       |
| Interest (net of amount  capitalized)                                                                |       | $            | 31,825,000 |         | $          | 22,128,000   |       | $ | 15,312,000 |   |
| Income taxes (current and  estimated)                                                                |       | 1,836,000    |       | 942,000      |       | 236,000      |       |
| **SUPPLEMENTAL DISCLOSURES OF NON-CASH  ACTIVITIES:**                                                |       |         |       |         |       |         |       |
| Consolidation of  Waterfront Associates, LLC                                                         |       | —       |       | —       |       | 9,385,000    |       |
| Debt assumed on  acquisitions                                                                        |       | 44,172,000   |       | 43,616,000   |       | 24,716,000   |       |
| Marketable securities  transferred in connection with the legal defeasance of mortgage notes payable |       | 23,562,000   |       | 49,433,000   |       | —       |       |
| Mortgage notes payable  legally defeased                                                             |       | 22,227,000   |       | 46,929,000   |       | —       |       |
| Trust preferred debt  issued for common stock                                                        |       | 930,000      |       | 1,238,000    |       | —       |       |
| Liabilities related to  loan guaranties                                                              |       | (57,000      | )          | 531,000      |       | —       |       |
| Accrued rental property and equipment                                                                |       | 1,543,000    |       | 1,593,000    |       | 880,000      |       |

 

See Notes to Consolidated Financial Statements

F-6

----

**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

*BASIS OFPRESENTATION AND ORGANIZATION*

Bresler &Reiner, Inc. (“B&R” and, together with its subsidiaries andaffiliates, “we,” the “Company” or “us”) engages in the acquisition,development, and ownership of commercial, residential and hospitality realestate in the Washington, D.C.; Philadelphia, Pennsylvania; Wilmington,Delaware; Baltimore, Maryland; Maryland and Delaware Eastern Shore; Houston,Texas; and the Lakeland and Orlando, Florida metropolitan areas.

*PRINCIPLES OFCONSOLIDATION*

Our consolidated financialstatements include the accounts of Bresler & Reiner, Inc., ourwholly owned subsidiaries, and entities which we control or, entities that arerequired to be consolidated under Financial Accounting Standards Board (“FASB”)Interpretation No. 46R (“FIN 46R”). Entities which we do not control orentities that are not to be consolidated under FIN 46R and over whom weexercise significant influence, are accounted for under the equity method. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

*REVENUE RECOGNITION*

Real estate sales—Gains on sales of real estate andinvestments in joint ventures are recognized pursuant to the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 66, *Accounting for Sales of Real Estate*. Forcondominium and land sales, revenues and cost of sales are recorded at the timethe sale of each unit or lot is closed and title and possession have beentransferred to the buyer. Gains on sale of long-lived assets and investments injoint ventures are recognized based on the full accrual method when all thecriteria for such recognition as detailed in SFAS No. 66 have been met.

Rental revenue—Rental revenue represents incomearising from tenant leases. We recognize rental revenue in accordance with SFASNo. 13, *Accounting for Leases*.SFAS No. 13 requires that revenue be recognized over the non-cancelableterm of the related leases on a straight-line basis which includes the effectsof rent steps and rent abatements under the leases. We commence rental revenuerecognition when the tenant takes possession of the leased space. Revenuearising from tenant leases which provide for the recovery of all or a portionof the operating expenses and real estate taxes of the respective property isrecognized in the same periods as the expenses are incurred. We recognizerevenue related to expense recoveries from tenants based on the accrual method,which matches the timing of the recoveries with the underlying expense.

Hospitality revenue—We recognize hospitality revenueas services are provided.

Rental, construction andmanagement fees—We recognize rental, construction and management fees asservices are provided.

*RENTAL PROPERTY ANDEQUIPMENT*

Rental property and equipment are stated at cost, netof accumulated depreciation and amortization. Costs directly related to the acquisition, improvement and leasing ofreal estate are capitalized. Maintenance and repairs are charged to operationsas incurred. The Company believes that its leasing practices and agreementswith the majority of its tenants provide that the leasehold improvements itfunds represent fixed assets that it owns and controls. The Company alsobelieves that leases with such arrangements are properly accounted for ascommencing at the completion of construction of such assets. Depreciation isrecorded using the straight-line method over the estimated useful lives of therelated assets, generally 39 years for buildings, 15 years for land improvementsand three to 10 years for furniture, fixtures and equipment. Tenantallowances and leasehold improvements are amortized on a straight-line basisover the term of the related leases which approximate the useful lives of theassets. Depreciation expense totaled $15,906,000, $9,816,000 and $7,717,000 forthe years ended December 31, 2006, 2005 and 2004, respectively.

Upon acquisitions of real estate, we assess the fairvalue of acquired assets and liabilities, including land, land improvements,buildings and improvements, furniture and fixtures and identifiable intangiblessuch as above and below market leases, and acquired in-place leases inaccordance with SFAS No. 141, *BusinessCombinations* and SFAS No. 142, 

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Goodwill and Other Intangible Assets*(together “SFAS 141 and 142”) and allocate the purchase price based onthese assessments. We assess fair value based on estimated cash flowprojections that utilize appropriate discount and capitalization rates andavailable market information. Estimates of future cash flows are based on anumber of factors including the historical operating results, known trends, andmarket conditions that may affect the property.

In accordance with SFASNo. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*, we evaluate the recoverability oflong-lived assets whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable. Recoverability is measuredbased on net, undiscounted expected cash flows. Assets are considered to beimpaired if the undiscounted expected cash flows are less than the carryingamount of the assets. Impairment charges are recorded based upon the differencebetween the carrying value of the asset and its estimated  fair value.

*PROPERTY AND LANDDEVELOPMENT*

Property and land development includes costsassociated with the development and sale of land parcels and lots as part ofresidential subdivisions; undeveloped commercial land sales; costs associatedwith the development and sale of commercial and residential condominiums; andcosts associated with the development and construction of commercial andresidential buildings that will be leased to tenants upon completion.

When constructioncommences, costs are recorded in property and land development where they areaccumulated by project. Project costs included in property and land developmentinclude materials and labor, capitalized interest and property taxes. Thesecosts are charged to costs of homes and lots sold based on either the specificidentification method or the relative sales value method, whichever is moreappropriate, in accordance with SFAS No. 67, *Accountingfor Costs and Initial Rental Operations of Real Estate Projects*. Wereview our accumulated costs to ensure that any costs in excess of netrealizable value are charged to operations when identified. As part of ourconstruction and development activities, we capitalized $2,234,000, $1,979,000and $1,738,000 of interest in 2006, 2005 and 2004, respectively.

*LAND HELD FOR INVESTMENT*

Land held for investmentis recorded at cost and reviewed for impairment when such indicators arise. Ifdetermined to be impaired, it is recorded at its estimated fair value.

*ASSETS HELD FORSALE*

We account for long-livedassets to be disposed of by sale in accordance with SFAS No. 144.Accordingly, a long-lived asset is classified as held for sale in the period inwhich management commits to a plan to sell the asset; the asset is availablefor immediate sale in its present condition; an active program to locate abuyer has been initiated and the asset is marketed at a price that isreasonable in relation to its current fair value; and the sale of the asset isprobable within one year Managementbelieves that in general these conditions are met once a purchase and sales’agreement has been executed. Depreciation ceases when an asset is classified asheld for sale. Assets held for sale are carried at the lower of depreciatedcosts or fair value less cost to sell.

*INVESTMENTS INJOINT VENTURES*

For entities that are deemed to be variable interestentities (“VIE’s”), as set forth in FIN 46R, we account for our investmentsbased on a determination of the entity’s primary beneficiary. If we are theprimary beneficiary through being subject to a majority of the potentialvariability in gains or losses of the VIE, then we consolidate our investment.If we are not the primary beneficiary then we do not consolidate ourinvestment, but account for it under the equity method.

For entities that are not deemed to be VIE’s, as setforth in FIN 46R, we account for our investments in these joint ventures inaccordance with Statement of Position No. 78-9, *Accounting for Investments in Real Estate Ventures*and APB Opinion No. 18, *The Equity Methodof Accounting for Investments in Common Stock*. For entities in whichwe have a controlling interest, we consolidate the investment and a minorityinterest is recognized in our consolidated financial statements (see *Minority Interest*). In determining whetherwe have a controlling interest in a joint venture and the requirement toconsolidate the accounts of that entity, we consider factors such as ownershipinterest, management representation, authority to make decisions, andcontractual and substantive participating rights of the members. We account for

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

investments in joint ventures on the equity methodwhen the requirements for consolidation are not met, and we have significantinfluence over the operations of the investee. Equity method investments areinitially recorded at cost and subsequently adjusted for our share of netincome or loss and cash contributions and distributions.

Our investments in jointventures are reviewed for impairment, periodically, if events or circumstanceschange indicating that the carrying amount of our investments may not berecoverable. The ultimate realization of our investments in joint ventures isdependent on a number of factors, including the performance of each investmentand market conditions. We will record an impairment charge if we determine thata decline in the value of an investment is other than temporary.

*INVESTMENTS*

Investments consistprincipally of investments in municipal instruments. Our investments areclassified as available-for-sale securities. Available-for-salesecurities are recorded at fair value, with unrealized holding gains and lossesincluded in comprehensive income. At December 31, 2006 and 2005, costapproximated fair value for these securities. At December 31, 2006 and2005, the total of these investments which were short term in nature withmaturities of less than one year, was $36,686,000 and $60,510,000 respectively.

*CASH AND CASHEQUIVALENTS*

We consider all highlyliquid investments purchased with an original maturity of three months or lessto be cash equivalents. The majority of our cash and cash equivalents are heldat major commercial banks and may at times exceed the Federal Deposit InsuranceCorporation limit of $100,000.

*RESTRICTED CASH ANDDEPOSITS HELD IN ESCROW*

Deposits held in escrowinclude: escrow balances funded in accordance with lender requirementsincluding escrows for real estate taxes, insurance, replacement reserves andlease reserves; deposits held in escrow for tenants; deposits on homes held forsale; and loan funds held back by lenders pending the successful achievement ofvarious coverage targets and occupancy statistics.

*ALLOWANCE FORDOUBTFUL ACCOUNTS*

Wemaintain an allowance for doubtful accounts for estimated losses that mayresult from our tenants’ inability to make lease payments per their leaseagreements. These estimates are based on our judgment of a tenant’s ability topay, length of time the receivable is outstanding and probability ofcollection. Management exercises judgment in establishing these allowances andconsiders payment history and current credit status in developing theseestimates. Presented below is the activity in the allowance for doubtfulaccounts for the periods indicated: 

| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at the  beginning of year | ** ** | $                                           | 392,000    |   | $ | 280,000 |   | $ | 51,000 |   |
| Allowance for  doubtful accounts  |       | 896,000                                     |       | 475,000 |   | 590,000 |   |
| Accounts  written-off             |       | (468,000                                    | )          | (363,000 | ) | (361,000 | ) |
| Balance at end of year            | ** ** | $                                           | 820,000    |   | $ | 392,000 |   | $ | 280,000 |   |

 

*DEFERRED CHARGESAND OTHER ASSETS*

Included in deferred charges are fees incurred inconnection with obtaining financing for our real estate. These fees aredeferred and amortized as a part of interest expense over the term of therelated debt instrument on a straight-line basis, which approximates theeffective interest method. In addition, deferred costs include leasingcommissions incurred to originate a lease, which are amortized on astraight-line basis over the term of the related lease.

Included in other assetsare the costs allocated to above market leases, acquired in-place leasesfor properties that were acquired. The application of SFAS No. 141 and 142to real estate acquisitions requires us to allocate the purchase price to theseassets in addition to land, land improvement, building and improvements and furniture and fixtures based on the 

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

relative fair values ofthe assets and liabilities acquired. In order to determine the amount of thepurchase price to be allocated to these assets, we make assumptions regardingthe relative value of the in-place leases when compared to the current market.Some of the judgments required as a part of this exercise include (1) determiningthe market rental rates of the acquired leases, (2) estimating the marketvalue of  tenant improvement allowancesand leasing commissions to be paid on new leases, (3) estimating an appropriatelease-up period and (4) applying an estimated risk-adjusted discount rateto the cash flows. The acquired above market leases are amortized throughrevenues. The acquired in-place leases and tenant relationships areamortized through depreciation and amortization expense.

*OTHER LIABILITIES*

Included in other liabilities are the costs allocatedto below market leases for properties that were acquired. The acquired belowmarket leases are amortized as an increase in revenues.

We account for loanguarantees of the indebtedness of joint ventures that are not consolidated intoour consolidated financial statements in accordance with FASB InterpretationNo. 45 (“FIN 45”), *Guarantor’s Accounting andDisclosure Requirements of Guarantees, Including Indirect Guarantees ofIndebtedness of Others*. FIN 45 requires that upon issuance of aguarantee, the guarantor recognize a liability for the fair value of theobligation it assumes under that guarantee. At December 31, 2006 and 2005the total recorded liability related to loan guaranties was $474,000 and $531,000respectively.

*MINORITY INTEREST*

Minority interest in thebalance sheet represents the minority owners’ share of equity in theconsolidated entity as of the balance sheet date, consisting of contributionsmade by the minority partner plus or minus the minority partner’s share ofincome or loss, less any distributions made to the minority partner. Minorityinterest in the statements of operations represents the minority owners’ shareof the income or loss of the consolidated joint venture.

*INCOME TAXES*

SFAS No. 109, *Accounting for IncomeTaxes*, is applied in calculating our provision for income taxes. Asprescribed therein, the provision for income tax is based on both current anddeferred taxes. Current taxes represent the estimated taxes payable or refundablein the current year, and deferred taxes represent estimated future tax effectsattributable to temporary differences and loss carryforwards. Nontaxableincome, such as interest on state and municipal securities, is excluded fromthe provision calculation.

Deferred income taxesresult principally from temporary differences related to the timing of therecognition of real estate sales, lease income, interest expense, and realestate taxes during development and the timing of depreciation for tax andfinancial reporting purposes.

*USE OF ESTIMATES*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the stated amounts of assets, liabilities, revenues,and expenses presented in the financial statements, as well as the disclosuresrelating to contingent liabilities. Consequently, actual results could differfrom those estimates that have been reported in our consolidated financialstatements. Critical accounting policies that require the use of estimates andsignificant judgment include the allocation of purchase prices and assignmentof useful lives for property acquisitions; the recording of cost of sales fordevelopment projects; the determination of consolidation methodology for jointventures; the valuation of assumed debt; the valuation of guarantees related todebt on entities that we do not consolidate; and the recording of impairmentlosses if applicable.

*EARNINGS PER COMMONSHARE*

We have no dilutivesecurities; therefore, basic and fully diluted earnings per share areidentical. Weighted average common shares outstanding were 5,477,212 for theyears ended December 31, 2006, 2005 and 2004 (after adjusting for the 2-for-1stock split which occurred in June 2004.)

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*DIVIDENDS*

In May and November 2006, our Board ofDirectors declared a semi-annual cash dividend of $0.15 per share of commonstock. These dividends were paid on June 15 and December 15, 2006 torecord holders of our common stock as of June 1 and December 1, 2006respectively.

In May 2005, our Board of Directors declared acash dividend of $0.28 per common share. Of the total dividend, $0.14 per sharewas paid in June 2005, while the remaining $0.14 dividend was paid inDecember 2005.

In May 2004, ourBoard of Directors declared a cash dividend of $0.25 per common share. Of thetotal dividend, $0.125 per share was paid in June 2004, while theremaining dividend of $.0125 was paid in December 2004. The per-sharedividend payment disclosure has been adjusted for the 2-for-1 stocksplit which occurred in 2004.

*COMPREHENSIVE INCOME(LOSS)*

Comprehensive income (loss)consists primarily of net income (loss) adjusted for the impact of theadjustment to the minimum pension liability after taxes. We generally recordincome taxes related to components of other comprehensive income based on ourtax rate, including the effects of federal and state taxes, which was 34.2% for2006. Net income and comprehensive income were identical in 2005 and 2004.

*RECLASSIFICATIONS*

Certain amounts for theyears 2005 and 2004 consolidated financial statements have been reclassified toconform to the current year presentation.

**2.**   NEWACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued StatementNo. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS No. 159”)which provides companies with an option to report selected financial assets andliabilities at fair value. The standard’s objective is to reduce both complexityin accounting for financial instruments and the volatility in earnings causedby measuring related assets and liabilities differently. SFAS No. 159 alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS No. 159 is effective for theyear ending December 31, 2008. With certain limitations, early adoption ispermitted. Management is evaluating the impact of this new standard on ourconsolidated financial statements.

In October 2006, the FASB issued StatementNo. 158, *Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans* (“SFAS No. 158”) thatrequires companies to fully recognize an asset or liability for the overfundedor underfunded status of their benefit plans in financial statements of yearsending after December 15, 2006. The pension asset or liability equals thedifference between the fair value of the plan’s assets and its benefitobligation. Effective December 31, 2006, we adopted SFAS No. 158. Theadoption of the requirement to recognize the funded status of a benefit planand the disclosure requirements as of December 31, 2006 did not have amaterial effect on our consolidated financial statements. The requirement tomeasure plan assets and benefit obligations to determine the funded status asof the end of the fiscal year and to recognize changes in the funded status inthe year in which the changes occur is effective for fiscal years ending afterDecember 15, 2008. The adoption of the measurement date provisions of thisstandard will not have any effect on our consolidated financial statements.

In September 2006, the SEC issued StaffAccounting Bulletin No. 108 (“SAB No. 108”), *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.*” SAB No. 108 provides guidance onthe consideration of the effects of prior period misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. SAB No.108 requires companies to quantify misstatements using both a balance sheet andan income statement approach and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualitative factors. When the effect of initial adoption is material, companieswill record the effect as a cumulative effect adjustment to beginning of yearretained earnings. The adoption of SAB No. 108 effective as ofDecember 31, 2006 did not have a material impact on our financialstatements.

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In September 2006, the FASB issued StatementNo. 157 *Fair Value Measurements*(“SFAS No.157”). SFAS No. 157 provides guidance for, among other things, thedefinition of fair value, establishes a framework for measuring fair value andprovides guidance on additional required disclosures of fair value measurement.The provisions of SFAS No. 157 are effective for the year endingDecember 31, 2008. Management is evaluating the impact of this newstandard on our consolidated financial statements.

In July 2006, the FASB issued InterpretationNo. 48 (“FIN No. 48”), *Accounting for Uncertaintyin Income Taxes—An**Interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109*.*FIN No. 48 also prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The new FASB interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The adoption of thisstandard effective January 1, 2007 will not have a material impact on ourconsolidated financial statements.

In December 2004, theFASB issued Statement No. 123R, *Share-BasedPayments*(“SFAS No. 123R”).SFAS No. 123R requires companies to recognize in the income statement thegrant-date fair value of stock options and other equity-basedcompensation issued to employees. We adopted SFAS No. 123R in January,2006. Prior to that date we had no equity-based awards.

**3.**   SIGNIFICANTTRANSACTIONS

During the years endedDecember 31, 2006, 2005 and 2004, we entered into several materialtransactions as described below. All acquisitions of real estate andinvestments in joint ventures have been included in our accompanying statementsof operations from the date of the transaction forward and any gains or losseson sales of assets have been calculated and recorded as of the date of thetransaction. All investments have been consolidated unless noted below:

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*ACQUISITIONS ANDINVESTMENTS*

Thefollowing table summarizes the commercial, residential and development realestate acquired during the years ended December 31, 2006, 2005 and 2004,described in further detail below:

| ** **                       | ** ** | **Location**          | ** ** | **Date of  Acquisition** | ** ** | **Size **(1) | ** ** | **B&R  Ownership** | ** ** | **Purchase  Price  (in 000s) **(2) | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------------------------|------------|-------------------|------------|------------------------|------------|----------------------------------------------|------------|
| *Commercial  Properties*         | * *   | * *              | * *   | * *                      | * *   |              | * *   | * *               |       |                                         | * *   | * * |   |   | * * | * * |   |
| 950 Threadneedle                 |       | Houston,  TX          |       | December 2006            |       |              | 59,000     | * *               |       |                                         | 100.0      | %(3) |   |   | $ | 5,250 | * * |   |
| Commerce Park North              |       | Houston,  TX          |       | July 2006                |       |              | 164,000    | * *               |       |                                         | 100.0      | %(3) |   |   | 11,750 | * * |   |
| 510 Township Road                |       | Plymouth  Meeting, PA |       | June 2006                |       |              | 87,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 13,500 | * * |   |
| 8700 Commerce Drive              |       | Houston,  TX          |       | June 2006                |       |              | 77,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 4,979 | * * |   |
| 9950 Westpark                    |       | Houston,  TX          |       | May 2006                 |       |              | 111,000    | * *               |       |                                         | 100.0      | %(3) |   |   | 7,818 | * * |   |
| Valley Square                    |       | Plymouth  Meeting, PA |       | April 2006               |       |              | 294,000    | * *               |       |                                         | 97.0       | %(3) |   |   | 42,500 | * * |   |
| 1717 Portway Plaza               |       | Houston,  TX          |       | April 2006               |       |              | 67,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 4,858 | * * |   |
| Mearns Park                      |       | Warminster,  PA       |       | March 2006               |       |              | 300,000    | * *               |       |                                         | 97.0       | %(3) |   |   | 19,000 | * * |   |
| 1120 NASA Road                   |       | Houston,  TX          |       | March 2006               |       |              | 80,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 6,642 | * * |   |
| 1110 NASA Road                   |       | Houston,  TX          |       | March 2006               |       |              | 60,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 4,978 | * * |   |
| 1100 NASA Road                   |       | Houston,  TX          |       | February 2006            |       |              | 57,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 4,502 | * * |   |
| 17043-49 El Camino               |       | Houston,  TX          |       | January 2006             |       |              | 82,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 6,052 | * * |   |
| 10333 Harwin Drive               |       | Houston,  TX          |       | January 2006             |       |              | 148,000    | * *               |       |                                         | 100.0      | %(3) |   |   | 12,585 | * * |   |
| Blue Bell Plaza                  |       | Plymouth  Meeting, PA |       | January 2006             |       |              | 155,000    | * *               |       |                                         | 100.0      | %(3) |   |   | 32,000 | * * |   |
| Wynwood                          |       | Chantilly,  VA        |       | June 2005                |       |              | 88,000     | * *               |       |                                         | 100.0      | % |   |   | 13,000 | * * |   |
| 919 Market Street                |       | Wilmington,  DE       |       | April 2005               |       |              | 223,000    | * *               |       |                                         | 100.0      | %(3) |   |   | 40,525 | * * |   |
| Cross Keys                       |       | Doylestown,  PA       |       | April 2005               |       |              | 82,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 17,792 | * * |   |
| 102 Pickering Way                |       | Exton,  PA            |       | April 2005               |       |              | 80,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 15,275 | * * |   |
| 1105 Market Street               |       | Wilmington,  DE       |       | February 2005            |       |              | 173,000    | * *               |       |                                         | 100.0      | %(3) |   |   | 20,700 | * * |   |
| Devon Square                     |       | Devon,  PA            |       | February 2005            |       |              | 140,000    | * *               |       |                                         | 5.5        | % |   |   | 2,667 | (4) |   |
| Historic Baltimore Portfolio     |       | Baltimore,  MD        |       | November 2004            |       |              | 530,000    | * *               |       |                                         | 51.0       | % |   |   | 29,500 | * * |   |
| Fort Washington Executive Center |       | Ft.  Washington, PA   |       | February 2004            |       |              | 393,000    | * *               |       |                                         | 97.5       | %(5) |   |   | 52,664 | * * |   |
| West Germantown Pike             |       | Plymouth  Meeting, PA |       | February 2004            |       |              | 115,000    | * *               |       |                                         | 98.1       | %(5) |   |   | 20,500 | * * |   |
| One Northbrook                   |       | Trevose,  PA          |       | February 2004            |       |              | 95,000     | * *               |       |                                         | 100.0      | %(3) |   |   | 16,900 | * * |   |
| Total Commercial Properties      |       |                  |       |                          |       |              | 3,660,000  | * *               |       |                                         |       |   |   |   | $ | 405,937 | * * |   |
| *Residential Property*           | * *   | * *              | * *   | * *                      | * *   |              | * *   | * *               |       |                                         | * *   |   |   |   | * * | * * |   |
| Huntington at Sundance           |       | Lakeland,  FL         |       | September 2006           |       |              | 292 units  | * *               |       |                                         | 100.0      | % |   |   | $ | 24,650 | * * |   |
| *Development Projects*           | * *   | * *              | * *   | * *                      | * *   |              | * *   | * *               |       |                                         | * *   | * * |   |   | * * | * * |   |
| Holliday                         |       | Baltimore,  MD        |       | November 2006            |       |              | (6         | )                      |       |                                         | 51.0       | *%* |   |   | $ | 4,541 | (4) |   |
| Guilford                         |       | Baltimore,  MD        |       | April 2006               |       |              | (6         | )                      |       |                                         | 51.0       | *%* |   |   | 6,231 | (4) |   |
| Red Mill Pond                    |       | Lewes,  DE            |       | May 2005                 |       |              | 541 lots   | * *               |       |                                         | 51.0       | *%* |   |   | 37,990 | * * |   |
| Symphony House                   |       | Philadelphia,  PA     |       | May 2005                 |       |              | 163 units  | * *               |       |                                         | 22.3       | *%* |   |   | 5,029 | (4) |   |
| Venice Lofts                     |       | Philadelphia,  PA     |       | May 2005                 |       |              | 128 units  | * *               |       |                                         | 22.3       | *%* |   |   | 2,971 | (4) |   |
| Crisfield                        |       | Crisfield,  MD        |       | March 2005               |       |              | 232 lots   | * *               |       |                                         | 51.0       | *%* |   |   | 10,250 | * * |   |
| Seaside                          |       | Ocean  City, MD       |       | November 2004            |       |              | 138 lots   | * *               |       |                                         | 51.0       | *%* |   |   | 25,000 | * * |   |
| 400 S Philadelphia Ave           |       | Ocean  City, MD       |       | September 2004           |       |              | 20 units   | * *               |       |                                         | 51.0       | *%* |   |   | 2,000 | * * |   |
| 146th Street                     |       | Ocean  City, MD       |       | August 2004              |       |              | 18 units   | * *               |       |                                         | 51.0       | *%* |   |   | 1,726 | * * |   |
| Golfview                         |       | St.  Petersburg, FL   |       | April 2004               |       |              | 139 units  | * *               |       |                                         | 50.0       | *%* |   |   | 10,800 | * * |   |
| 640 N Broad Street               |       | Philadelphia,  PA     |       | January 2004             |       |              | 266 units  | * *               |       |                                         | 86.5       | *%* |   |   | 9,050 | * * |   |
| Total Development  Projects      |       |                  |       |                          |       |              |       | * *               |       |                                         |       | * * |   |   | $ | 115,588 | * * |   |

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(1)             Sizerepresents square feet unless noted otherwise. For development projects, sizerepresents the anticipated size of the project following development.

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

(2)             Unlessnoted otherwise, amounts represent the gross purchase price for commercial andresidential properties and the initial acquisition price for developmentproperties, which are included in the consolidated financial statements.

(3)             Wehave entered into asset supervision agreements with a third party forproperties located in Pennsylvania and with an associate for properties locatedin Texas, that entitles these parties to 20% of cash available from operationsafter we have received a cumulative annual 12% return on our investment in theproperty, and 20% of cash available from a refinancing or sale of the propertyafter we have received a full return of our investment along with a cumulativeannual 12% return on our investment.

(4)             Amountrepresents our initial investment in an unconsolidated entity.

(5)             Anunrelated third party owns a Class B membership interest in the jointventure that entitles him to 15% of cash available from operations after theClass A members have received a cumulative annual 12% return on theirinvestment in the property and 15% of cash available from a refinancing or saleof the property after the Class A members have received a full return oftheir investment along with a cumulative annual 12% return on their investment.

(6)             The type ofdevelopment and size of the project has yet to be determined.

*COMMERCIAL PROPERTYACQUISITIONS*

**950Threadneedle.****  ****In December 2006, we acquired a59,000 square foot commercial office building in Houston, Texas for $5,250,000.In February, 2007 we placed a ten-year $4,300,000 mortgage on the propertywhich bears a fixed interest rate of 5.75%. Interest-only payments are due during the first five years of theloan term.**

**CommercePark North.****  ****In July 2006, we acquired acommercial property consisting of two office buildings containing 164,000square feet in Houston, Texas for $11,750,000. In connection with theacquisition, we placed a ten-year $9,400,000 mortgage on the property which bearsa fixed interest rate of 6.14%.**

**510Township Road**   InJune 2006, we acquired an 87,000 square foot office building located inPlymouth Meeting, Pennsylvania for $13,500,000. In connection with theacquisition, we placed a three-year, variable rate $12,160,000 mortgage loan onthe building, $10,760,000 of which was drawn down at the time of acquisitionwith the remainder available to fund future capital improvements, tenantimprovements and lease commissions. The loan bears interest at one-month LIBORplus 200 basis points and has a one-year extension option providing certaindebt covenant requirements are met.

**8700Commerce Drive  **In June 2006, we acquired a77,000 square foot commercial office building in Houston, Texas for a purchaseprice of $4,979,000. In connection with the acquisition we assumed theremaining balance of $3,836,000 on the existing mortgage loan on the buildingwith a fixed interest rate of 5.24% and due in October 2015. We recorded adiscount of $355,000 associated with the assumed debt.

**9950Westpark  **In May 2006, we acquired an111,000 square foot commercial office building in Houston, Texas for a purchaseprice of $7,818,000. In connection with the acquisition we placed a ten-year $6,375,000mortgage loan on the buildings, which bears a fixed interest rate of  6.37%.

**ValleySquare  **In April 2006, we purchased ValleySquare Office Park, consisting of five commercial office buildings containing atotal of 294,000 square feet of space, for a total purchase price of$42,500,000. The office park is located in Plymouth Meeting, Pennsylvania,adjacent to 510 Township Road. We placed a ten-year $37,500,000 mortgage loanon the buildings, which bears a fixed interest rate of  6.30%.

**1717Portway Plaza  **In April 2006, we acquired a67,000 square foot commercial office building in Houston, Texas for a purchaseprice of $4,858,000. In connection with the acquisition we assumed theremaining balance of $2,738,000 on the existing mortgage loan on the buildingwith a fixed interest rate of 5.75% and due in March 2013. We recorded adiscount of $156,000 associated with the assumed debt.

**MearnsPark  **In March 2006, we acquired a propertylocated in Warminster, Pennsylvania containing 230,000 square feet of industrialspace, 70,000 square feet of commercial office space and five acres of  land. The purchase price of the property was$19,000,000. In connection with the acquisition, we assumed a mortgage loanwith an outstanding principal balance of $11,547,000, a fixed interest rate of5.82% and maturing in 2013. In September 2006, we defeased the loan andplaced a $16,500,000 10-year mortgage loan on the property which bears afixed interest rate of 6.17%. (See Note 8)

**1120NASA Road****  **InMarch 2006, we acquired an 80,000 square foot commercial office buildinglocated in Houston, Texas for a purchase price of $6,642,000. In connectionwith the acquisition, we assumed a mortgage loan with an outstanding 

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

principal balance of $5,260,000, maturing in 2015. Theloan bears a fixed interest rate of 5.41%. We recorded a discount of $454,000associated with the assumed debt.

**1110NASA Road  **In March 2006, we acquired a60,000 square foot commercial office building located in Houston, Texas for a purchaseprice of $4,978,000. In connection with the acquisition, we assumed a mortgageloan with an outstanding principal balance of $3,446,000, maturing in 2014. Theloan bears a fixed interest rate of 5.55%. We recorded a discount of $253,000associated with the assumed debt.

**1100NASA Road  **In February 2006, we acquired a57,000 square foot commercial office building located in Houston, Texas for apurchase price of $4,502,000. In connection with the acquisition, we assumed amortgage loan with an outstanding principal balance of $2,864,000, maturing in2012. The loan bears a fixed interest rate of 6.12%. We recorded a discount of$73,000 associated with the assumed debt.

**17043-49El Camino  **In January 2006, we acquired fourcommercial office buildings containing a total of 82,000 square feet of officespace located in Houston, Texas for a purchase price of $6,052,000. We placed aten-year $5,075,000 mortgage loan on the buildings bearing a fixed interestrate of 5.78%.

**10333Harwin Drive  **In January 2006, we acquired a148,000 square foot commercial office building located in Houston, Texas for apurchase price of $12,585,000. We placed a ten-year $10,640,000 mortgage loanon the building bearing a fixed interest rate of 5.78%.

**BlueBell Plaza  **In January 2006, we acquired anoffice complex located in Plymouth Meeting, Pennsylvania, adjacent to ValleySquare, containing two commercial office buildings totaling 155,000 square feetof office space. The total purchase price of the buildings was $32,000,000. Weplaced a ten-year $29,800,000 mortgage loan on the buildings bearing a fixedinterest rate of 5.65%.

**Wynwood**   InJune 2005, we acquired two commercial office buildings containing a totalof 88,000 square feet of office space, located in Chantilly, Virginia, for apurchase price of $13,000,000. In January 2006 we placed a ten-year$11,800,000 mortgage loan on the buildings bearing a fixed interest rate of5.62%. Interest only payments are due during the first two years of the loanterm.

**919Market Street**   In April 2005, we acquired a223,000 square foot commercial office building located in Wilmington, Delawarefor $40,525,000. We assumed a 5.89% fixed-rate $22,498,000 mortgage loan on thebuilding which matures in 2033. In November 2005 we defeased this loan andplaced a $35,600,000 mortgage loan on the property, bearing a fixed rate ofinterest of 5.52% and maturing in 2015. Interest-only payments are dueduring the first three years of the loan.

**CrossKeys**   In April 2005, we acquired an 82,000square foot commercial office building located in Doylestown, Pennsylvania for$17,792,000. In connection with the acquisition, we assumed a $10,969,000 5.45%fixed-rate mortgage loan on the building, which matures in 2013 and recorded adebt discount of $528,000. In July 2006 we defeased this loan and placed aten-year $14,500,000 mortgage loan on the property bearing a fixed rate of  interest of 6.33%. (See Note 8) Interest-onlypayments are due during the first three years of the loan term.

**102Pickering Way**   In April 2005, we acquired an80,000 square foot commercial office building located in Exton, Pennsylvaniafor $15,275,000. In connection with the acquisition, we assumed a 6.5%fixed-rate mortgage loan for $10,149,000, which matures in 2013 and recorded adebt premium of $692,000.

**1105Market Street**   In February 2005, we acquireda 173,000 square foot commercial office building located in Wilmington,Delaware, for a purchase price of $20,700,000. At the time of purchase, weplaced a two-year $19,000,000 mortgage loan bearing interest at one-month LIBORplus 195 basis points that we guaranteed. In February 2007 we sold theproperty for $18,500,000. (See Note 20)

**DevonSquare**   In February 2005, we invested$2,667,000 for a 50% ownership interest in Devon Square which consists of twocommercial office buildings containing a total of 140,000 square feet of officespace in Devon, Pennsylvania through a tenant-in-common (“TIC”) agreement. Thepurchase price of the buildings was $17,109,000. A $21,350,000 acquisition anddevelopment loan at one-month LIBOR plus 170 basis points, maturing inAugust 2007, was obtained, which we guaranteed. We recorded a $78,000liability related to the loan guaranty. In September 2005, we sold 89% ofour 50% 

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

interest in the TIC to our third party joint venturemember for $2,496,000 and recognized a $140,000 gain on the sale. We accountfor our investment in Devon Square using the equity method.

**HistoricBaltimore Portfolio**   In November 2004 weinvested $4,500,000 for a 51% interest in a joint venture that purchased aportfolio of eight historic commercial office buildings located in the centralbusiness district of Baltimore, Maryland containing a total of 530,000 squarefeet of office space. The purchase price for the eight buildings was$29,500,000. The joint venture obtained a $15,000,000 loan on seven of thebuildings bearing interest at one-month LIBOR plus 175 basis points andmaturing in November 2006 and assumed an $8,470,000 loan on one of thebuildings bearing interest at 5.95% and maturing in October 2012. In 2005four of the buildings were sold and in 2006 the remaining four buildings weresold. We recognized pre-tax gains totaling $3,541,000, net of our partner’s share of the gain on the sale of theproperties.

**FortWashington Executive Center**   InFebruary 2004, we invested $7,000,000 for a 96.5% Class A interest ina joint venture that acquired an executive center located in Fort Washington,Pennsylvania for $52,664,000, consisting of three commercial buildingscontaining a total of 393,000 square feet of office space. In connection withthe acquisition, the joint venture placed two 10 year, 5.6% fixed-rate,mortgage loans aggregating $49,000,000 on the buildings. In June 2005, weacquired one of our equity partner’s interests, thereby increasing our equityinterest to 97.5% (see Other Significant Transactions below).

**WestGermantown Pike**   In February 2004, weinvested $4,875,000 for a 97.5% Class A interest in a joint venture thatacquired two commercial office buildings aggregating 115,000 square feet,located in Plymouth Meeting, Pennsylvania for $20,500,000. The buildings wereacquired subject to a 5.9% fixed-rate $16,246,000 mortgage loan maturing in2013. In June 2005, we acquired one of our entity partner’s interests, therebyincreasing our entity interest to 98.1% (see Other Significant Transactionsbelow).

**One Northbrook**   InFebruary 2004, we acquired a 95,000 square foot office building located inTrevose, Pennsylvania, for $16,900,000 and placed a 10-year, 5.75% fixed-rate,mortgage loan for $15,300,000 on the property.

*RESIDENTIALAPARTMENT ACQUISITION*

**Huntington at Sundance.****  **In September 2006, we acquired a 292 unitapartment community located in Lakeland, Florida for $**24,650,000. In connection with theacquisition we assumed the remaining balance of $14,482,000 on the existingmortgage loan on the property with a fixed interest rate of 7.28% and due in2039, with prepayment permitted beginning in February 2009. We recorded apremium of $856,000 associated with the assumed debt.**

*DEVELOPMENT PROJECTACQUISITIONS*

**HollidayProperties****  **In November 2006, weformed Holliday Properties Master LLC (“Holliday Properties”) in which we own a51% interest. Holliday Properties was formed for the purpose of acquiring andredeveloping a portion of a city block located in Baltimore, Maryland. We haveagreed to invest up to $5,000,000 to be used for the acquisition anddevelopment of six properties that comprise the city block. ThroughDecember 31 2006 we have invested a total of $5,000,000 in the venture. InFebruary 2007, the venture obtained a three year $9,116,000 acquisitionand development loan which we have guarantied bearing interest at one-month LIBORplus 1.75%. We account for our investment inHolliday Properties using the equity method.

**GuilfordProperties****  **InMay 2006, we formed Guilford Properties Master LLC (“Guilford Properties”)in which we own a 51% interest. Guilford Properties was formed for the purpose ofacquiring and redeveloping a city block located in Baltimore, Maryland. We haveagreed to invest up to $10,000,000 to be used for the acquisition anddevelopment of four properties that comprise the city block. InOctober 2006, the venture obtained a two year $7,480,000 acquisition anddevelopment loan. The loan, which we have fully guarantied, bears interest atthe LIBOR plus 2.10%. At December 31, 2006, $5,883,000 had been drawn downon the loan. Through December 31, 2006 we have invested a total of $6,231,000in the venture. We account for ourinvestment in Guilford Properties using the equity method.

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Red Mill Pond**   InMay 2005, we invested $3,000,000 for a 51% interest in an entity thatpurchased and is developing a residential lot community in Lewes, Delaware tobe sold to a homebuilder. In January 2007, the number of lots was reduced from541 to 520 by reconfiguring their sizes to create larger lots. The respectiveunit sales prices were adjusted in accordance with the increase in land area.The land to be developed was acquired for $37,990,000. To fund the purchase,the entity drew down $24,845,000 on an acquisition and development loan, issuedan $8,115,000 deferred purchase money note, and received a $7,000,000 advancedeposit from the homebuilder. The acquisition and development loan bears interestat the lender’s prime lending rate and matures in May 2008. The deferredpurchase money note bears interest at 6.0% and matures in May 2012.

**B&RPhiladelphia Condo Investors**   In May 2005,we invested $8,000,000 for a 44.5% interest in Philadelphia Condo Investors LP(Philadelphia Condo Investors). The remaining limited partners in PhiladelphiaCondo Investors, including several officers and directors of the Company,contributed a total of $10,000,000 for their equity interests. We haveconsolidated this entity’s assets and liabilities into our consolidatedfinancial statements. Philadelphia Condo Investors has made the following twoinvestments in joint ventures, which it has accounted for under the equitymethod:

*Symphony House*   InMay 2005, Philadelphia Condo Investors invested $11,000,000 for a 50%interest in Symphony House Associates LP (“Symphony House”), an entity that isdeveloping 163 luxury high-rise condominium units, a 35,000 square foottheater, a parking garage and 4,300 square feet of retail space in center cityPhiladelphia, Pennsylvania. Symphony House obtained a $98,100,000 constructionloan at one-month LIBOR, plus 220 basis points, and a $16,900,000 mezzanineconstruction loan at one-month LIBOR plus 1000 basis points. Both loans maturein March 2008. In August 2005, the construction loan cost was reducedby 40 basis points due to a pre-sales target being achieved. We have provided arepayment guaranty for up to $39,240,000 of the construction loan and the fullamount of the mezzanine loan for which we have recorded a liability, which isincluded in Other Liabilities in the Consolidated Balance Sheet, totaling$167,000 at December 31, 2006.

*Venice Lofts*   InMay 2005, Philadelphia Condo Investors invested $6,500,000 for a 50%interest in Venice Lofts Associates LP (“Venice Lofts”), an entity that isdeveloping 38 luxury townhouse and 90 mid-rise condominium units inPhiladelphia, Pennsylvania. In May 2005, Venice Lofts obtained both a$30,000,000 construction loan at one-month LIBOR, plus 225 points, and an$8,500,000 mezzanine loan at a fixed interest rate of 16.25%. Both loans maturein November 2007.

**Crisfield**   InJanuary and March 2005, we invested a total of $2,500,000 for a 51%interest in an entity that owns a parcel of undeveloped land in Crisfield,Maryland that is subdivided into 232 residential lots. The entity is developingthe land as lots to be sold to a homebuilder. The entity purchased the parcelfor $10,250,000, which was funded by a $7,950,000 drawdown on an $11,700,000acquisition and development loan and a $2,300,000 deposit from a homebuilder.The loan bears interest at one month LIBOR plus 200 basis points and matures inJanuary 2008.

**Seaside**   InNovember 2004, we invested $2,500,000 for a 51% interest in an entity thatowns a parcel of undeveloped land in Ocean City, Maryland which is subdividedinto 138 residential lots along with 50 boat slips. The entity is developingthe land as lots to be sold along with the boat slips to a homebuilder. Theentity purchased the parcel of land and boat slips for $25,000,000 which wasfunded by a $16,000,000 acquisition loan, a $2,000,000 drawdown on a $5,500,000construction loan and a $7,000,000 deposit from the homebuilder. Both theacquisition and the construction loan bear interest at the lender’s prime rateand mature in October 2007.

**400S. Philadelphia**   In September 2004, weinvested $2,000,000 for a 51% interest in a joint venture that purchased aparcel of land in Ocean City, Maryland for the purpose of developing 20for-sale residential condominium units. In February 2006, the jointventure obtained a $6,400,000 construction loan. The loan bears interest at thelender’s prime rate plus 100 basis points and matures in August 2007.Development of the units was completed in 2006.

**146****th Street**   In August 2004 weinvested $1,726,000 for a 51% interest in a joint venture that purchased aparcel of land in Ocean City, Maryland for the purpose of developing 18for-sale residential condominium units. In November 2005, prior toperforming any development activity, the joint venture sold the land parcel for$2,550,000 and we recorded a pre-tax gain of $269,000.

**Golfview**   InApril 2004 we invested $3,664,000 for a 50% interest in a joint venturethat purchased a 144 unit mid-rise residential rental complex located in St.Petersburg, Florida, for $10,800,000. The joint venture converted the complexinto 

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

139 residential condominium units. The condominium conversionprocess was completed in 2004 and the joint venture sold all the units in 2004and 2005.

**640 North Broad**   InJanuary 2004 we invested $3,200,000 for an 80% interest in a joint venturethat purchased an historic property in Philadelphia, PA for a purchase price of$9,050,000 to be redeveloped into a 266 unit apartment property building. In2004 the venture obtained a $32,000,000 acquisition and construction loanbearing interest at one-month LIBOR plus 155 basis points and maturing inAugust 2007, and a $6,900,000 construction bridge loan bearing interest atone month LIBOR plus 175 basis points and maturing in September 2007.  In January 2006, we sold our interest in640 North Broad to one of our equity partners for $5,462,000. The purchaser ofour interest obtained the funds from a $6,000,000 loan guarantied by us andsecured in part by a $3,000,000 certificate of deposit that we have purchasedfrom the lender. In connection with the transaction, we recorded a deferredpre-tax gain on sale of $262,000 and a liability associated with the loanguaranty of $300,000.

*DISPOSITIONS*

**7800Building.  **In December 2006 we sold a 15,000square foot commercial office building for $3,200,000, receiving net proceedsof $3,097,000 and recognizing a pre-tax gain on sale of $1,998,000.

**CharlestownNorth  **In October 2006, we sold theCharlestown North residential apartment building for $18,000,000, receiving netproceeds of $12,166,000 after the repayment of the related debt and recorded apre-tax gain on sale of approximately $13,988,000.

**Washington Business Park  **InOctober 2006 we sold our interest in a consolidated entity that owns two officeand seven flex and warehouse buildings (“Developed Properties”) at WashingtonBusiness Park and our interest in an unconsolidated entity that owns 50 acresof undeveloped land (“Undeveloped Land”) in the same office park, to ourpartner in the joint ventures, for $22,800,000. As a result of the sales wereceived $17,800,000 in cash along with a $5,000,000 promissory note with athree-year maturity, bearing interest at 10%. We recorded a $5,174,000 pre-taxgain related to the sale of the Developed Properties and a $4,910,000 pre-taxgain related to the sale of the Undeveloped Land with such amounts included in discontinuedoperations, net of tax and minority interest, and gain on sale of investmentsin joint ventures, respectively, in the accompanying consolidated financialstatements.

**DivineLorraine****  **In****May 2006, we sold the Divine Lorraine property and theadjacent ground for a total of $10,100,000 receiving $3,219,000 in net proceedsafter the repayment of the related debt and recognizing a pre-tax gain on saleof $1,751,000.

**1925K Street****  **InApril 2006, we sold our interest in 1925K Street Associates, LLC for$26,000,000. We received $25,749,000 in net cash proceeds from the sale andrecognized a pre-tax gain on sale of $18,285,000, which is included in the gainon sale of investments in joint ventures in our consolidated statements ofoperations.

**EGAP****  **In December 2004, we sold to two unaffiliatedthird parties five commercial properties that were leased to convenience storeoperators for a total sales price of $1,474,000. We received $564,000 in cashalong with promissory notes totaling $910,000, of which $740,000 were repaid byDecember 31, 2006. We recorded a $958,000 pre-tax gain related to thesales.

**Third Street**   InOctober 2004, Third Street, in which we own a 1% interest, sold itsinterests in two residential buildings located in Washington DC, to anunaffiliated third party for $10,600,000. A total of $8,400,000 of the netproceeds received by Third Street was used to pay in full notes and advancesmade by us to Third Street, together with accrued interest thereon. For theyear ended December 31, 2004, we recognized $2,400,000 of  pre-tax income on the repayment of amountsthat had been subject to uncollectibility allowances and the recognition of apreviously deferred gain on sale.

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*OTHER SIGNIFICANTTRANSACTIONS*

**Waterfront Associates**

InNovember 2006, Waterfront Associates LLC (“WALLC”) a joint venture betweenB&R Waterfront Properties LLC (“BRW”) a 54% owned subsidiary of ours andK/FCE, an unrelated property entered into a Land Disposition and DevelopmentAgreement (“LDDA”) with the lessor under the ground lease at the WaterfrontComplex, the RLA Revitalization Corporation (“RLARC”). Based on the LDDA, theexisting ground lease, which expires in 2078, will be extinguished and a feesimple ownership interest will be conveyed to WALLC. In return, RLARC willretain fee simple ownership in a portion of the site that is sufficient todevelop a 400,000 square foot mixed-use residential building. Based on theagreement, which is subject to several contingencies including obtaining thenecessary Planned Unit Development approvals, WALLC has committed to develop2,165,500 square feet of commercial office, retail and residential space at theWaterfront Complex.

InNovember 2006, WALLC entered into two lease agreements with agencies ofthe District of Columbia for the lease of a total of 500,000 square feet ofoffice space in two new commercial office buildings to be constructed by WALLCat the Waterfront  Complex. The leases,which are subject to several approval and development contingencies, have 15year terms and include rental payments of $28.40 per square foot on a triple-netbasis. Development of the office buildings is anticipated to commence in 2007.

InNovember 2006 WALLC entered into a contract for the removal of hazardousmaterial at the Waterfront Complex. Based on the terms of contract, the cost toremediate hazardous materials, for which BRW had established a $3,000,000reserve in 2002, totals $1,298,000.  As aresult, BRW recorded a $1,702,000 reduction in the reserve. The amount isincluded in other income with an offset of $783,000 in minority interest expensein the consolidated statement of operations for the year endedDecember 31, 2006.

**Midlantic OfficeTrust, Inc.****  **InMay 2005, Midlantic Office Trust, Inc. (“Midlantic”) filed aregistration statement with the Securities Exchange Commission for its initialcommon stock public offering (“IPO”). We participated as a sponsor for theMidlantic offering, and in July 2005, agreed to sell it certain commercialproperties. In August 2005, Midlantic determined not to proceed with itsIPO, due to market conditions. As a result, our agreements with Midlantic werecancelled. We incurred $3,312,000 in expenses related to this transaction.

**Purchase and sale of equity investments**   InJune 2005, we acquired one of our equity partner’s interests in theentities that own the Fort Washington, West Germantown Pike and 900 Northbrookproperties for a total consideration of $1,175,000. Funding of the purchase wasprovided by the sale to such equity partner of our interest in the CigarFactory residential condominium project valued at $800,000, the cancellation ofa promissory note receivable from such equity partner with a principal balanceoutstanding of $300,000 and the assumption of a $75,000 note payable of suchequity partner. As a result of the transaction, we recorded an increase in thecarrying amount of the Fort Washington, West Germantown Pike and 900 Northbrookproperties totaling $1,034,000 and a decrease in minority interest liability of$66,000.

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*PRO-FORMA RESULTS OFOPERATIONS—UNAUDITED*

The following pro-forma statements reflect our resultsof operations as if our acquisitions completed in 2006, which are in theaggregate material, had occurred on the first day of the periods presented (inthousands, except earnings per common share amounts):

| ** **                               | ** ** | **Pro Forma **(1)             | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **Years Ended  December 31,** | ** ** |
| ** **                               | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Operating revenues                       |       | $                                       | 112,733    |   | $ | 130,484 |   |
| Net income (loss)                        |       | 14,309                                  |       | (6,590 | ) |
| Income (loss) per share  of common stock |       | 2.61                                    |       | (1.20 | ) |
|                                          |            |                                         |            |  |  |  |  |

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(1)             Thepro-forma results have been prepared for comparative purposes only and do notpurport to be indicative of the results of operations which would have actuallyresulted had the acquisitions been effective on the first day of the periods presented.

**4.   RENTAL PROPERTY AND EQUIPMENT (in thousands):**

| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                                                |       | $                     | 84,061     |   | $ | 41,300 |   |
| Buildings and improvements                          |       | 409,706               |       | 262,068 |   |
| Equipment                                           |       | 23,482                |       | 9,168 |   |
|                                                |       | 517,249               |       | 312,536 |   |
| Less—Accumulated depreciation and amortization |       | (43,246               | )          | (28,744 | ) |
| Rental property and equipment, net                  |       | $                     | 474,003    |   | $ | 283,792 |   |

 

**5.   MORTGAGE AND NOTES RECEIVABLES (inthousands):**

| ** **            | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Notes receivable:     |       |                  |       |   |   |
| 10% due 2008          |       | $                     | 5,000      |   | $ | — |   |
| 8.5% due 2006         |       | —                |       | 585 |   |
| 7.0% due through 2015 |       | 138                   |       | 149 |   |
| Other                 |       | 300                   |       | 100 |   |
|                  |       | $                     | 5,438      |   | $ | 834 |   |

 

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6.   OTHERASSETS AND OTHER LIABILITIES**

In recording our acquisitions of rental properties, wehave established intangible assets and intangible liabilities. The followingtable summarizes these intangible assets and liabilities as of the datespresented (in thousands):

| ** **                           | ** ** | **December 31,**           | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Acquired in-place  lease assets      |       |                            | $          | 46,372 |   |   |   | $ | 20,554 |   |   |   | $ | 28,340 |   |   |   | $ | 8,785 |   |   |
| Acquired in-place  lease liabilities |       |                            | 14,897     |   |   |   | 4,906 |   |   |   | 6,295 |   |   |   | 1,955 |   |   |

 

The amortization of acquired lease assets included indepreciation and amortization expense, totaled $10,787,000 and $5,176,000 forthe years ended December 31, 2006 and 2005, respectively.

The amortization of acquired below-market-in-placeleases, included as a net increase in revenues, totaled $1,968,000 and $840,000for the years ended December 31, 2006 and 2005, respectively.

The estimated annualamortization of acquired in-place lease liabilities, to be included as a netincrease in revenues for each of the five succeeding years is as follows (inthousands):

| 2007 |   | $     | 2,059  |   |
|------|--------|-------|--------|--------|
| 2008 |   | 1,758 |   |
| 2009 |   | 1,562 |   |
| 2010 |   | 938   |   |
| 2011 |   | 608   |   |

 

The estimated annualamortization of acquired in-place lease assets to be included in amortizationexpense for each of the five succeeding years is as follows (in thousands):

| 2007 |   | $     | 8,370  |   |
|------|--------|-------|--------|--------|
| 2008 |   | 5,517 |   |
| 2009 |   | 3,560 |   |
| 2010 |   | 2,142 |   |
| 2011 |   | 1,556 |   |

 

**7.   INVESTMENTSIN JOINT VENTURES**

AtDecember 31, 2006, our investments in non-consolidated joint ventures andpartnerships consisted of the following:

| **Joint Venture**                                               | ** ** | ** ** | ** ** | **Ownership  Percentage **(1) | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|
| Guilford  Properties                                                 |       |       | 51%        |                               |       |
| Holliday  Properties                                                 |       |       | 51%        |                               |       |
| Redwood  Commercial Management, LLC (“Redwood Commercial”) |       |       | 50%        |                               |       |
| Tech-High  Leasing Company (“Tech-High Leasing”)           |       |       | 50%        |                               |       |
| Selborne House at  St. Marks Owner, LLC (“Arbor Crest”)    |       |       | 33%        |                               |       |
| Madison Building  Associates, LLC (“Madison Building”)     |       |       | 25%        |                               |       |
| Venice Lofts                                                         |       |       | 22%        |                               |       |
| Symphony House                                                       |       |       | 22%        |                               |       |
| B&R Devon Square  Owner, LP (“Devon Square”)           |       |       | 6%         |                               |       |

----

(1)             Representsour effective ownership of the underlying property.

F-21

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Beloware condensed combined balance sheets for our unconsolidated joint venture entitiesas of December 31, 2006 and 2005 (in thousands):

| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                           |       |                  |       |   |   |
| Cash and cash  equivalents                           |       | $                     | 3,138      |   | $ | 3,523 |   |
| Land held for  investment                            |       | —                |       | 5,929 |   |
| Property and land  development                       |       | 141,601               |       | 42,359 |   |
| Rental property  and equipment                       |       | 39,588                |       | 68,766 |   |
| Other assets                                         |       | 4,391                 |       | 4,772 |   |
| Total assets                                         |       | $                     | 188,718    |   | $ | 125,349 |   |
| **LIABILITIES  AND MEMBERS’ EQUITY**            |       |                  |       |   |   |
| Mortgages and construction  loans and other debt     |       | $                     | 137,677    |   | $ | 80,070 |   |
| Other liabilities                                    |       | 18,498                |       | 9,284 |   |
| Total liabilities                                    |       | 156,175               |       | 89,354 |   |
| Members’ equity                                 |       | 32,543                |       | 35,995 |   |
| Total liabilities and members’ equity           |       | $                     | 188,718    |   | $ | 125,349 |   |
| Company’s interest in  members’ equity (1) |       | $                     | 29,366     |   | $ | 29,063 |   |

----

(1)             Includedin Company’s interest in members’ equity on the consolidated balance sheets is$2,202,000 and $1,247,000 at December 31, 2006 and 2005 respectively, ofequity from the trust preferred securities disclosed in Note 8.

The difference between the carrying amount of ourinvestment in joint ventures and our accumulated membership interest notedabove is primarily due to capitalized interest on our investment balance injoint ventures that own real estate under development and the fair value ofloan guaranties we have provided. The capitalized interest is expensed as thedevelopment units are sold.

Beloware condensed combined statements of operations for our unconsolidated jointventure entities for the periods indicated (in thousands):

| ** **                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  revenues                                                     |       | $                                           | 11,207     |   | $ | 12,194 |   | $ | 23,397 |   |
| Operating  expenses                                                     |       | 5,893                                       |       | 5,776 |   | 8,132 |   |
| Interest expense                                                        |       | 2,773                                       |       | 3,130 |   | 2,511 |   |
| Depreciation and  amortization expense                                  |       | 1,920                                       |       | 2,482 |   | 2,112 |   |
| Net income                                                              |       | $                                           | 621        |   | $ | 806 |   | $ | 10,642 |   |
| Company’s equity in  earnings of unconsolidated joint ventures (2) |       | $                                           | 996        |   | $ | 793 |   | $ | 1,360 |   |

----

(2)             Includedin Company’s equity in earnings of unconsolidated joint ventures on the consolidatedincome statements is $155,000 and $9,000 for the years ended December 31,2006 and 2005 respectively, of equity in earnings from the trust preferredsecurity disclosed in Note 8.

F-22

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8.   MORTGAGE ANDCONSTRUCTION LOANS AND OTHER DEBT (in thousands):**

| ** **                                                                                                             | ** ** | ** **                                                    | ** ** | ** **                      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|
| **Property (1)**                                                                                                  | ** ** | ** **                                                    | ** ** | **Interest Rate (2)** | ** ** | **Maturity**          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Fort Washington                                                                                                        |       | 5.60%                                                         |       |                            | 2014       |                  |       | $47,249 |   | $47,921 |   |
| The Fountains at Waterford Lakes                                                                                       |       | 5.45%                                                         |       |                            | 2010       |                  |       | 39,500 |   | 39,500 |   |
| Valley Square                                                                                                          |       | 6.30%                                                         |       |                            | 2016       |                  |       | 37,500 |   | — |   |
| 919 Market Street                                                                                                      |       | 5.52%                                                         |       |                            | 2015       |                  |       | 35,600 |   | 35,600 |   |
| Victoria Place Apartments                                                                                              |       | 4.72%                                                         |       |                            | 2013       |                  |       | 32,341 |   | 32,907 |   |
| Blue Bell Plaza                                                                                                        |       | 5.65%                                                         |       |                            | 2016       |                  |       | 29,800 |   | — |   |
| Red Mill Pond—Development Loans                                                                                   |       | Lender’s Prime                                           |       |                            | 2008       |                  |       | 24,488 |   | 27,279 |   |
| Red Mill Pond—Promissory Note                                                                                     |       | 6.0%                                                          |       |                            | 2012       |                  |       | 8,115 |   | 8,115 |   |
| Versar Center                                                                                                          |       | 6.18%                                                         |       |                            | 2013       |                  |       | 17,626 |   | 17,869 |   |
| Sudley N. Bldgs A, B, C, D and Bank Bldg.                                                                         |       | 7.47%                                                         |       |                            | 2012       |                  |       | 17,222 |   | 17,416 |   |
| Mearns Park (3)                                                                                                        |       | 6.17%                                                         |       |                            | 2016       |                  |       | 16,500 |   | — |   |
| West Germantown Pike                                                                                                   |       | 5.90%                                                         |       |                            | 2033       |                  |       | 15,626 |   | 15,852 |   |
| One Northbrook                                                                                                         |       | 5.75%                                                         |       |                            | 2014       |                  |       | 14,770 |   | 14,973 |   |
| Cross Keys (3)(4)                                                                                                      |       | 6.33%                                                         |       |                            | 2016       |                  |       | 14,500 |   | 10,855 |   |
| Huntington at Sundance (4)                                                                                             |       | 7.28%                                                         |       |                            | 2039       |                  |       | 14,454 |   | — |   |
| Seaside                                                                                                                |       | Lender’s Prime Rate                                      |       |                            | 2007       |                  |       | 12,813 |   | 17,484 |   |
| Wynwood                                                                                                                |       | 5.62%                                                         |       |                            | 2016       |                  |       | 11,800 |   | — |   |
| Crisfield                                                                                                              |       | LIBOR + 200  basis pts.                             |       |                            | 2008       |                  |       | 11,700 |   | 9,867 |   |
| 900 Northbrook                                                                                                         |       | 5.98%                                                         |       |                            | 2013       |                  |       | 10,792 |   | 10,937 |   |
| 510 Township Road                                                                                                      |       | LIBOR + 200 basis pts.                                        |       |                            | 2009       |                  |       | 10,760 |   | — |   |
| 10333 Harwin Drive                                                                                                     |       | 5.78%                                                         |       |                            | 2016       |                  |       | 10,532 |   | — |   |
| 102 Pickering Way (4)                                                                                                  |       | 6.50%                                                         |       |                            | 2013       |                  |       | 9,940 |   | 10,069 |   |
| Commerce Park North                                                                                                    |       | 6.14%                                                         |       |                            | 2016       |                  |       | 9,400 |   | — |   |
| 400 South Philadelphia Avenue                                                                                          |       | Lender’s Prime + 100 basis pts. |       |                            | 2007       |                  |       | 6,400 |   | — |   |
| 9950 Westpark                                                                                                          |       | 6.37%                                                         |       |                            | 2016       |                  |       | 6,342 |   | — |   |
| Fort Hill                                                                                                              |       | 7.70%                                                         |       |                            | 2011       |                  |       | 5,428 |   | 5,493 |   |
| 1120 NASA Parkway (4)                                                                                                  |       | 5.41%                                                         |       |                            | 2015       |                  |       | 5,208 |   | — |   |
| 17043-49 El Camino                                                                                                     |       | 5.78%                                                         |       |                            | 2016       |                  |       | 5,024 |   | — |   |
| 1150 Northbrook Development                                                                                            |       | LIBOR + 170 basis pts.                                        |       |                            | 2009       |                  |       | 4,103 |   | — |   |
| 8700 Commerce Drive (4)                                                                                                |       | 5.24%                                                         |       |                            | 2015       |                  |       | 3,809 |   | — |   |
| Holiday Inn Express                                                                                                    |       | 7.88%                                                         |       |                            | 2011       |                  |       | 3,500 |   | 3,566 |   |
| 1110 NASA Parkway (4)                                                                                                  |       | 5.55%                                                         |       |                            | 2014       |                  |       | 3,408 |   | — |   |
| Sudley South Building No. III                                                                                     |       | LIBOR + 165 basis pts.                                        |       |                            | 2008       |                  |       | 2,855 |   | — |   |
| Sudley South Building No. I                                                                                       |       | LIBOR + 180  basis pts.                             |       |                            | 2006       |                  |       | — |   | 4,283 |   |
| 1100 NASA Parkway (4)                                                                                                  |       | 6.12%                                                         |       |                            | 2012       |                  |       | 2,830 |   | — |   |
| 1717 Portway Plaza (4)                                                                                                 |       | 5.75%                                                         |       |                            | 2013       |                  |       | 2,711 |   | — |   |
| Laguna Vista                                                                                                           |       | LIBOR + 185  basis pts.                             |       |                            | 2006       |                  |       | — |   | 1,670 |   |
| Total mortgage and  construction loans                                                                                 |       |                                                          |       |                            |       |                  |       | $504,646 |   | $331,656 |   |
| Junior subordinated notes—Series I (unsecured)                                                               |       | 8.37%                                                         |       |                            | 2035       |                  |       | 41,238 |   | 41,238 |   |
| Junior subordinated notes—Series II (unsecured)                                                              |       | 9.02%                                                         |       |                            | 2036       |                  |       | 30,930 |   | — |   |
| Corporate                                                                                                              |       | LIBOR + 250 basis pts.                                        |       |                            | 2009       |                  |       | 4,000 |   | — |   |
| Line of credit (unsecured)                                                                                             |       | LIBOR + 175  basis pts.                             |       |                            | 2007       |                  |       | — |   | 30,406 |   |
| Other                                                                                                                  |       | (5)                                                           |       |                            | (5)        |                  |       | 1,409 |   | 1,709 |   |
| Total  mortgage and construction loans and other debt before debt related to assets held  for sale |       |                                                          |       |                            |       |                  |       | $582,223 |   | $405,009 |   |
| **Debt Related  to Assets Held For Sale**                                                                              |       |                                                          |       |                            |       |                  |       |   |   |   |   |
| 1105 Market Street                                                                                                     |       | LIBOR + 195  basis pts.                             |       |                            | 2007       |                  |       | 19,000 |   | 19,000 |   |
| Inn at the Colonnade                                                                                                   |       | 7.45%                                                         |       |                            | 2011       |                  |       | 9,458 |   | 9,632 |   |
| Washington Business Park (2)                                                                                           |       | 7.63%                                                         |       |                            | 2031       |                  |       | — |   | 38,586 |   |
| Charlestown North                                                                                                      |       | 6.74%                                                         |       |                            | 2012       |                  |       | — |   | 4,816 |   |
| Baltimore Portfolio (1 Building) (4)                                                                                   |       | 5.95%                                                         |       |                            | 2012       |                  |       | — |   | 8,338 |   |
| Baltimore Portfolio (3 Buildings)                                                                                      |       | LIBOR + 175  basis pts.                             |       |                            | 2006       |                  |       | — |   | 8,083 |   |
| 640 North Broad—Construction Loan                                                                                 |       | LIBOR + 155 basis  pts.                        |       |                            | 2007       |                  |       | — |   | 28,651 |   |
| 640 North Broad—Bridge Loan                                                                                       |       | LIBOR + 175  basis pts.                             |       |                            | 2007       |                  |       | — |   | 6,545 |   |
| Total mortgage and construction loans and  other debt and debt related to assets held for sale                    |       |                                                          |       |                            |       |                  |       | $610,681 |   | $528,660 |   |
|                                                                                                                        |            |                                                               |            |                                 |            |                       |            |  |  |  |  |  |  |

----

(1)             Noteis secured by the property, unless otherwise noted.

(2)             LIBORrate is the one-Month LIBOR rate which was 5.35% and 4.39% at December 31,2006 and 2005 respectively.

(3)             Notewas refinanced in 2006. The interest rate and maturity date reflect the termsof the new loan.

                           (4)    The debt shown for these properties does notinclude the related premium or discount.

(5)             Representsa deferred purchase money promissory note.                

F-23

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

We have guarantied the debt of certain consolidatedsubsidiaries. Such guaranties do not increase our consolidated obligations.However, they may under certain conditions provide for accelerated repayments,if requested by the lender.

Several of our loans contain financial covenants. Themost stringent of these covenants require that we maintain a minimum net worthof $130,000,000, a minimum liquidity of $30,000,000, and a minimum annual FundsFrom Operations, as defined by the National Association of Real EstateInvestment Trusts and adjusted for income tax expense on property sales, of$15,000,000. We are in compliance with all our loan covenants atDecember 31, 2006.

Included in mortgages and construction loans and otherdebt on the balance sheets are fair market value adjustments on assumed debt.The net unamortized fair market value premium was $213,000 and $145,000 atDecember 31, 2006 and 2005 respectively.

As part of our construction and developmentactivities, we capitalized $2,234,000 and $1,979,000 of interest for the yearsended December 31, 2006 and 2005 respectively.

Annualcontractual principal payments as of December 31, 2006, are as follows (inthousands):

| 2007                 |   | $42,484  |   |
|----------------------|--------|----------|--------|
| 2008                 |   | 44,274   |   |
| 2009                 |   | 13,933   |   |
| 2010                 |   | 45,690   |   |
| 2011                 |   | 22,826   |   |
| 2012 and  thereafter |   | 441,474  |   |
| Total                |   | $610,681 |   |

 

*LOAN DEFEASANCES*

In 2006 and 2005 we defeased four mortgage loanscollateralized by our properties by purchasing US Treasury Securities(“Securities”). These Securities, whose cash flow is structured to match theprincipal and interest payments due under the respective mortgage notes, wereplaced in trusts for the sole purpose of funding these payments under themortgage notes. Since the transactions were structured as legal defeasances, inaccordance with SFAS No. 140,*****Accounting for Transfers on Servicing****of Financial Assets and Liabilities,*themortgage notes payable were accounted for as having been extinguished. Followingis a description of the mortgage loans that were defeased:

In September 2006 we defeased the $11,468,000loan collateralized by Mearns Park by purchasing $12,322,000, of Securities.Since the defeasance was completed as part of the asset purchase, we haveincluded the difference between the cost of the Securities purchased and thecarrying amount of the mortgage notes extinguished in rental property andequipment in the accompanying consolidated balance sheets. Simultaneous withthe defeasance we placed a new $16,500,000 10-year mortgage loan on theproperty bearing a fixed rate of interest of 6.17%.

In July 2006 we defeased the $10,759,000 mortgageloan collateralized by Cross Keys by purchasing $11,240,000 of Securities. Wehave recorded the difference between the cost of the Securities purchased andthe carrying amount of the mortgage notes extinguished, along with thewrite-off of unamortized deferred financing costs, totaling $1,047,000 as debtextinguishment costs in the accompanying consolidated statements of operations.Simultaneous with the defeasance we placed a $14,500,000 10-year mortgageloan on the property bearing a fixed rate of interest of 6.33%.

In November 2005 we defeased the $22,329,000mortgage loan collateralized by 919 Market Street by purchasing $24,024,000 of Securities.We have recorded the difference between the cost of the Securities purchasedand the carrying amount of the mortgage notes extinguished, along with thewrite-off of unamortized deferred financing costs, totaling $2,046,000 as debtextinguishment costs in the accompanying consolidated statements of operations.Simultaneous with the defeasance we placed a $35,600,000, 10-yearmortgage loan on the property bearing a fixed rate of interest of 5.52%.

In September 2005 we defeased the $24,600,000mortgage loan collateralized by The Fountains by purchasing $25,408,000 of Securities.We have recorded the difference between the cost of the Securities purchasedand the carrying amount of the mortgage notes extinguished, along with thewrite-off of unamortized deferred financing costs, totaling $865,000 as debtextinguishment costs in the accompanying consolidated statements of operations.

F-24

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Simultaneous with thedefeasance we placed a $39,500,000, 10-year mortgage loan on the propertybearing a fixed rate of interest of 5.45%.

*UNSECURED JUNIORSUBORDINATED NOTES AND TRUST PREFERRED SECURITIES*

On November 29, 2005, Bresler & Reiner,Statutory Trust I, (“Trust I”) a wholly owned subsidiary of the Company,completed the issuance and sale in a private placement of $40,000,000 inaggregate principal amount of trust preferred securities. Trust Isimultaneously issued $1,238,000 in aggregate principal amount of commonsecurities to the Company. Both the preferred securities and the commonsecurities (together the “Capital Securities I”), mature on January 30,2036 and may be redeemed by Trust I at any time on or after January 30,2011. The Capital Securities I require quarterly distributions payable at afixed rate equal to 8.37% per annum until January 30, 2011 and at a floatingrate equal to three-month LIBOR plus 350 basis points per annumthereafter. Trust I used the proceeds from the sale of the Capital Securities Ito purchase $41,238,000 in aggregate principal amount of unsecured juniorsubordinated debentures due January 30, 2036 issued by the Company (the“Debentures I”). The payment terms of the Debentures I are substantially thesame as the terms of the Capital Securities I.

In May 2006, Bresler & Reiner, StatutoryTrust II, (“Trust II”) our wholly owned subsidiary, completed the issuance andsale in a private placement of $30,000,000 in aggregate principal amount oftrust preferred securities. Trust II simultaneously issued $930,000 inaggregate principal amount of common securities to us. Both the preferredsecurities and the common securities (together the “Capital Securities II”),mature in May 2036 and may be redeemed by the Trust II at any time on orafter July 30, 2011. The Capital Securities II require quarterlydistributions payable at a fixed rate equal to 9.02% per annum untilJuly 31, 2011 and at a floating rate equal to three-month LIBOR plus 350basis points per annum thereafter. Trust II used the proceeds from the sale ofthe Capital Securities II to purchase $30,930,000 in aggregate principal amountof unsecured junior subordinated debentures (the “Debentures II”) due inMay 2036 issued by us. The payment terms of the Debentures II aresubstantially the same as the terms of the Capital Securities II.

Since we are not theprimary beneficiary of either Trust I or Trust II (“the Trusts”), we haveaccounted for our investment in the Trusts under the equity method inaccordance with FIN 46R. As a result, we have reported in our consolidatedfinancial statements as mortgage and construction loans and other debt, thedebentures issued to the Trusts totaling $72,168,000 and $41,238,000 atDecember 31, 2006 and 2005, respectively, and have included in investmentin and advances to joint ventures the common securities held by the Companytotaling $2,168,000 and $1,238,000 at December 31, 2006 and 2005,respectively. Interest expense under the debentures totaling $5,166,000 and$307,000 for the years ended December 31, 2006 and 2005, respectively, isrecorded as interest expense while our share of earnings of the trust totaling$155,000 and $9,000 for the years ended December 31, 2006 and 2005,respectively, is included in income from investments in joint ventures.

**9.**   LOSSON IMPAIRMENT OF ASSETS

We have reviewed thecarrying value of our rental property and equipment as well as our property andland under development and determined that the expected future cash flows forour Laguna Vista project are not sufficient to recover the recorded carryingamount. In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets,* we recorded animpairment charge of $1,494,000 before income taxes during 2006 to reduce thecarrying amount to the net estimated fair value of the project.

**10.**   DISCONTINUEDOPERATIONS

In December 2006 we sold the 7800 Building for$3,200,000. As a result of the sale we recorded a pre-tax gain on sale of $1,998,000.

In October 2006, we sold the Charlestown Northresidential apartment building for $18,000,000. As a result of the sale werecorded a pre-tax gain on sale of $13,988,000.

In October 2006, we sold our interest in both aconsolidated entity that owns two office and seven flex and warehouse buildingsat Washington Business Park and of our interest in the consolidated entity  that owns 50 acres of undeveloped land in thesame complex for $22,800,000. As a result of the sale we have included indiscontinued operations a pre-tax gain on sale of $5,174,000 related to the saleof our interest in the consolidated entity.

F-25

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In October 2006, we entered into a contract tosell 1105 Market Street for $18,500,000. In accordance with SFAS No. 144,we recorded an impairment charge of $4,807,000 to reduce the asset’s carryingvalue to reflect the sales price as negotiated, net of disposal costs. Theimpairment charge is included in loss from discontinued operations, net of taxand minority interest in our condensed consolidated financial statements.

In May 2006, we sold the Divine Lorraine propertyand the adjacent land for a total of $10,100,000 and recognized a pre-tax gainon sale of $1,751,000.

In 2005 we sold four of the Historic BaltimorePortfolio buildings for $12,651,000 and recorded a pre-tax gain, net ofminority interest of $782,000. In January and May 2006 we sold theremaining four buildings for $18,533,000 and recorded a pre-tax gain, net ofminority interest of $2,500,000.

In January 2006, we sold our interest in 640North Broad to one of our equity partners for $5,462,000 and recorded adeferred pre-tax gain on sale of $262,000.

In November 2005, we sold 146th Street for$2,550,000 and recorded a pre-tax gain on sale of $269,000.

In December 2004, we sold five commercialproperties that were leased to convenience store operators for a total of$1,474,000 and recorded a pre-tax gain on sale of $958,000.

In October 2004, Third Street, in which we own a1% interest, sold its interests in two residential buildings to an unaffiliatedthird party for $10,600,000. A total of $8,400,000 of the net proceeds receivedby Third Street was used to pay in full notes and advances made by us to Third Street,together with accrued interest thereon. We have recognized $818,000 ofpreviously deferred gain on sale, before taxes, in the accompanying consolidatedstatements of operations related to the repayment of the notes.

The followingsummary presents the combined operating results, gains on sale and impairmentof assets of properties we have classified as discontinued operations (inthousands):

| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                      |       | $34,353                                     |       | $27,325 |   | $15,575 |   |
| Loss before gain on sale and provision  for income taxes |       | $(997                                       | )          | $(3,925 | ) | $(329 | ) |
| Gain on sale                                                  |       | 30,413                                      |       | 4,458 |   | 1,874 |   |
| Loss on  impairment of assets                                 |       | (4,807                                      | )          | — |   | — |   |
| Minority interest                                             |       | (4,975                                      | )          | (1,946 | ) | (41 | ) |
| (Provision)  benefit for income taxes                         |       | (7,539                                      | )          | 558 |   | (627 | ) |
| Income (loss)  from discontinued operations                   |       | $12,095                                     |       | $(855 | ) | $877 |   |

 

**11.**   COMMITMENTS ANDCONTINGENCIES

*GUARANTIES*

Together with our joint venture partner, we haveguarantied repayment of up to $39,240,000 under the $98,100,000 primaryconstruction loan for the Symphony House construction project. In addition, wehave guarantied repayment of the full amount outstanding under the $16,900,000mezzanine construction loan for the same project. The guarantied repaymentunder the primary loan was reduced to $24,525,000 in the first quarter of 2006upon the joint venture obtaining in excess of $83,500,000 in sales contractsand will be further reduced to $9,810,000 once net sales proceeds reach 110% ofthe outstanding principal balance of the loan. Both the primary constructionloan and the mezzanine loan mature in 2008. Funding of the guaranty wouldincrease our equity participation in the venture. We have recorded a liabilityof $167,000, our estimate of the fair value of this guaranty, which is includedin other liabilities.

We have provided a guarantee to the lender on a$8,500,000 mezzanine construction loan for Venice Lofts, that should theinterest rate on the project’s $30,000,000 variable-rate senior constructionloan exceed 6.5%, the difference between the interest due and a calculation ofinterest due based on 6.5% interest rate, will be kept current. The amountoutstanding 

F-26

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

under the senior loan totaled $16,852,000 atDecember 31, 2006 and all the loan interest payments were current as ofthat date.

We have guarantied repayment of the entire loanbalance outstanding under a $21,350,000 acquisition and construction loanobtained by Devon Square. Our equity partner in the venture has provided thesame guaranty. Funding of the guaranty would increase our equity participationin the venture. The loan matures in August 2007. At December 31,2006, the balance outstanding under the loan totaled $16,557,000. We haverecorded a liability of $7,000, our estimate of the fair value of thisguaranty, which is included in other liabilities.

We have guarantied repayment of the entire loan balanceoutstanding under a $14,600,000 acquisition loan obtained by Madison BuildingAssociates, LLC (“Madison”). Our equity partner in the venture has provided thesame guaranty. The loan matures in 2012. At December 31, 2006, thebalance outstanding under the loan totaled $13,919,000. In February 2007we sold our interest in Madison and were released from the guaranty.

In conjunction with the sale of 640 North Broad weguarantied a $6,000,000 loan obtained by the buyer and secured in part by a$3,000,000 certificate of deposit that we purchased from the lender. We haverecorded a liability of $300,000, our estimate of the fair value of thisguaranty, which is included in other liabilities.

We have guarantied repayment of the entire loanbalance outstanding under a $7,480,000 acquisition and development loanobtained by Guilford Properties. Our equity partner in the venture has providedthe same guaranty. Funding of the guaranty would increase our equityparticipation in the venture. The loan matures in 2009. At December 31,2006, the balance outstanding under the loan totaled $5,883,000.

In support of certainconsolidated entities’ mortgage loans we have entered into master leaseagreements, and we have provided indemnification for certain environmentalevents. These agreements are entered into for the benefit of the mortgagelenders to facilitate more favorable terms.

*LONG-TERM PURCHASECOMMITMENTS*

In November 2006 we entered into several fixed-pricecancelable commitments to purchase electricity from third-party utilitycompanies through December 2011. The terms of the contracts commence in January2007 and provide for us to have electricity delivered to our properties inHouston at fixed prices per kilowatt hour.

Estimatedannual expenses, based on estimated annual kilowatt usage, to be paid underthese contracts as of December 31, 2006 are as follows (in thousands):

| 2007   |   | $   | 948    |   |
|--------|--------|-----|--------|--------|
| 2008   |   | 948 |   |
| 2009   |   | 948 |   |
| 2010   |   | 949 |   |
| 2011   |   | 949 |   |
|   |   | $   | 4,742  |   |

 

*MARKETCONCENTRATIONS*

The commercial propertieswe owned at December 31, 2006 are concentrated in both the Mid-Atlanticregion of the country, and the Houston, Texas metropolitan market. Ourresidential apartment properties are concentrated in the Central Florida area. Nosingle tenant represents more than 10% of our total revenues. Our hospitalityproperties are located in the Baltimore, Maryland and Washington, D.C.metropolitan areas. Our development projects are located in the Washington,D.C., Maryland and Delaware Eastern Shore, Baltimore, Maryland andPhiladelphia, Pennsylvania metropolitan areas.

*LITIGATION*

We are subject to various legal proceedings and claimsthat arise in the ordinary course of our business. Management believes that thefinal outcome of such matters will not have a material adverse effect on ourfinancial position, results of operations or liquidity.

F-27

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.**   INCOMETAXES

SFAS No. 109, *Accounting for IncomeTaxes*, establishes financial accounting and reporting standards forthe effects of income taxes that result from our activities during the currentand preceding years. It requires an asset and liability approach to accountingfor income taxes. Balance sheet accruals for income taxes are adjusted toreflect changes in tax rates in the period such changes are enacted.

Wefile a consolidated Federal income tax return. The provision (benefit) forincome taxes includes the following components (in thousands):

| ** **                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Provision (benefit) for  income taxes                                           |       |                                        |       |   |   |   |   |
| Current tax                                                                     |       | $                                           | 3,623      |   | $ | (473 | ) | $ | 2,631 |   |
| Deferred tax                                                                    |       | 4,863                                       |       | (2,460 | ) | (862 | ) |
| Total provision (benefit) for income taxes  (including discontinued operations) |       | 8,486                                       |       | (2,933 | ) | 1,769 |   |
| Effect of SFAS No. 158                                                          |       | (106                                        | )          | — |   | — |   |
| Total provision                                                                 |       | $8,380                                      |       | $(2,933 | ) | $1,769 |   |
|                                                                                 |            |                                             |            |  |  |  |  |  |  |  |

 

Areconciliation of the statutory Federal tax rate to the Company’s effective income tax rate follows:

| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                    | ** ** | **2005 **(1) | ** ** | **2004** | ** ** |
| Statutory rate                                       |       |                                        | 34.0       | % |   |   | 34.0 | % |   |   | 34.0 | % |   |
| Increase (decrease)  resulting from:                 |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| State taxes, net  of federal income tax benefit |       |                                        | 3.0        | % |   |   | 7.0 | % |   |   | 5.3 | % |   |
| Interest income  from tax-exempt bonds               |       |                                        | (2.3       | )% |   |   | 5.8 | % |   |   | (6.2 | )% |   |
| Other                                                |       |                                        | (0.5       | )% |   |   | 9.8 | %(2) |   |   | (4.5 | )% |   |
| Effective rate                                       |       |                                        | 34.2       | % |   |   | 56.6 | % |   |   | 28.6 | % |   |

----

(1)             The2005 tax rates reflect the tax rates of the benefit the Company receives, sincethe Company recorded a net loss before income taxes for the year.

(2)             Includesadjustments related to reconciliation of net receivables due on 2005 filedincome tax returns to income taxes receivable on December 31, 2004.

Deferredincome taxes result from temporary differences in the recognition of revenueand expense for income tax and financial statement reporting purposes. Thesources of these differences and the estimated tax effect of each are asfollows (in thousands):

| ** **                                 | ** ** | **Deferred tax  liability (asset)  as of  December 31,  2006** | ** ** | **Deferred income  tax provision  (benefit) for  the year ended  December 31,  2006** | ** ** | **Deferred tax  liability (asset)  as of  December 31,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Basis in property                          |       |                                                                               | $          | 12,518                                                                                                              |       |                                                                               |       | $ | 3,483 |   |   |   | $ | 9,035 |   |   |
| Charitable  contributions                  |       |                                                                               | (59        | )                                                                                                                   |       |                                                                               | 710        |   |   |   | (769 | ) |   |
| Investments in  partnerships               |       |                                                                               | 1,858      |                                                                                                                |       |                                                                               | 444        |   |   |   | 1,414 |   |   |
| Lease intangibles                          |       |                                                                               | (6,088     | )                                                                                                                   |       |                                                                               | (3,506     | ) |   |   | (2,582 | ) |   |
| Gain on sale                               |       |                                                                               | 6,206      |                                                                                                                |       |                                                                               | 1,667      |   |   |   | 4,539 |   |   |
| Other                                      |       |                                                                               | (2,901     | )                                                                                                                   |       |                                                                               | (2,717     | ) |   |   | (184 | ) |   |
| Deferred tax  liability                    |       |                                                                               | 11,534     |                                                                                                                |       |                                                                               | 81         |   |   |   | 11,453 |   |   |
| Deferred tax  asset (net operating losses) |       |                                                                               | (325       | )                                                                                                                   |       |                                                                               | 4,676      |   |   |   | (5,001 | ) |   |
| Total                                      |       |                                                                               | $          | 11,209                                                                                                              |       |                                                                               |       | $ | 4,757 |   |   |   | $ | 6,452 |   |   |

 

F-28

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The deferred tax asset at December 31,2006 represents a net operating loss carryforward that will expire at December 31,2026 if it is not applied prior to that date.

**13.**   OPERATINGLEASES

*AS A LESSEE*

At December 31, 2006 we were obligated under twoland leases with the District of Columbia Redevelopment Land Agency for theWaterfront Complex. The leases pertain to land on which we own commercialproperties that are currently under development. The leases, which expire in2078, have aggregate annual rental payments of $130,000.

During 2005, we relocated our corporate offices andterminated our previous office lease agreement that was entered into in 2003. Therent for our current office space commenced in July, 2005 and expires inDecember, 2012. Total rent paid under the leases for the year ended 2006 and 2005 was $255,000 and $169,000respectively.

Minimumrentals to be paid under these leases at December 31, 2006, are as follows(in thousands):

| 2007                 |   | $     | 388    |   |
|----------------------|--------|-------|--------|--------|
| 2008                 |   | 396   |   |
| 2009                 |   | 404   |   |
| 2010                 |   | 412   |   |
| 2011                 |   | 421   |   |
| 2012 and  thereafter |   | 6,320 |   |
| Total                |   | $     | 8,341  |   |

 

*AS A LESSOR*

Substantiallyall leases of our residential property are for a term of one year of less.Other leases are subject to cancellation at the lessee’s option under certainconditions. No single tenant represents more than 10% of our total revenues.Minimum future rentals to be received for commercial property subject tonon-cancelable and other leases as of December 31, 2006 are as follows (inthousands):

| 2007                 |   | $      | 44,304  |   |
|----------------------|--------|--------|---------|--------|
| 2008                 |   | 32,775 |    |
| 2009                 |   | 26,447 |    |
| 2010                 |   | 18,182 |    |
| 2011                 |   | 13,503 |    |
| 2012 and  thereafter |   | 24,315 |    |
| Total                |   | $      | 159,526 |   |

 

We are also entitled toadditional rents, which are not included above that are primarily based uponescalations of real estate taxes and operating expenses over base periodamounts. We earned approximately $3,943,000, $3,268,000 and $2,174,000 ofadditional rents for the years ended December 31, 2006, 2005 and 2004,respectively.

F-29

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**14.**   TRANSACTIONSWITH AFFILIATES

Wehave business transactions with several affiliates that are owned in part bycertain of our shareholders, officers, and directors. These transactions aresummarized as follows (in thousands):

| ** **          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------|------------|---------------------------------------------|------------|
| ** **          | ** ** | **  2006  **            | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Revenues:           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Management fees     |       |                                        | $          | 16 |   |   |   | $ | 16 |   |   |   | $ | 16 |   |   |
| Cost and  expenses: |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest            |       |                                        | 108        |   |   |   | 837 | (1) |   |   | 329 |   |   |
|                     |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)             Includesinterest on an $8,000,000 loan to the Company bearing interest at 10%. Thisloan was repaid in December 2005.

In addition, certainaffiliated entities participate under our insurance policy and reimburse us forthe associated policy premiums.

**15.**   STOCKAPPRECIATION RIGHTS

In January 2006, our Board of Directors adopted aStock Appreciation Rights Incentive Plan (“the Plan”). Under the Plan, we maygrant to employees and consultants up to an aggregate of 280,000 stockappreciation rights (“SARs”) with respect to shares of our common stock. Uponexercise, each SAR will entitle the exercising holder to a cash payment equalto the excess of the market value of a share of common stock at the time ofexercise over the market value of a share of common stock at the time of grantof the SAR. The Plan is administered by our Compensation Committee, which hassole authority to grant SARs to employees and consultants under the Plan. Atthe time of adoption, the term of each SAR granted pursuant to the Plan is nomore than ten years after the date of grant. The SARs vest immediately upongrant.

Under  SFAS123R, *Share-Based Payment*, we recognized acompensation liability for the fair value ofthe SARs and an addition to the compensation expense equal to thecomputed liability. The compensationliability is adjusted at the end of each reporting period by recomputing thefair values of the outstanding SARs and the change in the computed liability isreported as an increase or decrease in the compensation expense.

We use the “plain vanilla” Black-Scholes-Mertonclosed-form model as described in SEC Staff Accounting Bulletin 107 fordetermining the fair value of the SARs. All SARs are granted at the averagemarket value of our common stock for the 30 business day period preceding thegrant date. The following assumptions were used in determining the fair valueof the SARs as of  December 31,2006: expected volatility of 19.2%, a weighted average expected remaining lifeof 4.1 years and a risk free interest rate of 4.7%. For the year ended December 31,2006, we recognized $1,416,000 of compensation liability and compensationexpense for the SARs grants.

Thefollowing table summarizes the SARs information as of December 31, 2006:

| **Stock Appreciation Rights** | ** ** | **Number** | ** ** | **Weighted  Average  Grant Price** | ** ** | **Contract  Life** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------|------------|
| Outstanding as of  January 1, 2006 |       |       | —     |                                    |       |               | $          | — |   |   |   | — |   |   |
| Granted                                 |       |       | 178,500    |                                    |       |               | 32.91      |   |   |   | 10 years |   |   |
| Exercised                               |       |       | (500       | )                                       |       |               | 32.91      |   |   |   | 10 years |   |   |
| Terminated                              |       |       | (9,000     | )                                       |       |               | 32.91      |   |   |   | 10 years |   |   |
| Outstanding at December 31,  2006  |       |       | 169,000    |                                    |       |               | 32.91      |   |   |   | 10 years |   |   |

 

At December 31, 2006,the market value of a share of our common stock was $35.55.

F-30

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**16.**   BENEFITPLANS

*DEFINEDCONTRIBUTION PLAN*

In November 2004, weestablished a defined contribution plan (“401K”) that covers all employees. Forthe years ended December 31, 2006, 2005, and 2004, we contributed $82,000and $75,000 and $12,000, respectively, to the 401K plan, representing 3% of alleligible employees’ eligible compensation up to a maximum salary of  $220,000, $210,000 and $200,000 per employee,respectively.

*DEFINED BENEFITPENSION PLAN*

Most of our employees are covered by our definedbenefit pension plan. We have made contributions to the plan to trustsestablished to pay future benefits to eligible retirees and dependents. We use December 31as our measurement date. Benefit obligations as of the end of the year reflectassumptions in effect as of those dates. Net pension costs for each of theyears presented were based on assumptions in effect at the end of the respectivepreceding year.

In December 2006, we adopted SFAS No. 158,which requires us to recognize assets or liabilities depending on whether ourdefined benefit pension plan is overfunded or underfunded at December 31,2006, with a corresponding noncash adjustment to accumulated othercomprehensive loss, net of tax, in our stockholders’ equity. A plan’s fundedstatus is measured as the difference between the fair value of the plan’sassets and the projected benefit obligation (“PBO”) of the plan. The adjustmentto stockholders’ equity represents the net unrecognized actuarial losses andprior service costs which were previously netted against the plan’s fundedstatus on our balance sheet in accordance with SFAS No. 87. The adjustmentalso includes the elimination of the minimum pension liability related to ourdefined benefit pension plan that was recorded prior to the adoption of SFAS No. 158.

The unrecognized amounts recorded in accumulated othercomprehensive loss will be subsequently recognized as net periodic pension costconsistent with our historical accounting policy for amortizing those amounts. Actuarialgains and losses that arise in future periods and are not recognized as netperiodic pension cost in those periods will be recognized as increases ordecreases in other comprehensive income, net of tax, in the period they arise.Actuarial gains and losses recognized in other comprehensive income areadjusted as they are subsequently recognized as a component of net periodicpension cost.

The incremental impact ofadopting the provisions of SFAS No. 158 on our balance sheet at December 31,2006 is presented in the following table. The adoption of SFAS No. 158 hadno effect on our consolidated statements of operations for the years ended December 31,2006, 2005 or 2004.

**Incremental Effect of Applying SFAS 158 on IndividualLine Items on the Balance Sheet**

| **December 31, 2006**       | ** ** |
|---------------------------------------|------------|
| ** **                            | ** ** | **Before  Application  of SFAS 158** | ** ** | **Adjustments** | ** ** | **After  Application  of SFAS 158** | ** ** |
| Deferred income  taxes payable        |       | $ | 11,640,000 |   |   | $ | (106,000 | ) |   | $ | 11,534,000 |   |
| Other liabilities                     |       | 31,451,000 |   |   | 309,000 |   |   | 31,760,000 |   |
| Total liabilities                     |       | 674,588,000 |   |   | 203,000 |   |   | 674,791,000 |   |
| Accumulated other  comprehensive loss |       | — |   |   | (203,000 | ) |   | (203,000 | ) |
|                                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-31

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The following provides areconciliation of benefit obligations, plan assets and funded status related toour qualified defined benefit pension plan.

**Obligations and Funded Status (in thousands):**

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **Change in benefit obligation:** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Benefit obligation at  beginning of year         |       | $                     | 2,188      |   | $ | 3,438 |   |
| Service cost                                     |       | 116                   |       | 91 |   |
| Interest cost                                    |       | 141                   |       | 101 |   |
| Benefits paid                                    |       | (217                  | )          | (15 | ) |
| Settlement loss                                  |       | —                |       | (1,518 | ) |
| Actuarial gains                                  |       | 273                   |       | 91 |   |
| Benefit  obligations at end of year              |       | $                     | 2,501      |   | $ | 2,188 |   |

 

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| **Change in plan assets:**       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Fair value of  plan assets at beginning of year |       | $                     | 1,906      |   | $ | 3,273 |   |
| Actual return on  plan assets                   |       | 220                   |       | 116 |   |
| Contributions by  employer                      |       | —                |       | 50 |   |
| Benefits paid                                   |       | (217                  | )          | (15 | ) |
| Settlement                                      |       | —                |       | (1,518 | ) |
| Fair value of  plan assets at end of year       |       | $                     | 1,909      |   | $ | 1,906 |   |

 

| **Reconciliation of funded status:** | ** ** | ** 2006 ** | ** ** | ** 2005 ** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Funded status                                       |       | $                    | (593       | )                    | $          | (282 | ) |
| Unrecognized net  actuarial loss                    |       | 292                  |       | 120                  |       |
| Unrecognized  transition obligation                 |       | 17                   |       | 74                   |       |
| Accrued  liabilities                                |       | (284                 | )          | (88                  | )          |
| Adjustment due to  SFAS 158                         |       | (309                 | )          | —               |       |
| Accrued pension  cost                               |       | (593                 | )          | (88                  | )          |
|                                                     |            |                      |            |                      |            |  |  |

 

| ** **                                                                               | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Amounts recognized in the consolidated balance sheets:** | ** ** | ** 2006 **  | ** ** | ** 2005 ** | ** ** |
| Accrued liabilities                                                                      |       | $                     | 284        |   | $ | 88 |   |
|                                                                                          |            |                       |            |  |  |  |  |

 

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| **Net Periodic Pension Cost** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Service cost                                 |       | $                     | 116        |   | $ | 91 |   |
| Interest cost                                |       | 141                   |       | 101 |   |
| Expected return  on plan assets              |       | (130                  | )          | (110 | ) |
| Amortization of  transition asset            |       | 57                    |       | 57 |   |
| Recognized net  actuarial loss               |       | 12                    |       | — |   |
| Settlement loss                              |       | —                |       | 83 |   |
| Final net periodic pension expense           |       | $                     | 196        |   | $ | 222 |   |

 

F-32

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theactuarial assumptions used at December 31, 2006 and 2005 related to ourdefined benefit pension plan are as follows:

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| **Benefit Obligation Assumptions**    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Discount rates                                  |       |                  | 5.75       | % |   |   | 5.50 | % |   |
| Expected return  on plan assets                 |       |                  | 7.00       | % |   |   | 7.00 | % |   |
| Weighted average rate of  compensation increase |       |                  | 4.25       | % |   |   | 4.25 | % |   |

 

The long-term rate of return assumption represents theexpected average rate of earnings on the funds invested or to be invested toprovide for the benefits included in the benefit obligations. The long-termrate of return assumption is determined based on a number of factors, includinghistorical market index returns, the anticipated long-term asset allocation ofthe plan, historical plan return data, plan expenses and the potential tooutperform market index returns.

The investment objectives for the assets of thedefined benefit pension plan are to minimize the net present value of expectedfunding contributions and to meet or exceed the rate of return assumed for planfunding purposes over the long term. The nature and duration of benefitobligations, along with assumptions concerning assets class returns and returncorrelations, are considered when determining an appropriate asset allocationto achieve the investment objectives.

Investment policies and strategies governing theassets of the plan are designed to achieve investment objectives within prudentrisk parameters. Risk management practices include the use of externalinvestment managers and the maintenance of a portfolio diversified by assetclass, investment approach and security holdings, and the maintenance ofsufficient liquidity to meet benefit obligations as they come due.

Thefollowing benefit payments, which reflect expected future service, asappropriate, are expected to be paid (in thousands):

| 2007        |   | $   | 89     |   |
|-------------|--------|-----|--------|--------|
| 2008        |   | 484 |   |
| 2009        |   | 86  |   |
| 2010        |   | 88  |   |
| 2011        |   | 750 |   |
| 2012 - 2016 |   | 444 |   |

 

**17.**   DISCLOSUREABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of our financial instrumentsare described below.

As of December 31, 2006, the fair value of our$610,681,000 of mortgage and construction loans and other debt was $592,006,000.As of December 31, 2005, the fair value of our $528,660,000 of mortgageand construction loans and other debt was $522,862,000. The fair value of fixedrate debt is estimated by discounting the future cash flows based on borrowingrates currently available to us for financing on similar terms for borrowerswith similar credit ratings. For variable rate obligations the carrying amountis a reasonable estimate of fair value.

The fair value of ourother financial instruments approximates their carrying amounts.

F-33

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**18.**   SEGMENTINFORMATION

In accordance with SFASNo. 131, *Disclosures About Segments of an Enterpriseand Related Information,* we report segment information for thefollowing six categories:

*Commercial Rental Property*

This segment includes therental income derived by commercial properties from leases of office andindustrial space and other related revenue sources. Commercial leases generallyprovide for a fixed monthly rental over terms that range from three to10 years. Also included in this segment is income generated frommanagement and leasing activities associated with our 50% ownership interest inRedwood Commercial, a commercial management company.

*Residential Rental Property*

This segment includes therental income derived from residential properties from leases of apartmentunits and other related revenue sources. Apartment leases generally provide fora fixed monthly rental over a one-year term. Also included in this segment arefees earned from our management of residential properties in 2004 and 2003.

*Hospitality Properties*

This segment includesrevenue and income derived from services provided at our hospitalityproperties.

*Development—Residential andCommercial Condominiums*

Thissegment primarily includes the revenues and costs associated withcommercial and residential condominiums. Revenues and related cost of goodssold are included in our operating results.

*Development—Developed and Undeveloped Land*

This segment primarilyincludes the development and sale of land parcels and lots as part ofresidential subdivisions and undeveloped commercial land sales. Revenues andrelated cost of goods sold are included in our operating results.

*Development—Rental Properties*

This segment primarily includes the development andconstruction of commercial and residential buildings that will be leased totenants upon completion. Costs associated with this segment are capitalizeduntil completion, at which time the assets are placed in service andtransferred to either the Residential or Commercial Rental Property segment.

Our real estate investments are located in theWashington DC, Philadelphia, Pennsylvania, Houston, Texas, Baltimore, Maryland,Wilmington, Delaware, Maryland and Delaware Eastern Shore, and Orlando andTampa, Florida metropolitan areas. We are not involved in any operations incountries other than the United States of America.

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies. Weevaluate performance based upon revenues less operating expenses of thecombined properties in each segment.

F-34

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Followingis a summary of our reportable segments along with corporate debt and generaland administrative expenses:

| **December 31, 2006 (in thousands)** | ** ** | **Development—  Developed  and  Undeveloped  Land** | ** ** | **Development—  Residential  and  Commercial  Condominiums** | ** ** | **Development—  Rental  Properties** | ** ** | **Commercial  Rental** | ** ** | **Residential  Rental** | ** ** | **Hospitality** | ** ** | **Corporate** | ** ** | **TOTAL** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|-----------|------------|
| **Statement  of Operations:**                            |       |                                                     |       |                                                              |       |                                      |       |                   |       |                    |       |            |       |          |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |            |                                                          |            |                                                                   |            |                                           |            |                        |            |                         |            |                 |            |               |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Total operating revenues                                             |   |   | $       | 14,984 |   |   |    | $      | 13,118 |   |   |   | $      | — |    |   |   | $      | 58,976  |   |   |   | $      | 10,693  |   |   |    | $      | 3,408  |    |   |   | $ | 2,124   |   |   | $ | 103,303 |   |
|----------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---|---------|--------|--------|---|---------|--------|
| Cost of homebuilding, residential lots and other  development        |   |   | (12,482 | )      |   |   | (11,223 | )      |   |   | (118   | )      |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | —  |   |   | (23,823 | )      |
| Operating expenses                                                   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (25,072 | )      |   |   | (4,908  | )      |   |   | (2,360 | )       |   |   | —  |   |   | (32,340 | )      |
| Depreciation and amortization expense                                |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (22,863 | )      |   |   | (2,592  | )      |   |   | (312   | )       |   |   | —  |   |   | (25,767 | )      |
| Interest expense                                                     |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (19,043 | )      |   |   | (4,149  | )      |   |   | (306   | )       |   |   | (3,988  | )      |   | (27,486 | )      |
| Gain on sale of investments in joint ventures                   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | 24,417  |   |   |   | —  |   |   |   | — |    |   |   | —  |   |   | 24,417  |   |
| Income (loss) from investments in joint ventures                     |   |   | 247     |   |   |   | 100     |   |   |   | — |   |   |   | 545     |   |   |   | (51     | )      |   |   | — |    |   |   | 155     |   |   | 996     |   |
| Minority interest                                                    |   |   | 260     |   |   |   | (48     | )      |   |   | (1,091 | )      |   |   | (109    | )      |   |   | (27     | )      |   |   | — |    |   |   | —  |   |   | (1,015  | )      |
| Withdrawn public offering                                            |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | —  |   |   | —  |   |
| Debt extinguishment costs                                            |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (1,047  | )      |   |   | —  |   |   |   | — |    |   |   | —  |   |   | (1,047  | )      |
| Loss on impairment of assets                                         |   |   | —  |   |   |   | (1,494  | )      |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | —  |   |   | (1,494  | )      |
| General, administrative and other expenses                           |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | (12,676 | )      |   | (12,676 | )      |
| Interest/other income                                                |   |   | —  |   |   |   | —  |   |   |   | 1,702  |   |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | 410     |   |   | 2,112   |   |
| **Net income (loss) before taxes and  discontinued operations** |   |   | $       | 3,009  |   |   |    | $      | 453    |   |   |   | $      | 493    |    |   |   | $      | 15,804  |   |   |   | $      | (1,034  | )      |   |    | $      | 430    |    |   |   | $ | (13,975 | )      |   | $ | 5,180   |   |
| **Assets as of 12/31/06:**                                           |   |   |    |   |   |   |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |   |    |   |   |    |   |   |    |   |
| Real estate at cost                                                  |   |   | $       | 90,031 |   |   |    | $      | 21,995 |   |   |   | $      | 55,637 |    |   |   | $      | 405,162 |   |   |   | $      | 104,590 |   |   |    | $      | 7,498  |    |   |   | $ | —  |   |   | $ | 684,913 |   |
| Accumulated depreciation                                             |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (30,290 | )      |   |   | (7,554  | )      |   |   | (5,402 | )       |   |   | —  |   |   | (43,246 | )      |
| Investments in joint ventures                                        |   |   | —  |   |   |   | 18,918  |   |   |   | — |   |   |   | 9,563   |   |   |   | (280    | )      |   |   | — |    |   |   | 2,202   |   |   | 30,403  |   |
| Cash, cash equivalents and restricted cash                           |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | 65,144  |   |   | 65,144  |   |
| Investments                                                          |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |    |   |   | 36,829  |   |   | 36,829  |   |
| Other (inc. assets held for sale)                                    |   |   | 404     |   |   |   | —  |   |   |   | 512    |   |   |   | 61,123  |   |   |   | 1,217   |   |   |   | 6,852  |    |   |   | 15,984  |   |   | 86,092  |   |
|                                                                 |   |   | $       | 90,435 |   |   |    | $      | 40,913 |   |   |   | $      | 56,149 |    |   |   | $      | 445,558 |   |   |   | $      | 97,973  |   |   |    | $      | 8,948  |    |   |   | $ | 120,159 |   |   | $ | 860,135 |   |

 

F-35

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| **December 31, 2005 (in thousands)** | ** ** | **Development—  Developed  and  Undeveloped  Land** | ** ** | **Development—  Residential  and  Commercial  Condominiums** | ** ** | **Development—  Rental  Properties** | ** ** | **Commercial  Rental** | ** ** | **Residential  Rental** | ** ** | **Hospitality** | ** ** | **Corporate** | ** ** | **TOTAL** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|-----------|------------|
| **Statement  of Operations:**                            |       |                                                     |       |                                                              |       |                                      |       |                   |       |                    |       |            |       |          |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |            |                                                          |            |                                                                   |            |                                           |            |                        |            |                         |            |                 |            |               |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Total operating revenues                                             |   |   | $      | 8,745  |   |   |    | $      | 46,619 |   |   |   | $      | — |    |   |   | $      | 34,777  |   |   |   | $      | 9,384  |   |   |   | $      | 3,189  |    |   |   | $ | 339     |   |   | $ | 103,053 |   |
|----------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---|---------|--------|--------|---|---------|--------|
| Cost of homebuilding, residential lots and other  development        |   |   | (7,712 | )      |   |   | (35,442 | )      |   |   | (525   | )      |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | — |   |   | (43,679 | )      |
| Operating expenses                                                   |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | (13,582 | )      |   |   | (3,821  | )      |   |   | (2,316 | )      |   |   | — |   |   | (19,719 | )      |
| Depreciation and amortization expense                                |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | (9,483  | )      |   |   | (2,199  | )      |   |   | (272   | )      |   |   | — |   |   | (11,954 | )      |
| Interest expense                                                     |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | (10,259 | )      |   |   | (3,138  | )      |   |   | (316   | )      |   |   | (1,073 | )      |   | (14,786 | )      |
| Gain on sale of investments in joint ventures                        |   |   | (118   | )      |   |   | —  |   |   |   | — |   |   |   | 127     |   |   |   | 1,542   |   |   |   | — |   |   |   | — |   |   | 1,551   |   |
| Income (loss) from investments in joint ventures                     |   |   | (1     | )      |   |   | 3       |   |   |   |   |   |   |   | 1,017   |   |   |   | (235    | )      |   |   | — |   |   |   | 9      |   |   | 793     |   |
| Minority interest                                                    |   |   | (431   | )      |   |   | (4,960  | )      |   |   | (244   | )      |   |   | (140    | )      |   |   | (25     | )      |   |   | — |   |   |   | — |   |   | (5,800  | )      |
| Withdrawn public offering                                            |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (3,312 | )      |   | (3,312  | )      |
| Debt extinguishment costs                                            |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | (3,171  | )      |   |   | — |   |   |   | — |   |   | (3,171  | )      |
| General, administrative and Other expenses                           |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | (7,845 | )      |   | (7,845  | )      |
| Interest/other income                                                |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | 1,100  |   |   | 1,100   |   |
| **Net income (loss) before taxes and  discontinued operations** |   |   | $      | 483    |   |   |    | $      | 6,220  |   |   |   | $      | (769   | )       |   |   | $      | 2,457   |   |   |   | $      | (1,663 | )      |   |   | $      | 285    |    |   |   | $ | (10,782 | )      |   | $ | (3,769  | )      |
| **Assets as of 12/31/05:**                                           |   |   |   |   |   |   |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |   |   |   |   |   |   |   |    |   |
| Real estate at cost                                                  |   |   | $      | 92,870 |   |   |    | $      | 22,789 |   |   |   | $      | 41,469 |    |   |   | $      | 227,163 |   |   |   | $      | 78,014 |   |   |   | $      | 7,359  |    |   |   | $ | —  |   |   | $ | 469,664 |   |
| Accumulated depreciation                                             |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | (18,615 | )      |   |   | (5,039  | )      |   |   | (5,090 | )      |   |   | — |   |   | (28,744 | )      |
| Investments in joint ventures                                        |   |   | 414    |   |   |   | 18,599  |   |   |   | — |   |   |   | 9,422   |   |   |   | 371     |   |   |   | — |   |   |   | 1,247  |   |   | 30,053  |   |
| Cash, cash equivalents and restricted cash                           |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | 24,854 |   |   | 24,854  |   |
| Investments                                                          |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | 63,028 |   |   | 63,028  |   |
| Other (inc. assets held for sale)                                    |   |   | — |   |   |   | —  |   |   |   | 55,931 |   |   |   | 124,647 |   |   |   | 3,707   |   |   |   | 6,454  |   |   |   | 14,404 |   |   | 205,143 |   |
|                                                                 |   |   | $      | 93,284 |   |   |    | $      | 41,388 |   |   |   | $      | 97,400 |    |   |   | $      | 342,617 |   |   |   | $      | 77,053 |   |   |   | $      | 8,723  |    |   |   | $ | 103,533 |   |   | $ | 763,998 |   |

 

| **December 31, 2004 (in thousands)** | ** ** | **Development—  Developed  and  Undeveloped  Land** | ** ** | **Development—  Residential  and  Commercial  Condominiums** | ** ** | **Development—  Rental  Properties** | ** ** | **Commercial  Rental** | ** ** | **Residential  Rental** | ** ** | **Hospitality** | ** ** | **Corporate** | ** ** | **TOTAL** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|-----------|------------|
| **Statement  of Operations:**                            |       |                                                     |       |                                                              |       |                                      |       |                   |       |                    |       |            |       |          |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |            |                                                          |            |                                                                   |            |                                           |            |                        |            |                         |            |                 |            |               |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Total operating revenues                                             |   |   | $       | 18,346 |   |   |   | $      | 6,259  |   |   |   | $      | — |    |   |   | $      | 24,923 |   |   |   | $      | 8,757  |   |   |   | $      | 2,874  |    |   |   | $ | 1,735 |   |   | $ | 62,894 |   |
|----------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---|-------|--------|--------|---|--------|--------|
| Cost of homebuilding, residential lots and other  development        |   |   | (17,167 | )      |   |   | (3,843 | )      |   |   | (61    | )      |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (21,071 | )      |
| Operating expenses                                                   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | (9,925  | )      |   |   | (3,783 | )      |   |   | (2,198 | )      |   |   | — |   |   | (15,906 | )      |
| Depreciation and amortization expense                                |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | (6,774  | )      |   |   | (2,354 | )      |   |   | (364   | )      |   |   | — |   |   | (9,492  | )      |
| Interest expense                                                     |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | (16,430 | )      |   |   | 3,687  |   |   |   | 1,683  |   |   |   | 1,405  |   |   | (9,655  | )      |
| Gain on sale of investments in joint ventures                        |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | 624    |   |   | 624     |   |
| Income (loss) from investments in joint ventures                     |   |   | (10     | )      |   |   | — |   |   |   | (104   | )      |   |   | 1,502   |   |   |   | (28    | )      |   |   | — |   |   |   | — |   |   | 1,360   |   |
| Minority interest                                                    |   |   | —  |   |   |   | (1,584 | )      |   |   | (399   | )      |   |   | (35     | )      |   |   | 52     |   |   |   | — |   |   |   | — |   |   | (1,966  | )      |
| Withdrawn public offering                                            |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | — |   |   | —  |   |
| Debt extinguishment costs                                            |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | — |   |   | —  |   |
| General, administrative and Other expenses                           |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | (3,973 | )      |   | (3,973  | )      |
| Interest/other income                                                |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | 1,869  |   |   | 1,869   |   |
| **Net income  (loss) before taxes and discontinued operations** |   |   | $       | 1,169  |   |   |   | $      | 832    |   |   |   | $      | (564   | )       |   |   | $      | (6,739 | )      |   |   | $      | 6,331  |   |   |   | $      | 1,995  |    |   |   | $ | 1,660 |   |   | $ | 4,684  |   |

 

F-36

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**19.**   QUARTERLY RESULTSOF OPERATIONS (UNAUDITED)(in thousands except earnings per common share amounts):

| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,  2006**         | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** |
| Operating  revenues                 |       |                             | $          | 20,793 |   |   |   | $ | 23,066 |   |   |   | $ | 32,101 |   |   |   | $ | 27,343 |   |   |   |
| Operating income                    |       |                             | 1,368      |   |   |   | 2,624 |   |   |   | 1,687 |   |   |   | 1,524 |   |   |   |
| Net income (loss)                   |       |                             | (2,402     | ) |   |   | 11,790 |   |   |   | (6,744 | ) |   |   | 13,685 |   |   |   |
| Net income (loss) per  common share |       |                             | (0.44      | ) |   |   | 2.15 |   |   |   | (1.23 | ) |   |   | 2.50 |   |   |   |

 

| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,  2005**         | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
| Operating  revenues                 |       |                             | $          | 25,527 |   |   |   | $ | 39,081 |   |   |   | $ | 16,522 |   |   |   | $ | 21,923 |   |   |
| Operating income                    |       |                             | 6,315      |   |   |   | 9,353 |   |   |   | (580 | ) |   |   | 1,456 |   |   |
| Net income (loss)                   |       |                             | 881        |   |   |   | 2,765 |   |   |   | (3,503 | ) |   |   | (2,392 | ) |   |
| Net income (loss) per  common share |       |                             | 0.16       |   |   |   | 0.51 |   |   |   | (0.64 | ) |   |   | (0.44 | ) |   |

 

**20.   SUBSEQUENTEVENTS:**

* ACQUISITIONS*

**Westbury  **In January 2007,we acquired a 366 unit resident apartment community located in Lake Brandon,Florida for a purchase price of $42,050,000. In February 2007 we placed aten-year $36,000,000 mortgage loan on the property, bearing interest at 6.02%. Approximately$7,100,000 of the loan proceeds were held back by the lender and will bereleased upon the property achieving certain occupancy levels and debt servicecoverage ratio results. Interest-only payments are due during the first fiveyears of the loan term.

**14800 St. Mary’s Lane  **InFebruary 2007, we acquired a 85,000 square foot commercial office buildinglocated in Houston, Texas for a purchase price of $9,650,000. Subsequent to thepurchase in February 2007 we placed a ten-year $8,200,000 mortgage loan onthe building bearing a fixed interest rate of 5.75%. The loan requiresinterest-only payments during the first five years of the loan term.

**14825** St. Mary’s Lane**  **In February 2007, we acquired a 45,000 square foot commercialoffice building located in Houston, Texas for a purchase price of $4,845,000.In March 2007 we placed a ten-year $4,200,000 mortgage loan on thebuilding bearing a fixed interest rate of 5.669%. The loan requiresinterest-only payments during the first three years.

*DISPOSITIONS*

**Inn at the Colonnade  **InJanuary 2007, we sold the Inn at the Colonnade, a 125 room hotel locatedin Baltimore, Maryland, for $15,000,000 and recorded a pre-tax gain on saleof  $7,546,000. The sale generated netproceeds of approximately $4,194,000 after defeasance of the existing debt.

**1105 Market Street  **In February 2007,we sold 1105 Market Street, a 173,000 square foot commercial office buildinglocated in Wilmington, Delaware, for $18,500,000. At the time of the sale thesales price equaled the carrying value of the property, as adjusted forimpairment in 2006. The sale proceeds were used to help repay the outstandingloan on the property of $19,000,000.

**Madison Building****  **In February 2007, we sold our 25% interest inMadison Building, an 82,000 square foot commercial office building located inMcLean, Virginia, that is not consolidated into our consolidated financialstatements, for $4,000,000 and recorded a pre-tax gain on sale of $2,802,000.

F-37

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**BRESLER & REINER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*FINANCINGS*

**Victoria Place  **In February 2007,we defeased the $32,249,000 loan collateralized by Victoria Place and placed a$46,000,000 ten-year mortgage loan on the property bearing an interest rate of5.73%. Interest-only payments are due during the first five years of the loanterm. We recorded debt extinguishment costs, net of minority interest, of$684,296 related to the defeasance.

**950 Threadneedle  **In February 2007,we placed a ten-year $4,300,000 mortgage loan on 950 Threadneedle, bearinginterest at 5.75%. Interest-only payments are due during the first five yearsof the loan term.

**Holliday Development  **InFebruary 2007, we obtained a $9,116,000 acquisition and development loanfor Holliday Properties. The three year loan bears interest at one month LIBORplus 1.75%.  At the time of the closingwe drew down $3,097,000 on the loan.

**Ft. Hill  **In March 2007,we defeased the $5,418,000 loan collateralized by Ft. Hill and placed a$10,400,000 ten-year mortgage loan on the property bearing a fixed interestrate of 5.75%. Interest-only payments are due during the first five years ofthe loan term. We recorded debt extinguishment costs, net of minority interest,of $592,054 related to the defeasance.

**Sudley North  **In March 2007,we defeased the $17,192,000 loan collateralized by Sudley Buildings A,B,C&Dand the Bank Building and placed an $18,500,000 mortgage loan on SudleyBuildings A,B&C and the Bank Building and a $10,400,000 mortgage loan onSudley Building D. Both the new loans mature in 2017, bear interest at 5.75%and require interest-only payments during the first five years of the loan term.We recorded debt extinguishment costs, net of minority interest, of  $2,139,000 related to the defeasance.

The total increase inmortgage and construction loans and other debt, in our consolidated balancesheet as a result of these transactions is approximately $34,740,000.

*SIGNIFICANTTRANSACTION*

**Waterfront Complex**   InMarch 2007, in accordance with an amended and restated operating agreement forWALLC entered into the same month, K/FCE exercised its right to increase itsownership interest in the joint venture to 50% by making a $25,000,000contribution to WALLC ( the “equalization contribution”) with such amountdistributed to BRW.  The equalizationcontribution is in addition to $23,000,000 that K/FCE has either contributed orhas committed to contribute to WALLC.

F-38

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**BRESLER &REINER, INC.**

**SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATIONAS OF DECEMBER 31, 2006(Dollars in thousands)**

| ** **      | ** ** | ** ** | ** ** | ** **                    | ** ** | **Cost  Capitalization** | ** ** | ** **                                         | ** ** | ** **       | ** ** | ** **             | ** ** | ** **       | ** ** | **Life on which** | ** ** |
|-----------------|------------|------------|------------|-------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|------------------|------------|------------------------|------------|------------------|------------|-----------------------------|------------|
| ** **      | ** ** | ** ** | ** ** | **Initial Cost to** | ** ** | **Subsequent**           | ** ** | **Gross Amount at Which**           | ** ** | ** **       | ** ** | ** **             | ** ** | ** **       | ** ** | **Depreciation**            | ** ** |
| ** **      | ** ** | ** ** | ** ** | **Company**                   | ** ** | **to Acquisition**  | ** ** | **Carried at Close of Period** | ** ** | ** **       | ** ** | ** **             | ** ** | ** **       | ** ** | **on Latest**          | ** ** |
| ** **      | ** ** | ** ** | ** ** | ** **                    | ** ** | **Buildings**            | ** ** | ** **                                         | ** ** | ** **       | ** ** | ** **             | ** ** | ** **       | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Income** | ** ** |
| ** **      | ** ** | ** ** | ** ** | ** **                    | ** ** | **and**                  | ** ** | ** **                                         | ** ** | ** **       | ** ** | **Buildings and** | ** ** | ** **       | ** ** | **Accumulated**             | ** ** | **Date of** | ** ** | **Date** | ** ** | **Statement is** | ** ** |
| **Description** | ** ** | ** ** | ** ** | **Encumbrances**              | ** ** | **Land**                 | ** ** | **Improvements**                                   | ** ** | **Improvements** | ** ** | **Land**               | ** ** | **Improvements** | ** ** | **Total**                   | ** ** | **Depreciation** | ** ** | **Construction** | ** ** | **Acquired** | ** ** | **Computed** | ** ** |
|                 |            |            |            |                               |            |                          |            |                                                    |            |                  |            |                        |            |                  |            |                             |            |  |  |  |  |  |  |  |  |

| Versar Center (Two office  buildings in Springfield, VA)       |   |   | $         | 17,626  |   |   | $      | 2,187  |   |   | $      | 21,149  |   |   |   | $      | 2,630  |   |   | $      | 2,556  |   |   | $      | 23,410  |   |   | $      | 25,966  |   |   | $      | 3,132  |   |   |   | 1982/1986     |   |   |   | 2002   |   |   |   | 3  - 39 years |   |   |
|----------------------------------------------------------------|--------|--------|-----------|---------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---------------|--------|--------|--------|--------|--------|--------|--------|---------------|--------|--------|
| Bank Building (Office  building in Manassas, VA)               |   |   | 947       |    |   | 90     |   |   | 786    |   |   |    | — |   |   | 118    |   |   | 758    |   |   | 876    |   |   | 439     |   |   |   | 1991    |   |   |   | — |   |   |   | 3  - 39 years |   |   |
| Paradise/Sudley North  (Four office buildings in               |   |   |      |    |   |   |   |   |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |   |   |   |   |          |   |   |
| Manassas,  VA)                                                 |   |   | 16,275    |    |   | 1,898  |   |   | 12,679 |   |   |    | 4,834  |   |   | 3,534  |   |   | 15,877 |   |   | 19,411 |   |   | 9,995   |   |   |   | 1987    |   |   |   | 1987   |   |   |   | 3  - 39 years |   |   |
| Fort Hill (Office  building in Centreville, VA)                |   |   | 5,428     |    |   | 500    |   |   | 6,492  |   |   |    | 354    |   |   | 554    |   |   | 6,792  |   |   | 7,346  |   |   | 1,322   |   |   |   | 1987    |   |   |   | 2000   |   |   |   | 3  - 39 years |   |   |
| 900 Northbrook (Office  building in Trevose, PA)               |   |   | 10,792    |    |   | 1,800  |   |   | 7,874  |   |   |    | 542    |   |   | 2,115  |   |   | 8,101  |   |   | 10,216 |   |   | 762     |   |   |   | 2001    |   |   |   | 2003   |   |   |   | 3  - 39 years |   |   |
| Victoria Place  (Apartments in Orlando, FL)                    |   |   | 32,341    |    |   | 3,825  |   |   | 35,863 |   |   |    | 241    |   |   | 3,855  |   |   | 36,074 |   |   | 39,929 |   |   | 3,883   |   |   |   | —  |   |   |   | 2003   |   |   |   | 3  - 39 years |   |   |
| The Fountains at  Waterford Lakes  (Apartments in Orlando, FL) |   |   | 39,500    |    |   | 4,000  |   |   | 32,745 |   |   |    | 1,799  |   |   | 4,050  |   |   | 34,494 |   |   | 38,544 |   |   | 3,331   |   |   |   | —  |   |   |   | 2003   |   |   |   | 3  - 39 years |   |   |
| Holiday Inn Express  (Hotel in Camp Spings, MD)                |   |   | 3,500     |    |   | 377    |   |   | 2,793  |   |   |    | 4,330  |   |   | 413    |   |   | 7,087  |   |   | 7,500  |   |   | 5,401   |   |   |   | —  |   |   |   | 1987   |   |   |   | 3  - 39 years |   |   |
| Fort Washington (3 Office  buildings in                        |   |   |      |    |   |   |   |   |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |   |   |   |   |          |   |   |
| Fort  Washington, PA)                                          |   |   | 47,249    |    |   | 9,489  |   |   | 37,507 |   |   |    | 6,456  |   |   | 7,482  |   |   | 45,970 |   |   | 53,452 |   |   | 3,430   |   |   |   | 1987    |   |   |   | 2004   |   |   |   | 3  - 39 years |   |   |
| West Germantown Pike (2  Office buildings in                   |   |   |      |    |   |   |   |   |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |   |   |   |   |          |   |   |
| Plymouth  Meeting, PA)                                         |   |   | 15,626    |    |   | 3,136  |   |   | 14,961 |   |   |    | 446    |   |   | 3,311  |   |   | 15,232 |   |   | 18,543 |   |   | 1,165   |   |   |   | 1950    |   |   |   | 2004   |   |   |   | 3  - 39 years |   |   |
| One Northbrook (Office  building in Trevose, PA)               |   |   | 14,770    |    |   | 2,590  |   |   | 13,586 |   |   |    | 942    |   |   | 2,601  |   |   | 14,517 |   |   | 17,118 |   |   | 1,126   |   |   |   | 1989    |   |   |   | 2004   |   |   |   | 3  - 39 years |   |   |
| 102 Pickering Way (Office  building in Exton, PA)              |   |   | 9,940     |    |   | 2,501  |   |   | 11,469 |   |   |    | 437    |   |   | 2,523  |   |   | 11,884 |   |   | 14,407 |   |   | 550     |   |   |   | —  |   |   |   | 2005   |   |   |   | 3  - 39 years |   |   |
| Cross Keys (Office  building in Doylestown, PA)                |   |   | 14,500    |    |   | 2,836  |   |   | 11,817 |   |   |    | 104    |   |   | 2,890  |   |   | 11,867 |   |   | 14,757 |   |   | 535     |   |   |   | —  |   |   |   | 2005   |   |   |   | 3  - 39 years |   |   |
| Wynwood (2 Office  buildings in Chantilly, VA)                 |   |   | 11,800.00 |    |   | 1,105  |   |   | 11,318 |   |   |    | 69     |   |   | 1,105  |   |   | 11,387 |   |   | 12,492 |   |   | 477     |   |   |   | —  |   |   |   | 2005   |   |   |   | 3  - 39 years |   |   |
| 919 Market Steet (Office  building in Wilmington, DE)          |   |   | 35,600    |    |   | 4,434  |   |   | 30,646 |   |   |    | 839    |   |   | 4,434  |   |   | 31,485 |   |   | 35,919 |   |   | 1,465   |   |   |   | —  |   |   |   | 2005   |   |   |   | 3  - 39 years |   |   |
| Blue Bell Plaza (2 Office  buildings in  Plymouth Meeting, PA) |   |   | 29,800    |    |   | 4,769  |   |   | 27,809 |   |   |    | 202    |   |   | 4,794  |   |   | 27,986 |   |   | 32,780 |   |   | 1,450   |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 10333 Harwin Drive  (Office building in Houston, TX)           |   |   | 10,532    |    |   | 934    |   |   | 10,879 |   |   |    | 100    |   |   | 939    |   |   | 10,974 |   |   | 11,913 |   |   | 362     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 17043-49 El Camino (4 Office  buildings in Houston, TX)        |   |   | 5,024     |    |   | 1,725  |   |   | 3,964  |   |   |    | 159    |   |   | 1,725  |   |   | 4,123  |   |   | 5,848  |   |   | 193     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 1100 NASA Road (Office  building in Houston, TX)               |   |   | 2,830     |    |   | 674    |   |   | 3,480  |   |   |    | 61     |   |   | 674    |   |   | 3,541  |   |   | 4,215  |   |   | 127     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 1110 NASA Road (Office  building in Houston, TX)               |   |   | 3,408     |    |   | 1,064  |   |   | 3,404  |   |   |    | 133    |   |   | 1,064  |   |   | 3,537  |   |   | 4,601  |   |   | 126     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 1120 NASA Road (Office  building in Houston, TX)               |   |   | 5,208     |    |   | 1,625  |   |   | 4,078  |   |   |    | 128    |   |   | 1,625  |   |   | 4,206  |   |   | 5,831  |   |   | 154     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| Mearns Park (Office  building in Warminster, PA)               |   |   | 16,500    |    |   | 5,736  |   |   | 15,909 |   |   |    | 205    |   |   | 5,778  |   |   | 16,072 |   |   | 21,850 |   |   | 814     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 1717 Portway Plaza  (Office building in Houston, TX)           |   |   | 2,711     |    |   | 987    |   |   | 3,454  |   |   |    | 89     |   |   | 987    |   |   | 3,543  |   |   | 4,530  |   |   | 124     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| Valley Square (5 Office  buildings in  Plymouth Meeting, PA)   |   |   | 37,500    |    |   | 10,445 |   |   | 30,377 |   |   |    | 727    |   |   | 10,445 |   |   | 31,104 |   |   | 41,549 |   |   | 1,539   |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 9950 Westpark (Office  building in Houston, TX)                |   |   | 6,342     |    |   | 2,251  |   |   | 5,038  |   |   |    | 91     |   |   | 2,251  |   |   | 5,129  |   |   | 7,380  |   |   | 212     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 8700 Commerce Drive  (Office building in Houston, TX)          |   |   | 3,809     |    |   | 1,388  |   |   | 2,793  |   |   |    | 1      |   |   | 1,388  |   |   | 2,794  |   |   | 4,182  |   |   | 111     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 510 Township Road (Office  building in  Plymouth Meeting, PA)  |   |   | 10,760    |    |   | 1,632  |   |   | 11,308 |   |   |    | 7      |   |   | 1,632  |   |   | 11,315 |   |   | 12,947 |   |   | 333     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| Commerce Park North (2  Office buildings in  Houston, TX)      |   |   | 9,400     |    |   | 4,232  |   |   | 6,328  |   |   |    | 400    |   |   | 4,232  |   |   | 6,728  |   |   | 10,960 |   |   | 282     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| Huntington at Sundance  (Apartments in Lakeland, FL)           |   |   | 14,454    |    |   | 3,316  |   |   | 22,621 |   |   |    | 463    |   |   | 3,316  |   |   | 23,084 |   |   | 26,400 |   |   | 340     |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| 950 Threadneedle (Office  building in Houston, TX)             |   |   | —    |    |   | 1,668  |   |   | 3,085  |   |   |    | — |   |   | 1,670  |   |   | 3,083  |   |   | 4,753  |   |   | 23      |   |   |   | —  |   |   |   | 2006   |   |   |   | 3  - 39 years |   |   |
| Total  properties                                              |   |   | $         | 434,172 |   |   | $      | 83,214 |   |   | $      | 406,212 |   |   |   | $      | 26,789 |   |   | $      | 84,061 |   |   | $      | 432,154 |   |   | $      | 516,215 |   |   | $      | 43,203 |   |   |   |          |   |   |   |   |   |   |   |          |   |   |
| Corporate                                                      |   |   | —    |    |   | — |   |   | — |   |   |    | 1,034  |   |   | — |   |   | 1,034  |   |   | 1,034  |   |   | 43      |   |   |   |    |   |   |   |   |   |   |   | 3  - 39 years |   |   |
| Total Properties and  Corporate                                |   |   | $         | 434,172 |   |   | $      | 83,214 |   |   | $      | 406,212 |   |   |   | $      | 27,823 |   |   | $      | 84,061 |   |   | $      | 433,188 |   |   | $      | 517,249 |   |   | $      | 43,246 |   |   |   |          |   |   |   |   |   |   |   |          |   |   |

** **

F-39

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**BRESLER &REINER, INC.**

**NOTES TO SCHEDULEIII(in thousands)**

The aggregate cost of total real estate for Federalincome tax purposes was $675,162,000 at December 31, 2006.

Thechanges in rental property and equipment for the years ended December 31,2006, 2005 and 2004 are as follows:

| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance, January 1         |       | $                                           | 408,244    |   | $ | 319,322 |   | $ | 203,335 |   |
| Additions during period—   |       |                                        |       |   |   |   |   |
| Acquisitions                    |       | 196,973                                     |       | 98,110 |   | 115,987 |   |
| Improvements                    |       | 13,768                                      |       | 7,158 |   | — |   |
| Other—(2)                  |       | —                                      |       | 1,034 |   | — |   |
| Deductions during  period— |       |                                        |       |   |   |   |   |
| Real Estate Sold                |       | (69,394                                     | )          | (7,299 | ) | — |   |
| Other—(1)                  |       | (32,342                                     | )          | (10,081 | ) | — |   |
| Balance, December 31       |       | $                                           | 517,249    |   | $ | 408,244 |   | $ | 319,322 |   |

 

Thechanges in accumulated depreciation for the years ended December 31, 2006,2005 and 2004 are as follows:

| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance, January 1         |       | $                                           | 42,393     |   | $ | 32,820 |   | $ | 24,948 |   |
| Additions during period—   |       |                                        |       |   |   |   |   |
| Depreciation  expense           |       | 16,964                                      |       | 9,830 |   | 7,872 |   |
| Other                           |       | 27                                          |       | 16 |   | — |   |
| Deductions during  period— |       |                                        |       |   |   |   |   |
| Real Estate Sold                |       | (11,067                                     | )          | (45 | ) | — |   |
| Other—(1)                  |       | (5,071                                      | )          | (228 | ) | — |   |
| Balance, December 31       |       | $                                           | 43,246     |   | $ | 42,393 |   | $ | 32,820 |   |

 

**Notes:**

(1)             Includedin assets held for sale and are not included in the Schedule III table.

(2)             Representsan increase in the carrying amounts of Ft. Washington, West Germantown Pike and900 Northbrook.

F-40

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