UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                               |                                                                                         
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                        | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2005             
|OR                                                      
|o                                                        | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                        to

Commission file number 0-6201

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BRESLER & REINER, INC.(Exact Name of Registrant as Specified in Its Charter)

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

Registrant's telephone number, including area code: (301) 945-4300

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

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer
and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large
accelerated filer o        Accelerated
filer o        Non-accelerated filer ý

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

The aggregate market value of the voting stock held by non-affiliates (1,265,232 shares) was $39,222,192 as of June 30, 2005. The aggregate market value was
computed by reference to the last sale of the Common Stock of the Registrant at $31.00 per share. For purposes of this computation, directors, officers and holders of 5% or more of the Registrant's
Common Stock are considered affiliates of the Registrant at that date.

The
number of shares of the registrant's Common Stock outstanding as of March 24, 2006 was 5,477,212.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant's 2006 Annual Meeting of Stockholders
to be held on June 14, 2006.



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BRESLER & REINER, INC.        ANNUAL REPORT ON  FORM 10-K        For the Fiscal Year Ended December 31, 2005

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                                                                              |  | 13  
|         |  | Item 4  | Submission of Matters to a Vote of Security Holders                                            |  | 13  
|PART II  |  |        
|         |  | Item 5  | Market for Registrant's Common Equity and Related Stockholder Matters                          |  | 15  
|         |  | Item 6  | Selected Financial and Operating Data                                                          |  | 15  
|         |  | Item 7  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 16  
|         |  | Item 7A | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 26  
|         |  | Item 8  | Financial Statements and Supplementary Data                                                    |  | 27  
|         |  | Item 9  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 27  
|         |  | Item 9A | Controls and Procedures                                                                        |  | 27  
|         |  | Item 9B | Other Information                                                                              |  | 28  
|PART III |  |        
|         |  | Item 10 | Directors and Executive Officers of the Registrant                                             |  | 29  
|         |  | Item 11 | Executive Compensation                                                                         |  | 29  
|         |  | Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 29  
|         |  | Item 13 | Certain Relationships and Related Transactions                                                 |  | 29  
|         |  | Item 14 | Principal Accountant Fees and Services                                                         |  | 29  
|PART IV  |  |        
|         |  | Item 15 | Exhibits and Financial Statement Schedules                                                     |  | 29  
|         |  |         | Signatures                                                                                     |  | 32  

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these
safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company's future plans, strategies and expectations, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks,
uncertainties and other factors that are, in some cases, beyond the Company's control and which could materially affect actual results, performances or achievements. Factors that may cause actual
results to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no
assurance that the Company's expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any
updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.

The
"Company" means Bresler & Reiner, Inc., a Delaware corporation, and one or more of its subsidiaries and affiliates, and, as the context may require, Bresler &
Reiner, Inc. only.

ITEM 1. BUSINESS

Our Company

Bresler &
Reiner, Inc. is a Delaware corporation engaged in the ownership of commercial, residential, and hospitality properties; and in the development of commercial and residential
buildings and land for over 35 years. We conduct our business activities through both direct ownership and through joint ventures with third parties.

We
engage in real estate activities in the Philadelphia, Pennsylvania; Washington, D.C.; Wilmington, Delaware; Baltimore, Maryland; Maryland Eastern Shore; and Orlando, Florida, metropolitan areas. As
of January 2006, we also own properties in the Houston, Texas metropolitan market. We are not involved in any operations outside of the United States of America.

Our Strategy

Our goal is to generate attractive risk-adjusted investment returns through ownership of operating properties and participation in development projects.

Operating Properties

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



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Development Properties

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



Selling Properties

We
acquire operating properties as a long term investment, and we pursue our development properties to complete the development process. However, opportunities sometimes are presented to us to sell a
property under appropriate market conditions. In our evaluation of a sale of a property, we consider the opportunity cost of funds and re-deployment opportunities for the sale proceeds. We
may decide that the greater returns may be achieved through the

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sale
of a property and the reinvestment of the funds in new properties, than from continuing to own and operate the existing property.

Prudent Financing

We
maintain a strong liquidity position that allows us to effectively compete for acquisitions where the seller may require the buyer to rapidly close on the purchase of a property. We employ mortgage
debt in order to enhance our returns on invested capital. In certain instances we enter into master lease agreements or provide loan guarantees in order to maximize the benefits of leverage. At other
times we prepay existing mortgage debt in order to place more favorable debt, or to fix rates. While under Generally Accepted Accounting Principles (GAAP) the cost and other penalties associated with
such prepayments adversely affect our earnings in the year in which they occur, we proceed
with such prepayments after considering among other things, whether the benefits to be gained over the course of the loan from the new leverage outweigh the costs incurred in the current year on a net
present value basis.

Our Competitive Strengths

To employ our strategy we utilize our competitive strengths which include:



Financial Information about Business Segments

We operate in four reportable business segments: Commercial Rental Property, including the rental income derived by commercial properties from leases of office and industrial
space; Residential Rental Property, including the rental income derived from residential properties from leases of apartment units; Hospitality Properties, including revenue and income derived from
services provided at our hotel properties; and Commercial, Residential and Land Under Development, including the income derived from development and sale of residential and commercial condominium
units and developed and undeveloped land. For additional information about these segments see Note 17 of Notes to Consolidated Financial Statements and Managements' Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 of Part II of this report.

Narrative Description of the Business

The following is a brief description of each of our reportable business segments:

Commercial Rental Property

This
segment includes the rental income derived by commercial properties from the leasing of office and industrial space and other related revenue sources. Commercial leases generally provide for a
fixed monthly rental over terms that range from three to 10 years. At December 31, 2005 we owned, or had an ownership interest in, 39 commercial office and flex warehouse buildings
containing approximately 3,149,000 square feet of space. The properties are located in the Philadelphia, Pennsylvania; Washington, D.C.; Wilmington, Delaware; and Baltimore, Maryland metropolitan
areas. Since December 31, 2005, we have acquired an additional eight commercial office buildings containing 427,000 square feet of space in the Houston, Texas metropolitan market; acquired
three commercial office and warehouse buildings containing 455,000 square feet of space in the Philadelphia, Pennsylvania market; and disposed of three commercial office buildings containing 205,000
square feet of space in the Baltimore, Maryland market. For additional information about these transactions, See Note 18 of Notes to Consolidated Financial Statements.

Also
included in this segment is income generated from management and leasing activities associated with our 50% ownership interest in Redwood Commercial Management, LLC (Redwood), a commercial
management company. Redwood manages approximately 1,488,000 square feet of commercial office space, approximately 486,000 square feet of which are owned by entities which we control.

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Residential Rental Property

This
segment includes the rental income derived by residential properties from the leasing of apartment units and other related revenue sources. Apartment leases generally provide for a fixed monthly
rental over a one-year term. At December 31, 2005, we owned, or had an ownership interest in, four residential properties containing a total of 1,022 apartment units. The properties
are located in the Washington, D.C. and Orlando, Florida metropolitan areas.

Included
in this segment for 2003 and 2004 are fees previously generated from a wholly-owned subsidiary that formerly managed residential properties owned both by us and by affiliated third parties.
The management contracts on two residential properties that we managed were terminated during the year ended December 31, 2003, while the one remaining management contract was terminated during
the year ended December 31, 2004.

Hospitality Properties

This
segment includes revenue and income generated from services provided at our two hotel properties. The properties bear the Doubletree and Holiday Inn Express brands and are both managed by third
party managers. The properties are located in Baltimore, Maryland, across from Johns Hopkins University and Camp Springs, Maryland, across from Andrews Air Force base.

Commercial, Residential and Land Development

This
segment primarily includes the development and sale of residential condominium and rental apartment units, the development and sale of commercial condominium and rental buildings, the development
and sale of land to homebuilders, and sales of undeveloped commercial land. At December 31, 2005, we owned, or had a material ownership interest in, entities involved in 13 development
projects. These projects are located in the Washington, D.C., Maryland Eastern Shore and Philadelphia, Pennsylvania metropolitan areas.

Other Information

Competition

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



Employees

On
December 31, 2005, we had 22 full-time employees, all of whom were located at our corporate offices in Rockville, Maryland, working in such areas as finance, accounting, asset
management and internal audit. We believe that our relations with our employees are good. The on-site personnel engaged in the day-to-day operations and the
development activities of properties are employees or sub-contactors of the management companies or developers contracted to operate or develop such properties.

Market Concentrations

The
commercial properties we owned at December 31, 2005 are concentrated in the Mid-Atlantic region of the country, with properties located in the Philadelphia, Pennsylvania;
Wilmington, Delaware; Baltimore, Maryland; and Washington, D.C. metropolitan areas. Our residential apartment properties are located in the Washington, D.C. and Orlando, Florida metropolitan areas.
Our hospitality properties are located in the Baltimore, Maryland and Washington, D.C.

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metropolitan
areas. Our development projects are located in the Washington, D.C., Maryland Eastern Shore, and Philadelphia, Pennsylvania metropolitan areas. During the first quarter of 2006 we
expanded the geographic footprint of our commercial office properties to include the Houston, Texas metropolitan area. No single tenant represents more than 10% of our total revenues.

Seasonality

Our
commercial properties are unaffected by seasonality. There are limited seasonal impacts on results at our residential properties due to students moving in/out; however, most residential units are
leased on a one-year term. Our hospitality properties are affected to a larger extent by seasonality; however, the impact is minimal to our overall results of operations. Sales of
residential condominiums are affected by seasonality with fewer sales in the winter months. Sales of developed land are not affected by seasonality since the sales contracts with the homebuilders
incorporate structured take-down of lots on a quarterly basis.

Access to CompanyInformation

We
electronically file 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 these reports, with the Securities and Exchange Commission (the SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on 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 information regarding issuers that file electronically.

We
make available, free of charge, by responding to requests addressed to our investor relations department, 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 these reports. These reports are available as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. These reports can also be accessed on our website (http://www.breslerandreiner.com).
Information on our website, however is not part of this report.

ITEM 1A. RISK FACTORS

Risk Factors That May Affect Our Future Business Results

We face a number of material risks and uncertainties in our business, which could materially and adversely affect our business, financial condition and/or results of operations
and, as a result, the trading price of our common stock. We believe that the risks and uncertainties described below are the material risks that we face. Any investor in our securities should
carefully consider the risks described below.

We are subject to risks associated with investments in real estate.The value of and our income from our properties may decline due to
factors that adversely affect real estate generally and those that are specific to our properties. General factors that may adversely affect our real estate portfolios include:



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



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The
occurrence of one or more of the above risks could result in a significant reduction in the net operating income generated by these properties and we could lose some or all of our investments in
those properties.

We may not be able to recover increased property maintenance costs through rent increases.Our properties are subject to increases in
operating expenses. Certain commercial tenants are obligated to pay a portion of the escalating operating costs. In addition, certain tenants are subject to rent escalations for cost of living
increases. However, we may not be able to increase revenues enough to offset these increased expenses.

Various factors could adversely affect development of new projects or the repositioning of existing projects.Our development projects are
subject to significant risks relating to our ability to complete our projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from
completion include:



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

The
construction of real estate projects entails unique risks, including risks that the project will fail to conform to building plans, specifications and timetables. These failures could be caused by
strikes, weather, government regulations and other conditions beyond our control. In addition, we may become liable for injuries and accidents occurring during the construction process that are not
insured.

In
the construction of new projects, we may guarantee the 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 and cost overruns on us. This type of guaranty is released upon completion of the project. Furthermore, we typically guarantee a portion of project indebtedness. We may have to
make significant expenditures in the future in order to comply with our guaranty obligations.

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



We may be unable to sell properties at fair value to avoid losses or to reposition our portfolio.Because real estate investments are
relatively illiquid, we may be unable to dispose of underperforming properties and may be unable to reposition our portfolio in response to changes in regional or local real estate markets. As a
result, we may incur

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operating
losses from some of our properties and may have to write down the value of some properties due to impairment. In addition, we may be forced to sell properties during unfavorable market
conditions and therefore not realize their fair market value.

We face significant competition from other real estate developers.We compete with real estate developers, operators and institutions for
tenants and acquisition and development opportunities. Some of these competitors have significantly greater financial resources than we do. Such competition may reduce the number of suitable
investment opportunities offered to us, may interfere with our ability to attract and retain tenants and may increase vacancies, which could result in increased supply and lower market rental rates.
In addition, some of our competitors may be willing to make space available at lower prices than available space in our properties.

We may be unable to renew expiring leases, lease vacant space or re-lease space on a timely basis or on comparable or better
terms.Leases representing 14% of our annualized base rent (excluding residential rental properties) at December 31, 2005, expire on or before
December 31, 2006. In addition, leases accounting for 23% and 12% of the annualized base rent expire on or before December 31, 2007 and December 31, 2008, respectively. Current
tenants may not renew their leases upon the expiration of their terms; or we may not be able to locate qualified replacement tenants under acceptable terms.

We
cannot assure you that our tenants will not default on their leases and fail to make rental payments to us. Moreover, we may be unable to locate a replacement tenant in a timely manner or on
comparable or better terms if a tenant defaults on its lease. The loss of rental revenues from a number of our tenants and our inability to replace such tenants may adversely affect our profitability
and our ability to meet our financial obligations.

Increased interest rates would raise our cost of capital and could affect our ability to obtain new mortgage debt or refinance existing mortgage
debt.An increase in interest rates would increase our cost of capital, which may affect our ability to obtain new mortgage debt or to refinance existing mortgage
debt and would limit our ability to make future acquisitions. Higher interest rates upon refinancing mortgage debt would decrease cash flow from operations, negatively impacting our earnings and
lowering 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 in excess of increased earnings on our
short-term investments; thereby, negatively impacting our earnings. In addition, an increase in interest rates could decrease the amounts that third parties are willing to pay for our
assets; thereby, limiting our ability to alter our portfolio promptly in relation to economic or other conditions.

We may have difficulty obtaining financing in weak markets.Weak real estate markets not only affect the prices for which real estate
properties can be purchased or sold, and rental revenues, but also affect the availability of financing. Under such conditions we may have difficulty refinancing existing acquisition and construction
financing with long-term financing, which could result in our having to accept less favorable financing terms or use our cash resources to repay indebtedness that otherwise would be
refinanced. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity securities, cash flow
will not be sufficient to repay all maturing debt in years when significant "balloon" payments come due.

Our debt level may impair our ability to pursue our business plan.As of December 31, 2005, our indebtedness totaled $485,526,000,
and we are likely to incur significant additional debt to finance future acquisition and development activities. In addition, in March 2006, we increased our line of credit facility from
$32,200,000 to $50,000,000. Our level of debt and the limitations imposed on us by our debt agreements creates risks, including the following:



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If
the economic performance of any of our properties declines, our ability to make debt service payments could be adversely affected. If a property is mortgaged to secure payment of indebtedness and
we are unable to meet mortgage payments, we may lose that property to lender foreclosure.

We
do not have a policy limiting the amount of debt that we may incur. Furthermore, our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur. Accordingly, our
management and board of directors have discretion to increase the amount of our outstanding debt at any time without approval by our stockholders. Changes in our debt policies could expose us to
greater credit risk, interest rate risk or result in a more leveraged balance sheet. If we become highly leveraged, then the resulting increase in debt service could adversely affect our ability to
make payments on our outstanding indebtedness and may harm our financial condition.

Weaker economic conditions in the markets in which our properties are located could adversely affect our financial condition.Our
commercial properties are located primarily in and around Washington, D.C.; Wilmington, Delaware; Philadelphia, Pennsylvania; and Baltimore, Maryland metropolitan areas. As of January 2006 we
are also active in the Houston, Texas metropolitan area. Our residential rental properties are principally located in the Central Florida and Washington, D.C. areas. A decline in the economies of one
or more of our core real estate markets, or in the U.S. economy as a whole, could adversely affect our financial position, results of operations, cash flow and ability to make distributions to
shareholders.

We are investing in properties in real estate markets that are outside our core geographic markets.We have begun to make, and will
continue to make, acquisitions or develop properties outside of our core geographic areas, and may not be able to operate effectively outside of those core markets. We may be exposed to a variety of
risks if we choose to enter new markets. These risks include:



Our insurance may not be adequate to cover losses, including those that result from environmental damage or terrorist acts.We carry
comprehensive general liability, property, flood, earthquake and rental loss insurance with respect to our properties within insured limits and policy specifications that we believe are customary for
similar properties. There are specific types of losses, 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, for which we cannot obtain insurance at a reasonable cost.

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

The costs of compliance with or liabilities under environmental laws may adversely affect our operating results.Our operating expenses
could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. As an owner of real property, we can be liable for environmental contamination
created by the presence or discharge of hazardous substances on the property, regardless of:



There may be environmental problems associated with our properties of which we are unaware.We could be held liable for the environmental
costs associated with the release of regulated substances or related claims, whether by us, our tenants, former owners or tenants of the affected property or others. The presence of hazardous
substances on a property could result in personal injury or other claims by private parties; such claims could result in costs or liabilities that could exceed the value of that property.

We
are aware of asbestos-containing materials that exist in the Waterfront Complex that will require remediation as part of the property's redevelopment. A $3,000,000 escrow account to address the
asbestos removal project at the

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Waterfront
Complex has been established, of which we contributed 54%. This amount is in excess of written estimates of the cost to remediate and clean the site; however, we can not be certain that
these amounts will be adequate.

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

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem and which could adversely
affect the value of our properties.Molds exist everywhere and reproduce under most levels of moisture and temperature. Some molds may produce airborne toxins or
irritants. Concern about indoor exposure to mold has been increasing because exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a
result, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

We are controlled by the Bresler and Reiner families, whose interests may differ from those of other shareholders.As of March 25,
2006, members of the Bresler and Reiner families, which include members of our current board of directors and executive officers, owned over 70% of our common stock. As a result of their ownership,
these family members have the ability to elect our board of directors and to control our management and policies. Generally, they may also determine, without the consent of our other shareholders, the
outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and prevent
or cause a change in control.

We expect to experience significant growth in the future and may not be able to adapt our management and operational systems to integrate additional properties without
unanticipated significant disruption or expense.During the two year period ended December 31, 2005, we acquired 22 commercial office buildings containing
1,900,000 square feet of space for a total purchase price of $244,000,000. We intend to continue to make a significant number of additional acquisitions and cannot assure you that we will be able to
adapt our management, administrative, accounting and operational systems to integrate the properties into our portfolio, or that we will be able to manage any future acquisitions of additional
properties without operating disruptions or unanticipated costs. In addition, acquisitions will require substantial attention from our management, and may cause disruptions in our operations and
divert management's attention away from day-to-day operations. Our failure to successfully integrate additional property acquisitions into our portfolio could have a material
adverse effect on our results of operations and financial condition.

If our property managers or leasing agents default on their obligations, operating results from affected properties could suffer and we may have difficulty finding
replacements.We outsource property management and leasing of our properties to local property managers and leasing agents, who perform all
day-to-day property management and leasing functions for our properties. Although we oversee our property managers and leasing agents, they may not satisfy their obligations
under our agreements. If they fail to do so, our relationships with our tenants could be damaged or we could incur liabilities from loss or injury at a property. In either case our operating results
and financial condition could be negatively affected. If a property manager or leasing agent breaches its agreement with us, we will seek to replace them. However, we may not be able to obtain
suitable replacements within the relevant market. In addition, as we enter a new market we will seek to engage local third-party property managers, leasing agents and other service providers. However,
we may not be able to identify such service providers who meet our standards and who are capable of complying with our property management and leasing guidelines.

Property ownership through joint ventures may limit our ability to act exclusively in our interests.Several of our properties are owned
through joint ventures with third parties. We could become engaged in a dispute with one or more of our joint venture partners that might affect our ability to operate a jointly-owned property.
Moreover, our joint venture partners may have business objectives that are inconsistent with ours or may have competing interests that could create conflicts of interest. If the objectives of our
joint venture partners are inconsistent with ours, we may not be able to act exclusively in our interests.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unanticipated expenditures that adversely affect our financial
condition.Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by
disabled persons. We believe our properties substantially comply with present requirements of the ADA; however, if found non-compliant we would have to incur additional costs to bring the
property into compliance.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Commercial Rental Properties

We owned or held an ownership interest in the following commercial office properties at December 31, 2005:

|                                 |                                                  | Location             |  | Date of
Acquisition/
Opening |  | Number of
Buildings |     | Square
Feet |       | Occupancy
at 12/31/05 |     | B&R
Ownership |     | Loan
Balance at
12/31/05 |        | Purchase
Price/
Development
Cost (8)
|-------------------------------- | ------------------------------------------------ | -------------------- |  | ---------------------------- |  | ------------------- | --- | ----------- | ----- | --------------------- | --- | ------------- | --- | ------------------------ | ------ | ------------------------------------
|
|Consolidated Properties (1)      |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     
|Washington Business Park         |                                                  | Lanham, MD           |  | 2001                         |  | 9                   | (2) | 568         |       | 93.7%                 |     | 80.0%         |     | $                        | 38,586 |                                     
|Historic Baltimore Portfolio (3) |                                                  | Baltimore, MD        |  | 2004                         |  | 4                   |     | 409         |       | 77.1%                 |     | 51.0%         | (5) |                          | 16,421 |                                     
|Fort Washington Executive Center |                                                  | Ft. Washington, PA   |  | 2004                         |  | 3                   |     | 393         |       | 98.8%                 |     | 97.5%         | (6) |                          | 47,921 |                                     
|919 Market Street                |                                                  | Wilmington, DE       |  | 2005                         |  | 1                   |     | 223         |       | 93.8%                 |     | 100.0%        | (7) |                          | 35,600 |                                     
|Versar Center                    |                                                  | Springfield, VA      |  | 2002                         |  | 2                   |     | 217         |       | 90.0%                 |     | 100.0%        |     |                          | 17,869 |                                     
|1105 Market Street               |                                                  | Wilmington, DE       |  | 2005                         |  | 1                   |     | 173         |       | 49.8%                 | (4) | 100.0%        | (7) |                          | 19,000 |                                     
|Sudley North (Buildings A,B&C)   |                                                  | Manassas, VA         |  | 1987                         |  | 3                   |     | 116         |       | 91.4%                 |     | 100.0%        |     |                          | 10,275 |                                     
|West Germantown Pike             |                                                  | Plymouth Meeting, PA |  | 2004                         |  | 2                   |     | 115         |       | 94.6%                 |     | 98.1%         | (6) |                          | 15,852 |                                     
|One Northbrook                   |                                                  | Trevose, PA          |  | 2004                         |  | 1                   |     | 95          |       | 84.8%                 |     | 100.0%        | (7) |                          | 14,973 |                                     
|Wynwood                          |                                                  | Chantilly, VA        |  | 2005                         |  | 2                   |     | 88          |       | 100.0%                |     | 100.0%        |     |                          |       |                                     
|Cross Keys                       |                                                  | Doylestown, PA       |  | 2005                         |  | 1                   |     | 82          |       | 97.8%                 |     | 100.0%        | (7) |                          | 10,855 |                                     
|102 Pickering Way                |                                                  | Exton, PA            |  | 2005                         |  | 1                   |     | 80          |       | 97.9%                 |     | 100.0%        | (7) |                          | 10,069 |                                     
|Sudley North (Building D)        |                                                  | Manassas, VA         |  | 1987                         |  | 1                   |     | 69          |       | 100.0%                |     | 50.0%         |     |                          | 6,183  |                                     
|900 Northbrook                   |                                                  | Trevose, PA          |  | 2003                         |  | 1                   |     | 66          |       | 94.0%                 |     | 90.0%         | (6) |                          | 10,937 |                                     
|Fort Hill                        |                                                  | Centreville, VA      |  | 2000                         |  | 1                   |     | 66          |       | 96.0%                 |     | 80.0%         |     |                          | 5,493  |                                     
|7800 Building                    |                                                  | Manassas, VA         |  | 1988                         |  | 1                   |     | 15          |       | 100.0%                |     | 100.0%        |     |                          |       |                                     
|Bank Building                    |                                                  | Manassas, VA         |  | 1991                         |  | 1                   |     | 3           |       | 100.0%                |     | 100.0%        |     |                          | 958    |                                     
|                                 |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     
|                                 | Total consolidated properties                    |                      |  |                              |  |                     | 35  |             | 2,778 |                       |     |               |     |                          |        | 260,992                             
|                                 |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     
|Unconsolidated Properties (1)    |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     
|1925 K Street                    |                                                  | Washington, DC       |  | 2002                         |  | 1                   |     | 149         |       | 99.2%                 |     | 85.0%         |     |                          | 19,785 |                                     
|Devon Square                     |                                                  | Devon, PA            |  | 2005                         |  | 2                   |     | 140         |       | 61.4%                 | (4) | 5.5%          |     |                          | 13,064 |                                     
|Madison Building                 |                                                  | McLean, VA           |  | 2002                         |  | 1                   |     | 82          |       | 96.3%                 |     | 24.9%         |     |                          | 14,060 |                                     
|                                 |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     
|                                 | Total unconsolidated properties                  |                      |  |                              |  |                     | 4   |             | 371   |                       |     |               |     |                          |        | 46,909                              
|                                 |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     
|                                 | Total consolidated and unconsolidated properties |                      |  |                              |  |                     | 39  |             | 3,149 |                       |     |               |     |                          | $      | 307,901                             
|                                 |                                                  |                      |  |                              |  |                     |     |             |       |                       |     |               |     |                          |        |                                     

NOTES:

---

10

---



Subsequent to December 31, 2005, and prior to the issuance of this report, we acquired additional commercial properties in the Philadelphia,
Pennsylvania; and in the Houston, Texas metropolitan markets. See Note 18 of Notes to Consolidated Financial Statements.

Residential Apartment Properties

We owned or held an ownership interest in the following residential apartment properties at December 31, 2005:

|                            |                                       | Location          |  | Date of
Acquisition/
Opening |  | Apt.
Units |       | Occupancy at
12/31/05 |  | B&R
Ownership % |  | Loan
Balance at
12/31/05 |        | Purchase
Price/
Development
Cost (2)
|--------------------------- | ------------------------------------- | ----------------- |  | ---------------------------- |  | ---------- | ----- | --------------------- |  | --------------- |  | ------------------------ | ------ | ------------------------------------
|
|Consolidated Properties (1) |                                       |                   |  |                              |  |            |       |                       |  |                 |  |                          |        |                                     
|The Fountains               |                                       | Orlando, FL       |  | 2003                         |  | 400        |       | 94.8%                 |  | 100.0%          |  | $                        | 39,500 |                                     
|Victoria Place              |                                       | Orlando, FL       |  | 2003                         |  | 364        |       | 93.4%                 |  | 85.0%           |  |                          | 32,907 |                                     
|Charlestown North           |                                       | Greenbelt, MD     |  | 1971                         |  | 178        |       | 94.4%                 |  | 100.0%          |  |                          | 4,816  |                                     
|                            |                                       |                   |  |                              |  |            |       |                       |  |                 |  |                          |        |                                     
|                            | Total Consolidated Properties         |                   |  |                              |  |            | 942   |                       |  |                 |  |                          |        | 77,223                              
|                            |                                       |                   |  |                              |  |            |       |                       |  |                 |  |                          |        |                                     
|Unconsolidated Property (1) |                                       |                   |  |                              |  |            |       |                       |  |                 |  |                          |        |                                     
|Arbor Crest                 |                                       | Silver Spring, MD |  | 2004                         |  | 80         |       | 97.5%                 |  | 33.3%           |  |                          | 9,000  |                                     
|                            |                                       |                   |  |                              |  |            |       |                       |  |                 |  |                          |        |                                     
|                            | Total Consolidated and Unconsolidated |                   |  |                              |  |            | 1,022 |                       |  |                 |  |                          | $      | 86,223                              
|                            |                                       |                   |  |                              |  |            |       |                       |  |                 |  |                          |        |                                     

---

Hospitality Properties

We owned the following hospitality properties at December 31, 2005:

|                     |  | Location         |  | Rooms |  | Date of
Acquisition/
Opening |  | Average
Room
Rate
for the
Year
Ended 12/31/05 |        | REVPAR
for the
Year
Ended 12/31/05 |   | Occupancy
for the
Year
Ended 12/31/05 |  | B&R
Ownership
% |  | Loan
Balance at
12/31/05 |  | Purchase
Price/
Development
Cost
|-------------------- |  | ---------------- |  | ----- |  | ---------------------------- |  | --------------------------------------------- | ------ | ---------------------------------- | - | ------------------------------------- |  | --------------- |  | ------------------------ |  | --------------------------------
|
|Inn at the Colonnade |  | Baltimore, MD    |  | 125   |  | 1993                         |  | $                                             | 137.99 |                                    | $ | 92.86                                 |  | 67.3%           |  | 100.0%                   |  | $                               
|Holiday Inn Express  |  | Camp Springs, MD |  | 151   |  | 1987                         |  | $                                             | 88.77  |                                    | $ | 56.01                                 |  | 63.1%           |  | 100.0%                   |  |                                 
|                     |  |                  |  |       |  |                              |  |                                               |        |                                    |   |                                       |  |                 |  |                          |  |                                 
|Total                |  |                  |  | 276   |  |                              |  |                                               |        |                                    |   |                                       |  |                 |  |                          |  | $                               
|                     |  |                  |  |       |  |                              |  |                                               |        |                                    |   |                                       |  |                 |  |                          |  |                                 

11

---



Commercial, Residential and Land Development

We owned or had an ownership interest in the following development projects at December 31, 2005:

|Project Name                  |                                                | Location         |  | Date of
Acquisition |  | Development
Type           |  | Size (1)            |  | Number
sold (2) |     | B&R
Ownership
% |  | Loan
Balance at
12/31/05
|----------------------------- | ---------------------------------------------- | ---------------- |  | ------------------- |  | -------------------------- |  | ------------------- |  | --------------- | --- | --------------- |  | ------------------------
|
|Consolidated Properties (3)   |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|Laguna Vista                  |                                                | Ocean City, MD   |  | 2003                |  | Residential Condominiums   |  | 41 units            |  | 19              |     | 100.0%          |  | $                       
|400 S Philadelphia Ave. (6)   |                                                | Ocean City, MD   |  | 2004                |  | Residential Condominiums   |  | 20 units            |  |                |     | 51.0%           |  |                         
|Crisfield                     |                                                | Ocean City, MD   |  | 2005                |  | Residential Lots           |  | 232                 |  | 16              |     | 51.0%           |  |                         
|Red Mill Pond                 |                                                | Ocean City, MD   |  | 2005                |  | Residential Lots           |  | 541                 |  |                |     | 51.0%           |  |                         
|Seaside                       |                                                | Ocean City, MD   |  | 2004                |  | Residential Lots           |  | 138 lots            |  | 18              |     | 51.0%           |  |                         
|Waterfront                    |                                                | Washington, DC   |  | 1964                |  | Commercial Office Complex  |  | 1,144,000 sq ft (4) |  |                | (5) | 46.0%           |  |                         
|1150 Northbrook               |                                                | Trevose, PA      |  | 2003                |  | Commercial Office Building |  | 108,000 sq. ft.     |  |                | (5) | 100.0%          |  |                         
|Sudley South                  |                                                | Manassas, VA     |  |                     |  | Commercial Office Condo    |  | 54,000 sq. ft.      |  |                |     | 100.0%          |  |                         
|640 N Broad Street (6)        |                                                | Philadelphia, PA |  | 2004                |  | Residential Apartments     |  | 266 units           |  |                | (5) | 86.5%           |  |                         
|Divine Lorraine (7)           |                                                | Philadelphia, PA |  | 2003                |  | Residential Apartments     |  | 135 units           |  |                | (5) | 95.0%           |  |                         
|                              |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|                              | Total consolidated projects                    |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|                              |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|Unconsolidated Properties (3) |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|Symphony House                |                                                | Philadelphia, PA |  | 2005                |  | Residential Condominiums   |  | 163 units (8)       |  |                |     | 22.3%           |  |                         
|Venice Lofts                  |                                                | Philadelphia, PA |  | 2005                |  | Residential Condominiums   |  | 128 units           |  |                |     | 22.3%           |  |                         
|Washington Business Park Land |                                                | Lanham, MD       |  | 2001                |  | Undeveloped Land           |  | 79 acres            |  | 29 acres        |     | 80.0%           |  |                         
|                              |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|                              | Total unconsolidated projects                  |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|                              |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|                              | Total consolidated and unconsolidated projects |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         
|                              |                                                |                  |  |                     |  |                            |  |                     |  |                 |     |                 |  |                         

NOTES:

---

12

---



In addition, we benefited from the following development projects for which we either had sold all remaining units or we had sold our membership interest in,
during 2005.

|Project Name     |  | Location           |  | Date of
Acquisition |  | Development Type         |  | Number sold in 2005                        |  | B&R
Ownership
%
|---------------- |  | ------------------ |  | ------------------- |  | ------------------------ |  | ------------------------------------------ |  | ---------------
|Clarksburg Ridge |  | Clarksburg, MD     |  | 2003                |  | Residential Lots         |  | remaining 10 lots of 159 unit subdivision  |  | 100.0%         
|Golfview         |  | St. Petersburg, FL |  | 2004                |  | Residential Condominiums |  | remaining 137 units of a 139 unit property |  | 50.0%          
|Cigar Factory    |  | Philadelphia, PA   |  | 2003                |  | Residential Condominiums |  | 11 units of a 30 unit property(1)          |  | 66.7%          
|146th Street     |  | Ocean City, MD     |  | 2004                |  | Residential Condominiums |  | (2)                                       |  | 51.0%          

---

Major Tenants

There are no tenants or recurring customers whose revenues are 10% or more of our total operating revenues from continuing operations. The following is a table of our three
largest tenants:

|Tenant Name                                          |  | Property Name
Location                         |  | Lease
Maturity
Date |  | Base Rental Income for
the 12 months ended
December 31, 2005 |           | Percent of
commercial
Rental Revenue
for the twelve
months ended
December 31, 2005 |       | Percent of
Total Operating
Revenue
for the twelve
months ended
December 31, 2005
|---------------------------------------------------- |  | ---------------------------------------------- |  | ------------------- |  | ------------------------------------------------------------ | --------- | ---------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------
|Hartford Fire Insurance Company                      |  | Ft Washington Executive Ctr. Ft Washington, PA |  | 2007                |  | $                                                            | 4,617,000 |                                                                                    | 10.0% |                                                                                 
|Platinum Technology, Inc.                            |  | W Germantown Pike Plymouth Meeting, PA         |  | 2009                |  | $                                                            | 2,169,000 |                                                                                    | 4.7   |                                                                                 
|Board of County Supervisors of Prince William County |  | Sudley North
Manassas, VA                      |  | 2009                |  | $                                                            | 1,343,000 |                                                                                    | 2.9   |                                                                                 

ITEM 3. LEGAL PROCEEDINGS

We
are currently a party to a lawsuit filed by its partner in a joint venture that owns one of its commercial properties. The suit was filed in the Circuit Court of Montgomery County, Maryland in
December 2005. A motion for preliminary injunction preventing any sale or further encumbrance of the property was denied by the Court in February 2006. The
plaintiff seeks $15,000,000 in damages for breach of fiduciary duty and fraud and $25,000,000 for exemplary and punitive damages. Our management believes the complaint is without merit and intends to
vigorously defend the lawsuit.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No
matters were submitted to the vote of the security holders during the fourth quarter of 2005.

13

---





Executive Officers of the Registrant

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

The
following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on
June 14, 2006

|Name                |  | Age |  | Positions & Offices                                     |  | Date Elected to Office             
|------------------- |  | --- |  | ------------------------------------------------------- |  | -----------------------------------
|Charles S. Bresler  |  | 78  |  | Chairman & Director                                     |  | June 1970                          
|Sidney M. Bresler   |  | 51  |  | Chief Executive Officer, Director & Assistant Secretary |  | June 2002
August 2002
February 2003
|Jean S. Cafardi     |  | 59  |  | Corporate Secretary                                     |  | November 2000                      
|Darryl M. Edelstein |  | 38  |  | Chief Operating Officer & Treasurer                     |  | March 2005
May 2004                
|Robert O. Moore     |  | 57  |  | Chief Financial Officer                                 |  | August 2005                        

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

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

Each
officer has held the above positions as his principal occupation for more than the past five years with the exception of Mr. Sidney M. Bresler, Mr. Darryl M. Edelstein, and
Mr. Robert O Moore.

Prior
to June 2002 and during his seventeen years of employment with the Company, Mr. Sidney M. Bresler has served in various capacities.

Mr. Darryl
M. Edelstein joined us in August 2003, as our Chief Financial Officer. He became our Chief Operating Officer in March 2005. During the previous five years
Mr. Edelstein worked at the Company and in various finance capacities for Crestline Capital Corporation. During the eight years prior to that he worked in various finance and accounting
capacities at Host Marriott Corporation, Kraft Foods Inc. and Ernst & Young, LLP. Mr. Edelstein is a CPA.

Mr. Robert
O. Moore joined us in August 2005 as our Chief Financial Officer. He served from 2002 until 2005 as Chief Financial Officer and Treasurer of The Deltona Corporation, a real
estate development company. He served from 2000 to 2001 as Chief Financial Officer of SkyWay Partners, Inc, an operator/contractor for voice, video and data services for multi-tenant properties. From
1985 through 2000 he served as Chief Financial Officer for several public and private companies. Mr. Moore began his career as a CPA for Coopers & Lybrand where he worked for over
10 years.

14

---



PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is traded in the over-the-counter market. The following table presents the high and low bid quotations for the periods
shown, as reported by the National Quotation Bureau, Inc.

|     |                | High |   | Low  
|---- | -------------- | ---- | - | -----
|2005 |                |      |   |      
|     | First Quarter  |      | $ | 30.00
|     | Second Quarter |      |   | 33.50
|     | Third Quarter  |      |   | 39.00
|     | Fourth Quarter |      |   | 36.00
|2004 |                |      |   |      
|     | First Quarter  |      | $ | 25.77
|     | Second Quarter |      |   | 28.25
|     | Third Quarter  |      |   | 30.87
|     | Fourth Quarter |      |   | 30.00

The
above quotations are adjusted for a 2-for-1 stock split which was effected in the form of a stock dividend on September 1, 2004. These quotations also represent
prices between dealers and do not include retail markup, markdown or commissions and do not represent actual transactions. As of March 4, 2006, there were 77 record holders of Common Stock.

On
May 10, 2005, our Board of Directors declared a cash dividend 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 on December 15, 2005. On May 17, 2004, our Board of Directors declared a cash dividend of $0.25 per common share, $0.125 per share of which was paid on June 15,
2004. The remaining dividend payment was made on December 15, 2004 at an adjusted per share amount of $0.125. All per share amounts have been adjusted to take into account the
2-for-1 stock split. Prior to 2004, we had not declared any dividends.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial data (in thousands, except weighted average number of common shares outstanding and per share amounts). The
historical financial data should be read in conjunction with the consolidated financial statements and accompanying notes and the discussion set forth in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations," each included elsewhere in this Form 10-K.

Years Ended December 31,2005

2004

2003

2002

2001Operating revenues

$
122,944

$
77,646

$
31,298

$
52,833

$
46,891(Loss) income from continuing operations

$
(3,069
)
$
3,276

$
1,832

$
5,300

$
9,564Net (loss) income

$
(2,249
)
$
4,419

$
9,581

$
6,086

$
10,216(Loss) income from continuing operations per common share, basic and diluted

$
(0.56
)
$
0.60

$
0.33

$
0.97

$
1.75(Loss) earnings per common share, basic and diluted

$
(0.41
)
$
0.81

$
1.75

$
1.11

$
1.87Total assets

$
763,998

$
535,180

$
348,249

$
243,492

$
203,778Long-term obligations(3)

$
485,526

$
311,227

$
183,142

$
100,586

$
72,496Cash dividends per common share

$
0.28

$
0.25


(1
)

(1
)

(1
)Weighted average number of common shares outstanding(2)


5,477,212


5,477,212


5,477,212


5,477,502


5,477,812


---

15

---



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

Overview

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

Over
the three year period ending December 31, 2005, we aggressively acquired real estate assets, more than trebling our total assets. In doing so we have applied a dual investment approach,
investing in both operating commercial and residential properties that generate immediate returns that are relatively stable and predictable in addition to investments in development projects where
returns are generally higher but are less immediate and predictable.

In
order to maximize returns on our investments we have implemented a strategy that includes targeting properties with stable cash flows and upside potential; using third party property managers and
leasing agents; partnering with regional and national developers; employing intensive asset management and oversight; utilizing successful bidding and due diligence techniques; and using prudent
leverage. To implement our strategy we took advantage of our strong liquidity position, a low interest rate environment and our core strengths, including our extensive experience and knowledge of the
real estate industry; our strong relationships with financial institutions, real estate investors, management companies and developers; our ability to perform due diligence, arrange financing and
execute a transaction in an efficient and expedient manner; and our reputation and track record for executing such transactions.

During
this three year period we acquired, through both wholly-owned subsidiaries and joint venture entities with unaffiliated third parties that we consolidate into our Consolidated Financial
Statements, a total of 21 commercial office
buildings containing 1,845,000 square feet of office space and two residential apartment properties containing 764 apartment units. The total purchase price of these acquisitions was $331,000,000. In
connection with these acquisitions, we obtained or assumed fixed-rate mortgage debt totaling $203,000,000 at an average interest rate of 5.5% and obtained variable-rate
mortgage debt of $34,000,000.

During
this three year period we also acquired, through joint venture entities with unaffiliated third parties, 14 parcels of real estate for the purpose of developing residential for-sale
condominium units, residential rental apartment units and residential lots.

In
the first quarter of 2005, with the goal of raising additional capital for future growth, we decided to monetize several of our commercial properties in which we had significant equity positions,
but for which debt refinancing was prohibitively expensive due to high loan prepayment costs, through the sale of these properties to a newly created Real Estate Investment Trust called Midlantic
Office Trust Inc. (Midlantic). We participated as a sponsor for Midlantic's proposed initial public offering (IPO). Due to general market conditions, in the third quarter of 2005, Midlantic
determined not to proceed with its IPO. Subsequent to this, we focused on additional sources of capital and in the remainder of 2005 completed a private placement of $40,000,000 of trust preferred
securities, generating net proceeds of $38,748,000. In the first quarter of 2006, we amended our unsecured line of credit to increase the borrowing capacity to $50,000,000 from $32,200,000.

We
continued to utilize our liquidity in the first quarter of 2006, through the acquisition of 11 commercial office and warehouse buildings containing 882,000 square feet of space with purchase prices
totaling $85,759,000. In connection with these acquisitions we incurred or assumed mortgage debt totaling $68,725,000. These acquisitions included eight buildings located in Houston, Texas,
representing an expansion of our geographic footprint beyond the East Coast.

We
are focused on growing our portfolio of assets, and acquiring properties for long term investment. However, we consider and evaluate the sale of existing properties and our investments in
development projects when we believe we can re-deploy the sales proceeds and achieve superior returns through investments in a new property or development opportunity rather than
continuing to own and operate the existing property.

During
the three year period ended December 31, 2005, we sold five commercial office buildings containing 183,000 square feet of space, a residential apartment complex containing 116 apartment
units, five commercial properties leased to convenience store operators; and our interests in three development projects. We also entered into agreements to sell three additional commercial buildings
containing 205,000 square feet, and our interests in two development projects,

16

---



which
either closed or are expected to close in 2006. Where possible, we structure the sales of our properties as part of a tax free exchange under §1031 of the US Internal Revenue Code,
which provides for the deferral of the gain on the sale.

We
intend to continue to utilize our liquidity position and access to borrowings under our line of credit to both acquire operating properties and to invest in development real estate. We may continue
to expand into other geographic regions should properties in these regions meet our criteria as attractive investment opportunities. Challenges we will face over the course of the year include an
interest rate environment that may not be as accommodating as it has been in recent years and a general softening in the housing and condominium market.

It
is widely anticipated that the Federal Reserve will continue to raise short term interest rates in 2006 and while the yield curve has remained flat or at times been inverted, there is no assurance
that the yield curve will not change over the course of the year. A higher interest rate environment would raise our cost of capital, thereby putting pressure on the returns on our invested equity.
Higher interest rates would also adversely affect sales at our development projects, since higher potential mortgage payments could lower the amount buyers would be prepared to pay for houses and
condominium units. Conversely, we may benefit from a higher interest rate environment through higher occupancy rates at our residential apartment properties since fewer tenants will likely vacate
their apartments in order to purchase their own homes.

A
softening in the housing market could adversely affect sales of our condominium units. Sales at our land development projects will be less affected by the general softening in the housing market
since we have entered into purchase and sale agreements for all our current land development projects with national homebuilders who have provided significant non-refundable deposits.

The
discussion that follows is based primarily on our consolidated balance sheets as of December 31, 2005 and 2004, and the results of operations for the years ended December 31, 2005,
2004 and 2003 and should be read with our Consolidated Financial Statements. The ability to compare one period to another may be significantly affected by operating properties in the process of being
repositioned, acquisitions and dispositions of commercial and residential properties, development projects and the acquisition and subsequent partial sale of undeveloped commercial and residential
lots. Historical results set forth in our consolidated financial statements are not necessarily indicative of our future financial position and results of our operations.

Application of Critical Accounting Policies.Our accounting policies comply with accounting principles generally accepted in the United
States. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties. We have made best estimates and judgments of certain amounts
included in the financial statements. However, actual results could differ from these estimates and a change in the facts and circumstances of the underlying transactions could significantly change
the application of an accounting policy and the resulting financial statement impact. We have listed below those policies that we believe are critical and require the use of significant judgment in
their application.

Rental Property and Equipment.Rental property and equipment is stated at cost. We use judgment in order to allocate the purchase price of
all acquired assets and assign useful lives to those assets that have finite lives. Depreciation expense is computed using the straight-line method applied over the deemed useful life of
depreciable assets, generally 39 years for buildings and three to ten years for furniture, fixtures and equipment. Replacements and renovations that extend the useful life of an asset are
capitalized and depreciated over their estimated useful lives. Repairs, maintenance and minor improvements are expensed as incurred. The allocation of the purchase price to assets or assignment of
useful lives will affect the amount of depreciation expense recorded.

Upon
acquisitions of real estate, we assess the fair value of the acquired assets (including land, buildings and improvements, and identified intangibles such as above- and below -market leases and
acquired in-place leases and tenant relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinationsand SFAS
No. 142,Goodwill and Other Intangible Assetsand allocate
purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market conditions that may affect the property.

In
accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate the recoverability of
long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured based on net, undiscounted
expected cash flows. Assets are

17

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considered
to be impaired if the undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value
of the asset and its fair value.

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

In
accordance with SFAS No. 143, and FASB Interpretation No. 47, we recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are 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 conditional costs and depreciated over the useful life of the respective
asset. The amount recorded on our books related to the recognition of this liability could vary significantly depending on the assumptions used.

In
accordance with SFAS No. 141, we record on our balance sheet the fair value of debt assumed in connection with our acquisitions. In order to calculate the fair value of assumed debt, we
discount the cash flows relating to the debt by an interest rate that is an estimate of the market rate of interest for a loan of that type, taking into account such factors as the cash flow generated
by the property, any guarantees of indebtedness, and the amount of debt relative to the property's fair market value. The estimate of fair value of the assumed debt will affect our interest expense
and the carrying amount of the assumed debt on our balance sheet.

Cost of Real Estate Sales.Homebuilding and land development costs are charged to the cost of the homes and land parcels sold under either
the specific identification or relative sales value basis methods, based on what is deemed more appropriate for the project. The relative sales value basis method requires us to estimate the total
project revenue. An inaccurate projection of total revenue would affect the cost of sales recorded related to the sale of homes and developed land.

Investments in Joint Ventures.For all investments not wholly-owned, we determine if the entity is a variable interest entity (VIE). Such a
determination includes, among other requirements that we evaluate whether the equity investment at risk is sufficient to allow the entity to finance its activities without additional subordinated
support from others. If the equity at risk is not sufficient then the entity is considered a VIE and is subject to consolidation based on the guidelines of FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities(FIN 46R). If the equity at risk is sufficient, and various other conditions are met, then the entity is not
considered to be a VIE.

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

Our
evaluation of the sufficiency of equity at risk and our determination of the primary beneficiary is based on subjective assessments that involve our estimating a number of possible future outcomes
of cash flows for the entity as well as the probability of each outcome occurring. This process includes our estimating future operating income and losses, taking into account industry trends, the
impact of macro economic forces, as well as the effects of demand, competition and other factors. The evaluation of the sufficiency of equity of an entity and the determination of the primary
beneficiary will affect the presentation of that entity in our consolidated balance sheet and results of operations.

Deferred Charges and Other Assets.Fees incurred in connection with obtaining financing are deferred and amortized as a part of interest
expense over the term of the related debt instrument on a straight-line basis, which approximates the effective interest method. Tenant allowances incurred at the origination of a lease
are deferred and amortized on a straight-line basis over the term of the related lease. Lease commissions incurred to originate a lease are deferred and amortized on a
straight-line basis over the term of the related lease.

Included
in Other Assets is the value of acquired in-place leases for purchased properties. In accordance with SFAS No. 141 and SFAS No. 142 we allocate a portion of the real
estate acquisition purchase price to acquired in-place leases based on the relative fair values of the assets and liabilities acquired. In order to determine the amount of the purchase
price to be allocated to the acquired leases, we develop assumptions regarding the relative value of the in-place leases when compared to the current market. Some of the judgments required
as part of this exercise include (1) determining the market rental rates of the acquired leases (2) estimating the market value of concessions (including rent concessions and tenant
improvement allowances) and leasing commissions to be paid on new leases (3) estimating an appropriate lease-up period and (4) applying an estimated risk-adjusted
discount rate to the existing tenant's leases. The amount

18

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allocated
to in-place leases and the associated amortization of those leases could vary significantly depending on the assumptions used.

Other Liabilities.The application of FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", requires us to recognize, upon the issuance of a guarantee, a liability for the fair value of the obligation we assume. The
calculation of the fair value of this obligation involves significant judgment. The liability recorded for such obligation on our balance sheet could vary significantly depending on the assumptions
used.

Balance Sheet Overview

The following table reflects certain condensed balance sheet items as of the dates presented (in thousands):

|                                      |                                                | December 31, |   |         | 
|------------------------------------- | ---------------------------------------------- | ------------ | - | ------- | 
|
|
|Assets:                               |                                                |              |   |         | 
|                                      | Rental property and equipment, at cost         |              | $ | 409,563 | 
|                                      | Property and land development                  |              |   | 154,139 | 
|                                      | Cash, cash equivalents, and investments        |              |   | 73,848  | 
|                                      | Investments in and advances to joint ventures  |              |   | 30,053  | 
|                                      | Deferred charges and other assets, net         |              |   | 45,770  | 
|                                      | Total assets                                   |              |   | 763,998 | 
|Liabilities and Shareholders' Equity: |                                                |              |   |         | 
|                                      | Mortgage and construction loans and other debt |              | $ | 485,526 | 
|                                      | Total liabilities                              |              |   | 586,940 | 
|                                      | Minority interest                              |              |   | 49,696  | 
|                                      | Shareholders' equity                           |              |   | 127,362 | 

Material
changes in assets include:



Material
changes in liabilities and shareholders' equity include:



19

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Financial Overview

Results of OperationsComparison of the results of operations for the year ended December 31, 2005 compared to
2004.

The
following table reflects key line items from our statements of operations for the twelve months ended December 31, 2005 and 2004 (in thousands, except percentages):

|                                                 |                                   | Years Ended December 31, |        |         |  |        |       
|------------------------------------------------ | --------------------------------- | ------------------------ | ------ | ------- |  | ------ | ------
|
|
|
|Operating revenues from:                         |                                   |                          |        |         |  |        |       
|                                                 | Homebuilding and residential lots |                          | $      | 55,364  |  | $      | 24,605
|                                                 | Commercial rental properties      |                          |        | 46,163  |  |        | 32,540
|                                                 | Residential rental properties     |                          |        | 11,365  |  |        | 10,343
|                                                 | Hospitality properties            |                          |        | 9,713   |  |        | 8,099 
|                                                 | Total operating revenues          |                          |        | 122,944 |  |        | 77,646
|Cost of homebuilding and residential lots        |                                   |                          | 43,679 |         |  | 21,071 |       
|Commercial operating expenses                    |                                   |                          | 18,984 |         |  | 12,746 |       
|Residential operating expenses                   |                                   |                          | 5,028  |         |  | 5,017  |       
|Hospitality operating expenses                   |                                   |                          | 8,869  |         |  | 6,172  |       
|Commercial depreciation and amortization expense |                                   |                          | 12,760 |         |  | 8,985  |       
|General and administrative expense               |                                   |                          | 7,723  |         |  | 3,973  |       
|Withdrawn public offering costs                  |                                   |                          | 3,312  |         |  |       |       
|Interest income                                  |                                   |                          | 1,130  |         |  | 1,885  |       
|Interest expense                                 |                                   |                          | 20,462 |         |  | 13,890 |       
|Debt extinguishment costs                        |                                   |                          | 3,171  |         |  |       |       
|Gain on sale of investments in joint ventures    |                                   |                          | 1,551  |         |  | 624    |       
|Income from investments in joint ventures        |                                   |                          | 793    |         |  | 1,360  |       
|Minority interest                                |                                   |                          | 5,542  |         |  | 2,067  |       
|Net (loss) income                                |                                   |                          | (2,249 | )       |  | 4,419  |       

General Overview.Total operating revenues for 2005 increased by $45,298,000 over 2004. This was primarily due to revenue generated from
sales of condominium apartment units at Cigar Factory, Laguna Vista and Golfview, revenue generated from sales of developed lots at Seaside and Crisfield, and a full year's revenue from the operation
of commercial properties acquired during the fourth quarter of 2004 and during the year 2005.

Net
income for 2005 decreased by $6,668,000 from 2004. This decrease is primarily due to the one-time recognition of $3,312,000 of expenses associated with the withdrawal of the Midlantic
IPO, expenses of $3,171,000 related to the early extinguishment of debt, and $1,330,000 of retirement expenses incurred related to the retirement of one of the founders of the Company.

Homebuilding and Residential Lots.Homebuilding and residential lots revenue in 2005 increased by $30,759,000 from 2004. The increase can
be primarily attributed to the sale in 2005 of 10 developed lots at Clarksburg Ridge, 11 condominium units at Cigar Factory, 137 condominium units at Golfview, 19 condominium units at Laguna Vista, 18
lots at Seaside and 16 lots at Crisfield. In 2004, we sold 120 developed lots at Clarksburg Ridge, 13 condominium units at Cigar factory and two condominium units at Golfview.

The
increase in the cost of homebuilding and residential lots in 2005 by $22,608,000 compared to 2004 is a result of increased development sales described in the proceeding paragraph.

Commercial Rental Properties.The $13,623,000 revenue increase in 2005 compared to 2004 was primarily due to the operation of commercial
office properties acquired during the fourth quarter of 2004 and during 2005. Revenues from properties 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 Washington Business Park and Versar Center.

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Operating
expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. Operating expenses in 2005
increased by $6,238,000 compared to 2004 due to the addition of operating expenses of properties acquired in the fourth quarter of 2004 and in 2005. Operating expenses from properties that we owned
for a full twelve months in 2005 and 2004 were comparable.

Depreciation
and amortization expense in 2005 increased by $3,775,000 compared to 2004 due to the net increase in acquisitions.

Residential Rental Properties.The $1,022,000 increase in revenue in 2005 compared to 2004 was primarily due to higher occupancy and
increased rental rates at all three of our properties.

Operating
expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. Operating expenses in 2005 were
comparable with 2004.

Hospitality Properties.Revenue for 2005 increased by $1,614,000 compared to 2004, primarily due to the inclusion of $1,056,000 of food and
beverage revenue generated by The Club at the Colonnade, a restaurant on the premises of the Inn at the Colonnade. Prior to November 2004, the restaurant space was leased to an unrelated third
party operator. The revenue increase is also attributed to an increase in revenue per available room (RevPAR) in 2005 at both properties.

Operating
expenses, which consist of direct operating costs of the properties including property taxes and insurance, and excluding interest expense and depreciation expense, increased by $2,697,000
compared to 2004. The increase can be primarily attributed to inclusion of $1,879,000 of food and beverage expenses associated with The Club at the Colonnade; increased salary and benefits at the Inn
at the Colonnade due to the hiring of additional staff; and management fees incurred at the Holiday Inn due to the termination of the management agreement with a wholly-owned subsidiary and the
signing of a new management agreement with an unrelated third party management company in July 2004.

General and Administrative Expense.General and administrative expense increased by $3,750,000 in 2005 over 2004, primarily due to
retirement benefit expenses totaling $1,330,000 for Burton J Reiner, one of our co-founders. Of the retirement expenses $1,000,000 was paid in 2005 and $330,000 was accrued related to post
retirement benefits. We have also hired additional personnel and incurred other additional administrative costs due to the increased operations and moving to new premises.

Withdrawn Public Offering Costs.The $3,312,000 of expense relates to costs incurred by us associated with the proposed Midlantic initial
public offering, which were recorded by us upon Midlantic's decision to withdraw the offering.

Interest Income.The decrease in interest income of $755,000 for 2005 from 2004 was primarily due to the repayment of several notes
receivable from unrelated parties during the fourth quarter of 2004.

Interest Expense.The increase in interest expense of $6,572,000 in 2005 compared to 2004 was primarily due to interest on debt obtained or
assumed in connection with properties acquired during the fourth quarter of 2004 and during 2005. For the years ended December 31, 2005 and 2004, we capitalized interest of $1,979,000 and
$1,738,000, respectively, related to our investment in development projects.

Debt Extinguishment Costs.The $3,171,000 of expense are costs incurred related to the defeasance of debt secured by The Fountains and by
919 Market Street both of which we refinanced.

Gain on Sale of Investments in Joint Ventures.The increase of $927,000 in the gain on the sale of investments in joint ventures was a
result of our share of a gain on the sale of Foxchase Village, an unconsolidated low-income residential housing complex in the second quarter of 2005.

Income from Investments in Joint Ventures.Income from investments in joint ventures, which consists of income earned from joint ventures
that are not consolidated into our financial statements, decreased by $567,000 in 2005. This is attributed primarily to operating losses at Arbor Crest and decreased income from 1925 K Street. These
were offset, in part, by operating income from Devon Square.

Minority Interest.Minority interest expense, reflecting our minority partner's share of profits in joint ventures that we consolidate into
our consolidated financial statements, increased by $3,475,000 in 2005 compared to 2004 primarily due to sales of condominiums and lots at Cigar Factory, Golfview, Seaside and Crisfield.

21

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Results of OperationsComparison of the results of operations for the year ended December 31, 2004 compared to 2003.

The
following table reflects key line items from our statements of operations for the years ended December 31, 2004 and 2003 (in thousands, except percentages):

|                                                  |                                   | Years Ended December 31, |        |        |  |       |       
|------------------------------------------------- | --------------------------------- | ------------------------ | ------ | ------ |  | ----- | ------
|
|
|
|Operating Revenues from:                          |                                   |                          |        |        |  |       |       
|                                                  | Commercial rental properties      |                          | $      | 32,540 |  | $     | 15,864
|                                                  | Residential rental properties     |                          |        | 10,343 |  |       | 4,592 
|                                                  | Hospitality properties            |                          |        | 8,099  |  |       | 7,896 
|                                                  | Homebuilding and residential lots |                          |        | 24,605 |  |       | 1,633 
|                                                  | Other revenues                    |                          |        | 2,059  |  |       | 1,313 
|                                                  | Total operating revenues          |                          |        | 77,646 |  |       | 31,298
|Commercial operating expenses                     |                                   |                          | 12,746 |        |  | 6,484 |       
|Residential operating expenses                    |                                   |                          | 5,017  |        |  | 2,389 |       
|Hospitality operating expenses                    |                                   |                          | 6,172  |        |  | 5,236 |       
|Commercial depreciation and amortization expense  |                                   |                          | 8,985  |        |  | 4,272 |       
|Residential depreciation and amortization expense |                                   |                          | 2,680  |        |  | 1,025 |       
|Cost of homebuilding and residential lots         |                                   |                          | 21,071 |        |  | 1,650 |       
|General and administrative expense                |                                   |                          | 3,973  |        |  | 3,762 |       
|Interest expense                                  |                                   |                          | 13,890 |        |  | 8,025 |       
|Gain on sale of investments in joint ventures     |                                   |                          | 624    |        |  |      |       
|Income from investments in joint ventures         |                                   |                          | 1,360  |        |  | 1,725 |       
|Minority interest                                 |                                   |                          | 2,067  |        |  | 49    |       
|Income from discontinued operations, net of tax   |                                   |                          | 1,143  |        |  | 7,749 |       
|Net income                                        |                                   |                          | 4,419  |        |  | 9,581 |       

General Overview.Total operating revenues for 2004 increased by $46,348,000 compared to 2003. The increase was primarily due to revenue
generated from sales of residential lots at Clarksburg Ridge, sales of condominium units at Cigar Factory, and operating revenue generated from the acquisition of rental properties during the second
half of 2003 and during 2004.

Net
income for 2004 decreased by $5,162,000 from 2003. The decrease was primarily due to $7,129,000 gain, net of taxes, recognized in 2003. This gain was from the sale of a commercial building and
from the sale of 95% of our interest in a residential apartment complex.

Commercial Rental Properties.The $16,676,000 revenue increase in 2004 compared to 2003 was primarily due to a $16,010,000 increase related
to the operations of properties acquired during the second half of 2003 and during 2004. In addition, the average occupancy during the year at Washington Business Park increased in 2004 compared to
2003.

Operating
expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. Operating expenses in 2004
increased compared to 2003 by $6,262,000 due to operating expenses for properties acquired during 2004 and during the second half of 2003.

Depreciation
and amortization expense in 2004 increased by $4,713,000 compared to 2003 due to the depreciation expense for the properties acquired during 2004 and the second half of 2003.

Residential Rental Properties.The $5,751,000 increase in residential rental revenue for 2004 compared to 2003 was primarily due to a full
year of revenues from Victoria Place and The Fountains.

Operating
expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. The increase in residential
operating expenses of $2,628,000 in 2004 compared to 2003 was primarily due to a full year of operating expenses from Victoria Place and The Fountains.

Depreciation
and amortization expense in 2004 increased compared to 2003 by $1,655,000 which was primarily due to a full year of expense from Victoria Place and The Fountains.

22

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Hospitality Properties.Revenue increased by $203,000 in 2004 compared to 2003 which was primarily due to an increase in revenues at the
Inn at the Colonnade, partially offset by lower revenues at the Holiday Inn.

Operating
expenses, which consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense, increased by $936,000 in
2004 compared to 2003. The increase can be primarily attributed to increased salary and benefits at the Inn at the Colonnade due to the hiring of additional staff in 2004 and severance payments made
and management fees incurred at the Holiday Inn due to the termination of the management agreement with a wholly-owned subsidiary and the signing of a new management agreement with an unrelated third
party management company in July 2004.

Homebuilding and Residential Lots.Homebuilding and residential lots revenue in 2004 increased by $22,972,000 compared to the prior year.
The increase can be attributed to the sale in 2004 of 120 developed lots at Clarksburg Ridge, 13 condominium units at Cigar Factory and two condominium units at Golfview, compared to the sale in 2003
of 11 developed lots at Clarksburg Ridge and one remaining home in a residential subdivision we developed in 2002.

The
cost of homebuilding and residential lots in 2004 increased by $19,421,000 compared to the prior year. The increase can be attributed to the cost of sales allocated to the developed lots and
condominium units sold at Clarksburg Ridge, Cigar Factory and Golfview.

Other Revenues.Other revenues in 2004 increased by $746,000 compared to 2003, primarily due to the payment in full by Third Street S.W.
Investors (Third Street), a joint venture in which we have a 1% ownership interest, of a note receivable for which $1,584,000 had been previously written-off as uncollectible. This
increase was partially offset by decreased management fee income earned on the residential properties we managed.

General and Administrative Expense.General and administrative expense increased by $211,000 compared to 2003 primarily due to higher
salary and benefits expense due to the hiring of additional personnel as well as an increase in consulting expense in 2004, partially offset by a reduction in the pension liability accrual.

Interest Expense.The increase in interest expense of $5,865,000 over the prior year is primarily due to interest on debt obtained or
assumed in 2004 and 2003 in connection with the acquisitions of Fort Washington, Victoria Place, The Fountains, the Baltimore portfolio, West Germantown Pike, One Northbrook and 900 Northbrook. For
the years ended
December 31, 2004 and December 31, 2003, we capitalized interest of $1,738,000 and $1,023,000, respectively related to our investment in development projects.

Gain on Sale of Investments in Joint Ventures.Gain on sale of investments in joint ventures increased by $624,000 due to a $731,000 gain
recorded in 2004, related to the sale of our 25% interest in Congressional Village Associates, LLC (Congressional South), a joint venture that owned a shopping center. This gain was partially offset
by a $107,000 loss recorded in 2004, related to the sale of all the assets owned by Builders Leasing Company, a joint venture in which we had a 20% ownership interest.

Income from Investments in Joint Ventures.Income from investments in joint ventures, which consists of income earned from joint ventures
that are not consolidated into our financial statements, decreased by $365,000 in 2004 primarily due to the sale in 2003 of five parcels consisting of 15 acres of undeveloped land at Washington
Business Park compared to no land sales by unconsolidated joint ventures in 2004, partially offset by increased income at 1925K Street and Redwood Commercial in 2004.

Income from Discontinued Operations, Net of Tax.Discontinued operations, net of tax, decreased by $6,606,000, primarily due to a
$7,129,000 gain, net of taxes, recorded in 2003 relating to the sale of Maplewood Manor, a commercial building leased to a nursing home operator and the sale of 95% of our interest in Town Square
Commons, LLC (The Commons), which owned a residential apartment complex. In 2004 gains on sale, net of taxes, totaling $1,462,000 were recorded relating to the recognition of a deferred gain on the
sale of a residential apartment building and a gain on the sale of five commercial properties leased to convenience store operators.

23

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Funds From Operations

We consider Funds From Operations (FFO) to be a meaningful measure of our performance and we evaluate management based on FFO. We provide FFO as a supplemental measure for
reviewing our operating performance, although FFO should be reviewed in conjunction with net income which remains the primary measure of performance. FFO is a recognized metric used extensively within
the real estate industry by operators of rental properties. Accounting for real estate assets using historical cost accounting under GAAP is based on the presumption of the value of real estate assets
diminishing predictably over time. Since real estate values instead have risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results
that exclude historical cost depreciation to 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 operating performance that adjusts GAAP net income to exclude historical cost depreciation.

While
we are not a real estate investment trust (REIT), our real estate operations include large amounts of depreciable and amortizable real estate assets and we compete against REITS; therefore, we
believe FFO to be a relevant measurement of our performance.

FFO
as defined by the NAREIT is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. Our FFO measure
differs from NAREIT'S definition in that we also exclude income tax expense related to property sales. The exclusion of income tax expense on property sales is consistent with the objective of
presenting comparative period operating performance. FFO should not be considered an alternative to net income as an indicator of our operating performance, or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. Additionally, the FFO measure presented by us is not calculated in the same manner as FFO measures of other real estate
companies and therefore may not necessarily be comparable. We believe that FFO provides relevant information about our operations and is useful, along with net income, for an understanding of our
operating activities.

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, a decrease of $3,941,000 or 24.7%. This decrease is primarily
due to the recognition in 2005 of (i) $3,312,000 of expenses associated with the withdrawal of the Midlantic IPO; (ii) $3,171,000 of costs incurred related to the early extinguishments
of debt; and (iii) $1,330,000 of retirement costs incurred related to the retirement of one of our founders. The after-tax impact of these expenses totaled $4,782,000. This decrease
was partially offset by FFO generated from properties we acquired in 2005 and 2004 and increased development sales of condominium units and lots in 2005.

The
following table reflects the calculation of FFO (in thousands):

|                      |                                                                                                 | Years Ended December 31, |       
|--------------------- | ----------------------------------------------------------------------------------------------- | ------------------------ | ------
|
|Net (loss) income     |                                                                                                 | $                        | (2,249
|                      | Add: Depreciation and amortization including share of unconsolidated real estate joint ventures |                          |       
|                      | Add: Income tax expense from property sales, net of minority interest                           |                          |       
|                      | Less: Gain on sale of properties, net of minority interest                                      |                          |       
|                      |                                                                                                 |                          |       
|Funds from operations |                                                                                                 | $                        | 12,012
|                      |                                                                                                 |                          |       

Liquidity and Capital Resources

General.At December 31, 2005 our consolidated current cash and cash equivalents and investments that are principally short-term
municipal obligations were $71,330,000. Of this amount, approximately $14,000,000 is either maintained for working capital purposes or represents our joint venture partner's share of cash at our
consolidated joint ventures. The remaining amount is available for funding future acquisitions, investments in development projects and capital expenditures, or to fund a short term need, subject to
certain debt covenants requiring us to maintain a minimum liquidity of $30,000,000. In addition, under our line of credit which we amended and restated in March 2006, we have as of the time of
this filing available borrowing capacity totaling $34,602,000. While the availability of these

24

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funds
is restricted by certain covenants and sub-limits it should still aid us in quickly responding to real estate acquisition opportunities.

Short-Term Liquidity.Our most material short-term liquidity requirements over the next twelve months relate to
interest and scheduled principal payments on our outstanding debt that total approximately $30,000,000 in 2006, based on existing debt and variable interest rates as of December 31, 2005; and
to capital improvements at our existing properties budgeted to total approximately $12,000,000 in 2006. Other short-term liquidity requirements include recurring repair and maintenance
necessary to adequately maintain our properties; tenant improvement allowance payments, lease commissions; and general and administrative expenses. In addition, we intend to make additional
acquisitions that will require the use of capital. We anticipate meeting these short-term liquidity requirements from the cash provided from operations, and to the extent necessary, from
our available cash on hand at December 31, 2005.

A
number of factors could affect our cash provided from operations, including a change in occupancy levels and leasing rates, caused by tenants' perception about the attractiveness of the property
relative to competing properties; the physical deterioration of the property; competitive pressure caused by newly developed properties within the same geographic market; and rent concessions offered
by competitors. Furthermore, an economic downturn in the markets in which we operate could affect the ability of tenants to meet their rental obligations, the likelihood that tenants will renew their
leases and our ability to lease the space on economically favorable terms.

Future Capital Requirements.Our future capital requirements include funds necessary to pay scheduled debt maturities and capital
improvements, additional investment that could be required at our current development projects as a result of cost overruns, and funds required for future property acquisitions and investments in
development projects. Our fixed-rate mortgage debt matures on average in 11.8 years, beginning in 2007 (see annual contractual
principal payments schedule in Note 8 of Notes to Consolidated Financial Statements). We anticipate meeting these liquidity requirements through available cash on hand, debt refinancings, draws
on our line of credit and asset dispositions.

In
the first quarter of 2006 we acquired 11 commercial office and warehouse buildings with an aggregate purchase price of $85,759,000. In connection with these acquisitions, we placed or assumed
mortgage debt totaling $68,725,000 and funded the remaining amount with cash. During this time period we also sold three commercial office buildings and our interest in a development project,
generating net proceeds to us of $7,400,000.

Several
of our loans contain financial covenants, including requirements that we maintain a minimum liquidity of $30,000,000, a minimum net worth of $110,000,000 and minimum annual funds from
operations of $11,000,000 in 2005 and of $15,000,000 thereafter.

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

Operating Activities.For the year ended December 31, 2005, net cash used in operating activities was $7,982,000. Net cash used for
operating activities includes uses of $32,417,000 associated with operating homebuilding and land development.

Investing Activities.For the year ended December 31, 2005, net cash used in investing activities totaled $153,772,000 primarily due
to the acquisition of five commercial office properties, development activity at five investment development projects, investments in joint ventures and an increase in investments in municipal
obligations.

Financing Activities.For the year ended December 31, 2005, net cash provided by financing activities totaled $162,660,000. This
primarily resulted from the placement or assumption of mortgage debt related to the acquisition of five commercial office properties, draws on construction debt related to Crisfield and Red Mill Pond
and the refinancing of the mortgage on The Fountains at Waterford Lakes. Reductions in cash as a result of loan principal payments and an increase in deposits held in escrow were partially offset by
amounts contributed by our equity partners into joint venture entities that we consolidate into our consolidated financial statements.

Excess
cash flow generated from our properties' operations and from distributions from joint ventures is typically invested in municipal obligations that are short-term in nature. These
investments are then liquidated as needed for our real estate acquisitions and investments in development projects.

25

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Off-Balance Sheet Commitments.To assist in obtaining beneficial terms for certain debt instruments for properties in which we
have an unconsolidated investment, we sometimes provide loan guaranties, or master lease agreements for the lenders.

We
have guarantied repayment of up to $39,240,000 under the $98,100,000 primary construction loan and repayment of the full amount outstanding under the $16,900,000 mezzanine construction loan
obtained by Symphony House. The guarantied repayment under the primary loan will be reduced to $12,263,000 upon the joint venture obtaining $83,500,000 in sales revenue and will be further reduced to
$4,950,000 once net sales proceeds reach 110% of the outstanding principal balance of the loan. Both the primary construction loan and the mezzanine loan mature in 2008. Funding of the guaranty would
increase our equity participation in the venture. At December 31, 2005, there was no amount outstanding under the primary loan and the amount outstanding under the mezzanine loan totaled
$14,813,000.

We
have guarantied repayment of an $8,500,000 mezzanine construction loan obtained by Venice Lofts. The loan matures in 2007. The amount outstanding under the loan totaled $1,226,000 at
December 31, 2005.

We
have guarantied repayment of the entire loan balance outstanding under a $21,300,000 acquisition and construction loan obtained by Devon Square, our equity partner in the venture has provided the
same guaranty. Funding of the guaranty would increase our equity participation in the venture. The loan matures in 2007. At December 31, 2005, the balance outstanding under the loan totaled
$13,064,000.

We
have provided an unconditional and irrevocable payment guaranty of $5,500,000 to Wachovia Bank, N.A in connection with a loan made to 1925K Associates, LLC. The loan matures in April 2007,
but may be extended for up to an additional two years at the option of the borrower. Funding of the guaranty would increase our equity participation in the venture.

At
December 31, 2005 we were a guarantor of both the $32,000,000 acquisition and construction loan and the $6,900,000 bridge construction loan obtained by 640 North Broad. In 2004 the joint
venture admitted another equity partner which is obligated to contribute approximately $7,300,000 in exchange for receiving the benefit of certain tax credits. A portion of these equity contributions
will be used to repay the bridge construction loan. At December 31, 2005, the amount outstanding under the acquisition and construction loan totaled $28,651,000 and the amount outstanding under
the bridge construction loan totaled $6,545,000. In the first quarter of 2006 we sold our interest in 640 North Broad and were released from our guaranty of the acquisition and construction loan,
while the guaranty under the bridge construction loan remains in place. In connection with the sale of our interest, we guarantied a $6,000,000 loan obtained by the purchaser of our interest (See
Note 18 of the Notes to the Consolidated Financial Statements). We have received an indemnification against our funding under all the guaranties from an equity partner in the venture.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We
do not believe that we have any material exposures to adverse changes in interest rates associated with our investment assets. We invest in investment grade state and local government issues with
short-term maturities and fixed rates of return. The short-term nature of the investments provides opportunities for reinvestment at higher interest rates, as those rates
increase.

We
do not currently use derivatives to manage interest rate risk. At December 31, 2005, $125,989,000 of our debt was variable-rate. In addition, a joint venture in which we have an
85% non-controlling interest had $20,000,000 of variable-rate debt outstanding. Based on the total of this variable-rate debt outstanding at December 31,
2005, a 1% increase in market interest rates would adversely impact our annual pre-tax earnings by approximately $1,430,000. While it is difficult to predict the spread between interest
rates of our variable-rate debt and rates of interest we earn on our short-term investments, an increase in interest rates should increase the yield on our investments,
partially offsetting this adverse impact on earnings.

At
December 31, 2005, $402,671,000 of our debt was fixed rate. Based upon requirements for assessing the market value of debt instruments, we estimate the fair market value by discounting
future cash payments at interest rates that approximate the current market. Based on these parameters, at December 31, 2005, the estimated fair value of our fixed-rate debt was
$396,873,000.

26

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2005 (in thousands):

|                              |  |   |         | Payments Due by Period
|----------------------------- |  | - | ------- | ----------------------
|
|Long-term debt obligations(1) |  | $ | 528,660 |                       
|Fixed interest payments       |  |   | 206,592 |                       
|Variable interest payments(2) |  |   | 10,708  |                       
|Operating lease obligations   |  |   | 8,722   |                       
|Outstanding letters of credit |  |   | 2,189   |                       
|Other                         |  |   | 551     |                       
|                              |  |   |         |                       
|Total                         |  | $ | 757,422 |                       
|                              |  |   |         |                       

---

During 2005, we assumed debt with a total principal balance of $43,616,000. This assumed debt had a fair value in excess of carrying amount of $145,000 as of
December 31, 2005.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our
audited financial statements are listed under Item 15 in this annual report and are included therein.

No
supplementary data are supplied because none are required.

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

In
October 2004, upon recommendation of the Audit Committee and approval of the Board of Directors, we dismissed Ernst & Young LLP (Ernst & Young) as our independent auditors.
Effective as of that date, we appointed Deloitte & Touche LLP (Deloitte & Touche) to serve as our independent auditors for the year ended December 31, 2004.

Ernst &
Young's report on our consolidated financial statements for the year ended December 31, 2003 did not contain an adverse opinion or disclaimer of opinion, nor was such report
qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended December 31, 2003 and through the dismissal date, there were: (i) no disagreements
with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedure which, if not resolved to the satisfaction of
Ernst & Young, would have caused Ernst & Young to make reference to the matter in their report; and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.

During
the year ended December 31, 2003 and through the appointment date, we did not consult Deloitte & Touche with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls
and procedures as of December 31, 2005. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation
of disclosure control and

27

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procedures
provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives, except as noted below.

During
the course of the year ended December 31, 2005 our Chief Executive Officer and Chief Financial Officer concluded that there were insufficient resources at the company to adequately
review the accounting for cost of sales at our development projects and the accounting for straight-line rental income and depreciation and amortization expense at our operating
properties. In response, the Chief Executive Officer and Chief Financial Officer caused the company to hire additional personnel, principally in the areas of accounting and internal audit, thereby
substantially increasing the total number of employees of the company. The hiring of additional personnel and the implementation of a new fixed-asset accounting system, enabled us to assume primary
responsibility for accounting for development costs, straight-line rental income and depreciation and amortization expense and to increase our level of supervision of transactions and of
operations at our properties.

The
Chief Executive Officer and Chief Financial Officer will continue to evaluate and, if necessary, modify our staffing, systems and accounting processes in order for our disclosure controls and
procedures to be effective.

ITEM 9B. OTHER INFORMATION

No
information is required to be disclosed under this Item.

28

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

The
information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors, which is expected to be filed by us pursuant to
Regulation 14A, within 120 days after the close of our fiscal year, except for the information contained in such definitive proxy statement under the captions "Board Compensation
Committee Report on Executive Compensation" and "Performance Graph."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

A. Financial Statements

| | Reports of Independent Registered Public Accounting Firms                                                                                                                                       |  | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                                                                                    |  | 
| | Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                                                                                                      |  | 
| | Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003                                                                                 |  | 
| | Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                                                                                                      |  | 
| | Notes to the Consolidated Financial Statements                                                                                                                                                  |  | 
| | Schedule IIIReal Estate and Accumulated Depreciation as of December 31, 2005                                                                                                                   |  | 
| | 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. |  | 

29

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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           |  | Agreement of Sale and Purchase dated May 14. 2001 between ASP Washington, L.L.C. and ASP Washington Development, L.L.C., and Cohen Companies, LLC. (Incorporated by reference to Exhibit 10.1 of Registrant's Report on Form 10-K for 2003, filed
March 30, 2004.)                                                                                                                            
|10.2           |  | Membership Interest Purchase Agreement dated May 6, 2003 by and among KGH Corporation, Victoria Place Apartments, Ltd. and Osprey Capital, Inc., P.A.C. Land Development Corporation and Bresler & Reiner, Inc. (Incorporated by reference to
Exhibit 10.2 of Registrant's Report on Form 10-K for 2003, filed March 30, 2004.)                                                               
|10.3           |  | Purchase and Sale Agreement dated June 6, 2003 between Fountain Ponds, LLC and Bresler & Reiner, Inc. (Incorporated by reference to Exhibit 10.3 of Registrant's Report on Form 10-K for 2003, filed March 30, 2004.)                                                                                                                                                                         
|10.4           |  | Bresler & Reiner 2006 Stock Appreciation Rights Incentive Plan. (Filed herewith.)                                                                                                                                                                                                                                                                                                             
|10.5           |  | 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. (Filed
herewith).                                                                                                                                               
|10.6           |  | Junior Subordinated Indenture dated November 29, 2005 by and between Bresler & Reiner, Inc. and JPMorgan Chase Bank, National Association. (Filed herewith.)                                                                                                                                                                                                                                  
|10.7           |  | Common Securities Subscription Agreement dated November 29, 2005 by and between Bresler & Reiner, Inc. and Bresler & Reiner Statutory Trust I. (Filed herewith.)                                                                                                                                                                                                                              
|10.8           |  | Purchase Agreement dated November 23, 2005 by and among Bresler & Reiner, Inc., Bresler & Reiner Statutory Trust I, and Merrill Lynch International. (Filed herewith.)                                                                                                                                                                                                                        
|16.1           |  | Letter from Ernst & Young LLP to the SEC dated October 7, 2004 regarding the change in certifying accountants. (Incorporated by reference to Exhibit 16 to Registrant's Current Report on Form 8-K, filed October 7,
2004.)                                                                                                                                                                   
|21             |  | Subsidiaries of the Registrant. (Filed herewith.)                                                                                                                                                                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                                                                                                                                               

30

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|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 Robert O. Moore, 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 Robert O. Moore, Chief Financial Officer. (Filed herewith.)

Shareholders
may obtain a copy of any financial statement schedules and any exhibits filed with Form 10-K by writing to: Mr. Robert O. Moore, CFO, 11200 Rockville Pike, Suite
502, Rockville, MD 20852. Mr. Moore will advise shareholders of the fee for any exhibit.

31

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theCompanyhas duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2006.

| |  | BRESLER & REINER, INC.
| |  | ----------------------
| |  | By:                   
| |  | By:                   

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theCompanyand in the capacities indicated on March 31, 2006.

|                                              |  |                                                                   
|--------------------------------------------- |  | ------------------------------------------------------------------
|/s/SIDNEY M. BRESLERSidney M. Bresler         |  | Chief Executive Officer, Director                                 
|/s/ROBERT O. MOORERobert O. Moore             |  | Chief Financial Officer (Principal Financial & Accounting Officer)
|Benjamin C. Auger                             |  | Director                                                          
|/s/CHARLES S. BRESLERCharles S. Bresler       |  | Director                                                          
|/s/GARY F. BULMASHGary F. Bulmash             |  | Director                                                          
|/s/RALPH S. CHILDS, JR.Ralph S. Childs, Jr.   |  | Director                                                          
|/s/MICHAEL W. MALAFRONTEMichael W. Malafronte |  | Director                                                          
|/s/BURTON J. REINERBurton J. Reiner           |  | Director                                                          
|/s/RANDALL L. REINERRandall L. Reiner         |  | Director                                                          
|/s/JOHN P. CASEYJohn P. Casey                 |  | Director                                                          

32

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BRESLER & REINER, INC.        FINANCIAL STATEMENTS  YEARS ENDED DECEMBER 31, 2005 and 2004

CONTENTS

|Reports of Independent Registered Public Accounting Firms |                                                            | F-2 & 3
|--------------------------------------------------------- | ---------------------------------------------------------- | -------
|Audited Financial Statements                              |                                                            |        
|                                                          | Consolidated Balance Sheets                                |        
|                                                          | Consolidated Statements of Operations                      |        
|                                                          | Consolidated Statements of Changes in Shareholders' Equity |        
|                                                          | Consolidated Statements of Cash Flows                      |        
|                                                          | Notes to Consolidated Financial Statements                 |        

F-1

---



Report of Independent Registered Public Accounting Firm

To
the Shareholders of Bresler & Reiner, Inc.

We
have audited the accompanying consolidated balance sheets of Bresler & Reiner, Inc. as of December 31, 2005 and 2004 and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years then ended. Our audit also included the 2005 and 2004 information included in the financial statement schedule listed in the Index at Item
15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for
the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bresler & Reiner Inc., at December 31, 2005 and 2004,
and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
2005 and 2004 information included in the financial statement schedule, when considered in relation to the basic 2005 and 2004 consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

/s/
Deloitte & Touche LLP

McLean,
Virginia
March 31, 2006

F-2

---



Report of Independent Registered Public Accounting Firm

To
the Shareholders of Bresler & Reiner, Inc.

We
have audited the accompanying consolidated statements of operations, changes in shareholders' equity, and cash flows for the year ended December 31, 2003 of Bresler &
Reiner, Inc. (a Delaware corporation, the Company). Our audit also included the 2003 information included in the financial statement schedule listed in the Index at Item 15. These
consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows for the year ended
December 31, 2003 of Bresler & Reiner, Inc., in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the 2003 information included
in the financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



McLean,
Virginia
March 26, 2004

F-3

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BRESLER & REINER, INC.        CONSOLIDATED BALANCE SHEETS  DECEMBER 31, 2005 AND 2004

|                                                                                                                                                                                                                                                 |                                      | 2005 |                                            | 2004        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | ---- | ------------------------------------------ | ----------- | -
|ASSETS                                                                                                                                                                                                                                           |                                      |      |                                            |             |  
|Real Estate:                                                                                                                                                                                                                                     |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 | Rental property and equipment        |      | $                                          | 409,563,000 |  
|                                                                                                                                                                                                                                                 | Property and land development        |      |                                            | 154,139,000 |  
|                                                                                                                                                                                                                                                 | Land held for investment             |      |                                            | 2,989,000   |  
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|Real estate, at cost                                                                                                                                                                                                                             |                                      |      | 566,691,000                                |             |  
|Less: accumulated depreciation                                                                                                                                                                                                                   |                                      |      | (42,394,000                                | )           |  
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 |                                      |      | Total real estate, net                     |             |  
|Assets held for sale                                                                                                                                                                                                                             |                                      |      | 66,494,000                                 |             |  
|Receivables:                                                                                                                                                                                                                                     |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 | Income taxes receivable              |      |                                            | 2,429,000   |  
|                                                                                                                                                                                                                                                 | Mortgage and notes receivable, other |      |                                            | 834,000     |  
|                                                                                                                                                                                                                                                 | Other receivables                    |      |                                            | 6,239,000   |  
|Cash and cash equivalents                                                                                                                                                                                                                        |                                      |      | 10,820,000                                 |             |  
|Restricted cash and deposits held in escrow                                                                                                                                                                                                      |                                      |      | 14,034,000                                 |             |  
|Investments, principally available-for-sale securities                                                                                                                                                                                           |                                      |      | 63,028,000                                 |             |  
|Investment in and advances to joint ventures                                                                                                                                                                                                     |                                      |      | 30,053,000                                 |             |  
|Deferred charges and other assets, net                                                                                                                                                                                                           |                                      |      | 45,770,000                                 |             |  
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 |                                      |      | Total assets                               |             | $
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                             |                                      |      |                                            |             |  
|LIABILITIES                                                                                                                                                                                                                                      |                                      |      |                                            |             |  
|Mortgage and construction loans and other debt                                                                                                                                                                                                   |                                      | $    | 485,526,000                                |             | $
|Liabilities of assets held for sale                                                                                                                                                                                                              |                                      |      | 43,402,000                                 |             |  
|Accounts payable, trade and accrued expenses                                                                                                                                                                                                     |                                      |      | 18,662,000                                 |             |  
|Deferred income taxes payable                                                                                                                                                                                                                    |                                      |      | 11,453,000                                 |             |  
|Other liabilities                                                                                                                                                                                                                                |                                      |      | 27,897,000                                 |             |  
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 |                                      |      | Total liabilities                          |             |  
|Minority interest                                                                                                                                                                                                                                |                                      |      | 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, 2005; and 7,000,000 shares authorized; 5,679,306 shares issued, and 5,477,212 shares
outstanding as of December 31, 2004 |                                      |      | 55,000                                     |             |  
|Additional paid-in capital                                                                                                                                                                                                                       |                                      |      | 5,721,000                                  |             |  
|Retained earnings                                                                                                                                                                                                                                |                                      |      | 121,586,000                                |             |  
|Treasury stock (202,094 shares as of December 31, 2004)                                                                                                                                                                                          |                                      |      |                                           |             |  
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 |                                      |      | Total shareholders' equity                 |             |  
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  
|                                                                                                                                                                                                                                                 |                                      |      | Total liabilities and shareholders' equity |             | $
|                                                                                                                                                                                                                                                 |                                      |      |                                            |             |  

See
Notes to Consolidated Financial Statements

F-4

---





BRESLER & REINER, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

|                                                                                                                                        |                                                 | 2005 |                          | 2004       |   | 2003        |           
|--------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ---- | ------------------------ | ---------- | - | ----------- | ----------
|OPERATING REVENUES                                                                                                                      |                                                 |      |                          |            |   |             |           
|Homebuilding, residential lots and other development                                                                                    |                                                 | $    | 55,364,000               |            | $ | 24,605,000  |           
|Rentalscommercial                                                                                                                      |                                                 |      | 46,163,000               |            |   | 32,540,000  |           
|Rentalsresidential                                                                                                                     |                                                 |      | 11,365,000               |            |   | 10,343,000  |           
|Hospitality                                                                                                                             |                                                 |      | 9,713,000                |            |   | 8,099,000   |           
|Other                                                                                                                                   |                                                 |      | 339,000                  |            |   | 2,059,000   |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|                                                                                                                                        |                                                 |      | Total operating revenues |            |   | 122,944,000 |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|COSTS AND EXPENSES                                                                                                                      |                                                 |      |                          |            |   |             |           
|Cost of homebuilding, residential lots and other development                                                                            |                                                 |      | 43,679,000               |            |   | 21,071,000  |           
|Rental expensecommercial                                                                                                               |                                                 |      |                          |            |   |             |           
|                                                                                                                                        | Operating expenses                              |      |                          | 18,984,000 |   |             | 12,746,000
|                                                                                                                                        | Depreciation and amortization expense           |      |                          | 12,760,000 |   |             | 8,985,000 
|Rental expenseresidential                                                                                                              |                                                 |      |                          |            |   |             |           
|                                                                                                                                        | Operating expenses                              |      |                          | 5,028,000  |   |             | 5,017,000 
|                                                                                                                                        | Depreciation and amortization expense           |      |                          | 2,741,000  |   |             | 2,680,000 
|Hospitality expense                                                                                                                     |                                                 |      |                          |            |   |             |           
|                                                                                                                                        | Operating expenses                              |      |                          | 8,869,000  |   |             | 6,172,000 
|                                                                                                                                        | Depreciation and amortization expense           |      |                          | 563,000    |   |             | 685,000   
|General and administrative expense                                                                                                      |                                                 |      | 7,723,000                |            |   | 3,973,000   |           
|Withdrawn public offering costs                                                                                                         |                                                 |      | 3,312,000                |            |   |            |           
|Other expenses                                                                                                                          |                                                 |      | 121,000                  |            |   |            |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|                                                                                                                                        |                                                 |      | Total operating expenses |            |   | 103,780,000 |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|                                                                                                                                        |                                                 |      | Total operating income   |            |   | 19,164,000  |           
|OTHER INCOME (EXPENSES)                                                                                                                 |                                                 |      |                          |            |   |             |           
|Interest income                                                                                                                         |                                                 |      | 1,130,000                |            |   | 1,885,000   |           
|Interest expense                                                                                                                        |                                                 |      | (20,462,000              | )          |   | (13,890,000 | )         
|Debt extinguishment costs                                                                                                               |                                                 |      | (3,171,000               | )          |   |            |           
|Gain on sale of investments in joint ventures                                                                                           |                                                 |      | 1,551,000                |            |   | 624,000     |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|(Loss) income before income taxes, income from investments in joint ventures, minority interest and income from discontinued operations |                                                 |      | (1,788,000               | )          |   | 4,936,000   |           
|Income from investments in joint ventures                                                                                               |                                                 |      | 793,000                  |            |   | 1,360,000   |           
|Minority interest                                                                                                                       |                                                 |      | (5,542,000               | )          |   | (2,067,000  | )         
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|(Loss) income before income taxes and discontinued operations                                                                           |                                                 |      | (6,537,000               | )          |   | 4,229,000   |           
|Benefit (provision) for income taxes                                                                                                    |                                                 |      | 3,468,000                |            |   | (953,000    | )         
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|(Loss) income from continuing operations                                                                                                |                                                 |      | (3,069,000               | )          |   | 3,276,000   |           
|Income from discontinued operations, net of tax                                                                                         |                                                 |      | 820,000                  |            |   | 1,143,000   |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|Net (loss) income                                                                                                                       |                                                 | $    | (2,249,000               | )          | $ | 4,419,000   |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|(LOSS) EARNINGS PER SHARE OF COMMON STOCK                                                                                               |                                                 |      |                          |            |   |             |           
|Basic and Diluted:                                                                                                                      |                                                 |      |                          |            |   |             |           
|                                                                                                                                        | (Loss) income from continuing operations        |      | $                        | (0.56      | ) | $           | 0.60      
|                                                                                                                                        | Income from discontinued operations, net of tax |      |                          | 0.15       |   |             | 0.21      
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|                                                                                                                                        | Net (loss) income                               |      | $                        | (0.41      | ) | $           | 0.81      
|                                                                                                                                        |                                                 |      |                          |            |   |             |           
|Weighted average number of common shares outstanding                                                                                    |                                                 |      | 5,477,212                |            |   | 5,477,212   |           
|                                                                                                                                        |                                                 |      |                          |            |   |             |           

See
Notes to Consolidated Financial Statements

F-5

---





BRESLER & REINER, INC.        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

|                               |  | COMMON
STOCK |        | ADDITIONAL
PAID-IN
CAPTIAL |   | RETAINED
EARNINGS |   | TREASURY
STOCK |             | TOTAL
SHAREHOLDERS'
EQUITY |  
|------------------------------ |  | ------------ | ------ | -------------------------- | - | ----------------- | - | -------------- | ----------- | -------------------------- | -
|Balance, January 1, 2003       |  | $            | 28,000 |                            | $ | 7,565,000         |   | $              | 112,738,000 |                            | $
|Net income                     |  |              |       |                            |   |                  |   |                | 9,581,000   |                            |  
|                               |  |              |        |                            |   |                   |   |                |             |                            |  
|Balance, December 31, 2003     |  |              | 28,000 |                            |   | 7,565,000         |   |                | 122,319,000 |                            |  
|Stock split                    |  |              | 29,000 |                            |   | (29,000           | ) |                |            |                            |  
|Cash dividends paid            |  |              |       |                            |   |                  |   |                | (1,369,000  | )                          |  
|Net income                     |  |              |       |                            |   |                  |   |                | 4,419,000   |                            |  
|                               |  |              |        |                            |   |                   |   |                |             |                            |  
|Balance, December 31, 2004     |  |              | 57,000 |                            |   | 7,536,000         |   |                | 125,369,000 |                            |  
|Cash dividends paid            |  |              |       |                            |   |                  |   |                | (1,534,000  | )                          |  
|Cancellation of treasury stock |  |              | (2,000 | )                          |   | (1,815,000        | ) |                |            |                            |  
|Net loss                       |  |              |       |                            |   |                  |   |                | (2,249,000  | )                          |  
|                               |  |              |        |                            |   |                   |   |                |             |                            |  
|Balance, December 31, 2005     |  | $            | 55,000 |                            | $ | 5,721,000         |   | $              | 121,586,000 |                            | $
|                               |  |              |        |                            |   |                   |   |                |             |                            |  

See
Notes to Consolidated Financial Statements

F-6

---





BRESLER & REINER, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

|                                                                                       |                                                                              | 2005                                 |                   | 2004                                      |            | 2003       |             
|-------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------ | ----------------- | ----------------------------------------- | ---------- | ---------- | ------------
|OPERATING ACTIVITIES:                                                                  |                                                                              |                                      |                   |                                           |            |            |             
|Net (loss) income                                                                      |                                                                              | $                                    | (2,249,000        | )                                         | $          | 4,419,000  |             
|Adjustments to reconcile net (loss) income to net cash (used in) operating activities: |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       | Depreciation and amortization                                                |                                      |                   | 15,398,000                                |            |            | 12,482,000  
|                                                                                       | Gain on sale of properties and investments in joint ventures                 |                                      |                   | (4,300,000                                | )          |            | (1,680,000  
|                                                                                       | Income from investments in joint ventures                                    |                                      |                   | (793,000                                  | )          |            | (1,360,000  
|                                                                                       | Minority interest expense                                                    |                                      |                   | 7,746,000                                 |            |            | 2,007,000   
|                                                                                       | Deferred income taxes                                                        |                                      |                   | 2,542,000                                 |            |            | (862,000    
|                                                                                       | Amortization of finance costs and capitalized interest                       |                                      |                   | (670,000                                  | )          |            | (925,000    
|                                                                                       | Homebuilding and land development                                            |                                      |                   | (32,417,000                               | )          |            | (45,741,000 
|                                                                                       | Distribution of income from investments in joint ventures                    |                                      |                   | 526,000                                   |            |            | 1,583,000   
|                                                                                       | Early extinguishment of debt                                                 |                                      |                   | 3,171,000                                 |            |            |            
|                                                                                       | Changes in assets and liabilities:                                           |                                      |                   |                                           |            |            |             
|                                                                                       |                                                                              | Receivables                          |                   |                                           | (710,000   | )          |             
|                                                                                       |                                                                              | Other assets                         |                   |                                           | (997,000   | )          |             
|                                                                                       |                                                                              | Other liabilities                    |                   |                                           | 4,771,000  |            |             
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       |                                                                              |                                      | Total adjustments |                                           |            | (5,733,000 | )           
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       |                                                                              |                                      |                   | Net cash used in operating activities     |            |            | (7,982,000  
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|INVESTING ACTIVITIES:                                                                  |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       | Increase in cash due to change in consolidation method                       |                                      |                   |                                          |            |            | 519,000     
|                                                                                       | Investment in joint ventures                                                 |                                      |                   | (21,849,000                               | )          |            | (1,154,000  
|                                                                                       | Distributions from joint ventures in excess of income                        |                                      |                   | 416,000                                   |            |            | 7,278,000   
|                                                                                       | Deposits for property acquisitions                                           |                                      |                   | (2,613,000                                | )          |            | (3,610,000  
|                                                                                       | (Increase) decrease in restricted cash                                       |                                      |                   | (3,494,000                                | )          |            | 2,328,000   
|                                                                                       | (Increase) decrease in investments principally available-for-sale securities |                                      |                   | (22,999,000                               | )          |            | 12,606,000  
|                                                                                       | Purchase of rental property, equipment and other                             |                                      |                   | (73,938,000                               | )          |            | (101,626,000
|                                                                                       | Net purchase of property and land under development                          |                                      |                   | (40,549,000                               | )          |            | (26,923,000 
|                                                                                       | Decrease (increase) in notes receivable                                      |                                      |                   | 4,546,000                                 |            |            | 4,060,000   
|                                                                                       | Proceeds from sale of properties and investments in joint ventures           |                                      |                   | 6,708,000                                 |            |            | 535,000     
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       |                                                                              |                                      |                   | Net cash used in investing activities     |            |            | (153,772,000
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|FINANCING ACTIVITIES:                                                                  |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       | Proceeds from mortgage and construction loans and other debt                 |                                      |                   | 256,732,000                               |            |            | 129,234,000 
|                                                                                       | Repayment of mortgage and construction loans and other debt                  |                                      |                   | (101,726,000                              | )          |            | (2,737,000  
|                                                                                       | Contributions from (distributions to) minority partners                      |                                      |                   | 11,150,000                                |            |            | 6,489,000   
|                                                                                       | Increase in deferred charges                                                 |                                      |                   | (1,962,000                                | )          |            | (1,967,000  
|                                                                                       | Dividends paid and purchase of treasury stock                                |                                      |                   | (1,534,000                                | )          |            | (1,369,000  
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       |                                                                              |                                      |                   | Net cash provided by financing activities |            |            | 162,660,000 
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|Net increase (decrease) in cash and cash equivalents                                   |                                                                              |                                      | 906,000           |                                           |            | (3,647,000 | )           
|Cash and cash equivalents, beginning of year                                           |                                                                              |                                      | 9,914,000         |                                           |            | 13,561,000 |             
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|Cash and cash equivalents, end of year                                                 |                                                                              | $                                    | 10,820,000        |                                           | $          | 9,914,000  |             
|                                                                                       |                                                                              |                                      |                   |                                           |            |            |             
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                     |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       | Cash paid during the year for:                                               |                                      |                   |                                           |            |            |             
|                                                                                       |                                                                              | Interest (net of amount capitalized) |                   | $                                         | 22,128,000 |            | $           
|                                                                                       |                                                                              | Income taxes (current and estimated) |                   |                                           | 942,000    |            |             
|SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:                                       |                                                                              |                                      |                   |                                           |            |            |             
|                                                                                       | Consolidation of Waterfront Associates, LLC                                  |                                      |                   |                                          |            |            | 9,385,000   
|                                                                                       | Debt assumed on acquisitions                                                 |                                      |                   | 43,616,000                                |            |            | 24,716,000  
|                                                                                       | Deposit liability assumed on Clarksburg Ridge acquisition                    |                                      |                   |                                          |            |            |            
|                                                                                       | Liabilities related to loan guaranties                                       |                                      |                   | 531,000                                   |            |            |            
|                                                                                       | Accrued rental property and equipment                                        |                                      |                   | 1,593,000                                 |            |            | 880,000     

See Notes to Consolidated Financial Statements

F-7

---





BRESLER & REINER, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND ORGANIZATION

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

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include the accounts of Bresler & Reiner, Inc., our wholly owned subsidiaries, and entities which we control or, entities
that are required to be consolidated under Financial Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R). Entities which we do not control or entities that are not to be
consolidated under FIN 46R and over whom we exercise significant influence, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated in
consolidation.

REVENUE RECOGNITION

Real estate salesGains on sales of real estate are recognized pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sales of Real
Estate. For condominium and land sales, revenues and cost of sales are recorded at the time the sale of each unit or lot is
closed and title and possession have been transferred to the buyer. Gains on sale of long-lived assets are recognized based on the full accrual method when all the criteria for such
recognition as detailed in SFAS No. 66 have been met.

Rentalswe
recognize rental revenue in accordance with SFAS No. 13,Accounting for Leases. SFAS No. 13 requires that revenue
be recognized on a straight-line basis over the term of the lease for operating leases. We recognize revenue related to expense recoveries from tenants based on the accrual method, which
matches the timing of the recoveries with the underlying expense.

Hospitalitywe
recognize hospitality revenue as services are provided.

Rental,
construction and management feeswe recognize rental, construction and management fees as services are provided.

RENTAL PROPERTY AND EQUIPMENT

Rental property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets,
generally 39 years for buildings and three to 10 years for furniture, fixtures and equipment. Depreciation expense totaled $9,585,000, $7,660,000 and $6,393,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.

Upon
acquisitions of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below market leases and acquired
in-place leases and tenant relationships) and acquired liabilities in accordance with SFAS No. 141,Business Combinationsand SFAS
No. 142,Goodwill and Other Intangible Assets(together SFAS 141 and 142) and allocate purchase price based on these assessments. We
assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a
number of factors including the historical operating results, known trends, and market conditions that may affect the property.

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

F-8

---



PROPERTY AND LAND DEVELOPMENT

When construction commences, costs are recorded in property and land development where they are accumulated by project. Project costs included in property and land development
include materials and labor, capitalized interest and property taxes. These costs are charged to costs of homes and lots sold based on either the specific identification method or the relative sales
value method, whichever is more appropriate, in accordance with SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects." We review our accumulated costs to
ensure that any costs in excess of net realizable value are charged to operations when identified. As part of our construction and development activities, we capitalized $1,979,000, $1,738,000 and
$1,023,000 of interest in 2005, 2004 and 2003, respectively.

LAND HELD FOR INVESTMENT

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

ASSETS HELD FOR SALE

We account for long-lived assets 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 in which management commits to a plan to sell the asset; the asset is available for immediate sale in its present condition; an active program to locate a buyer has been
initiated and the asset is marketed at a price that is reasonable in relation to its current fair value; and the sale of the asset is probable within one year.

INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

For entities that are not deemed to be variable interest entities (VIEs), as set forth in FIN 46R, we account for our investments in these joint ventures in accordance with
Statement of Position No. 78-9,Accounting for
Investments in Real Estate Venturesand APB Opinion No. 18,The Equity Method of Accounting for Investments in Common
Stock. For entities in which we have a controlling interest, we consolidate the investment and a minority interest is recognized in our consolidated financial statements.
Minority interest in the balance sheet represents the minority owners' share of equity as of the balance sheet date, consisting of contributions made by the minority partner plus or minus the minority
partner's share of income or loss, less any distributions made to the minority partner. Minority interest in the statements of operations represents the minority owners' share of the income or loss of
the consolidated joint venture. For entities in which we exercise significant influence but do not control, we account for our investment using the equity method of accounting and do not consolidate
the investment. We evaluate control primarily based on the investors' relative voting rights in the joint venture.

For
entities that are deemed to be VIEs, as set forth in FIN 46R, we account for our investments based on a determination of the entity's primary beneficiary. If we are the primary beneficiary through
being subject to a majority of the potential variability in gains or losses of the VIE, then we consolidate our investment. If we are not the primary beneficiary then we do not consolidate our
investment, but account for it under the equity method.

INVESTMENTS

Investments consist principally of investments in municipal instruments. Our investments are classified as available-for-sale securities. Available-for-sale securities are
recorded at fair value, with unrealized holding gains and losses included in comprehensive income. At December 31, 2005 and 2004, cost approximated fair value for these securities. At
December 31, 2005 and December 31, 2004, the total of these investments which were short term in nature with maturities of less than one year, was $60,510,000 and $34,748,000
respectively.

CASH AND CASH EQUIVALENTS

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

F-9

---



RESTRICTED CASH AND DEPOSITS HELD IN ESCROW

Deposits held in escrow include: escrow balances funded in accordance with lender requirements, including escrows for real estate taxes, insurance, replacement reserves, and
lease reserves; deposits held in escrow for tenants; deposits on homes held for sale; and loan funds held back by a lender pending the successful achievement of various coverage targets and occupancy
statistics.

DEFERRED CHARGES AND OTHER ASSETS

Included in deferred charges are fees incurred in connection with obtaining financing for our real estate. These fees are deferred and amortized as a part of interest expense
over the term of the related debt instrument on a straight-line basis, which approximates the effective interest method. In addition, deferred costs include leasing charges, comprised of
tenant allowances and lease commissions incurred to originate a lease, which are amortized on a straight-line basis over the term of the related lease.

Included
in Other Assets are the costs allocated to above and below market leases, acquired in-place leases and tenant relationships for properties that were acquired. The application of SFAS
No. 141 and 142 to real estate acquisitions requires us to allocate the purchase price to these assets in addition to land, building and improvements based on the relative fair values of the
assets and liabilities acquired. In order to determine the amount of the purchase price to be allocated to these assets, we make assumptions regarding the 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) determining the market rental rates of the acquired leases,
(2) estimating the market value of concessions (including rent concessions and tenant improvement allowances) and leasing commissions to be paid on new leases, (3) estimating an
appropriate lease-up period and (4) applying an estimated risk-adjusted discount rate to the existing tenants' leases. The acquired above and below market leases are
amortized through revenues. The acquired in-place leases and tenant relationships are amortized through depreciation and amortization expense.

OTHER LIABILITIES

We account for loan guarantees of the indebtedness of joint ventures that are not consolidated into our consolidated financial statements in accordance with FASB Interpretation
No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a
guarantee, the guarantor recognize a liability for the fair value of the obligation it assumes under that guarantee. At December 31, 2005 the total recorded liability related to loan guarantees
was $531,000. There were no recorded liabilities related to loan guarantees at December 31, 2004.

INCOME TAXES

SFAS No. 109, "Accounting for Income Taxes," is applied in calculating our provision for income taxes. As prescribed therein, the provision for income tax is based on
both current and deferred taxes. Current taxes represent the estimated taxes payable or refundable in the current year, and deferred taxes represent estimated future tax effects attributable to
temporary differences and loss carryforwards. Nontaxable income, such as interest on state and municipal securities, is excluded from the provision calculation.

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

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the stated amounts of assets, liabilities, revenues, and expenses presented in the financial statements, as well as the disclosures relating to contingent liabilities. Consequently, actual
results could differ from those estimates that have been reported in our consolidated financial statements. Critical accounting policies that require the use of estimates and significant judgement
include the allocation of purchase prices and assignment of useful lives for property acquisitions; the recording of cost of sales for development projects; and the determination of consolidation
methodology for joint ventures.

F-10

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RECLASSIFICATIONS

Certain amounts for the years 2004 and 2003 consolidated financial statements have been reclassified to conform to the current year presentation.

EARNINGS PER COMMON SHARE

We have no dilutive securities; therefore, basic and fully diluted earnings per share are identical. Weighted average common shares outstanding were 5,477,212 for the years
ended December 31, 2005, 2004 and 2003 (after adjusting for the 2-for-1 stock split).

In
June 2004, the Board of Directors approved an amendment to the Certificate of Incorporation to increase the authorized Common Stock from 4,000,000 shares to 7,000,000 shares. On the same
date the Board of Directors approved a 2-for-1 stock split of the Company's common stock, which was effected in the form of a stock dividend. In July 2004, stockholders
holding more than fifty percent of the voting power of the issued and outstanding capital stock executed the shareholder consent to this amendment. The amendment was filed with the Secretary of State
of Delaware in September 2004, at which time the stock dividend was distributed.

DIVIDENDS

In May 2005, our Board of Directors declared a cash dividend of $0.28 per common share. Of the total dividend, $0.14 per share was paid in June 2005, while the
remaining $0.14 dividend was paid in December 2005. In May 2004, our Board of Directors declared a cash dividend of $0.25 per common share. Of the total dividend, $0.125 per share was
paid in June 2004, while the remaining dividend of $.0125 was paid in December 2004. The per-share dividend payment disclosure has been adjusted for the
2-for-1 stock split.

COMPREHENSIVE INCOME

Except for net income, we do not have any items impacting comprehensive income. Therefore, comprehensive income and net income are the same.

2.     NEW ACCOUNTING PRONOUNCEMENTS

In
March 2005, the FASB issued Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations,an interpretation of
Statement No. 143,Accounting for Asset Retirement Obligation.Interpretation No. 47 requires companies to recognize a liability for the
fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. We adopted Interpretation No. 47 in
2005. The impact of adopting Interpretation No. 47 was not material to our financial position or results of operations.

In
December 2004, the FASB issued Statement No. 123R,Share-Based Payments. Statement No. 123R requires companies to recognize in
the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. We adopted Statement No. 123R in January, 2006. Prior to
that date Statement 123R did not apply to the Company.

In
December 2004, the FASB issued Statement No. 153,Exchanges of Nonmonetary Assets, an Amendment of APB No. 29. Statement
No. 153 amends APB Opinion No. 29 and states that companies will no longer be permitted to use the "similar productive assets" concept to account for nonmonetary exchanges at book value with no
gain being recognized. An exchange must be accounted for at fair value if the exchange has commercial substance and fair value is determinable. We adopted Statement No. 153 in 2005. The impact
of adopting Statement No. 153 was not material to our financial position or results of operations.

In
May 2005, the FASB issued Statement No. 154,Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion
No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and
reporting of a change in accounting principles. It requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005.

F-11

---



Emerging
Issues Task Force (EITF) Issue 04-5,Determining Whether a General Partner or the General Partners, as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners have Certain Rights(Issue
04-5) was ratified by the FASB in June 2005. At issue is what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would
consolidate the limited partnership. The assessment of limited partners' rights and their impact on the presumption of control of the limited partnership by the sole general partner should be made
when an investor becomes the sole general partner and should be reassessed if (a) there is a change to the terms or in the exercisability of the rights of the limited partners, (b) the
sole general partner increases or decreases its ownership of limited partnership interests, or (c) there is an increase or decrease in the number of outstanding limited partnership interests.
Issue 04-5 is effective no later than for fiscal years beginning after December 15, 2005 and as of June 29, 2005 for new or modified arrangements. The guidance provided in
this EITF will not have a material effect on our financial position or results of operations.

3.     SIGNIFICANT TRANSACTIONS, ACQUISITIONS AND INVESTMENTS

During
the years ended December 31, 2005, 2004 and 2003, we entered into several material transactions as described below. All acquisitions of real estate and investments in joint ventures have
been included in our accompanying statements of operations from the date of the transaction forward and any gain or losses on sales of assets have been calculated and recorded as of the date of the
transaction. All investments have been consolidated unless noted below:

SIGNIFICANT TRANSACTIONS

Midlantic Office Trust, Inc.In May 2005, Midlantic Office Trust, Inc. (Midlantic) filed a
registration statement with the Securities Exchange Commission for its initial common stock public offering (IPO). We participated as a sponsor for the Midlantic offering, and in July 2005,
agreed to sell it certain commercial properties. In August 2005, Midlantic determined not to proceed with its IPO, due to market conditions. As a result, our agreements with Midlantic were
cancelled. We incurred $3,312,000 in expenses related to this transaction.

Purchase and sale of equity investmentsIn June 2005, we acquired one of our equity partner's interests in the entities that own the
Fort Washington, West Germantown Pike and 900 Northbrook properties for a total consideration of $1,175,000. Funding of the purchase was provided by the sale to such equity partner of our interest in
the Cigar Factory residential condominium project valued at $800,000, the cancellation of a promissory note receivable from such equity partner with a principal balance outstanding of $300,000 and the
assumption of a $75,000 note payable of such equity partner. As a result of the transaction, we recorded an increase in the carrying amount of the Fort Washington, West Germantown Pike and 900
Northbrook properties totaling $1,034,000 and a decrease in minority interest liability of $66,000.

Third StreetIn October 2004, Third Street, in which we own a 1% interest, sold its interests in two residential buildings located
in Washington DC, to an unaffiliated third party for $10,600,000; $8,400,000 of the proceeds were used to repay notes and advances we made to Third Street. For the year ended December 31, 2004,
we recognized $2,400,000 of income, before taxes, on the repayment of amounts that had been subject to uncollectibility allowances and the recognition of a previously deferred gain on sale.

F-12

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ACQUISITIONS AND INVESTMENTS

The following table summarizes the commercial, residential and development real estate acquired during the years ended December 31, 2005, 2004 and 2003,
described in further detail below:

|                                 |  | Location             |  | Date of
Acquisition |  | Size (1)          |  | B&R Ownership |     | Purchase Price
(in 000s) (2) |        
|-------------------------------- |  | -------------------- |  | ------------------- |  | ----------------- |  | ------------- | --- | ---------------------------- | -------
|Commercial Properties            |  |                      |  |                     |  |                   |  |               |     |                              |        
|Wynwood                          |  | Chantilly, VA        |  | June 2005           |  | 88,000 sq. ft.    |  | 100.0         | %   | $                            | 13,000 
|919 Market Street                |  | Wilmington, DE       |  | April 2005          |  | 223,000 sq. ft.   |  | 100.0         | %   |                              | 40,525 
|Cross Keys                       |  | Doylestown, PA       |  | April 2005          |  | 82,000 sq. ft.    |  | 100.0%        | (3) |                              | 17,792 
|102 Pickering Way                |  | Exton, PA            |  | April 2005          |  | 80,000 sq. ft.    |  | 100.0%        | (3) |                              | 15,275 
|1105 Market Street               |  | Wilmington, DE       |  | February 2005       |  | 173,000 sq. ft.   |  | 100.0%        | (3) |                              | 20,700 
|Devon Square                     |  | Devon, PA            |  | February 2005       |  | 140,000 sq. ft.   |  | 5.5           | %   |                              | 2,667  
|Historic Baltimore Portfolio     |  | Baltimore, MD        |  | November 2004       |  | 530,000 sq. ft.   |  | 51.0          | %   |                              | 29,500 
|Fort Washington Executive Center |  | Ft. Washington, PA   |  | February 2004       |  | 393,000 sq. ft.   |  | 97.5%         | (5) |                              | 52,664 
|West Germantown Pike             |  | Plymouth Meeting, PA |  | February 2004       |  | 115,000 sq. ft.   |  | 98.1%         | (5) |                              | 20,500 
|One Northbrook                   |  | Trevose, PA          |  | February 2004       |  | 95,000 sq. ft.    |  | 100.0%        | (3) |                              | 16,900 
|900 Northbrook                   |  | Trevose, PA          |  | November 2003       |  | 66,000 sq. ft.    |  | 90.0%         | (5) |                              | 12,050 
|                                 |  |                      |  |                     |  |                   |  |               |     |                              |        
|Total Commercial Properties      |  |                      |  |                     |  | 1,985,000 sq. ft. |  |               |     | $                            | 241,573
|                                 |  |                      |  |                     |  |                   |  |               |     |                              |        
|Residential Properties           |  |                      |  |                     |  |                   |  |               |     |                              |        
|The Fountains                    |  | Orlando, FL          |  | September 2003      |  | 400 units         |  | 100.0         | %   | $                            | 35,100 
|Victoria Place                   |  | Orlando, FL          |  | July 2003           |  | 364 units         |  | 85.0          | %   |                              | 39,500 
|                                 |  |                      |  |                     |  |                   |  |               |     |                              |        
|Total Residential Properties     |  |                      |  |                     |  | 764 units         |  |               |     | $                            | 74,600 
|                                 |  |                      |  |                     |  |                   |  |               |     |                              |        
|Development Projects             |  |                      |  |                     |  |                   |  |               |     |                              |        
|Red Mill Pond                    |  | Ocean City, MD       |  | May 2005            |  | 541 lots          |  | 51.0          | %   | $                            | 37,990 
|Symphony House                   |  | Philadelphia, PA     |  | May 2005            |  | 163 units         |  | 22.3          | %   |                              | 5,029  
|Venice Lofts                     |  | Philadelphia, PA     |  | May 2005            |  | 128 units         |  | 22.3          | %   |                              | 2,971  
|Crisfield                        |  | Ocean City, 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  
|1150 Northbrook                  |  | Trevose, PA          |  | November 2003       |  | 108,000 sq. ft.   |  | 100.0         | %   |                              | 2,000  
|Laguna Vista                     |  | Ocean City, MD       |  | September 2003      |  | 41 units          |  | 100.0         | %   |                              | 6,000  
|Divine Lorraine                  |  | Philadelphia, PA     |  | August 2003         |  | 135 units         |  | 95.0          | %   |                              | 5,875  
|Cigar Factory                    |  | Philadelphia, PA     |  | July 2003           |  | 30 units          |  | 66.7          | %   |                              | 1,500  
|Clarksburg Ridge                 |  | Clarksburg, MD       |  | March 2003          |  | 159 lots          |  | 100.0         | %   |                              | 12,200 
|                                 |  |                      |  |                     |  |                   |  |               |     |                              |        
|Total Development Projects       |  |                      |  |                     |  |                   |  |               |     | $                            | 132,391
|                                 |  |                      |  |                     |  |                   |  |               |     |                              |        

---

F-13

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COMMERCIAL ACQUISITIONS

WynwoodIn June 2005, we acquired two commercial office buildings containing a total of 88,000 square feet
of office space, located in Chantilly, Virginia, for a purchase price of $13,000,000. We funded the purchase through a draw on our unsecured acquisition line of credit.

919 Market StreetIn April 2005, we acquired a 223,000 square foot commercial office building located in Wilmington, Delaware for
$40,525,000. We assumed a 5.89% fixed-rate $22,498,000 mortgage loan on the building which matures in 2033. The interest rate increases by a minimum of 2% in 2013. In November 2005
we defeased this loan and placed a $35,600,000 mortgage loan on the property (see Note 8). The loan bears interest at 5.52% and matures in 2015. Interest-only payments are due during the first
three years of the loan.

Cross KeysIn April 2005, we acquired an 82,000 square 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 which matures in 2013 on the building and recorded a debt discount of $528,000.

102 Pickering WayIn April 2005, we acquired an 80,000 square foot commercial office building located in Exton, Pennsylvania for
$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 a debt premium of $692,000.

1105 Market StreetIn February 2005, we acquired a 173,000 square foot commercial office building located in Wilmington, Delaware,
for a purchase price of $20,700,000. At the time of purchase, we placed a two-year $19,000,000 mortgage loan bearing interest at one-month LIBOR plus 195 basis points that we
guaranteed. We anticipate spending between $3,000,000 and $4,000,000 on capital expenditures, and lease-up costs.

Devon SquareIn February 2005, we invested $2,667,000 for a 50% ownership interest in Devon Square which consists of two commercial
office buildings containing a total of 140,000 square feet of office space in Devon, Pennsylvania through a tenant-in-common (TIC) agreement. The purchase price of the
buildings was $17,109,000. A $21,350,000 acquisition and development loan at one-month LIBOR plus 170 basis points, maturing in August 2007, was obtained, which we guaranteed. In
September 2005, we sold 89% of our 50% interest in the TIC to our third party joint venture member for $2,496,000 and recognized a $140,000 gain on the sale. We account for our investment in
Devon Square using the equity method. We have recorded a $78,000 liability related to the loan guaranty, which is included in Other Liabilities in the Consolidated Balance Sheet at December 31,
2005.

Historic Baltimore PortfolioIn November 2004 we invested $4,500,000 for a 51% interest in a joint venture that purchased a
portfolio of eight historic commercial office buildings located in the central business district of Baltimore, Maryland containing a total of 530,000 square feet of office space (the Baltimore
Properties). The purchase price for the eight buildings was $29,500,000. The joint venture obtained a $15,000,000 loan on seven of the buildings bearing interest at one-month LIBOR plus
175 basis points and maturing in November 2006 and assumed an $8,470,000 loan on one of the buildings bearing interest at 5.95% and maturing in October 2012. In accordance with the joint
venture agreement we receive 28% of the net proceeds from any building sales. In 2005 four of the buildings were sold and we recognized a pre-tax gain of $1,003,000, net of our partner's
share of the gain. A further three buildings have been classified in assets held for sale in the accompanying consolidated financial statements. These three buildings were sold in January 2006
(see Note 18).

F-14

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Fort Washington Executive CenterIn February 2004, we invested $7,000,000 for a 96.5% Class A
interest in a joint venture that acquired an executive center located in Fort Washington, Pennsylvania for $52,664,000, consisting of three commercial buildings containing a total of 393,000 square
feet of office space. In connection with the acquisition, the joint venture placed two 10 year, 5.6% fixed-rate, mortgage loans aggregating $49,000,000 on the buildings. In
June 2005, we acquired one of our equity partner's interests, thereby increasing our equity interest to 97.5% (see Purchase and sale of equity interests above).

West Germantown PikeIn February 2004, we invested $4,875,000 for a 97.5% Class A interest in a joint venture that acquired
two commercial office buildings aggregating 115,000 square feet, located in Plymouth Meeting, Pennsylvania for $20,500,000. The buildings were acquired subject to a 5.9% fixed-rate
$16,246,000 mortgage loan maturing in 2013. In June 2005, we acquired one of our entity partner's interests, thereby increasing our entity interest to 98.1% (see Purchase and sale of equity
interests above).

One NorthbrookIn February 2004, we acquired a 95,000 square foot office building located in Trevose, Pennsylvania, for $16,900,000.
We placed a 10-year, 5.75% fixed-rate, mortgage loan for $15,300,000 on the property.

900 NorthbrookIn November 2003, we invested $1,312,000 for an 87.5% Class A interest in a joint venture that purchased a
66,000 square foot office building located in Trevose, Pennsylvania for $12,050,000. We placed an $11,200,000 ten-year, 5.98% fixed-rate mortgage on the property. In
June 2005, we acquired one of our equity partner's interests, thereby increasing our equity interest to 90.0% (see Purchase and sale of equity interests above).

RESIDENTIAL ACQUISITIONS

The Fountains at Waterford LakesIn September 2003, we acquired a 400 unit apartment community, located in
Orange County, Florida for $35,100,000. The property was acquired subject to a 5.0% fixed-rate $24,600,000 mortgage that matures in December 2007. We recorded a premium of $245,000
in connection with the loan assumption. In September 2005, we defeased this loan and placed a 10-year $39,500,000 loan on the property bearing interest at a fixed-rate
of 5.45% (see Note 8). Interest-only payments are due during the loan term.

Victoria Place ApartmentsIn July 2003, we invested $8,500,000 for an 85% interest in a joint venture that purchased Victoria Place
Apartments, a 364 unit apartment complex in Orange County, Florida for $39,500,000. The venture placed a $34,120,000 ten-year, 4.72% fixed-rate, mortgage on the property.

DEVELOPMENT PROJECTS

Red Mill PondIn May 2005, we invested $3,500,000 for a 51% interest in an entity that purchased and is
developing a 541 residential lot community in Sussex County, Delaware to be sold to a homebuilder. An unaffiliated third party owns the remaining interest in the entity. The land to be developed was
acquired for $37,990,000. To fund the development, the entity drew down $24,845,000 on an acquisition and development loan, issued an $8,115,000 deferred purchase money note, and received a $7,000,000
advance deposit from the homebuilder. Both the loan and the deferred purchase money note bear interest at 6.0% and mature in May 2008.

Based
on the terms of the acquisition and development loan, we are required to contribute an additional $3,500,000 to the venture during 2006, with such funds to be available to repay a portion of the
loan.

B&R Philadelphia Condo InvestorsIn 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 Philadelphia Condo Investors, including several officers and directors of the Company, contributed a total of $10,000,000 for their
equity interests. We have consolidated this entity's assets and liabilities into our consolidated financial statements. Philadelphia Condo Investors has made the following two investments in joint
ventures, which it has accounted for under the equity method:



F-15

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CrisfieldIn January 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 developing the land as lots to be sold to a homebuilder. The entity purchased the parcel for
$10,250,000, which was funded by an $7,950,000 drawdown on an $11,700,000 acquisition 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 in January 2008. During 2005 16 lots were sold.

SeasideIn November 2004, we invested $2,500,000 for a 51% interest in an entity that owns a parcel of undeveloped land in Ocean
City, Maryland which is subdivided into 138 residential lots along with 50 boat slips. The entity is developing the land as lots to be sold along with the boat slips to a homebuilder. The entity
purchased the parcel of land and boat slips for $25,000,000 which was funded primarily by a $16,000,000 acquisition loan, a $2,000,000 drawdown on a $5,500,000 construction loan and a $7,000,000
deposit from the homebuilder. Both the acquisition and the construction loan bear interest at the lender's prime rate and mature in October 2007. During 2005 18 lots were sold.

400 S. PhiladelphiaIn September 2004, we invested $2,000,000 for a 51% interest in a joint venture that purchased a parcel of land
in Ocean City, Maryland for the purpose of developing 20 for-sale residential condominium units. In February 2006, the joint venture obtained a $6,400,000 construction loan. We have
begun development and anticipate completing the units in 2006.

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

GolfviewIn April 2004 we invested $3,664,000 for a 50% interest in a joint venture that purchased a 144 unit mid-rise
residential rental complex located in St. Petersburg, Florida, for $10,800,000. The joint venture converted the complex into 139 residential condominium units. The condo conversion process was
completed in 2004 and the joint venture sold two units and 137 units in 2004 and 2005, respectively.

640 North BroadIn January 2004 we invested $3,200,000 for an 80% interest in a joint venture that purchased an historic property in
Philadelphia, PA for a purchase price of $9,050,000 to be redeveloped into a 266 unit apartment property. In 2004 the venture obtained a $32,000,000 acquisition and construction loan bearing interest
at one-month LIBOR plus 155 basis points and maturing in August 2007, and a $6,900,000 construction bridge loan bearing interest at one month LIBOR plus 175 basis points and
maturing in September 2007. Simultaneous with the closing of the bridge construction loan, the joint venture admitted another equity partner which is obligated to contribute approximately
$7,300,000 in exchange for receiving the benefit of certain tax credits, when certain conditions are met. A portion of these equity contributions will be used to repay the bridge loan. In 2005 we
entered into an agreement to sell our interest in the project to one of our minority partners. As a result, we have included this property in assets held for sale in the accompanying consolidated
financial statements. In January 2006, we closed on the sale of our interest (see Note 18).

1150 Northbrook Development ParcelIn November 2003, we acquired a 9.6-acre tract of land adjacent to the 900 Northbrook
building in the commercial office park in Trevose, Pennsylvania for $2,000,000. We intend to develop a commercial office building containing 108,000 square feet of office space on the land.

F-16

---



Laguna VistaIn September 2003, we entered into an agreement that resulted in us acquiring 100% of a 41 unit luxury condominium
development project in Ocean City, Maryland for a total investment of $6,000,000. In March 2004, we obtained a $15,100,000 construction loan with interest at one-month LIBOR, plus
185 basis points. Development was completed and 19 of the units were sold in 2005.

Divine LorraineIn August 2003, we acquired for $2,375,000 a 95% interest, in a joint venture which acquired an historic building in
Philadelphia, Pennsylvania called the Divine Lorraine for $2,295,000 for the purpose of developing 135 apartment units. In October 2004 we acquired 3.8 acres of adjacent land for $3,580,000,
using a draw on our unsecured line of credit. In 2005, we reached an agreement to sell the building and adjacent land for $10,100,000 and as a result have included this property in assets held for
sale in the accompanying consolidated financial statements. The sale is anticipated to close in the second quarter of 2006.

Cigar FactoryIn 2003, we acquired for $1,000,000 a 66.7% interest in a joint venture that owned a warehouse in Philadelphia, PA, for the
purpose of developing a 30 unit for-sale condominium property. The joint venture obtained a $6,300,000 acquisition and construction loan. The joint venture sold 13 units in 2004 and 11
units in the first six months of 2005. In June 2005, we sold our interest in the Cigar Factory for a value of $1,100,000 (see Purchase and sale of equity investments above).

Clarksburg Ridge, LLCIn March 2003, we acquired an undeveloped 159 lot residential subdivision in Clarksburg, Maryland, for
$12,200,000. Simultaneous with the acquisition, we entered into a $7,000,000 development management agreement for the development of the lots. We also entered into an agreement with a homebuilder for
the sale of the lots. We sold 11 lots in 2003, 138 lots in 2004 and the remaining 10 lots in 2005.

Pro-Forma Results of OperationsUnauditedThe following unaudited pro-forma statements reflect our
results of operations as if our acquisitions completed in 2005, which are in the aggregate material, had occurred on the first day of the periods presented (in thousands, except earnings per share
amounts):

Pro-forma
Years Ended December 31,2005

2004Operating revenues

$
126,506

$
89,414Net (loss) income

$
(2,447
)
$
3,623(Loss) earnings per share

$
(0.45
)
$
0.66


These
unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had
the acquisitions been effective on the first day of the periods presented.

4.     RENTAL PROPERTY AND EQUIPMENT (in thousands):

December 31,2005

2004Land

$
56,815

$
42,989Buildings and improvements


341,954


253,656Equipment


10,794


5,438409,563


302,083LessAccumulated depreciation


(42,394
)

(32,762
)Rental property and equipment, net

$
367,169

$
269,321


F-17

---



5.     MORTGAGE AND NOTES RECEIVABLES (in thousands):

December 31,2005

2004Notes receivable:12% due 2006

$


$
4,3938.5% due 2006


585


7507.0% due through 2015


149


160Other(1)


100


377$
834

$
5,680


All
mortgages are collateralized by first deeds of trust on real estate property.

---

6.     INTANGIBLE ASSETS

In recording our acquisitions of rental properties, we have established intangible in-place lease assets and intangible in-place lease
liabilities. The following table summarizes these intangible assets and liabilities as of the dates presented (in thousands):

December 31,2005

2004Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
AmortizationAcquired in-place lease assets

$
35,665

$
13,002

$
19,800

$
6,893Acquired in-place lease liabilities


9,263


3,093


3,130


1,224


The
amortization of acquired above and below-market-in-place leases, included as a net increase in revenues, totaled $840,000 and $57,000 for the years ended
December 31, 2005 and 2004, respectively.

The
amortization of acquired lease assets and tenant relationships, included in depreciation and amortization expense, totaled $5,176,000 and $3,512,000 for the years ended December 31, 2005
and 2004, respectively.

The
estimated annual amortization of acquired in-place lease liabilities, net of acquired in-place lease assets to be included as a net increase in revenues for each of the
five succeeding years is as follows (in thousands):

2006

$
1,0662007


8232008


8152009


6272010


269


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

2006

$
5,7542007


4,7582008


3,5312009


2,4432010


1,353


F-18

---



7.     INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

At December 31, 2005, our investments in non-consolidated joint ventures and partnerships consisted of the following:

Joint Venture

Ownership Percentage1925 K Associates LLC (1925 K Street)

85%WBP Undeveloped Land (WBP Undeveloped Land)

80%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%


Below
are condensed combined balance sheets for our unconsolidated joint venture entities as of December 31, 2005 and 2004 (in thousands):

December 31,2005

2004ASSETSCash

$
3,523

$
1,348Land held for investment


5,929


5,432Construction in progress


42,359


Land, building and equipment, net


68,766


77,654Other assets


4,772


1,276Total assets

$
125,349

$
85,710LIABILITIES AND MEMBERS' EQUITYMortgages and notes

$
80,070

$
39,366Other liabilities


9,284


5,527Total liabilities


89,354


44,893Members' equity


35,995


40,817Total liabilities and members' equity

$
125,349

$
85,710Company's interest in members' equity(1)

$
29,063

$
9,842


---

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

F-19

---



Below
are condensed combined statements of operations for our unconsolidated joint venture entities for the periods indicated (in thousands):

Years Ended December 31,2005

2004

2003Operating revenues

$
12,194

$
23,397

$
18,609Operating expenses


5,776


8,132


11,591Interest expense


3,130


2,511


2,263Depreciation and amortization expense


2,482


2,112


1,703Net income

$
806

$
10,642

$
3,052Company's equity in earnings of unconsolidated joint ventures(2)

$
793

$
1,360

$
1,725


---

Waterfront AssociatesIn October 2002, B&R Waterfront Properties, LLC (BRW), a 54% owned
subsidiary of ours that is consolidated into our Consolidated Financial Statements, entered into a joint venture called Waterfront Associates LLC (WALLC), with K/FCE Investment LLC (K/FCE), to
redevelop and reposition the Waterfront Complex. BRW contributed the leasehold improvements relating to the Waterfront Complex to WALLC. Affiliates of K/FCE are marketing, leasing, redeveloping, and
managing the complex. K/FCE is the managing member of WALLC and has sole responsibility for the management, control, and operation of WALLC, as well as for the formulation and execution of its
business and investment policy. Beginning the date the joint venture was formed through March 31, 2004, BRW did not consolidate the assets, liabilities and operations of WALLC, since BRW did
not had control of the Waterfront Complex. Beginning March 31, 2004 BRW consolidated the assets, liabilities and operations of WALLC, in accordance with FIN 46R.

F-20

---



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

|                                                     |                                       |                            |  |      |  | December 31,
|---------------------------------------------------- | ------------------------------------- | -------------------------- |  | ---- |  | ------------
|
|
|Fort Washington                                      |                                       | 5.60%                      |  | 2014 |  | $           
|Washington Business Park                             |                                       | 7.63%                      |  | 2031 |  |             
|The Fountains at Waterford Lakes (2)(8)              |                                       | 5.45%                      |  | 2010 |  |             
|919 Market Street (2)                                |                                       | 5.52%                      |  | 2015 |  |             
|Victoria Place Apartments                            |                                       | 4.72%                      |  | 2013 |  |             
|640 North BroadConstruction Loan (7)                |                                       | LIBOR + 155 basis pts. (6) |  | 2007 |  |             
|640 North BroadBridge Loan (7)                      |                                       | LIBOR + 175 basis pts.     |  | 2007 |  |             
|Red Mill PondDevelopment Loans                      |                                       | 6.00%                      |  | 2008 |  |             
|Red Mill PondPromissory Note                        |                                       | 6.00%                      |  | 2012 |  |             
|1105 Market Street                                   |                                       | LIBOR +195 basis pts. (6)  |  | 2007 |  |             
|Versar Center                                        |                                       | 6.18%                      |  | 2013 |  |             
|Seaside (4)                                          |                                       | Lender's Prime Rate        |  | 2007 |  |             
|Sudley N. Bldgs A,B,C,& D and Bank Bldg.             |                                       | 7.47%                      |  | 2012 |  |             
|West Germantown Pike                                 |                                       | 5.90%                      |  | 2033 |  |             
|One Northbrook                                       |                                       | 5.75%                      |  | 2014 |  |             
|900 Northbrook                                       |                                       | 5.98%                      |  | 2013 |  |             
|Cross Keys (8)                                       |                                       | 5.45%                      |  | 2013 |  |             
|102 Pickering Way (8)                                |                                       | 6.50%                      |  | 2013 |  |             
|Inn at the Colonnade                                 |                                       | 7.45%                      |  | 2011 |  |             
|Crisfield (4)                                        |                                       | LIBOR + 200 basis pts. (6) |  | 2008 |  |             
|Baltimore Portfolio (1 Building)                     |                                       | 5.95%                      |  | 2012 |  |             
|Baltimore Portfolio (3 Buildings) (7)(4)             |                                       | LIBOR + 175 basis pts.     |  | 2006 |  |             
|Fort Hill                                            |                                       | 7.70%                      |  | 2011 |  |             
|Charlestown North                                    |                                       | 6.74%                      |  | 2012 |  |             
|Holiday Inn Express                                  |                                       | 7.88%                      |  | 2011 |  |             
|Sudley South                                         |                                       | LIBOR + 180 basis pts. (6) |  | 2006 |  |             
|Laguna Vista (4)                                     |                                       | LIBOR + 185 basis pts. (6) |  | 2006 |  |             
|Golfview (4)                                         |                                       | LIBOR + 175 basis pts. (6) |  | 2007 |  |             
|Cigar Factory (4)                                    |                                       | LIBOR + 275 basis pts. (6) |  | 2005 |  |             
|                                                     |                                       |                            |  |      |  |             
|                                                     | Total mortgage and construction loans |                            |  |      |  |             
|Junior subordinated notes (5)                        |                                       | 8.37%                      |  | 2035 |  |             
|Line of Credit (3)                                   |                                       | LIBOR + 175 basis pts. (6) |  | 2006 |  |             
|Unsecured Loan                                       |                                       | LIBOR + 195 basis pts. (6) |  | 2005 |  |             
|Other                                                |                                       | (9)                        |  | (9)  |  |             
|                                                     |                                       |                            |  |      |  |             
|Total mortgage and construction loans and other debt |                                       |                            |  |      |  | $           
|                                                     |                                       |                            |  |      |  |             

---

F-21

---





In March 2006, we amended our unsecured line of credit facility increasing the capacity under the line from $32,200,000 to $50,000,000, extending the maturity date to
May 2007 and reducing the required annual funds from operations, for the year ending December 31, 2005, from $15,000,000 to $11,000,000.

Several
of our loans contain certain financial covenants. The most stringent of these covenants require that we maintain a minimum net worth of $110,000,000, a minimum liquidity of $30,000,000, and a
minimum liquidity to unsecured debt ratio of 1:1.

We
are in compliance with our loan covenants, including covenants under our line of credit as amended in March 2006.

Annual
contractual principal payments as of December 31, 2005, are as follows (in thousands):

2006

$
21,1702007


105,9492008


37,7512009


4,3652010


44,1412011 and thereafter


315,284Total

$
528,660


Included
in mortgages and construction loans and other debt are fair market value adjustments on assumed debt. The net unamortized fair market value adjustments were $145,000 at December 31,
2005 and $173,000 at December 31, 2004.

UNSECURED JUNIOR SUBORDINATED NOTES AND TRUST PREFERRED SECURITIES

On November 29, 2005, Bresler & Reiner, Statutory Trust I, (the Trust) a wholly owned subsidiary of the Company, completed the issuance and sale in a private
placement of $40,000,000 in aggregate principal amount of trust preferred securities. The Trust simultaneously issued $1,238,000 in aggregate principal amount of common securities to the Company. Both
the preferred securities and the common securities (together the Capital Securities), mature on January 30, 2036 and may be redeemed by the Trust at any time on or after January 30,
2011. The Capital Securities require quarterly distributions payable at a fixed rate equal to 8.37% per annum until January 30, 2011 and at a floating rate equal to three-month LIBOR plus 350
basis points per annum thereafter.

The
Trust used the proceeds from the sale of the Capital Securities to purchase $41,238,000 in aggregate principal amount of unsecured junior subordinated debentures due January 30, 2036 issued
by the Company (the Debentures). The payment terms of the Debentures are substantially the same as the terms of the Capital Securities.

Since
we are not the primary beneficiary of the Trust, we have accounted for our investment in the Trust under the equity method, in accordance with FIN46. As a result, we have reflected in our
consolidated financial statements as mortgage and construction loans and other debt, the debentures issued to the Trust totaling S41,238,000 and have included in investment in and advances to joint
ventures the common securities held by the Company totaling $l,238,000. Interest paid under the debentures totaling $307,000 for the year ended December 31, 2005 is recorded as interest expense
while our share of earnings of the trust totaling $9,000 for the year ended December 31, 2005 is included in income from investments in joint ventures.

LOAN DEFEASANCE

In September 2005, we defeased the $24,600,000 mortgage note collateralized by The Fountains by purchasing $25,408,000 of U.S Treasury securities. In
November 2005, we defeased the $22,329,000 mortgage note collateralized by 919 Market Street, by purchasing $24,024,000 of U.S. Treasury and government sponsored agency securities. These
securities, whose cash flow is structured to match the principal and interest payments due under the mortgage notes, were placed in trusts for the sole purpose of funding these payments under the
mortgage notes. Since both the transactions were structured as legal defeasances, in accordance with SFAS No. 140,Accounting for Transfers on Servicing of Financial
Assets and Liabilities, these mortgage notes payable were accounted for as having been extinguished. We have recorded the difference between the cost of the securities
purchased and the carrying amount of the mortgage notes extinguished, along with the write-off of unamortized deferred financing costs, totaling $865,000
and $2,046,000 for The Fountains and 919 Market Street, respectively, as debt extinguishment costs for the year ended December 31, 2005, in the accompanying Consolidated Statements of
Operations. We subsequently placed new mortgage debt on these properties.

F-22

---



9.     COMMITMENTS AND CONTINGENCIES

GUARANTIES

We have guarantied repayment of up to $39,240,000 under the $98,100,000 primary construction loan and repayment of the full amount outstanding under the $16,900,000 mezzanine
construction loan obtained by Symphony House. The guarantied repayment under the primary loan will be reduced to $12,263,000 upon the joint venture obtaining $83,500,000 in sales revenue and will be
further reduced to $4,950,000 once net sales proceeds reach 110% of the outstanding principal balance of the loan. Both the primary construction loan and the mezzanine loan mature in 2008. Funding of
the guaranty would increase our equity participation in the venture. At December 31, 2005, there was no amount outstanding under the primary loan and the amount outstanding under the mezzanine
loan totaled $14,813,000.

We
have guarantied repayment of an $8,500,000 mezzanine construction loan obtained by Venice Lofts. The loan matures in 2007. The amount outstanding under the loan totaled $1,226,000 at
December 31, 2005.

We
have guarantied repayment of the entire loan balance outstanding under a $21,350,000 acquisition and construction loan obtained by Devon Square and our equity partner in the venture has provided
the same guarantee. Funding of the guaranty would increase our equity participation in the venture. The loan matures in 2007. At December 31, 2005, the balance outstanding under the loan
totaled $13,064,000.

We
have provided an unconditional and irrevocable payment guaranty of $5,500,000 to Wachovia Bank, N.A in connection with a loan made to 1925 K Street. The loan matures in April 2007, but may
be extended for up to an additional two years at the option of the borrower. Funding of the guaranty would increase our equity participation in the venture.

At
December 31, 2005 we were a guarantor of both the $32,000,000 acquisition and construction loan and the $6,900,000 bridge construction loan obtained by 640 North Broad. In 2004 the joint
venture admitted another equity partner which is obligated to contribute approximately $7,300,000 in exchange for receiving the benefit of certain tax credits. A portion of these equity contributions
will be used to repay the bridge construction loan. At December 31, 2005, the amount outstanding under the acquisition and construction loan totaled $28,651,000 and the amount outstanding under
the bridge construction loan totaled $6,545,000. In the first quarter of 2006 we sold our interest in 640 North Broad and
were released from our guarantee of the acquisition and construction loan, while the guarantee under the bridge construction loan remains in place. In connection with the sale of our interest, we
guarantied a $6,000,000 loan obtained by the purchaser of our interest (see Note 18). We have received an indemnification against our funding under all the guaranties from an equity partner in the
venture.

In
connection with the $15,100,000 construction loan Laguna Vista has obtained from Wachovia Bank, N.A., we have guarantied the purchase of half of all unpurchased condominium units at Laguna Vista
for a total acquisition price that will equate to one half of the outstanding loan balance at that date. At December 31, 2005, the outstanding loan balance totaled $1,670,000.

We
have guarantied repayment of the entire loan balance outstanding under a $15,000,000 mortgage loan made by Wachovia Bank, N.A. to the entities that own seven of the Baltimore Properties. The loan
matures in 2006 and provides for two, two-year extension options. The outstanding loan balance totaled $8,074,000 at December 31, 2005, reflecting a reduction in the loan as a result of the
sale of four of the properties in 2005. In the first quarter of 2006 the full amount outstanding under the loan was repaid upon the sale of the remaining three properties. (See Note 18.)

Paradise
Developers, our wholly-owned subsidiary has obtained a $7,044,000 development loan from Wachovia Bank, N.A., maturing in 2006, the full amount of which has been guarantied by us. At
December 31, 2005, the outstanding loan balance totaled $4,283,000.

In
February 2004, in connection with two mortgage loans totaling $49,000,000 obtained by the Fort Washington Executive Center, we guarantied the rental income under a master lease agreement for
110,000 square feet of office space at an annual rent of $21.00 per square foot for a five year term beginning January 2008, providing a major tenant fails to exercise a five year extension
option on their lease at that time.

F-23

---



LITIGATION

We are currently a party to a lawsuit filed by its partner in a joint venture that owns one of its commercial properties. The suit was filed in the Circuit Court of Montgomery
County, Maryland in December 2005. A motion by the plaintiff for a preliminary injunction preventing any sale or further encumbrance of the property was denied by the Court in
February 2006. The plaintiff seeks $15,000,000 in damages for breach of fiduciary duty and fraud and $25,000,000 for exemplary and punitive damages. We believe the complaint is without merit
and intends to vigorously defend the lawsuit. No provision has been recorded in the accompanying Consolidated Financial Statements for our exposure, if any, related to this litigation.

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

10.   DISCONTINUED OPERATIONS

The
assets and liabilities of the following properties comprised assets held for sale in the accompanying consolidated balance sheets: 640 North Broad; Divine Lorraine; and three properties in the
Historic Baltimore Portfolio.

The
results of operations and gains on sale for the following properties are included in discontinued operations in the accompanying consolidated statements of operations: 640 North Broad; seven
properties in the Historic Baltimore Portfolio; 146th Street, The Commons, five commercial properties leased to convenience store operators, Maplewood Manor and Third Street.

During
2005, we sold four of the eight Baltimore Properties for a total of $12,651,000 and recorded a pre-tax gain on sale of $783,000, net of our equity partner's share of the gain. We
have also executed agreements to sell another three of the remaining four properties. The sales of these three properties were completed in January 2006 (See Note 18).

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

In
June 2005, we executed an agreement to sell our interest in 640 North Broad to one of our equity partners for $5,462,000. The sale closed in January 2006 (See Note 18).

In
September 2005, we executed an agreement to sell the Divine Lorraine property and the adjacent ground for $10,100,000. Upon the closing of the sale, which is anticipated to occur in the
second quarter of 2006, we will record a pre-tax gain on sale of approximately $2,200,000.

In
December 2004, we sold to two unaffiliated parties five commercial properties that were leased to convenience store operators. The total sales price, less closing costs, was $1,474,000, of
which $910,000 was paid by promissory notes. One note, in the amount of $750,000, bears interest at a fixed-rate of 8.5%, is non-amortizing and matures in December 2006.
The other note, in the amount of $160,000, bears interest at a fixed-rate of 7.0%, is amortized over an 11 year period and matures in December 2015. We have recorded the
results of operations of the five properties along with a $575,000 gain, net of taxes, as part of discontinued operations, in the accompanying Consolidated Statements of Operations.

In
October 2004, Third Street, in which we own a 1% interest, sold its interests in two residential buildings to an unaffiliated third party for $10,600,000. A total of $8,400,000 of the net
proceeds received by Third Street was used to pay in full notes and advances made by us to Third Street, together with accrued interest thereon. We have recorded a $478,000 of previously deferred gain
on sale, net of taxes, in the accompanying Consolidated Statements of Operations related to the repayment of the notes.

In
December 2003, we sold 95% of our interest in Town Square Commons, LLC (The Commons), to an unaffiliated party, for $9,918,000. The Commons owns a 116 unit apartment complex in Washington
DC. The sale was part of a tax free exchange under §1031 of the US Internal Revenue Code and, as such, the taxable gain on the sale was deferred. In 2005 we sold our remaining 5% interest
in The Commons for $522,000. We have recorded the results of operations of The Commons along with a $5,418,000 gain, net of taxes which was recorded in 2005, as part of discontinued operations, in the
accompanying consolidated statements of operations.

F-24

---



In
May 2003, we sold our Maplewood Manor nursing home in Lakewood, New Jersey to an unaffiliated party for $6,500,000. Of the total purchase price, $3,900,000 was paid in cash. The balance
$2,600,000 was donated by us as a charitable gift to the purchaser, a charitable organization. The sale was part of a tax free exchange under §1031 of the US Internal Revenue Code and, as
such, the taxable gain on the sale was deferred. We have recorded the operating results of the nursing home along with a $1,711,000 gain, net of taxes, as part of discontinued operations in the
accompanying consolidated statements of operations.

The
following summary presents the combined operating results of and gains on sale from properties we have classified as discontinued operations (in thousands):

Years Ended December 31,2005

2004

2003Revenues

$
7,404

$
807

$
1,573(Loss) income before gain on sale and provision for income taxes

$
(898
)
$
25

$
772Gain on sale


4,458


1,874


11,882Minority interest


(2,204
)

60


Provision for income taxes


(536
)

(816
)

(4,905
)Income from discontinued operations

$
820

$
1,143

$
7,749


11.   INCOME TAXES

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

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

Years Ended December 31,2005

2004

2003(Benefit) provision for income taxesCurrent tax

$
(474
)
$
2,631

$
(724
)Deferred tax


(2,459
)

(862
)

5,092Total (benefit) provision for income taxes (including discontinued operations)

$
(2,933
)
$
1,769

$
4,368


A
reconciliation of the statutory Federal tax rate to theCompany'seffective income tax rate follows:

Years Ended December 31,2005(1)

2004

2003Statutory rate

34.0%

34.0%

34.0%Increase (decrease) resulting from:State taxes, net of federal income tax benefit

7.0%

5.3%

5.5%Interest income from tax-exempt bonds

5.8%

(6.2)%

(5.7)%Other (includes return to accrual adjustment)

9.8%(2)

(4.5)%

(2.5)%Effective rate

56.6%

28.6%

31.3%


---

F-25

---





Deferred income taxes result from temporary differences in the recognition of revenue and expense for income tax and financial statement reporting purposes. The sources of
these differences and the estimated tax effect of each are as follows (in thousands):

Deferred tax
liability (asset)
as of
December 31, 2005

Deferred income
tax provision
(benefit) for
the year ended
December 31, 2005

Deferred tax
liability (asset)
as of
December 31,
2004Basis in property

$
9,035

$
4,508

$
4,527Charitable contributions


(769
)

(61
)

(708
)Investments in partnerships


1,414


190


1,224Lease intangibles


(2,582
)

(1,339
)

(1,243
)Gain on sale


4,539


(375
)

4,914Other


(184
)

(381
)

197Deferred tax liability


11,453


2,542


8,911Deferred tax asset (net operating losses)


(5,001
)




Total

$
6,452

$
2,542

$
8,911


At
December 31, 2005 we had an estimated net operating loss (NOL) carryforward with an estimated tax effect of $5,001,000. The NOL is recorded as a deferred tax asset and is included in
deferred charges and other assets on the balance sheet.

12.   OPERATING LEASES

AS A LESSEE

At December 31, 2005 we were obligated under two land leases with the District of Columbia Redevelopment Land Agency for the Waterfront Complex. The leases pertain to
land on which we own commercial properties that are currently under development. The leases, which expire in 2058, have aggregate annual rental payments of $130,000.

During
2005, we relocated our corporate offices within Rockville, Maryland and terminated our previous office lease agreement that was entered into in 2003. We paid a $50,000 fee to terminate this
lease. The rent for our current office space commenced in July, 2005 and expires in December, 2012. Total rent paid under both of these leases for the year ended 2005 was $169,000.

Minimum
rentals to be paid under these leases at December 31, 2005, are as follows (in thousands):

2006

$
3812007


3882008


3962009


4042010


4122011 and thereafter


6,741Total

$
8,722


AS A LESSOR

Substantially all 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 certain
conditions. No single tenant represents more than 10% of our total

F-26

---



revenues.
Minimum future rentals to be received for commercial property subject to non-cancelable and other leases as of December 31, 2005 are as follows (in thousands):

2006

$
45,8492007


39,7592008


30,2892009


23,1552010


11,3412011 and thereafter


31,869Total

$
182,262


We
are also entitled to additional rents, which are not included above that are primarily based upon escalations of real estate taxes and operating expenses over base period amounts. We earned
approximately $3,268,000, $2,174,000 and $1,054,000 of additional rents for the years ended December 31, 2005, 2004 and 2003.

13.   TRANSACTIONS WITH AFFILIATES

We
have business transactions with several affiliates that are owned in part by certain of our shareholders, officers, and directors. These transactions are summarized as follows (in thousands):

Years Ended December 31,2005

2004

2003Revenues:Management fees

$
16

$
16

$
365Interest








306Cost and expenses:Interest


837
(1)

329





---

In addition, certain affiliated entities participate under our insurance policy and reimburse us for the associated policy premiums.

14.   BENEFIT PLANS

DEFINED CONTRIBUTION PLAN

In November 2004, we established a defined contribution plan (401K) that covers all employees. For the years ended December 31, 2005 and 2004, we contributed
$75,000 and $12,000, respectively, to the 401K plan, representing 3% of all employee's salaries up to a maximum salary of $210,000 per employee in 2005 and $200,000 per employee in 2004.

DEFINED BENEFIT PENSION PLAN

Most of our employees are covered by our defined benefit pension plan. We have made contributions to the plan to trusts established to pay future benefits to eligible retirees
and dependents. We use December 31 as our measurement date. Benefit obligations as of the end of the year reflect assumptions in effect as of those dates. Net pension costs for each of the
years presented were based on assumptions in effect at the end of the respective preceding year.

F-27

---



Obligations and Funded Status (in thousands):

December 31,Change in benefit obligations:2005

2004Benefit obligation at beginning of year

$
3,438

$
4,818Service cost


91


174Interest cost


101


265Benefits paid


(15
)

(1,488
)Curtailment gains





(564
)Settlement loss


(1,518
)

400Actuarial gains


91


(167
)Benefit obligations at end of year

$
2,188

$
3,438


December 31,Change in plan assets:2005

2004Fair value of plan assets at beginning of year

$
3,273

$
4,422Actual return on plan assets


116


339Contributions by Employer


50Benefits paid


(15
)

(1,488
)Settlement


(1,518
)

Fair value of plan assets at end of year

$
1,906

$
3,273


2005

2004Unfunded status of plan

$
(282
)
$
(165
)Unrecognized (loss) gains


(120
)

117Unrecognized transition asset


74


130Accrued liabilities


88


Prepaid pension expense





83


December 31,Amounts recognized in the consolidated balance sheet:2005

2004Prepaid assets

$


$
83Accrued liabilities


88





F-28

---



December 31,Information for pension plans with an accumulated benefit obligation in excess of plan assets2005

2004Projected benefit obligation

$
2,188

$
3,438Accumulated benefit obligation


1,937


3,039Fair value of plan assets


1,906


3,273


December 31,Components of Net Periodic Benefit Cost2005

2004Service cost

$
91

$
174Interest cost


101


265Expected return on plan assets


(110
)

(291
)Amortization of transition asset


57


57Preliminary net pension expense


139


205Curtailment gain





(411
)Settlement loss


83


50Final net periodic pension expense (income)

$
222

$
(156
)


The
actuarial assumptions used to determine the benefit obligations at December 31, 2005 and 2004 related to our defined benefit pension plan, as appropriate, are as follows:

December 31,Benefit Obligation Assumptions2005

2004Discount rates

5.50%

6.00%Rates of increase in future compensation

4.25%

4.25%


The
actuarial assumptions used to determine the net (income) expense related to our defined benefit plan for years ended December 31, 2005 and 2004, as appropriate, are as follows:

December 31,Pension Cost Assumptions2005

2004Discount rates

5.50%

5.50%Expected long-term rates of return on assets

7.00%

7.00%Rates of increase in future compensation levels

4.25%

4.25%


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

The
asset allocations of our plans at December 31, 2005 and 2004, by asset category, were as follows:

December 31,Asset Category2005

2004Equity securities

26.0%

56.0%Debt securities

72.0%

41.0%Other

2.0%

3.0%


The
investment objectives for the assets of the defined benefit pension plan are to minimize the net present value of expected funding contributions and to meet or exceed the rate of return assumed
for plan funding purposes over the long term. The nature and duration of benefit obligations; along with assumptions concerning assets class returns and

F-29

---



return
correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives.

Investment
policies and strategies governing the assets of the plan are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external
investment managers and the maintenance of a portfolio diversified by asset class, investment approach and security holdings, and the maintenance of sufficient liquidity to meet benefit obligations as
they come due.

The
following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2006

$
522007


532008


3952009


492010


492011-2015


683


15.   DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The
estimated fair values of our financial instruments are described below.

As
of December 31, 2005, the fair value of our $528,660,000 of mortgage and construction loans and other debt was $522,862,000. As of December 31, 2004, the fair value of our
$334,182,000 of mortgage and construction loans and other debt was $331,848,000. The fair value of fixed rate debt is estimated by discounting the future cash flows based on borrowing rates currently
available to us for financing on similar terms for borrowers with similar credit ratings. For variable rate obligations the carrying amount is a reasonable estimate of fair value.

The
fair value of our other financial instruments approximates their carrying amounts.

16.   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands except earnings per common share amounts):

|                                   |  | Three Months Ended |       
|---------------------------------- |  | ------------------ | ------
|
|Operating revenues                 |  | $                  | 29,874
|Operating income                   |  |                    | 6,995 
|Net income (loss)                  |  |                    | 881   
|Net income (loss) per common share |  |                    | .16   

|                            |  | Three Months Ended
|--------------------------- |  | ------------------
|
|Operating revenues          |  | $                 
|Operating income            |  |                   
|Net income                  |  |                   
|Net income per common share |  |                   

F-30

---



17.   SEGMENT INFORMATION:

In
accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," we report segment information for the following four categories:

Commercial Rental Property

This
segment includes the rental income derived by commercial properties from leases of office and industrial space and other related revenue sources. Commercial leases generally provide for a fixed
monthly rental over terms that range from three to 10 years.

Also
included in this segment is income generated from management and leasing activities associated with our 50% ownership interest in Redwood Commercial, a commercial management company.

Residential Rental Property

This
segment includes the rental income derived from residential properties from leases of apartment units and other related revenue sources. Apartment leases generally provide for a fixed monthly
rental over a one-year term. Also included in this segment are fees earned from our management of residential properties in 2004 and 2003.

Hospitality Properties

This
segment includes revenue and income derived from services provided at our hospitality properties.

Commercial, Residential and Land Under Development

This
segment primarily includes the development and sale of homes and residential condominium units, the development of commercial and residential buildings and the development and sale of lots as
part of residential subdivisions. Also included are the revenues and costs associated with undeveloped commercial land sales, and other construction activity.

Our
real estate investments are located in the Washington DC, Philadelphia, Pennsylvania, Baltimore, Maryland, Wilmington, Delaware, Ocean City, Maryland, Orlando Florida and Tampa, Florida
metropolitan areas. We are not involved in any operations in countries other than the United States of America.

The
accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based upon revenues less operating expenses of the
combined properties in each segment.

Our
reportable segments are a consolidation of related subsidiaries that are managed separately as each segment requires different operating, pricing, and leasing strategies.

F-31

---





Following is a summary of our reportable segments.

|December 31, 2005 (in thousands) |                                                              | Commercial,
Residential and
Land
Development |   | Commercial
Rental |   | Residential
Rental |         | Hospitality |   | Corporate
and Other |   | Consolidated |       
|-------------------------------- | ------------------------------------------------------------ | -------------------------------------------- | - | ----------------- | - | ------------------ | ------- | ----------- | - | ------------------- | - | ------------ | ------
|Statement of Operations:         |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 | Total operating revenues                                     |                                              | $ | 55,364            |   | $                  | 46,163  |             | $ | 11,365              |   | $            | 9,713 
|                                 | Cost of homebuilding, residential lots and other development |                                              |   | (43,679           | ) |                    |        |             |   |                    |   |              |      
|                                 | Operating expenses                                           |                                              |   |                  |   |                    | (18,984 | )           |   | (5,028              | ) |              | (8,869
|                                 | Depreciation and amortization expense                        |                                              |   |                  |   |                    | (12,760 | )           |   | (2,741              | ) |              | (563  
|                                 | Interest expense                                             |                                              |   |                  |   |                    | (14,768 | )           |   | (3,508              | ) |              | (1,113
|                                 | Gain on sale of investments in joint ventures                |                                              |   | (118              | ) |                    | 127     |             |   | 1,542               |   |              |      
|                                 | Income (loss) from investments in joint ventures             |                                              |   | 1                 |   |                    | 1,018   |             |   | (235                | ) |              |      
|                                 | Minority interest                                            |                                              |   | (5,636            | ) |                    | 119     |             |   | (25                 | ) |              |      
|                                 | Withdrawn public offering                                    |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Debt extinguishment costs                                    |                                              |   |                  |   |                    | (2,046  | )           |   | (865                | ) |              |      
|                                 | General, administrative and other expenses                   |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Other (expense)                                              |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 | Income (loss) before taxes and discontinued operations       |                                              | $ | 5,932             |   | $                  | (1,131  | )           | $ | 505                 |   | $            | (832  
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|Assets:                          |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 | Real estate at cost                                          |                                              | $ | 157,128           |   | $                  | 308,258 |             | $ | 84,312              |   | $            | 16,993
|                                 | Accumulated depreciation                                     |                                              |   |                  |   |                    | (24,311 | )           |   | (8,948              | ) |              | (9,135
|                                 | Investments in joint ventures                                |                                              |   | 19,013            |   |                    | 10,669  |             |   | 371                 |   |              |      
|                                 | Cash, cash equivalents and restricted cash                   |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Investments                                                  |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Other                                                        |                                              |   | 55,931            |   |                    | 39,397  |             |   | 2,195               |   |              | 864   
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 |                                                              |                                              | $ | 232,072           |   | $                  | 334,013 |             | $ | 77,930              |   | $            | 8,722 
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       

F-32

---



|December 31, 2004 (in thousands) |                                                              | Commercial,
Residential and
Land
Development |   | Commercial
Rental |   | Residential
Rental |         | Hospitality |   | Corporate
and Other |   | Consolidated |       
|-------------------------------- | ------------------------------------------------------------ | -------------------------------------------- | - | ----------------- | - | ------------------ | ------- | ----------- | - | ------------------- | - | ------------ | ------
|Statement of Operations:         |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 | Total operating revenues                                     |                                              | $ | 24,605            |   | $                  | 32,812  |             | $ | 10,395              |   | $            | 8,099 
|                                 | Cost of homebuilding, residential lots and other development |                                              |   | (21,071           | ) |                    |        |             |   |                    |   |              |      
|                                 | Operating expenses                                           |                                              |   |                  |   |                    | (12,746 | )           |   | (5,017              | ) |              | (6,172
|                                 | Depreciation and amortization expense                        |                                              |   |                  |   |                    | (8,985  | )           |   | (2,680              | ) |              | (685  
|                                 | Interest expense                                             |                                              |   |                  |   |                    | (19,608 | )           |   | 3,316               |   |              | 997   
|                                 | Gain on sale of investments in joint ventures                |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Income from investments in joint ventures                    |                                              |   | (114              | ) |                    | 1,502   |             |   | (28                 | ) |              |      
|                                 | Minority interest                                            |                                              |   | (1,983            | ) |                    | (136    | )           |   | 52                  |   |              |      
|                                 | General, administrative and other expenses                   |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Other income                                                 |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 | Income (loss) before taxes and discontinued operations       |                                              | $ | 1,437             |   | $                  | (7,161  | )           | $ | 6,038               |   | $            | 2,239 
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|Assets:                          |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 | Real estate at cost                                          |                                              | $ | 106,384           |   | $                  | 203,583 |             | $ | 82,596              |   | $            | 15,904
|                                 | Accumulated depreciation                                     |                                              |   |                  |   |                    | (17,973 | )           |   | (6,217              | ) |              | (8,572
|                                 | Investments in joint ventures                                |                                              |   | 415               |   |                    | 8,942   |             |   | 485                 |   |              |      
|                                 | Cash, cash equivalents and restricted cash                   |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Investments                                                  |                                              |   |                  |   |                    |        |             |   |                    |   |              |      
|                                 | Other                                                        |                                              |   | 29,027            |   |                    | 26,443  |             |   | 5,162               |   |              | 905   
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       
|                                 |                                                              |                                              | $ | 135,826           |   | $                  | 220,995 |             | $ | 82,026              |   | $            | 8,237 
|                                 |                                                              |                                              |   |                   |   |                    |         |             |   |                     |   |              |       

|December 31, 2003 (in thousands) |                                                              | Commercial,
Residential
and Land
Development |   | Commercial
Rental |   | Residential
Rental |        | Hospitality |   | Corporate
and Other |   | Consolidated |       
|-------------------------------- | ------------------------------------------------------------ | -------------------------------------------- | - | ----------------- | - | ------------------ | ------ | ----------- | - | ------------------- | - | ------------ | ------
|Statement of Operations:         |                                                              |                                              |   |                   |   |                    |        |             |   |                     |   |              |       
|                                 | Total operating revenues                                     |                                              | $ | 1,633             |   | $                  | 16,106 |             | $ | 4,715               |   | $            | 7,896 
|                                 | Cost of homebuilding, residential lots and other development |                                              |   | (1,650            | ) |                    |       |             |   |                    |   |              |      
|                                 | Operating expenses                                           |                                              |   |                  |   |                    | (6,484 | )           |   | (2,389              | ) |              | (5,236
|                                 | Depreciation and amortization expense                        |                                              |   |                  |   |                    | (4,272 | )           |   | (1,025              | ) |              | (863  
|                                 | Interest expense                                             |                                              |   |                  |   |                    | (6,545 | )           |   | (659                | ) |              | (821  
|                                 | Gain on sale of investments in joint ventures                |                                              |   |                   |   |                    |        |             |   |                     |   |              |       
|                                 | Income from investments in joint ventures                    |                                              |   | 141               |   |                    | 1,584  |             |   |                    |   |              |      
|                                 | Minority interest                                            |                                              |   |                  |   |                    | (49    | )           |   |                    |   |              |      
|                                 | General, administrative and other expenses                   |                                              |   |                  |   |                    |       |             |   |                    |   |              |      
|                                 | Other income                                                 |                                              |   |                   |   |                    |        |             |   |                     |   |              |       
|                                 |                                                              |                                              |   |                   |   |                    |        |             |   |                     |   |              |       
|                                 | Income (loss) before taxes and discontinued operations       |                                              | $ | 124               |   | $                  | 340    |             | $ | 642                 |   | $            | 976   
|                                 |                                                              |                                              |   |                   |   |                    |        |             |   |                     |   |              |       

F-33

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18.   SUBSEQUENT EVENTS:

10333 Harwin DriveIn January 2006 we acquired a 148,000 square foot commercial office building located in Houston, Texas for a
purchase price of $12,585,000. We placed a ten-year $10,640,000 mortgage loan on the building bearing a fixed interest rate of 5.78%.

El Camino RealIn January 2006 we acquired four commercial office buildings containing a total of 82,000 square feet of office space
located in Houston, Texas for a purchase price of $6,052,000. We placed a ten-year $5,075,000 mortgage loan on the buildings bearing a fixed interest rate of 5.78%.

1100 NASA RoadIn February 2006 we acquired a 57,000 square foot commercial office building located in Houston, Texas for a purchase
price of $4,502,000. In connection with the acquisition we assumed a mortgage loan with an outstanding principal balance of $2,864,000, maturing in 2012. The loan bears a fixed interest rate of 6.12%.

1110 NASA RoadIn March 2006, we acquired a 60,000 square foot commercial office building located in Houston, Texas for a purchase
price of $4,978,000. In connection with the acquisition we assumed a mortgage loan with an outstanding principal balance of $3,500,000, maturing in 2014. The loan bears a fixed interest rate of 5.55%.

1120 NASA RoadIn March 2006, we acquired an 80,000 square foot commercial office building located in Houston, Texas for a purchase
price of $6,642,000. In connection with the acquisition we assumed a mortgage loan with an outstanding principal balance of $5,300,000, maturing in 2015. The loan bears a fixed interest rate of 5.41%.

Blue Bell PlazaIn January 2006 we acquired an office complex located in Plymouth Meeting, Pennsylvania, containing two commercial
office buildings totaling 155,000 square feet of office space. The total purchase price of the buildings was $32,000,000. We placed a ten-year $29,800,000 mortgage loan on the buildings.
The loan bears a fixed interest rate of 5.65% with interest-only payments due during the first two years of the loan. In connection with the acquisition we reimbursed the seller for
approximately $2,300,000 for costs associated with prepayment of the existing mortgage debt, which we recorded as an addition to the purchase price.

Mearns ParkIn March 2006, we acquired a property located in Warminster Pennsylvania, containing 230,000 square feet of industrial
space, 70,000 square feet of commercial office space and land upon which we intend to construct a 48,000 square foot industrial building. The purchase price of the property was $19,000,000. In
connection with the acquisition we assumed a mortgage loan with an outstanding principal balance of $11,546,000, maturing in 2013. The loan bears a fixed interest rate of 5.82%.

Historic Baltimore PortfolioIn January 2006, we sold three of the remaining four Baltimore properties for $17,100,000. We received
$3,500,000 in net proceeds from the sales. All three properties are classified as assets held for sale on our consolidated balance sheet at December 31, 2005.

640 North Broad StreetIn January 2006, we sold our interest in 640 North Broad to one of our equity partners for $5,462,000. At the
time of the sale we received a promissory note for the entire purchase price. This note was repaid in March 2006 from proceeds obtained by the maker of the note from a $6,000,000 loan
guaranteed by us and secured in part by a $3,000,000 certificate of deposit that we have purchased from the lender. In connection with the sale of our interest, we were removed as a guarantor under
640 North Broad's $32,000,000 acquisition and construction loan. In connection with the transaction, we recorded a deferred gain on sale of $596,000.

Stock Appreciation Rights Incentive PlanIn January 2006, our Board of Directors adopted a Stock Appreciation Rights Incentive Plan (the
Plan). Under the Plan, we may grant to employees and consultants stock appreciation rights (SARs) with respect to up to 280,000 shares of our common stock. Upon exercise, each SAR will entitle the
exercising holder to a cash payment equal to the excess of the market value of a share of common stock at the time of exercise over the market value of a share of common stock at the time of grant of
the SAR. The Plan is administered by our Compensation Committee, which has sole authority to grant SARs to employees and consultants under the Plan. At the time of adoption, the term of each SAR
granted pursuant to the Plan is no more than ten years after the date of grant. The SARs vest immediately upon grant. In January 2006, the Compensation Committee granted 172,500 SARs to our
employees and our consultants. At the time of the grant the market value of a share of our common stock was $32.91. We will recognize in the Consolidated Statement of Operations the grant-date fair
value of the SARs granted. As of the date of this filing, we have not calculated the grant-date fair value.

F-34

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BRESLER & REINER, INC.        SCHEDULE IIIREAL ESTATE AND ACCUMULATED DEPRECIATION  AS OF DECEMBER 31, 2005  (Dollars in thousands)

|                                                                                                 |  |   |         |  |   |        |  | Cost Capitalization
Subsequent
to Acquisition |         | Gross Amount at Which
Carried at Close of Period |   |        |  |   |        |  |   | Life on Which
Depreciation
on Latest
Income
Statement is
Computed
|------------------------------------------------------------------------------------------------ |  | - | ------- |  | - | ------ |  | --------------------------------------------- | ------- | ------------------------------------------------ | - | ------ |  | - | ------ |  | - | -----------------------------------------------------------------
|
|
|Versar Center (Two office buildings in Springfield, VA)                                          |  | $ | 17,870  |  | $ | 2,187  |  | $                                             | 21,149  |                                                  | $ | 2,250  |  | $ | 2,556  |  | $ | 23,030                                                           
|Bank Building (Office building in Manassas, VA)                                                  |  |   | 958     |  |   | 90     |  |                                               | 786     |                                                  |   |       |  |   | 118    |  |   | 758                                                              
|Paradise/Sudley North (Four office buildings in Manassas, VA)                                    |  |   | 16,458  |  |   | 1,898  |  |                                               | 12,679  |                                                  |   | 4,625  |  |   | 3,534  |  |   | 15,668                                                           
|7800 Building (Office building in Manassas, VA)                                                  |  |   | 0       |  |   | 283    |  |                                               | 1,636   |                                                  |   | 382    |  |   | 427    |  |   | 1,874                                                            
|Fort Hill (Office building in Centreville, VA)                                                   |  |   | 5,493   |  |   | 500    |  |                                               | 6,492   |                                                  |   | 347    |  |   | 554    |  |   | 6,785                                                            
|Washington Business Park (Two office buildings and seven flex warehouse buildings in Lanham, MD) |  |   | 38,586  |  |   | 9,260  |  |                                               | 30,492  |                                                  |   | 5,480  |  |   | 9,260  |  |   | 35,972                                                           
|900 Northbrook (Office building in Trevose, PA)                                                  |  |   | 10,937  |  |   | 1,800  |  |                                               | 7,874   |                                                  |   | 417    |  |   | 2,115  |  |   | 7,976                                                            
|Charlestown North (Apartments in Greenbelt, MD)                                                  |  |   | 4,816   |  |   |       |  |                                               | 2,179   |                                                  |   | 4,119  |  |   | 253    |  |   | 6,045                                                            
|Victoria Place (Apartments in Orlando, FL)                                                       |  |   | 32,907  |  |   | 3,825  |  |                                               | 35,863  |                                                  |   | 138    |  |   | 3,855  |  |   | 35,971                                                           
|The Fountains (Apartments in Orlando, FL)                                                        |  |   | 39,500  |  |   | 4,000  |  |                                               | 32,745  |                                                  |   | 1,443  |  |   | 4,000  |  |   | 34,188                                                           
|Inn at the Colonnade (Hotel in Baltimore, MD)                                                    |  |   | 9,632   |  |   | 1,955  |  |                                               | 5,413   |                                                  |   | 2,220  |  |   | 1,955  |  |   | 7,633                                                            
|Holiday Inn Express (Hotel in Camp Spings, MD)                                                   |  |   | 3,566   |  |   | 377    |  |                                               | 2,793   |                                                  |   | 3,713  |  |   | 378    |  |   | 6,505                                                            
|Fort Washington (2 Office buildings in Fort Washington, PA)                                      |  |   | 47,921  |  |   | 9,489  |  |                                               | 37,507  |                                                  |   | 4,204  |  |   | 7,114  |  |   | 44,086                                                           
|West Germantown Pike (2 Office buildings in Plymouth Meeting, PA)                                |  |   | 15,852  |  |   | 3,136  |  |                                               | 14,961  |                                                  |   | 275    |  |   | 3,193  |  |   | 15,179                                                           
|One Northbrook (Office building in Trevose, PA)                                                  |  |   | 14,973  |  |   | 2,590  |  |                                               | 13,586  |                                                  |   | 556    |  |   | 2,590  |  |   | 14,142                                                           
|10 Calvert Street (Office building in Baltimore, MD)                                             |  |   | 8,338   |  |   | 1,599  |  |                                               | 9,626   |                                                  |   | 159    |  |   | 1,599  |  |   | 9,785                                                            
|102 Pickering Way (Office building in Exton, PA)                                                 |  |   | 10,069  |  |   | 2,501  |  |                                               | 11,469  |                                                  |   | 56     |  |   | 2,522  |  |   | 11,504                                                           
|Cross Keys (Office building in Doylestown, PA)                                                   |  |   | 10,855  |  |   | 2,836  |  |                                               | 11,817  |                                                  |   | 3      |  |   | 2,836  |  |   | 11,820                                                           
|Wynwood (Office building in Chantilly, VA)                                                       |  |   |        |  |   | 1,105  |  |                                               | 11,318  |                                                  |   |       |  |   | 1,105  |  |   | 11,318                                                           
|1105 Market Street (Office building in Wilmington, DE)                                           |  |   | 19,000  |  |   | 2,417  |  |                                               | 18,806  |                                                  |   | 651    |  |   | 2,417  |  |   | 19,457                                                           
|919 Market Steet (Office building in Wilmington, DE)                                             |  |   | 35,600  |  |   | 4,434  |  |                                               | 30,646  |                                                  |   | 52     |  |   | 4,435  |  |   | 30,697                                                           
|                                                                                                 |  |   |         |  |   |        |  |                                               |         |                                                  |   |        |  |   |        |  |   |                                                                  
|Total properties                                                                                 |  | $ | 343,331 |  | $ | 56,282 |  | $                                             | 319,837 |                                                  | $ | 31,090 |  | $ | 56,816 |  | $ | 350,393                                                          
|                                                                                                 |  |   |         |  |   |        |  |                                               |         |                                                  |   |        |  |   |        |  |   |                                                                  
|Corporate                                                                                        |  |   | 30,406  |  |   |       |  |                                               |        |                                                  |   | 1,034  |  |   |       |  |   | 1,034                                                            
|                                                                                                 |  |   |         |  |   |        |  |                                               |         |                                                  |   |        |  |   |        |  |   |                                                                  
|Total Properties and Corporate                                                                   |  | $ | 373,737 |  | $ | 56,282 |  | $                                             | 319,837 |                                                  | $ | 32,124 |  | $ | 56,816 |  | $ | 351,427                                                          
|                                                                                                 |  |   |         |  |   |        |  |                                               |         |                                                  |   |        |  |   |        |  |   |                                                                  

F-35

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BRESLER & REINER, INC.        NOTES TO SCHEDULE III  (in thousands)

The aggregate cost of total real estate for Federal income tax purposes was $561,187,000 at December 31, 2005.

The
changes in rental property and equipment for the years ended December 31, 2005, 2004 and 2003 are as follows:

|                                           |              | Years Ended December 31, |        
|------------------------------------------ | ------------ | ------------------------ | -------
|
|Balance, January 1                         |              | $                        | 319,322
|Additions during period
Acquisitions      |              |                          | 98,110 
|                                           | Improvements |                          |        
|Deductions during period
Real Estate Sold |              |                          | (7,299 
|                                           | Other(1)    |                          |        
|                                           |              |                          |        
|Balance, December 31                       |              | $                        | 407,209
|                                           |              |                          |        

The
changes in accumulated depreication for the years ended December 31, 2005, 2004 and 2003 are as follows:

|                                              |           | Years Ended December 31, |       
|--------------------------------------------- | --------- | ------------------------ | ------
|
|Balance, January 1                            |           | $                        | 32,820
|Additions during period
Depreciation expense |           |                          | 9,830 
|Deductions during period
Real Estate Sold    |           |                          | (45   
|                                              | Other(1) |                          |       
|                                              |           |                          |       
|Balance, December 31                          |           | $                        | 42,376
|                                              |           |                          |       

Notes:

F-36

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