UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10 - Q





(Mark
One)


x          QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For
the quarterly period ended September 30, 2008.





OR





o           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For
the transition period from _________ to __________.





Commission
File Number:  001-32470





Franklin
Street Properties Corp.


(Exact
name of registrant as specified in its charter)








Maryland
            04-3578653(State
      or other jurisdiction of incorporation
            (IRS
      Employer Identification Number)or
      organization)





401
Edgewater Place, Suite 200


Wakefield,
MA 01880-6210


(Address
of principal executive offices)(Zip Code)





(781) 557-1300


(Registrant’s
telephone number, including area code)





N/A


(Former
name, former address and former fiscal year, if changed since last
report)





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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer x
            
            Accelerated
      filer oNon-accelerated
      filer    o
      (Do not check if a smaller reporting company)
            Smaller
      reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





YES     o
            NOx





The
number of shares of common stock outstanding as of October 31, 2008 was
70,480,705.








Franklin
Street Properties Corp.





Form
10-Q





Quarterly
Report


September
30, 2008





Table
of Contents








Part
      I.
            Financial
      Information (Unaudited)PageItem
      1.
            Financial
      StatementsCondensed
      Consolidated Balance Sheets as of September 30, 2008 and
              December
      31, 2007
            
            3Condensed
      Consolidated Statements of Income for the three and nine months
      ended
              September
      30, 2008 and 2007
            
            4Condensed
      Consolidated Statements of Cash Flows for the nine months ended
              September
      30, 2008 and 2007
            
            5-6Notes
      to Condensed Consolidated Financial Statements
            
            7-18Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            19-27Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            28Item
      4.
            Controls
      and Procedures
            
            29Part
      II.
            Other
      InformationItem
      1.
            Legal
      Proceedings
            
            30Item
      1A.
            Risk
      Factors
            
            30Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            31Item
      3.
            Defaults
      Upon Senior Securities
            
            32Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            32Item
      5.
            Other
      Information
            
            32Item
      6.
            Exhibits
            
            32Signatures
            
            
            33
















PART
I – FINANCIAL INFORMATION


Item
1.          Financial
Statements





Franklin
Street Properties Corp.


Condensed
Consolidated Balance Sheets


(Unaudited)





September
      30,
            
            
            December
      31,(in
      thousands, except share and par value amounts)
            
            2008
            
            
            2007Assets:Real
      estate assets:Land
            
            $
            100,440
            
            
            $
            99,140Buildings
      and improvements
            
            
            780,276
            
            
            
            743,027Fixtures
      and equipment
            
            
            301
            
            
            
            212881,017
            
            
            
            842,379Less
      accumulated depreciation
            
            
            68,579
            
            
            
            52,060Real
      estate assets, net
            
            
            812,438
            
            
            
            790,319Acquired
      real estate leases, less accumulated amortizationof
      $26,831 and $23,401, respectively
            
            
            28,024
            
            
            
            33,695Investment
      in non-consolidated REITs
            
            
            83,896
            
            
            
            85,663Assets
      held for syndication, net
            
            
            13,335
            
            
            
            26,310Cash
      and cash equivalents
            
            
            34,527
            
            
            
            46,988Restricted
      cash
            
            
            336
            
            
            
            336Tenant
      rent receivables, less allowance for doubtful accountsof
      $509 and $430, respectively
            
            
            1,174
            
            
            
            1,472Straight-line
      rent receivable, less allowance for doubtful accountsof
      $261 and $261, respectively
            
            
            8,255
            
            
            
            7,387Prepaid
      expenses
            
            
            2,922
            
            
            
            1,395Other
      assets
            
            
            1,475
            
            
            
            406Office
      computers and furniture, net of accumulated depreciationof
      $1,075 and $968, respectively
            
            
            313
            
            
            
            309Deferred
      leasing commissions, net of accumulated amortizationof
      $2,988, and $1,975, respectively
            
            
            10,365
            
            
            
            9,186Total
      assets
            
            $
            997,060
            
            
            $
            1,003,466Liabilities and Stockholders’
      Equity:Liabilities:Bank note payable
            
            $
            105,118
            
            
            $
            84,750Accounts payable and accrued
      expenses
            
            
            24,945
            
            
            
            20,255Accrued compensation
            
            
            1,652
            
            
            
            1,564Tenant security
      deposits
            
            
            1,823
            
            
            
            1,874Acquired unfavorable real estate
      leases, less accumulated amortizationof $1,587, and $1,226, respectively
            
            
            4,654
            
            
            
            4,405Total liabilities
            
            
            138,192
            
            
            
            112,848Commitments and
      contingenciesStockholders’
      Equity:Preferred
      stock, $.0001 par value, 20,000,000 shares
              authorized,
      none issued or outstanding
            
            
            -
            
            
            
            -Common
      stock, $.0001 par value, 180,000,000 shares authorized,
              70,480,705
      and 70,480,705 shares issued and outstanding, respectively
            
            
            7
            
            
            
            7Additional
      paid-in capital
            
            
            889,019
            
            
            
            889,019Earnings
      (distributions) in excess of accumulated earnings/distributions
            
            
            (30,158
            )
            
            
            1,592Total
      stockholders’ equity
            
            
            858,868
            
            
            
            890,618Total
      liabilities and stockholders’ equity
            
            $
            997,060
            
            
            $
            1,003,466The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.








3





Franklin
Street Properties Corp.


Condensed
Consolidated Statements of Income


(Unaudited)





For
      the
              Three
      Months Ended
              September
      30,
            
            
            For
      the
              Nine
      Months Ended
              September
      30,(in
      thousands, except per share amounts)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue:Rental
            
            $
            27,927
            
            
            $
            27,109
            
            
            $
            82,283
            
            
            $
            75,110Related
      party revenue:Syndication
      fees
            
            
            304
            
            
            
            687
            
            
            
            3,766
            
            
            
            7,090Transaction
      fees
            
            
            300
            
            
            
            604
            
            
            
            3,606
            
            
            
            7,446Management
      fees and interest income from loans
            
            
            380
            
            
            
            1,497
            
            
            
            1,364
            
            
            
            5,176Other
            
            
            13
            
            
            
            37
            
            
            
            52
            
            
            
            84Total
      revenue
            
            
            28,924
            
            
            
            29,934
            
            
            
            91,071
            
            
            
            94,906Expenses:Real
      estate operating expenses
            
            
            7,159
            
            
            
            7,151
            
            
            
            20,973
            
            
            
            19,026Real
      estate taxes and insurance
            
            
            4,590
            
            
            
            4,398
            
            
            
            13,375
            
            
            
            12,490Depreciation
      and amortization
            
            
            7,666
            
            
            
            7,756
            
            
            
            22,616
            
            
            
            21,710Selling,
      general and administrative
            
            
            1,927
            
            
            
            1,787
            
            
            
            6,557
            
            
            
            5,675Commissions
            
            
            208
            
            
            
            406
            
            
            
            2,020
            
            
            
            3,720Interest
            
            
            1,108
            
            
            
            1,823
            
            
            
            3,351
            
            
            
            6,121Total
      expenses
            
            
            22,658
            
            
            
            23,321
            
            
            
            68,892
            
            
            
            68,742Income
      before interest income, equity in earnings (losses) ofnon-consolidated
      REITs and taxes
            
            
            6,266
            
            
            
            6,613
            
            
            
            22,179
            
            
            
            26,164Interest
      income
            
            
            177
            
            
            
            650
            
            
            
            657
            
            
            
            1,864Equity
      in earnings (losses) of non-consolidated REITs
            
            
            679
            
            
            
            147
            
            
            
            2,167
            
            
            
            (611
            )Income
      before taxes
            
            
            7,122
            
            
            
            7,410
            
            
            
            25,003
            
            
            
            27,417Income
      tax expense (benefit)
            
            
            (297
            )
            
            
            (206
            )
            
            
            (337
            )
            
            
            514Income
      from continuing operations
            
            
            7,419
            
            
            
            7,616
            
            
            
            25,340
            
            
            
            26,903Discontinued
      operations:Income
      (loss) from discontinued operations
            
            
            -
            
            
            
            (72
            )
            
            
            -
            
            
            
            1,259Gain
      on sale of assets, less applicable income tax
            
            
            -
            
            
            
            1,942
            
            
            
            -
            
            
            
            23,532Total
      discontinued operations
            
            
            -
            
            
            
            1,870
            
            
            
            -
            
            
            
            24,791Net
      income
            
            $
            7,419
            
            
            $
            9,486
            
            
            $
            25,340
            
            
            $
            51,694Weighted
      average number of shares outstanding,basic
      and diluted
            
            
            70,481
            
            
            
            70,596
            
            
            
            70,481
            
            
            
            70,709Earnings
      per share, basic and diluted, attributable to:Continuing
      operations
            
            $
            0.11
            
            
            $
            0.11
            
            
            $
            0.36
            
            
            $
            0.38Discontinued
      operations
            
            
            -
            
            
            
            0.02
            
            
            
            -
            
            
            
            0.35Net
      income per share, basic and diluted
            
            $
            0.11
            
            
            $
            0.13
            
            
            $
            0.36
            
            
            $
            0.73The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.





4





Franklin
Street Properties Corp.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





For
      the
              Nine
      Months Ended
              September
      30,(in
      thousands)
            
            2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            25,340
            
            
            $
            51,694Adjustments
      to reconcile net income to net cash
              provided
      by  operating activities:Gains
      on assets sold
            
            
            -
            
            
            
            (23,532
            )Depreciation
      and amortization expense
            
            
            22,649
            
            
            
            22,818Amortization
      of above market lease
            
            
            3,376
            
            
            
            3,706Equity
      in earnings (losses) from non-consolidated REITs
            
            
            (2,167
            )
            
            
            619Distributions
      from non-consolidated REITs
            
            
            3,838
            
            
            
            1,199Increase
      in bad debt reserve
            
            
            79
            
            
            
            -Changes
      in operating assets and liabilities:Restricted
      cash
            
            
            -
            
            
            
            425Tenant
      rent receivables, net
            
            
            219
            
            
            
            1,053Straight-line
      rents, net
            
            
            (854
            )
            
            
            (2,924
            )Prepaid
      expenses and other assets, net
            
            
            (1,474
            )
            
            
            (717
            )Accounts
      payable and accrued expenses
            
            
            3,863
            
            
            
            572Accrued
      compensation
            
            
            88
            
            
            
            (1,273
            )Tenant
      security deposits
            
            
            (51
            )
            
            
            179Payment
      of deferred leasing commissions
            
            
            (2,434
            )
            
            
            (2,905
            )Net
      cash provided by operating activities
            
            
            52,472
            
            
            
            50,914Cash
      flows from investing activities:Purchase
      of real estate assets, office computers and
              furniture,
      capitalized merger costs
            
            
            (37,215
            )
            
            
            (75,887
            )Purchase
      of acquired favorable and unfavorable leases
            
            
            (2,067
            )
            
            
            (3,726
            )Investment
      in non-consolidated REITs
            
            
            (10
            )
            
            
            (18
            )Investment
      in loan receivable
            
            
            (1,125
            )
            
            
            -Redemption
      of certificate of deposit
            
            
            -
            
            
            
            5,143Investment
      in assets held for syndication, net
            
            
            12,235
            
            
            
            (112,618
            )Proceeds
      received on sales of real estate assets
            
            
            -
            
            
            
            85,673Net
      cash used in investing activities
            
            
            (28,182
            )
            
            
            (101,433
            )Cash
      flows from financing activities:Distributions
      to stockholders
            
            
            (57,089
            )
            
            
            (65,813
            )Purchase
      of treasury shares
            
            
            -
            
            
            
            (4,767
            )Repayments
      under bank note payable, net
            
            
            20,368
            
            
            
            104,550Deferred
      financing costs
            
            
            (30
            )
            
            
            (7
            )Net
      cash (used in) provided by financing activities
            
            
            (36,751
            )
            
            
            33,963Net
      increase (decrease) in cash and cash equivalents
            
            
            (12,461
            )
            
            
            (16,556
            )Cash
      and cash equivalents, beginning of period
            
            
            46,988
            
            
            
            69,973Cash
      and cash equivalents, end of period
            
            $
            34,527
            
            
            $
            53,417The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.








5





Franklin
Street Properties Corp.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





For
      the
              Nine
      Months Ended
              September
      30,(in
      thousands)
            
            2008
            
            
            2007Non-cash investing and financing
      activities:Accrued
      costs for purchase of real estate assets
            
            $
            2,027
            
            
            $
            1,716Deposits
      on investments in assets held for syndication
            
            $
            -
            
            
            $
            5,010Investment
      in non-consolidated REITs converted to real estate assetsand
      acquired real estate leases in conjunction with merger
            
            $
            1,162
            
            
            $
            -The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.








6




Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





1.      Organization,
Properties, Basis of Presentation and Recent Accounting Pronouncements





Organization





Franklin
Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and
indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management
LLC, FSP Holdings LLC and FSP Protective TRS Corp.  The Company also
has a non-controlling common stock interest in twelve corporations organized to
operate as real estate investment trusts ("REITs") and a non-controlling
preferred stock interest in two of those REITs.





The
Company operates in two business segments: real estate operations and investment
banking/investment services. FSP Investments LLC provides real estate investment
and broker/dealer services. FSP Investments LLC's services include: (i) the
organization of REIT entities (the "Sponsored REITs"), which are syndicated
through private placements; (ii) sourcing of the acquisition of real estate on
behalf of the Sponsored REITs; and (iii) the sale of preferred stock in the
Sponsored REITs.  FSP Investments LLC is a registered broker/dealer
with the Securities and Exchange Commission and is a member of the Financial
Industry Regulatory Authority, or FINRA.  FSP Property Management LLC
provides asset management and property management services for the Sponsored
REITs.





The Company owns and operates a
portfolio of real estate, which consisted of 27 properties as of September 30, 2008.  From
time-to-time the Company may acquire real estate or invest in real estate by
purchasing shares of preferred stock offered in syndications of Sponsored
REITs.  The Company may also pursue, on a selective basis, the sale of
its properties in order to take advantage of the value creation and demand for
its properties, or for geographic or property specific reasons.





On
May 15, 2008, the Company acquired one of its Sponsored REITs, FSP Park Ten
Development Corp. (“Park Ten Development”) by merging a wholly-owned subsidiary
of the Company with and into Park Ten Development for a total purchase price of
approximately $35.4 million.  The holders of preferred stock in Park
Ten Development received cash consideration of approximately $127,290 per
share.  The merger was accounted for as a purchase and the acquired
assets and liabilities were recorded at their fair value.





Properties





The
following table summarizes the Company’s investment in real estate assets,
excluding assets held for syndication and assets held for sale:





As
      ofSeptember
      30,2008
            
            
            2007Commercial
      real estate:Number
      of properties
            
            
            27
            
            
            
            27Square
      feet
            
            
            5,153,396
            
            
            
            5,066,813





Basis
of Presentation





The
unaudited condensed consolidated financial statements of the Company include all
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. These financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for its fiscal year ended December 31, 2007, as filed with the
Securities and Exchange Commission.





The
accompanying interim financial statements are unaudited; however, the financial
statements have been prepared in accordance with generally accepted accounting
principles (“GAAP”) in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.  Operating results for the three and nine months ended
September 30, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008 or for any other period.




7





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





1.      Organization,
Properties, Basis of Presentation and Recent Accounting Pronouncements
(continued)





Reclassifications





Certain amounts from the 2007 income
statement have been reclassified to conform to the 2008
presentation.  The reclassification primarily reflected a state tax on gross
receipts as an income tax, which is further described in the income tax
footnote.  The reclassification changed the amount of real estate taxes and
insurance and income taxes presented on the Company’s 2007 income
statement. There was no change to net
income as a result of this
reclassification.





Recent
Accounting Standards





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements.  SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute.  SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years.  The adoption of this
standard did not have a material impact on the Company’s financial position,
operations or cash flow.





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”, which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The adoption of this standard
did not have a material impact the Company’s financial position, results of
operations or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, which establishes principles and requirements for how the
acquirer shall recognize and measure in its financial statements the
identifiable assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree and goodwill acquired in a business combination. SFAS No. 141(R)
is effective for 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. The Company is currently assessing the potential impact that
the adoption of SFAS No. 141(R) will have on our financial position, results of
operations or cash flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS No.
160).  SFAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS No. 160 also amends certain of
ARB No. 51’s consolidation procedures for consistency with the requirements of
SFAS No. 141R.  SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.  The Company is currently evaluating the impact of SFAS No. 160
on the Company’s consolidated financial statements.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”
SFAS No. 161 requires entities to provide greater transparency about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash
flows.  SFAS No. 161 is effective on January 1, 2009.  The
Company is currently evaluating the impact of SFAS No. 161 on the Company’s
consolidated financial statements.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162).  SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy).  SFAS No.
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.  The Company is currently evaluating the impact of SFAS
No. 162 on the Company’s consolidated financial statements.








8





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





2.      Investment
Banking/Investment Services Activity







During
the nine months ended September 30, 2008, the Company has sold on a best efforts
basis, through private placements, preferred stock in the following Sponsored
REITs:





Sponsored REIT
            Property Location
            
            Gross Proceeds (1)(in thousands)FSP Grand Boulevard
      Corp.
            Kansas City, MO
            
            $
            24,075FSP 385 Interlocken Development
      Corp.
            Broomfield, CO
            
            
            33,275Total
            
            $
            57,350





(1).
The syndications of FSP Grand Boulevard Corp. (“Grand Boulevard”), which
commenced in September 2007, and FSP 385 Interlocken Development Corp. (“385
Interlocken”), which commenced in June 2008, were not complete at September 30,
2008.





3.      Related
Party Transactions and Investments in Non-Consolidated Entities





Investment
in Sponsored REITs:





At
September 30, 2008, the Company held an interest in twelve Sponsored
REITs.  Ten were fully syndicated and the Company no longer derives
economic benefits or risks from the common stock interest that is retained in
them.  The Company holds a non-controlling preferred stock investment
in two of these Sponsored REITs, FSP Phoenix Tower Corp. (“Phoenix Tower”) and
FSP 303 East Wacker Drive Corp. (“East Wacker”), from which it continues to
derive economic benefits and risks.  The remaining entities that were
not fully syndicated at September 30, 2008 are Grand Boulevard and 385
Interlocken.  Grand Boulevard has a carrying value of approximately
$13.3 million and $26.3 million on the accompanying condensed consolidated
balance sheets as of September 30, 2008 and December 31, 2007, respectively and
is classified as an asset held for syndication.





The table below shows the Company’s
share of revenues
and expenses from Sponsored REITs
prior to consolidation.  Management fees of $30,000 and interest
expense on acquisition
loans made by the Company
to Sponsored REITs for
the nine months
ended September 30, 2007 are eliminated in
consolidation.





Nine Months EndedSeptember 30,(in thousands)
            
            2007Operating Data:Rental revenues
            
            $
            3,449Operating and
      maintenanceexpenses
            
            
            (1,834
            )Depreciation and
      amortization
            
            
            (856
            )Interest expense: permanent
      mortgage loan
            
            
            (179
            )Interest expense: acquisition
      loan
            
            
            (1,448
            )Interest income
            
            
            51$
            (817
            )











9





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





3.      Related
Party Transactions and Investments in Non-consolidated Entities
(continued)





Equity in earnings (losses) of
investment in
non-consolidated Sponsored REITs:





The
following table includes equity in earnings (losses) of investments in
non-consolidated Sponsored REITs:





Nine Months EndedSeptember 30,(in thousands)
            
            2008
            
            
            2007Equity in earnings (losses) of
      Sponsored REITs
            
            $
            133
            
            
            $
            (776
            )Equity in earnings of Park Ten
      Development
            
            
            10
            
            
            
            8Equity in earnings of Phoenix
      Tower
            
            
            18
            
            
            
            157Equity in earnings of East
      Wacker
            
            
            2,006
            
            
            
            -$
            2,167
            
            
            $
            (611
            )





Equity
in earnings (losses) of investments in Sponsored REITs is derived from the
Company’s share of income or losses following the commencement of syndication of
Sponsored REITs.  Following the commencement of syndication, the
Company exercises influence over, but does not control these entities, and
investments are accounted for using the equity method.





Equity
in earnings of Park Ten Development was derived from the Company’s preferred
stock investment in the entity.  In September 2005, the Company
acquired 8.5 preferred shares or 3.05% of the authorized preferred shares of
Park Ten Development via a non-monetary exchange of land valued at
$850,000.  The Company acquired Park Ten Development by merger on May
15, 2008, which merger was accounted for as a purchase, and the acquired assets
and liabilities were recorded at their fair value.





Equity
in earnings of Phoenix Tower is derived from the Company’s preferred stock
investment in the entity.  In September 2006, the Company purchased 48
preferred shares or 4.6% of the outstanding preferred shares of Phoenix Tower
for $4,116,000 (which represented $4,800,000 at the offering price net of
commissions of $384,000 and fees of $300,000 that were excluded).





Equity
in earnings of East Wacker is derived from the Company’s preferred stock
investment in the entity.  In December 2007, the Company purchased
965.75 preferred shares or 43.7% of the outstanding preferred shares of East
Wacker for $82,813,000 (which represented $96,575,000 at the offering price net
of commissions of $7,726,000, loan fees of $5,553,000 and acquisition fees of
$483,000 that were excluded).





The
Company recorded distributions declared of $3,838,000 and $1,199,000 from
Sponsored REITs during the nine months ended September 30, 2008 and 2007,
respectively.





Non-consolidated
Sponsored REITs:





The
Company has in the past acquired by merger entities similar to the Sponsored
REITs.  On March 19, 2008, the Company entered into an agreement and
plan of merger to acquire Park Ten Development by merger for a total purchase
price of approximately $35.4 million. Upon completion of the acquisition on May
15, 2008, the holders of preferred stock in Park Ten Development received cash
consideration of approximately $127,290 per share. The acquisition was effected
by merging a wholly-owned subsidiary of the Company with and into Park Ten
Development.  Consummation of the acquisition required the approval of
Park Ten Development's stockholders.  The Company’s business model for
growth includes the potential acquisition by merger in the future of Sponsored
REITs.  The Company has no legal or any other enforceable obligation
to acquire or to offer to acquire any Sponsored REIT.  In addition,
any offer (and the related terms and conditions) that might be made in the
future to acquire any Sponsored REIT would require the approval of the boards of
directors of the Company and the Sponsored REIT and the approval of the
shareholders of the Sponsored REIT.





The
operating data below for 2008 includes operations of the twelve Sponsored REITs
the Company held an interest in as of September 30, 2008, and Park Ten
Development from January through May 14, 2008.  The Company acquired
Park Ten Development by merger on May 15, 2008.  The operating data
for 2007 includes operations of the twelve Sponsored REITs the Company held an
interest in as of September 30, 2007.





10





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





3.      Related
Party Transactions and Investments in Non-consolidated Entities
(continued)





At
September 30, 2008, December 31, 2007 and September 30, 2007, the Company had
ownership interests in twelve Sponsored REITs.  Summarized financial information for
these Sponsored REITs is as follows:





September 30,
            
            
            December 31,(in thousands)
            
            2008
            
            
            2007Balance
      Sheet Data (unaudited):Real estate, net
            
            $
            678,645
            
            
            $
            684,441Other assets
            
            
            123,229
            
            
            
            96,180Total liabilities
            
            
            (189,784
            )
            
            
            (202,757
            )Shareholders' equity
            
            $
            612,090
            
            
            $
            577,864





For
      the Nine Months Ended
              September
      30,(in thousands)
            
            2008
            
            
            2007Operating
      Data (unaudited):Rental revenues
            
            $
            76,023
            
            
            $
            69,654Other revenues
            
            
            1,638
            
            
            
            2,348Operating and
      maintenance  expenses
            
            
            (40,303
            )
            
            
            (33,605
            )Depreciation and
      amortization
            
            
            (17,805
            )
            
            
            (16,280
            )Interest expense
            
            
            (7,970
            )
            
            
            (17,838
            )Net income
            
            $
            11,583
            
            
            $
            4,279





Syndication fees and Transaction
fees:




The
Company provides syndication and real estate acquisition advisory services for
Sponsored REITs.  Syndication and transaction
fees from non-consolidated entities amounted to approximately $7,372,000
and $14,536,000 for the nine months ended September 30, 2008 and 2007, respectively.




Management fees and interest income from
loans:




Asset
management fees range from 1% to 5% of collected rents and the applicable
contracts are cancelable with 30 days notice.  Asset management fee income from non-consolidated
entities amounted to approximately $706,000 and $637,000 for the nine months ended September 30, 2008 and 2007, respectively.The
Company typically makes interim mortgage loans to Sponsored REITs that enable
Sponsored REITs to acquire their respective properties prior to the consummation
of the offering of their equity interests.  The interim mortgage loans
are subsequently repaid out of offering proceeds.





In
December 2007, the Company entered into a secured promissory note for a
revolving line of credit (the “Highland Revolver”) for up to $5.5 million with a
Sponsored REIT, FSP Highland Place I Corp., that owns an office building in
Englewood, Colorado, of which $1,125,000 has been drawn and is outstanding as of
September 30,
2008.  The balance of this loan is classified in other
assets.  Advances under the Highland Revolver bear interest at a rate
equal to the 30 day LIBOR rate plus 200 basis points.  The Highland
Revolver was made for the purpose of funding capital expenditures and other
costs of leasing.  The Company anticipates that any advances made
under the Highland Revolver will be repaid at its maturity on December 31, 2010
or earlier from long-term financing of the property, cash flows from the
property or a capital event.





The
Company recognized interest income from interim mortgage loans and advances on
the Highland Revolver of approximately $658,000 and $4,540,000 for the nine months ended September 30, 2008 and 2007, respectively.








11





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





4.      Bank
Note Payable





The
Company has a revolving line of credit agreement (the "Revolver") with a group
of banks providing for borrowings at the Company’s election of up to
$250,000,000, which matures on August 11, 2011.  Borrowings under the
Revolver bear interest at either the bank's prime rate (5.00% at September 30,
2008) or a rate equal to LIBOR plus 100 basis points (3.70% at September 30,
2008). There were borrowings of $105,118,000 and $84,750,000 at the LIBOR plus
100 basis point rate at a weighted average rate of 3.49% and 6.20% outstanding
under the Revolver at September 30, 2008 and December 31, 2007,
respectively.  The weighted average interest rate on amounts
outstanding during the nine months ended September 30, 2008 and 2007 was
approximately 3.90% and 6.62%, respectively; and for the year ended December 31,
2007 was approximately 6.51%.





The
loan agreement (the “Revolver Loan Agreement”) that evidences the Revolver
includes restrictions on property liens and requires compliance with various
financial covenants. Financial covenants include the maintenance of at least
$1,500,000 in operating cash accounts, a minimum unencumbered cash and liquid
investments balance and tangible net worth, limitations on permitted secured
debt and compliance with various debt and operating income ratios, as defined in
the Revolver Loan Agreement. The Company was in compliance with the Revolver
Loan Agreement's financial covenants as of September 30, 2008 and December 31,
2007.





5.      Net
Income Per Share





Basic
net income per share is computed by dividing net income by the weighted average
number of Company shares outstanding during the period.  Diluted net
income per share reflects the potential dilution that could occur if securities
or other contracts to issue shares were exercised or converted into
shares.  There were no potential dilutive shares outstanding at
September 30, 2008 and 2007.





6.      Discontinued
Operations





During 2007, the Company sold five properties.  Accordingly, each
of the five properties sold are classified as
discontinued operations on our financial statements.  Income from
discontinued operations was approximately $1,259,000 for the nine months ended September 30, 2007.





The operating results for these real
estate assets have been reflected as discontinued operations in the condensed
consolidated statements of income for all periods presented, and are summarized
below:





(in
      thousands)
            
            For
      the Three Months Ended
              September
      30,
            
            
            For
      the Nine Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Rental
      revenue
            
            $
            -
            
            
            $
            335
            
            
            $
            -
            
            
            $
            4,057Rental
      operating expenses
            
            
            -
            
            
            
            (176
            )
            
            
            -
            
            
            
            (1,116
            )Real
      estate taxes and insurance
            
            
            -
            
            
            
            (117
            )
            
            
            -
            
            
            
            (610
            )Depreciation
      and amortization
            
            
            -
            
            
            
            (114
            )
            
            
            -
            
            
            
            (1,080
            )Interest
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8Net
      income from discontinued operations
            
            $
            -
            
            
            $
            (72
            )
            
            $
            -
            
            
            $
            1,259





7.      Business
Segments





The
Company operates in two business segments: real estate operations (including
real estate leasing, interest income on interim acquisition and other financings
and asset/property management) including discontinued operations and investment
banking/investment services (including real estate acquisition, development
services and broker/dealer services).  The Company has identified
these segments because this information is the basis upon which management makes
decisions regarding resource allocation and performance
assessment.  The accounting policies of the reportable segments are
the same as those described in the “Significant Accounting Policies” in Note 2
to the Company’s consolidated financial statements included in its Annual Report
on Form 10-K for the year ended December 31, 2007.   The
Company’s operations are located entirely in the United States of
America.





12





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





7.      Business
Segments (continued)





The
Company evaluates the performance of its reportable segments based on Funds From
Operations (“FFO”) as management believes that FFO represents the most accurate
measure of the reportable segment’s activity and is the basis for distributions
paid to equity holders.  The Company defines FFO as net income
(computed in accordance with GAAP), excluding gains (or losses) from sales of
property, plus depreciation and amortization, and after adjustments to exclude
non-cash income (or losses) from non-consolidated or Sponsored REITs, plus
distributions received from non-consolidated or Sponsored REITs.





FFO
should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company’s financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company’s
needs.  Other real estate companies may define this term in a
different manner.  We believe that in order to facilitate a clear
understanding of the results of the Company, FFO should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the consolidated financial statements.











13





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





7.      Business
Segments (continued)





The
calculation of FFO by business segment is shown in the following table:





(in
      thousands)
            
            Real
      Estate
              Operations
            
            
            Investment
              Banking/
              Investment
              Services
            
            
            TotalThree
      Months Ended March 31, 2008Net
      Income
            
            $
            7,874
            
            
            $
            (488
            )
            
            $
            7,386Equity
      in income of non-consolidated REITs
            
            
            (793
            )
            
            
            -
            
            
            
            (793
            )Distributions
      from non-consolidated REITs
            
            
            546
            
            
            
            -
            
            
            
            546Depreciation
      and amortization
            
            
            8,464
            
            
            
            34
            
            
            
            8,498Funds
      From Operations
            
            $
            16,091
            
            
            $
            (454
            )
            
            $
            15,637Three
      Months Ended June 30, 2008Net
      Income
            
            $
            7,182
            
            
            $
            3,352
            
            
            $
            10,534Equity
      in income of non-consolidated REITs
            
            
            (694
            )
            
            
            -
            
            
            
            (694
            )Distributions
      from non-consolidated REITs
            
            
            1,731
            
            
            
            -
            
            
            
            1,731Depreciation
      and amortization
            
            
            8,677
            
            
            
            35
            
            
            
            8,712Funds
      From Operations
            
            $
            16,896
            
            
            $
            3,387
            
            
            $
            20,283Six
      Months Ended June 30, 2008Net
      Income
            
            $
            15,056
            
            
            $
            2,864
            
            
            $
            17,920Equity
      in income of non-consolidated REITs
            
            
            (1,487
            )
            
            
            -
            
            
            
            (1,487
            )Distributions
      from non-consolidated REITs
            
            
            2,277
            
            
            
            -
            
            
            
            2,277Depreciation
      and amortization
            
            
            17,141
            
            
            
            69
            
            
            
            17,210Funds
      From Operations
            
            $
            32,987
            
            
            $
            2,933
            
            
            $
            35,920Three
      Months Ended September 30, 2008Net
      Income
            
            $
            7,673
            
            
            $
            (253
            )
            
            $
            7,420Gain
      on sale of assets, net
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      in losses of non-consolidated REITs
            
            
            (680
            )
            
            
            -
            
            
            
            (680
            )Distributions
      from non-consolidated REITs
            
            
            1,561
            
            
            
            -
            
            
            
            1,561Depreciation
      and amortization
            
            
            8,747
            
            
            
            37
            
            
            
            8,784Funds
      From Operations
            
            $
            17,301
            
            
            $
            (216
            )
            
            $
            17,085Nine
      Months Ended September 30, 2008Net
      Income
            
            $
            22,729
            
            
            $
            2,611
            
            
            $
            25,340Gain
      on sale of assets, net
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      in losses of non-consolidated REITs
            
            
            (2,167
            )
            
            
            -
            
            
            
            (2,167
            )Distributions
      from non-consolidated REITs
            
            
            3,838
            
            
            
            -
            
            
            
            3,838Depreciation
      and amortization
            
            
            25,888
            
            
            
            106
            
            
            
            25,994Funds
      From Operations
            
            $
            50,288
            
            
            $
            2,717
            
            
            $
            53,005











14





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





7.      Business
Segments (continued)





(in
      thousands)
            
            Real
      Estate
              Operations
            
            
            Investment
              Banking/
              Investment
              Services
            
            
            TotalThree
      Months Ended March 31, 2007Net
      Income
            
            $
            6,548
            
            
            $
            3,184
            
            
            $
            9,732Equity
      in losses of non-consolidated REITs
            
            
            583
            
            
            
            -
            
            
            
            583Distributions
      from non-consolidated REITs
            
            
            281
            
            
            
            -
            
            
            
            281Depreciation
      and amortization
            
            
            8,960
            
            
            
            30
            
            
            
            8,990Funds
      From Operations
            
            $
            16,372
            
            
            $
            3,214
            
            
            $
            19,586Three
      Months Ended June 30, 2007Net
      Income
            
            $
            28,464
            
            
            $
            4,012
            
            
            $
            32,476Gain
      on sale of assets, net
            
            
            (21,590
            )
            
            
            -
            
            
            
            (21,590
            )Equity
      in losses of non-consolidated REITs
            
            
            142
            
            
            
            -
            
            
            
            142Distributions
      from non-consolidated REITs
            
            
            442
            
            
            
            -
            
            
            
            442Depreciation
      and amortization
            
            
            8,468
            
            
            
            31
            
            
            
            8,499Funds
      From Operations
            
            $
            15,926
            
            
            $
            4,043
            
            
            $
            19,969Six
      Months Ended June 30, 2007Net
      Income
            
            $
            35,012
            
            
            $
            7,196
            
            
            $
            42,208Gain
      on sale of assets, net
            
            
            (21,590
            )
            
            
            -
            
            
            
            (21,590
            )Equity
      in losses of non-consolidated REITs
            
            
            725
            
            
            
            -
            
            
            
            725Distributions
      from non-consolidated REITs
            
            
            723
            
            
            
            -
            
            
            
            723Depreciation
      and amortization
            
            
            17,428
            
            
            
            61
            
            
            
            17,489Funds
      From Operations
            
            $
            32,298
            
            
            $
            7,257
            
            
            $
            39,555Three
      Months Ended September 30, 2007Net
      Income
            
            $
            9,306
            
            
            $
            180
            
            
            $
            9,486Gain
      on sale of assets, net
            
            
            (1,942
            )
            
            
            -
            
            
            
            (1,942
            )Equity
      in losses of non-consolidated REITs
            
            
            (105
            )
            
            
            -
            
            
            
            (105
            )Distributions
      from non-consolidated REITs
            
            
            476
            
            
            
            -
            
            
            
            476Depreciation
      and amortization
            
            
            8,977
            
            
            
            30
            
            
            
            9,007Funds
      From Operations
            
            $
            16,712
            
            
            $
            210
            
            
            $
            16,922Nine
      Months Ended September 30, 2007Net
      Income
            
            $
            44,318
            
            
            $
            7,376
            
            
            $
            51,694Gain
      on sale of assets, net
            
            
            (23,532
            )
            
            
            -
            
            
            
            (23,532
            )Equity
      in losses of non-consolidated REITs
            
            
            620
            
            
            
            -
            
            
            
            620Distributions
      from non-consolidated REITs
            
            
            1,199
            
            
            
            -
            
            
            
            1,199Depreciation
      and amortization
            
            
            26,405
            
            
            
            91
            
            
            
            26,496Funds
      From Operations
            
            $
            49,010
            
            
            $
            7,467
            
            
            $
            56,477








15





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





7.      Business
Segments (continued)





The
following table is a summary of other financial information by business
segment:





(in
      thousands)
            
            Real
      Estate
              Operations
            
            
            Investment
              Banking/
              Investment
              Services
            
            
            TotalThree Months Ended September 30,
      2008Revenue
            
            $
            28,320
            
            
            $
            604
            
            
            $
            28,924Interest
      income
            
            
            167
            
            
            
            10
            
            
            
            177Interest
      expense
            
            
            1,108
            
            
            
            -
            
            
            
            1,108Capital
      expenditures
            
            
            2,407
            
            
            
            -
            
            
            
            2,407Nine Months Ended September 30,
      2008Revenue
            
            $
            83,699
            
            
            $
            7,372
            
            
            $
            91,071Interest
      income
            
            
            629
            
            
            
            28
            
            
            
            657Interest
      expense
            
            
            3,351
            
            
            
            -
            
            
            
            3,351Capital
      expenditures
            
            
            5,874
            
            
            
            -
            
            
            
            5,874Identifiable
      Assets as of September 30, 2008
            
            $
            991,487
            
            
            $
            5,573
            
            
            $
            997,060Three Months Ended September 30,
      2007Revenue
            
            $
            28,608
            
            
            $
            1,326
            
            
            $
            29,934Interest
      income
            
            
            634
            
            
            
            16
            
            
            
            650Interest
      expense
            
            
            1,823
            
            
            
            -
            
            
            
            1,823Capital
      expenditures
            
            
            4,146
            
            
            
            88
            
            
            
            4,234Nine Months Ended September 30,
      2007Revenue
            
            $
            80,335
            
            
            $
            14,571
            
            
            $
            94,906Interest
      income
            
            
            1,819
            
            
            
            45
            
            
            
            1,864Interest
      expense
            
            
            6,121
            
            
            
            -
            
            
            
            6,121Capital
      expenditures
            
            
            9,195
            
            
            
            88
            
            
            
            9,283Identifiable
      Assets as of September 30, 2007
            
            $
            1,029,002
            
            
            $
            5,591
            
            
            $
            1,034,593





8.      Cash Dividends





The
Company declared and paid dividends as follows (in thousands, except per share
amounts):





Quarter Paid
            
            Dividends
              Per Share
            
            
            Total
              DividendsFirst quarter of
      2008
            
            $
            0.31
            
            
            $
            21,849Second quarter of
      2008
            
            $
            0.31
            
            
            $
            21,849Third quarter of
      2008
            
            $
            0.19
            
            
            $
            13,391First quarter of
      2007
            
            $
            0.31
            
            
            $
            21,938Second quarter of
      2007
            
            $
            0.31
            
            
            $
            21,937Third quarter of
      2007
            
            $
            0.31
            
            
            $
            21,938








16





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





9.      Income
Taxes





The
Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code").  As a REIT, the Company generally is
entitled to a tax deduction for distributions paid to its shareholders, thereby
effectively subjecting the distributed net income of the Company to taxation at
the shareholder level only.  The Company must comply with a variety of
restrictions to maintain its status as a REIT.  These restrictions
include the type of income it can earn, the type of assets it can hold, the
number of shareholders it can have and the concentration of their ownership, and
the amount of the Company’s taxable income that must be distributed
annually.





One
such restriction is that the Company generally cannot own more than 10% of the
voting power or value of the securities of any one issuer unless the issuer is
itself a REIT or a taxable REIT subsidiary (“TRS”).  In the case of
TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed
20% of the value of all of the Company’s assets and, when considered together
with other non-real estate assets, cannot exceed 25% of the value of all of the
Company’s assets.   FSP Investments LLC and FSP Protective TRS
Corp, which are subsidiaries of the Company, are TRSs and operate as taxable
corporations under the Code and have accounted for income taxes in accordance
with the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No.
109”).





Income
taxes are recorded based on the future tax effects of the difference between the
tax and financial reporting bases of the Company’s assets and
liabilities.  In estimating future tax consequences, potential future
events are considered except for potential changes in income tax law or in
rates.





The
Company follows the provisions of Financial Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”), which has not resulted in recording
a liability or recognition of any accrued interest or
penalties.  Accrued interest and penalties will be recorded as income
tax expense, if the Company records a liability in the future.  The
Company’s effective tax rate was not affected by the adoption of FIN
48.  The Company and one or more of its subsidiaries files income tax
returns in the U.S federal jurisdiction and various state
jurisdictions.  The statute of limitations for the Company’s income
tax returns is generally three years and as such, the Company’s returns that
remain subject to examination would be primarily from 2004 and
thereafter.





The
income tax expense reflected in the condensed consolidated statements of income
related to the TRS was a tax benefit of $519,000 for the nine months ended
September 30, 2008 and tax expense of $352,000 for the nine months ended
September 30, 2007.  The expense differs from the amounts computed by
applying the Federal statutory rate of 34% to income before income taxes as
follows:





For the
              Nine Months Ended
              September 30,(in thousands)
            
            2008
            
            
            2007Federal income tax expense
      (credit) at statutory rate
            
            $
            (438
            )
            
            $
            297Increase in taxes resulting
      from:State income taxes (credit), net
      of federal impact
            
            
            (81
            )
            
            
            55Revised Texas franchise
      tax
            
            
            182
            
            
            
            162$
            (337
            )
            
            $
            514





No
deferred income taxes were provided as there were no material temporary
differences between the financial reporting basis and the tax basis of the
TRS.





In
May 2006, the State of Texas enacted a new business tax (the “Revised Texas
Franchise Tax”) that replaced its existing franchise tax, which the Company
became subject to.  The Revised Texas Franchise Tax is a tax at a rate
of approximately 0.7% of revenues at Texas properties commencing with 2007
revenues.  Some of the Company’s leases allow reimbursement by tenants
for these amounts because the Revised Texas Franchise Tax replaces a portion of
the property tax for school districts.  Because the tax base on the
Revised Texas Franchise Tax is derived from an income based measure it is
considered an income tax and is accounted for in accordance with SFAS No.
109.  The Company recorded a provision in income taxes on its income
statement of $182,000 and $162,000 for the nine months ended September 30, 2008
and 2007, respectively.








17





Franklin
Street Properties Corp.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





10.       Subsequent
Events





The
Company declared a cash distribution of $0.19 per share on October 17, 2008 to
stockholders of record on October 31, 2008 payable on November 20, 2008.





On
October 15, 2008, the Company closed on a $75 million unsecured term loan
facility (the “Term Loan”) with three banks. Proceeds from the Term Loan were
used to reduce the outstanding principal balance on the Revolver.  The
Term Loan has an initial three-year term that matures on October 15,
2011.  In addition, the Company has the right to extend the initial
maturity date for up to two successive one-year periods, or until October 15,
2013 if both extensions are exercised.  The Company fixed the interest
rate for the initial three-year term of the Term Loan at 5.84% per annum
pursuant to an interest rate swap agreement.  As part of the Term Loan
closing, the Company also amended the Revolver Loan Agreement to, among other
items, conform its loan covenants and definitions to the Term Loan.





On
October 31, 2008, a wholly-owned subsidiary of the Company entered into an
agreement for the purchase and sale of an office property located in Chicago,
Illinois.  The purchase price is $130 million and the Company expects
to consummate the transaction either during the fourth quarter of 2008 or the
first quarter of 2009.





On
October 31, 2008, a wholly-owned subsidiary of the Company entered into an
agreement for the purchase and sale of an office property located in Maryland
Heights, Missouri.  The purchase price is $19.75 million and the
Company expects to consummate the transaction during the fourth quarter of
2008.





18





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





The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report and in our Annual Report on
Form 10-K for the year ended December 31, 2007.  Historical results
and percentage relationships set forth in the condensed consolidated financial
statements, including trends which might appear, should not be taken as
necessarily indicative of future operations.  The following discussion
and other parts of this Quarterly Report on Form 10-Q may also contain
forward-looking statements based on current judgments and current knowledge of
management, which are subject to certain risks, trends and uncertainties that
could cause actual results to differ materially from those indicated in such
forward-looking statements.  Accordingly, readers are cautioned not to
place undue reliance on forward-looking statements.  Investors are
cautioned that our forward-looking statements involve risks and uncertainty,
including without limitation changes in economic conditions in the United
States, disruptions in the debt markets, changes in economic conditions in the
markets in which we own properties, changes in the demand by investors for
investment in Sponsored REITs, risks of a lessening of demand for the types of
real estate owned by us, changes in government regulations, and expenditures
that cannot be anticipated such as utility rate and usage increases,
unanticipated repairs, additional staffing, insurance increases and real estate
tax valuation reassessments.  See the factors set forth below under
the caption, Item 1A. “Risk Factors”.  Although we believe the
expectations reflected in the forward looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements.  We may not update any of the forward-looking statements
after the date this Quarterly Report on Form 10-Q is filed to conform them to
actual results or to changes in our expectations that occur after such date,
other than as required by law.





Overview





FSP
Corp. or the Company, operates in two business segments: real estate operations
and investment banking/investment services. The real estate operations segment
involves real estate rental operations, leasing, secured financing of real
estate for interim acquisition or other property financing, and services
provided for asset management, property management, property acquisitions,
dispositions and development.  The investment banking/investment
services segment involves the structuring of real estate investments and
broker/dealer services that include the organization of Sponsored REITs, the
acquisition and development of real estate on behalf of Sponsored REITs and the
raising of capital to equitize the Sponsored REITs through sale of preferred
stock in private placements.





The
main factor that affects our real estate operations is the broad economic market
conditions in the United States.  These market conditions affect the
occupancy levels and the rent levels on both a national and local
level.  We have no influence on the national market
conditions.   We look to acquire and/or develop quality
properties in good locations in order to lessen the impact of downturns in the
market and to take advantage of upturns when they occur.





Our
investment banking/investment services customers are primarily institutions and
high net-worth individuals.  To the extent that the broad capital
markets affect these investors our business is also affected.  These
investors have many investment choices.  We must continually search
for real estate at a price and at a competitive risk/reward rate of return that
meets our customer’s risk/reward profile for providing a stream of income and as
a long-term hedge against inflation.





Due
to the transactional nature of significant portions of our business, our
quarterly financial metrics have historically been quite variable.  We
do not manage our business to quarterly targets but rather manage our business
to longer-term targets.  Consequently, we consider annual financial
results to be much more meaningful for performance and trend
measurements.





Critical
Accounting Policies





We
have certain critical accounting policies that are subject to judgments and
estimates by our management and uncertainties of outcome that affect the
application of these policies.  We base our estimates on historical
experience and on various other assumptions we believe to be reasonable under
the circumstances.  On an on-going basis, we evaluate our
estimates.  In the event estimates or assumptions prove to be
different from actual results, adjustments are made in subsequent periods to
reflect more current information.  The accounting policies that we
believe are most critical to the understanding of our financial position and
results of operations, and that require significant management estimates and
judgments, are discussed in Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2007.





Critical
accounting policies are those that have the most impact on the reporting of our
financial condition and results of operations and those requiring significant
judgments and estimates.  We believe that our judgments and
assessments are consistently applied and produce financial information that
fairly presents our results of operations.  No changes to our critical
accounting policies have occurred since the filing of our Annual Report on Form
10-K for the year ended December 31, 2007.








19





Trends
and Uncertainties





Economic
Conditions





The
economy in the United States is currently experiencing unprecedented
disruptions, including increased levels of unemployment, the failure and near
failure of a number of large financial institutions, reduced liquidity and
increased credit risk premiums for a number of market
participants.  Economic conditions may be affected by
numerous factors, including but not limited to, inflation and employment levels,
energy prices, recessionary concerns, changes in currency exchange rates, the
availability of debt and interest rate fluctuations. The current
disruptions in the U.S. economy have affected our business and may affect real
estate values, occupancy levels, property income and the propensity and the
ability of investors to invest in Sponsored REITs in the future.  At
this time, we cannot predict the extent or duration of any negative impact that
the current disruptions in the U.S. economy will have on our business.





On
July 21, 2008, we announced that we had reduced our regular quarterly dividend
to $0.19 per share of common stock for the three months ended June 30, 2008,
which was paid on August 20, 2008.  In our July 21, 2008 announcement,
we noted that we had experienced a significant slowing of activity in, and
lower profit contribution from, two transactional components of our business,
investment banking/investment services and property dispositions, since the
onset of the current disruptions in the U.S. economy.  We also
noted that our ongoing/recurring real estate operations continued to show solid
performance and that our board of directors believed it was prudent to
better align our regular quarterly dividends with the results of our current
real estate operations only, without taking into account the results of our less
predictable transactional operations.  During the third quarter of
2008, our real estate operations have again shown solid performance and, on
October 17, 2008, we announced a dividend of $0.19 per share of common stock for
the three months ended September 30, 2008, which will be paid on November 20,
2008.





Real
Estate Operations





Our
real estate portfolio was approximately 93% leased as of September 30,
2008.  While we were able to maintain occupancy rates during the
quarter, new leasing activity has slowed in most of our markets, and we do not
expect to see an increase in the pace of leasing until the broader economic
markets stabilize and there is new job growth.





While
we cannot predict when existing vacancy will be leased or if existing tenants
with expiring leases will renew their leases or what the terms and conditions of
the lease renewals will be, we expect to renew or sign new leases at current
market rates for locations in which the buildings are located, which in some
cases may be below the expiring rates.





Investment
Banking/Investment Services





Unlike
our real estate business, which provides a rental revenue stream that is ongoing
and recurring in nature, our investment banking/investment services business is
transactional in nature.  Equity raised for Sponsored REIT
syndications for the three and nine months ended September 30, 2008 was $4.8
million and $57.4 million, respectively compared to $10.0 million and $119.2
million for the three and nine months ended September 30, 2007,
respectively.  The resulting total decrease in equity raised was $5.2
million and $61.8 million comparing the three and nine months ended September
30, 2008 to the same periods in 2007, respectively.  The slowdown in
our investment banking business actually began in the third quarter of 2007 and,
at this point, it remains unclear when or if a higher volume of equity
investment will return.  Business in this area, while always
uncertain, continues to be adversely affected by the current turmoil in the
financial, debt and real estate markets.  Investors who have
historically participated in our private placement real estate offerings
continue to express concern and uncertainty about investing in this
environment.





In
addition to difficulties in raising equity from potential real estate investors
in this market, our property acquisition executives are now grappling with
greater uncertainty surrounding the valuation levels for prime commercial
investment real estate.  We believe that the current turmoil in the
debt markets, as well as perceptions about the future U.S. economy and interest
rates, are producing a larger than normal divergence in the perception of value
and future relative investment performance of commercial
properties.  While we generally believe that such an environment has
the potential to produce some exceptional property acquisition opportunities,
caution, perspective and disciplined underwriting standards can significantly
impact the timing of any future acquisitions.  Consequently, our
ability to provide a regular stream of real estate investment product necessary
to grow our overall investment banking/investment services business continues to
remain uncertain as the fourth quarter of 2008 begins.  We also
continue to rely solely on our in-house investment executives to access
interested investors who have capital they can afford to place in an illiquid
position for an indefinite period of time (i.e., invest in a Sponsored
REIT).  We continue to evaluate whether our in-house sales force is
capable, either through our existing client base or through new clients, of
raising sufficient investment capital in Sponsored REITs to achieve future
performance objectives.








20





Discontinued
Operations





During
the year ended December 31, 2007, the Company disposed of five office
properties.  The five office properties are located in Greenville,
South Carolina; Alpharetta, Georgia; San Diego, California; Westford,
Massachusetts and Austin, Texas.  The operating results for these real
estate assets have been reflected as discontinued operations in the financial
statements for the three and nine months ended September 30, 2007.





We
continue to evaluate our portfolio, and in the future may decide to dispose of
additional properties from time-to-time.  However, because of the
current uncertainty surrounding the valuation levels for real estate and the
current uncertainty in the capital and debt markets previously discussed, we do
not expect the level of disposition activity to be as significant as the prior
three years.





The
following table shows results for the three months ended September 30, 2008 and
2007:




(in
      thousands)Three
      months ended September 30,Revenue:
            
            2008
            
            
            2007
            
            
            ChangeRental
            
            $
            27,927
            
            
            $
            27,109
            
            
            $
            818Related
      party revenue:Syndication
      fees
            
            
            304
            
            
            
            687
            
            
            
            (383
            )Transaction
      fees
            
            
            300
            
            
            
            604
            
            
            
            (304
            )Management
      fees and interest income from loans
            
            
            380
            
            
            
            1,497
            
            
            
            (1,117
            )Other
            
            
            13
            
            
            
            37
            
            
            
            (24
            )Total
      revenue
            
            
            28,924
            
            
            
            29,934
            
            
            
            (1,010
            )Expenses:Real
      estate operating expenses
            
            
            7,159
            
            
            
            7,151
            
            
            
            8Real
      estate taxes and insurance
            
            
            4,590
            
            
            
            4,398
            
            
            
            192Depreciation
      and amortization
            
            
            7,666
            
            
            
            7,756
            
            
            
            (90
            )Selling,
      general and administrative
            
            
            1,927
            
            
            
            1,787
            
            
            
            140Commissions
            
            
            208
            
            
            
            406
            
            
            
            (198
            )Interest
            
            
            1,108
            
            
            
            1,823
            
            
            
            (715
            )Total
      expenses
            
            
            22,658
            
            
            
            23,321
            
            
            
            (663
            )Income
      before interest income, equity in earnings (losses)
      in non-consolidated REITs and taxes
            
            
            6,266
            
            
            
            6,613
            
            
            
            (347
            )Interest
      income
            
            
            177
            
            
            
            650
            
            
            
            (473
            )Equity
      in earnings (losses) in non-consolidated REITs
            
            
            679
            
            
            
            147
            
            
            
            532Income
      before taxes
            
            
            7,122
            
            
            
            7,410
            
            
            
            (288
            )Income
      tax expense (benefit)
            
            
            (297
            )
            
            
            (206
            )
            
            
            (91
            )Income from
      continuing operations
            
            
            7,419
            
            
            
            7,616
            
            
            
            (197
            )Discontinued
      operations:Income
      from discontinued operations
            
            
            -
            
            
            
            (72
            )
            
            
            72Gain
      on sale of assets, less applicable income tax
            
            
            -
            
            
            
            1,942
            
            
            
            (1,942
            )Total
      discontinued operations
            
            
            -
            
            
            
            1,870
            
            
            
            (1,870
            )Net
      income
            
            $
            7,419
            
            
            $
            9,486
            
            
            $
            (2,067
            )





Comparison
of the three months ended September 30, 2008 to the three months ended September
30, 2007:


Revenues
  Total
revenue decreased by approximately $1.0 million to $28.9 million for the quarter
ended September 30, 2008 compared to the quarter ended September 30,
2007.  The decrease was primarily a result of:





21




o
            A
      $0.7 million decrease in syndication fees and transaction (loan
      commitment) fees, which was principally a result of the decrease in gross
      syndication proceeds in the quarter ended September 30, 2008 compared to
      the same period in 2007.





o
            A
      decrease in loan interest income of approximately $1.1 million, which was
      principally a result of a larger loan receivable balance during the third
      quarter of 2007 as compared to the third quarter of 2008, from which
      interest income is derived.  The impact of this decrease was
      also greater as a result of lower interest rates charged for the third
      quarter of 2008 compared to the same period in 2007.





These
decreases were partially offset by:




o
            An
      increase to rental revenue of approximately $0.8 million arising primarily
      from the acquisition of a property in Texas in May 2008, which was
      partially offset by net decreases in leasing rates related
      to new leasing that has occurred over the last twelve months.





Expenses





Total
expenses decreased by $0.7 million to $22.7 million for the three months ended
September 30, 2008 compared to the three months ended September 30,
2007.  The decrease was primarily a result of:





o
            A
      decrease in interest expense of approximately $0.7 million primarily
      resulting from lower average loan balances outstanding during the three
      months ended September 30, 2008 compared to the three months ended
      September 30, 2007 and lower interest rates during the three months ended
      September 30, 2008 compared to the three months ended September 30,
      2007.





o
            A
      decrease in commission expense of $0.2 million, which was principally a
      result of the decrease in gross syndication proceeds in the three months
      ended September 30, 2008 compared to the same period in 2007.





These
decreases were partially offset by:





o
            An
      increase in real estate operating expenses and real estate taxes and
      insurance of approximately $0.2 million, which was primarily from the
      acquisition of a property in Texas in May 2008.





Interest
income





Interest
income decreased $0.5 million to $0.2 million during the three months ended
September 30, 2008, which was primarily a result of lower average interest rates
in effect on invested funds and lower average balances of cash and cash
equivalents in 2008 compared to the same period in 2007.





Equity in earnings (losses)
in non-consolidated REITs





Equity
in earnings (losses) in non-consolidated REITs increased approximately $0.5
million to $0.7 million, which was principally a result of our preferred stock
investment in East Wacker acquired in December 2007, and increased equity
in earnings of other non-consolidated REITs in the third quarter of 2008,
compared to the third quarter of 2007.





Taxes on
income





Taxes
on income decreased approximately $0.1 million to $0.3 million in the third
quarter of 2008 compared to the third quarter of 2007.  The decrease
was primarily due to a lower taxable income from the investment banking and
investment services business in the 2008 period compared to
2007.  During the third quarter in each of 2008 and 2007, we had an
effective tax rate of 40.3%.





Income from continuing
operations





The
resulting income from continuing operations for the third quarter of 2008
decreased $0.2 million to $7.4 million from $7.6 million in the third quarter of
2007 for the reasons discussed above.




22





Discontinued operations and
gain on sale of assets





During
2007, we completed the sale of five properties.  Accordingly, the
properties sold are reported as discontinued operations on our financial
statements for the relevant periods presented.  There was loss from
discontinued operations of $0.1 million for the three months ended September 30,
2007 related to the properties sold.  During the three months ended
September 30, 2007, we sold one of these properties and reported a $1.9 million
gain on sale of assets.





The
Company will continue to evaluate its portfolio, and from time-to-time may
decide to dispose of other properties.





Net income





Net
income for the three months ended September 30, 2008 decreased by approximately
$2.1million to $7.4 million compared to $9.5 million for the three months ended
September 30, 2007, for the reasons discussed above.








The
following table shows results for the nine months ended September 30, 2008 and
2007:




(in
      thousands)Nine
      months ended September 30,Revenue:
            
            2008
            
            
            2007
            
            
            ChangeRental
            
            $
            82,283
            
            
            $
            75,110
            
            
            $
            7,173Related
      party revenue:Syndication
      fees
            
            
            3,766
            
            
            
            7,090
            
            
            
            (3,324
            )Transaction
      fees
            
            
            3,606
            
            
            
            7,446
            
            
            
            (3,840
            )Management
      fees and interest income from loans
            
            
            1,364
            
            
            
            5,176
            
            
            
            (3,812
            )Other
            
            
            52
            
            
            
            84
            
            
            
            (32
            )Total
      revenue
            
            
            91,071
            
            
            
            94,906
            
            
            
            (3,835
            )Expenses:Real
      estate operating expenses
            
            
            20,973
            
            
            
            19,026
            
            
            
            1,947Real
      estate taxes and insurance
            
            
            13,375
            
            
            
            12,490
            
            
            
            885Depreciation
      and amortization
            
            
            22,616
            
            
            
            21,710
            
            
            
            906Selling,
      general and administrative
            
            
            6,557
            
            
            
            5,675
            
            
            
            882Commissions
            
            
            2,020
            
            
            
            3,720
            
            
            
            (1,700
            )Interest
            
            
            3,351
            
            
            
            6,121
            
            
            
            (2,770
            )Total
      expenses
            
            
            68,892
            
            
            
            68,742
            
            
            
            150Income
      before interest income, equity in earnings (losses)
      in non-consolidated REITs and taxes
            
            
            22,179
            
            
            
            26,164
            
            
            
            (3,985
            )Interest
      income
            
            
            657
            
            
            
            1,864
            
            
            
            (1,207
            )Equity
      in earnings (losses) in non-consolidated REITs
            
            
            2,167
            
            
            
            (611
            )
            
            
            2,778Income before
      taxes
            
            
            25,003
            
            
            
            27,417
            
            
            
            (2,414
            )Income
      tax expense (benefit)
            
            
            (337
            )
            
            
            514
            
            
            
            (851
            )Income from
      continuing operations
            
            
            25,340
            
            
            
            26,903
            
            
            
            (1,563
            )Discontinued
      operations:Income
      from discontinued operations
            
            
            -
            
            
            
            1,259
            
            
            
            (1,259
            )Gain
      on sale of assets, less applicable income tax
            
            
            -
            
            
            
            23,532
            
            
            
            (23,532
            )Total
      discontinued operations
            
            
            -
            
            
            
            24,791
            
            
            
            (24,791
            )Net
      income
            
            $
            25,340
            
            
            $
            51,694
            
            
            $
            (26,354
            )











23





Comparison
of the nine months ended September 30, 2008 to the nine months ended September
30, 2007:




Revenues




Total
revenue decreased by $3.8 million to $91.1million for the nine months ended
September 30, 2008 compared to the nine months ended September 30,
2007.  The decrease was primarily a result of:




o
            A
      $7.2 million decrease in syndication fees and transaction (loan
      commitment) fees, which was principally a result of the decrease in gross
      syndication proceeds for the nine months ended September 30, 2008 compared
      to the same period in 2007.





o
            A
      decrease in loan interest income of approximately $3.8 million, which was
      principally a result of a larger loan receivable balance during the nine
      months ended September 30, 2007 as compared the nine months ended
      September 30, 2008, from which interest income is derived.  The
      impact of this decrease was also greater as a result of lower interest
      rates charged for the nine months ended September 30, 2008 compared to the
      same period in 2007.





This
increase was partially offset by:




o
            An
      increase to rental revenue of approximately $7.2 million arising primarily
      from the acquisition of a property in Maryland in June 2007, and a
      property in Texas in May 2008, which was partially offset by net decreases
      in leasing rates related to new leasing that has occurred over
      the last twelve months.





Expenses





Total
expenses increased by approximately $0.1 million to $68.9 million for the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007.  The increase was primarily a result of:





o
            An
      increase in real estate operating expenses and real estate taxes and
      insurance of approximately $2.8 million, and depreciation and amortization
      of $0.9 million, which were primarily from the acquisition of a property
      in Maryland in June 2007 and a property in Texas in May 2008.





o
            Selling,
      general and administrative expenses, which increased by $0.9 million to
      $6.6 million for the nine months ended September 30, 2008 compared to same
      period in 2007.  The increase was primarily a result of
      increased compensation related costs, professional and consulting
      fees.  We had 40 and 39 employees as of September 30, 2008 and
      2007, respectively, at our headquarters in Wakefield.





These
increases were partially offset by:





o
            A
      decrease in commission expense of $1.7 million, which was principally a
      result of the decrease in gross syndication proceeds in the nine months
      ended September 30, 2008 compared to the same period in 2007.





o
            A
      decrease in interest expense of approximately $2.8 million primarily
      resulting from lower average loan balances outstanding during the nine
      months ended September 30, 2008 compared to the nine months ended
      September 30, 2007 and lower interest rates during the nine months ended
      September 30, 2008 compared to the 2007 period.





Interest
income





Interest
income decreased $1.2 million to $0.7 million during the nine months ended
September 30, 2008, which was primarily a result of lower average interest rates
on invested funds and lower average balances of cash and cash equivalents in
2008 compared to the same period in 2007.





Equity in earnings (losses)
of non-consolidated REITs





Equity
in earnings (losses) from non-consolidated REITs increased approximately $2.8
million to $2.2 million, which was principally a result of our preferred stock
investments in East Wacker acquired in December 2007, and increased equity
in earnings of other non-consolidated REITs during the nine months ended
September 30, 2008 compared to net losses of approximately $0.6 million
during the same period of 2007.




24





Taxes on
income





Taxes
on income decreased approximately $0.9 million to a credit of $0.3 million in
the nine months ended September 30, 2008 compared to the same period of
2007.  The decrease was primarily due to a lower taxable income from
the investment banking and investment services business in the 2008 period
compared to 2007.  During the nine month periods in each of 2008 and
2007, we had an effective tax rate of 40.3%.





Income from continuing
operations





The
resulting income from continuing operations for the nine months ended September
30, 2008 decreased $1.6 million to $25.3 million from $26.9 million in the nine
months ended September 30, 2007 for the reasons discussed above.





Discontinued operations and
gain on sale of assets





During
2007, we completed the sale of five properties.  Accordingly, the
properties sold are reported as discontinued operations on our financial
statements for the relevant periods presented.  There was income from
discontinued operations of $1.3 million for the nine months ended September 30,
2007 related to the properties sold.  During the nine months ended
September 30, 2007, we sold four of these properties and reported a $23.5
million gain on sale of assets.





The
Company will continue to evaluate its portfolio, and from time-to-time may
decide to dispose of other properties.





Net income





Net
income for the nine months ended September 30, 2008 decreased by approximately
$26.4 million to $25.3 million compared to $51.7 million for the nine months
ended September 30, 2007, for the reasons discussed above.





Liquidity
and Capital Resources





Cash
and cash equivalents were $34.5 million and $47.0 million at September 30, 2008
and December 31, 2007, respectively. The decrease of $12.5 million is
attributable to $52.5 million provided by operating activities, less $28.2
million used for investing activities, less $36.8 million used by financing
activities.  Management believes that existing cash, cash anticipated
to be generated by operations and our existing debt financing will be sufficient
to meet working capital requirements and anticipated capital expenditures and
improvements for at least the next 12 months. Although there is no guarantee
that we will be able to obtain the funds necessary for our future growth, we
anticipate generating funds from continuing real estate operations and from fees
and commissions from the sale of shares in newly formed Sponsored
REITs.  We believe that we have adequate funds to cover unusual
expenses and capital improvements, in addition to normal operating
expenses.  Our ability to maintain or increase our level of dividends
to stockholders, however, depends in significant part upon the level of interest
on the part of investors in purchasing shares of Sponsored REITs and the level
of rental income from our real properties.





Operating
Activities




As
of September 30, 2008, the cash provided by our operating activities of $52.5
million is primarily attributable to net income of $25.3 million, plus the
add-back of $24.0 million of non-cash activities, $3.8 million of distributions
from non-consolidated REITs and decreases in accrued expenses and compensation
of $4.0 million, which was partially offset by increases in tenant rent
receivables and prepaid and other assets of $1.3 million, and increases in
straight-line rents of $0.9 million and payment of leasing commissions of $2.4
million.




Investing
Activities




As
of September 30, 2008, our cash used for investing activities of $28.2 million
is primarily attributable to additions to real estate investments, including our
acquisition by merger of FSP Park Ten Development Corp. on May 15, 2008, and to
a lesser extent tenant improvements and office equipment, of approximately $39.3
million and a loan made to a Sponsored REIT of approximately $1.1 million that
is classified in other assets on our balance sheet, which were partially offset
by approximately $12.2 million of proceeds received from the syndications in
process with FSP Grand Boulevard Corp. and FSP 385 Interlocken Development
Corp.







25





Financing
Activities




As
of September 30, 2008, our cash used by financing activities of $36.8 million is
primarily attributable to distributions to shareholders of $57.1 million, which
was partially offset by net borrowings on our $250 million revolving line of
credit, which we refer to as the Revolver, of $20.3 million.





Line
of Credit




The
Revolver is with a group of banks, provides for borrowings at our election of up
to $250,000,000 and matures on August 11, 2011.  Borrowings under the
Revolver bear interest at either the bank's prime rate (5.00% at September 30,
2008) or a rate equal to LIBOR plus 100 basis points (4.70% at September 30,
2008).  There were borrowings of $105,118,000 and $84,750,000 at the
LIBOR plus 100 basis point rate at a weighted average rate of 3.49% and 6.20%
outstanding under the line of credit at September 30, 2008 and December 31,
2007, respectively.  The weighted average interest rate on amounts
outstanding during the nine months ended September 30, 2008 and 2007 was
approximately 3.90% and 6.62%, respectively; and for the year ended December 31,
2007 was approximately 6.51%.  As of September 30, 2008, we believe
that we were in compliance with all bank covenants required under the
Revolver.




We
have drawn on the Revolver, and intend to draw on the Revolver in the future for
a variety of corporate purposes, including the funding of interim mortgage loans
to Sponsored REITs and the acquisition of properties that we acquire directly
for our portfolio.  We typically cause mortgage loans to Sponsored
REITs to be secured by a first mortgage against the real property owned by the
Sponsored REIT.  We make these loans to enable a Sponsored REIT to
acquire real property prior to the consummation of the offering of its equity
interests, and the loan is repaid out of the offering proceeds.  We
also may make secured loans to Sponsored REITs for the purpose of funding
capital expenditures and other costs which would be repaid from long-term
financing of the property, cash flows from the property or a capital
event.





Term
Loan





On
October 15, 2008, we closed on a $75,000,000 unsecured term loan facility with
three banks, which we refer to as the Term Loan.  Proceeds from the
Term Loan were used to reduce the outstanding principal balance on the
Revolver.  The Term Loan has an initial three-year term that matures
on October 15, 2011.  In addition, we have the right to extend the
initial maturity date for up to two successive one-year periods, or until
October 15, 2013 if both extensions are exercised.  We fixed the
interest rate for the initial three-year term of the Term Loan at 5.84% per
annum pursuant to an interest rate swap agreement.





Equity Securities





As
of September 30, 2008, we have an automatic shelf registration statement on
Form S-3 on file with the SEC relating to the offer and sale, from time to
time, of an indeterminate amount of our common stock.  From time to
time, we expect to issue additional shares of our common stock under our
automatic shelf registration statement or a different registration statement to
fund the acquisition of additional properties, to pay down any existing debt
financing and for other corporate purposes.





Contingencies




From
time to time, we may provide financing to Sponsored REITs in the form of a
revolving line of credit secured by a mortgage.  As of September 30,
2008, we were committed to fund up to $5.5 million to one Sponsored REIT under
such an arrangement for the purpose of funding capital expenditures and leasing
costs of which $1,125,000 has been drawn and is outstanding. We anticipate that
any advances made under this revolving line of credit will be repaid at its
maturity on December 31, 2010 or earlier from long-term financing of the
property, cash flows from the property or a capital event.





We
may be subject to various legal proceedings and claims that arise in the
ordinary course of its business.  Although occasional adverse
decisions (or settlements) may occur, we believe that the final disposition of
such matters will not have a material adverse effect on our financial position
or results of operations.





Assets
Held for Syndication





As
of September 30, 2008 and December 31, 2007, we had one asset held for
syndication, FSP Grand Boulevard Corp.








26





Related
Party Transactions





In
June 2008, we commenced the syndication of FSP 385 Interlocken Development
Corp.  During 2007, we commenced the syndication of FSP Grand
Boulevard Corp. and completed the syndications of FSP 50 South Tenth Street
Corp. and FSP 303 East Wacker Drive Corp.  As part of the syndication
of FSP 303 East Wacker Drive Corp., we purchased the final 965.75 shares of its
preferred stock for approximately $82.8 million on December 27, 2007,
representing approximately a 43.7% interest.





In
December 2007, we entered into a secured promissory note for a revolving line of
credit, which we refer to as the Highland Revolver, for up to $5.5 million with
a Sponsored REIT, FSP Highland Place I Corp., that owns an office building in
Englewood, Colorado, of which $1,125,000 has been drawn and is outstanding as of
September 30,
2008.  The balance of this loan is classified in other
assets.  Advances under the Highland Revolver bear interest at a rate
equal to the 30 day LIBOR rate plus 200 basis points.  The Highland
Revolver was made for the purpose of funding capital expenditures and other
costs of leasing.  We anticipate that any advances made under the
Highland Revolver will be repaid at its maturity on December 31, 2010 or earlier
from long-term financing of the property, cash flows from the property or a
capital event.





On
May 15, 2008, we acquired FSP Park Ten Development Corp. by merger for a total
purchase price of approximately $35.4 million. The acquisition was effected by
merging a wholly owned acquisition subsidiary of the Company with and into FSP
Park Ten Development Corp.  The holders of preferred stock in FSP Park
Ten Development Corp. received cash consideration of approximately $127,290 per
share.




For
a discussion of transactions between us and related parties during 2007, see
Footnote No. 4 “Related Party Transactions” to the Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007.





Other
Considerations





We
generally pay the ordinary annual operating expenses of our properties from the
rental revenue generated by the properties.  For the three and nine
months ended September 30, 2008 and 2007, the rental income exceeded the
expenses for each individual property, with the exception of a property located
in Westford, Massachusetts, which we sold on July 16, 2007, a property located
in San Jose, California, and a property located in Federal Way,
Washington.




·
            The
      Westford, Massachusetts property had operating expenses of approximately
      $25,000 and $188,000 for the three and nine months ended September 30,
      2007.  On July 16, 2007, the property was sold resulting in a
      $1.9 million gain.




·
            During
      2007, the San Jose, California property had one tenant in the building
      occupying approximately 19% of the rentable square footage of the
      property.  In December 2007, we signed a lease that commenced in
      2008 with another tenant for approximately 62% of the rentable square
      footage of the property.  As a result, the property had rental
      income that exceeded expenses during the three and nine months ended
      September 30, 2008.  For the three and nine months ended
      September 30, 2007, the property had rental income of $97,000 and
      $310,000, respectively; and operating expenses of $114,000 and $353,000,
      respectively.




·
            The
      property at Federal Way, Washington had a single tenant lease, which
      expired September 14, 2006.  During the nine months ended
      September 30, 2007 a lease was signed for 8% of the space and generated
      revenue for the three and nine months ended September 30, 2007 of $40,000
      and $59,000, respectively.  The property had operating expenses
      of $173,000 and $463,000 for the three and nine months ended September 30,
      2007, respectively.   Over the remainder of 2007 and in
      2008 we signed two other leases.  The three tenants now account
      for approximately 14% of the space, which generated rental income of
      $69,000 and $260,000 for the three and nine months ended September 30,
      2008, respectively.  The Federal Way property had operating
      expenses of $156,000 and $444,000 for the three and nine months ended
      September 30, 2008, respectively.  We do not expect the property
      to produce revenue that is sufficient to cover its expenses during the
      fourth quarter of 2008.










27





Item
3.        Quantitative and Qualitative
Disclosures About Market Risk





We
were not a party to any derivative financial instruments at or during the three
and nine months ended September 30, 2008.





Market
risk is the exposure to loss resulting from adverse changes in market prices,
interest rates, foreign currency exchange rates, commodity prices and equity
prices. The primary market risk to which we are exposed is interest rate risk,
which is sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors that are beyond our control. Our $250 million revolving line of
credit (which we refer to as the Revolver) matures in August 2011 and has a
variable rate of interest.  Upon maturity, our future income, cash
flows and fair values relevant to financial instruments will be dependent upon
the balance then outstanding and prevalent market interest rates.





We
borrow from time-to-time under the Revolver.  These borrowings bear
interest at the bank’s base rate (5.0% at September 30, 2008) or at 30 day LIBOR
plus 100 basis points (3.70% at September 30, 2008), as elected by us when
requesting funds.  Generally the borrowings are for 30 day LIBOR plus
100 basis points.  As of September 30, 2008 and December 31, 2007, we
had two borrowings totaling $105,118,000 and $84,750,000 in the aggregate at the
30 day LIBOR plus 100 basis point rate, representing a weighted average rate of
3.49% and 6.20%, outstanding under the Revolver, respectively.  We
have drawn on the Revolver, and intend to draw on the Revolver in the future for
a variety of corporate purposes, including the funding of interim mortgage loans
to Sponsored REITs and the acquisition of properties that we acquire directly
for our portfolio.  Generally interim mortgage loans bear interest at
the same variable rate payable by us under the Revolver.  We also may
draw on the Revolver to fund advances we may make under a $5.5 million revolving
credit facility (which we refer to as the Highland Revolver) that we provided to
a Sponsored REIT, FSP Highland Place I Corp., that owns an office building in
Englewood, Colorado in December 2007, of which $1,125,000 has been drawn and is
outstanding as of September 30, 2008.  Advances under the Highland
Revolver bear interest at a rate equal to the 30-day LIBOR rate plus 200 basis
points.  We anticipate that any advances made under the Highland
Revolver will be repaid at its maturity on December 31, 2010 or earlier from
long-term financing of the property, cash flows from the property or a capital
event.  We therefore believe that we have mitigated our interest rate
risk with respect to our borrowings for both interim mortgage loans and the
Highland Revolver.  Historically we have satisfied obligations arising
from interim or other financing of acquisitions through cash or sale of
properties in our portfolio.  We believe that we can mitigate interest
rate risk with respect to borrowings for interim or other financing of
acquisitions as well.





The
following table presents as of September 30, 2008 our contractual variable rate
borrowings under the Revolver, which matures August 11, 2011:





Payment due by
      period
              (in thousands)Total
            2008
            2009
            2010
            2011
            2012
            After 2012Line of credit
            $  105,118
            $  105,118
            $            -
            $            -
            $            -
            $            -
            $            -Total
            $  105,118
            $  105,118
            $            -
            $            -
            $            -
            $            -
            $            -





If
market rates on our borrowings under the Revolver increased by 10% at maturity,
or approximately 34.9 basis points, over the current variable rate, the increase
in interest expense would decrease future earnings and cash flows by
approximately $0.4 million annually.  We do not believe that the
interest rate risk represented by our variable rate borrowings is material as of
September 30, 2008.







28





Item
4.         Controls and
Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2008. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.  Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.  Based on the evaluation of our disclosure controls and
procedures as of September 30, 2008, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.




Changes
in Internal Control Over Financial Reporting





No
change in our internal control over financial reporting occurred during the
quarter ended September 30, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





29





PART
II - OTHER INFORMATION





Item
1.         Legal Proceedings





From
time to time, we may be subject to legal proceedings and claims that arise in
the ordinary course of our business.  Although occasional adverse
decisions (or settlements) may occur, we believe that the final disposition of
any such matters will not have a material adverse effect on our financial
position, cash flows or results of operations.




Item
1A.  Risk Factors





There
were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk
Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007,
except (i) for the updates set forth below and (ii) to the extent previously
updated or to the extent additional factual information disclosed elsewhere in
this Quarterly Report on Form 10-Q relates to such risk factors.  In
addition to the updates below and the other information set forth in this
report, you should carefully consider the risk factors disclosed in Part I,
“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2007, which could materially affect our business, financial
condition or future results.  The risks described below and in our
Annual Report on Form 10-K for the year ended December 31, 2007 are not the only
risks facing our Company.  Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.




Economic
conditions in the United States could have a material adverse impact on our
earnings and financial condition.




Because
economic conditions in the United States may affect real estate values,
occupancy levels, property income and the propensity and the ability of
investors to invest in Sponsored REITs, current economic conditions in the
United States could have a material adverse impact on our earnings and financial
condition. The economy in the United States is currently experiencing
unprecedented disruptions, including increased levels of unemployment, the
failure and near failure of a number of large financial instituions, reduced
liquidy and increased credit risk premiums for a number of market participants.
Economic conditions may be affected by numerous factors, including but not
limited to, inflation and employement levels, energy prices, recessionary
concerns, changes in currency exchange rates, the availability of debt and
interest rate fluctuations. At this time we cannot predict the extent or
duration of any negative impact that the current disruptions in the U.S.
economy will have on our earnings and financial condition.





If
we are unable to fully syndicate a Sponsored REIT, we may be required to keep a
balance outstanding on the Revolver or use our cash balance to repay the
Revolver which may reduce cash available for distribution to our stockholders or
for other corporate purposes.





We
typically draw on the Revolver to make an interim mortgage loan to a Sponsored
REIT, so that it can acquire real property prior to the consummation of the
offering of its equity interests; this interim loan is typically secured by a
first mortgage against the real property acquired by the Sponsored
REIT.  Once the offering has been completed, the Sponsored REIT
typically repays the loan out of the offering proceeds.  If we are
unable to fully syndicate a Sponsored REIT, the Sponsored REIT could be unable
to fully repay the loan, and we would have to satisfy our obligation under the
Revolver through other means.  If we are required to use cash for this
purpose, we would have less cash available for distribution to our stockholders
or for other corporate purposes.




Covenants
in our debt agreements could adversely affect our financial condition.




Our
debt agreements contain customary restrictions, requirements and other
limitations on our ability to incur indebtedness, including loan to value
ratios, debt service coverage ratios, unencumbered liquidity requirements,
account balance requirements, net worth requirements, total debt to asset ratios
and secured debt to total asset ratios, which we must maintain.  Our
continued ability to borrow under the Revolver is subject to compliance with our
financial and other covenants.  Failure to comply with such covenants
could cause a default under the applicable debt agreement, and we may then be
required to repay such debt with capital from other sources.  Under
those circumstances, other sources of capital may not be available to us, or be
available only on unattractive terms.




We
may use debt financing to purchase properties directly for our real estate
portfolio, to make loans to Sponsored REITs or for other corporate
purposes.  If we are unable to obtain debt financing from these or
other sources, or to refinance existing indebtedness upon maturity, our
financial condition and results of operations could be materially adversely
affected.  If we breach covenants in our debt agreements, the lenders
can declare a default.  A default under our debt agreements could
result in difficulty financing growth in both the investment banking/investment
services and real estate segments of our business and could also result in a
reduction in the cash available for distribution to our stockholders or for
other corporate purposes.  In addition, our debt agreements include
cross-default provisions so that a default under one constitutes a default under
the other.  Defaults under our debt agreements could materially and
adversely affect our financial condition and results of
operations.





30





An
increase in interest rates would increase our interest costs on variable rate
debt and could adversely impact our ability to refinance existing debt or sell
assets.




As
of October 31, 2008, we had approximately $105 million of indebtedness that
bears interest at variable rates, and we may incur more of such indebtedness in
the future.  Approximately $75.0 million of this variable rate debt is
fixed through an interest rate swap contract at 5.84% per annum through
October 15, 2011.  If interest rates increase, then so will the
interest costs on our unhedged variable rate debt, which could adversely affect
our cash flow, our ability to pay principal and interest on our debt and our
ability to make distributions to our stockholders.  In addition,
rising interest rates could limit our ability to refinance existing debt when it
matures.  From time to time, we may enter into interest rate swap
agreements and other interest rate hedging contracts, including swaps, caps and
floors.  While these agreements are intended to lessen the
impact of rising interest rates on us, they also expose us to the risk
that the other parties to the agreements will not
perform, we could incur significant costs associated with the
settlement of the agreements, the agreements will be unenforceable and
the underlying transactions will fail to qualify as
highly-effective cash flow hedges under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as amended.  In
addition, an increase in interest rates could decrease the amount third-parties
are willing to pay for our assets, thereby limiting our ability to change our
portfolio promptly in response to changes in economic or other
conditions.




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





The
following table provides information about purchases by Franklin Street
Properties Corp. during the quarter ended September 30, 2008 of equity
securities that are registered by the Company pursuant to Section 12 of the
Exchange Act:





ISSUER
PURCHASES OF EQUITY SECURITIES





Period
            (a)
              
              
              
              
              Total
      Number of
              Shares
      (or Units)
              Purchased
      (1) (2)
            (b)
              
              
              
              
              Average
      Price
              Paid
      per Share
              (or
      Unit)
            (c)
              
              Total
      Number of
              Shares
      (or Units)
              Purchased
      as Part
              of
      Publicly
              Announced
      Plans
              or
      Programs
              (1)
      (2)
            (d)
              
              Maximum
      Number (or
              Approximate
      Dollar
              Value)
      of Shares (or
              Units)
      that May Yet Be
              Purchased
      Under the
              Plans
      or Programs
              (1)
      (2)07/01/08-07/31/08
            0
            N/A
            0
            $31,240,46508/01/08-08/31/08
            0
            N/A
            0
            $31,240,46509/01/08-09/30/08
            0
            N/A
            0
            $31,240,465Total:
            0
            N/A
            0
            $31,240,465





(1)  Our
Articles of Incorporation provide that we will use our best efforts to redeem
shares of our common stock from stockholders who request such
redemption.  Any FSP Corp. stockholder wishing to have shares redeemed
must make such a request no later than July 1 of any year for a redemption that
would be effective the following January 1.  This obligation is
subject to significant conditions.  However, as our common stock is
currently listed for trading on the American Stock Exchange, we are no longer
obligated to, and do not intend to, effect any such redemption.





(2)
On October 28, 2005, FSP Corp. announced that the Board of Directors of FSP
Corp. had authorized the repurchase of up to $35 million of the Company’s common
stock from time to time in the open market or in privately negotiated
transactions. On September 10, 2007, FSP Corp. announced that the Board of
Directors of FSP Corp. had authorized certain modifications to this common stock
repurchase plan. The Board of Directors increased the repurchase authorization
to up to $50 million of the Company’s common stock (inclusive of all repurchases
previously made under the plan).  The repurchase authorization expires
at the earlier of (i) November 1, 2009 or (ii) a determination by the Board of
Directors of FSP Corp. to discontinue repurchases.





31





Item
3.           Defaults
Upon Senior Securities





None.





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





None.





Item
5.           Other
Information





None.





Item
6.           Exhibits





The
Exhibits listed in the Exhibit Index are filed as part of this Quarterly Report
on Form 10-Q.








32





SIGNATURES





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








FRANKLIN
STREET PROPERTIES CORP.











Date
            Signature
            TitleDate:  November
      4, 2008
            /s/ George J.
      Carter
              George
      J. Carter
            Chief
      Executive Officer and Director
              (Principal
      Executive Officer)Date:  November
      4, 2008
            /s/ John G.
      Demeritt
              John
      G. Demeritt
            Chief
      Financial Officer
              (Principal
      Financial Officer)











33





EXHIBIT INDEX








2.1(1)
Agreement and Plan of Merger by and among FSP Corp., Park Ten Phase II
Acquisition Corp. and FSP Park Ten
Development Corp. dated as of March 19, 2008.





3.1(2)
Articles of Incorporation





3.2(3)
Amended and Restated By-laws





31.1*
Certification of the President and Chief Executive Officer of the Registrant
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





31.2*
Certification of the Chief Financial Officer of the Registrant pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.





32.1*
Certification of the President and Chief Executive Officer of the Registrant
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.





32.2*
Certification of the Chief Financial Officer of the Registrant pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.





______________________________________________________





(1)
            Incorporated
      by reference to FSP Corp.’s Current Report on Form 8-K, filed on March 21,
      2008 (File No. 001-32470).(2)
            Incorporated
      by reference to FSP Corp.’s Form 8-A, filed April 5, 2005 (File No.
      001-32470).(3)
            Incorporated
      by reference to FSP Corp.’s Current Report on Form 8-K, filed on May 15,
      2006 (File No. 001-32470).





*
Filed herewith