---

---

|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
 D.C. 20549           
|                                  
|FORM 10-K                         

|                                                                 |                                                                                         
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|[Mark One]                                                      
|x                                                                | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF
1934    
|                                                                 |                                                                                         
|For
 the fiscal year ended December 31, 2007                    
|                                                                 |                                                                                         
|OR                                                              
|                                                                 |                                                                                         
|o                                                                | TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF
1934
|                                                                 |                                                                                         
|For
 the transition period from ______________ to ______________
|Commission File Number: 000-50256                               
|                                                                
|                                                                
|                                                                
|                                                                
|(WHITESTONE REIT LOGO)                                          
|(Exact
 Name of Registrant as Specified in Its Charter)         

|                                                                        |                     
|----------------------------------------------------------------------- | --------------------
|Maryland                                                                | 76-0594970          
|(State
 or Other Jurisdiction of                                        | (I.R.S.
 Employer   
|Incorporation
 or Organization)                                         | Identification
 No.)
|                                                                        |                     
|2600 South Gessner, Suite 500 Houston, Texas                            | 77063               
|                                                                        |                     
|(Address
 of Principal Executive Offices)                               | (Zip
 Code)         
|                                                                       
|Registrants
 telephone number, including area code: (713)
 827-9595   
|                                                                       
|Securities
 registered pursuant to section 12(b) of the Act:
      None
|                                                                       
|Securities
 registered pursuant to section 12(g) of the Act:           
|Common Shares of Beneficial Interest, par value $0.001 per
 share      

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 x

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

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 x     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
or Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

Large
accelerated filer o                    Accelerated
filer o                    Non-accelerated
filer x

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

The
aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of June 30, 2007 (the last business day of the Registrants most
recently completed second fiscal quarter) was $100,012,690 assuming a market
value of $10 per share.

As of March 31, 2008, the Registrant had
10,001,269 common shares of beneficial interest outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: We
incorporate by reference into Part III portions of our proxy statement for the
2008 Annual Meeting of Shareholders.

---

---



WHITESTONE REIT
FORM 10-K
Year Ended December 31, 2007

TABLE OF CONTENTS

|         |                                                                                                               |     
|-------- | ------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                               | Page
|         |                                                                                                               |     
|         |                                                                                                               |     
|PART I   |                                                                                                               | 1   
|Item 1.  | Business                                                                                                      | 1   
|Item 1A. | Risk Factors                                                                                                  | 4   
|Item 1B. | Unresolved Staff Comments                                                                                     | 12  
|Item 2.  | Properties                                                                                                    | 13  
|Item 3.  | Legal Proceedings                                                                                             | 17  
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                           | 18  
|         |                                                                                                               |     
|PART II  |                                                                                                               | 18  
|Item 5.  | Market for Registrants Common Equity, Related Shareholder Matters
 and Issuer Purchases of Equity Securities | 18  
|Item 6.  | Selected Financial Data                                                                                       | 20  
|Item 7.  | Managements Discussion and Analysis of Financial Condition and
 Results of Operations                        | 21  
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                                    | 35  
|Item 8.  | Consolidated financial Statements and Supplementary Data                                                      | 35  
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure                         | 35  
|Item 9T. | Controls and Procedures                                                                                       | 35  
|Item 9B. | Other Information                                                                                             | 36  
|         |                                                                                                               |     
|PART III |                                                                                                               | 37  
|Item 10. | Trust Managers, Executive Officers and Corporate Governance                                                   | 37  
|Item 11. | Executive Compensation                                                                                        | 37  
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and
 Related Shareholder Matters               | 37  
|Item 13. | Certain Relationships and Related Transactions, and Director
 Independence                                    | 37  
|Item 14. | Principal Accounting Fees and Services                                                                        | 37  
|         |                                                                                                               |     
|PART IV  |                                                                                                               | 38  
|Item 15. | Exhibits and Financial Statement Schedules                                                                    | 38  

---



Unless the context
otherwise requires, all references in this report to we, us or our are to
Whitestone REIT and its subsidiaries.

Forward-Looking Statements

This
Form 10-K contains forward-looking statements, including discussion and analysis
of our financial condition, anticipated capital expenditures required to
complete projects, amounts of anticipated cash distributions to our
shareholders in the future and other matters. These forward-looking statements
are not historical facts but are the intent, belief or current expectations of
our management based on its knowledge and understanding of our business and
industry. Forward-looking statements are typically identified by the use of
terms such as may, will, should, potential, predicts,
anticipates,
expects, intends, plans, believes, seeks, estimates or the
negative
of such terms and variations of these words and similar expressions. These
statements are not guarantees of future performance and are subject to risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements.

Forward-looking
statements that were true at the time made may ultimately prove to be incorrect
or false. You are cautioned to not place undue reliance on forward-looking
statements, which reflect our managements view only as of the date of this
Form 10-K. We undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results. Factors that could cause actual
results to differ materially from any forward-looking statements made in this
Form 10-K include:

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | changes in
  general economic conditions;                                                                   
| |   |                                                                                                             
| |  | changes in real estate conditions;                                                                          
| |   |                                                                                                             
| |  | construction costs that may exceed estimates;                                                               
| |   |                                                                                                             
| |  | construction
  delays;                                                                                      
| |   |                                                                                                             
| |  | increases in interest rates;                                                                                
| |   |                                                                                                             
| |  | litigation risks;                                                                                           
| |   |                                                                                                             
| |  | lease-up risks;                                                                                             
| |   |                                                                                                             
| |  | inability to obtain new tenants upon the expiration of existing
  leases; and                               
| |   |                                                                                                             
| |  | the
  potential need to fund tenant improvements or other capital expenditures out
  of operating cash flow.

The
forward-looking statements should be read in light of these factors and the
factors identified in the Risk Factors sections of this Form 10-K and our
Registration Statement on Form S-11, as amended, as previously filed with the
Securities and Exchange Commission.

---



PART I

Item 1. Business.

General

We
are a Maryland real estate investment trust (REIT) engaged in owning and
operating income-producing real properties. We invest in and operate retail,
office and warehouse properties located in the Houston, Dallas, San Antonio and
Phoenix metropolitan areas.

We
own a real estate portfolio of 37 properties containing approximately 3.1
million square feet of leasable space, located in Texas and Arizona. The
portfolio has a gross book value of approximately $182 million and book equity,
including minority interest, of approximately $81 million at December 31, 2007.
We currently own one property, located in Phoenix, Arizona, which is under
development and is expected to be leasable by mid year 2008.

We
were organized in December 2003 for the purpose of merging with Hartman
Commercial Properties REIT, a Texas real estate investment trust organized in
August 1998. We are the surviving entity resulting from the merger, which was
consummated on July 28, 2004. We have elected to be taxed as a REIT trust under
federal income tax laws.

Our
common shares are currently not traded on a stock exchange. Our offices are
located at 2600 South Gessner, Suite 500, Houston, Texas 77063. Our telephone
number is (713) 827-9595 and we maintain an internet site at www.whitestonereit.com.

Our Strategy

Our
primary business objective is to increase shareholder value by employing a
value-add strategy. We seek well-located small properties in major cities
that are income producing with renovation potential or other upside potential,
and add-value through our management and leasing expertise. The key elements of
our strategy include:

| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maximize value in current properties
  through operational focus and redevelopment.                                                                         
| |   |                                                                                                                                                             
| |  | Grow through strategic acquisitions of
  commercial properties in high potential markets, including properties outside
  of Texas.                          
| |   |                                                                                                                                                             
| |  | Selectively
  dispose of properties that have little or no growth potential and reinvest
  the capital into properties having potential for greater returns.
| |   |                                                                                                                                                             
| |  | Pare down
  from three current product lines (retail, office and warehouse) and focus on
  one or possible two product lines.                               
| |   |                                                                                                                                                             
| |  | Raise
  capital using a combination of the private and public equity and debt
  markets, as well as joint ventures.                                         
| |   |                                                                                                                                                             
| |  | Bring
  liquidity to our stock by listing on a national stock exchange.                                                                                     

We
believe that our people are the heart of our company, our strategy and our
structure. We are focused on developing a team of people that display at all
times a high degree of character and competence. We believe that our people are
key to our ability to generate long term shareholder value.

Our Structure

Substantially
all of our business is conducted through Whitestone REIT Operating Partnership,
L.P., a Delaware limited partnership organized in 1998 (the Operating
Partnership). We are the sole general partner of the Operating Partnership. As
of December 31, 2007, we owned a 62.4% interest in the Operating Partnership.

---



As
of December 31, 2007, we owned a real estate portfolio consisting of 37
properties located in two states. Leased to national, regional and local
tenants, our retail, office and warehouse properties are primarily located
throughout Texas. As of December 31, 2007, the occupancy rate at our operating
properties was 86.2% based on leasable square footage compared to 83.3% as of
December 31, 2006.

We
invest in commercial properties with upside potential, where our leasing and
operating strategies can improve the existing properties value while providing
superior current economic returns. We believe that investment in and operation
of commercial retail real estate is a local business and we focus our
investments in areas where we have strong knowledge of the local markets. The
areas where a majority of our properties are located are densely populated
areas in and around Houston, Dallas, San Antonio and Phoenix. We plan to
further expand into markets outside of Texas and will continue to maintain our
hands-on management philosophy. We look for markets with strong demographic
characteristics similar to that of Houston.

Our
retail properties are primarily strip centers whose tenants consist of
national, regional and local retailers. Our properties generally attract
tenants who provide basic staples and convenience items to local customers. We
believe sales of these items are less sensitive to fluctuations in the business
cycle than higher priced retail items. No single retail tenant represented more
than 2.0% of total revenues for the year ended December 31, 2007.

During
2007 we acquired one property, a 33,400 square ft garden office property
located in Phoenix, Arizona. This property was under development as of December
31, 2007. We take a very hands-on approach to ownership, and directly manage
the operations and leasing of our properties. Substantially all of our revenues
consist of base rents received under long-term leases. For the year ended
December 31, 2007, our total revenues were approximately $31.0 million.
Approximately 72.2% of our existing leases contain step up rental clauses
that provide for increases in the base rental payments.

As
of December 31, 2007, we have no assets that accounted for more that 10% of our
year end consolidated total assets. 33 of our 37 properties are located in the
Houston, Texas metropolitan area. See Location of Properties in Item 2 for
further discussion regarding Houstons economy.

Economic Factors

The
national economy softened in 2007. The residential mortgage and capital markets
began showing signs of stress, primarily in the form of escalating default
rates on sub-prime mortgages and declining residential housing prices
nationwide. This credit crisis spread to the broader commercial credit
markets and has generally reduced the availability of financing and widened
spreads. These factors, coupled with a slowing economy, may negatively impact
the volume of real estate transactions and cap rates, which could negatively
impact the value of public real estate companies, including ours. While the
housing market and energy prices may affect consumer spending, the vast majority
of our retail properties are located in densely populated metropolitan areas
and are anchored by supermarkets and discount stores, which generally provide
basic necessity-type items and tend to be less affected by economic changes.
Furthermore, our portfolio is primarily positioned in metropolitan areas in
Texas which are forecasted to exceed the national average according to many
economic measures. Our operating areas continue to show strong employment
growth as compared to other large metropolitan areas. However, if these
economic conditions persist in 2008 and beyond, our real estate portfolio may
experience lower occupancy and effective rents, which would result in a
corresponding decrease in net income, funds from operations and cash flows.

Competition

All
of our properties are located in areas that include competing properties. The
amount of competition in a particular area could impact our ability to acquire
additional real estate, sell current real estate, lease space and the amount of
rent we are able to charge. We may be competing with owners, including but not
limited to, other REITs, insurance companies and pension funds, with access to
greater resources than those available to us.

2

---



Compliance with Governmental Regulations

Under
various federal and state environmental laws and regulations, as an owner or
operator of real estate, we may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at our properties. We may also be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by those parties in connection with
the contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The presence of contamination or the failure
to remediate contaminations at any of our properties may adversely affect our
ability to sell or lease the properties or to borrow using the properties as
collateral. We could also be liable under common law to third parties for
damages and injuries resulting from environmental contamination coming from our
properties.

We
will not purchase any property unless and until we obtain what is generally
referred to as a Phase I environmental site assessment and are generally
satisfied with the environmental status of the property. A Phase I
environmental site assessment basically consists of a visual survey of the
building and the property in an attempt to identify areas of potential
environmental concerns, visually observing neighboring properties to assess
surface conditions or activities that may have an adverse environmental impact
on the property, and contacting local governmental agency personnel and
performing a regulatory agency file search in an attempt to determine any known
environmental concerns in the immediate vicinity of the property. A Phase I
environmental site assessment does not generally include any sampling or
testing of soil, groundwater or building materials from the property. Certain
properties that we have acquired contain, or contained, dry-cleaning
establishments utilizing solvents. Where believed to be warranted, samplings of
building materials or subsurface investigations were undertaken with respect to
these and other properties. To date, the costs associated with these
investigations and any subsequent remedial measures taken have not been material
to us.

We
believe that our properties are in compliance in all material respects with all
federal, state and local ordinances and regulations regarding the handling,
discharge and emission of hazardous or toxic substances. We have not been notified
by any governmental authority, and are not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of our present or former properties. We have not recorded
in our financial statements any material liability in connection with
environmental matters. Nevertheless, it is possible that the environmental
assessments we have obtained or reviewed have not revealed all potential
environmental liabilities. It is also possible that subsequent environmental
assessments or investigations will identify material contamination, that
adverse environmental conditions have arisen subsequent to the performance of
the environmental assessments, or that there are material environmental
liabilities of which our management is unaware.

Employees

As
of December 31, 2007, we had 46 employees.

Materials Available on Our Website

Copies
of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, as well as Reports on
Forms 3, 4 and 5 regarding our officers, trust managers or 10% beneficial
owners, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the
Securities Exchange Act of 1934 are available free of charge through our
website (www.whitestonereit.com) as soon as reasonably practicable after we
electronically file the material with, or furnish it to, the Securities and
Exchange Commission (SEC). We have also made available on our website copies
of our Audit Committee Charter, Compensation Committee Charter, Nominating and
Governance Committee Charter, Insider Trading Compliance Policy, and Code of
Business Conduct and Ethics Policy. In the event of any changes to these
charters or the code or guidelines, changed copies will also be made available
on our website. You may also read and copy any materials we file with the SEC
at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Materials on our website are not part of our Annual Report on Form 10-K.

3

---



Financial Information

Additional
financial information related to Whitestone REIT is included in Item 8
Consolidated Financial Statements and Supplementary Data.

Item 1A. Risk Factors.

In
addition to the other information contained in this Form 10-K the following
risk factors should be considered carefully in evaluating our business. Our
business, financial condition, or results of operations could be materially
adversely affected by any of these risks. Please note additional risks not
presently known to us or which we currently consider immaterial may also impair
our business and operations.

Risks Associated with Real Estate

Real estate property
investments are illiquid, and therefore we may not be able to dispose of
properties when appropriate or on favorable terms.

Real
estate property investments generally cannot be disposed of quickly. In
addition, the federal tax code imposes restrictions on the ability of a REIT to
dispose of properties that are not applicable to other types of real estate
companies. Therefore, we may not be able to vary our portfolio in response to
economic or other conditions promptly or on favorable terms, which could cause
us to incur extended losses and reduce our cash flows and adversely affect
distributions to shareholders.

Turmoil in capital
markets could adversely impact acquisition activities and pricing of real
estate assets.

Volatility
in capital markets could adversely affect acquisition activities by impacting
certain factors including the tightening of underwriting standards by lenders
and credit rating agencies and the significant inventory of unsold
collateralized mortgage backed securities in the market. These factors directly
affect a lenders ability to provide debt financing as well as increase the
cost of available debt financing. As a result, we may not be able to obtain
favorable debt financing in the future or at all. This may result in future
acquisitions generating lower overall economic returns, which may adversely
affect our results of operations and distributions to shareholders.
Furthermore, any turmoil in the capital markets could adversely impact the
overall amount of capital available to invest in real estate, which may result
in price or value decreases of real estate assets.

The value of
investments in our common shares will be directly affected by general economic
and regulatory factors we cannot control or predict.

We
only own commercial real estate. Investments in real estate typically involve a
high level of risk as the result of factors we cannot control or predict. One
of the risks of investing in real estate is the possibility that our properties
will not generate income sufficient to meet operating expenses or will generate
income and capital appreciation, if any, at rates lower than those anticipated
or available through investments in comparable real estate or other
investments. The following factors may affect income from properties and yields
from investments in properties and are generally outside of our control:

| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | conditions
  in financial markets;                                                           
| |   |                                                                                              
| |  | over-building in our markets;                                                                
| |   |                                                                                              
| |  | a
  reduction in rental income as the result of the inability to maintain
  occupancy levels;
| |   |                                                                                              
| |  | adverse
  changes in applicable tax, real estate, environmental or zoning laws;              
| |   |                                                                                              
| |  | changes in general economic conditions;                                                      

4

---



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a taking of any of our properties by
  eminent domain;                                                                                          
| |   |                                                                                                                                                 
| |  | adverse local conditions (such as changes in real estate zoning
  laws that may reduce the desirability of real estate in the area);            
| |   |                                                                                                                                                 
| |  | acts of God, such as earthquakes or floods and other uninsured
  losses;                                                                        
| |   |                                                                                                                                                 
| |  | changes in supply of or demand for similar or competing
  properties in an area;                                                                
| |   |                                                                                                                                                 
| |  | changes in interest rates and availability of permanent mortgage
  funds, which may render the sale of a property difficult or unattractive; and
| |   |                                                                                                                                                 
| |  | periods of high interest rates and tight money supply.                                                                                          

Some
or all of these factors may affect our properties, which could adversely affect
our operations and ability to pay dividends to shareholders.

Compliance or
failure to comply with laws requiring access to our properties by disabled
persons could result in substantial cost.

The
Americans with Disabilities Act (ADA) and other federal, state and local laws
generally require public accommodations be made accessible to disabled persons.
Noncompliance could result in the imposition of fines by the government or the
award of damages to private litigants. These laws may require us to modify our
existing properties. These laws may also restrict renovations by requiring
improved access to such buildings by disabled persons or may require us to add
other structural features which increase our construction costs. Legislation or
regulations adopted in the future may impose further burdens or restrictions on
us with respect to improved access by disabled persons. We may incur
unanticipated expenses that may be material to our financial condition or
results of operations to comply with ADA and other federal, state and local
laws, or in connection with lawsuits brought by private litigants.

Competition could
limit our ability to lease our properties or increase or maintain rental income.

There
are numerous alternatives which compete with our properties in attracting
tenants. Our properties compete directly with other commercial properties which
are available for rent or purchase in the markets in which our properties are
located. This competitive environment could have a material adverse effect on
our ability to lease our properties or any newly developed or acquired
property, as well as on the rents charged.

Risks Associated with Our Operations

There can be no assurance that we
will be able to pay or maintain cash dividends or that dividends will increase
over time.

There
are many factors that can affect the availability and timing of cash dividends
to shareholders. Dividends will be based principally on cash available from our
properties, real estate securities, mortgage loans and other investments. The
amount of cash available for dividends will be affected by many factors, such
as our ability to buy properties, the yields on securities of other real estate
programs that we invest in, and our operating expense levels, as well as many
other variables. We can give no assurance that we will be able to pay or
maintain dividends or that dividends will increase over time. In addition, we
can give no assurance that rents from the properties will increase, that the
securities we buy will increase in value or provide constant or increased
dividends over time, or that future acquisitions of real properties, mortgage
loans or our investments in securities will increase our cash available for
dividends to shareholders. Our actual results may differ significantly from the
assumptions used by our Board in establishing the dividend rate to
shareholders.

5

---



If we experience
decreased cash flows, we may need to use other sources of cash to fund
dividends or we may be unable to pay dividends.

Actual
cash available for dividends may vary substantially from estimates. If our cash
dividends exceed the amount of cash available for dividends, we may need to
fund the shortage out of working capital, borrowings under our lines of credit
or by obtaining other debt, which would reduce the amount of proceeds available
for real estate investments. During the year ended December 31, 2007, our cash
provided from operating activities was $4.6 million and our total distributions
were $9.5 million. Therefore we had distributions in excess of cash flow for
operations of approximately $4.9 million. Our primary funding for paying
dividends in excess of cash flow from operations was borrowing from our credit
facility and the increase in the debt on our Windsor Park Centre mortgage loan.

Because of the lack
of geographic diversification of our portfolio, an economic downturn in the
Texas metropolitan areas could adversely impact our operations and ability to
pay dividends to our shareholders.

The
majority of our assets and revenues are currently derived from properties
located in Texas metropolitan areas. Our results of operations are directly
contingent on our ability to attract financially sound commercial tenants. If
Texas experiences a significant economic downturn, our ability to locate and
retain financially sound tenants may be adversely impacted. Likewise, we may be
required to lower our rental rates to attract desirable tenants in such an
environment. Consequently, because of the lack of geographic diversity among
our current assets, if Texas experiences an economic downturn, our operations
and ability to pay dividends to our shareholders could be adversely impacted.

Our Properties have
significant deferred maintanence which will affect our ability to lease the
properties, the types of tenants we are able to attract, and cash flow
available for dividends

In
2007 we had property condition assessments (PCAs) performed on 20 of our
properties. The PCAs were performed as a result of the litigation with our
former External Manager and were to determine the amount of deferred
maintanence that existed on the properties as of October 2006. The PCAs
indicated that approximately $25 million in deferred maintanence existed on our
properties as of October 2006. The majority of these repairs relate to roofing
($10.3 million), parking lots ($3.6 million), structural ($3.3 million) and
HVAC ($2.6 million). The significance of the deferred maintanence affects our
ability to lease the vacant spaces and the types of tenants we are able to
attract. During 2007 we began to address these needed repairs and spent
approximately $1 million more on repairs than in 2006. Although we intend to
judicially address the needed repairs over the next several years, they will
have a significant affect on our cash available to pay dividends.

Uninsured losses
relating to real property or excessively expensive premiums for insurance
coverage may adversely affect our returns.

We
will attempt to ensure that all of our properties are adequately insured to
cover casualty losses. However, there are types of losses, generally
catastrophic in nature, such as losses due to wars, acts of terrorism,
earthquakes, floods, hurricanes, pollution or environmental matters, which are
uninsurable or not economically insurable, or may be insured subject to
limitations, such as large deductibles or co-payments. Insurance risks
associated with potential terrorism acts could sharply increase the premiums we
pay for coverage against property and casualty claims. In some instances, we
may be required to provide other financial support, either through financial
assurances or self-insurance, to cover potential losses. We cannot assure you
that we will have adequate coverage for these losses. In the event that any of
our properties incurs a casualty loss that is not fully covered by insurance,
the value of our assets will be reduced by these uninsured losses. In addition,
other than any reserves we may establish, we have no source of funding to
repair or reconstruct any uninsured damaged property, and we cannot assure you
that any sources of funding will be available to us for this purpose in the
future. Also, to the extent we must pay unexpectedly large insurance premiums,
we could suffer reduced earnings that would result in less cash dividends to be
distributed to shareholders.

6

---



Discovery of
previously undetected environmentally hazardous conditions may adversely affect
our operating results.

Under
various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the cost of removal or remediation of hazardous or toxic substances
on, under or in its property. The costs of removal or remediation could be
substantial. These laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of any hazardous or toxic
substances. Environmental laws also may impose restrictions on the manner in
which property may be used or businesses may be operated, and these
restrictions may require substantial expenditures. Environmental laws provide
for sanctions in the event of noncompliance and may be enforced by governmental
agencies or, in certain circumstances, by private parties. Certain
environmental laws and common law principles could be used to impose liability
for release of and exposure to hazardous substances, including asbestos
containing materials into the air. In addition, third parties may seek recovery
from owners or operators of real properties for personal injury or property
damage associated with exposure to released hazardous substances. The cost of
defending against claims of liability, of compliance with environmental
regulatory requirements, of remediating any contaminated property, or of paying
personal injury claims could materially adversely affect our business, assets
or results of operations and, consequently, amounts available for payments of
dividends to our shareholders.

There is no public
trading market for our shares of common stock, making it difficult for
shareholders to sell their shares.

There
is no current public market for our common shares of beneficial interest. If
you are able to find a buyer for your shares, you may not sell your shares to
that buyer unless the buyer meets the suitability standards applicable to him
or her, including any suitability standards imposed by the potential
purchasers state of residence. Our declaration of trust also imposes
restrictions on the ownership of common shares that will apply to potential
transferees that may restrict your ability to sell your shares. In addition,
our Board has delayed the implementation of our share redemption program. Even
if this program is implemented in the future, our Board may reject any request
for redemption of shares or amend, suspend or terminate the program at any
time. Therefore, it will be difficult for you to sell your shares promptly or
at all. You may not be able to sell your shares in the event of an emergency,
and, if you are able to sell your shares, you may have to sell them at a substantial
discount.

We have acquired a
majority of our properties, on a non arms-length basis, from entities
controlled by the previous advisor and CEO, Allen R. Hartman.

We
acquired 27 of the 37 properties we owned as of December 31, 2007, from
entities controlled by Mr. Hartman. We acquired these properties by paying cash
or issuing our commons shares of beneficial interest or units of the Operating
Partnership that are convertible into our common shares. No third parties were
retained to represent or advise these selling entities or us, and the
transactions were not conducted on an arms-length basis.

Mr.
Hartman had interests that differed from, and in certain cases conflicted with,
his co-investors in these entities. Mr. Hartman received the following as a
result of these transactions:

| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 897,117.19
  units of the Operating Partnership that are convertible into our common
  shares, as adjusted to reflect the recapitalization, in consideration of Mr.
  Hartmans general partner interest in the selling entities;
| |   |                                                                                                                                                                                                                                  
| |  | the ability
  to limit his future exposure to general partner liability as a result of Mr.
  Hartman no longer serving as the general partner to certain of the selling
  entities; and                                          
| |   |                                                                                                                                                                                                                                  
| |  | the
  repayment of debt encumbering several of our properties that was personally
  guaranteed by Mr. Hartman.                                                                                                                   

Mr.
Hartman might not have been able to negotiate all of these benefits if the
transactions were negotiated at arms length. Further, Mr. Hartman did not make
any representations or warranties in regard to the properties or the selling
entities (neither personally nor in his capacity as a general partner) in the
documents evidencing the

7

---



transactions.
Consequently, we essentially acquired the properties on an as is basis.
Therefore, we will bear the risk associated with any characteristics of or
deficiencies in these properties unknown at the closing of the acquisitions
that may affect their valuation or revenue potential.

Approximately 38% of
our gross leasable area is subject to leases that expire prior to December 31,
2010.

As
of December 31, 2007, approximately 38% of the aggregate gross leasable area of
our properties is subject to leases that expire prior to December 31, 2010. We
are subject to the risk that:

| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | tenants may
  choose not to renew these leases;                                                     
| |   |                                                                                                     
| |  | we may not
  be able to re-lease the space subject to these leases; and                             
| |   |                                                                                                     
| |  | the terms of
  any renewal or re-lease may be less favorable than the terms of the current
  leases.

If
any of these risks materialize, our cash flow and ability to pay dividends
could be adversely affected.

Litigation with
Allen R. Hartman and Hartman Management.

We
are currently involved in litigation with our former Chief Executive Officer,
Allen R. Hartman, and manager and advisor, Hartman Management, L.P. While we
intend to vigorously defend against claims brought by Mr. Hartman and Hartman
Management and vigorously prosecute our claims against Mr. Hartman and Hartman
Management, there can be no assurances that we will ultimately prevail. Even if
we do ultimately prevail in these lawsuits, we may continue to incur
significant legal costs to do so. For more discussion, see Legal Proceedings and Managements Discussion
and
Analysis of Financial Condition and Results of Operations  Commitments and
Contingencies.

Defending an
adversarial shareholder campaign could be costly to shareholders, take
managements attention from day to day business operations and interfere with
the execution of our strategic plan.

Our
former Chief Executive Officer, Allen R. Hartman owns
approximately 2.9% of the voting shares of the REIT. If Mr. Hartman were to
convert his ownership interests in the Operating Partnership into REIT common
shares, Mr. Hartman would own approximately 12.3% of the REITs
voting shares. Mr. Hartman is also the general partner of a partnership which owns 1.2 million OP units which are convertible into REIT common shares. Mr. Hartman has mounted an adversarial shareholder campaign with
our shareholders and has attempted to replace our current executive management
and board of trustees. Defending this campaign could be costly to shareholders,
take managements attention from day to day business operations and interfere
with the execution of our strategic plan.

Loss of our key
personnel could adversely affect the value of our common shares of beneficial
interest and operations.

We
are dependent on the efforts of our key executive personnel. Although we
believe qualified replacements could be found for these key executives, the
loss of their services could adversely affect the value of our common shares of
beneficial interest and operations.

Risks Associated with Our Indebtedness and
Financing

Our debt agreements
impose limits on our operations and our ability to make distributions to our
shareholders.

The
agreements relating to the debt we incur contain financial and operating
covenants that may limit our ability to make distributions or other payments to
our shareholders. Our existing credit facilities contain financial and
operating covenants, including:

| |   |                                                
| | - | -----------------------------------------------
| |  | debt service
  coverage of at least 1.4 to 1.0;

8

---



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | loan-to-value
  ratio of a borrowing base pool to total funded loan balance of at least 1.67
  to 1.00;                                                                  
| |   |                                                                                                                                                                          
| |  | total debt not to exceed 60% of fair market value of our real
  estate assets;                                                                                           
| |   |                                                                                                                                                                          
| |  | the ratio of secured debt to fair market
  value of our real estate assets not to exceed 40%;                                                                            
| |   |                                                                                                                                                                          
| |  | interest
  coverage ratio of at least 1.55 to 1.0;                                                                                                                       
| |   |                                                                                                                                                                          
| |  | we must hedge
  certain amounts of variable interest rate debt;                                                                                                          
| |   |                                                                                                                                                                          
| |  | maintenance
  of specific levels of insurance; and                                                                                                                       
| |   |                                                                                                                                                                          
| |  | limitations
  on our ability to make distributions or other payments to our shareholders,
  sell assets or engage in mergers, consolidation or make certain acquisitions.

Failure
to comply with these covenants could result from, among other things, changes
in our results of operations, incurrence of debt or changes in general economic
conditions. These covenants may restrict our ability to fund our operations and
conduct our business. Failure to comply with any of these covenants could
result in a default under our credit agreement or other debt agreements we may
enter into in the future. A default could cause one or more of our lenders to
accelerate the timing of payments which could force us to dispose of one or
more of our properties, possibly on disadvantageous terms. For more discussion,
see Managements Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources

We may incur losses
on interest rate hedging arrangements.

Periodically,
we have entered into agreements to reduce the risks associated with increases
in interest rates, and may continue to do so. Although these agreements may
partially protect against rising interest rates, they also may reduce the
benefits to us if interest rates decline. If a hedging arrangement is not
indexed to the same rate as the indebtedness which is hedged, we may be exposed
to losses to the extent which the rate governing the indebtedness and the rate
governing the hedging arrangement change independently of each other. Finally,
nonperformance by the other party to the hedging arrangement may subject us to
increased credit risks.

We may incur
mortgage indebtedness and other borrowings, which may increase our business
risks.

If
it is determined to be in our best interests, we may, in some instances,
acquire real properties by using either existing financing or borrowing new
funds. In addition, we may incur or increase our current mortgage debt to
obtain funds to acquire additional real properties. We may also borrow funds if
necessary to satisfy the REIT distribution requirement described above, or
otherwise as may be necessary or advisable to assure that we maintain our
qualification as a REIT for federal income tax purposes.

We may incur
mortgage debt on a particular piece of real property if we believe the
propertys projected cash flow is sufficient to service the mortgage debt. If
there is a shortfall in cash flow, however, the amount available for dividends
to shareholders may be affected. In addition, incurring mortgage debt increases
the risk of loss because defaults on such indebtedness may result in loss of
property in foreclosure actions initiated by lenders. For tax purposes, a
foreclosure of any of our properties would be treated as a sale of the property
for a purchase price equal to the outstanding balance of the debt secured by
the mortgage. If the outstanding balance of the debt secured by the mortgage
exceeds our tax basis in the property, we would recognize taxable income on
foreclosure, but would not receive any cash proceeds. We may give lenders full
or partial guarantees for mortgage debt incurred by the entities that own our
properties. When we give a guaranty on behalf of an entity that owns one of our
properties, we will be responsible to the lender for satisfaction of the debt
if it is not paid by that entity. If any mortgages contain
cross-collateralization or cross-default provisions, there is a risk that more
than one real property may be affected by a default. If any of our properties
are foreclosed upon due to a default, our ability to pay cash dividends to our
shareholders will be adversely affected.

9

---



If we are unable to retain key personnel, our revolving
credit facility could be in default and immediately due.

In
the event that James C. Mastandrea, for any reason, ceases to retain the title
of Chief Executive Officer of the Trust and to perform the functions typically
performed under such office and to be actively involved in strategic planning
and decision-making for the Trust, unless within six months after such failure,
the Board of Directors or Board of Trustees has duly elected or appointed a
qualified substitute to replace such individual who is acceptable to our bank
in its sole discretion, our bank may declare our loan in default and all
amounts immediately due.

In the event we have
a change of control, our revolving credit facility could be in default and
immediately due.

If
we have the occurrence of any transaction in which any person or group
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934) becomes the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient
number of voting rights applicable to the Trust ordinarily entitled to vote in
the election of directors or trustees, empowering such person or group to
elect a majority of the Board of Directors or Board of Trustees of the Trust,
who did not have such power before such transaction, our bank could declare our
loan in default and all amounts immediately due.

10

---



Risks
Associated with Income Tax Laws

If we fail to
qualify as a REIT, our operations and dividends to shareholders would be
adversely impacted.

We
intend to continue to operate so as to qualify as a REIT under the Internal
Revenue Code. A REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders. Qualification as a REIT involves the
application of highly technical and complex rules for which there are only
limited judicial or administrative interpretations. The determination of
various factual matters and circumstances not entirely within our control may
affect our ability to continue to qualify as a REIT. In addition, new
legislation, new regulations, administrative interpretations or court decisions
could significantly change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of qualification.

If
we were to fail to qualify as a REIT in any taxable year:

| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we would not
  be allowed to deduct our distributions to shareholders when computing our
  taxable income;                                                                                                
|
| |  | we would be
  subject to federal income tax (including any applicable alternative minimum
  tax) on our taxable income at regular corporate rates;                                                        
|
| |  | we would be
  disqualified from being taxed as a REIT for the four taxable years following
  the year during which qualification was lost, unless entitled to relief under
  certain statutory provisions;
|
| |  | our cash
  available for dividends would be reduced and we would have less cash to pay
  dividends to shareholders; and                                                                                   
|
| |  | we may be
  required to borrow additional funds or sell some of our assets in order to
  pay corporate tax obligations we may incur as a result of our
  disqualification.                                

We may need to incur
additional borrowings to meet REIT minimum distribution requirements.

In
order to maintain our qualification as a REIT, we are required to distribute to
our shareholders at least 90% of our annual net taxable income (excluding any
net capital gain). In addition, the Internal Revenue Code will subject us to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by us with respect to any calendar year are less than the
sum of (i) 85% of our ordinary income for that year, (ii) 95% of our net
capital gain for that year and (iii) 100% of our undistributed taxable income
from prior years. Although we intend to pay dividends to our shareholders in a
manner that allows us to meet the distribution requirement and avoid this 4%
excise tax, we cannot assure you that we will always be able to do so.

Our
income consists almost solely of our share of the Operating Partnerships
income, and the cash available for distribution by us to our shareholders
consists of our share of cash distributions made by the Operating Partnership.
Because we are the sole general partner of the Operating Partnership, our Board
determines the amount of any distributions made by it. Our Board may consider a
number of factors in making distributions, including:

| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | the amount
  of the cash available for distribution;                                     
| |   |                                                                                          
| |  | the
  Operating Partnerships financial condition;                                       
| |   |                                                                                          
| |  | the
  Operating Partnerships capital expenditure requirements; and                      
| |   |                                                                                          
| |  | our annual
  distribution requirements necessary to maintain our qualification as a REIT.

11

---



Differences
in timing between the actual receipt of income and actual payment of deductible
expenses and the inclusion of income and deduction of expenses when determining
our taxable income, as well as the effect of nondeductible capital expenditures
and the creation of reserves or required debt amortization payments could
require us to borrow funds on a short-term or long-term basis to meet the REIT
distribution requirement and to avoid the 4% excise tax described above. In
these circumstances, we may need to borrow funds to avoid adverse tax
consequences even if our management believes that the then prevailing market
conditions generally are not favorable for borrowings or that borrowings would
not be advisable in the absence of the tax consideration.

Changes in the tax
law may adversely affect our REIT status

The
discussions of the federal income tax considerations are based on current tax
laws. Changes in the tax laws could result in tax treatment that differs
materially and adversely from that described herein.

Item 1B. Unresolved Staff Comments

None.

12

---



Item 2. Properties.

General

At
December 31, 2007, we owned 37 commercial properties located in two states. We
own 33 properties located in the Houston, Texas, two properties located in
Dallas, Texas, one property located in San Antonio, Texas and one property in
Phoenix, Arizona. Our properties consist of 19 retail centers with
approximately 1,293,000 square feet of gross leasable area, 11 warehouse
properties with approximately 1,202,000 square feet of gross leasable area and
seven office buildings with approximately 599,000 square feet of gross leasable
area and 33,000 square feet under development. We expect the Arizona property,
which is under development, to be leaseable by mid 2008. Each property is
designed to meet the needs of surrounding local communities. As of December 31,
2007, our properties contain approximately 3,093,000 square feet of gross
leasable area. As of December 31, 2007, our retail, warehouse and office
properties were approximately 83.2%, 89.1% and 87.1% leased, respectively.

As
of December 31, 2007, we had one property that accounted for more than 10% of
total gross revenue. Uptown Tower is an office building located in Dallas,
Texas that was acquired during 2005 and accounts for 11.4% of our total revenue
and 9.7% of real estate assets, net of accumulated depreciation.

Location of Properties

Of
our 37 properties, 36 are located in Texas, with 33 being located in the
greater Houston metropolitan statistical area. These 33 represent 78% of our
rental income for the year ended December 31, 2007.

We
believe that the Houston real estate market and economy are strong, boasting
excellent long-term growth prospects. The Houston workforce is concentrated in
energy, chemicals, information technology, aerospace sciences and medical
sciences. The Houston area ranked first in Texas for employment growth in 2006,
with a growth rate of 4.1%. The most recent job growth data indicates that the
Houston area gained approximately 100,000 new jobs in 2007, ranking the metro
area first in the country in job growth

Houston
Highlights

|  |                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Houston is the largest
  city in Texas and the 4th largest city in the U.S.                                                                          
|  |                                                                                                                                                      
| | Houston ranks 4th
  among U.S. metro areas in number of corporate headquarters for Fortune
  500 companies.                                          
|  |                                                                                                                                                      
| | Houston is a key center
  for international finance with 21 foreign banks from 10 different nations.                                                 
|  |                                                                                                                                                      
| | The Houston metro areas
  population base grew by 797,700 people from 2000 to 2006, ranking the area
  third in population growth during the period.
|  |                                                                                                                                                      
| | The Houston
  metro area grew by 127,500 people during 2007.                                                                                         

13

---



General Physical Attributes

The
following table lists, for all properties owned by us on December 31, 2007, the
year each property was developed or significantly renovated, the total leasable
area of each property and the purchase price we paid for each property.

|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 
|------------------------ |  | ------------- |  | --------------------------- |  | ----------------------------- | --------- | ------------------------------- | ----- | ------- | - | ------ | 
|Property Name            |  | Location      |  | Year Developed/
  Renovated |  | Total Leasable Area (Sq. Ft.) |           | Purchase Price
  (in thousands)
|                         |  |               |  |                             |  |                               |           |                                
|Retail Properties:       |  |               |  |                             |  |                               |           |                                 |      
|Bellnott Square          |  | Houston       |  | 1982                        |  | 73,930                        |           |                                 | $     | 5,792   |  
|Bissonnet/Beltway        |  | Houston       |  | 1978                        |  | 29,205                        |           |                                 |       | 2,361   |  
|Centre South             |  | Houston       |  | 1974                        |  | 44,543                        |           |                                 |       | 2,077   |  
|Garden Oaks              |  | Houston       |  | 1954                        |  | 95,046                        |           |                                 |       | 6,578   |  
|Greens Road              |  | Houston       |  | 1979                        |  | 20,507                        |           |                                 |       | 1,637   |  
|Holly Knight             |  | Houston       |  | 1984                        |  | 20,015                        |           |                                 |       | 1,613   |  
|Kempwood Plaza           |  | Houston       |  | 1974                        |  | 112,359                       |           |                                 |       | 2,532   |  
|Lion Square              |  | Houston       |  | 1980                        |  | 119,621                       |           |                                 |       | 5,835   |  
|Northeast Square         |  | Houston       |  | 1984                        |  | 40,525                        |           |                                 |       | 2,573   |  
|Providence               |  | Houston       |  | 1980                        |  | 90,327                        |           |                                 |       | 4,594   |  
|South Richey             |  | Houston       |  | 1980                        |  | 69,928                        |           |                                 |       | 3,362   |  
|South Shaver             |  | Houston       |  | 1978                        |  | 21,926                        |           |                                 |       | 817     |  
|SugarPark Plaza          |  | Houston       |  | 1974                        |  | 95,032                        |           |                                 |       | 8,906   |  
|Sunridge                 |  | Houston       |  | 1979                        |  | 49,359                        |           |                                 |       | 1,462   |  
|Torrey Square            |  | Houston       |  | 1983                        |  | 105,766                       |           |                                 |       | 4,952   |  
|Town Park                |  | Houston       |  | 1978                        |  | 43,526                        |           |                                 |       | 3,761   |  
|Webster Point            |  | Houston       |  | 1984                        |  | 26,060                        |           |                                 |       | 1,870   |  
|Westchase                |  | Houston       |  | 1978                        |  | 42,924                        |           |                                 |       | 2,173   |  
|Windsor Park             |  | San
  Antonio |  | 1992                        |  |                               | 192,458   |                                 |       |         |   | 13,103 | 
|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 
|                         |  |               |  |                             |  |                               | 1,293,057 |                                 |       |         | $ | 75,998 | 
|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 
|Warehouse
  Properties:  |  |               |  |                             |  |                               |           |                                 |       |        
|Brookhill                |  | Houston       |  | 1979                        |  | 74,757                        |           |                                 |       | 973     |  
|Corporate Park Northwest |  | Houston       |  | 1981                        |  | 185,627                       |           |                                 |       | 7,840   |  
|Corporate Park West      |  | Houston       |  | 1999                        |  | 175,665                       |           |                                 |       | 12,822  |  
|Corporate Park Woodland  |  | Houston       |  | 2000                        |  | 99,937                        |           |                                 |       | 5,982   |  
|Dairy Ashford            |  | Houston       |  | 1981                        |  | 42,902                        |           |                                 |       | 1,437   |  
|Holly Hall               |  | Houston       |  | 1980                        |  | 90,000                        |           |                                 |       | 3,123   |  
|Interstate 10            |  | Houston       |  | 1980                        |  | 151,000                       |           |                                 |       | 3,908   |  
|Main Park                |  | Houston       |  | 1982                        |  | 113,410                       |           |                                 |       | 4,049   |  
|Plaza Park               |  | Houston       |  | 1982                        |  | 105,530                       |           |                                 |       | 4,195   |  
|Westbelt Plaza           |  | Houston       |  | 1978                        |  | 65,619                        |           |                                 |       | 2,733   |  
|Westgate                 |  | Houston       |  | 1984                        |  | 97,225                        |           |                                 |       | 3,448   |  
|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 
|                         |  |               |  |                             |  | 1,201,672                     |           |                                 | $     | 50,510  |  
|                         |  |               |  |                             |  |                               |           |                                 |       |         |  
|Office
  Properties:     |  |               |  |                             |  |                               |           |                                 |       |         |  
|9101 LBJ Freeway         |  | Dallas        |  | 1985                        |  | 125,874                       |           |                                 |       | 8,093   |  
|Featherwood              |  | Houston       |  | 1983                        |  | 49,670                        |           |                                 |       | 2,959   |  
|Pima Norte               |  | Phoenix       |  | 2007                        |  | Under
  Development           |           |                                 | 8,248 |        
|Royal Crest              |  | Houston       |  | 1984                        |  | 24,900                        |           |                                 |       | 1,864   |  
|Uptown Tower             |  | Dallas        |  | 1982                        |  | 253,981                       |           |                                 |       | 17,171  |  
|Woodlake Plaza           |  | Houston       |  | 1974                        |  | 106,169                       |           |                                 |       | 5,533   |  
|Zeta Building            |  | Houston       |  | 1982                        |  | 37,740                        |           |                                 |       | 2,457   |  
|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 
|                         |  |               |  |                             |  | 598,334                       |           |                                 | $     | 46,326  |  
|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 
|                         |  |              
|Grand
  Totals           |  |               |  |                             |  | 3,093,063                     |           |                                 | $     | 172,834 |  
|                         |  |               |  |                             |  |                               |           |                                 |       |         |   |        | 

14

---



General Economic Attributes

The
following table lists certain information that relates to the rents generated
by each property, the anchor or largest tenant at the property and the date the
anchor or largest tenants leases expires. All of the information contained in
this table is current as of December 31, 2007.

|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|------------------------------- |  | ---------------- | ----- | --------------------------------------------- |  | ---------------------------------- | ------ | ------------------------ |  | ------------------------- | ----- |  |  | --------------------------------- |  |  | -------- | 
|Property Name                   |  | Percent
  Leased |       | Total Annualized
  Base Rent
  (in thousands) |  | Effective Net
  Rent
  Per Sq. Ft. |        | Anchor or Largest Tenant |  | Lease
  Expiration
  Date |      
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |      
|Retail
  Properties:            |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|Bellnott Square                 |  |                  | 43.0  | %                                             |  | $                                  | 637    |                          |  | $                         | 8.61  |  |  | American Audio                    |  |  | 6/30/10  | 
|Bissonnet/Beltway               |  |                  | 71.7  | %                                             |  |                                    | 425    |                          |  |                           | 14.56 |  |  | Lydia & Ajibade Owoyemi           |  |  | 9/30/09  | 
|Centre South                    |  |                  | 63.4  | %                                             |  |                                    | 370    |                          |  |                           | 8.31  |  |  | Carlos Alvarez                    |  |  | 12/31/16 | 
|Garden Oaks                     |  |                  | 70.9  | %                                             |  |                                    | 969    |                          |  |                           | 10.19 |  |  | Bally Total Fitness               |  |  | 12/31/12 | 
|Greens Road                     |  |                  | 100.0 | %                                             |  |                                    | 372    |                          |  |                           | 18.15 |  |  | Celaya Meat Market                |  |  | 3/31/12  | 
|Holly Knight                    |  |                  | 100.0 | %                                             |  |                                    | 426    |                          |  |                           | 21.27 |  |  | Quick Wash Laundry                |  |  | 9/30/09  | 
|Kempwood Plaza                  |  |                  | 65.5  | %                                             |  |                                    | 928    |                          |  |                           | 8.26  |  |  | Dollar General                    |  |  | 1/31/09  | 
|Lion Square                     |  |                  | 98.7  | %                                             |  |                                    | 1,370  |                          |  |                           | 11.45 |  |  | Asian Supermarket                 |  |  | 4/30/23  | 
|Northeast Square                |  |                  | 84.9  | %                                             |  |                                    | 437    |                          |  |                           | 10.79 |  |  | Sultan Allana / 99 Cents
  Only   |  |  | 11/30/08 | 
|Providence                      |  |                  | 98.4  | %                                             |  |                                    | 998    |                          |  |                           | 11.17 |  |  | 99 Cents Only                     |  |  | 1/31/09  | 
|South Richey                    |  |                  | 100.0 | %                                             |  |                                    | 663    |                          |  |                           | 9.48  |  |  | Kroger Food Store # 303           |  |  | 2/28/11  | 
|South Shaver                    |  |                  | 86.9  | %                                             |  |                                    | 276    |                          |  |                           | 12.60 |  |  | EZ Pawn                           |  |  | 11/30/12 | 
|SugarPark Plaza                 |  |                  | 100.0 | %                                             |  |                                    | 1,354  |                          |  |                           | 14.25 |  |  | Marshalls                        |  |  | 1/31/13  | 
|Sunridge                        |  |                  | 85.4  | %                                             |  |                                    | 505    |                          |  |                           | 10.22 |  |  | Crece, Inc.                       |  |  | 2/28/18  | 
|Torrey Square                   |  |                  | 85.4  | %                                             |  |                                    | 916    |                          |  |                           | 8.66  |  |  | 99 Cents Only Stores Texas        |  |  | 9/14/08  | 
|Town Park                       |  |                  | 100.0 | %                                             |  |                                    | 889    |                          |  |                           | 20.46 |  |  | Raphael & Elvira Ortega           |  |  | 12/31/13 | 
|Webster Point                   |  |                  | 68.0  | %                                             |  |                                    | 240    |                          |  |                           | 9.22  |  |  | Straus Frank Enterprises          |  |  | 11/30/12 | 
|Westchase                       |  |                  | 85.5  | %                                             |  |                                    | 521    |                          |  |                           | 12.13 |  |  | Apolinar & Leticia                |  |  | 11/30/11 | 
|Windsor Park                    |  |                  | 82.3  | %                                             |  |                                    | 1,986  |                          |  |                           | 10.32 |  |  | Sports Authority                  |  |  | 8/31/15  | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|                                |  |                  | 83.2  | %                                             |  | $                                  | 14,282 |                          |  | $                         | 11.05 |  |  |                                   |  |  |          | 
|                               
|Warehouse
  Properties:         |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|Brookhill                       |  |                  | 100.0 | %                                             |  |                                    | 411    |                          |  |                           | 5.50  |  |  | Umer Ahmad                        |  |  | 7/31/09  | 
|Corporate Park Northwest        |  |                  | 84.8  | %                                             |  |                                    | 1,606  |                          |  |                           | 8.65  |  |  | Region IV Education               |  |  | 1/31/11  | 
|Corporate Park West             |  |                  | 92.1  | %                                             |  |                                    | 1,798  |                          |  |                           | 10.24 |  |  | LTC Pharmacy Services             |  |  | 5/31/09  | 
|Corporate Park Woodland         |  |                  | 100.0 | %                                             |  |                                    | 1,192  |                          |  |                           | 11.93 |  |  | Carrier Sales &
  Distribution    |  |  | 7/31/08  | 
|Dairy Ashford                   |  |                  | 98.8  | %                                             |  |                                    | 198    |                          |  |                           | 4.61  |  |  | Houston Fellowship Church         |  |  | 11/30/14 | 
|Holly Hall                      |  |                  | 100.0 | %                                             |  |                                    | 646    |                          |  |                           | 7.18  |  |  | The Methodist Hospital            |  |  | 12/31/11 | 
|Interstate 10                   |  |                  | 81.3  | %                                             |  |                                    | 785    |                          |  |                           | 5.20  |  |  | River Oaks L-M, Inc.              |  |  | 12/31/08 | 
|Main Park                       |  |                  | 96.7  | %                                             |  |                                    | 769    |                          |  |                           | 6.78  |  |  | Transport Sales Associates        |  |  | 8/31/08  | 
|Plaza Park                      |  |                  | 82.1  | %                                             |  |                                    | 893    |                          |  |                           | 8.46  |  |  | American Medical                  |  |  | 5/31/11  | 
|Westbelt Plaza                  |  |                  | 83.6  | %                                             |  |                                    | 484    |                          |  |                           | 7.38  |  |  | Hartman Management, L.P.          |  |  | M-to-M   | 
|Westgate                        |  |                  | 72.1  | %                                             |  |                                    | 446    |                          |  |                           | 4.59  |  |  | TVI, Inc.                         |  |  | 6/30/12  | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|                                |  |                  | 89.1  | %                                             |  | $                                  | 9,228  |                          |  | $                         | 7.68  |  |  |                                   |  |  |          | 
|                               
|Office
  Properties:            |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|9101 LBJ Freeway                |  |                  | 81.1  | %                                             |  |                                    | 2,139  |                          |  |                           | 16.98 |  |  | Compass Insurance                 |  |  | 1/31/11  | 
|Featherwood                     |  |                  | 85.7  | %                                             |  |                                    | 793    |                          |  |                           | 15.97 |  |  | Sage Environmental                |  |  | 4/30/10  | 
|Royal Crest                     |  |                  | 75.0  | %                                             |  |                                    | 227    |                          |  |                           | 9.07  |  |  | Emerald Environmental
  Service   |  |  | 12/31/09 | 
|Uptown Tower                    |  |                  | 89.9  | %                                             |  |                                    | 3,664  |                          |  |                           | 14.35 |  |  | Brockett Davis Drake, Inc.        |  |  | 4/30/11  | 
|Woodlake Plaza                  |  |                  | 85.5  | %                                             |  |                                    | 1,439  |                          |  |                           | 13.56 |  |  | Rock Solid Images                 |  |  | 7/31/09  | 
|Zeta Building                   |  |                  | 99.0  | %                                             |  |                                    | 607    |                          |  |                           | 16.07 |  |  | Texas Retirement & Tax
  Advisors |  |  | 5/30/11  | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|                                |  |                  | 87.1  | %                                             |  | $                                  | 8,869  |                          |  | $                         | 14.82 |  |  |                                   |  |  |          | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|Grand
  Totals/Averages         |  |                  | 86.2  | %                                             |  | $                                  | 32,379 |                          |  | $                         | 10.47 |  |  |                                   |  |  |          | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|                                |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  |  |          | 
|                               
|Properties
  Under Development: |  |                  |       |                                               |  |                                    |        |                          |  |                           |       |  |  |                                   |  | 
|Pima Norte                      |  |                  | n/a   |                                               |  |                                    | n/a    |                          |  |                           | n/a   |  |  | n/a                               |  |  | n/a      | 

15

---



Lease Expirations

The
following table lists, on an aggregate basis, all of our scheduled lease
expirations over the next 10 years.

|      |  |                      |     |                           |  |                                                  |  |                         |  |                                               |   |  |   |        |  |  |      |   | 
|----- |  | -------------------- | --- | ------------------------- |  | ------------------------------------------------ |  | ----------------------- |  | --------------------------------------------- | - |  | - | ------ |  |  | ---- | - | 
|      |  |                      |     | Gross
  Leasable Area     |  | Annualized
  Base Rent
  as of December 31, 2007 | 
|      |  |                      |     |                           |  |                                                  | 
|     
|Year  |  | Number
  of
  Leases |     | Approximate
  Square Feet |  | Percent
  of Total
  Leasable Area               |  | Amount
  (in thousands) |  | Percent
  of the Total
  Annualized Base Rent |  
|      |  |                      |     |                           |  |                                                  |  |                         |  |                                               |  
|2008  |  |                      | 146 |                           |  | 426,120                                          |  |                         |  | 13.8                                          | % |  | $ | 3,736  |  |  | 14.8 | % | 
|2009  |  |                      | 168 |                           |  | 487,452                                          |  |                         |  | 15.8                                          |   |  |   | 5,186  |  |  | 20.5 |   | 
|2010  |  |                      | 106 |                           |  | 260,754                                          |  |                         |  | 8.4                                           |   |  |   | 3,133  |  |  | 12.4 |   | 
|2011  |  |                      | 115 |                           |  | 408,380                                          |  |                         |  | 13.2                                          |   |  |   | 4,482  |  |  | 17.7 |   | 
|2012  |  |                      | 98  |                           |  | 309,255                                          |  |                         |  | 10.0                                          |   |  |   | 3,443  |  |  | 13.6 |   | 
|2013  |  |                      | 46  |                           |  | 228,696                                          |  |                         |  | 7.4                                           |   |  |   | 2,387  |  |  | 9.5  |   | 
|2014  |  |                      | 16  |                           |  | 90,552                                           |  |                         |  | 2.9                                           |   |  |   | 879    |  |  | 3.5  |   | 
|2015  |  |                      | 22  |                           |  | 122,599                                          |  |                         |  | 4.0                                           |   |  |   | 933    |  |  | 3.7  |   | 
|2016  |  |                      | 5   |                           |  | 39,851                                           |  |                         |  | 1.3                                           |   |  |   | 297    |  |  | 1.2  |   | 
|2017  |  |                      | 3   |                           |  | 18,460                                           |  |                         |  | 0.6                                           |   |  |   | 153    |  |  | 0.6  |   | 
|      |  |                      |     |                           |  |                                                  |  |                         |  |                                               |   |  |   |        |  |  |      |   | 
|Total |  |                      | 725 |                           |  | 2,392,119                                        |  |                         |  | 77.3                                          | % |  | $ | 24,629 |  |  | 97.5 | % | 
|      |  |                      |     |                           |  |                                                  |  |                         |  |                                               |   |  |   |        |  |  |      |   | 

Insurance

We
believe that we have property and liability insurance with reputable,
commercially rated companies. We also believe that our insurance policies
contain commercially reasonable deductibles and limits, adequate to cover our
properties. We expect to maintain this type of insurance coverage and to obtain
similar coverage with respect to any additional properties we acquire in the
near future. Further, we have title insurance relating to our properties in an
aggregate amount that we believe to be adequate.

Regulations

Our
properties, as well as any other properties that we may acquire in the future,
are subject to various federal, state and local laws, ordinances and
regulations. They include, among other things, zoning regulations, land use
controls, environmental controls relating to air and water quality, noise
pollution and indirect environmental impacts such as increased motor vehicle
activity. We believe that we have all permits and approvals necessary under
current law to operate our properties.

16

---



Item 3.  Legal Proceedings.

The nature of our business exposes us to the risk of lawsuits for damages or penalties relating to, among other things, breach of contract and employment disputes.  We are currently involved in the following litigation:

Hartman Commercial Properties REIT and Hartman REIT Operating Partnership, L.P. v. Allen R. Hartman and Hartman Management, L.P., in the 333rd Judicial District Court of Harris County, Texas

In October 2006, we terminated our Chief Executive Officer, Allen R. Hartman, and our former manager and advisor, Hartman Management, L.P.  The same day, we filed this lawsuit seeking damages for breach of contract, fraudulent inducement, and breach of fiduciary duties.  Our new management approached Mr. Hartman about cooperatively turning over operations of the company but Mr. Hartman ousted them from his offices.  We then sought an emergency court order requiring Mr. Hartman to turn over control to new management.  Mr. Hartman opposed this legal relief.  The court issued an order requiring him to turn over control of the company.

As part of the change from Mr. Hartman to new management, the company asked Mr. Hartman to agree to a timeline for turning over specific operations and bank accounts.  Mr. Hartman refused, so we had to file another request with the court to require Mr. Hartmans compliance.  Only after we filed the request with the court did Mr. Hartman relent and agree to a turnover timeline.  During the turnover process, however, Mr. Hartman denied the company access to its own books and records and we had to go back to court to enforce the previously entered order that turned over the company to present management.

In November 2006, Mr. Hartman and Hartman Management filed a counterclaim against us, the individual members of our Board, our Chief Operating Officer, John J. Dee, and our prior outside law firm and one of its partners.  The counterclaims claimed that we had breached our contracts with Mr. Hartman and Hartman Managment and committed tortious interference with contract, intentional infliction of emotional distress, and conspiracy.  We prepared defenses to these counterclaims.

Subsequent to our preparations, Mr. Hartman and Hartman Management retained new attorneys.  The new attorneys filed amended counterclaims on behalf of Mr. Hartman and Hartman Management and dropped the claims against the individual members of our Board, with the exception of our Chairman, James C. Mastandrea.  The amended counterclaims now also alleged negligence, fraud, and breach of fiduciary duty.  We proceeded to prepare defenses in response to these amended counterclaims.

Mr. Hartman then hired a different set of attorneys and amended the counterclaims again to drop all of the claims against our prior outside law firm and its partner, many of the claims against us, and all of the claims, without prejudice, against Mr. Mastandrea and Mr. Dee.  The amended counterclaim now asserts claims against us only for breach of contract and alleges that we owe Mr. Hartman and Hartman Management a fee for the termination of an advisory agreement.  In communications to shareholders, Mr. Hartman represented that the termination fee, as calculated by him, could be in excess of $20 million.

We filed a motion for summary judgment on Mr. Hartmans and Hartman Managements claims that we breached our contracts with Hartman Management.  On March 25, 2008, the court granted our motion, in part, and stated that the termination fee allegedly due under the advisory agreement was subject to the cap on total operating expenses described in Section IV.D.1 of the North American Securities Administrators Associations Statement of Policy on Real Estate Investment Trusts.

The parties have each submitted reports of experts as to the amount of the fee due for the termination of the advisory agreement, other fees and expense reimbursements, and damages.  Discovery is being conducted for this case, which has a court date of May 19, 2008.  Before the courts March 25, 2008 ruling that capped the advisory agreement termination fee, Mr. Hartman and Hartman Management claimed damages of either $4.8 million or $6.4 million plus prejudgment interest and attorneys fees; Whitestone maintains that no amounts are due for fees, expenses and damages and we intend to vigorously defend against those claims and vigorously prosecute our affirmative claims.

Hartman Commercial Properties REIT v. Allen R. Hartman, et al; in the United States District Court for the Southern District of Texas

In November 2006, we learned that Mr. Hartman was soliciting written consents from shareholders and had sought approval from the SEC to distribute a consent solicitation to replace our Board.  We asked Mr. Hartman to refrain from distributing the consent solicitation until the false and misleading information was removed. He refused, so we initiated this lawsuit and sought a Temporary Injunction to stop Mr. Hartman from distributing the consent solicitation.

Mr. Hartman and Hartman Management filed a counterclaim, alleging that certain changes to our bylaws and declaration of trust were invalid and that their enactment was a breach of fiduciary duty.  Mr. Hartman sought a Temporary Injunction to prevent these changes from taking effect.  These changes, among other things, staggered the terms of our Board members over three years, required a two-thirds vote of the outstanding common shares to remove a Board member and provided that our secretary may call a special meeting of shareholders only on the written request of a majority of outstanding common shares.

With Mr. Hartman's encouragement, a group of shareholders filed a motion to intervene and bring claims against us in this lawsuit.  The interveners claims were similar to the counterclaims filed by Mr. Hartman and Hartman Management.  The shareholders eventually dismissed their request to intervene with prejudice, though not before we were required to prepare defenses to their claims and move to block their intervention.

The court ordered Mr. Hartman to refrain from distributing the consent solicitation while the parties exchanged discovery and took depositions in preparation for a full hearing on the competing requests for Temporary Injunctions.  On April 6, 2007, the court ruled in our favor and Mr. Hartman was ordered not to distribute the consent solicitation.  Also on April 6, 2007, the court denied Mr. Hartmans request for a Temporary Injunction challenging the changes to our bylaws and declaration of trust and the court upheld the changes to our bylaws and declaration of trust as valid exercises of the Boards powers.  The court also granted our Motion to Dismiss, dismissing many of Mr. Hartmans and Hartman Managements remaining claims against us.

Mr. Hartman appealed the courts April 6, 2007 rulings to the Fifth Circuit Court of Appeals.  After considering the parties written briefs and oral arguments held in New Orleans, the Fifth Circuit upheld the lower courts rulings.  We still have securities law claims against Mr. Hartman and Hartman Management and his remaining counterclaims are still pending against us, though no monetary damages are being sought by either side.  Trial is currently set for November 2008.

Other

We
are a participant in various other legal proceedings and claims that arise in
the ordinary course of our business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, we believe that the final outcome of these matters will not have a
material effect on our financial position, results of operations or cash flows.

17

---



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

None.

PART II

|                                                                                                                       | 
|---------------------------------------------------------------------------------------------------------------------- | 
|Item 5.  Market for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities.

Market Information

There
is no established trading market for our common shares of beneficial interest.
As of March 31, 2008, we had 10,001,269 common shares of beneficial interest
outstanding held by a total of approximately 1,423 shareholders.

Public Offering Proceeds

On
September 15, 2004, our Registration Statement on Form S-11, with respect to
our public offering of up to 10,000,000 common shares of beneficial interest at
a price of $10.00 per share, was declared effective under the Securities Act of
1933. The Registration Statement also covers up to 1,000,000 shares available
pursuant to our dividend reinvestment plan to be offered at a price of $9.50
per share. The shares are offered to investors on a best efforts basis.
Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were
declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006,
respectively.

Our
Board of Trustees terminated our public offering on October 2, 2006. Through
December 31, 2007, approximately 2.8 million shares had been issued pursuant to
our public offering with gross offering proceeds received of $28.3 million. An
additional 165,000 shares had been issued pursuant to the dividend reinvestment
plan in lieu of dividends totaling $1.6 million. Shareholders that received
shares pursuant to our dividend reinvestment plan on or after October 2, 2006,
may have recission rights as described in Dividend
Reinvestment Plan below.

The
application of our gross offering proceeds from the offering are as follows (in
thousands):

|                                                                                           |  |                            |   |        |  | 
|------------------------------------------------------------------------------------------ |  | -------------------------- | - | ------ |  | 
|Description
  of Use of Offering Proceeds                                                  |  | Amount of ProceedsUtilized |  
|                                                                                           |  |                            |  
|                                                                                           |  |                            |   |       
|Selling Commissions paid to broker/dealers not affiliated with D.H.
  Hill Securities, LLP |  |                            | $ | 1,644  |  | 
|Selling Discounts                                                                          |  |                            |   | 71     |  | 
|Dealer Manager Fee paid to Hartman Management                                              |  |                            |   | 705    |  | 
|Offering expense reimbursements paid to the Hartman
Management                             |  |                            |   | 708    |  | 
|Acquisition Fees paid to Hartman Management                                                |  |                            |   | 566    |  | 
|                                                                                           |  |                            |   |        |  | 
|Total Offering Expenses                                                                    |  |                            | $ | 3,694  |  | 
|                                                                                           |  |                            |   |        |  | 
|Net Offering Proceeds                                                                      |  |                            | $ | 26,185 |  | 
|                                                                                           |  |                            |   |        |  | 
|Repayment of Lines of Credit                                                               |  |                            | $ | 18,300 |  | 
|Used for Working Capital                                                                   |  |                            | $ | 7,885  |  | 

We
initially used approximately $18.3 million and $7.9 million of our net proceeds
from the offering to repay our lines of credit and for working capital,
respectively. We subsequently purchased real estate assets by redrawing on our
lines of credit and using working capital. Therefore, the ultimate use of our
net offering proceeds was the acquisition of real estate assets.

18

---



Dividend Reinvestment Plan

Our
dividend reinvestment plan allowed our shareholders to elect to have dividends
from our common shares reinvested in additional common shares. The purchase
price per share under our dividend reinvestment plan was $9.50. On March 27,
2007, we gave the required ten day notice to participants informing them that
we intend to terminate our dividend reinvestment plan. As a result, our
dividend reinvestment plan terminated on April 6, 2007. Shares issued under our
dividend reinvestment plan were registered on our Registration Statement on
Form S-11. We did not amend or supplement our Registration Statement following
our change in management on October 2, 2006, and the events that occurred
thereafter. As a result, shareholders that received approximately 64,000 shares
issued under our dividend reinvestment plan on or after that date could be entitled
to recission rights. These rights would entitle these shareholders to recovery
of their purchase price less any income received on their shares.

Issuer Repurchases

We
did not repurchase any of our equity securities during 2007. Our Board has
approved (but delayed the implementation of) a share redemption program that
would enable shareholders to sell shares to us after holding them for at least
one year under limited circumstances. Our Board could choose to amend the
provisions of the share redemption program without shareholder approval. Our
Board has chosen not to implement the share redemption program at this time.

Dividends

In
order to remain qualified as a REIT, we are required to distribute at least 90%
of our annual taxable income to our shareholders. We currently accrue dividends
quarterly and pay dividends in three monthly installments following the end of
the quarter. We intend to continue paying dividends in this manner. For a
discussion of our cash flow as compared to dividends, see Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.

The
following table reflects the total dividends we have paid (including the total
amount paid and the amount paid per share) in each indicated quarter. The
amounts provided give effect to our reorganization as a Maryland real estate
investment trust and the concurrent recapitalization of our common shares on
July 28, 2004.

|                    |  |                                                   |   |                       |  |  |  |   |        |  | 
|------------------- |  | ------------------------------------------------- | - | --------------------- |  |  |  | - | ------ |  | 
|Quarter Paid        |  | Total Amount of
  Dividends Paid
  (in thousands) |   | Dividends per
  Share | 
|                    |  |                                                   |   |                       | 
|                    |  |                                                   |   |                       |  |  | 
|03/31/2006          |  |                                                   | $ | 1,526                 |  |  |  | $ | 0.1768 |  | 
|06/30/2006          |  |                                                   |   | 1,632                 |  |  |  |   | 0.1768 |  | 
|09/30/2006          |  |                                                   |   | 1,443                 |  |  |  |   | 0.1500 |  | 
|12/31/2006          |  |                                                   |   | 1,477                 |  |  |  |   | 0.1500 |  | 
|03/31/2007          |  |                                                   |   | 1,522                 |  |  |  |   | 0.1500 |  | 
|06/30/2007          |  |                                                   |   | 1,500                 |  |  |  |   | 0.1500 |  | 
|09/30/2007          |  |                                                   |   | 1,500                 |  |  |  |   | 0.1500 |  | 
|12/31/2007          |  |                                                   |   | 1,500                 |  |  |  |   | 0.1500 |  | 
|03/31/2008          |  |                                                   | $ | 1,500                 |  |  |  | $ | 0.1500 |  | 
|                    |  |                                                   |   |                       |  |  |  |   |        |  | 
|Average Per Quarter |  |                                                   |   |                       |  |  |  | $ | 0.1560 |  | 

19

---



Equity Compensation Plan Information

Please
refer to Item 12 of this report on Form 10-K for information concerning
securities authorized under our incentive share plan.

Item 6. Selected Financial
Data.

The
following table sets forth our selected consolidated financial information and
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations
and our audited consolidated financial statements and the notes thereto, both
of which appear elsewhere in this report.

|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|---------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                 |  | Year Ended December 31,               |        
|                                                                 |  | (in thousands, except per share data) |        
|                                                                 |  |                                       |        
|                                                                 |  | 2007                                  |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |  
|Operating Data:                                                  |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Revenues                                                         |  | $                                     | 30,982  |      | $ | 29,840  |   | $    | 24,919  |      | $ | 23,279  |   | $ | 20,897  |  
|Operating expenses (excluding
depreciation and amortization) (1) |  |                                       | 19,674  |      |   | 15,832  |   |      | 11,012  |      |   | 9,183   |   |   | 8,383   |  
|Depreciation and
amortization                                    |  |                                       | 6,343   |      |   | 6,476   |   |      | 6,099   |      |   | 5,223   |   |   | 4,758   |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Operating income                                                 |  |                                       | 4,965   |      |   | 7,532   |   |      | 7,808   |      |   | 8,873   |   |   | 7,756   |  
|Interest expense                                                 |  |                                       | (5,402  | )    |   | (5,296  | ) |      | (3,770  | )    |   | (2,664  | ) |   | (1,323  | )
|Interest income and
other                                        |  |                                       | 314     |      |   | 613     |   |      | 301     |      |   | 205     |   |   | 76      |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Income (loss) before minority
interests                          |  |                                       | (123    | )    |   | 2,849   |   |      | 4,339   |      |   | 6,414   |   |   | 6,509   |  
|Minority interest in (income)
loss                               |  |                                       | 46      |      |   | (1,068  | ) |      | (1,891  | )    |   | (2,990  | ) |   | (3,035  | )
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net income (loss)                                                |  | $                                     | (77     | )    | $ | 1,781   |   | $    | 2,448   |      | $ | 3,424   |   | $ | 3,474   |  
|Net income (loss) per common
share                               |  | $                                     | (0.008  | )    | $ | 0.185   |   | $    | 0.310   |      | $ | 0.488   |   | $ | 0.496   |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Balance Sheet Data:                                              |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate (net)                                                |  | $                                     | 154,392 |      | $ | 149,488 |   | $    | 153,965 |      | $ | 126,547 |   | $ | 120,256 |  
|Other assets                                                     |  |                                       | 20,752  |      |   | 17,488  |   |      | 17,497  |      |   | 16,070  |   |   | 13,810  |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total assets                                                     |  | $                                     | 175,144 |      | $ | 167,087 |   | $    | 171,462 |      | $ | 142,617 |   | $ | 134,066 |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Liabilities                                                      |  | $                                     | 94,262  |      | $ | 76,464  |   | $    | 83,462  |      | $ | 66,299  |   | $ | 55,183  |  
|Minority interests in
Operating Partnership                      |  |                                       | 28,039  |      |   | 31,709  |   |      | 34,272  |      |   | 36,489  |   |   | 37,567  |  
|Shareholders
equity                                             |  |                                       | 52,843  |      |   | 58,914  |   |      | 53,728  |      |   | 39,829  |   |   | 41,316  |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                 |  | $                                     | 175,144 |      | $ | 167,087 |   | $    | 171,462 |      | $ | 142,617 |   | $ | 134,066 |  
|                                                                 |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Other Data:                                                      |  |                                       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Proceeds from issuance of
common shares                          |  | $                                     | 260     |      | $ | 9,453   |   | $    | 17,035  |      | $ | 1,472   |   | $ |        |  
|Additions to real
estate                                         |  | $                                     | 10,234  |      | $ | 2,055   |   | $    | 31,792  |      | $ | 10,277  |   | $ | 8,242   |  
|Dividends per share
(2)                                          |  | $                                     | 0.600   |      | $ | 0.625   |   | $    | 0.701   |      | $ | 0.701   |   | $ | 0.700   |  
|Funds from operations
(3)                                        |  | $                                     | 6,001   |      | $ | 8,993   |   | $    | 9,851   |      | $ | 11,138  |   | $ | 10,825  |  
|Occupancy at year end                                            |  |                                       | 86      | %    |   | 83      | % |      | 82      | %    |   | 86      | % |   | 88      | %

(1) Operating expenses for the years ended
December 31, 2007 and 2006 include approximately $2.2 million and $0.9 million,
respectively, of legal costs resulting from litigation with Allen Hartman and
Hartman Management, LP.

(2)The dividends per share represent total cash payments divided by
weighted average common shares.

(3)We believe that
Funds From Operations (FFO) is an appropriate supplemental measure of
operating performance because it helps our investors compare our operating
performance relative to other REITs. The National Association of Real Estate
Investment Trusts (NAREIT) defines FFO as net income (loss) available to
common shareholders computed in accordance with GAAP, excluding gains or losses
from sales of operating properties and extraordinary items, plus depreciation
and amortization of real estate assets, including our share of unconsolidated
partnerships and joint ventures. We calculate FFO in a manner consistent with
the NAREIT definition.

20

---



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

You
should read the following discussion of our financial condition and results of
operations in conjunction with our audited consolidated financial statements
and the notes thereto included in this annual report. For more detailed
information regarding the basis of presentation for the following information,
you should read the notes to our audited consolidated financial statements
included in this annual report.

Overview

We
are a real estate investment trust (REIT) engaged in owning and operating
income-producing real properties. Our investments include retail, office and
warehouse properties located in the Houston, Dallas, San Antonio and Phoenix
metropolitan areas. Our properties consist of:

| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 19 retail
  properties containing approximately 1.3 million square feet of leasable space
  and having a total carrying amount (net of accumulated depreciation) of $67.0
  million.          
| |   |                                                                                                                                                                                               
| |  | Six office
  properties containing approximately 0.6 million square feet of leasable space
  and having a total carrying amount (net of accumulated depreciation) of $36.2
  million.         
| |   |                                                                                                                                                                                               
| |  | 11
  office/warehouse properties containing approximately 1.2 million square feet
  of leasable space and having a total carrying amount (net of accumulated
  depreciation) of $42.8 million.
| |   |                                                                                                                                                                                               
| |  | One office
  property under development having a total carrying amount of $8.4 million,
  which will contain approximately 0.03 million square feet of leasable space
  upon completion.      

Our
primary source of income and cash is rents associated with commercial leases.
Our business objective is to increase shareholder value by employing a
value-add investment strategy. This strategy is focused on owning and
renovating commercial real estate assets in markets with positive demographic
trends, achieving diversification by property type and location, and acquiring
properties within our targeted returns.

As
of December 31, 2007, we had 720 total tenants. We have a diversified tenant
base with our largest tenant compromising only 1.8% of our total revenues for
2007. Lease terms for our properties range from less than one year for smaller
tenants to over 15 years for larger tenants. Our leases generally include
minimum monthly lease payments and tenant reimbursements for payment of taxes,
insurance and maintenance.

We
are a self-managed REIT, employing 46 full-time employees as of December 31,
2007. As a self-managed REIT, we bear our own expenses of operations, including
the salaries, benefits and other compensation of our employees, office
expenses, legal, accounting and investor relations expenses and other overhead.

Prior
to November 14, 2006, our properties and day-to-day operations were externally
managed by Hartman Management, LP (the External Manager) under an advisory
agreement and a management agreement. Under this arrangement we were charged
fees based on percentages of gross revenues, asset values, capital raised, and
expenses submitted for reimbursement. Our advisory agreement expired at the end
of September 2006 and our Board terminated our property management agreement in
October 2006. The External Manager turned over all property management functions
to us on November 14, 2006.

We
believe that one of the most key measures of our performance is property
occupancy. Occupancy for the total portfolio was 86.2% at December 31, 2007,
compared to 83.3% at December 31, 2006. We completed 256 new and renewal leases
during 2007 totaling 0.9 million square feet and $42.0 million in total lease
value.

In the fourth
quarter of 2006, our Board approved our five year business plan. The key
elements of the plan are as follows:

| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Maximize
  value in current properties through operational focus and redevelopment

21

---



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Grow through
  strategic acquisitions of commercial properties in high potential markets,
  including properties outside of Texas                              
| |   |                                                                                                                                                                
| |  | Dispose of
  non-core properties and reinvest the capital in redevelopment of existing
  properties or acquisition of core properties in high potential markets
| |   |                                                                                                                                                                
| |  | Pare down
  from three current product lines (retail, office and warehouse) and focus on
  one or possible two product lines.                                  
| |   |                                                                                                                                                                
| |  | Raise capital
  using a combination of the private and public equity and debt markets, as
  well as joint ventures                                             
| |   |                                                                                                                                                                
| |  | Bring
  liquidity to our stock by listing on a national stock exchange                                                                                         

During
2007, we have begun progress on the execution of this five year plan as
described in the following sections on redevelopment, acquisitions and
dispositions.

Redevelopment

We
began redevelopment in late 2007 to add 5,000 square feet of office space and
upgrade the Westchase Plaza Retail and Office Center located in Houston, Texas.
The total redevelopment of this center is projected to cost approximately $1.7
million and be completed by late 2008.

Acquisitions

In
October of 2007, we acquired a 33,400 square foot commercial property in Carefree,
Arizona which is adjacent to North Scottsdale, for approximately $8.3 million.
The property, Pima Norte, is a newly constructed one and two story class A
executive medical office building. The property is currently under development
and is expected to be leasable by mid 2008. We expect to invest approximately
$2.0 million to complete the construction.

Dispositions

On
July 26, 2007, we sold a 2.4 acre parcel of vacant land next to our South
Shaver retail property located in Houston, Texas for a sales price of $0.3
million.

On
December 1, 2006, we sold Northwest Place II, a 27,974 square foot
office/warehouse building located in Houston, Texas for a sales price of $1.2
million.

Summary of Critical Accounting Policies

Our
discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements. We prepared these financial
statements in conformity with U.S. generally accepted accounting principles.
The preparation of these financial statements required us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. We based our estimates on historical
experience and on various other assumptions we believe to be reasonable under
the circumstances. Our results may differ from these estimates. Currently, we
believe that our accounting policies do not require us to make estimates using
assumptions about matters that are highly uncertain. You should read Note 2,
Summary of Significant Accounting Policies, to our consolidated financial
statements in conjunction with this Managements
Discussion and Analysis of Financial Condition and Results of Operations.

22

---



We
have described below the critical accounting policies that we believe could
impact our consolidated financial statements most significantly.

Revenue
Recognition. All leases on our properties are classified
as operating leases, and the related rental income is recognized on a
straight-line basis over the terms of the related leases. Differences between
rental income earned and amounts due per the respective lease agreements are
capitalized or charged, as applicable, to accrued rent and accounts receivable.
Percentage rents are recognized as rental income when the thresholds upon which
they are based have been met. Recoveries from tenants for taxes, insurance, and
other operating expenses are recognized as revenues in the period the
corresponding costs are incurred. We have established an allowance for doubtful
accounts against the portion of tenant accounts receivable which is estimated
to be uncollectible.

Development
Properties. Land, buildings and improvements are
recorded at cost. Expenditures related to the development of real estate are
carried at cost which includes capitalized carrying charges, acquisition costs
and development costs. Carrying charges, primarily interest, real estate taxes
and loan acquisition costs, and direct and indirect development costs related
to buildings under construction, are capitalized as part of construction in
progress. The capitalization of such costs ceases when the property, or any
completed portion, becomes available for occupancy. The Company capitalizes
acquisition costs once the acquisition of the property becomes probable. Prior
to that time, we expense these costs as acquisition expense. During the year
ended December 31, 2007, interest in the amount of $0.1 was capitalized on
properties under development. No such amounts were capitalized in 2006 or 2005.

Acquired
Properties and Acquired Lease Intangibles. We account
for real estate acquisitions pursuant to Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations. Accordingly, we allocate the purchase price of the
acquired properties to land, building and improvements, identifiable intangible
assets and to the acquired liabilities based on their respective fair values.
Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationship value, if any.
We determine 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 specific market and economic
conditions that may affect the property. Factors considered by management in
our analysis of determining the as-if-vacant property value include an estimate
of carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and estimates of lost rentals
at market rates during the expected lease-up periods, tenant demand and other
economic conditions. Management also estimates costs to execute similar leases including
leasing commissions, tenant improvements, legal and other related expenses.
Intangibles related to out-of-market leases and in-place lease value are
recorded as acquired lease intangibles and are amortized as an adjustment to
rental revenue or amortization expense, as appropriate, over the remaining
terms of the underlying leases. Premiums or discounts on acquired out-of-market
debt are amortized to interest expense over the remaining term of such debt.

Depreciation.Depreciation is computed using the straight-line
method over the estimated useful lives of five to 39 years for the buildings
and improvements. Tenant improvements are depreciated using the straight-line
method over the life of the lease.

Impairment.We review our properties for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount
of the assets, including accrued rental income, may not be recoverable through
operations. We determine whether an impairment in value has occurred by
comparing the estimated future cash flows (undiscounted and without interest
charges), including the estimated residual value of the property, with the
carrying cost of the property. If impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the property exceeds its
fair value. Management has determined that there has been no impairment in the
carrying value of our real estate assets as of December 31, 2007.

Accrued
Rent and Accounts Receivable. Included in accrued rent
and accounts receivable are base rents, tenant reimbursements and receivables
attributable to recording rents on a straight-line basis. An allowance for the
uncollectible portion of accrued rents and accounts receivable is determined
based upon customer credit-worthiness (including expected recovery of our claim
with respect to any tenants in bankruptcy), historical bad debt levels, and

23

---



current
economic trends. As of December
31, 2007 and 2006, we had an allowance for uncollectible accounts of $1.1
million and $0.6 million, respectively. During 2007, 2006 and 2005, we recorded
bad debt expense in the amount of $0.6 million, $0.4 million and $0.1 million,
respectively, related to tenant receivables that we specifically identified as
potentially uncollectible based on our assessment of each tenants
credit-worthiness. Bad debt expenses and any related recoveries are included in
property operation and maintenance expense.

Unamortized
Lease Commissions and Loan Costs. Leasing commissions
are amortized using the straight-line method over the terms of the related
lease agreements. Loan costs are amortized on the straight-line method over the
terms of the loans, which approximates the interest method. Costs allocated to
in-place leases whose terms differ from market terms related to acquired
properties are amortized over the remaining life of the respective leases.

Federal
Income Taxes. We are qualified as a real estate
investment trust under the Internal Revenue Code of 1986 and are therefore not
subject to Federal income taxes provided we meet all conditions specified by
the Internal Revenue Code for retaining our REIT status. We believe we have
continuously met these conditions since reaching 100 shareholders in 1999 (see
Note 11 to the consolidated financial statements).

Derivative
Instruments. We have initiated a program designed to
manage exposure to interest rate fluctuations by entering into financial
derivative instruments. The primary objective of this program is to comply with
debt covenants on a credit facility. We have entered into an interest rate swap
agreement with respect to amounts borrowed under certain of our credit
facilities, which effectively exchanges existing obligations to pay interest
based on floating rates for obligations to pay interest based on fixed LIBOR
rates.

We
have adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging
Activities, as subsequently amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and
Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments
and Hedging Activities, which require for items appropriately
classified as cash flow hedges that changes in the market value of the
instrument and in the market value of the hedged item be recorded as other
comprehensive income with the exception of the portion of the hedged items that
are considered ineffective. The derivative instruments are reported at fair
value as other assets or other liabilities as applicable. As of December 31,
2007, we have a $70.0 million dollar interest rate swap which has been
designated as a cash flow hedge. The fair value of this interest rate swap is
approximately ($0.4) million and is included in accounts payable and accrued
expenses in the consolidated balance sheet. Additionally, for a previous
interest rate swap which was not designated as a cash flow hedge, approximately
($0.03) million and $0.03 million are included in other expense and other income
on the consolidated statement of income for the year ended December 31, 2007
and 2006, respectively.

New Accounting Pronouncements

In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
the financial statements. The interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition of a tax
position taken, or expected to be taken, in a tax return. A tax position may
only be recognized in the financial statements if it is more likely than not
that the tax position will be sustained upon examination. There are also
several disclosure requirements. We adopted this interpretation during the
first quarter of 2007, and it had no effect on our consolidated financial
statements.

In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value under U.S. generally accepted
accounting principles and requires enhanced disclosures about fair value
measurements. It does not require any new fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not
expect this pronouncement to have a material effect on our consolidated results
of operation or financial position.

24

---



In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We currently do not plan to
measure any eligible financial assets and liabilities at fair value under the
provisions of SFAS No. 159.

In
September 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue
07-6, Accounting for the Sale of Real
Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement
Includes a Buy-Sell Clause, which clarifies that a buy-sell clause,
in and of itself, does not constitute a prohibited form of continuing
involvement that would preclude partial sale treatment under Statement 66. EITF
07-6 applies prospectively to new arrangements entered into in fiscal years
beginning after December 15, 2007.

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No.
141,  Business Combinations, which, among
other things, establishes principles and requirements for how an acquirer
entity recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed (including intangibles) and any
noncontrolling interests in the acquired entity. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS
No. 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51s consolidation procedures for
consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. We are currently evaluating what impact our
adoption of SFAS No. 160 will have on our financial statements.

Liquidity and Capital Resources

Our
primary liquidity demands are distributions to the holders of our common shares
and holders of units of limited partnership interest in the Operating
Partnership (OP Units), capital improvements and repairs and maintenance for
our properties, acquisition of additional properties, tenant improvements and
debt repayments.

Primary
sources of capital for funding our acquisitions and redevelopment programs are
our $75 million revolving credit facility, cash generated from sales of
properties that no longer meet investment criteria, cash flow generated from
operating activities and bank debt.

Our
capital structure also includes non-recourse secured debt that we assumed or
originated on certain properties. We hedge the future cash flows of certain debt
transactions principally through interest rate swaps with major financial
institutions.

During the year ended
December 31, 2007,
our cash provided from operating activities was $4.6 million and our total
distributions were $9.5 million. Therefore we had distributions in excess of
cash flow from operations of approximately $4.9 million. Our primary funding
for paying dividends in excess of cash flow from operations was borrowing from
our credit facility and the increase in the debt on our Windsor Park Centre
mortgage loan.

During
the year ended December 31, 2007, we incurred approximately $2.2 million in
legal costs as a result of the ongoing litigation with Mr. Hartman and Hartman
Management, LP. For a full discussion of the litigation with Mr. Hartman and
Hartman Management see Item 3  Legal
Proceedings. We do not know when this litigation will be fully
resolved. The continued legal cost associated with this litigation may have a
significant impact on our cash flow. We anticipate that cash flows from
operating activities and our borrowing capacity will provide

25

---



adequate
capital for our working capital requirements, anticipated capital expenditures,
litigation costs and scheduled debt payments during the next 12 months. We also
believe that cash flows from operating activities and our borrowing capacity
will allow us to make all distributions required for us to continue to qualify
to be taxed as a REIT.

Cash
and Cash Equivalents

We
had cash and cash equivalents of $10.8 million at December 31, 2007, as
compared to $8.3 million on December 31, 2006. The increase of $2.5 million was
primarily the result of the following:

Sources
of Cash

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash flow
  from operations of $4.6 million for the year ended December 31, 2007.                                                              
| |   |                                                                                                                                                
| |  | Net proceeds
  of $17.1 million from our credit facility and refinancing of our Windsor Park
  Centre property.                                
| |   |                                                                                                                                                
| |  | Repayment of
  note receivable of $0.6 million. We originally issued this note receivable in
  2003 in conjunction with the sale of a property.
| |   |                                                                                                                                                
| |   | Uses of Cash                                                                                                                                   
| |   |                                                                                                                                                
| |  | Payment of
  dividends and distributions to common shareholders and OP Unit holders of
  $9.5 million.                                         
| |   |                                                                                                                                                
| |  | Additions to
  real estate of $10.2 million.                                                                                                   

We place all
cash in short-term, highly liquid investments that we believe provide
appropriate safety of principal.

Debt

As
of December 31, 2007, we had two active loans:

Revolving
Credit Facility

We
have a revolving credit facility with a consortium of banks. The credit
facility is secured by a pledge of the partnership interests in Whitestone REIT
Operating Partnership III, L.P. (WROP III), a wholly owned subsidiary of the
Operating Partnership that was formed to hold title to the properties comprising
the borrowing base pool for the facility. At December 31, 2007, WROP III owned
35 properties.

As
of December 31, 2007 and December 31, 2006, the balance outstanding under the
credit facility was $73.5 million and $61.2 million, respectively, and the
availability to draw was $1.5 million and $13.8 million, respectively.

Mortgage
Loan on Windsor Park Centre

On March 1, 2007, we obtained
a $10.0
million loan to pay off the loan obtained upon the acquisition of the Windsor Park
property and to provide funds for future acquisitions. The mortgage loan is
secured by the Windsor Park property which is owned by Whitestone REIT
Operating Company IV, LLC (WROC IV), a wholly owned subsidiary of the
Operating Partnership that was formed to hold title to the Windsor Park
property. On March 1, 2007, we conveyed ownership of the Windsor Park property
from the Operating Partnership to WROC IV in order to secure the $10.0 million
mortgage loan.

26

---



The
note is payable in equal monthly installments of principal and interest of
$60,212, with interest at the rate of 6.04% per annum. The balance of the note
is payable in full on March 1, 2014. The loan balance is approximately $9.9
million at December 31, 2007.

For
further discussion regarding specific terms of our debt, see Note 9 of the
Consolidated Financial Statements.

Capital
Expenditures

We
continually evaluate our properties performance and value. We may determine it
is best to invest capital in properties we believe have potential for
increasing value. We also may have unexpected capital expenditures or
improvements for our existing assets. Additionally, we intend to invest in
similar properties outside of Texas in cities with exceptional demographics to
diversify market risk, and we may incur significant capital expenditures or
make improvements in connection with any properties we may acquire.

Contractual
Obligations

As
of December 31, 2007, we had the following contractual debt obligations (see
Note 9 of the Consolidated Financial Statements for further discussion
regarding the specific terms of our debt) (in thousands):

|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       |  | 
|----------------------------------------------------------------------------------- |  | - | ------ |  | ----------------- | --------------------- | ------------- | - | ------------- |  | ------------------ | - |  | - | ----- |  | 
|                                                                                    |  |   |        |  |                   | Payment due by period |              
|                                                                                    |  |   |        |  |                   |                       |              
|Contractual
 Obligations                                                            |  |   | Total  |  | Less than
 1 Year |                       | 1 to 3
 Years |   | 3 to 5
 Years |  | More than
 5 Years |  
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |  
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       |  | 
|Long-Term Debt Obligations                                                          |  | $ | 83,461 |  | $                 | 73,562                |               | $ |              |  | $                  |  |  | $ | 9,899 | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       |  | 
|Capital Lease Obligations                                                           |  |   |       |  |                   |                      |               |   |              |  |                    |  |  |   |      | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       |  | 
|Operating Lease Obligations                                                         |  |   |       |  |                   |                      |               |   |              |  |                    |  |  |   |      | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       |  | 
|Purchase Obligations                                                                |  |   |       |  |                   |                      |               |   |              |  |                    |  |  |   |      | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       |  | 
|Other Long-Term Liabilities Reflected on the Registrants Balance
 Sheet under GAAP |  |   |       |  |                   |                      |               |   |              |  |                    |  |  |   |      | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       | 
|Total                                                                               |  | $ | 83,461 |  | $                 | 73,562                |               | $ |              |  | $                  |  |  | $ | 9,899 | 
|                                                                                    |  |   |        |  |                   |                       |               |   |               |  |                    |   |  |   |       | 

27

---



Distributions

During
2007, we paid dividends to our
common shareholders and distributions to our OP Unit holders of $9.5 million,
compared to $9.8 million in 2006. Common shareholders and OP Unit holders
receive monthly dividends and distributions, respectively. Payments of
dividends and distributions are declared quarterly and paid monthly. The
dividends paid to common shareholders and distributions paid to OP Unit holders
follow (in thousands):

|               |  |                      |   |                                     |  |  |  |   |       |  | 
|-------------- |  | -------------------- | - | ----------------------------------- |  |  |  | - | ----- |  | 
|               |  | Common
 Shareholders |   | Minority Interest
 OP Unit
 Holders | 
|               |  |                      |   |                                     |  |  |  |   |       |  | 
|2007           |  |                      |   |                                     |  |  |  |   |       |  | 
|Fourth Quarter |  |                      | $ | 1,500                               |  |  |  | $ | 871   |  | 
|Third Quarter  |  |                      |   | 1,500                               |  |  |  |   | 871   |  | 
|Second Quarter |  |                      |   | 1,500                               |  |  |  |   | 871   |  | 
|First Quarter  |  |                      |   | 1,522                               |  |  |  |   | 871   |  | 
|2006           |  |                      |   |                                     |  |  |  |   |       |  | 
|Fourth Quarter |  |                      |   | 1,477                               |  |  |  |   | 871   |  | 
|Third Quarter  |  |                      |   | 1,443                               |  |  |  |   | 871   |  | 
|Second Quarter |  |                      |   | 1,632                               |  |  |  |   | 1,005 |  | 
|First Quarter  |  |                      | $ | 1,526                               |  |  |  | $ | 1,006 |  | 

Results of Operations

Year Ended December 31, 2007 Compared to Year
Ended December 31, 2006

The
following table provides a general comparison of our results of operations for
the years ended December 31, 2007 and December 31, 2006:

|                                                |  |                                        |   |                   |   |  |  |   |           |   | 
|----------------------------------------------- |  | -------------------------------------- | - | ----------------- | - |  |  | - | --------- | - | 
|                                                |  | December 31, 2007                      |   | December 31, 2006 |  
|                                                |  |                                        |   |                   |   |  |  |   |           |   | 
|Number of properties owned and operated         |  |                                        |   | 37                |   |  |  |   | 36        |   | 
|Aggregate gross leasable area (sq. ft.)         |  |                                        |   | 3,093,063         |   |  |  |   | 3,093,063 |   | 
|Ending occupancy rate                           |  |                                        |   | 86                | % |  |  |   | 83        | % | 
|                                                |  |                                        |   |                   |   |  |  |   |           |   | 
|                                                |  | (in
 thousands, except per share data) |  
|Total revenues                                  |  |                                        | $ | 30,982            |   |  |  | $ | 29,840    |   | 
|Total operating expenses                        |  |                                        |   | 26,017            |   |  |  |   | 22,308    |   | 
|Operating income                                |  |                                        |   | 4,965             |   |  |  |   | 7,532     |   | 
|Other income (expense), net                     |  |                                        |   | (5,088            | ) |  |  |   | (4,683    | ) | 
|Income (loss) before minority interests         |  |                                        |   | (123              | ) |  |  |   | 2,849     |   | 
|Minority interests in the Operating Partnership |  |                                        |   | 46                |   |  |  |   | (1,068    | ) | 
|Net income (loss)                               |  |                                        | $ | (77               | ) |  |  | $ | 1,781     |   | 
|                                                |  |                                        |   |                   |   |  |  |   |           |   | 
|Funds from operations (1)                       |  |                                        | $ | 6,001             |   |  |  | $ | 8,993     |   | 
|Dividends paid on common shares and OP Units    |  |                                        |   | 9,507             |   |  |  |   | 9,831     |   | 
|Per common share and OP unit                    |  |                                        | $ | 0.60              |   |  |  | $ | 0.63      |   | 
|Dividends paid as a % of FFO                    |  |                                        |   | 158               | % |  |  |   | 109       | % | 

| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | (1) In accordance with Regulation G,
 reconciliation of non-GAAP measures, see Funds From Operations following.

28

---



Revenues

Substantially
all of our revenue is derived from rents received from leases at our properties. We had rental income and tenant
reimbursements of approximately $31.0 million for the year ended December 31,
2007, as compared to $29.8 million for the year ended December 31, 2006, an
increase of $1.2 million or 4%. Our year end occupancy rate in 2007 was 86%, as
compared to 83% at year end 2006. The majority of the increase in occupancy
occurred near the end of the year in 2007 and did not have a material impact on
revenue in 2007. We expect revenue to increase in 2008 as a result of this
increase in occupancy. Our average gross leaseable area was approximately
3,093,000 in 2007 versus 3,127,000 in 2006. Our average annualized revenue was
$10.02 per square foot in 2007, as compared to our average annualized revenue
of $9.56 per square foot in 2006.

Operating
Expenses

Our
total operating expenses were $26.0 million for the year ended December 31,
2007, as compared to $22.3 million for the year ended December 31, 2006, an
increase of $3.7 million, or 16.6%. The primary components of total operating
expense are detailed in the table below (in thousands):

|                                                              |  |                         |        |      |   |        | 
|------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | 
|                                                              |  | Year Ended December 31, |       
|                                                              |  |                         |       
|                                                              |  | 2007                    |        | 2006 |  
|                                                              |  |                         |        |      |  
|                                                              |  |                         |        |      |   |        | 
|Property operation and maintanence                            |  | $                       | 9,165  |      | $ | 8,101  | 
|Real estate taxes                                             |  |                         | 3,788  |      |   | 3,950  | 
|Property management and asset management fees to an
affiliate |  |                         |       |      |   | 1,482  | 
|General and administrative                                    |  |                         | 6,721  |      |   | 2,299  | 
|Depreciation and amortization                                 |  |                         | 6,343  |      |   | 6,476  | 
|                                                              |  |                         |        |      |   |        | 
|                                                              |  |                         |        |      |   |        | 
|Total operating expenses                                      |  | $                       | 26,017 |      | $ | 22,308 | 
|                                                              |  |                         |        |      |   |        | 

Property
operation and maintenance

The
increase in property operation and maintenance expenses for the year ended
December 31, 2007, as compared to the year ended December 31, 2006, is
primarily the result of increased repair and maintenance costs for our
properties. The majority of these costs relate to work that had been deferred
prior to our managing our own properties. While these costs decreased our
earnings for the year ended December 31, 2007, we believe that they will
ultimately result in higher tenant satisfaction, lower tenant attrition and
higher occupancy levels.

Property
management and asset management fees paid to an affiliate

On
September 30, 2006, our advisory agreement with our External Manager expired.
On November 14, 2006, all property management functions were transferred to us
from our external manager. As such, no external management fees were charged
after November 13, 2006.

General
and Administrative Expense

Prior
to October 2, 2006, we were externally managed, which makes a comparison of
costs difficult given the different nature of the expenses incurred by an
externally-managed REIT versus an internally-managed one. As an
externally-managed REIT, we were charged fees based on percentages of gross
revenues, asset values, capital raised, and expenses submitted for
reimbursement. Generally accepted accounting principles allowed for many of
theses fees to be capitalized as an asset or accounted for as a reduction in
equity.

29

---



Subsequent
to October 2, 2006, we operated as an internally-managed REIT and many of the
costs that were previously capitalized or recorded as a reduction in equity are
now charged to general and administrative expense and reflected in the
Consolidated Statement of Operations.

During
the years ended December 31, 2007 and 2006, we executed new and renewal leases
with a total lease value of $42.0 million and $20.0 million, respectively.
Prior to October 2, 2006 we paid our former management company 6.0% of the
total value of new leases and 4.0% of the total value of renewal leases. If we
had executed the same volume of leases in 2006, we estimate that we would have
paid an additional $1.1 million in leasing commission cost to our External
Manager in 2006. Additionally, significant legal expense has been incurred in
2007 related to the ongoing litigation with our former External Manager. For a
detailed discussion of the litigation, please refer to Item 3, Legal Proceedings.

The
chart below is a comparison of the total costs incurred for general and
administrative services in the years ended December 31, 2007 and 2006. In order
to be a meaningful comparison, the chart contains a pro forma adjustment to
2006 to show the increased lease commission cost assuming the same volume of
leasing activity as 2007. Excluding legal costs related to the litigation with
our former External Manager and adjusting for the incremental leasing commission
that would have been paid in 2006, costs for general and administrative
services in 2007 were slightly lower than in 2006.

|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|-------------------------------- |  | ----------------------------- | ----- | ----------------------------------- | - | ------------- |  | -------------------------- | ----------------------- | ---- | - | ----- |  | -------- | ----- |  | - | ----- |  | - | ----- | 
|                                 |  | Capitalized in
 Balance Sheet |       | Charged to
 Statement of Operations |   | Pro Forma (1) |  | Total, including Pro Forma |                        
|                                 |  |                               |       |                                     |   |               |  |                            |                        
|                                 |  | Year Ended December 31,       |       | Year Ended December 31,             |   |               |  |                            | Year Ended December 31, |     
|                                 |  | 2007                          |       | 2006                                |   | 2007          |  | 2006                       |                         | 2006 |   | 2007  |  | 2006 (1) |      
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |      
|                                 |  | (Unaudited)                   |       | (Unaudited)                         |   |               |  |                            | (Unaudited)             |     
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Personnel Cost                   |  | $                             |      |                                     | $ |              |  | $                          | 2,799                   |      | $ |      |  | $        |      |  | $ | 2,799 |  | $ |      | 
|Office Expense                   |  |                               |      |                                     |   |              |  |                            | 860                     |      |   |      |  |          |      |  |   | 860   |  |   |      | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Professional Fees (Acctg, etc.)  |  |                               |      |                                     |   |              |  |                            | 855                     |      |   | 1,396 |  |          |      |  |   | 855   |  |   | 1,396 | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Offering Costs:                  |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Selling Commissions              |  |                               |      |                                     |   | 378           |  |                            |                        |      |   |      |  |          |      |  |   |      |  |   | 378   | 
|Discounts                        |  |                               |      |                                     |   | 15            |  |                            |                        |      |   |      |  |          |      |  |   |      |  |   | 15    | 
|Dealer Manager Fee               |  |                               |      |                                     |   | 139           |  |                            |                        |      |   |      |  |          |      |  |   |      |  |   | 139   | 
|Expense Reimbursements           |  |                               |      |                                     |   | 139           |  |                            |                        |      |   |      |  |          |      |  |   |      |  |   | 139   | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Acquisition Fees                 |  |                               |      |                                     |   | 111           |  |                            |                        |      |   |      |  |          |      |  |   |      |  |   | 111   | 
|Leasing Fees                     |  |                               | 1,197 |                                     |   | 983           |  |                            |                        |      |   |      |  |          | 1,116 |  |   | 1,197 |  |   | 2,099 | 
|Property Management Fees         |  |                               |      |                                     |   |              |  |                            |                        |      |   | 1,482 |  |          |      |  |   |      |  |   | 1,482 | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Total, excluding litigation cost |  | $                             | 1,197 |                                     | $ | 1,765         |  | $                          | 4,514                   |      | $ | 2,878 |  | $        | 1,116 |  | $ | 5,711 |  | $ | 5,759 | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Litigation Cost (2)              |  |                               |      |                                     |   |              |  |                            | 2,207                   |      |   | 903   |  |          |       |  |   | 2,207 |  |   | 903   | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 
|Total, including litigation cost |  | $                             | 1,197 |                                     | $ | 1,765         |  | $                          | 6,721                   |      | $ | 3,781 |  | $        | 1,116 |  | $ | 7,918 |  | $ | 6,662 | 
|                                 |  |                               |       |                                     |   |               |  |                            |                         |      |   |       |  |          |       |  |   |       |  |   |       | 

(1) In order to be comparable, a pro forma
adjustment is made to the 2006 lease fees to relect the additional fees that
would have been paid to the former management company if they had executed the
same volume of leases, as defined by total lease value, in 2006 as we executed
in 2007 with our internal leasing staff.

(2) Litigation cost represent fees paid as a
result of our litigation with Allen R. Hartman and Hartman Managment L.P. For
further discussion regarding our ongoing litigation please refer to Item 3. Legal Proceedings.

30

---



Operating
Income

Operating
income was $5.0 million for the year ended December 31, 2007, as compared to
$7.5 million for the year ended December 31, 2006, a decrease of $2.5 million
or 33%. The primary reasons for the decrease are detailed above in Revenues and Operating Expenses.

Other
Income (Expense)

Other
expense increased by $0.4 million primarily as a result of the Texas Margin Tax
which was enacted in 2007.

Net
Income (Loss)

Income
before minority interest was a loss of ($0.1) million for the year ended
December 31, 2007, as compared to $2.8 million for the year ended December 31,
2006, a decrease of $2.9 million. Net income for the year ended December 31,
2007, was a loss of ($0.08) million, as compared to $1.8 million for the year
ended December 31, 2006, a decrease of $1.9 million. These decreases are a
result of the items discussed above.

Result of Operations

Year Ended December 31, 2006 Compared to Year
Ended December 31, 2005

The
following table provides a general comparison of our results of operations for
the years ended December 31, 2006 and December 31, 2005 (dollars in thousands):

|                                                  |  |                                         |           |                   |   |           |  
|------------------------------------------------- |  | --------------------------------------- | --------- | ----------------- | - | --------- | -
|                                                  |  | December 31, 2006                       |           | December 31, 2005 |  
|                                                  |  |                                         |           |                   |  
|Number of properties owned
  and operated         |  |                                         | 36        |                   |   | 37        |  
|Aggregate gross leasable
  area (sq. ft.)         |  |                                         | 3,093,063 |                   |   | 3,121,037 |  
|Ending Occupancy rate                             |  |                                         | 83        | %                 |   | 82        | %
|                                                  |  |                                         |           |                   |   |           |  
|                                                  |  | (in
  thousands, except per share data) |          
|Total revenues                                    |  | $                                       | 29,840    |                   | $ | 24,919    |  
|Total operating expenses                          |  |                                         | 22,308    |                   |   | 17,111    |  
|Operating income                                  |  |                                         | 7,532     |                   |   | 7,808     |  
|Other income (expense)                            |  |                                         | (4,683    | )                 |   | (3,469    | )
|Income before minority
  interests                |  |                                         | 2,849     |                   |   | 4,339     |  
|Minority interests in the
  Operating Partnership |  |                                         | (1,068    | )                 |   | (1,891    | )
|Net income                                        |  | $                                       | 1,781     |                   | $ | 2,448     |  
|                                                  |  |                                         |           |                   |   |           |  
|Funds from operations (1)                         |  | $                                       | 8,993     |                   | $ | 9,851     |  
|Dividends paid on common
  shares and OP Units    |  |                                         | 9,831     |                   |   | 9,389     |  
|Per
  common share and OP unit                    |  | $                                       | 0.63      |                   | $ | 0.71      |  
|Dividends
  paid as a % of FFO                    |  |                                         | 109       | %                 |   | 95        | %

| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | (1) In accordance with Regulation G,
  reconciliation of non-GAAP measures, see Funds From  Operations following.

Revenues

Substantially
all of our revenue is derived from rents received for leases at our properties. We had rental income and tenant
reimbursements of approximately $29.8 million for the year ended December 31,
2006, as compared to $24.9 million for the year ended December 31, 2005, an
increase of $4.9 million or 20%. Of this increase, $4.4 million or 90% was from
receiving a full year of revenue on the three properties acquired during 2005.
The remaining increase resulted from an increase in rental rates charged. Our
average occupancy rate in

31

---



2006 was 83%,
as compared to 84% in 2005, and our average annualized revenue was $9.56 per
square foot in 2006, as compared to our average annualized revenue of $8.91 per
square foot in 2005.

Operating
Expenses

Our
total operating expenses were $22.3 million for the year ended December 31,
2006, as compared to $17.1 million for the year ended December 31, 2005, an increase
of $5.2 million, or 30%. Of this increase, $2.9 million or 56% was from having
a full year of operating expenses for the three properties acquired during
2005. The primary components of operating expense are detailed in the table
below (in thousands):

|                                                                |  |                         |        |      |   |        | 
|--------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | 
|                                                                |  | Year Ended December 31, |       
|                                                                |  |                         |       
|                                                                |  | 2006                    |        | 2005 |  
|                                                                |  |                         |        |      |  
|Properties acquired in 2005                                     |  | $                       | 4,828  |      | $ | 1,461  | 
|                                                                |  |                         |        |      |   |        | 
|Other Properties                                                |  |                         |        |      |   |        | 
|Property operations and maintanence                             |  |                         | 5,229  |      |   | 4,584  | 
|Real estate taxes                                               |  |                         | 2,993  |      |   | 2,774  | 
|Property
  management and asset management fees to an affiliate |  |                         | 1,266  |      |   | 1,354  | 
|General and administrative                                      |  |                         | 2,299  |      |   | 1,128  | 
|Depreciation and amortizaton                                    |  |                         | 5,693  |      |   | 5,810  | 
|                                                                |  |                         |        |      |   |        | 
|                                                                |  | $                       | 17,480 |      | $ | 15,650 | 
|                                                                |  |                         |        |      |   |        | 
|                                                                |  |                         |        |      |   |        | 
|Total operating expenses                                        |  | $                       | 22,308 |      | $ | 17,111 | 
|                                                                |  |                         |        |      |   |        | 

Properties
acquired in 2005

During
2005, we acquired from unrelated parties three multi-tenant office buildings
comprising approximately 0.4 million square feet of gross leasable area. The
properties were acquired for cash for approximately $30.8 million. As these
properties were acquired during the year, only a partial year of operating
expense is included in 2005. The increase is primarily a result of a full year
of operating expense in 2006 compared to a partial year in 2005.

Real
Estate Taxes

The
increase in taxes of $0.2 million is primarily a result of an approximate 8%
increase in overall property values by local appraisal districts.

Property
management and asset management fees paid to an affiliate

On
September 30, 2006, our advisory agreement with the External Manager expired.
On November 14, 2006, all property management functions were transferred to us
from the External Manager. As such, no fees were paid to the External Manager
after November 13, 2006. The property management and asset management fees paid
to by the External Manager through November 13, 2006 and September 30, 2006,
respectively, were $0.3 million or 24% higher than the same period in 2005.

General
and Administrative

The
increase in our general and administrative expenses of $1.2 million is
primarily due to legal fees incurred in the fourth quarter of 2006 resulting
from the termination of the management and advisory agreements, the termination
of Mr. Hartman as our President, Secretary and Chief Executive Officer and the
litigation with Mr. Hartman and Hartman Management.

32

---



Operating
Income

Operating
income was $7.5 million for the year ended December 31, 2006, as compared to
$7.8 million for the year ended December 31, 2005, a decrease of $0.3 million
or 4%. The primary reasons for the decrease are detailed above in Revenues and Operating Expenses.

Other
Income (Expense)

Other
expense was $4.7 million for the year ended December 31, 2006, as compared to
$3.5 million for the year ended December 31, 2005, an increase of $1.2 million
or 34%. The primary reason for the increase was a $1.5 million increase in
interest expense as a result of higher variable interest rates in 2006, as
compared to 2005, offset by a gain of $0.2 million recorded in 2006 from the
sale of Northwest Place II.

Net
Income

Income
before minority interest was $2.8 million for the year ended December 31, 2006,
as compared to $4.3 million for the year ended December 31, 2005, a decrease of
$1.5 million or 35%. Net income for the year ended December 31, 2006, was $1.8
million, as compared to $2.4 million for the year ended December 31, 2005, a
decrease of $0.6 million, or 25%. These decreases are a result of the items
discussed above.

33

---



Funds From Operations

The
National Association of Real Estate Investment Trusts defines funds from
operations (FFO) as net income (loss) available to common shareholders
computed in accordance with generally accepted accounting principles (GAAP),
excluding gains or losses from sales of operating real estate assets and
extraordinary items, plus depreciation and amortization of operating
properties, including our share of unconsolidated real estate joint ventures
and partnerships. We calculate FFO in a manner consistent with the NAREIT
definition.

Management
uses FFO as a supplemental measure to conduct and evaluate our business because
there are certain limitations associated with using GAAP net income by itself
as the primary measure of our operating performance. Historical cost accounting
for real estate assets in accordance with GAAP implicitly assumes that the
value of real estate assets diminishes predictably over time. Since real estate
values instead have historically risen or fallen with market conditions,
management believes that the presentation of operating results for real estate
companies that uses historical cost accounting is insufficient by itself. There
can be no assurance that FFO presented by us is comparable to similarly titled
measures of other REITs.

FFO
should not be considered as an alternative to net income or other measurements
under GAAP as an indicator of our operating performance or to cash flows from
operating, investing or financing activities as a measure of liquidity. FFO
does not reflect working capital changes, cash expenditures for capital
improvements or principal payments on indebtedness.

Below
is the calculation of FFO and the reconciliation to net income, which we
believe is the most comparable GAAP financial measure (in thousands):

Reconciliation of Non-GAAP Financial Measures

|                                                            |  |      |       |      |   |       |   |   |       | 
|----------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | 
|                                                            |  | 2007 |       | 2006 |   | 2005  |  
|                                                            |  |      |       |      |   |       |  
|                                                           
|Net income (loss)                                           |  | $    | (77   | )    | $ | 1,781 |   | $ | 2,448 | 
|Minority interest in income (loss) of operating
partnership |  |      | (46   | )    |   | 1,068 |   |   | 1,891 | 
|Depreciation and amortization of real estate
assets         |  |      | 6,108 |      |   | 6,341 |   |   | 5,512 | 
|(Gain) loss on sale or disposal of assets                   |  |      | 16    |      |   | (197  | ) |   |      | 
|                                                            |  |      |       |      |   |       |   |   |       | 
|FFO                                                         |  | $    | 6,001 |      | $ | 8,993 |   | $ | 9,851 | 
|                                                            |  |      |       |      |   |       |   |   |       | 

Taxes

We
elected to be taxed as a REIT under the Internal Revenue Code beginning with
our taxable year ended December 31, 1999. As a REIT, we generally are not
subject to federal income tax on income that we distribute to our shareholders.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax on our taxable income at regular corporate rates. We believe
that we are organized and operate in such a manner as to qualify to be taxed as
a REIT, and we intend to operate so as to remain qualified as a REIT for
federal income tax purposes.

34

---



Inflation

We
anticipate that the majority of our leases will continue to be triple-net
leases or otherwise provide that tenants pay for increases in operating
expenses and will contain provisions that we believe will mitigate the effect
of inflation. In addition, many of our leases are for terms of less than five
years, which allows us to adjust rental rates to reflect inflation and other
changing market conditions when the leases expire. Consequently, increases due
to inflation, as well as ad valorem tax rate increases, generally do not have a
significant adverse effect upon our operating results.

Off-Balance Sheet Arrangements

We
have no significant off-balance sheet arrangements as of December 31, 2007.

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

Market
risk is the risk of loss arising from adverse changes in market rates and
prices. The principal market risk to which we are exposed is the risk related
to interest rate fluctuations. Based upon the nature of our operations, we are
not subject to foreign exchange or commodity risk. We will be exposed to
changes in interest rates as a result of our credit facilities that have
floating interest rates. As of December 31, 2007, we had $3.5 million of indebtedness
outstanding under facilities with floating interest rates. The impact of a 1%
increase in interest rates on our debt would result in an increase in interest
expense and a decrease in income before minority interests of approximately
$0.04 million annually.

Item 8. Financial Statements and
Supplementary Data.

The
information required by this Item 8 is incorporated by reference to our
Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

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

None.

Item 9T. Controls and Procedures.

Evaluation of Disclosure Controls and
Procedures

In
connection with the preparation of this Form 10-K, as of December 31, 2007, an
evaluation was performed under the supervision and with the participation of
the Companys management, including the CEO and CFO, of the effectiveness of
the design and operation of our disclosure controls and procedures as defined
in Rule 13a-15(e) under the Exchange Act. In performing this evaluation,
management reviewed the selection, application and monitoring of our historical
accounting policies. Based on that evaluation, the CEO and CFO concluded that
these disclosure controls and procedures were effective and designed to ensure
that the information required to be disclosed in our reports filed with the SEC
is recorded, processed, summarized and reported on a timely basis.

During
the audit of the year ended December 31, 2006, our independent registered
public accounting firm brought to managements attention two material
weaknesses in internal controls: (1) Inadequate controls and procedures in
place to effectively monitor and record non-routine transactions and (2)
Inadequate controls and procedures in place to effectively manage certain
spreadsheets that support the financial reporting process. A material weakness
in internal control is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements would not be prevented or detected on
a timely basis by the Company. The Company implemented controls and procedures
designed to remediate these material weaknesses. These controls and procedures
included the automation of many of the processes that previously were performed
in spreadsheets and further review of non-routine transactions. Management has
ensured that these new controls and procedures are operating effectively and
fully address the

35

---



risks giving
rise to the material weakness. Accordingly, management believes that these
material weaknesses have been fully remediated as of December 31, 2007.

Managements Annual Report on Internal
Control Over Financial Reporting and Attestation Report of the Independent
Registered Public Accounting Firm

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal ControlIntegrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.

The
effectiveness of the Companys internal control over financial reporting as of
December 31, 2007 is not subject to attestation pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
Managements report and therefore has not been audited by our independent
registered public accounting firm.

Changes in Internal Control Over Financial
Reporting

Except
as discussed above, there have been no other changes during the Companys
quarter ended December 31, 2007, in the Companys internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Companys internal controls over financing reporting.

Item 9B. Other Information.

None.

36

---



PART III

Item 10. Trust Managers, Executive Officers and Corporate Governance

The
information required by Item 10 of Form 10-K is incorporated herein by
reference to such information as set forth in the proxy statement for our 2008
annual meeting.

Item 11. Executive Compensation.

The
information required by Item 11 of Form 10-K is incorporated herein by
reference to such information as set forth in the proxy statement for our 2008
annual meeting.

Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters.

The
information required by Item 12 of Form 10-K is incorporated herein by
reference to such information as set forth in the proxy statement for our 2008
annual meeting.

Item 13. Certain Relationships and Related
Transactions, and Director Independence

The
information required by Item 13 of Form 10-K is incorporated herein by
reference to such information as set forth in the proxy statement for our 2008
annual meeting.

Item 14. Principal Accounting Fees and
Services.

The
information required by Item 14 of Form 10-K is incorporated herein by
reference to such information as set forth in the proxy statement for our 2008
annual meeting.

37

---



PART IV

Item 15. Exhibits and Financial Statement Schedules.

|   |                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------
|1. | Financial Statements. The list of our
 financial statements filed as part of this Annual Report on Form 10-K is set
 forth on page F-1 herein.
|   |                                                                                                                                               
|2. | Financial Statement Schedules.                                                                                                                

| |    |                                                         
| | -- | --------------------------------------------------------
| | a. | Schedule II
  Valuation and Qualifying Amounts         
| |    |                                                         
| | b. | Schedule III
  Real Estate and Accumulated Depreciation

|   |                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | All other
 financial statement schedules have been omitted because the required
 information of such schedules is not present, is not present in amounts
 sufficient to require a schedule or is included in the consolidated financial
 statements.
|   |                                                                                                                                                                                                                                                     
|3. | Exhibits. The list of exhibits filed as part
 of this Annual Report on Form 10-K in response to Item 601 of Regulation S-K
 is submitted on the Exhibit Index attached hereto.                                                                      

38

---



SIGNATURES

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

|                       |  |                                       
|---------------------- |  | --------------------------------------
|                       |  | WHITESTONE REIT                       
|                       |  |                                       
|Dated: March
 31, 2008 |  | /s/ James C.
 Mastandrea              
|                       |  |                                       
|                       |  | James C.
 Mastandrea, Chairman and CEO

POWER OF ATTORNEY

KNOW
ALL PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints James C. Mastandrea and David K. Holeman, and each of
them, acting individually, as his attorney-in-fact, each with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.

|                |  |                                                        
|--------------- |  | -------------------------------------------------------
|March 31,
 2008 |  | /s/ James C.
 Mastandrea                               
|                |  |                                                        
|                |  | James C.
 Mastandrea, Chairman and CEO                 
|                |  | (Principal
 Executive Officer)                         
|                |  |                                                        
|March 31,
 2008 |  | /s/ David K.
 Holeman                                  
|                |  |                                                        
|                |  | David K.
 Holeman, Chief Financial Officer             
|                |  | (Principal
 Financial and Principal Accounting Officer)
|                |  |                                                        
|March 31,
 2008 |  | /s/ Donald F.
 Keating                                 
|                |  |                                                        
|                |  | Donald F. Keating,
 Trustee                            
|                |  |                                                        
|                |  |                                                        
|                |  | Jack L. Mahaffey,
 Trustee                             
|                |  |                                                        
|March 31,
 2008 |  | /s/ Chris A.
 Minton                                   
|                |  |                                                        
|                |  | Chris A.
 Minton, Trustee                              
|                |  |                                                        
|
|                |  |                                                        

39

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                               |  |      | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | 
|                                                                                                                               |  | Page
|                                                                                                                               |  |     
|Report of Independent Registered Public
  Accounting Firm                                                                      |  | F-2  | 
|                                                                                                                               |  |      | 
|Consolidated Balance Sheets as of December
  31, 2007 and 2006                                                                 |  | F-3  | 
|                                                                                                                               |  |      | 
|Consolidated Statements of Operations and
  Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2006 and
  2005 |  | F-4  | 
|                                                                                                                               |  |      | 
|Consolidated Statements of Changes in
  Shareholders Equity for the Years Ended December 31, 2007, 2006 and 2005              |  | F-5  | 
|                                                                                                                               |  |      | 
|Consolidated Statements of Cash Flows for
  the Years Ended December 31, 2007, 2006 and 2005                                   |  | F-6  | 
|                                                                                                                               |  |      | 
|Notes to Consolidated Financial
Statements                                                                                     |  | F-7  | 
|                                                                                                                               |  |      | 
|Schedule II  Valuation and Qualifying
  Accounts                                                                              |  | F-25 | 
|                                                                                                                               |  |      | 
|Schedule III  Real Estate and Accumulated
  Depreciation                                                                      |  | F-26 | 

All
other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.

F-1

---



Report of
Independent Registered Public Accounting Firm

To the Board
of Trustees and Shareholders of
Whitestone REIT

We
have audited the accompanying consolidated balance sheets of Whitestone REIT
and subsidiary (the Company) as of December 31, 2007 and 2006, and the
related consolidated statements of operations and comprehensive income (loss),
shareholders equity and cash flows, for each of the three years in the period
ended December 31, 2007. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedules as
listed in the accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules 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 audits 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 audits 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 purposes 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, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Whitestone REIT and
subsidiary as of December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007 in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.

/s/ PANNELL
KERR FORSTER OF TEXAS, P.C.

Houston, Texas
March 31, 2008

F-2

---



Whitestone REIT and Subsidiary


CONSOLIDATED BALANCE SHEETS
( in thousands, except share
data)


|                                                                                                                                                                         |  |              |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | -
|                                                                                                                                                                         |  | December 31, |        
|                                                                                                                                                                         |  |              |        
|                                                                                                                                                                         |  | 2007         |         | 2006 |  
|                                                                                                                                                                         |  |              |         |      |  
|                                                                                                                                                                        
|ASSETS                                                                                                                                                                   |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Property                                                                                                                                                                 |  | $            | 181,809 |      | $ | 173,747 |  
|Accumulated depreciation                                                                                                                                                 |  |              | (27,417 | )    |   | (24,259 | )
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Property, net                                                                                                                                                            |  |              | 154,392 |      |   | 149,488 |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Cash and cash equivalents                                                                                                                                                |  |              | 10,811  |      |   | 8,298   |  
|Escrows and acquisition deposits                                                                                                                                         |  |              | 486     |      |   | 382     |  
|Note receivable                                                                                                                                                          |  |              |        |      |   | 604     |  
|Accrued rent and accounts receivable, net of allowance for doubtful
  accounts                                                                                           |  |              | 5,611   |      |   | 4,762   |  
|Unamortized lease commissions and loan costs                                                                                                                             |  |              | 2,958   |      |   | 2,890   |  
|Prepaid expenses and other assets                                                                                                                                        |  |              | 886     |      |   | 663     |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|TOTAL ASSETS                                                                                                                                                             |  | $            | 175,144 |      | $ | 167,087 |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Notes payable                                                                                                                                                            |  | $            | 83,461  |      | $ | 66,363  |  
|Accounts payable and accrued expenses                                                                                                                                    |  |              | 6,734   |      |   | 6,246   |  
|Tenants security deposits                                                                                                                                               |  |              | 1,664   |      |   | 1,455   |  
|Dividends and distributions payable                                                                                                                                      |  |              | 2,403   |      |   | 2,400   |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Total liabilities                                                                                                                                                        |  |              | 94,262  |      |   | 76,464  |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Minority interests of unit holders in Operating Partnership; 5,808,337
  units at December 31, 2007 and 2006                                                             |  |              | 28,039  |      |   | 31,709  |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Commitments and Contingencies                                                                                                                                            |  |              |        |      |   |        |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Shareholders equity                                                                                                                                                     |  |              |         |      |   |         |  
|Preferred shares, $0.001 par value per share;
50,000,000 shares
  authorized; none issued and outstanding at December 31, 2007 and 2006                                  |  |              |        |      |   |        |  
|Common shares, $0.001 par value per share;
400,000,000 shares
  authorized; 10,001,269 and 9,974,362 issued and oustanding at December 31,
  2007 and 2006, respectively |  |              | 10      |      |   | 10      |  
|Additional paid-in capital                                                                                                                                               |  |              | 72,273  |      |   | 72,012  |  
|Accumulated deficit                                                                                                                                                      |  |              | (19,210 | )    |   | (13,108 | )
|Accumulated other comprehensive loss                                                                                                                                     |  |              | (230    | )    |   |        |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|Total shareholders equity                                                                                                                                               |  |              | 52,843  |      |   | 58,914  |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                         |  |              |         |      |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                               |  | $            | 175,144 |      | $ | 167,087 |  
|                                                                                                                                                                         |  |              |         |      |   |         |  

See notes to consolidated financial statements.

F-3

---



Whitestone REIT and SubsidiaryCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)

|                                                                |  |                         |        |      |   |        |   |   |        |  
|--------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                |  | Year Ended December 31, |       
|                                                                |  |                         |       
|                                                                |  | 2007                    |        | 2006 |   | 2005   |  
|                                                                |  |                         |        |      |   |        |  
|Revenues                                                        |  |                         |        |      |   |        |   |   |        |  
|Rental income                                                   |  | $                       | 24,950 |      | $ | 24,644 |   | $ | 20,073 |  
|Tenants reimbursements                                         |  |                         | 5,858  |      |   | 5,002  |   |   | 4,635  |  
|Other income                                                    |  |                         | 174    |      |   | 194    |   |   | 211    |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Total revenues                                                  |  |                         | 30,982 |      |   | 29,840 |   |   | 24,919 |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Operating expenses                                              |  |                         |        |      |   |        |   |   |        |  
|Property operation and maintenance                              |  |                         | 9,165  |      |   | 8,101  |   |   | 5,939  |  
|Real estate taxes                                               |  |                         | 3,788  |      |   | 3,950  |   |   | 3,100  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Property management and asset
  management fees to an affiliate |  |                         |       |      |   | 1,482  |   |   | 1,406  |  
|General and administrative                                      |  |                         | 6,721  |      |   | 2,299  |   |   | 567    |  
|Depreciation and amortization                                   |  |                         | 6,343  |      |   | 6,476  |   |   | 6,099  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Total operating expenses                                        |  |                         | 26,017 |      |   | 22,308 |   |   | 17,111 |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Operating income                                                |  |                         | 4,965  |      |   | 7,532  |   |   | 7,808  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Other income (expense)                                          |  |                         |        |      |   |        |   |   |        |  
|Interest income                                                 |  |                         | 577    |      |   | 386    |   |   | 301    |  
|Interest expense                                                |  |                         | (5,402 | )    |   | (5,296 | ) |   | (3,770 | )
|Provision for income taxes                                      |  |                         | (217   | )    |   |       |   |   |       |  
|Gain (loss) on sale or disposal of assets                       |  |                         | (16    | )    |   | 197    |   |   |       |  
|Change in fair value of derivative
  instrument                 |  |                         | (30    | )    |   | 30     |   |   |       |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Income (loss) before minority interests                         |  |                         | (123   | )    |   | 2,849  |   |   | 4,339  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Minority interests in Operating Partnership                     |  |                         | 46     |      |   | (1,068 | ) |   | (1,891 | )
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                               |  | $                       | (77    | )    | $ | 1,781  |   | $ | 2,448  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Net income (loss) per common share - basic
  and diluted        |  | $                       | (0.008 | )    | $ | 0.185  |   | $ | 0.310  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Comprehensive income (loss):                                    |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                               |  | $                       | (77    | )    | $ | 1,781  |   | $ | 2,448  |  
|Other comprehensive loss:                                       |  |                         |        |      |   |        |   |   |        |  
|Unrealized loss on derivatives                                  |  |                         | (230   | )    |   |       |   |   |       |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Other comprehensive loss                                        |  |                         | (230   | )    |   |       |   |   |       |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Comprehensive income (loss)                                     |  | $                       | (307   | )    | $ | 1,781  |   | $ | 2,448  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|                                                                |  |                         |        |      |   |        |   |   |        |  
|Weighted-average shares outstanding                             |  |                         | 9,999  |      |   | 9,652  |   |   | 7,888  |  
|                                                                |  |                         |        |      |   |        |   |   |        |  

See notes to consolidated financial statements.

F-4

---



Whitestone REIT and SubsidiaryCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY(in thousands except per share data)

|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|------------------------------------------------------------------------ |  | ------------- | ------ | ------------------------------ | --------------------- | -- |  |  | ----- | ------ |  |  | - | ------------------------------------------ | - |  | - | ---- | -
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   | Accumulated
  Other
  Comprehensive
  Loss |   |  |   |     
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |  
|                                                                         |  | Common Shares |        | Additional
  Paid-in
  Capital |                       |    |  |  |       |        |  | 
|                                                                         |  |               |        |                                | Accumulated
  Deficit |    |  |  |       |       
|                                                                         |  | Shares        |        | Amount                         |                       |    |  |  | Total |       
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Balance, December 31, 2004                                               |  |               | 7,010  |                                | $                     | 7  |  |  | $     | 45,527 |  |  | $ | (5,705                                     | ) |  | $ |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Issuance of common stock for
  cash, net of offering costs               |  |               | 1,866  |                                |                       | 2  |  |  |       | 16,672 |  |  |   |                                           |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Issuance of shares under dividend
  reinvestment plan at $9.50 per share |  |               | 38     |                                |                       |   |  |  |       | 361    |  |  |   |                                           |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Net income                                                               |  |               |       |                                |                       |   |  |  |       |       |  |  |   | 2,448                                      |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Dividends                                                                |  |               |       |                                |                       |   |  |  |       |       |  |  |   | (5,584                                     | ) |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Balance, December 31, 2005                                               |  |               | 8,914  |                                | $                     | 9  |  |  | $     | 62,560 |  |  | $ | (8,841                                     | ) |  | $ |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Issuance of common stock for
  cash, net of offering costs               |  |               | 960    |                                |                       | 1  |  |  |       | 8,501  |  |  |   |                                           |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Issuance of shares under dividend
  reinvestment plan at $9.50 per share |  |               | 100    |                                |                       |   |  |  |       | 951    |  |  |   |                                           |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Net income                                                               |  |               |       |                                |                       |   |  |  |       |       |  |  |   | 1,781                                      |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Dividends                                                                |  |               |       |                                |                       |   |  |  |       |       |  |  |   | (6,048                                     | ) |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Balance, December 31, 2006                                               |  |               | 9,974  |                                | $                     | 10 |  |  | $     | 72,012 |  |  | $ | (13,108                                    | ) |  | $ |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Issuance of shares under dividend
  reinvestment plan at $9.50 per share |  |               | 27     |                                |                       |   |  |  |       | 261    |  |  |   |                                           |   |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Net loss                                                                 |  |               |       |                                |                       |   |  |  |       |       |  |  |   | (77                                        | ) |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Unrealized loss on change in fair
  value of cash flow hedges            |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   | (230 | )
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Dividends                                                                |  |               |       |                                |                       |   |  |  |       |       |  |  |   | (6,025                                     | ) |  |   |     |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  
|Balance, December 31, 2007                                               |  |               | 10,001 |                                | $                     | 10 |  |  | $     | 72,273 |  |  | $ | (19,210                                    | ) |  | $ | (230 | )
|                                                                         |  |               |        |                                |                       |    |  |  |       |        |  |  |   |                                            |   |  |   |      |  

See notes to consolidated financial
statements.

F-5

---



Whitestone REIT and SubsidiaryCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | Year Ended December 31, |        
|                                                                                   |  |                         |        
|                                                                                   |  | 2007                    |         | 2006 |   | 2005    |  
|                                                                                   |  |                         |         |      |   |         |  
|                                                                                   | 
|Cash flows from operating activities:                                              |  |                         |         |      |   |         |   |   |         |  
|Net income (loss)                                                                  |  | $                       | (77     | )    | $ | 1,781   |   | $ | 2,448   |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |                         |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                      |  |                         | 6,343   |      |   | 6,476   |   |   | 6,099   |  
|Minority interests in Operating Partnership                                        |  |                         | (46     | )    |   | 1,068   |   |   | 1,891   |  
|(Gain) loss on sale or disposal of assets                                          |  |                         | 16      |      |   | (197    | ) |   |        |  
|Bad debt expense                                                                   |  |                         | 623     |      |   | 388     |   |   | 130     |  
|Change in fair value of derivative
 instrument                                     |  |                         | 30      |      |   | (30     | ) |   |        |  
|Changes in operating assets and
 liabilities:                                      |  |                         |         |      |   |         |   |   |         |  
|Escrows and acquisition deposits                                                   |  |                         | (104    | )    |   | 4,956   |   |   | (329    | )
|Receivables                                                                        |  |                         | (1,472  | )    |   | (1,308  | ) |   | (369    | )
|Due from affiliates                                                                |  |                         |        |      |   | 2,933   |   |   | (205    | )
|Deferred costs                                                                     |  |                         | (1,215  | )    |   | (977    | ) |   | (1,588  | )
|Prepaid expenses and other assets                                                  |  |                         | 205     |      |   | 21      |   |   | (591    | )
|Accounts payable and accrued expenses                                              |  |                         | 31      |      |   | 1,335   |   |   | 709     |  
|Tenants security deposits                                                         |  |                         | 209     |      |   | 14      |   |   | 374     |  
|Prepaid rent                                                                       |  |                         | 88      |      |   | 275     |   |   | 215     |  
|                                                                                   |  |                         |         |      |   |         |   |   |        
|Net cash provided by operating activities                                          |  |                         | 4,631   |      |   | 16,735  |   |   | 8,784   |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|                                                                                  
|Cash flows from investing activities:                                              |  |                         |         |      |   |         |   |   |         |  
|Additions to real estate                                                           |  |                         | (10,234 | )    |   | (1,944  | ) |   | (31,792 | )
|Proceeds from sale of real estate                                                  |  |                         | 265     |      |   | 1,065   |   |   |        |  
|Proceeds from legal settlement                                                     |  |                         |         |      |   | 288     |   |   |        |  
|Distributions received from real estate
 partnership                               |  |                         |        |      |   |        |   |   | 10      |  
|Repayment of note receivable                                                       |  |                         | 604     |      |   | 25      |   |   | 26      |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|Net cash used in investing activities                                              |  |                         | (9,365  | )    |   | (566    | ) |   | (31,756 | )
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|                                                                                  
|Cash flows from financing activities:                                              |  |                         |         |      |   |         |   |   |         |  
|Dividends paid                                                                     |  |                         | (6,022  | )    |   | (6,078  | ) |   | (5,289  | )
|Distributions paid to OP unit holders                                              |  |                         | (3,485  | )    |   | (3,753  | ) |   | (4,100  | )
|Proceeds from issuance of common shares                                            |  |                         | 261     |      |   | 9,453   |   |   | 17,035  |  
|Increase (decrease) in stock offering
 proceeds escrowed                           |  |                         |        |      |   | (1,560  | ) |   | 88      |  
|Proceeds from notes payable                                                        |  |                         | 22,392  |      |   | 35,281  |   |   | 46,725  |  
|Repayments of notes payable                                                        |  |                         | (5,752  | )    |   | (41,943 | ) |   | (30,926 | )
|Payments of loan origination costs                                                 |  |                         | (147    | )    |   | (120    | ) |   | (344    | )
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by (used in) financing
 activities                               |  |                         | 7,247   |      |   | (8,720  | ) |   | 23,189  |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|Net increase in cash and cash equivalents                                          |  |                         | 2,513   |      |   | 7,449   |   |   | 217     |  
|Cash and cash equivalents at beginning of
 period                                  |  |                         | 8,298   |      |   | 849     |   |   | 632     |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of period                                         |  | $                       | 10,811  |      | $ | 8,298   |   | $ | 849     |  
|                                                                                   |  |                         |         |      |   |         |   |   |         |  
|Supplemental disclosure of cash flow
 information                                  |  |                         |         |      |   |         |   |   |         |  
|Disposal of fully depreciated real estate                                          |  | $                       | 1,844   |      | $ | 570     |   | $ |        |  
|Cash paid for interest                                                             |  | $                       | 5,344   |      | $ | 4,981   |   | $ | 3,788   |  
|Financed insurance premiums                                                        |  | $                       | 458     |      | $ | 491     |   | $ | 398     |  

See notes to consolidated financial statements.

F-6

---



WHITESTONE REIT AND SUBSIDIARYNotes to Consolidated Financial Statements
December 31, 2007

1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

Whitestone
REIT (Whitestone) was formed as a real estate investment trust, pursuant to
the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, Whitestone
changed its state of organization from Texas to Maryland pursuant to a merger
of Whitestone directly with and into a Maryland real estate investment trust
formed for the sole purpose of the reorganization and the conversion of each
outstanding common share of beneficial interest of the Texas entity into
1.42857 common shares of beneficial interest of the Maryland entity. Whitestone
serves as the general partner of Whitestone REIT Operating Partnership, L.P.
(the Operating Partnership or WROP or OP), formerly known as Hartman REIT
Operating Partnership L.P., which was formed on December 31, 1998 as a Delaware
limited partnership. Whitestone currently conducts substantially all of its
operations and activities through the Operating Partnership. As the general
partner of the Operating Partnership, Whitestone has the exclusive power to
manage and conduct the business of the Operating Partnership, subject to
certain customary exceptions. As of December 31, 2007, 2006 and 2005 we owned
and operated 37, 36, and 37 retail, warehouse and office properties in and
around Houston, Dallas, San Antonio and Phoenix.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

We
are the sole general partner of the Operating Partnership and possess full
legal control and authority over the operations of the Operating Partnership.
As of December 31, 2007, 2006 and 2005, we owned a majority of the partnership
interests in the Operating Partnership. Consequently, the accompanying consolidated
financial statements include the accounts of the Operating Partnership. All
significant inter-company balances have been eliminated. Minority interest in
the accompanying consolidated financial statements represents the share of
equity and earnings of the Operating Partnership allocable to holders of
partnership interests other than us. Net income or loss is allocated to
minority interests based on the weighted-average percentage ownership of the
Operating Partnership during the year. Issuance of additional common shares of
beneficial interest in Whitestone (common shares) and units of limited
partnership interest in the Operating Partnership that are convertible into
common shares on a one for one basis (OP Units) changes the ownership interests
of both the minority interests and Whitestone.

Basis of Accounting

Our
financial records are maintained on the accrual basis of accounting whereby
revenues are recognized when earned and expenses are recorded when incurred.

Use of Estimates

The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates that we use
include the estimated useful lives for depreciable and amortizable assets and
costs, the estimated allowance for doubtful accounts, and the estimated fair
value of interest rate swaps. Actual results could differ from those estimates.

Reclassifications

We
have reclassified certain prior fiscal year amounts in the accompanying
consolidated financial statements in order to be consistent with the current
fiscal year presentation. These reclassifications had no effect on net income
or shareholders equity.

F-7

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

Revenue
Recognition

All
leases on our properties are classified as operating leases, and the related
rental income is recognized on a straight-line basis over the terms of the
related leases. Differences between rental income earned and amounts due per
the respective lease agreements are capitalized or charged, as applicable, to
accrued rent receivable. Percentage rents are recognized as rental income when
the thresholds upon which they are based have been met. Recoveries from tenants
for taxes, insurance, and other operating expenses are recognized as revenues
in the period the corresponding costs are incurred. We have established an
allowance for doubtful accounts against the portion of tenant accounts
receivable which is estimated to be uncollectible.

Cash
and Cash Equivalents

We
consider all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. Cash and cash equivalents at
December 31, 2007 and 2006 consist of demand deposits at commercial banks and
money market funds.

Real
Estate

Development
Properties.Land,
buildings and improvements are recorded at cost. Expenditures related to the
development of real estate are carried at cost which includes capitalized
carrying charges, acquisition costs and development costs. Carrying charges,
primarily interest, real estate taxes and loan acquisition costs, and direct
and indirect development costs related to buildings under construction, are
capitalized as part of construction in progress. The capitalization of such
costs ceases when the property, or any completed portion, becomes available for
occupancy. The Company capitalizes acquisition costs once the acquisition of
the property becomes probable. Prior to that time, we expense these costs as
acquisition expense. During the year ended December 31, 2007, interest in the
amount of $0.1 million was capitalized on properties under development. No such
amounts were capitalized in 2006 or 2005.

Acquired
Properties and Acquired Lease Intangibles.We account for real estate acquisitions
pursuant to Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations.
Accordingly, we
allocate the purchase price of the acquired properties to land, building and
improvements, identifiable intangible assets and to the acquired liabilities
based on their respective fair values. Identifiable intangibles include amounts
allocated to acquired out-of-market leases, the value of in-place leases and
customer relationship value, if any. We determine 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 specific market and economic conditions that may affect the
property. Factors considered by management in our analysis of determining the
as-if-vacant property value include an estimate of carrying costs during the
expected lease-up periods considering market conditions, and costs to execute
similar leases. In estimating carrying costs, management includes real estate
taxes, insurance and estimates of lost rentals at market rates during the
expected lease-up periods, tenant demand and other economic conditions.
Management also estimates costs to execute similar leases including leasing commissions,
tenant improvements, legal and other related expenses. Intangibles related to
out-of-market leases and in-place lease value are recorded as acquired lease
intangibles and are amortized as an adjustment to rental revenue or
amortization expense, as appropriate, over the remaining terms of the
underlying leases. Premiums or discounts on acquired out-of-market debt are
amortized to interest expense over the remaining term of such debt.

Depreciation.Depreciation is
computed using the straight-line method over the estimated useful lives of 5 to
39 years for the buildings and improvements. Tenant improvements are
depreciated using the straight-line method over the life of the improvement or
remaining term of the lease, whichever is shorter.

Impairment.We review our
properties for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through operations. We determine whether
an impairment in value has occurred by comparing the estimated future cash
flows (undiscounted and without interest charges), including the estimated
residual value of the property, with the carrying cost of the property. If
impairment is indicated, a loss will be recorded for the amount by which the
carrying value of the

F-8

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

property exceeds its fair
value. Management has determined that there has been no impairment in the
carrying value of our real estate assets as of December 31, 2007.

Accrued
Rent and Accounts Receivable

Included
in accrued rent and accounts receivable are base rents, tenant reimbursements
and receivables attributable to recording rents on a straight-line basis. An
allowance for the uncollectible portion of accrued rents and accounts
receivable is determined based upon customer credit-worthiness (including
expected recovery of our claim with respect to any tenants in bankruptcy),
historical bad debt levels, and current economic trends. As of December 31, 2007 and 2006, we had
an allowance for uncollectible accounts of $1.1 million and $0.6 million
respectively. During 2007, 2006 and 2005, we recorded bad debt expense in the
amount of $0.6 million, $0.4 million and $0.1 million respectively, related to
tenant receivables that we specifically identified as potentially uncollectible
based on our assessment of the tenants credit-worthiness. Bad debt expenses
and any related recoveries are included in property operation and maintenance
expense in the consolidated statements of operations.

Unamortized
Lease Commissions and Loan Costs

Leasing
commissions are amortized using the straight-line method over the terms of the
related lease agreements. Loan costs are amortized on the straight-line method
over the terms of the loans, which approximates the interest method. Costs
allocated to in-place leases whose terms differ from market terms related to
acquired properties are amortized over the remaining life of the respective
leases.

Prepaids
and Other Assets

Prepaids
and other assets include escrows established pursuant to certain mortgage
financing arrangements for real estate taxes and insurance and acquisition
deposits which include earnest money deposits on future acquisitions.

Income
Taxes

Federal
- We are qualified as a real estate investment trust (REIT) under the
Internal Revenue Code of 1986 and are therefore not subject to Federal income
taxes provided we meet all conditions specified by the Internal Revenue Code
for retaining our REIT status. We believe we have continuously met these
conditions since reaching 100 shareholders in 1999 (see Note 11).

State
- In May 2006, the State of Texas adopted House Bill 3, which modified the
states franchise tax structure, replacing the previous tax based on capital or
earned surplus with one based on margin (often referred to as the Texas Margin
Tax) effective with franchise tax reports filed on or after January 1, 2008.
The Texas Margin Tax is computed by applying the applicable tax rate (1% for
us) to the profit margin, which, generally, will be determined for us as total
revenue less a 30% standard deduction. Although House Bill 3 states that the
Texas Margin Tax is not an income tax, SFAS No. 109, Accounting for Income Taxes,applies to
the Texas Margin Tax. We have recorded a margin tax provision of $0.2 million
for the Texas Margin Tax for the Year Ended December 31, 2007.

Derivative
Instruments

We
have initiated a program designed to manage exposure to interest rate
fluctuations by entering into financial derivative instruments. The primary
objective of this program is to comply with debt covenants on a credit
facility. We entered into an interest rate swap agreement with respect to
amounts borrowed under certain of our credit facilities, which effectively
exchanges existing obligations to pay interest based on floating rates for
obligations to pay interest based on fixed LIBOR rates.

We
have adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging
Activities, as subsequently amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities,and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, which

F-9

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

require for items appropriately
classified as cash flow hedges that changes in the market value of the
instrument and in the market value of the hedged item be recorded as other
comprehensive income or loss with the exception of the portion of the hedged
items that are considered ineffective. The derivative instruments are reported
at fair value as other assets or other liabilities as applicable. As of
December 31, 2007, we have a $70 million dollar interest rate swap which has
been designated as a cash flow hedge. The fair value of this interest rate swap
is approximately ($0.4) million and is included in accounts payable and accrued
expenses in the consolidated balance sheets. Additionally for a previous
interest rate swap which was not designated as a cash flow hedge, approximately
($0.03) million and $0.03 million are included in other expense and other
income on the consolidated statements of operations for the years ended
December 31, 2007 and 2006, respectively.

Fair
Value of Financial Instruments

Our
financial instruments consist primarily of cash, cash equivalents, accounts
receivable, derivative instruments, accounts and notes payable. The carrying
value of cash, cash equivalents, accounts receivable and accounts payable are
representative of their respective fair values due to the short-term nature of
these instruments. The fair value of our debt obligations is representative of
its carrying value based upon current rates offered for similar types of
borrowing arrangements. The fair value of interest rate swaps (used for hedging
purposes) is the estimated amount that the financial institution would receive
or pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current credit worthiness of the swap
counterparties.

Concentration
of Risk

Substantially
all of our revenues are obtained from office, warehouse and retail locations in
the Houston, Dallas and San Antonio, Texas metropolitan areas. We maintain cash
accounts in major U.S. financial institutions. The terms of these deposits are
on demand to minimize risk. The balances of these accounts occasionally exceed
the federally insured limits, although no losses have been incurred in
connection with these deposits.

Comprehensive
Loss

We
follow SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and
display of comprehensive income and its components. In October 2007 we entered
into an interest rate swap which was designated as a cash flow hedge. The fair
value of this cash flow hedge was ($0.4) million at December 31, 2007. This
amount has been recorded as a reduction to minority interest and to other
comprehensive loss.

New
Accounting Pronouncements

In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
the financial statements. The interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition of a tax
position taken, or expected to be taken, in a tax return. A tax position may
only be recognized in the financial statements if it is more likely than not
that the tax position will be sustained upon examination. There are also
several disclosure requirements. We adopted this interpretation during the
first quarter of 2007, and it had no effect on our consolidated financial
statements.

In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under U.S. generally accepted accounting
principles and requires enhanced disclosures about fair value measurements. It
does not require any new fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We do not expect this
pronouncement to have a material effect on our consolidated results of
operation or financial position.

In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115. SFAS No. 159 permits entities
to choose to measure

F-10

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS
No. 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We
currently do not plan to measure any eligible financial assets and liabilities
at fair value under the provisions of SFAS No. 159.

In
September 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
07-6, Accounting for the Sale of Real
Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement
Includes a Buy-Sell Clause,which clarifies that a buy-sell clause,
in and of itself, does not constitute a prohibited form of continuing
involvement that would preclude partial sale treatment under SFAS No. 66. EITF No.
07-6 applies prospectively to new arrangements entered into in fiscal years
beginning after December 15, 2007.

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations,which replaces SFAS No. 141,
Business Combinations,which, among
other things, establishes principles and requirements for how an acquiring
entity recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed (including intangibles) and any
noncontrolling interests in the acquired entity. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51.SFAS
No. 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51s consolidation procedures for
consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. We are currently evaluating what impact our
adoption of SFAS No. 160 will have on our consolidated financial statements.

3. DERIVATIVES AND HEDGING

On
September 28, 2007, we entered into an interest rate swap transaction which we
have designated as a cash flow hedge. The effective date of the swap
transaction is October 1, 2007, has a total notional amount of $70 million, and
fixes the swap rate at 4.77% plus the LIBOR margin (see Note 9) through October
1, 2008. The purpose of this swap is to mitigate the risk of future
fluctuations in interest rates on our variable rate debt. We have determined
that this swap is highly effective in offsetting future variable interest cash
flows on variable rate debt.

As
of December 31, 2007, the balance in Accumulated Other Comprehensive Loss
relating to derivatives was $0.2 million. Within the next 12 months the balance
in Accumulated Other Comprehensive Loss is expected to be amortized to Interest
Expense.

On
September 28, 2007, in conjunction with the execution of the $70 million
interest rate swap transaction, we terminated an interest rate swap transaction
that was initiated on March 16, 2006. This swap transaction had a total
notional amount of $30 million, was at a fixed rate of 5.09% plus the LIBOR
margin (see Note 9) and was set to mature on March 11, 2008. As a result of
this termination ($0.03) million is included in other income in our
consolidated statements of operations.

4. REAL ESTATE

During
2005, we acquired from an unrelated party one multi-tenant office building
comprising approximately 106,169 square feet of gross leasable area. The
property was acquired for cash in the amount of approximately $5.5 million plus
closing costs.

F-11

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

During
2005, we acquired from an unrelated party one multi-tenant office building
comprising approximately 125,874 square feet of gross leasable area. The
property was acquired for cash in the amount of approximately $8.0 million plus
closing costs.

During
2005, we acquired from an unrelated party one multi-tenant office building
comprising approximately 253,981 square feet of gross leasable area. The
property was acquired for cash in the amount of approximately $17.0 million
plus closing costs.

During
2006, we sold Northwest Place II, a 27,974 square foot office/warehouse
building located in Houston, Texas for a sales price of $1.2 million. A gain of
$0.2 million was generated from this sale, which is reflected in our
consolidated financial statements for the year ended December 31, 2006. It is
anticipated that the funds received from this sale will be used for future
acquisitions and/or capital improvements to existing properties. It was
determined that discontinued operations classification was not required due
to the immateriality of this property to our overall results.

During
2007, we sold a 2.4 acre parcel of vacant land adjacent to our South Shaver
retail property located in Houston, Texas for a sales price of $0.3 million. A
gain of $0.1 million was generated from this sale, which is reflected in our
consolidated financial statements for the three and nine months ended September
30, 2007. It is anticipated that the funds received from this sale will be used
for future acquisitions and/or capital improvements to existing properties

During
2007, we acquired from an unrelated party one office building under
development. The property was acquired for cash in the amount of approximately
$8.2 million plus closing costs. Upon completion we expect to have invested
approximately $10.0 million in the building which will contain approximately
33,400 square feet of gross leaseable area.

At
December 31, 2007, we owned 37 commercial properties in the Houston, Dallas,
San Antonio and Phoenix comprising approximately 3.1 million square feet of
gross leasable area.

5. NOTE RECEIVABLE

In
January 2003, we partially financed the sale of a property we had previously
sold and for which we had taken a note receivable of $0.4 million as part of
the consideration. We advanced $0.3 million and renewed and extended the
balance of $0.4 million still due from the original sale.

The
original principal amount of the note receivable, dated January 10, 2003, is
$0.7 million. The note had monthly installments of $6,382, including interest
at 7% per annum, for the first two years, and thereafter monthly installments
of $7,489 with interest at 10% per annum until maturity on January 10, 2018.

This
note was paid in full on August 30, 2007.

F-12

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

6. ACCRUED RENT AND ACCOUNTS RECEIVABLE, NET

Accrued
rent and accounts receivable, net, consists of amounts accrued, billed and due
from tenants, amounts due from insurance claims, allowance for doubtful
accounts and other receivables as follows (in thousands):

|                                  |  |              |        |      |   |       |  
|--------------------------------- |  | ------------ | ------ | ---- | - | ----- | -
|                                  |  | December 31, |       
|                                  |  |              |       
|                                  |  | 2007         |        | 2006 |  
|                                  |  |              |        |      |  
|                                  |  |              |        |      |   |       |  
|Tenant receivables                |  | $            | 2,517  |      | $ | 1,941 |  
|Accrued rent                      |  |              | 3,319  |      |   | 3,035 |  
|Allowance for doubtful
  accounts |  |              | (1,094 | )    |   | (641  | )
|Insurance claim receivables       |  |              | 550    |      |   | 427   |  
|Other receivables                 |  |              | 319    |      |   |      |  
|                                  |  |              |        |      |   |       |  
|                                  |  |              |        |      |   |       |  
|Totals                            |  | $            | 5,611  |      | $ | 4,762 |  
|                                  |  |              |        |      |   |       |  

7. UNAMORTIZED LEASING COMMISSIONS AND LOAN COSTS

Costs
which have been deferred consist of the following (in thousands):

|                                 |  |              |        |      |   |        |  
|-------------------------------- |  | ------------ | ------ | ---- | - | ------ | -
|                                 |  | December 31, |       
|                                 |  |              |       
|                                 |  | 2007         |        | 2006 |  
|                                 |  |              |        |      |  
|                                 |  |              |        |      |   |        |  
|Leasing commissions              |  | $            | 4,733  |      | $ | 6,904  |  
|Deferred financing costs         |  |              | 2,096  |      |   | 1,949  |  
|                                 |  |              |        |      |   |        |  
|                                 |  |              | 6,829  |      |   | 8,853  |  
|                                 |  |              |        |      |   |        |  
|Less: accumulated
  amortization |  |              | (3,871 | )    |   | (5,963 | )
|                                 |  |              |        |      |   |        |  
|Totals                           |  | $            | 2,958  |      | $ | 2,890  |  
|                                 |  |              |        |      |   |        |  

A summary of expected future
amortization of deferred costs is as follows (in thousands):

|                           |  |  |   |       | 
|-------------------------- |  |  | - | ----- | 
|Years Ended
  December 31, |  |  |   |       | 
|                           |  |  |   |       | 
|2008                       |  |  | $ | 805   | 
|2009                       |  |  |   | 613   | 
|2010                       |  |  |   | 491   | 
|2011                       |  |  |   | 368   | 
|2012                       |  |  |   | 254   | 
|Thereafter                 |  |  |   | 427   | 
|                           |  |  |   |       | 
|Total                      |  |  | $ | 2,958 | 
|                           |  |  |   |       | 

F-13

---



WHITESTONE REIT AND SUBSIDIARY 
Notes to Consolidated Financial Statements 
December 31, 2007

8. FUTURE MINIMUM LEASE INCOME

We
lease the majority of our office and retail properties under noncancelable
operating leases which provide for minimum base rentals plus, in some
instances, contingent rentals based upon a percentage of the tenants gross
receipts.

A
summary of minimum future rentals to be received (exclusive of renewals, tenant
reimbursements, and contingent rentals) under noncancelable operating leases in
existence at December 31, 2007 is as follows (in thousands):

|                           |  |   |        | 
|-------------------------- |  | - | ------ | 
|Years Ended
  December 31, |  |   |        | 
|                           |  |   |        | 
|2008                       |  | $ | 24,758 | 
|2009                       |  |   | 21,078 | 
|2010                       |  |   | 16,807 | 
|2011                       |  |   | 12,731 | 
|2012                       |  |   | 9,185  | 
|Thereafter                 |  |   | 8,600  | 
|                           |  |   |        | 
|Total                      |  | $ | 93,159 | 
|                           |  |   |        | 

9. DEBT

Notes payable

Notes
payable consists of the following (in thousands):

|                                       |  |              |        |      |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                       |  | December 31, |       
|                                       |  |              |       
|                                       |  | 2007         |        | 2006 |  
|                                       |  |              |        |      |  
|Mortgages and other notes
  payable    |  | $            | 9,936  |      | $ | 5,138  | 
|Revolving loan secured by
  properties |  |              | 73,525 |      |   | 61,225 | 
|                                       |  |              |        |      |   |        | 
|Totals                                 |  | $            | 83,461 |      | $ | 66,363 | 
|                                       |  |              |        |      |   |        | 
|                                       |  |              |        |      |   |        | 

As
of December 31, 2007, we have two active loans which are described below:

Revolving
Credit Facility

We
have a revolving credit facility with a consortium of banks.  The credit facility is secured by a pledge
of the partnership interests in Whitestone REIT Operating Partnership III LP
(WROP III), a wholly owned subsidiary of the Operating Partnership that was
formed to hold title to the properties comprising the borrowing base pool for
the facility.  At December 31, 2007,
WROP III owns 35 properties.

As
of December 31, 2007 and December 31, 2006, the balance outstanding under the
credit facility was $73.5 million and $61.2 million, respectively, and the
availability to draw was $1.5 million and $13.8 million, respectively.

Outstanding
amounts under the credit facility accrue interest computed (at our option) at
either the LIBOR or the Alternative Base Rate on the basis of a 360 day year,
plus the applicable margin as determined from the following table:

F-14

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

|                                                 |  |              |  |                               |   |  |  |  |       |   | 
|------------------------------------------------ |  | ------------ |  | ----------------------------- | - |  |  |  | ----- | - | 
|Total Leverage Ratio                             |  | LIBOR Margin |  | Applicable Base
  Rate Margin |  
|                                                 |  |              |  |                               |  
|                                                 |  |              |  |                               |   |  |  |  |       |   | 
|Less than 60% but greater
  than or equal to 50% |  |              |  | 2.40                          | % |  |  |  | 1.150 | % | 
|Less than 50% but greater
  than or equal to 45% |  |              |  | 2.15                          | % |  |  |  | 1.025 | % | 
|Less than 45%                                    |  |              |  | 1.90                          | % |  |  |  | 1.000 | % | 

The
Alternative Base Rate is a floating rate equal to the higher of the banks base
rate or the Federal Funds Rate plus0.5%. LIBOR Rate loans will be available in
one, two, three or six month periods, with a maximum of nine contracts at any
time. The effective interest rate as of December 31, 2007 was 7.03% per annum.

Interest
only is payable monthly under the loan with the total amount of principal due
at maturity on March 11, 2008. The loan may be prepaid at any time in part or
in whole, provided that the credit facility is not in default. If LIBOR pricing
is elected, there is a prepayment penalty based on a make-whole calculation
for all costs associated with prepaying a LIBOR borrowing.

The
revolving credit facility is supported by a pool of eligible properties
referred to as the borrowing base pool. The borrowing base pool must meet the
following criteria:

| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will provide a negative
  pledge on the borrowing base pool and may not provide a negative pledge of the
  borrowing base pool to any other lender.                           
| |   |                                                                                                                                                                                  
| |  | The properties must be
  free of all liens, unless otherwise permitted.                                                                                                          
| |   |                                                                                                                                                                                  
| |  | All eligible properties
  must be retail, warehouse, or office properties, must be free and clear of
  material environmental concerns and must be in good repair.               
| |   |                                                                                                                                                                                  
| |  | The aggregate physical
  occupancy of the borrowing base pool must remain above 80% at all times.                                                                                
| |   |                                                                                                                                                                                  
| |  | No property may comprise
  more than 15% of the value of the borrowing base pool with the exception of
  Corporate Park Northwest, which is allowed into the borrowing base pool.
| |   |                                                                                                                                                                                  
| |  | The borrowing base pool
  must at all times be comprised of at least ten properties.                                                                                             
| |   |                                                                                                                                                                                  
| |  | The borrowing base pool
  properties may not contain development or redevelopment projects.                                                                                      

Properties
can be added to and removed from the borrowing base pool at any time provided
no defaults would occur as a result of the removal. If a property does not meet
the criteria of an eligible property and we want to include it in the borrowing
base pool, a majority vote of the bank consortium is required for inclusion in
the borrowing base pool.

Covenants,
tested quarterly, relative to the borrowing base pool are as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will not permit any
  liens on the properties in the borrowing base pool unless otherwise
  permitted.                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | The ratio of aggregate net
  operating income from the borrowing base pool to debt service shall at all
  times exceed 1.5 to 1.0. For any quarter, debt service shall be equal to the
  average loan balance for the past quarter times an interest rate which is the
  greater of (a) the then current annual yield on ten year United States Treasury
  notes over 25 years plus 2%; (b) a 6.5% constant; or (c) the actual interest
  rate for the facility.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | The ratio of the value of
  the borrowing base pool to total funded loan balance must always exceed 1.67
  to 1.00. The value of the borrowing base pool is defined as aggregate net
  operating income for the preceding four quarters, less a $0.15 per square foot
  per annum capital expenditure reserve, divided by a 9.25% capitalization rate.                                                                                                          

Other
covenants, tested quarterly, relative to us are as follows:

| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will not permit our
  total indebtedness to exceed 60% of the fair market value of our real estate
  assets at the end of any quarter. Total indebtedness is defined as all our
  liabilities, including this

F-15

---



WHITESTONE REIT AND SUBSIDIARY 
Notes to Consolidated Financial Statements
December 31, 2007

| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | facility and all other
  secured and unsecured debt, including letters of credit and guarantees. Fair
  market value of real estate assets is defined as aggregate net operating
  income for the preceding four quarters, less a $0.15 per square foot per
  annum capital expenditure reserve, divided by a 9.25% capitalization rate.                             
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | The ratio of consolidated
  rolling four-quarter earnings before interest, income tax, depreciation and
  amortization expenses to total interest expense, including capitalized
  interest, shall not be less than 2.0 to 1.0.                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | The ratio of consolidated
  earnings before interest, income tax, depreciation and amortization expenses
  to total interest expense, including capitalized interest, principal
  amortization, capital expenditures and preferred stock dividends shall not be
  less than 1.5 to 1.0. Capital expenditures shall be deemed to be $0.15 per
  square foot per annum.
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | The ratio of secured debt
  to fair market value of real estate assets shall not be greater than 40%.                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | The ratio of declared
  dividends to funds from operations shall not be greater than 95%. This has
  been amended to 105% through March 11, 2008,                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | The ratio of development
  assets to fair market value of real estate assets shall not be greater than
  20%.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | We must maintain our
  status as a REIT for income tax purposes.                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | Total other investments
  shall not exceed 30% of total asset value. Other investments shall include
  investments in joint ventures, unimproved land, marketable securities and
  mortgage notes receivable. Additionally, the preceding investment categories
  shall not comprise greater than 30%, 15%, 10% and 20%, respectively, of total
  other investments. 
| |   |                                                                                                                                                                                                                                                                                                                                                                      
| |  | We must maintain a
  consolidated tangible net worth of not less than $30 million plus 75% of the
  value of stock and OP units issued in conjunction with an offering or with
  the acquisition of an asset or stock. Consolidated tangible net worth is
  defined as shareholders equity less intangible assets.                                                   

On March 11, 2008, we
amended our Revolving Credit Facility and extended the maturity through October
1, 2008. The amendment is filed with this Form 10-K as exhibit 10.28. The key
amendments were:

| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The minimum ratio of
  consolidated rolling four-quarter earnings before interest, income tax,
  depreciation and amortization expenses to total interest expense, including
  capitalized interest, was reduced from a ratio of 2.0 to 1.0 to a ratio of 1.55
  to 1.0.                                                       
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | The minimum ratio of
  consolidated earnings before interest, income tax, depreciation and
  amortization expenses to total interest expense, including capitalized
  interest, principal amortization, capital expenditures and preferred stock
  dividends was lowered from a ratio of 1.50 to 1.0 to a ratio of 1.40 to 1.0.
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | Declared or subsequently
  paid dividends will not be allowed to increase above the fourth quarter 2007
  level. If the number of shares issued and outstanding decrease, then the
  dividend payout must decrease proportionately.                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | Outstanding amounts under
  the credit facility accrue interest (at our option) at either the LIBOR or
  the Applicable Base Rate on the basis of a 360 day year, plus the applicable
  margin as shown below:                                                                                                                 

| |   |                        |       
| | - | ---------------------- | ------
| |  | LIBOR Margin           | 2.625%
| |  | Applicable Base Margin | 1.625%

Mortgage Loan on Windsor Park Centre

On
March 1, 2007, we obtained a $10 million loan to pay off the loan obtained upon
the acquisition of the Windsor Park property and to provide funds for future
acquisitions. The mortgage loan is secured by the Windsor Park property which
is owned by Whitestone REIT Operating Company IV LLC (WROC IV), a wholly
owned subsidiary of the Operating Partnership that was formed to hold title to
the Windsor Park property. On March 1, 2007, we conveyed

F-16

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

ownership of the Windsor
Park property from the Operating Partnership to WROC IV in order to secure the
$10 million mortgage loan.

The
note is payable in equal monthly installments of principal and interest of
$60,212, with interest at the rate of 6.04% per annum. The balance of the note
is payable in full on March 1, 2014. The loan balance is approximately $9.9
million at December 31, 2007.

Other

On
January 25, 2008 we entered into a $6.4 million term loan agreement with
KeyBank. The term loan is secured by a pledge of the partnership interests in
WROP III, and Whitestone Pima Norte LLC (WPN), a wholly owned subsidiary of
the Operating Partnership that was formed to hold title to our Pima Norte
property that was purchased in October 2007. At December 31, 2007, WROP III
owns 35 properties and WPN owns 1 property.

Outstanding
amounts under the term loan accrue interest computed at the LIBOR Rate on the
basis of a 360 day year, plus 2%. Interest only is payable monthly under the
loan with the total amount of principal due at maturity in July, 2009. The
covenants of this agreement mirror those in our $75 million revolving credit
agreement and are described above. This term loan agreement is filed with this
Form 10-K as exhibit 10.29.

We expect that we will have substantially leased this property by end of 2008
and plan to obtain long term financing on this property at the maturity of the
revolving credit facility.

Annual
maturities of notes payable as of December 31, 2007, including the revolving
loan, are as follows (in thousands):

|                          |  |  |   |        | 
|------------------------- |  |  | - | ------ | 
|Year Ended
  December 31, |  |  |   |        | 
|                          |  |  |   |        | 
|                          |  |  |   |        | 
|2008                      |  |  | $ | 73,562 | 
|2014                      |  |  |   | 9,899  | 
|                          |  |  |   |        | 
|Total                     |  |  | $ | 83,461 | 
|                          |  |  |   |        | 

10. EARNINGS PER SHARE

Basic earnings per share is
computed using net income to common shareholders and the weighted average
number of common shares outstanding. Diluted earnings per share reflects common
shares issuable from the assumed conversion of OP Units convertible into common
shares. Only those items that have a dilutive impact on basic earnings per
share are included in the diluted earnings per share. Accordingly, excluded
from the earnings per share calculation for each of the years ended December
31, 2007, 2006 and 2005, are 5,808,337 OP units as their inclusion would be
anti-dilutive.

|                                                            |  |                         |        |      |   |       |  |   |       | 
|----------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | ----- | 
|                                                            |  | Year Ended December 31, |       
|                                                            |  |                         |       
|                                                            |  | 2007                    |        | 2006 |   | 2005  | 
|                                                            |  |                         |        |      |   |       | 
|Basic and diluted earnings
  per share:                     |  |                         |        |      |   |       |  |   |       | 
|                                                            |  |                         |        |      |   |       |  |   |       | 
|Net income (loss) (in
  thousands)                          |  | $                       | (77    | )    | $ | 1,781 |  | $ | 2,448 | 
|                                                            |  |                         |        |      |   |       |  |   |       | 
|Basic and diluted earnings
  (loss) per share               |  | $                       | (0.008 | )    | $ | 0.185 |  | $ | 0.310 | 
|                                                            |  |                         |        |      |   |       |  |   |       | 
|Weighted average common
  shares outstanding (in thousands) |  |                         | 9,999  |      |   | 9,652 |  |   | 7,888 | 

F-17

---



WHITESTONE REIT AND SUBSIDIARY 
Notes to Consolidated Financial Statements 
December 31, 2007

11. FEDERAL INCOME TAXES

Federal
income taxes are not provided because we intend to and believe we qualify as a
REIT under the provisions of the Internal Revenue Code. Our shareholders
include their proportionate taxable income in their individual tax returns. As
a REIT, we must distribute at least 90% of its ordinary taxable income to our
shareholders and meet certain income sources and investment restriction
requirements. In addition, REITs are subject to a number of organizational and
operational requirements. If we fail to qualify as a REIT in any taxable year,
we will be subject to federal income tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate tax rates.

Taxable
income differs from net income for financial reporting purposes principally due
to differences in the timing of recognition of interest, real estate taxes,
depreciation and rental revenue.

For
Federal income tax purposes, the cash dividends distributed to shareholders are
characterized as follows for the years ended December 31:

| |                                          |  |      |       |      |  |       |   |  |       |   | 
| | ---------------------------------------- |  | ---- | ----- | ---- |  | ----- | - |  | ----- | - | 
| |                                          |  | 2007 |       | 2006 |  | 2005  |   | 
| |                                          |  |      |       |      |  |       |   | 
|
| | Ordinary income (unaudited)              |  |      | 15.0  | %    |  | 36.2  | % |  | 62.6  | % | 
| | Return of capital
  (unaudited)          |  |      | 84.1  | %    |  | 59.9  | % |  | 37.4  | % | 
| | Capital gain distributions
  (unaudited) |  |      | 0.9   | %    |  | 3.9   | % |  | 0.0   | % | 
| |                                          |  |      |       |      |  |       |   |  |       |   | 
|
| | Total                                    |  |      | 100.0 | %    |  | 100.0 | % |  | 100.0 | % | 
| |                                          |  |      |       |      |  |       |   |  |       |   | 

12. RELATED PARTY TRANSACTIONS

Prior
to October 2006, our day-to-day operations and portfolio of properties were
managed by our former External Manager through property management and advisory
agreements. Mr. Hartman, our former President, Secretary, Chief Executive
Officer, and Chairman of the Board, is the sole limited partner of our former
External Manager, as well as the President, Secretary, sole trustee and sole
shareholder of the general partner of the External Manager.

Mr.
Hartman was removed by our Board as our President, Secretary, and Chief
Executive Officer on October 2, 2006, and he resigned from our Board on October
27, 2006.

In
October 2006, our Board terminated for cause our property management agreement
with our former External Manager. Our former External Manager turned over all
property management functions to us on November 14, 2006.

In
addition, our Board elected not to renew our advisory agreement, dated August
31, 2004, with our former External Manager. This agreement had been extended on
a month-to-month basis and ultimately expired on September 30, 2006.

Transactions
between us, our former External Manager, and Mr. Hartman are considered related
party transactions and are discussed in the following paragraphs.

In
January 1999, we entered into a property management agreement with our former
External Manager. Effective September 1, 2004, this agreement was amended and
restated. Prior to September 1, 2004, in consideration for supervising the
management and performing various day-to-day affairs, we paid our former
External Manager a management fee of 5% and a partnership management fee of 1%
based on effective gross revenues from the properties, as defined in the
agreement. After September 1, 2004, we paid our former External Manager
property management fees in an amount not to exceed the fees customarily
charged in arms length transactions by others rendering similar services in
the same geographic area, as determined by a survey of brokers and agents in
that area. These fees have ranged between approximately 2% and 4% of gross
revenues (as defined in the amended and restated agreement) for the management
of office buildings and approximately 5% of gross revenues for the management
of retail and warehouse properties.

F-18

---



WHITESTONE REIT AND SUBSIDIARY 
Notes to Consolidated Financial Statements 
December 31, 2007

Effective
September 1, 2004, we entered into an advisory agreement with our former
External Manager which provided that we pay our former External Manager a
quarterly fee of one-fourth of .25% of gross asset value (as defined in the
advisory agreement) for asset management services. In addition, the advisory
agreement provided for the payment of a deferred performance fee, payable in
certain events, including termination of the advisory agreement, based upon
appreciation in the value of certain of our real estate assets. The advisory
agreement expired by its terms on September 30, 2006.

We
incurred total management, partnership and asset management fees of $1.5
million and $1.4 million, under the advisory and management agreements for the
years ended December 31, 2006 and 2005, respectively. We incurred no such fee
for the year ended December 31, 2007. No management fees were payable at December
31, 2007 or 2006. We have not accrued any deferred performance fees, as we
believe the amount of these fees, if any are owing, cannot be determined with
reasonable certainty at this time.

In
consideration of leasing the properties, we historically paid our former
External Manager leasing commissions for leases originated by our former
External Manager and for expansions and renewals of existing leases. We
incurred total leasing commissions to our former External Manager of $0.9
million and $1.6 million for the years ended December 31, 2006 and 2005,
respectively. No such fees were incurred for the year ended December 31, 2007.
No such amounts were payable at December 31, 2007 or 2006.

In
connection with our public offering described in Note 13, we have reimbursed
our former External Manager up to 2.5% of the gross selling price of all common
shares sold for organization and offering expenses (excluding selling
commissions and a dealer manager fee) incurred by our former External Manager
on our behalf. We have paid our dealer manager, through our former External
Manager by agreement between them, a fee of up to 2.5% of the gross selling
price of all common shares sold in the offering. We incurred total fees of $0.5
million and $0.9 million for the years ended December 31, 2006 and 2005,
respectively. No such fees were incurred for the year ended December 31, 2007.
These fees have been treated as offering costs and netted against the proceeds
from the sale of common shares. On October 2, 2006, our Board elected to
terminate the public offering described in Note 13.

Also
in connection with our public offering described in Note 13, our former
External Manager has historically received an acquisition fee equal to 2% of
the gross selling price of all common shares sold for services in connection
with the selection, purchase, development or construction of properties for us.
The advisory agreement expired by its terms on September 30, 2006. On September
30, 2006, $0.2 million of acquisition fees paid to our former External Manager
had been capitalized and not yet allocated to the purchase price of a property.
In accordance with the advisory agreement, our former External Manager is
obligated to reimburse us for any acquisition fee that has not been allocated
to the purchase price of our properties as provided for in our declaration of
trust. A letter demanding payment was sent to our former External Manager on
December 21, 2006, and $0.2 million is included in accrued rent and accounts
receivables on our consolidated balance sheet at December 31, 2007 as
reclassified from December 31, 2006 as described in Note 2  Reclassification.

We
incurred total acquisition fees to our former External Manager of $0.2 million
and $0.4 million for the years ended December 31, 2006 and 2005, respectively.
No such fees were incurred for the year ended December 31, 2007. No such
amounts were payable at December 31, 2007 or December 31, 2006.

Our
former External Manager was billed $0.1 million, $0.2 million and $0.1 million
for office space for the years ended December 2007, 2006 and 2005,
respectively. These amounts are included in rental income in our consolidated
statements of operations.

Mr.
Hartman our former President, Secretary, Chief Executive Officer, and Chairman
was owed $0.04 million in dividends payable on his common shares at December
31, 2007 and December 31, 2006. Mr. Hartman owned 2.9% of our issued and
outstanding common shares as of December 31, 2007 and December 31, 2006.

F-19

---



WHITESTONE REIT AND SUBSIDIARY 
Notes to Consolidated Financial Statements 
December 31, 2007

13. SHAREHOLDERS EQUITY

Under
our declaration of trust, we have authority to issue 400 million common shares
of beneficial interest, $0.001 par value per share, and 50 million preferred
shares of beneficial interest, $0.001 par value per share.

On
September 15, 2004, our Registration Statement on Form S-11, with respect to
our public offering of up to 10 million common shares of beneficial interest
offered at a price of $10 per share was declared effective under the Securities
Act of 1933. The Registration Statement also covered up to 1 million shares
available pursuant to our dividend reinvestment plan offered at a price of
$9.50 per share. The shares were offered to investors on a best efforts basis.
Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were
declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006,
respectively.

On
October 2, 2006, our Board terminated the public offering. On March 27, 2007,
we gave the required ten day notice to participants informing them that we
intend to terminate our dividend reinvestment plan. As a result, our dividend
reinvestment plan terminated on April 6, 2007.

As
of December 31, 2007, 2.8 million shares had been issued pursuant to our public
offering with net offering proceeds received of $24.6 million. An additional
165,000 shares had been issued pursuant to the dividend reinvestment plan in
lieu of dividends totaling $1.6 million. Shareholders that received shares
pursuant to our dividend reinvestment plan on or after October 2, 2006 may have
rescission rights.

All
net proceeds of our public offering were contributed to the Operating
Partnership in exchange for OP Units. The Operating Partnership used the
proceeds to acquire additional properties and for general working capital. In
accordance with the Operating Partnerships Agreement of Limited Partnership,
in exchange for the contribution of net proceeds from sales of stock, we
received an equivalent number of OP Units as shares of stock that are sold.

At
December 31, 2007 and December 31, 2006, Mr. Hartman owned 2.9% of our
outstanding shares. At December 31, 2007 and December 31, 2006, our Board
collectively owned 2.6% of our outstanding shares.

Operating
Partnership Units

Substantially
all of our business is conducted through the Operating Partnership. We are the
sole general partner of the Operating Partnership. As of December 31, 2007, we
owned a 62.4% interest in the Operating Partnership.

Limited
partners in the Operating Partnership holding OP Units have the right to
convert their OP Units into common shares at a ratio of one OP Unit for one
common share. Distributions to OP Unit holders are paid at the same rate per
unit as dividends per share of Whitestone. Subject to certain restrictions, OP
Units are not convertible into common shares until the later of one year after
acquisition or an initial public offering of the common shares. As of December
31, 2007 and December 31, 2006, there were 15,448,118 and 15,421,212 OP Units
outstanding, respectively. We owned 9,639,781 and 9,612,875 OP Units as of December
31, 2007 and December 31, 2006, respectively. The balance of the OP Units is
owned by third parties, including Mr. Hartman and certain trustees. Our
weighted-average share ownership in the Operating Partnership was approximately
62.40%, 61.53% and 56.44% for the years ended December 31, 2007, 2006 and 2005,
respectively. At December 31, 2007 and December 31, 2006, Mr. Hartman owned
6.9% of the Operating Partnerships outstanding units. At December 31, 2007 and
December 31, 2006, our Board collectively owned 0.4% of the Operating
Partnerships outstanding units.

F-20

---



WHITESTONE REIT AND SUBSIDIARY 
Notes to Consolidated Financial Statements 
December 31, 2007

Dividends
and distributions

The
following tables summarize the cash dividends/distributions paid to holders of
common shares and holders of OP Units (after giving effect to the
recapitalization) during the years ended December 31, 2007 and 2006 and the
quarter ended March 31, 2008.

|                           |  |                     |                     |                                   |  |       | 
|-------------------------- |  | ------------------- | ------------------- | --------------------------------- |  | ----- | 
|Whitestone Shareholders    | 
|                           | 
|Dividend
 per Common Share |  | Date Dividend
 Paid |                     | Total Amount
 Paid (in thousands) | 
|                           |  |                     |                     |                                   | 
|                           |  |                     |                     |                                   |  |       | 
|0.1768                     |  |                     | Qtr
 ended 03/31/06 |                                   |  | 1,526 | 
|0.1768                     |  |                     | Qtr
 ended 06/30/06 |                                   |  | 1,632 | 
|0.1500                     |  |                     | Qtr
 ended 09/30/06 |                                   |  | 1,443 | 
|0.1500                     |  |                     | Qtr
 ended 12/31/06 |                                   |  | 1,477 | 
|0.1500                     |  |                     | Qtr
 ended 03/31/07 |                                   |  | 1,522 | 
|0.1500                     |  |                     | Qtr
 ended 06/30/07 |                                   |  | 1,500 | 
|0.1500                     |  |                     | Qtr
 ended 09/30/07 |                                   |  | 1,500 | 
|0.1500                     |  |                     | Qtr
 ended 12/31/07 |                                   |  | 1,500 | 
|0.1500                     |  |                     | Qtr
 ended 03/31/08 |                                   |  | 1,500 | 

|                                                |  |                         |                     |                                   |  |       | 
|----------------------------------------------- |  | ----------------------- | ------------------- | --------------------------------- |  | ----- | 
|OP Unit Holders Including Minority Unit Holders | 
|                                                | 
|Distribution
 per OP Unit                       |  | Date Distribution
 Paid |                     | Total Amount
 Paid (in thousands) | 
|                                                |  |                         |                     |                                   | 
|                                                |  |                         |                     |                                   |  |       | 
|0.1768                                          |  |                         | Qtr
 ended 03/31/06 |                                   |  | 2,488 | 
|0.1768                                          |  |                         | Qtr
 ended 06/30/06 |                                   |  | 2,594 | 
|0.1500                                          |  |                         | Qtr
 ended 09/30/06 |                                   |  | 2,260 | 
|0.1500                                          |  |                         | Qtr
 ended 12/31/06 |                                   |  | 2,294 | 
|0.1500                                          |  |                         | Qtr
 ended 03/31/07 |                                   |  | 2,314 | 
|0.1500                                          |  |                         | Qtr
 ended 06/30/07 |                                   |  | 2,317 | 
|0.1500                                          |  |                         | Qtr
 ended 09/30/07 |                                   |  | 2,317 | 
|0.1500                                          |  |                         | Qtr
 ended 12/31/07 |                                   |  | 2,317 | 
|0.1500                                          |  |                         | Qtr
 ended 03/31/08 |                                   |  | 2,317 | 

14. INCENTIVE SHARE PLAN

We
have no incentive share plans in effect as of December 31, 2007.



15. COMMITMENTS AND CONTINGENCIES

The nature of our business exposes us to the risk of lawsuits for damages or penalties relating to, among other things, breach of contract and employment disputes.  We are currently involved in the following litigation:

Hartman Commercial Properties REIT and Hartman REIT Operating Partnership, L.P. v. Allen R. Hartman and Hartman Management, L.P., in the 333rd Judicial District Court of Harris County, Texas

In October 2006, we terminated our Chief Executive Officer, Allen R. Hartman, and our former manager and advisor, Hartman Management, L.P.  The same day, we filed this lawsuit seeking damages for breach of contract, fraudulent inducement, and breach of fiduciary duties.  Our new management approached Mr. Hartman about cooperatively turning over operations of the company but Mr. Hartman ousted them from his offices.  We then sought an emergency court order requiring Mr. Hartman to turn over control to new management.  Mr. Hartman opposed this legal relief.  The court issued an order requiring him to turn over control of the company.

As part of the change from Mr. Hartman to new management, the company asked Mr. Hartman to agree to a timeline for turning over specific operations and bank accounts.  Mr. Hartman refused, so we had to file another request with the court to require Mr. Hartmans compliance.  Only after we filed the request with the court did Mr. Hartman relent and agree to a turnover timeline.  During the turnover process, however, Mr. Hartman denied the company access to its own books and records and we had to go back to court to enforce the previously entered order that turned over the company to present management.

In November 2006, Mr. Hartman and Hartman Management filed a counterclaim against us, the individual members of our Board, our Chief Operating Officer, John J. Dee, and our prior outside law firm and one of its partners.  The counterclaims claimed that we had breached our contracts with Mr. Hartman and Hartman Managment and committed tortious interference with contract, intentional infliction of emotional distress, and conspiracy.  We prepared defenses to these counterclaims.

Subsequent to our preparations, Mr. Hartman and Hartman Management retained new attorneys.  The new attorneys filed amended counterclaims on behalf of Mr. Hartman and Hartman Management and dropped the claims against the individual members of our Board, with the exception of our Chairman, James C. Mastandrea.  The amended counterclaims now also alleged negligence, fraud, and breach of fiduciary duty.  We proceeded to prepare defenses in response to these amended counterclaims.

Mr. Hartman then hired a different set of attorneys and amended the counterclaims again to drop all of the claims against our prior outside law firm and its partner, many of the claims against us, and all of the claims, without prejudice, against Mr. Mastandrea and Mr. Dee.  The amended counterclaim now asserts claims against us only for breach of contract and alleges that we owe Mr. Hartman and Hartman Management a fee for the termination of an advisory agreement.  In communications to shareholders, Mr. Hartman represented that the termination fee, as calculated by him, could be in excess of $20 million.

We filed a motion for summary judgment on Mr. Hartmans and Hartman Managements claims that we breached our contracts with Hartman Management.  On March 25, 2008, the court granted our motion, in part, and stated that the termination fee allegedly due under the advisory agreement was subject to the cap on total operating expenses described in Section IV.D.1 of the North American Securities Administrators Associations Statement of Policy on Real Estate Investment Trusts.

The parties have each submitted reports of experts as to the amount of the fee due for the termination of the advisory agreement, other fees and expense reimbursements, and damages.  Discovery is being conducted for this case, which has a court date of May 19, 2008.  Before the courts March 25, 2008 ruling that capped the advisory agreement termination fee, Mr. Hartman and Hartman Management claimed damages of either $4.8 million or $6.4 million plus prejudgment interest and attorneys fees; Whitestone maintains that no amounts are due for fees, expenses and damages and we intend to vigorously defend against those claims and vigorously prosecute our affirmative claims.



F-21

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

Hartman Commercial Properties REIT v. Allen R. Hartman, et al; in the United States District Court for the Southern District of Texas

In November 2006, we learned that Mr. Hartman was soliciting written consents from shareholders and had sought approval from the SEC to distribute a consent solicitation to replace our Board.  We asked Mr. Hartman to refrain from distributing the consent solicitation until the false and misleading information was removed. He refused, so we initiated this lawsuit and sought a Temporary Injunction to stop Mr. Hartman from distributing the consent solicitation.

Mr. Hartman and Hartman Management filed a counterclaim, alleging that certain changes to our bylaws and declaration of trust were invalid and that their enactment was a breach of fiduciary duty.  Mr. Hartman sought a Temporary Injunction to prevent these changes from taking effect.  These changes, among other things, staggered the terms of our Board members over three years, required a two-thirds vote of the outstanding common shares to remove a Board member and provided that our secretary may call a special meeting of shareholders only on the written request of a majority of outstanding common shares.

With Mr. Hartman's encouragement, a group of shareholders filed a motion to intervene and bring claims against us in this lawsuit.  The interveners claims were similar to the counterclaims filed by Mr. Hartman and Hartman Management.  The shareholders eventually dismissed their request to intervene with prejudice, though not before we were required to prepare defenses to their claims and move to block their intervention.

The court ordered Mr. Hartman to refrain from distributing the consent solicitation while the parties exchanged discovery and took depositions in preparation for a full hearing on the competing requests for Temporary Injunctions.  On April 6, 2007, the court ruled in our favor and Mr. Hartman was ordered not to distribute the consent solicitation.  Also on April 6, 2007, the court denied Mr. Hartmans request for a Temporary Injunction challenging the changes to our bylaws and declaration of trust and the court upheld the changes to our bylaws and declaration of trust as valid exercises of the Boards powers.  The court also granted our Motion to Dismiss, dismissing many of Mr. Hartmans and Hartman Managements remaining claims against us.

Mr. Hartman appealed the courts April 6, 2007 rulings to the Fifth Circuit Court of Appeals.  After considering the parties written briefs and oral arguments held in New Orleans, the Fifth Circuit upheld the lower courts rulings.  We still have securities law claims against Mr. Hartman and Hartman Management and his remaining counterclaims are still pending against us, though no monetary damages are being sought by either side.  Trial is currently set for November 2008.

Other

We
are a participant in various other legal proceedings and claims that arise in
the ordinary course of our business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, we believe that the final outcome of these matters will not have a
material effect on our financial position, results of operations, or cash
flows.

16. SEGMENT INFORMATION

Our
management historically has not differentiated by property types and therefore
does not present segment information.

F-22

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

17. SELECT QUARTERLY FINANCIAL DATA (unaudited)

The
following is a summary of our unaudited quarterly financial information for the
years ended December 31, 2007 and 2006 (in thousands, except per share data):

|                                            |  |                |        |                 |   |                |   |                 |       |   |   |        |  
|------------------------------------------- |  | -------------- | ------ | --------------- | - | -------------- | - | --------------- | ----- | - | - | ------ | -
|                                            |  | First
 Quarter |        | Second
 Quarter |   | Third
 Quarter |   | Fourth
 Quarter |      
|                                            |  |                |        |                 |   |                |   |                 |      
|2007                                        |  |                |        |                 |   |                |   |                 |       |   |   |        |  
|Revenues                                    |  | $              | 7,545  |                 | $ | 7,568          |   | $               | 7,805 |   | $ | 8,064  |  
|Income (loss) before minority interests     |  |                | (222   | )               |   | 214            |   |                 | 276   |   |   | (391   | )
|Minority interest in income (loss)          |  |                | 84     |                 |   | (81            | ) |                 | (104  | ) |   | 147    |  
|Net income (loss)                           |  |                | (138   | )               |   | 133            |   |                 | 172   |   |   | (244   | )
|Basic and diluted earnings (loss) per
share |  | $              | (0.014 | )               | $ | 0.013          |   | $               | 0.017 |   | $ | (0.024 | )
|                                            |  |                |        |                 |   |                |   |                 |       |   |   |        |  
|2006                                        |  |                |        |                 |   |                |   |                 |       |   |   |        |  
|Revenues                                    |  | $              | 7,414  |                 | $ | 7,689          |   | $               | 7,416 |   | $ | 7,321  |  
|Income (loss) before minority interests     |  |                | 937    |                 |   | 1,403          |   |                 | 974   |   |   | (465   | )
|Minority interest in income (loss)          |  |                | (372   | )               |   | (545           | ) |                 | (371  | ) |   | 220    |  
|Net income (loss)                           |  |                | 565    |                 |   | 858            |   |                 | 603   |   |   | (245   | )
|Basic and diluted earnings (loss) per
share |  | $              | 0.061  |                 | $ | 0.089          |   | $               | 0.061 |   | $ | (0.026 | )

18. SUBSEQUENT EVENTS

Pima Norte Loan

On
January 25, 2008 we entered into a $6.4 million term loan agreement with
KeyBank. The term loan is secured by a pledge of the partnership interests in
WROP III, and Whitestone Pima Norte LLC (WPN), a wholly owned subsidiary of
the Operating Partnership that was formed to hold title to our Pima Norte
property that was purchased in October 2007. At December 31, 2007, WROP III
owns 35 properties and WPN owns one property.

Outstanding
amounts under the term loan accrue interest computed at the LIBOR Rate on the
basis of a 360 day year, plus 2%. Interest only is payable monthly under the
loan with the total amount of principal due at maturity in July, 2009. The
covenants of this agreement mirror those in our $75 million revolving credit
agreement and are described in Note 9. This term loan agreement is filed with
this Form 10-K as exhibit 10.29.

We
expect that we will have substantially leased this property by end of 2008 and
plan to obtain long term financing on this property at the maturity of the
revolving credit facility.

F-23

---



WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

Extension of Maturity Date of
our Revolving Credit
Facility

On
March 11, 2008, we amended our Revolving Credit Facility and extended the
maturity through October 1, 2008. The amendment is filed with this Form 10-K as
exhibit 10.28. The key amendments were:

| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The minimum ratio of
 consolidated rolling four-quarter earnings before interest, income tax,
 depreciation and amortization expenses to total interest expense, including
 capitalized interest, was reduced from a ratio of 2.0 to 1.0 to a ratio of
 1.55 to 1.0.                                                       
| |   |                                                                                                                                                                                                                                                                                                                            
| |  | The minimum ratio of
 consolidated earnings before interest, income tax, depreciation and
 amortization expenses to total interest expense, including capitalized
 interest, principal amortization, capital expenditures and preferred stock
 dividends was lowered from a ratio of 1.50 to 1.0 to a ratio of 1.40 to 1.0.
| |   |                                                                                                                                                                                                                                                                                                                            
| |  | Declared or subsequently
 paid dividends will not be allowed to increase above the fourth quarter 2007
 level. If the number of shares issued and outstanding decrease, then the
 dividend payout must decrease proportionately.                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                            
| |  | Outstanding amounts under
 the credit facility accrue interest (at our option) at either the LIBOR or
 the Applicable Base Rate on the basis of a 360 day year, plus the applicable
 margin as shown below:                                                                                                                

|  |                        |       
|- | ---------------------- | ------
| | LIBOR Margin           | 2.625%
| | Applicable Base Margin | 1.625%

F-24

---



Whitestone REIT and Subsidiary

Schedule II - Valuation and Qualifying Accounts

|                                  |  |                                  |   |                                |  |                            |  |                            |     |  |  |  |   |      |   |  |  |   |       |  | 
|--------------------------------- |  | -------------------------------- | - | ------------------------------ |  | -------------------------- |  | -------------------------- | --- |  |  |  | - | ---- | - |  |  | - | ----- |  | 
|                                  |  | (in thousands)                   |  
|                                  |  |                                  |  
|Description                       |  | Balance at
 Beginning
 of Period |   | Charged
 (credited)
 to Income |  | Deductions
 from
 Reserves |  | Balance at
 End of
 Period |    
|                                  |  |                                  |   |                                |  |                            |  |                            |    
|                                  |  |                                  |   |                                |  |                            |  |                            |    
|Allowance for doubtful
 accounts: |  |                                  |   |                                |  |                            |  |                            |     |  |  |  |   |      |   |  |  |   |       |  | 
|Year ended December 31,
2007      |  |                                  | $ | 641                            |  |                            |  | $                          | 624 |  |  |  | $ | (171 | ) |  |  | $ | 1,094 |  | 
|Year ended December 31,
2006      |  |                                  |   | 473                            |  |                            |  |                            | 388 |  |  |  |   | (220 | ) |  |  |   | 641   |  | 
|Year ended December 31,
2005      |  |                                  |   | 343                            |  |                            |  |                            | 130 |  |  |  |   |     |   |  |  |   | 473   |  | 

F-25

---



Whitestone REIT and Subsidiary

Schedule III -
Real Estate and Accumulated Depreciation

December 31, 2007

|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|------------------------ |  | --------------------------- | ------ | ----------------------------------------------------------- |  | --------------------------------------------------------------------- | ------- | --------------- |  | ---- | - | -------------------------- |  | ----- |  | - | --- |  |  | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                         |  | Initial Cost (in thousands) |        | Costs Capitalized Subsequent
 to Acquisition (in thousands) |  | Gross Amount at which Carried at
 End of Period (In thousands)(1) (2) |        
|                         |  |                             |        |                                                             |  |                                                                       |        
|Property Name            |  | Land                        |        | Building and
 Improvements                                  |  | Improvements
 (net)                                                   |         | Carrying
 Costs |  | Land |   | Building and
 Improvements |  | Total | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       | 
|Retail
 Properties:      |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        | 
|Bellnot Square           |  | $                           | 1,154  |                                                             |  | $                                                                     | 4,638   |                 |  |      | $ | 107                        |  |       |  | $ |    |  |  | $ | 1,154  |  |  | $ | 4,745   |  |  | $ | 5,899   | 
|Bissonnet Beltway        |  |                             | 415    |                                                             |  |                                                                       | 1,947   |                 |  |      |   | 177                        |  |       |  |   |    |  |  |   | 415    |  |  |   | 2,124   |  |  |   | 2,539   | 
|Centre South             |  |                             | 481    |                                                             |  |                                                                       | 1,596   |                 |  |      |   | 260                        |  |       |  |   |    |  |  |   | 481    |  |  |   | 1,856   |  |  |   | 2,337   | 
|Garden Oaks              |  |                             | 1,285  |                                                             |  |                                                                       | 5,293   |                 |  |      |   | 162                        |  |       |  |   |    |  |  |   | 1,285  |  |  |   | 5,455   |  |  |   | 6,740   | 
|Greens Road              |  |                             | 354    |                                                             |  |                                                                       | 1,284   |                 |  |      |   | 107                        |  |       |  |   |    |  |  |   | 354    |  |  |   | 1,391   |  |  |   | 1,745   | 
|Holly Knight             |  |                             | 320    |                                                             |  |                                                                       | 1,293   |                 |  |      |   | 67                         |  |       |  |   |    |  |  |   | 320    |  |  |   | 1,360   |  |  |   | 1,680   | 
|Kempwood Plaza           |  |                             | 733    |                                                             |  |                                                                       | 1,798   |                 |  |      |   | 810                        |  |       |  |   |    |  |  |   | 733    |  |  |   | 2,608   |  |  |   | 3,341   | 
|Lion Square              |  |                             | 1,546  |                                                             |  |                                                                       | 4,289   |                 |  |      |   | 249                        |  |       |  |   |    |  |  |   | 1,546  |  |  |   | 4,538   |  |  |   | 6,084   | 
|Northeast Square         |  |                             | 565    |                                                             |  |                                                                       | 2,008   |                 |  |      |   | 289                        |  |       |  |   |    |  |  |   | 565    |  |  |   | 2,297   |  |  |   | 2,862   | 
|Providence               |  |                             | 918    |                                                             |  |                                                                       | 3,675   |                 |  |      |   | 508                        |  |       |  |   |    |  |  |   | 918    |  |  |   | 4,183   |  |  |   | 5,101   | 
|South Richey             |  |                             | 778    |                                                             |  |                                                                       | 2,584   |                 |  |      |   | 194                        |  |       |  |   |    |  |  |   | 778    |  |  |   | 2,778   |  |  |   | 3,556   | 
|South Shaver             |  |                             | 184    |                                                             |  |                                                                       | 633     |                 |  |      |   | 60                         |  |       |  |   |    |  |  |   | 71     |  |  |   | 693     |  |  |   | 764     | 
|SugarPark Plaza          |  |                             | 1,781  |                                                             |  |                                                                       | 7,125   |                 |  |      |   | 25                         |  |       |  |   |    |  |  |   | 1,781  |  |  |   | 7,150   |  |  |   | 8,931   | 
|Sunridge                 |  |                             | 276    |                                                             |  |                                                                       | 1,186   |                 |  |      |   | 57                         |  |       |  |   |    |  |  |   | 276    |  |  |   | 1,243   |  |  |   | 1,519   | 
|Torrey Square            |  |                             | 1,981  |                                                             |  |                                                                       | 2,971   |                 |  |      |   | 544                        |  |       |  |   |    |  |  |   | 1,981  |  |  |   | 3,515   |  |  |   | 5,496   | 
|Town Park                |  |                             | 850    |                                                             |  |                                                                       | 2,911   |                 |  |      |   | 175                        |  |       |  |   |    |  |  |   | 850    |  |  |   | 3,086   |  |  |   | 3,936   | 
|Webster Point            |  |                             | 720    |                                                             |  |                                                                       | 1,150   |                 |  |      |   | 40                         |  |       |  |   |    |  |  |   | 720    |  |  |   | 1,190   |  |  |   | 1,910   | 
|Westchase                |  |                             | 423    |                                                             |  |                                                                       | 1,751   |                 |  |      |   | 269                        |  |       |  |   |    |  |  |   | 423    |  |  |   | 2,020   |  |  |   | 2,443   | 
|Windsor Park             |  |                             | 2,621  |                                                             |  |                                                                       | 10,482  |                 |  |      |   |                           |  |       |  |   |    |  |  |   | 2,621  |  |  |   | 10,482  |  |  |   | 13,103  | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|                         |  | $                           | 17,385 |                                                             |  | $                                                                     | 58,614  |                 |  |      | $ | 4,100                      |  |       |  | $ |    |  |  | $ | 17,272 |  |  | $ | 62,714  |  |  | $ | 79,986  | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|Warehouse
 Properties:   |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|Brookhill                |  |                             | 186    |                                                             |  |                                                                       | 788     |                 |  |      |   | 159                        |  |       |  | $ |    |  |  |   | 186    |  |  |   | 947     |  |  |   | 1,133   | 
|Corporate Park Northwest |  |                             | 1,534  |                                                             |  |                                                                       | 6,306   |                 |  |      |   | 581                        |  |       |  |   |    |  |  |   | 1,534  |  |  |   | 6,887   |  |  |   | 8,421   | 
|Corporate Park West      |  |                             | 2,555  |                                                             |  |                                                                       | 10,267  |                 |  |      |   | 467                        |  |       |  |   |    |  |  |   | 2,555  |  |  |   | 10,734  |  |  |   | 13,289  | 
|Corporate Park Woodland  |  |                             | 652    |                                                             |  |                                                                       | 5,330   |                 |  |      |   | 444                        |  |       |  |   |    |  |  |   | 652    |  |  |   | 5,774   |  |  |   | 6,426   | 
|Dairy Ashford            |  |                             | 226    |                                                             |  |                                                                       | 1,211   |                 |  |      |   | 90                         |  |       |  |   |    |  |  |   | 226    |  |  |   | 1,301   |  |  |   | 1,527   | 
|Holly Hall               |  |                             | 608    |                                                             |  |                                                                       | 2,516   |                 |  |      |   | 18                         |  |       |  |   |    |  |  |   | 608    |  |  |   | 2,534   |  |  |   | 3,142   | 
|Interstate 10            |  |                             | 208    |                                                             |  |                                                                       | 3,700   |                 |  |      |   | 277                        |  |       |  |   |    |  |  |   | 208    |  |  |   | 3,977   |  |  |   | 4,185   | 
|Main Park                |  |                             | 1,328  |                                                             |  |                                                                       | 2,721   |                 |  |      |   | 420                        |  |       |  |   |    |  |  |   | 1,328  |  |  |   | 3,141   |  |  |   | 4,469   | 
|Plaza Park               |  |                             | 902    |                                                             |  |                                                                       | 3,294   |                 |  |      |   | 375                        |  |       |  |   |    |  |  |   | 902    |  |  |   | 3,669   |  |  |   | 4,571   | 
|West Belt Plaza          |  |                             | 568    |                                                             |  |                                                                       | 2,165   |                 |  |      |   | 212                        |  |       |  |   |    |  |  |   | 568    |  |  |   | 2,377   |  |  |   | 2,945   | 
|Westgate                 |  |                             | 672    |                                                             |  |                                                                       | 2,776   |                 |  |      |   | 113                        |  |       |  |   |    |  |  |   | 672    |  |  |   | 2,889   |  |  |   | 3,561   | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|                         |  | $                           | 9,439  |                                                             |  | $                                                                     | 41,074  |                 |  |      | $ | 3,156                      |  |       |  | $ |    |  |  | $ | 9,439  |  |  | $ | 44,230  |  |  | $ | 53,669  | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|Office
 Properties:      |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|9101 LBJ Freeway         |  | $                           | 1,597  |                                                             |  | $                                                                     | 6,078   |                 |  |      | $ | 347                        |  |       |  | $ |    |  |  | $ | 1,597  |  |  | $ | 6,425   |  |  | $ | 8,022   | 
|Featherwood              |  |                             | 368    |                                                             |  |                                                                       | 2,591   |                 |  |      |   | 408                        |  |       |  |   |    |  |  |   | 368    |  |  |   | 2,999   |  |  |   | 3,367   | 
|Pima Norte               |  |                             | 1,086  |                                                             |  |                                                                       | 7,162   |                 |  |      |   |                           |  |       |  |   | 144 |  |  |   | 1,086  |  |  |   | 7,306   |  |  |   | 8,392   | 
|Royal Crest              |  |                             | 509    |                                                             |  |                                                                       | 1,355   |                 |  |      |   | 90                         |  |       |  |   |    |  |  |   | 509    |  |  |   | 1,445   |  |  |   | 1,954   | 
|Uptown Tower             |  |                             | 1,621  |                                                             |  |                                                                       | 15,551  |                 |  |      |   | 551                        |  |       |  |   |    |  |  |   | 1,621  |  |  |   | 16,102  |  |  |   | 17,723  | 
|Woodlake Plaza           |  |                             | 1,107  |                                                             |  |                                                                       | 4,426   |                 |  |      |   | 527                        |  |       |  |   |    |  |  |   | 1,107  |  |  |   | 4,953   |  |  |   | 6,060   | 
|Zeta Building            |  |                             | 636    |                                                             |  |                                                                       | 1,819   |                 |  |      |   | 181                        |  |       |  |   |    |  |  |   | 636    |  |  |   | 2,000   |  |  |   | 2,636   | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|                         |  | $                           | 6,924  |                                                             |  | $                                                                     | 38,982  |                 |  |      | $ | 2,104                      |  |       |  | $ | 144 |  |  | $ | 6,924  |  |  | $ | 41,230  |  |  | $ | 48,154  | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 
|Grand
 Totals            |  | $                           | 33,748 |                                                             |  | $                                                                     | 138,670 |                 |  |      | $ | 9,360                      |  |       |  | $ | 144 |  |  | $ | 33,635 |  |  | $ | 148,174 |  |  | $ | 181,809 | 
|                         |  |                             |        |                                                             |  |                                                                       |         |                 |  |      |   |                            |  |       |  |   |     |  |  |   |        |  |  |   |         |  |  |   |         | 

F-26

---



Whitestone REIT and Subsidiary

Schedule III - Real Estate and Accumulated
Depreciation

December 31, 2007

(Continued)

|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|------------------------ |  | ---------------------------------------- | - | --------------------- |  | ------------- | --------- | ----------------- | ---------- |  |  | ----------- | 
|Property Name            |  | Accumulated Depreciation
 (in thousands) |   | Date of
 Construction |  | Date Acquired |           | Depreciation Life |           
|                         |  |                                          |   |                       |  |               |           |                   |           
|Retail
 Properties:      |  |                                          |   |                       |  |               |           |                   |            | 
|Bellnot Square           |  |                                          | $ | 753                   |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Bissonnet Beltway        |  |                                          |   | 749                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Centre South             |  |                                          |   | 543                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|Garden Oaks              |  |                                          |   | 1,064                 |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Greens Road              |  |                                          |   | 479                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Holly Knight             |  |                                          |   | 447                   |  |               |           |                   | 8/1/2000   |  |  | 5-39
 years | 
|Kempwood Plaza           |  |                                          |   | 982                   |  |               |           |                   | 2/2/1999   |  |  | 5-39
 years | 
|Lion Square              |  |                                          |   | 1,091                 |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|Northeast Square         |  |                                          |   | 660                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Providence               |  |                                          |   | 832                   |  |               |           |                   | 3/30/2001  |  |  | 5-39
 years | 
|South Richey             |  |                                          |   | 655                   |  |               |           |                   | 8/25/1999  |  |  | 5-39
 years | 
|South Shaver             |  |                                          |   | 173                   |  |               |           |                   | 12/17/1999 |  |  | 5-39
 years | 
|SugarPark Plaza          |  |                                          |   | 618                   |  |               |           |                   | 9/8/2004   |  |  | 5-39
 years | 
|Sunridge                 |  |                                          |   | 264                   |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Torrey Square            |  |                                          |   | 923                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|Town Park                |  |                                          |   | 976                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Webster Point            |  |                                          |   | 324                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|Westchase                |  |                                          |   | 434                   |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Windsor Park             |  |                                          |   | 1,078                 |  |               |           |                   | 12/16/2003 |  |  | 5-39
 years | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|                         |  |                                          | $ | 13,045                |  |               |           |                   |            |  |  |             | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|Warehouse
 Properties:   |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|Brookhill                |  |                                          | $ | 295                   |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Corporate Park Northwest |  |                                          |   | 1,328                 |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Corporate Park West      |  |                                          |   | 2,061                 |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Corporate Park Woodlands |  |                                          |   | 1,600                 |  |               | 11/1/2000 |                   |            |  |  | 5-39
 years | 
|Dairy Ashford            |  |                                          |   | 360                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Holly Hall               |  |                                          |   | 468                   |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|Interstate 10            |  |                                          |   | 1,398                 |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Main Park                |  |                                          |   | 991                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Plaza Park               |  |                                          |   | 979                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|West Belt Plaza          |  |                                          |   | 828                   |  |               |           |                   | 1/1/1999   |  |  | 5-39
 years | 
|Westgate                 |  |                                          |   | 528                   |  |               |           |                   | 1/1/2002   |  |  | 5-39
 years | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|                         |  |                                          | $ | 10,836                |  |               |           |                   |            |  |  |             | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|Office
 Properties:      |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|9101 LBJ Freeway         |  |                                          | $ | 461                   |  |               |           |                   | 8/10/2005  |  |  | 5-39
 years | 
|Featherwood              |  |                                          |   | 824                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|Pima Norte               |  |                                          |   |                      |  |               |           |                   | 10/4/2007  |  |  | 5-39
 years | 
|Royal Crest              |  |                                          |   | 352                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|Uptown Tower             |  |                                          |   | 973                   |  |               |           |                   | 11/22/2005 |  |  | 5-39
 years | 
|Woodlake Plaza           |  |                                          |   | 439                   |  |               |           |                   | 3/14/2005  |  |  | 5-39
 years | 
|Zeta Building            |  |                                          |   | 487                   |  |               |           |                   | 1/1/2000   |  |  | 5-39
 years | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|                         |  |                                          | $ | 3,536                 |  |               |           |                   |            |  |  |             | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 
|Grand
 Total             |  |                                          | $ | 27,417                |  |               |           |                   |            |  |  |             | 
|                         |  |                                          |   |                       |  |               |           |                   |            |  |  |             | 

F-27

---



(1)Reconciliations of total real estate carrying value for the three years ended
December 31 follows:

|                                                   |  |                  |         |      |   |         |   |   |         | 
|-------------------------------------------------- |  | ---------------- | ------- | ---- | - | ------- | - | - | ------- | 
|                                                   |  | (In
  thousands) |        
|                                                   |  |                  |        
|                                                   |  | 2007             |         | 2006 |   | 2005    |  
|                                                   |  |                  |         |      |   |         |  
|Balance at
  beginning of period                   |  | $                | 173,747 |      | $ | 173,789 |   | $ | 141,997 | 
|Additions
  during the period:                     |  |                  |         |      |   |         |   |   |         | 
|Acquisitions                                       |  |                  | 8,248   |      |   |        |   |   | 30,379  | 
|Improvements                                       |  |                  | 1,986   |      |   | 1,944   |   |   | 1,413   | 
|                                                   |  |                  |         |      |   |         |   |   |         | 
|                                                   |  |                  | 10,234  |      |   | 1,944   |   |   | 31,792  | 
|Deductions -
  cost of real estate sold or retired |  |                  | (2,172  | )    |   | (1,986  | ) |   |        | 
|                                                   |  |                  |         |      |   |         |   |   |         | 
|Balance at close of period                         |  | $                | 181,809 |      | $ | 173,747 |   | $ | 173,789 | 
|                                                   |  |                  |         |      |   |         |   |   |         | 

(2)The aggregate
cost of real estate (in thousands) for federal income tax purposes is $145,531

F-28

---



Whitestone REIT and Subsidiary

Index to Exhibits

|            |      |             |                                                                                                                                                                                                                                                                           | 
|----------- | ---- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |      | Description |                                                                                                                                                                                                                                                                           | 
|            |      |             |                                                                                                                                                                                                                                                                           | 
|            |      |             |                                                                                                                                                                                                                                                                           | 
|            | 3.1  |             | Declaration
 of Trust of Whitestone REIT, a Maryland real estate investment trust
 (previously filed as and incorporated by reference to Exhibit 3.1 to the Registrants
 Registration Statement on Form S-11/A, Commission File No. 333-111674, filed
 on May 24, 2004) 
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 3.2  |             | Articles of
 Amendment and Restatement of Declaration of Trust of Whitestone REIT
 (previously filed as and incorporated by reference to Exhibit 3.2 to the
 Registrants Registration Statement on Form S-11/A, Commission File No.
 333-111674, filed on July 29, 2004)
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 3.3  |             | Articles
 Supplementary (previously filed as and incorporated by reference to Exhibit
 3(i).1 to the Registrants Current Report on Form 8-K, Commission File No.
 000-50256, filed on December 6, 2006)                                                                 
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 3.4  |             | Bylaws
 (previously filed as and incorporated by reference to Exhibit 3.2 to the
 Registrants Registration Statement on Form S-11, Commission File No.
 333-111674, filed on December 31, 2003)                                                                         
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 3.5  |             | First
 Amendment to Bylaws (previously filed as and incorporated by reference to
 Exhibit 3(ii).1 to the Registrants Current Report on Form 8-K, Commission
 File No. 000-50256, filed on December 6, 2006)                                                             
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 4.1  |             | Specimen
 certificate for common shares of beneficial interest, par value $.001
 (previously filed as and incorporated by reference to Exhibit 4.2 to the
 Registrants Registration Statement on Form S-11, Commission File No.
 333-111674, filed on December 31, 2003)
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 10.1 |             | Agreement of
 Limited Partnership of Hartman REIT Operating Partnership, L.P. (previously
 filed as and incorporated by reference to Exhibit 10.1 to the Registrants
 General Form for Registration of Securities on Form 10, filed on April 30,
 2003)                 
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 10.2 |             | Amended and
 Restated Property Management Agreement (previously filed and incorporated by
 reference to Exhibit 10.2 to the Registrants Form 10-K Annual Report for the
 year ended December 31, 2004, filed on March 31, 2005) (terminated on October
 2, 2006)        
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 10.3 |             | Advisory
 Agreement (previously filed and incorporated by reference to Exhibit 10.3 to
 the Registrants Annual Report on Form 10-K for the year ended December 31,
 2004, filed on March 31, 2005) (terminated on September 30, 2006)                                   
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 10.4 |             | Certificate
 of Formation of Hartman REIT Operating Partnership II GP, LLC (previously
 filed as and incorporated by reference to Exhibit 10.3 to the Registrants
 General Form for Registration of Securities on Form 10, filed on April 30,
 2003)                    
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 10.5 |             | Limited
 Liability Company Agreement of Hartman REIT Operating Partnership II GP, LLC
 (previously filed as and incorporated by reference to Exhibit 10.4 to the
 Registrants General Form for Registration of Securities on Form 10, filed on
 April 30, 2003)         
|            |      |             |                                                                                                                                                                                                                                                                          
|            | 10.6 |             | Agreement of
 Limited Partnership of Hartman REIT Operating Partnership II, L.P.
 (previously filed as and incorporated by reference to Exhibit 10.6 to the
 Registrants General Form for Registration of Securities on Form 10, filed on
 April 30, 2003)              

---



|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|----------- | ------ | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |        | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.7   |             | Promissory
 Note, dated December 20, 2002, between Hartman REIT Operating Partnership II,
 L.P. and GMAC Commercial Mortgage Corporation (previously filed as and
 incorporated by reference to Exhibit 10.7 to the Registrants General Form
 for Registration of Securities on Form 10, filed on April 30, 2003)                                                                                                                                                 
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.8   |             | Deed of
 Trust and Security Agreement, dated December 20, 2002, between Hartman REIT
 Operating Partnership II, L.P. and GMAC Commercial Mortgage Corporation
 (previously filed as and incorporated by reference to Exhibit 10.8 to the
 Registrants General Form for Registration of Securities on Form 10, filed on
 April 30, 2003)                                                                                                                           
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.9   |             | Loan
 Agreement between Hartman REIT Operating Partnership, L.P. and Union
 Planters Bank, N.A. (previously filed as and incorporated by reference to
 Exhibit 10.10 to Amendment No. 2 to the Registrants General Form for
 Registration of Securities on Form 10, filed on August 6, 2003)                                                                                                                                                                     
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.11+ |             | Summary
 Description of Whitestone REIT Trustee Compensation Arrangements (previously
 filed and incorporated by reference to Exhibit 10.11 of the Registrants
 Annual Report on Form 10-K for the year ended December 31, 2004, filed on
 March 31, 2005)                                                                                                                                                                                                        
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.12  |             | Form of
 Agreement and Plan of Merger and Reorganization (previously filed as and
 incorporated by reference to the Registrants Proxy Statement, filed on April
 29, 2004)                                                                                                                                                                                                                                                                                        
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.13  |             | Dealer
 Manager Agreement (previously filed and as incorporated by reference to
 Exhibit 10.13 to the Registrants Annual Report on Form 10-K for the year
 ended December 31, 2004, Commission File No. 000-50256, Central Index Key No.
 0001175535, filed on March 31, 2005)                                                                                                                                                                                    
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.14  |             | Escrow
 Agreement (previously filed as and incorporated by reference to Exhibit 10.14
 to the Registrants Annual Report on Form 10-K for the year ended December
 31, 2004, filed on March 31, 2005)                                                                                                                                                                                                                                                              
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.15  |             | Form of
 Amendment to the Agreement of Limited Partnership of Hartman REIT Operating
 Partnership, L.P. (previously filed in and incorporated by reference to the
 Registrants Registration Statement on Form S-11, Commission File No.
 333-111674, filed on December 31, 2003)                                                                                                                                                                                  
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.16  |             | Revolving
 Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman REIT
 Operating Partnership III LP, and KeyBank National Association (together with
 other participating lenders), dated June 2, 2005 (previously filed as and
 incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1
 to the Registrants Registration Statement on Form S-11, Commission File No.
 333-111674, filed on June 17, 2005)                
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.17  |             | Form of
 Revolving Credit Note under Revolving Credit Agreement among Hartman REIT
 Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and
 KeyBank National Association (together with other participating lenders)
 (previously filed as and incorporated by reference to Exhibit 10.14 to
 Post-Effective Amendment No. 1 to the Registrants Registration Statement on
 Form S-11, Commission File No. 333-111674, filed on June 17, 2005)

---



|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|----------- | ----- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |       | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.18 |             | Guaranty
 under Revolving Credit Agreement among Hartman REIT Operating Partnership,
 L.P., Hartman REIT Operating Partnership III LP, and KeyBank National
 Association (together with other participating lenders) (previously filed as
 and incorporated by reference to Exhibit 10.15 to Post-Effective Amendment
 No. 1 to the Registrants Registration Statement on Form S-11, Commission
 File No. 333-111674, filed on June 17, 2005)                                              
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.19 |             | Form of
 Negative Pledge Agreement under Revolving Credit Agreement among Hartman REIT
 Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and
 KeyBank National Association (together with other participating lenders)
 (previously filed as and incorporated by reference to Exhibit 10.16 to
 Post-Effective Amendment No. 1 to the Registrants Registration Statement on
 Form S-11, Commission File No. 333-111674, filed on June 17, 2005)                     
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.20 |             | Form of Collateral
 Assignment of Partnership Interests under Revolving Credit Agreement among
 Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership
 III LP, and KeyBank National Association (together with other participating
 lenders) (previously filed as and incorporated by reference to Exhibit 10.17
 to Post-Effective Amendment No. 1 to the Registrants Registration Statement
 on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.21 |             | Modification
 Agreement, dated as of February 28, 2006, between Hartman REIT Operating
 Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously
 filed and incorporated by reference to Exhibit 10.1 to the Registrants
 Current Report on Form 8-K, filed March 3, 2006)                                                                                                                                                                                                
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.22 |             | Interest
 Rate Swap Agreement dated as of March 16, 2006, between Hartman REIT
 Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and
 KeyBank National Association (previously filed as and incorporated by
 reference to Exhibit 10.22 to the Registrants Annual Report on Form 10-K for
 the year ended December 31, 2005, filed on March 31, 2006)                                                                                                               
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.23 |             | Waiver and
 Amendment No. 1, dated May 8, 2006, between Hartman REIT Operating
 Partnership, L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank
 National Association, as agent for the consortium of lenders (previously
 filed and incorporated by reference to Exhibit 10.23 to the Registrants
 Quarterly Report on Form 10-Q, filed on May 12, 2006)                                                                                                                     
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.24 |             | Amendment
 No. 2, dated May 19, 2006, between Hartman REIT Operating Partnership, L.P.,
 Hartman REIT Operating Partnership III, L.P., and KeyBank National
 Association, as agent for the consortium of lenders (previously filed and
 incorporated by reference to Exhibit 10.24 to the Registrants Annual Report
 on Form 10-K for the year ended December 31, 2006, filed on March 30, 2007)                                                                                           
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.25 |             | Promissory
 Note between HCP REIT Operating Company IV LLC and MidFirst Bank, dated March
 1, 2007 (previously filed and incorporated by reference to Exhibit 10.25 to
 the Registrants Annual Report on Form 10-K for the year ended December 31,
 2006, filed on March 30, 2007)                                                                                                                                                                                                         
|            |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10.26 |             | Amendment
 No. 3, dated March 26, 2007, between Hartman REIT Operating Partnership,
 L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National
 Association, as agent for the consortium of lenders (previously filed and
 incorporated by reference to Exhibit 10.26 to the Registrants Annual Report
 on Form 10-K for the year ended December 31, 2006, filed on March 30, 2007)                                                                                         

---



|            |        |             |                                                                                                                                                                                                                                                                                                                                                                        | 
|----------- | ------ | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |        | Description |                                                                                                                                                                                                                                                                                                                                                                       
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.27  |             | Amendment
 No. 5, dated October 31, 2007, between Hartman REIT Operating Partnership,
 L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National
 Association, as agent for the consortium of lenders (previously filed and
 incorporated by reference to Exhibit 10.27 to the Registrants Quarterly
 Report on Form 10-Q, filed on November 14, 2007)
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.28* |             | Amendment
 No.6, dated March 11, 2008, between Whitestone REIT Operating Partnership,
 L.P., Whitestone REIT Operating Partnership III, L.P., and KeyBank National
 Association, as agent for the consortium of lenders                                                                                                                                               
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.29* |             | Term Loan
 Agreement among Whitestone REIT Operating Partnership, L.P., Whitestone Pima
 Norte LLC, and KeyBank National Association, dated January 25, 2008                                                                                                                                                                                                          
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 14.1   |             | Code of
 Business Conduct and Ethics effective May 14, 2007 (previously filed and
 incorporated by reference to Exhibit 14.1 to the Registrants Quarterly
 Report on Form 10-Q, filed on November 14, 2007)                                                                                                                                                          
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 99.1   |             | Insider
 Trading Compliance Policy effective May 14, 2007 (previously filed and
 incorporated by reference to Exhibit 99.1 to the Registrants Quarterly
 Report on Form 10-Q, filed on November 14, 2007)                                                                                                                                                            
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 99.2   |             | Nominating
 and Governance Committee Charter effective May 14, 2007 (previously filed and
 incorporated by reference to Exhibit 99.2 to the Registrants Quarterly
 Report on Form 10-Q, filed on November 14, 2007)                                                                                                                                                  
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 99.3   |             | Audit
 Committee Charter effective May 14, 2007 (previously filed and incorporated
 by reference to Exhibit 99.3 to the Registrants Quarterly Report on Form
 10-Q, filed on November 14, 2007)                                                                                                                                                                      
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 99.4   |             | Compensation
 Committee Charter effective May 14, 2007 (previously filed and incorporated
 by reference to Exhibit 99.4 to the Registrants Quarterly Report on Form
 10-Q, filed on November 14, 2007)                                                                                                                                                               
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 21.1   |             | List of
 subsidiaries of Whitestone REIT (previously filed as and incorporated by
 reference to Exhibit 21.1 to the Registrants Annual Report on Form 10-K for
 the year ended December 31, 2004, filed on March 31, 2005)                                                                                                                                           
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 24.1   |             | Power of
 Attorney (included on the Signatures page hereto)                                                                                                                                                                                                                                                                                                           
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 31.1*  |             | Certification
 of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
 Act of 2002                                                                                                                                                                                                                                                              
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 31.2*  |             | Certification
 of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
 Act of 2002                                                                                                                                                                                                                                                              
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 32.1*  |             | Certificate
 of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002                                                                                                                                                                                                                                                                    
|            |        |             |                                                                                                                                                                                                                                                                                                                                                                       
|            | 32.2*  |             | Certificate
 of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002                                                                                                                                                                                                                                                                    

|  |                                                                   | 
|- | ----------------------------------------------------------------- | 
|  |                                                                  
|  |                                                                   | 
|* | Filed
 herewith.                                                 
|  |                                                                   | 
|+ | Denotes
 management contract or compensatory plan or arrangement.

---