##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-Q



---



|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



| | For the quarterly period ended March 31, 2007.
| | ----------------------------------------------



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



| | For the Transition Period From  to
.
| | ------------------------------------

Commission
file number 0-50854



---

THOMAS PROPERTIES GROUP, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                       |  | 20-0852352                         
|(State or other jurisdiction of incorporation or organization) |  | (IRS employeridentification number)
|                                                               | 
|515 South Flower Street, Sixth Floor Los Angeles, CA           |  | 90071                              
|(Address of principal executive offices)                       |  | (Zip Code)                         

Registrants telephone number, including area code     (213) 613-1900



---

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 ̈

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

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                       |  |                           
|-------------------------------------- |  | --------------------------
|Class                                  |  | Outstanding at May 8, 2007
|Common Stock, $.01 par value per share |  | 23,744,372                



---



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2007

TABLE OF CONTENTS



|                              |  |                                                                                                                                                       |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                                       |  | PAGE NO.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                                      
|                              |  |                                                                                                                                                      
|ITEM 1.                       |  | Consolidated Financial Statements of Thomas Properties Group, Inc. Consolidated Balance Sheets as of March 31, 2007
(unaudited) and December 31, 2006 |  | 1       
|                              |  |                                                                                                                                                      
|                              |  | Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited)                                                  |  | 2       
|                              |  |                                                                                                                                                      
|                              |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)                                                  |  | 3       
|                              |  |                                                                                                                                                      
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                                                                |  | 4       
|                              |  |                                                                                                                                                      
|ITEM 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                 |  | 19      
|                              |  |                                                                                                                                                      
|ITEM 3.                       |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                             |  | 28      
|                              |  |                                                                                                                                                      
|ITEM 4.                       |  | Controls and Procedures                                                                                                                               |  | 29      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                                      
|                              |  |                                                                                                                                                      
|ITEM 1A.                      |  | Risk Factors                                                                                                                                          |  | 30      
|                              |  |                                                                                                                                                      
|ITEM 6.                       |  | Exhibits                                                                                                                                              |  | 46      
|                              |  |                                                                                                                                                      
|Signatures                    |  |                                                                                                                                                       |  | 47      





---

##### Table of Contents

|PART I. | FINANCIAL INFORMATION
|------- | ---------------------



|ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS
|------- | ---------------------------------

THOMAS
PROPERTIES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                             |  | March 31, 2007 |          |   | December 31, 2006 |  
|                                                                                                                                                                             |  | (unaudited)    |          |   |                   |  
|ASSETS                                                                                                                                                                       |  |                |          |   |                   |   |          |  
|Investments in real estate:                                                                                                                                                  |  |                |          |   |                   |   |          |  
|Land and improvements                                                                                                                                                        |  | $              | 35,499   |   |                   | $ | 35,499   |  
|Land and improvements - development property                                                                                                                                 |  |                | 69,197   |   |                   |   | 65,526   |  
|Construction in progress                                                                                                                                                     |  |                | 40,404   |   |                   |   | 25,403   |  
|Buildings and improvements                                                                                                                                                   |  |                | 254,928  |   |                   |   | 254,539  |  
|Tenant improvements                                                                                                                                                          |  |                | 61,921   |   |                   |   | 61,831   |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|                                                                                                                                                                             |  |                | 461,949  |   |                   |   | 442,798  |  
|Less accumulated depreciation                                                                                                                                                |  |                | (109,241 | ) |                   |   | (106,644 | )
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|                                                                                                                                                                             |  |                | 352,708  |   |                   |   | 336,154  |  
|                                                                                                                                                                             |  |               
|Investments in unconsolidated real estate entities                                                                                                                           |  |                | 47,895   |   |                   |   | 52,364   |  
|Cash and cash equivalents                                                                                                                                                    |  |                | 53,700   |   |                   |   | 64,343   |  
|Restricted cash                                                                                                                                                              |  |                | 18,841   |   |                   |   | 21,500   |  
|Rents and other receivables                                                                                                                                                  |  |                | 2,502    |   |                   |   | 2,195    |  
|Receivablesunconsolidated real estate entities                                                                                                                              |  |                | 3,639    |   |                   |   | 4,074    |  
|Deferred rents                                                                                                                                                               |  |                | 16,142   |   |                   |   | 17,610   |  
|Deferred leasing and loan costs, net                                                                                                                                         |  |                | 14,567   |   |                   |   | 14,707   |  
|Other assets, net                                                                                                                                                            |  |                | 17,887   |   |                   |   | 5,133    |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total assets                                                                                                                                                                 |  | $              | 527,881  |   |                   | $ | 518,080  |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                         |  |                |          |   |                   |   |          |  
|Liabilities:                                                                                                                                                                 |  |                |          |   |                   |   |          |  
|Mortgage loans                                                                                                                                                               |  | $              | 264,686  |   |                   | $ | 265,823  |  
|Other secured loans                                                                                                                                                          |  |                | 65,866   |   |                   |   | 62,105   |  
|Unsecured loan                                                                                                                                                               |  |                | 3,900    |   |                   |   | 3,900    |  
|Accounts payable and other liabilities, net                                                                                                                                  |  |                | 47,071   |   |                   |   | 35,458   |  
|Dividends and distributions payable                                                                                                                                          |  |                | 1,934    |   |                   |   | 1,916    |  
|Prepaid rent                                                                                                                                                                 |  |                | 3,762    |   |                   |   | 3,558    |  
|Deferred tax liability                                                                                                                                                       |  |                |         |   |                   |   | 2,392    |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                            |  |                | 387,219  |   |                   |   | 375,152  |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Minority interests:                                                                                                                                                          |  |                |          |   |                   |   |          |  
|Unitholders in the Operating Partnership                                                                                                                                     |  |                | 75,982   |   |                   |   | 76,390   |  
|Minority interests in consolidated real estate entities                                                                                                                      |  |                | 4, 129   |   |                   |   | 4,288    |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total minority interests                                                                                                                                                     |  |                | 80,111   |   |                   |   | 80,678   |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Commitments and contingencies                                                                                                                                                |  |                |          |   |                   |   |          |  
|                                                                                                                                                                             |  |               
|Stockholders equity:                                                                                                                                                        |  |                |          |   |                   |   |          |  
|Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as March 31, 2007 and December 31,
2006                                            |  |                |         |   |                   |   |         |  
|Common stock, $.01 par value, 75,000,000 shares authorized, 14,526,594 and 14,418,261 shares issued and outstanding as of March 31, 2007
and December 31, 2006, respectively |  |                | 144      |   |                   |   | 144      |  
|Limited voting stock, $.01 par value, 20,000,000 shares authorized, 16,666,666 shares issued and outstanding as of March 31, 2007 and
December 31, 2006                      |  |                | 167      |   |                   |   | 167      |  
|Additional paid-in capital                                                                                                                                                   |  |                | 70,658   |   |                   |   | 71,095   |  
|Retained deficit and dividends                                                                                                                                               |  |                | (10,418  | ) |                   |   | (9,156   | )
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                   |  |                | 60,551   |   |                   |   | 62,250   |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                   |  | $              | 527,881  |   |                   | $ | 518,080  |  
|                                                                                                                                                                             |  |                |          |   |                   |   |          |  

See accompanying notes to consolidated financial statements.



1



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)



|                                                                                                       |  |                              |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                       |  | Three Months Ended March 31, |           
|                                                                                                       |  | 2007                         |            |   | 2006 |  
|Revenues:                                                                                              |  |                              |            |   |      |   |            |  
|Rental                                                                                                 |  | $                            | 8,162      |   |      | $ | 8,295      |  
|Tenant reimbursements                                                                                  |  |                              | 5,171      |   |      |   | 4,893      |  
|Parking and other                                                                                      |  |                              | 1,018      |   |      |   | 897        |  
|Investment advisory, management, leasing, and development services                                     |  |                              | 2,203      |   |      |   | 1,414      |  
|Investment advisory, management, leasing, and development servicesunconsolidated real estate entities |  |                              | 4,358      |   |      |   | 2,173      |  
|                                                                                                       |  |                              |            |   |      |   |            |  
|Total revenues                                                                                         |  |                              | 20,912     |   |      |   | 17,672     |  
|                                                                                                       |  |                              |            |   |      |   |            |  
|Expenses:                                                                                              |  |                              |            |   |      |   |            |  
|Rental property operating and maintenance                                                              |  |                              | 4,350      |   |      |   | 4,328      |  
|Real estate taxes                                                                                      |  |                              | 1,475      |   |      |   | 1,456      |  
|Investment advisory, management, leasing, and development services                                     |  |                              | 2,332      |   |      |   | 1,803      |  
|Rentunconsolidated real estate entities                                                               |  |                              | 60         |   |      |   | 58         |  
|Interest                                                                                               |  |                              | 4,261      |   |      |   | 5,487      |  
|Depreciation and amortization                                                                          |  |                              | 3,059      |   |      |   | 3,105      |  
|General and administrative                                                                             |  |                              | 5,118      |   |      |   | 3,274      |  
|                                                                                                       |  |                              |            |   |      |   |            |  
|Total expenses                                                                                         |  |                              | 20,655     |   |      |   | 19,511     |  
|                                                                                                       |  |                              |            |   |      |   |            |  
|Gain on sale of real estate                                                                            |  |                              | 969        |   |      |   |           |  
|Loss from early extinguishment of debt                                                                 |  |                              |           |   |      |   | (360       | )
|Interest income                                                                                        |  |                              | 839        |   |      |   | 676        |  
|Equity in net loss of unconsolidated real estate entities                                              |  |                              | (3,169     | ) |      |   | (2,971     | )
|Minority interests  unitholders in the Operating Partnership                                          |  |                              | 593        |   |      |   | 2,691      |  
|Minority interests in consolidated real estate entities                                                |  |                              | 25         |   |      |   | (524       | )
|                                                                                                       |  |                              |            |   |      |   |            |  
|Loss before benefit for income taxes                                                                   |  |                              | (486       | ) |      |   | (2,327     | )
|Benefit for income taxes                                                                               |  |                              | 231        |   |      |   | 899        |  
|                                                                                                       |  |                              |            |   |      |   |            |  
|Net loss                                                                                               |  | $                            | (255       | ) |      | $ | (1,428     | )
|                                                                                                       |  |                              |            |   |      |   |            |  
|Loss per share  basic                                                                                 |  | $                            | (0.02      | ) |      | $ | (0.10      | )
|Loss per share  diluted                                                                               |  | $                            | (0.02      | ) |      | $ | (0.10      | )
|                                                                                                       |  |                             
|Weighted average common shares outstanding - basic                                                     |  |                              | 14,373,318 |   |      |   | 14,320,779 |  
|Weighted average common shares outstanding - diluted                                                   |  |                              | 14,373,318 |   |      |   | 14,320,779 |  

See accompanying notes to consolidated financial statements.



2



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                                               |  |                             |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                               |  | Three Months EndedMarch 31, |        
|                                                                                                                               |  | 2007                        |         |   | 2006 |  
|Cash flows from operating activities:                                                                                          |  |                             |         |   |      |   |        |  
|Net loss                                                                                                                       |  | $                           | (255    | ) |      | $ | (1,428 | )
|Adjustments to reconcile net loss to net cash provided (used in) operating activities:                                         |  |                             |         |   |      |   |        |  
|Loss from early extinguishment of debt                                                                                         |  |                             |        |   |      |   | 360    |  
|Gain on sale of real estate                                                                                                    |  |                             | (969    | ) |      |   |       |  
|Equity in net loss of unconsolidated real estate entities                                                                      |  |                             | 3,169   |   |      |   | 2,971  |  
|Deferred rents                                                                                                                 |  |                             | 1,481   |   |      |   | 1,334  |  
|Depreciation and amortization expense                                                                                          |  |                             | 3,060   |   |      |   | 3,105  |  
|Amortization of loan costs                                                                                                     |  |                             | 82      |   |      |   | 172    |  
|Amortization of above and below market leases, net                                                                             |  |                             | (2      | ) |      |   | (69    | )
|Vesting of incentive units, stock options and restricted stock                                                                 |  |                             | 709     |   |      |   | 145    |  
|Minority interests                                                                                                             |  |                             | (618    | ) |      |   | (2,168 | )
|Distributions from operations of unconsolidated real estate entities                                                           |  |                             | 1,462   |   |      |   | 376    |  
|Changes in assets and liabilities:                                                                                             |  |                             |         |   |      |   |        |  
|Rents and other receivables                                                                                                    |  |                             | (307    | ) |      |   | (537   | )
|Receivablesunconsolidated real estate entities                                                                                |  |                             | 435     |   |      |   | (1,024 | )
|Deferred leasing costs                                                                                                         |  |                             | 735     |   |      |   | (5     | )
|Other assets                                                                                                                   |  |                             | (13,013 | ) |      |   | (5,482 | )
|Deferred interest payable                                                                                                      |  |                             | 44      |   |      |   | 44     |  
|Accounts payable and other liabilities                                                                                         |  |                             | 8,539   |   |      |   | (618   | )
|Prepaid rent                                                                                                                   |  |                             | 204     |   |      |   | (114   | )
|Deferred tax liability                                                                                                         |  |                             | (2,392  | ) |      |   |       |  
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                                            |  |                             | 2,364   |   |      |   | (2,938 | )
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Cash flows from investing activities:                                                                                          |  |                             |         |   |      |   |        |  
|Expenditures for improvements to real estate                                                                                   |  |                             | (16,271 | ) |      |   | (4,182 | )
|Return of capital from unconsolidated real estate entities                                                                     |  |                             | 212     |   |      |   | 1      |  
|Contributions to unconsolidated real estate entities                                                                           |  |                             | (373    | ) |      |   | (2,864 | )
|Change in restricted cash                                                                                                      |  |                             | 2,659   |   |      |   | 6,051  |  
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Net cash used in investing activities                                                                                          |  |                             | (13,773 | ) |      |   | (994   | )
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Cash flows from financing activities:                                                                                          |  |                             |         |   |      |   |        |  
|Payment of dividends to common stockholders and distributions to limited partners of the operating partnership                 |  |                             | (1,916  | ) |      |   | (1,905 | )
|Proceeds from mortgage and other secured loans                                                                                 |  |                             | 5,035   |   |      |   |       |  
|Principal payments of mortgage and other secured loans                                                                         |  |                             | (2,455  | ) |      |   | (2,312 | )
|Minority interest distributions                                                                                                |  |                             |        |   |      |   | (550   | )
|Payment of loan costs                                                                                                          |  |                             |        |   |      |   | (28    | )
|Proceeds from exercise of stock options                                                                                        |  |                             | 102     |   |      |   | 34     |  
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Net cash provided by (used in) financing activities                                                                            |  |                             | 766     |   |      |   | (4,761 | )
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                                                      |  |                             | (10,643 | ) |      |   | (8,693 | )
|Cash and cash equivalents at beginning of period                                                                               |  |                             | 64,343  |   |      |   | 63,915 |  
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                                                                     |  | $                           | 53,700  |   |      | $ | 55,222 |  
|                                                                                                                               |  |                             |         |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                                                              |  |                             |         |   |      |   |        |  
|Cash paid for interest                                                                                                         |  | $                           | 5,799   |   |      | $ | 5,684  |  
|Supplemental disclosure of non-cash investing and financing activities:                                                        |  |                             |         |   |      |   |        |  
|Accrual for declaration of dividends to common shareholders and distributions to limited partners of the operating partnership |  | $                           | 1,934   |   |      | $ | 1,916  |  
|Accrual for real estate improvements                                                                                           |  |                             | 4,040   |   |      |   | 783    |  
|Restricted cash                                                                                                                |  |                             | 6,549   |   |      |   |       |  
|Minority interest reclass                                                                                                      |  |                             | 930     |   |      |   |       |  

See accompanying notes to consolidated financial statements.



3



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



1. Organization and Description of Business

The terms Thomas Properties, us, we and our as used in this report refer to Thomas Properties Group, Inc.
together with our operating partnership, Thomas Properties Group, L.P., or the Operating Partnership.

We were incorporated in
the State of Delaware on March 9, 2004 to succeed to certain businesses of the Thomas Properties predecessor (Thomas Properties Group, Inc. Predecessor, or TPGI Predecessor), which was not a legal entity but rather a combination of
real estate entities and operations. We own, manage, lease, acquire and develop real estate, consisting primarily of office properties, as well as mixed-use and residential, located in Southern California; Sacramento, California; Philadelphia,
Pennsylvania; Northern Virginia; Houston, Texas; and Austin, Texas. The ultimate owners of TPGI Predecessor were Mr. James A. Thomas, our Chairman, Chief Executive Officer and President, and certain others who had minor ownership
interests.

Our business operations are carried on through our Operating Partnership. We are the sole general partner in the Operating
Partnership. Pursuant to contribution agreements among the owners of TPGI Predecessor and the Operating Partnership, the Operating Partnership received a contribution of interests in the real estate properties, as well as the investment advisory,
property management, leasing and real estate development operations of TPGI Predecessor and the assumption of debt and other specified liabilities in exchange for limited partnership units (Units) in the Operating Partnership issued to
the contributors. As of March, 31, 2007, we held a 45.1% interest in the Operating Partnership which we consolidated, as we have control over the major decisions of the Operating Partnership.

As of March, 31, 2007, we were invested in the following real estate entities:



|                                                  |  |                                                                |  |                                                              
|------------------------------------------------- |  | -------------------------------------------------------------- |  | -------------------------------------------------------------
|Entity                                            |  | Type; Possible Development                                     |  | Location                                                     
|Consolidated entities:                            |  |                                                                |  |                                                              
|                                                  |  |                                                               
|One Commerce Square                               |  | High-rise office                                               |  | Philadelphia Central Business District, Pennsylvania (PCBD)
|Two Commerce Square                               |  | High-rise office                                               |  | PCBD                                                         
|Murano                                            |  | Land and construction in progress; Residential                 |  | PCBD                                                         
|2100 JFK Boulevard                                |  | Undeveloped land; Residential/Office/Retail                    |  | PCBD                                                         
|Four Points Centre                                |  | Undeveloped land; Office/Retail/Research and Development/Hotel |  | Austin, Texas                                                
|Campus El Segundo                                 |  | Undeveloped land; Office/Retail/Research and Development/Hotel |  | El Segundo, California                                       
|                                                  |  |                                                               
|Unconsolidated entities:                          |  |                                                                |  |                                                              
|                                                  |  |                                                               
|2121 Market Street and Harris Building Associates |  | Residential and Retail                                         |  | PCBD                                                         
|                                                  |  |                                                               
|TPG/CalSTRS, LLC:                                 |  |                                                                |  |                                                              
|                                                  |  |                                                               
|City National Plaza                               |  | High-rise office                                               |  | Los Angeles Central Business District, California            
|Reflections I                                     |  | Suburban office  single tenancy                               |  | Reston, Virginia                                             
|Reflections II                                    |  | Suburban office  single tenancy                               |  | Reston, Virginia                                             
|Four Falls Corporate Center                       |  | Suburban office                                                |  | Conshohocken, Pennsylvania                                   
|Oak Hill Plaza                                    |  | Suburban office                                                |  | King of Prussia, Pennsylvania                                



4



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



|                                  |  |                                      |  |                              
|--------------------------------- |  | ------------------------------------ |  | -----------------------------
|Entity                            |  | Type; Possible Development           |  | Location                     
|Walnut Hill Plaza                 |  | Suburban office                      |  | King of Prussia, Pennsylvania
|San Felipe Plaza                  |  | High-rise office                     |  | Houston, Texas               
|2500 City West                    |  | Suburban office and undeveloped land |  | Houston, Texas               
|Brookhollow Central I, II and III |  | Suburban office                      |  | Houston, Texas               
|Intercontinental Center           |  | Suburban office                      |  | Houston, Texas               
|CityWestPlace                     |  | Suburban office and undeveloped land |  | Houston, Texas               
|Centerpointe I and II             |  | Suburban office                      |  | Fairfax, Virginia            
|Fair Oaks Plaza                   |  | Suburban office                      |  | Fairfax, Virginia            

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements of our company
include all the accounts of Thomas Properties Group, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership. Property interests owned by Mr. Thomas and entities majority owned by him were contributed to the Operating
Partnership in exchange for Units and have been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. Accordingly, the contributed assets and assumed liabilities were recorded at TPGI
Predecessors historical cost basis. The pooling-of-interests method of accounting also requires the reporting of results of operations, for the period in which the combination occurred, as though the entities had been combined at either the
beginning of the period or inception.

The real estate entities included in the consolidated financial statements have been consolidated
only for the periods that such entities were under control by us, or were considered a variable interest entity. The equity method of accounting is utilized to account for investments in real estate entities over which we have significant influence,
but not control over major decisions, including the decision to sell or refinance the properties owned by such entities. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

The interests in One Commerce Square and Two Commerce Square (for all periods presented) and Murano (beginning August 2, 2006) not
owned by us are reflected as minority interests. Mr. Thomas has an 11% ownership interest in each of One Commerce Square and Two Commerce Square. No further losses of One Commerce Square and Two Commerce Square are being allocated to
Mr. Thomas, as no further contributions are required from Mr. Thomas. Future income allocable to Mr. Thomas will be reduced by such unrecognized losses. The unrecognized minority interest of Mr. Thomas in the deficit of One
Commerce Square and Two Commerce Square is $1.5 million and $1.4 million at March 31, 2007 and December 31, 2006, respectively.

We have a $20,510,000 preferred equity interest in Murano, of which we have fully funded the required cash commitment of $16,711,000 as of March 31, 2007. Excluding the preferred equity interest, a third party has a 27.0% ownership
interest in Murano.

(Loss) earnings per share

The computation of basic (loss) earnings per share is based on net (loss) earnings and the weighted average number of shares of our common stock outstanding during the period. The computation of diluted (loss) earnings per share includes
the assumed exercise of outstanding stock options and the effect of the vesting of unvested restricted stock that have been granted, all calculated using the treasury stock method.



5



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



Development Activities

Project costs associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, loan fees, real estate taxes, and general and administrative
expenses that are directly associated with and incremental to our development activities and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the
pre-development and lease-up phases. Once the development and construction of the building shell of a real estate project is completed, the costs capitalized to construction in progress will be transferred to land and improvements and buildings and
improvements. Included in land held for development and construction in progress is capitalized interest of $9,211,000 and $8,109,000 as of March 31, 2007 and December 31, 2006, respectively.

Gains on Dispositions of Real Estate

Gains on sales
of real estate are recognized pursuant to the provisions of FASB Statement No. 66, Accounting for Sales of Real Estate (SFAS 66). The specific timing of a sale is measured against various criteria in SFAS 66 related to the
terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the
property by applying the deposit, finance, installment, percentage of completion or cost recovery methods, as appropriate.

Recent Accounting
Pronouncements

In July 2006, FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income Taxes, which is effective for fiscal years beginning after December 15, 2006, and clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we
recognize the impact of a tax position in our financial statements if that position would more likely than not be sustained on audit, based on the technical merits of the position. See note 7 for further details regarding the adoption of FIN 48.

In September 2006, FASB issued FASB Statement No. 157 (SFAS 157), Fair Value Measurement, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and provides for expanded disclosure about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair
value measurements. This guidance was issued to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We do not expect that the adoption of SFAS 157 will have a material impact on our financial statements.



6



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



Interim Financial Data

The accompanying interim financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) 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 GAAP 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. The results of operations for the interim periods are not necessarily indicative of the
results to be obtained for the full fiscal year.

3. Unconsolidated Real Estate Entities

The unconsolidated real estate entities include the entities that own 2121 Market Street, Harris Building Associates, and TPG/CalSTRS, LLC, a joint
venture with the California State Teachers Retirement System (CalSTRS). As of March 31, 2007, TPG/CalSTRS, LLC owns the following properties:

City National Plaza (purchased January 2003)

Reflections I (purchased October 2004)

Reflections II (purchased October 2004)

Four
Falls Corporate Center (purchased March 2005)

Oak Hill Plaza (purchased March 2005)

Walnut Hill Plaza (purchased March 2005)

San
Felipe Plaza (purchased August 2005)

2500 City West (purchased August 2005)

Brookhollow Central I, II and III (purchased August 2005)

Intercontinental Center (purchased August 2005)

2500 City West land (purchased December 2005)

CityWestPlace (purchased June 2006)

CityWestPlace land (purchased June 2006)

Centerpointe I and II (purchased January 2007)

Fair Oaks Plaza (purchased January 2007)

Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the
stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any
preferred or special allocations, as of March 31, 2007:



|                           |  |      |     
|-------------------------- |  | ---- | ----
|2121 Market Street         |  | 50.0 | %   
|Harris Building Associates |  | 0.1  | %(1)
|TPG/CalSTRS, LLC:          |  |      |     
|City National Plaza        |  | 21.3 | %(2)
|All other properties       |  | 25.0 | %(3)



| | (1) | The partnership that owns 2121 Market Street entered into a master lease for the property with Harris Building Associates designed to allow a third party investor to take advantage
of the historic tax credits for the property. The Operating Partnership and an unrelated party each hold a 0.05% general partnership interest in Harris Building Associates. The 99.9% limited partner of Harris Building Associates contributed $3.5
million and no further contributions are required. In addition, this partner is entitled to various distributions, fees, and priority returns. During 2004, the accumulated losses and distributions for this limited partner equaled their contribution
amount and priority return. As such, net income/loss is allocated equally to the general partners, resulting in an allocation of 50% net income/loss to us.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



| | (2) | Prior to January 1, 2006, the minority owner of City National Plaza and the Operating Partnership were allocated depreciation expense of City National Plaza ahead of CalSTRS,
resulting in the allocation to us of 22.5% of City National Plazas depreciation expense and 21.3% of City National Plazas net income/loss (excluding depreciation expense). During 2005, the accumulated losses and distributions for the
minority owner equaled their contribution amount. As such, net income/loss is allocated to the Operating Partnership and CalSTRS.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Beginning January 1, 2006, the Operating Partnership is allocated 25% of net income/loss, including depreciation expense. Depreciation expense was previously allocated to the members in accordance with the operating agreement of the
limited liability company. The minority owner and the Operating Partnership were initially allocated depreciation expense ahead of CalSTRS. Based on the American Institute of Certified Public Accountants (AICPA) Statement of Position
78-9 Accounting for Investments in Real Estate Ventures, we determined that the allocation of net income/loss, including depreciation expense, to the members should be based on the allocation of cash distributions and liquidating
distributions, not the profit and loss allocation ratios as specified in the operating agreement.



| | (3) | Prior to January 1, 2006, the Operating Partnership was allocated depreciation expense of the properties ahead of CalSTRS, resulting in the allocation to us of 100% of
depreciation expense and 25% of net income/loss (excluding depreciation expense) of the properties.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Beginning
January 1, 2006, the Operating Partnership is allocated 25% of net income/loss, including depreciation expense, which is equal to the economic ownership of the Operating Partnership. Depreciation expense was previously allocated to the members
in accordance with the operating agreement of the limited liability company. The Operating Partnership was initially allocated depreciation expense ahead of CalSTRS. Based on the American Institute of Certified Public Accountants (AICPA)
Statement of Position 78-9 Accounting for Investments in Real Estate Ventures, we determined that the allocation of net income/loss, including depreciation expense, to the members should be based on the allocation of cash distributions
and liquidating distributions, not the profit and loss allocation ratios as specified in the operating agreement.



8



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



| | Investments | in unconsolidated real estate entities as of March, 31, 2007 and December 31, 2006 are as follows:
| | ----------- | --------------------------------------------------------------------------------------------------



|                                                            |  |                |        |   |                  |   |        |  
|----------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                                            |  | March 31, 2007 |        |   | December 31,2006 |  
|TPG/CalSTRS, LLC:                                           |  |                |        |   |                  |   |        |  
|City National Plaza                                         |  | $              | (2,724 | ) |                  | $ | (766   | )
|Reflections I                                               |  |                | 1,430  |   |                  |   | 1,525  |  
|Reflections II                                              |  |                | 1,650  |   |                  |   | 1,778  |  
|Four Falls Corporate Center                                 |  |                | 1,772  |   |                  |   | 1,989  |  
|Oak Hill Plaza / Walnut Hill Plaza                          |  |                | 1,225  |   |                  |   | 1,532  |  
|Valley Square Office Park                                   |  |                | 36     |   |                  |   | 60     |  
|San Felipe Plaza                                            |  |                | 5,999  |   |                  |   | 6,514  |  
|2500 City West                                              |  |                | 3,550  |   |                  |   | 3,874  |  
|Brookhollow Central I, II and III / Intercontinental Center |  |                | 2,727  |   |                  |   | 2,942  |  
|CityWestPlace                                               |  |                | 23,299 |   |                  |   | 23,328 |  
|Centerpointe I, II                                          |  |                | 7,177  |   |                  |   |       |  
|Fair Oaks Plaza                                             |  |                | 3,215  |   |                  |   |       |  
|TPG/CalSTRS                                                 |  |                | 33     |   |                  |   | 10,912 |  
|2121 Market Street and Harris Building Associates           |  |                | (1,494 | ) |                  |   | (1,324 | )
|                                                            |  |                |        |   |                  |   |        |  
|                                                            |  | $              | 47,895 |   |                  | $ | 52,364 |  
|                                                            |  |                |        |   |                  |   |        |  

The following is a summary of the investments in unconsolidated real estate entities for the three
months ended March, 31, 2007:



|                                                          |  |   |        |  
|--------------------------------------------------------- |  | - | ------ | -
|Investment balance December, 31, 2006                     |  | $ | 52,364 |  
|                                                          | 
|Contributions                                             |  |   | 372    |  
|Equity in net loss of unconsolidated real estate entities |  |   | (3,169 | )
|Distributions                                             |  |   | (1,672 | )
|                                                          |  |   |        |  
|Investment balance, March, 31, 2007                       |  | $ | 47,895 |  
|                                                          |  |   |        |  

TPG/CalSTRS, LLC, was formed to acquire office properties on a nationwide basis classified as
moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by
unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management. Under the joint venture
agreement, we have an exclusive obligation until the earlier of May 1, 2007 and the date CalSTRS has contributed its full capital commitment to the joint venture to first present all acquisition opportunities involving core plus and value-add
properties to the joint venture before we may pursue them individually or in a joint venture with other parties. We are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization,
except for stabilized properties, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period.

The total initial capital commitment to the joint venture was $333.3 million, which was fully funded as of December 31, 2006. Our aggregate
commitment to the joint venture was $83.3 million and CalSTRS aggregate commitment was $250.0 million. On June 8, 2006, we amended our agreement with CalSTRS to allow for all capital distributions to be recalled as additional
capital contributions through May 1, 2007. As of March 31, 2007 approximately $44.6 million and $14.9 million was subject to reinvestment by CalSTRS and our company, respectively. If the pending acquisition of the ten office
properties in Austin, Texas, which is also described in note 8, closes, we anticipate that the remaining amounts subject to reinvestment will be contributed by CalSTRS and our company in connection with such acquisition.

A buy-sell provision may be exercised under the joint venture agreement by either CalSTRS or us. Under this provision, the initiating party sets a price
for its interest in the joint venture, and the other party has a specified time to either elect to buy the initiating partys interest, or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has
a buy-out option to purchase our interest in the joint venture. The



9



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



buyout price is based upon a 3% discount to the appraised fair market value. In addition, the minority owners of City
National Plaza have the option to require the joint venture to purchase its interest for an amount equal to what would be payable to them upon liquidation of the assets at fair market value.

Following is summarized financial information for the unconsolidated real estate entities as of March, 31, 2007 and December 31, 2006 and for the
three months ended March, 31, 2007 and 2006:

Summarized Balance Sheets



|                                                                                                                                 |  |                |           |                  |   |          
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ---------------- | - | ---------
|                                                                                                                                 |  | March, 31,2007 |           | December 31,2006
|ASSETS                                                                                                                           |  |                |           |                  |   |          
|Investments in real estate, net                                                                                                  |  | $              | 1,178,144 |                  | $ | 1,022,480
|Assets associated with real estate held for sale                                                                                 |  |                | 14,799    |                  |   | 287      
|Receivables including deferred rents                                                                                             |  |                | 47,091    |                  |   | 42,103   
|Other assets                                                                                                                     |  |                | 200,140   |                  |   | 203,927  
|                                                                                                                                 |  |                |           |                  |   |          
|Total assets                                                                                                                     |  | $              | 1,440,174 |                  | $ | 1,268,797
|                                                                                                                                 |  |                |           |                  |   |          
|LIABILITIES AND OWNERS EQUITY                                                                                                   |  |                |           |                  |   |          
|Mortgage and other secured loans                                                                                                 |  | $              | 1,198,144 |                  | $ | 1,050,020
|Other liabilities                                                                                                                |  |                | 68,783    |                  |   | 73,763   
|Obligations associated with real estate held for sale                                                                            |  |                | 13,908    |                  |   | 48       
|                                                                                                                                 |  |                |           |                  |   |          
|Total liabilities                                                                                                                |  |                | 1,280,835 |                  |   | 1,123,831
|                                                                                                                                 |  |                |           |                  |   |          
|Minority interest                                                                                                                |  |                |          |                  |   |         
|                                                                                                                                 |  |               
|Owners equity:                                                                                                                  |  |                |           |                  |   |          
|Thomas Properties, including $275 and $258 of other comprehensive loss as of March, 31, 2007 and December 31, 2006,
respectively |  |                | 51,733    |                  |   | 55,442   
|Other owners, including $1,259 and $1,199 of other comprehensive loss as of March, 31, 2007 and December 31, 2006,
respectively  |  |                | 107,606   |                  |   | 89,524   
|                                                                                                                                 |  |                |           |                  |   |          
|Total owners equity                                                                                                             |  |                | 159,339   |                  |   | 144,966  
|                                                                                                                                 |  |                |           |                  |   |          
|Total liabilities and owners equity                                                                                             |  | $              | 1,440,174 |                  | $ | 1,268,797
|                                                                                                                                 |  |                |           |                  |   |          



10



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



Summarized Statements of Operations



|                                           |  |                              |         |   |      |   |         |  
|------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                           |  | Three months ended March 31, |        
|                                           |  | 2007                         |         |   | 2006 |  
|Revenues                                   |  | $                            | 43,763  |   |      | $ | 27,408  |  
|                                           |  |                              |         |   |      |   |         |  
|Expenses:                                  |  |                              |         |   |      |   |         |  
|Operating and other expenses               |  |                              | 24,514  |   |      |   | 17,568  |  
|Interest expense                           |  |                              | 18,908  |   |      |   | 10,866  |  
|Depreciation and amortization              |  |                              | 15,211  |   |      |   | 12,539  |  
|                                           |  |                              |         |   |      |   |         |  
|Total expenses                             |  |                              | 58,633  |   |      |   | 40,973  |  
|                                           |  |                              |         |   |      |   |         |  
|Loss from continuing operations            |  |                              | (14,870 | ) |      |   | (13,565 | )
|Minority interest                          |  |                              | (26     | ) |      |   | 706     |  
|Income (loss) from discontinued operations |  |                              | (204    | ) |      |   | 188     |  
|                                           |  |                              |         |   |      |   |         |  
|Net loss                                   |  | $                            | (15,100 | ) |      | $ | (12,671 | )
|                                           |  |                              |         |   |      |   |         |  
|Thomas Properties share of net loss       |  | $                            | (3,169  | ) |      | $ | (2,971  | )
|                                           |  |                              |         |   |      |   |         |  

Included in the preceding summarized balance sheets as of March, 31, 2007 and December 31,
2006, are the following balance sheets of TPG/CalSTRS, LLC:



|                                                                                                                                 |  |                |           |                  |   |          
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ---------------- | - | ---------
|                                                                                                                                 |  | March, 31,2007 |           | December 31,2006
|ASSETS                                                                                                                           |  |                |           |                  |   |          
|Investments in real estate, net                                                                                                  |  | $              | 1,160,499 |                  | $ | 1,004,584
|Assets associated with real estate held for sale                                                                                 |  |                | 14,799    |                  |   |         
|Receivables including deferred rents                                                                                             |  |                | 44,238    |                  |   | 39,189   
|Other assets                                                                                                                     |  |                | 196,813   |                  |   | 201,912  
|                                                                                                                                 |  |                |           |                  |   |          
|Total assets                                                                                                                     |  | $              | 1,416,349 |                  | $ | 1,245,685
|                                                                                                                                 |  |                |           |                  |   |          
|LIABILITIES AND MEMBERS EQUITY                                                                                                  |  |                |           |                  |   |          
|Mortgage and other secured loans                                                                                                 |  | $              | 1,178,815 |                  | $ | 1,030,615
|Other liabilities                                                                                                                |  |                | 62,671    |                  |   | 68,600   
|Obligations associated with real estate held for sale                                                                            |  |                | 13,908    |                  |   |         
|                                                                                                                                 |  |                |           |                  |   |          
|Total liabilities                                                                                                                |  |                | 1,255,394 |                  |   | 1,099,215
|                                                                                                                                 |  |                |           |                  |   |          
|Minority interest                                                                                                                |  |                |          |                  |   |         
|                                                                                                                                 |  |               
|Members equity:                                                                                                                 |  |                |           |                  |   |          
|Thomas Properties, including $275 and $258 of other comprehensive loss as of March, 31, 2007 and December 31, 2006,
respectively |  |                | 52,238    |                  |   | 55,916   
|CalSTRS, including $1,259 and $1,199 of other comprehensive loss as of March, 31, 2007 and December 31, 2006,
respectively       |  |                | 108,717   |                  |   | 90,554   
|                                                                                                                                 |  |                |           |                  |   |          
|Total members equity                                                                                                            |  |                | 160,955   |                  |   | 146,470  
|                                                                                                                                 |  |                |           |                  |   |          
|Total liabilities and members equity                                                                                            |  | $              | 1,416,349 |                  | $ | 1,245,685
|                                                                                                                                 |  |                |           |                  |   |          

Following is summarized financial information by real estate entity for the unconsolidated real
estate entities for the three months ended March, 31, 2007 and 2006:



11



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|--------------------------------------------------------- |  | ----------------------------------------------- | ----- | - | --------------- | - | ------- | ----- |  | - | ------- | -
|                                                          |  | Three months ended March, 31, 2007              |      
|                                                          |  | 2121 Market Streetand Harris BuildingAssociates |       |   | TPG/CalSTRS,LLC |   |         | Total | 
|Revenues                                                  |  | $                                               | 1,398 |   |                 | $ | 42,367  |       |  | $ | 43,765  |  
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Expenses:                                                 |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Operating and other                                       |  |                                                 | 899   |   |                 |   | 23,615  |       |  |   | 24,514  |  
|Interest                                                  |  |                                                 | 293   |   |                 |   | 18,616  |       |  |   | 18,909  |  
|Depreciation and amortization                             |  |                                                 | 240   |   |                 |   | 14,970  |       |  |   | 15,210  |  
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Total expenses                                            |  |                                                 | 1,432 |   |                 |   | 57,201  |       |  |   | 58,633  |  
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Income (loss) from continuing operations                  |  |                                                 | (34   | ) |                 |   | (14,834 | )     |  |   | (14,868 | )
|Minority interest                                         |  |                                                 | (26   | ) |                 |   |        |       |  |   | (26     | )
|Discontinued operations                                   |  |                                                 |      |   |                 |   | (204    | )     |  |   | (204    | )
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Net loss                                                  |  | $                                               | (60   | ) |                 | $ | (15,038 | )     |  | $ | (15,098 | )
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Thomas Properties share of net loss                      |  | $                                               | (30   | ) |                 | $ | (3,760  | )     |  | $ | (3,790  | )
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Intercompany eliminations                                 |  |                                                 |       |   |                 |   |         |       |  |   | 621     |  
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  
|Equity in net loss of unconsolidated real estate entities |  |                                                 |       |   |                 |   |         |       |  | $ | (3,169  | )
|                                                          |  |                                                 |       |   |                 |   |         |       |  |   |         |  



|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------------------------------------- | ----- | - | ------ | - | ---- | --------------- |  | - | ------- | - |  | - | ------- | -
|                                                          |  | Three months ended March, 31, 2006              |      
|                                                          |  | 2121 Market Streetand Harris BuildingAssociates |       |   | Murano |   |      | TPG/CalSTRS,LLC |  |   | Total   |  
|Revenues                                                  |  | $                                               | 1,353 |   |        | $ |     |                 |  | $ | 26,055  |   |  | $ | 27,408  |  
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Expenses:                                                 |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Operating and other                                       |  |                                                 | 857   |   |        |   | 259  |                 |  |   | 16,452  |   |  |   | 17,568  |  
|Interest                                                  |  |                                                 | 297   |   |        |   |     |                 |  |   | 10,569  |   |  |   | 10,866  |  
|Depreciation and amortization                             |  |                                                 | 285   |   |        |   | 407  |                 |  |   | 11,847  |   |  |   | 12,539  |  
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Total expenses                                            |  |                                                 | 1,439 |   |        |   | 666  |                 |  |   | 38,868  |   |  |   | 40,973  |  
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Loss from continuing operations                           |  |                                                 | (86   | ) |        |   | (666 | )               |  |   | (12,813 | ) |  |   | (13,565 | )
|Minority interest                                         |  |                                                 | (26   | ) |        |   |     |                 |  |   | 732     |   |  |   | 706     |  
|Loss from discontinued operations                         |  |                                                 |      |   |        |   |     |                 |  |   | 188     |   |  |   | 188     |  
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Net loss                                                  |  | $                                               | (112  | ) |        | $ | (666 | )               |  | $ | (11,893 | ) |  | $ | (12,671 | )
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Thomas Properties share of net loss                      |  | $                                               | (56   | ) |        | $ | (333 | )               |  | $ | (2,924  | ) |  | $ | (3,313  | )
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Intercompany eliminations                                 |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   | 342     |  
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  
|Equity in net loss of unconsolidated real estate entities |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  | $ | (2,971  | )
|                                                          |  |                                                 |       |   |        |   |      |                 |  |   |         |   |  |   |         |  



12



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



Following is a reconciliation of our share of owners equity of the unconsolidated real estate
entities as shown above to amounts recorded by us as of March, 31, 2007 and December 31, 2006:



|                                                                            |  |                |        |   |                  |   |        |  
|--------------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                                                            |  | March, 31,2007 |        |   | December 31,2006 |  
|Our share of owners equity recorded by unconsolidated real estate entities |  | $              | 51,733 |   |                  | $ | 55,442 |  
|Intercompany eliminations and other adjustments                             |  |                | (3,838 | ) |                  |   | (3,078 | )
|                                                                            |  |                |        |   |                  |   |        |  
|Investments in unconsolidated real estate entities                          |  | $              | 47,895 |   |                  | $ | 52,364 |  
|                                                                            |  |                |        |   |                  |   |        |  

4. Debt

A summary of the outstanding debt as of March, 31, 2007 is as follows:



|                                      |  |                           |  |                 |         |              |         
|------------------------------------- |  | ------------------------- |  | --------------- | ------- | ------------ | --------
|                                      |  | Interest rate             |  | Outstandingdebt |         | Maturitydate
|Secured debt                          |  |                           |  |                 |         |              |         
|One Commerce Square mortgage loan (1) |  | 5.7%                      |  | $               | 130,000 |              | 1/6/16  
|Two Commerce Square:                  |  |                           |  |                 |         |              |         
|Mortgage loan (2)                     |  | 6.3                       |  |                 | 113,427 |              | 5/09/13 
|Senior mezzanine loan (3) (4)         |  | 17.7                      |  |                 | 39,246  |              | 1/09/10 
|Junior mezzanine loan (3) (5)         |  | 15.0                      |  |                 | 4,151   |              | 1/09/10 
|Campus El Segundo mortgage loan (6)   |  | Prime Rate orLIBOR + 2.25 |  |                 | 17,259  |              | 10/10/07
|Four Points Centre mortgage loan (7)  |  | Prime Rate                |  |                 | 4,000   |              | 8/28/07 
|Murano construction loan (8)          |  | 7% orLIBOR + 3.25         |  |                 | 5,035   |              | 7/31/09 
|Murano loan (9)                       |  | LIBOR + 1.50%             |  |                 | 17,434  |              | 9/26/07 
|                                      |  |                           |  |                 |         |              |         
|Total debt                            |  |                           |  | $               | 330,552 |              |         
|                                      |  |                           |  |                 |         |              |         
|Unsecured and other debt              |  |                           |  |                 |         |              |         
|Former minority partner (10)          |  | 5.0                       |  |                 | 3,900   |              | 10/12/09
|                                      |  |                           |  |                 |         |              |         
|                                      |  |                           |  | $               | 3,900   |              |         
|                                      |  |                           |  |                 |         |              |         



| | (1) | The mortgage loan is subject to interest only payments through January 9, 2011, and thereafter, principal and interest payments are due based on a thirty-year amortization
schedule through maturity on January 6, 2016. The loan is subject to yield maintenance payments for any prepayments prior to October 2015, and may be defeased beginning January 2009.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The mortgage loan may be defeased and may be prepaid beginning February 2012.
| | --- | -----------------------------------------------------------------------------

| | (3) | These loans are guaranteed by Mr. Thomas up to an aggregate maximum of $7,500,000. We have agreed to indemnify Mr. Thomas in the event his guarantees are called upon.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The senior mezzanine loan bears interest at a rate such that the weighted average of the rate on this loan and the rate on the mortgage loan secured by Two Commerce Square equals
9.2% per annum. The effective interest rate on this loan as of March 31, 2007 was 17.7% per annum. The loan may not be prepaid prior to August 9, 2009, and thereafter is subject to yield maintenance payments unless the loan is
prepaid within 60 days of maturity. The loan is secured by our ownership interest in the real estate entities that own Two Commerce Square.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



| | (5) | Interest at a rate of 10% per annum is payable currently, and additional interest of 5% per annum is deferred until maturity. The loan is subject to the greater of 3% of
the principal amount or a yield maintenance premium for any prepayments. The loan is secured by our ownership interest in the real estate entities that own Two Commerce Square.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | The weighted average interest rate as of March 31, 2007 was 7.6% per annum.
| | --- | ---------------------------------------------------------------------------

| | (7) | The prime rate as of March 31, 2007 was 8.25% per annum.
| | --- | --------------------------------------------------------

| | (8) | In August 2006 an entity developing Murano obtained a construction loan on which we may borrow up to $142,500,000.
| | --- | ------------------------------------------------------------------------------------------------------------------

| | (9) | A subsidiary of the Operating Partnership pledged its preferred equity interest in Murano to a lender in the amount of $17,434,000. With the consent of the lender, the maturity date
can be extended until September 2008. The Operating Partnership has guaranteed this loan.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (10) | The loan is due to our former minority partner in TPG-El Segundo Partners, LLC. Principal and interest are due at maturity.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

5. Earnings (Loss) per Share and Dividends Declared

The following is a summary of the components used in calculating basic and diluted earnings (loss) per share for the three months ended March, 31, 2007 and 2006 (in thousands except share and per share amounts):



|                                                              |  |                             |            |   |      |   |            |  
|------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                              |  | Three Months EndedMarch 31, |           
|                                                              |  | 2007                        |            |   | 2006 |  
|Earnings (loss) available to common shares                    |  | $                           | (255       | ) |      | $ | (1,428     | )
|                                                              |  |                             |            |   |      |   |            |  
|Weighted average common shares outstanding  basic            |  |                             | 14,373,318 |   |      |   | 14,320,779 |  
|Potentially dilutive common shares (1)                        |  |                             |            |   |      |   |            |  
|Stock options                                                 |  |                             |           |   |      |   |           |  
|Unvested restricted stock                                     |  |                             |           |   |      |   |           |  
|Unvested incentive units                                      |  |                             |           |   |      |   |           |  
|                                                              |  |                             |            |   |      |   |            |  
|Adjusted weighted average common shares outstanding  diluted |  |                             | 14,373,318 |   |      |   | 14,320,779 |  
|                                                              |  |                             |            |   |      |   |            |  
|Earnings (loss) per share  basic                             |  | $                           | (0.02      | ) |      | $ | (0.10      | )
|                                                              |  |                             |            |   |      |   |            |  
|Earnings (loss) per share  diluted                           |  | $                           | (0.02      | ) |      | $ | (0.10      | )
|                                                              |  |                             |            |   |      |   |            |  
|Dividends declared per share                                  |  | $                           | 0.06       |   |      | $ | 0.06       |  
|                                                              |  |                             |            |   |      |   |            |  

---

|(1) | For the three months ended March 31, 2007, and 2006, the potentially dilutive shares were not included in the loss per share calculation as their effect is antidilutive.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6. Stockholders Equity

A Unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. A Unit may be redeemed for cash, or exchanged
for shares of common stock at our election, on a one-for-one basis. We have issued 1,033,336 incentive units to certain employees. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular
Units in the Operating Partnership and rank pari passu with the Units as to payment of distributions, including distributions of assets upon liquidation. Incentive units are subject to



14



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the
Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into Units, but only to the extent of the incentive units economic capital account balance. As general partner, we may
also cause any number of vested incentive units to be converted into Units to the extent of the incentive units economic capital account balance. We had 14,526,594 shares of common stock, and 16,666,666 Units outstanding as of March, 31,
2007, and 1,033,336 incentive units outstanding which were issued under our Incentive Plan, defined below.

We adopted the 2004 Equity
Incentive Plan of Thomas Properties Group, Inc. (the Incentive Plan) effective upon the closing of our initial public offering. The Incentive Plan provides incentives to our employees and is designed to attract, reward and retain
personnel. Our Incentive Plan permits the granting of awards in the form of options to purchase common stock, restricted shares of common stock and restricted incentive units in our Operating Partnership. We may issue up to 1,392,858 shares reserved
under the Incentive Plan as either restricted stock awards or incentive unit awards and up to 619,048 shares upon the exercise of options granted pursuant to the Incentive Plan. In addition, under our Non-Employee Directors Restricted Stock Plan
(the Non-Employee Directors Plan) a total of 60,000 shares are reserved for grant.

Shares of newly issued common stock will be
issued upon exercise of stock options.

Restricted Stock

Under the Incentive Plan, we have issued the following restricted shares to Mr. Thomas:



|                              |  |         |  |                 |      
|----------------------------- |  | ------- |  | --------------- | -----
|                              |  | Shares  |  | Aggregate Value
|Issued in October 2004        |  | 46,667  |  | $               | 560  
|Issued in February 2006       |  | 60,000  |  |                 | 740  
|Issued in March 2007          |  | 100,000 |  |                 | 1,580
|                              |  |         |  |                 |      
|Outstanding at March 31, 2007 |  | 206,667 |  |                 | 2,880
|                              |  |         |  |                 |      

Vesting for the 46,667, 60,000 and 100,000 shares commenced as of October 13,
2004, February 22, 2006 and March 7, 2007 respectively. The restricted shares will vest in full on the third anniversary of the vesting commencement date, provided that vesting with respect to the February 2006 and March 2007 awards
could occur on the second anniversary of the vesting commencement date if certain performance goals are met. Mr. Thomas has full voting rights and will receive any dividends paid.

Under the Non-Employee Directors Plan, we have issued the following outstanding restricted shares to our non-employee directors:



|                              |  |        |  |                 |    
|----------------------------- |  | ------ |  | --------------- | ---
|                              |  | Shares |  | Aggregate Value
|Issued in October 2004        |  | 10,000 |  | $               | 120
|Issued in 2005                |  | 4,984  |  |                 | 60 
|Issued in 2006                |  | 6,419  |  |                 | 83 
|                              |  |        |  |                 |    
|Outstanding at March 31, 2007 |  | 21,403 |  | $               | 263
|                              |  |        |  |                 |    

Vesting for the 10,000, 4,984, and 6,419 shares commenced as of October 13,
2004, June 15, 2005, and May 24, 2006 respectively. The 10,000 and 4,984 shares vested following the 2006 Annual Meeting of Stockholders on May 24, 2006. The 6,419 shares granted will vest subject to the continued service of the
directors following the 2007 Annual Meeting of Stockholders. The holders of these shares have full voting rights and will receive any dividends paid.

As of March 31, 2007, there was $2,139,000 of total unrecognized compensation cost related to the nonvested restricted stock under both the Incentive Plan and Non-Employees Directors Plan. The cost is expected to
be recognized over a weighted average period of 2.6 years. The total fair value of shares vested during the three



15



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



months ended March 31, 2007 and 2006, was $190,000 and $121,000, respectively. The weighted-average grant date
fair value of restricted stock granted during the three months ended March 31, 2007 was $15.80.

We recorded compensation expense
totaling $158,000 and $108,000 for the vesting of the restricted stock grants for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the statements of operations related to this compensation
expense was $64,000 and $20,000 for the three months ended March 31, 2007 and 2006, respectively.

Incentive Units

Under our Incentive Plan, we issued to certain executives 730,003 incentive units upon consummation of our initial public offering in October 2004. These
incentive units awards are vesting either over a three-year period, with one part of the incentive units vesting one-third on each of the first, second, and third anniversary dates of the grant, or vest in full on the third anniversary of the date
of grant, subject to continued services and the terms of the Incentive Plan. On February 2006 we issued 120,000 incentive units to certain executives, these units vest on the third anniversary of the grant date. In March 2007 we issued an additional
183,336 incentive units to certain executives, these units vest over a three year period, with one third vesting each on the first, second, and third anniversary dates of the grant.

For the three months ended March 31, 2007, we recorded compensation expense of $501,000 relating to the incentive units. As of March 31, 2007,
there was $4,074,000 of unrecognized compensation cost related to incentive units. The weighted-average grant date fair value of incentive units granted in March 2007 was $14.88.

Stock options

Under our Incentive Plan, we have 482,308 stock options outstanding as of
March 31, 2007. The options vest at the rate of one third per year over three years and expire ten years after the date of commencement of vesting. The fair market value of each option granted was estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2007, 2006 and 2005:



|                                |  |              |   |  |              |   |  |              |  
|------------------------------- |  | ------------ | - |  | ------------ | - |  | ------------ | -
|                                |  | 2007         |   |  | 2006         |   |  | 2005         |  
|Expected dividend yield         |  | 2.0          | % |  | 2.0          | % |  | 2.0          | %
|Expected life of option         |  | 2 to 4 years |   |  | 2 to 4 years |   |  | 1 to 3 years |  
|Risk-free interest rate         |  | 4.40         | % |  | 4.40         | % |  | 2.88         | %
|Expected stock price volatility |  | 15           | % |  | 15           | % |  | 20           | %

The following is a summary of stock option activity under our Incentive Plan as of March 31,
2007 and for the three months ended March 31, 2007:



|                                      |  |         |   |  |                               |       |                                                    |     |                         |   |      
|------------------------------------- |  | ------- | - |  | ----------------------------- | ----- | -------------------------------------------------- | --- | ----------------------- | - | -----
|                                      |  | Shares  |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm (in years) |     | AggregateIntrinsicValue
|Outstanding at January 1, 2007        |  | 389,166 |   |  | $                             | 12.42 |                                                    |     |                         |   |      
|Granted                               |  | 101,475 |   |  |                               | 15.45 |                                                    |     |                         |   |      
|Forfeitures                           |  |        |   |  |                               |      |                                                    |     |                         |   |      
|Exercised                             |  | (8,333  | ) |  |                               | 12.26 |                                                    |     |                         |   |      
|                                      |  |         |   |  |                               |       |                                                    |     |                         |   |      
|Outstanding at March 31, 2007         |  | 482,308 |   |  | $                             | 13.05 |                                                    | 8.3 |                         | $ | 1,189
|                                      |  |         |   |  |                               |       |                                                    |     |                         |   |      
|Options exercisable at March 31, 2007 |  | 208,750 |   |  | $                             | 12.42 |                                                    | 7.6 |                         | $ | 647  
|                                      |  |         |   |  |                               |       |                                                    |     |                         |   |      



16



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



As of March 31, 2007, there was $262,000 of total unrecognized compensation cost related to the
nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.7 years. The total fair value of shares vested during the three months ended March 31, 2007 and 2006 was $547,000 and $344,000, respectively. The
weighted-average grant date fair value of options granted during the three months ended March 31, 2007 was $1.90. The options exercised during the three months ended March 31, 2007 had an intrinsic value of $7,000.

We recorded compensation expense totaling $49,000 and $37,000 related to the stock options for the three months ended March 31, 2007 and 2006,
respectively. The total income tax benefit recognized in the statements of operations related to this compensation expense was $20,000 and $15,000 for the three months ended March 31, 2007 and 2006, respectively.

7. Income Taxes

All operations are carried on
through the Operating Partnership and its subsidiaries. The Operating Partnership is not subject to income tax, and all of the taxable income, gains, losses, deductions and credits are passed through to its partners. We are responsible for our share
of taxable income or loss of the Operating Partnership allocated to us in accordance with the Operating Partnerships Agreement of Limited Partnership. As of March 31, 2007, we held a 45.08% capital interest in the Operating Partnership.
For the three months ended March 31, 2007, we were allocated 45.08% of the losses from the Operating Partnership.

Our effective tax
rate is 44.9% for the three months ended March 31, 2007. The higher effective tax rate compared to the federal statutory rate of 35% is primarily due to state taxes, net of federal tax expense.

The provision for income taxes is based on reported income before income taxes. Deferred income tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amount recognized for tax purposes, as measured by applying the currently enacted tax laws.

FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Realization of the deferred tax asset is dependent on us generating sufficient taxable income in future years as the deferred income tax charges
become currently deductible for tax reporting purposes. Although realization is not assured, management believes that it is more likely than not that the net deferred income tax asset will be realized.

In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition.

The Company files U.S. federal income tax returns and returns in various states jurisdictions. The Companys policy is to
recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company adopted the
provisions of FIN 48 on January 1, 2007, which resulted in unrecognized tax benefits of approximately $10.2 million, of which $134,000 was recorded as a reduction to the opening balance of retained earnings, and if recognized, would effect
our effective tax rate. As of January 1, 2007, the Company has recorded $227,000 of accrued interest with respect to unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.



17



---

##### Table of Contents

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

(Tabular amounts in thousands, except share and per share data)



At this time, we are unable to estimate the amount of unrecognized tax benefits for tax positions
that may increase or decrease within the next 12 months.

8. Fair Value of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires us to disclose fair value information about all financial instruments,
whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.

Our estimates of the fair value of
financial instruments at March 31, 2007 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different
market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and
cash equivalents, restricted cash, rents and other receivables, due from affiliate, accounts payable and other liabilities approximate fair value because of the short-term nature of these instruments.

As of March 31, 2007, the fair value of our mortgage and other secured loans and unsecured loan aggregates $328,542,000, compared to the aggregate
carrying value of $330,552,000.

9. Subsequent Events



On April 25, 2007, we sold 9,200,000 shares of common stock, pursuant to an effective registration statement previously filed with the Securities and
Exchange Commission, at $16.00 per share. We received net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses, of $139.3 million from this offering of which $33.7 million was used to redeem 2,170,000
units in our operating partnership held by our Chief Executive Officer and President, and 45,000 units held by another senior executive. Following the closing of the offering, we held a 60.5% interest in our operating partnership on April 25,
2007.

On March 28, 2007, Thomas Properties Group, Inc., in joint venture with institutional investment partners, entered into a
definitive agreement with affiliates of Blackstone Real Estate Advisors to acquire ten Class A office properties totaling approximately 3.5 million square feet in Austin, Texas for an aggregate purchase price of $1.15 billion.
Approximately 75 percent to 80 percent of the gross purchase price, including closing costs, is expected to be financed with property-level mortgage debt, with 20 percent to 25 percent coming from equity investments by Thomas Properties and its
investment partners. Thomas Properties anticipates contributing approximately 6.25 percent of the overall equity to the transaction and expects to receive customary incentive and other fees that are typical for a transaction of this type. We expect
the acquisition to close in June 2007.



18



---

##### Table of Contents

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. This report includes statements that are forward-looking statements within the meaning of the federal securities
laws. For a complete discussion of forward-looking statements, see the section in this report entitled Forward-Looking Statements. Certain risks may cause our actual results, performance or achievements to differ materially from those
expressed or implied by the following discussion. For a discussion of such risks, see the section in this report entitled Risk Factors.

When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual
and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate
transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, declining demand for or increased supply of real estate, or the public perception that any of these events may occur
can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead
to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees.

Forward-Looking Statements

Forward-looking
statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current
estimations, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events
described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as believes, expects, may, should,
seeks, approximately, intends, plans, pro forma, estimates or anticipates or the negative of these words and phrases or similar words or phrases. You can also
identify forward-looking statements by discussions of strategy, plans or intentions.

Overview and Background

We are a full-service real estate operating company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential
properties on a nationwide basis. We conduct our business through our Operating Partnership, of which we own 45.1% and have control over the major decisions of the Operating Partnership.

Results of Operations

The results of operations reflect the consolidation of the affiliates that own
One Commerce Square, Two Commerce Square, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo, the Murano and our investment advisory, property management, leasing and real estate development operations. The following properties are accounted
for using the equity method of accounting:

2121 Market Street (for all periods presented)

City National Plaza (for all periods presented)

Reflections I (for all periods presented)

Reflections II (for all periods presented)

Murano (as of March 2005, the date of formation, through to August 1, 2006)

Four Falls Corporate Center (as of March 2005, the date of acquisition)

Oak Hill Plaza (as of March 2005, the date of acquisition)

Walnut Hill Plaza (as of March 2005, the date of
acquisition)

Valley Square Office Park (from March 2005, the date of acquisition, to April 2006, the date of disposition)



19



---

##### Table of Contents

San Felipe Plaza (as of August 2005, the date of acquisition)

2500 City West (as of August 2005, the date of acquisition)

Brookhollow Central I, II, and III (as of August 2005, the date of acquisition)

Intercontinental Center (as
of August 2005, the date of acquisition)

2500 City West land (as of December 2005, the date of acquisition)

CityWestPlace (as of June 2006, the date of acquisition)

CityWestPlace land (as of June 2006, the date of acquisition)

Centerpointe I and II (as of January 2007,
the date of acquisition)

Fair Oaks Plaza (as of January 2007, the date of acquisition)

Comparison of three months ended March 31, 2007 to three months ended March 31, 2006

Rental revenues. Rental revenue remained consistent at $8 million for each of the three month periods ended March 31, 2007 and 2006.

Tenant reimbursements.Revenues increased by $278,000, or 5.7%, to $5.2 million for the three months ended March 31, 2007
compared to $4.9 million for the three months ended March 31, 2006 primarily due to an increase in escalatable expenses.

Parking
and other revenues. Revenues increased by $121,000, or 13.5%, to $1 million for the three months ended March 31, 2007 compared to $900,000 for the three months ended March 31, 2006 primarily due to after hours parking revenue resulting
from a special event near one of our properties.

Investment advisory, management, leasing and development services revenues.This
caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services increased by $789,000, or 55.8%, to $2.2 million for the three months ended March 31, 2007
compared to $1.4 million for the three months ended March 31, 2006. The increase was primarily due to an increase in development fees of approximately $1 million relating to a professional services agreement with NBC Universal, Inc. to advise
on a plan for future development at its Universal City property in Los Angeles. This agreement was entered into in March 2006. This was offset by a decrease of approximately $158,000 in leasing commissions from properties we manage on behalf of
CalSTRS.

Investment advisory, management, leasing and development services revenues  unconsolidated real estate entities.
This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services
from unconsolidated real estate entities increased by $2.2 million, or 100.6%, to $4.4 million for the three months ended March 31, 2007 compared to $2.2 million for the three months ended March 31, 2006. This increase was primarily a
result of an increase in fee income of $759,000 related to the property investments in Fairfax, Virginia acquired on January 31, 2007 and $441,000 related to the CityWestPlace acquisition in June 2006 by our joint venture with CalSTRS. In
addition, leasing commissions increased $255,000 during the first quarter of 2007 relating to our properties in Houston. The increase was also due to an increase in leasing commissions of $368,000 and an increase in fee income of $368,000 relating
to City National Plaza. There was also an increase of approximately $234,000 in payroll reimbursements due to the purchase of additional properties.

Rental property operating and maintenance expense.Rental property operating and maintenance expense remained consistent at $4 million for each of the three month periods ended March 31, 2007 and
2006.

Real estate taxes.Real estate taxes remained consistent at $1.5 million for each of the three month periods ended
March 31, 2007 and 2006.

Investment advisory, management, leasing and development services expenses.Expenses for these
services increased by $529,000, or 29.3%, to $2.3 million for the three months ended March 31, 2007 compared to $1.8 million for the three months ended March 31, 2006, primarily as a result of an increase in salaries and employment related
costs due to an increase in the number of personnel, as well as an increase in various professional services costs.

Interest
expense. Interest expense decreased by $1.2 million or 22.3% to $4.3 million for the three months ended March 31, 2007 compared to $5.5 million for the three months ended March 31, 2006. The decrease is primarily due to capitalized
interest of $904,000 during the three months ended March 31, 2007, related to Campus El Segundo and Murano development properties. In addition there was a decrease in interest expense relating to



20



---

##### Table of Contents

Two Commerce Square of $203,000 for the three months ended March 31, 2007 as compared to the three months ended
March 31, 2006, primarily due to the amortizing loan balances for the mortgage and mezzanine loans.

Depreciation and amortization
expense. Depreciation and amortization expense remained consistent at $3.1 million for each of the three month periods ended March 31, 2007 and 2006.

General and administrative. General and administrative expense increased by $1.3 million, or 41%, to $4.6 million for the three months ended March 31, 2007 compared to $3.3 million for the three months
ended March 31, 2006. The increase is primarily due to an increase in salaries and employment related costs due to an increase in the number of personnel. In addition, there was an increase in stock compensation expense recognized of $563,000
related to the incentive units. Leasing expenses increased by approximately $256,000 relating to property investments in Houston and there was an increase in City of Philadelphia business taxes due to increased fee revenue. This was offset by a
decrease in professional fees of approximately $182,000.

Gain on sale of real estate.Gain on sale of real estate was $1.0 million
for the three months ended March 31, 2007 due to the recognition of deferred gain on infrastructure costs incurred related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006. The parcel was sold for $24.6 million resulting in a
total gain of $18.4 million. We are obligated to fund certain infrastructure improvements of approximately $2.7 million with respect to the development of the sold parcel; therefore we recorded a deferred gain of $8.1 million. The remaining deferred
gain as of March 31, 2007 was $6.8 million, which will be recognized as we complete infrastructure improvements on a percentage of completion basis.

Interest income. Interest income increased by $163,000, or 24.1%, to $839,000 for the three months ended March 31, 2007 compared to $676,000 for the three months ended March 31, 2006, primarily due to
higher average cash balances and interest rates.

Equity in net loss of unconsolidated real estate entities.Set forth below is a
summary of the unconsolidated condensed financial information for the unconsolidated real estate entities and our share of net loss and equity in net loss for the three months ended March 31, 2007 and 2006 (in thousands):



|                                                          |  |      |         |   |      |   |         |  
|--------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                          |  | 2007 |         |   | 2006 |  
|Revenue                                                   |  | $    | 43,765  |   |      | $ | 27,408  |  
|Operating and other expenses                              |  |      | (24,514 | ) |      |   | (17,568 | )
|Interest expense                                          |  |      | (18,909 | ) |      |   | (10,866 | )
|Depreciation and amortization                             |  |      | (15,210 | ) |      |   | (12,539 | )
|Minority interest                                         |  |      | (26     | ) |      |   | 706     |  
|Loss from discontinued operations                         |  |      | (204    | ) |      |   | 188     |  
|                                                          |  |      |         |   |      |   |         |  
|Net loss                                                  |  | $    | (15,098 | ) |      | $ | (12,671 | )
|                                                          |  |      |         |   |      |   |         |  
|Thomas Properties share of net loss                      |  | $    | (3,790  | ) |      | $ | (3,313  | )
|Intercompany eliminations                                 |  |      | 621     |   |      |   | 342     |  
|                                                          |  |      |         |   |      |   |         |  
|Equity in net loss of unconsolidated real estate entities |  | $    | (3,169  | ) |      | $ | (2,971  | )
|                                                          |  |      |         |   |      |   |         |  

Aggregate revenue attributable to, and operating and other expenses for unconsolidated real estate
entities for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 increased primarily due to the acquisition of our interests in CityWestPlace in June 2006 and the two properties in Fairfax in January
2007.

Aggregate interest expense increased by $8.0 million, or 74%, to $18.9 million for the three months ended March 31, 2007
compared to $10.9 million for the three months ended March 31, 2006 primarily as a result of an increase in interest expense of $3.4 million relating to the debt obligations of City West Place and $1.7 million relating to the debt obligations
of the Fairfax, Virginia investment properties. The increase was also due to refinancing of the City National Plaza mortgage and mezzanine loans in July 2006, resulting in higher additional borrowings in 2007, which resulted in an increase in
interest expense of $2.8 million.

Aggregate depreciation and amortization expense increased by $2.7 million, or 21.3%, to $15.1 million
for the three months ended March 31, 2007 compared to $12.5 million for the three months ended March 31, 2006



21



---

##### Table of Contents

primarily as a result of additional depreciation and amortization expense of $1.6 million due to the acquisition of
CityWestPlace in June 2006 and $818,000 due to the acquisition of two properties in Fairfax, Virginia.

Liquidity and Capital Resources

Analysis of liquidity and capital resources

As of March 31, 2007, we have unrestricted cash and cash equivalents of $53.7 million. Our management believes that our company will have sufficient capital to satisfy our liquidity needs over the next 12 months through working capital
and net cash provided by operations. We expect to meet our long-term liquidity requirements, including property and undeveloped land acquisitions and additional future development and redevelopment activity, through cash flow from operations,
additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, and the potential issuance of common units of our Operating Partnership or additional debt, common or preferred equity securities, including convertible
securities. Additionally, as noted elsewhere herein, on April 25, 2007, we sold 9,200,000 shares of common stock, pursuant to an effective registration statement previously filed with the Securities and Exchange Commission, at $16.00 per share. We
received net proceeds, after deducting underwriting discounts and commissions, estimated offering expenses and redemption of units in our operating partnership held by our Chief Executive Officer and President and one of our other senior executives,
of $105.6 million. We do not have any present intent to reserve funds to retire existing debt upon maturity. We will instead seek to refinance this debt at maturity or retire the long-term debt through the issuance of securities, as market
conditions permit.

As of March 31, 2007, we have an unfunded capital commitment to our joint venture with CalSTRS of $14.9 million.
Our requirement to fund all or a portion of this commitment is subject to our identifying properties to acquire that are mutually acceptable to us and CalSTRS.

We intend to declare and pay annual dividends on our common stock. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. Two Commerce Square is subject to debt financing
covenants containing lock-box arrangements. Funds generated by Two Commerce Square cannot be distributed to us under the terms of the lock-box arrangements established for the existing lenders for the property. In addition, all of our properties
held in our joint venture with CalSTRS are subject to debt financing with a lockbox arrangement. With respect to our joint venture properties, we do not control decision making with respect to these properties, and may not be able to obtain monies
from these properties even if funds are available for distribution to us. In addition, future financing arrangements we may enter into may contain restrictions on our use of cash generated from our properties.

Development and Redevelopment Projects

We currently own interests in four development projects and our joint venture with CalSTRS includes nine redevelopment and two development sites. We have considerable expertise in the completion of large-scale development and redevelopment
projects. The construction of Murano, a 302 unit high-rise residential condominium project, commenced in the second quarter of 2006. We expect construction to be substantially complete in the second quarter of 2008. We anticipate developing the
other development projects as market feasibility permits. We also anticipate seeking to mitigate development risk by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. Our redevelopment projects are primarily
financed through property-level bank financing. There can be no assurance we will be able to successfully implement these risk mitigation measures.

The amount and timing of costs associated with our development and redevelopment projects is inherently uncertain due to market and economic conditions. We presently intend to fund development and redevelopment expenditures primarily
through construction or refurbishment financing. In July 2006, a parent of the entity that owns City National Plaza refinanced the loan for City National Plaza, which provides proceeds to cover the future redevelopment costs. In August 2006, the
entity developing Murano obtained a $142.5 million construction loan, and in September 2006, we borrowed $17.4 million to finance our preferred equity position in this property. We are obligated to fund our preferred equity to Murano to pay
construction costs before we can draw the construction loan. We met this obligation during the quarter ended March 31, 2007, and began making draws on the construction loan. If we are unable to sell the condominium units upon completion or obtain
permanent financing on advantageous terms or at all, we would need to fund these obligations from cash flow from operations or seek alternative capital sources. If unsuccessful, this could adversely impact our financial condition and results of
operations and impair our ability to satisfy our debt service obligations. If we are successful in obtaining construction or refurbishment financing and permanent financing, we anticipate that the corresponding interest costs would represent both a
significant use of our cash flow and a material component of our results of operations.



22



---

##### Table of Contents

Leasing, Tenant Improvement and Capital Needs

In addition to our development and redevelopment projects, our company also owns majority interests in One Commerce Square and Two Commerce Square. These
properties are substantially leased and have significant stabilized cash flows. These properties require routine capital maintenance in the ordinary course of business. The properties also require that we incur expenditures for leasing commissions
and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. Based upon historical expenditure levels, the leasing activity for the properties and the current rent
roll, we anticipate incurring expenditures of approximately $8.2 million in capital improvements, tenant improvements, and leasing costs for the One Commerce Square and Two Commerce Square properties collectively during the remainder of 2007 and
2008.

Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our
properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall
market conditions.



23



---

##### Table of Contents

Contractual Obligations

A summary of our contractual obligations at March 31, 2007 is as follows (in thousands):



|                                           |  |                        |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|------------------------------------------ |  | ---------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | -------
|                                           |  | Payments Due by Period
|                                           |  | Remainder of 2007      |        | 2008 |   | 2009   |  | 2010 |        | 2011 |   | Thereafter |  | Total
|Regularly scheduled principal payments     |  | $                      | 6,669  |      | $ | 3,200  |  | $    | 500    |      | $ | 492        |  | $     | 6,143  |  | $ | 7,992   |  | $ | 24,996 
|Balloon principal payments due at maturity |  |                        | 38,693 |      |   |       |  |      | 8,935  |      |   | 34,201     |  |       |       |  |   | 227,627 |  |   | 309,456
|Interest paymentsfixed rate debt          |  |                        | 21,937 |      |   | 21,406 |  |      | 21,956 |      |   | 14,932     |  |       | 14,269 |  |   | 39,006  |  |   | 133,506
|Interest paymentsvariable rate debt (1)   |  |                        | 1,782  |      |   | 433    |  |      | 253    |      |   |           |  |       |       |  |   |        |  |   | 2,468  
|Capital commitments (2)                    |  |                        | 22,996 |      |   | 2,806  |  |      |       |      |   |           |  |       |       |  |   |        |  |   | 25,802 
|Purchase commitment (3)                    |  |                        | 530    |      |   |       |  |      |       |      |   |           |  |       |       |  |   |        |  |   | 530    
|Operating lease (4)                        |  |                        | 95     |      |   | 127    |  |      | 53     |      |   |           |  |       |       |  |   |        |  |   | 275    
|                                           |  |                        |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|Total                                      |  | $                      | 92,702 |      | $ | 27,972 |  | $    | 31,697 |      | $ | 49,625     |  | $     | 20,412 |  | $ | 274,625 |  | $ | 497,033
|                                           |  |                        |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        

---

|(1) | The interest payments on Murano, Four Points Centre and Campus El Segundo loans are based on the prime rate or LIBOR based rate.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Capital commitments of our company, our operating partnership and other consolidated subsidiaries include approximately $5 million of tenant improvement allowances and leasing
commissions for certain tenants in One Commerce Square and Two Commerce Square. In addition, the capital commitments include approximately $2.3 million in required funding of certain infrastructure improvements with respect to the development of the
Campus El Segundo parcel we sold in September 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We also have an unfunded capital commitment of $18 million, representing our anticipated 6.25 percent capital contribution related to the acquisition of ten Class A office
properties in Austin, Texas. We expect the acquisition to close in June 2007. In addition to the capital commitment, we have provided a guarantee of $12.5 million, in connection with potential liquidating damages if the seller terminates the
agreement of purchase and sale as a result of a material breach or default by our joint venture.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This guarantee is not reflected in the table above.
| | ---------------------------------------------------

|(3) | In the second quarter of 2007 we acquired a parcel of land located adjacent to our Four Points Centre development project in Austin, Texas for $530,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents the future minimum lease payments on our long-term operating lease for our corporate office at City National Plaza. The table does not reflect available maturity
extension options.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Off-Balance Sheet Arrangements  Indebtedness of Unconsolidated Real Estate Entities

As of March 31, 2007, our company had investments in entities owning unconsolidated properties with stated ownership percentages ranging from 21.3%
to 50.0%. We do not have control of these entities, and none of the entities are considered variable interest entities in accordance with the Financial Accounting Standard Boards revision to Interpretation No. 46. Therefore, we account
for them using the equity method of accounting. The table below summarizes the outstanding debt for the unconsolidated properties as of March 31, 2007 (in thousands). We have not guaranteed any of the debt.



24



---

##### Table of Contents

|                                                            |  |               |        |  |                 |           |              |        
|----------------------------------------------------------- |  | ------------- | ------ |  | --------------- | --------- | ------------ | -------
|                                                            |  | Interest Rate |        |  | PrincipalAmount |           | MaturityDate
|City National Plaza (1)                                     |  |               |        |  |                 |           |              |        
|Senior mortgage loan                                        |  | LIBOR + 1.07  | %(2)   |  | $               | 355,300   |              | 7/17/08
|Senior mezzanine loan (Note A)                              |  | LIBOR + 2.59  | (2)    |  |                 | 19,903    |              | 7/17/08
|Senior mezzanine loan (Note B)                              |  | LIBOR + 1.90  | (2)    |  |                 | 24,000    |              | 7/17/08
|Senior mezzanine loan (Note C)                              |  | LIBOR + 2.25  | (2)    |  |                 | 24,000    |              | 7/17/08
|Senior mezzanine loan (Note D)                              |  | LIBOR + 2.50  | (2)    |  |                 | 24,000    |              | 7/17/08
|Senior mezzanine loan (Note E)                              |  | LIBOR + 3.05  | (2)    |  |                 | 22,700    |              | 7/17/08
|Junior mezzanine loan                                       |  | LIBOR + 5.00  | (2)    |  |                 | 17,059    |              | 7/17/08
|CityWestPlace                                               |  |               |        |  |                 |           |              |        
|Senior mortgage loan                                        |  | 6.16          |        |  |                 | 121,000   |              | 7/6/16 
|Senior mortgage loan (Note A)                               |  | LIBOR + 1.25  | (2)    |  |                 | 82,400    |              | 7/1/08 
|Senior mortgage loan (Note B)                               |  | LIBOR + 1.25  | (2)    |  |                 | 2,596     |              | 7/1/08 
|San Felipe Plaza                                            |  |               |        |  |                 |           |              |        
|Senior mortgage loan                                        |  | 5.28          |        |  |                 | 101,500   |              | 8/11/10
|Senior mortgage loan (3)                                    |  | LIBOR + 3.00  |        |  |                 | 3,428     |              | 8/11/10
|2500 City West                                              |  |               |        |  |                 |           |              |        
|Senior mortgage loan                                        |  | 5.28          |        |  |                 | 70,000    |              | 8/11/10
|Senior mortgage loan (4)                                    |  | LIBOR + 3.00  |        |  |                 | 4,380     |              | 8/11/10
|Brookhollow Central I, II and III / Intercontinental Center |  |               |        |  |                 |           |              |        
|Senior mortgage loan                                        |  | LIBOR + 2.25  | (2)    |  |                 | 53,000    |              | 8/9/07 
|Senior mortgage loan (5)                                    |  | LIBOR + 3.25  | (2)    |  |                 | 1,984     |              | 8/9/07 
|Four Falls Corporate Center                                 |  |               |        |  |                 |           |              |        
|Note A                                                      |  | 5.31          |        |  |                 | 42,200    |              | 3/6/10 
|Note B (6) (7)                                              |  | LIBOR + 3.25  | (2)(9) |  |                 | 9,867     |              | 3/6/10 
|Oak Hill Plaza/Walnut Hill Plaza                            |  |               |        |  |                 |           |              |        
|Note A                                                      |  | 5.31          |        |  |                 | 35,300    |              | 3/6/10 
|Note B (7) (8)                                              |  | LIBOR + 3.25  | (2)(9) |  |                 | 9,152     |              | 3/6/10 
|2121 Market Street mortgage loan (10)                       |  | 6.05          |        |  |                 | 19,331    |              | 8/1/33 
|Reflections I mortgage loan                                 |  | 5.23          |        |  |                 | 22,782    |              | 4/1/15 
|Reflections II mortgage loan                                |  | 5.22          |        |  |                 | 9,492     |              | 4/1/15 
|Centerpointe I and II                                       |  |               |        |  |                 |           |              |        
|Note A (11)                                                 |  | LIBOR + 0.6   | (2)    |  |                 | 55,000    |              | 1/31/09
|Note B (11)(12)                                             |  | 7.7           | (2)    |  |                 | 36,000    |              | 1/31/09
|Fair Oaks Plaza (13)                                        |  | 5.52          |        |  |                 | 44,300    |              | 1/31/17
|                                                            |  |               |        |  |                 |           |              |        
|                                                            |  |               |        |  | $               | 1,210,674 |              |        
|                                                            |  |               |        |  |                 |           |              |        

---

|(1) | The senior mortgage loan and senior mezzanine loan are subject to exit fees equal to .25% of the loan amounts. The junior mezzanine loan, with maximum borrowings up to $130.0
million, is subject to an exit fee equal to .5% of the outstanding loan amount. Under certain circumstances all of the exit fees will be waived.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our joint venture with CalSTRS has purchased interest rate cap agreements for the funded portion of these loans.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Our joint venture with CalSTRS may borrow up to $16.2 million under this loan.
|--- | ------------------------------------------------------------------------------

|(4) | Our joint venture with CalSTRS may borrow up to $15.5 million under this loan.
|--- | ------------------------------------------------------------------------------

|(5) | Our joint venture with CalSTRS may borrow up to $32.8 million under this loan.
|--- | ------------------------------------------------------------------------------

|(6) | Our joint venture with CalSTRS may borrow up to $12.9 million under this loan.
|--- | ------------------------------------------------------------------------------



25



---

##### Table of Contents

|(7) | These loans are subject to exit fees equal to 1% of the loan amounts, however, under certain circumstances the exit fees will be waived.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(8) | Our joint venture with CalSTRS may borrow up to $13.4 million under this loan.
|--- | ------------------------------------------------------------------------------

|(9) | These loans bear interest at the greater of the one month LIBOR or 2.25% per annum, plus the applicable margin. As of March 31, 2007, one month LIBOR exceeds
2.25%, per annum.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this debt will be approximately $17.2
million. The interest rate will increase to the greater of 8.1% or the treasury rate plus 2.0% on August 1, 2013. Any amounts over the initial interest rate may be deferred to the extent excess cash is not available to make such payments.
Provided there is no deferred interest, the loan balance will be fully amortized on August 1, 2033, the maturity date of the loan.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | These loans are subject to a one year lockout, prepayable subject to a prepayment fee of 1% for the first six months after lockout, thereafter the exit fee equals 0.5%. The
Centerpointe I and II senior mortgage loan bears interest at a rate equal to one month LIBOR plus 0.60%. The mezzanine loan bears interest at a rate such that the weighted average of the rate on this loan and the rate on the senior mortgage loan
secured by Centerpointe I and II equals LIBOR plus 1.59% per annum. The effective interest rate on the senior mezzanine loan as of March 31, 2007 was 7.7% per annum. The weighted average interest rate on both loans was 6.9% per
annum.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Our joint venture with CalSTRS may borrow up to $68.8 million under this loan.
|---- | ------------------------------------------------------------------------------

|(13) | This loan may be defeased in full after three years, or prepaid in full after 9 years and 8 months.
|---- | ---------------------------------------------------------------------------------------------------

Cash Flows

Comparison of three months ended March 31, 2007 to three months ended
March 31, 2006

Cash and cash equivalents were $53.7 million as of March 31, 2007 and $55.2 million as of March 31, 2006.

Operating Activities - Net cash used in operating activities increased by $5.3 million to $2.4 million for the three months ended
March 31, 2007 compared to $(2.9) million for the three months ended March 31, 2006. The increase was primarily the result of an increase in non cash items of $8.4 million offset by a change in assets and liabilities of $5.8 and a decrease
in net loss of $1.2 million, from $1.4 million for the three months ended March 31, 2006 to $255,000 for the three months ended March 31, 2007.

Investing Activities - Net cash used in investing activities increased by $12.8 million to $13.8 million for the three months ended March 31, 2007 compared to $1 million for the three months ended March 31,
2006. The increase was primarily the result of an increase in real estate improvements of $12.1 million.

Financing Activities - Net cash
provided by (used in) financing activities increased by $5.5 million to $766,000 for the three months ended March 31, 2007 compared to $(4.7) million for the three months ended March 31, 2006. The increase was primarily the result of draws
on the Murano construction loan of $5.0 million. In addition, there were no minority interest distributions for the three months ended March 31, 2007 compared to $550,000 for the three months ended March 31, 2006.

Inflation

Substantially all of our office leases
provide for tenants to reimburse us for increases in real estate taxes and operating expenses related to the leased space at the applicable property. In addition, many of the leases provide for increases in fixed base rent. We believe that
inflationary increases may be partially offset by the contractual rent increases and expense reimbursements as described above. We have one residential property and are in the process of developing Murano, another residential property. The existing
residential property is located in the Philadelphia central business district and subject to short-term leases. Our residential property under development represents units for sale, and is also in the Philadelphia central business district.
Inflationary increases can often be offset by increased rental rates, however, a weak economic environment may restrict our ability to raise rental rates.



26



---

##### Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A primary market risk faced by our
company is interest rate risk. We intend to mitigate this risk by seeking to maintain a target debt-to-gross assets ratio of approximately 60%, while continuously evaluating all available debt and equity resources and following established risk
management policies and procedures. Our strategy is to match as closely as possible the expected holding periods and income streams of our assets with the terms of our debt. In general, we use floating rate debt on assets with higher growth
prospects and less stability to their income streams. Correspondingly, with respect to stabilized assets with lower growth rates, we will generally use longer-term fixed-rate debt. As of March 31, 2007, our company had $43.7 million of
outstanding consolidated floating rate debt, which is not subject to an interest rate cap.

The unconsolidated real estate entities have
total debt of $1,210.7 million, of which $744.8 million bears interest at floating rates. As of March 31, 2007, interest rate caps have been purchased for all of these floating rate loans.

Our fixed and variable rate consolidated long-term debt at March 31, 2007 consisted of the following (in thousands):



|                               |  |            |         |   |               |   |        |       |  |   |         |  
|------------------------------ |  | ---------- | ------- | - | ------------- | - | ------ | ----- |  | - | ------- | -
|Year of Maturity               |  | Fixed Rate |         |   | Variable Rate |   |        | Total | 
|2007                           |  | $          | 6,669   |   |               | $ | 38,693 |       |  | $ | 45,362  |  
|2008                           |  |            | 3,200   |   |               |   |       |       |  |   | 3,200   |  
|2009                           |  |            | 4,400   |   |               |   | 5,035  |       |  |   | 9,435   |  
|2010                           |  |            | 34,693  |   |               |   |       |       |  |   | 34,693  |  
|2011                           |  |            | 6,143   |   |               |   |       |       |  |   | 6,143   |  
|Thereafter                     |  |            | 235,619 |   |               |   |       |       |  |   | 235,619 |  
|                               |  |            |         |   |               |   |        |       |  |   |         |  
|Total                          |  | $          | 290,724 |   |               | $ | 43,728 |       |  | $ | 334,452 |  
|                               |  |            |         |   |               |   |        |       |  |   |         |  
|Weighted average interest rate |  |            | 7.7     | % |               |   | 7.5    | %     |  |   | 7.6     | %

We utilize sensitivity analyses to assess the potential effect of our variable rate debt. At
March 31, 2007, our variable rate long-term debt represents 13.1% of our total long-term debt. If interest rates were to increase by 75 basis points, or by approximately 10% of the weighted average variable rate at March 31, 2007, the net
impact would be increased interest costs of $328,000 per year.

As of March 31, 2007, the fair value of our mortgage and other secured
loans and unsecured loan aggregate $332.4 million, compared to the aggregate carrying value of $334.5 million.



27



---

##### Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that
we file or submit under the Securities Exchange Act, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission
(SEC) and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required
by Rule 13a-15(b), promulgated by the SEC under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms.

Internal Controls over Financial Reporting

There was no change in our internal control over financial reporting as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act that occurred
during the three months ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. From time to time, we may make changes in our companys internal control
processes in the future.



28



---

##### Table of Contents

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

Risks Related to Our Properties and Our Business

We generate a significant portion of our revenues as a result of
our relationships with CalSTRS. If we were to lose these relationships, our financial results and growth prospects would be significantly negatively affected.

Our relationships with CalSTRS are a significant factor in our ability to achieve our intended business growth. Our separate account and joint venture relationships with CalSTRS provide us with substantial fee
revenues. For the three months ended March 31, 2007 and 2006, approximately 24.4% and 17.7 %, respectively, of our revenue has been derived from fees earned from these relationships. In addition, we recognized equity in net loss of
unconsolidated real estate entities of $5.1 million and $3.0 million related to these relationships for the three months ended March 31, 2007 and 2006, respectively.

We cannot assure you that our relationships with CalSTRS will continue and we may not be able to replace these relationships with another strategic alliance that would provide comparable revenues. Our interest in our
CalSTRS joint venture is subject to a buy-sell provision, and is subject to purchase by CalSTRS upon the occurrence of certain events. Under the buy-sell provision either our Operating Partnership or CalSTRS can initiate a buy-out by delivering a
notice to the other specifying a purchase price for all the joint ventures assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price
is based on what each venture partner would receive on liquidation if the joint ventures assets were sold for the specified price and the joint ventures liabilities paid and the remaining assets distributed to the joint venture partners.
In addition, CalSTRS has the ability to initiate this provision upon an event of default by us under the joint venture agreement or related management and development agreements or upon bankruptcy of our Operating Partnership, or upon the death or
disability of either Mr. Thomas or John R. Sischo, one of our Executive Vice Presidents, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (a
Buyout Default), or upon any transfer of stock of our company or limited partnership units in our Operating Partnership resulting in Mr. Thomas, his immediate family and controlled entities owning less than 30% of our securities
entitled to vote for the election of directors. Our Operating Partnership has the ability to initiate the buy-sell provision upon an event of default of CalSTRS, such as a failure to contribute capital in accordance with capital calls. Upon the
occurrence of a Buyout Default, the non-defaulting member may elect to purchase the other members joint venture interest based on a three percent discount to the appraised fair market value.



29



---

##### Table of Contents

Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30
days notice. Termination of either our joint venture or separate account relationship with CalSTRS could adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to
co-investment capital to acquire additional properties.

Our joint venture investments may be adversely affected by our lack of control or input on
decisions or shared decision-making authority or disputes with our co-venturers.

We hold interests in each of our operating properties
in a joint venture or partnership. As a result, we do not exercise sole decision-making authority regarding the property, joint venture or other entity, including with respect to cash distributions or the sale of the property. Furthermore, we expect
to co-invest in the future through other partnerships, joint ventures or other entities, acquiring non-controlling interests or in sharing responsibility for managing the affairs of a property, partnership or joint venture.

Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks including third parties who may have
economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on
significant decisions, because neither we nor our partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase
our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for the actions of our
third-party partners or co-venturers such as if a partner or co-venturer were to become bankrupt and default on its reimbursement and contribution obligations to us, were to subject property owned by the partnership or joint venture to liabilities
in excess of those contemplated by the partnership or joint venture agreement or were to incur debts or liabilities on behalf of the partnership or joint venture in excess of the authority otherwise granted by the partnership or joint venture
agreement. In some joint ventures or other investments we make, if the entity in which we invest is a limited partnership, we have acquired and may acquire in the future all or a portion of our interest in such partnership as a general partner. In
such event, we may be liable for all the liabilities of the partnership, although we attempt to limit such liability to our investment in the partnership by investing through a subsidiary.

CalSTRS has rights under our joint venture agreement that could adversely affect us.

As of May 7, 2007, we hold interests in 13 of our properties through our joint venture with CalSTRS. Our joint venture with CalSTRS requires a unanimous vote of the joint ventures management committee on
certain major decisions, including approval of annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with an approved annual plan. All other decisions, including sales of properties, are made
based upon a majority decision of the management committee, which currently consists of two members appointed by CalSTRS and one member appointed by us. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result
in an outcome contrary to our interests. In addition to CalSTRS ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could
adversely affect us. Unless otherwise determined by the management committee of the joint venture, we are required to use diligent efforts to sell each joint venture property generally within five years of that property reaching stabilization,
except that the holding period for Reflections I and Reflections II, both of which are 100% leased, will be separately determined by the joint venture management committee. With respect to these two properties, we are required to perform a hold/sell
analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period, which could be less than five years. We have a right of first offer to purchase a joint venture property upon a required sale
at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to
assume control of the sale process. This may require us to sell a substantial portion of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.



30



---

##### Table of Contents

We are required to present certain investment opportunities to CalSTRS which may limit our opportunities to make
investments for our own account or with other third parties.

Under our joint venture agreement with CalSTRS, until the earlier of
May 1, 2007 or the date CalSTRS has contributed an aggregate of $250 million to the joint venture, we are required to first present to CalSTRS for potential investment by the joint venture all core plus and value-add office property investment
opportunities involving a total capital investment of $10 million or more that are defined within CalSTRS guidelines as moderate or high risk projects. As of March 31, 2007, CalSTRS had contributed an aggregate of approximately $205
million, which is net of distributions received, to the joint venture. In June 2006, we amended our joint venture agreement to allow for capital distributions, as defined in the joint venture agreement, to be recalled as additional capital
contributions through May 1, 2007. If CalSTRS fails to approve an investment within five business days of receipt of all required information, then we may pursue the opportunity for our own account or in joint venture with another third party
investor. This obligation may limit our ability to obtain additional separate account or joint venture relationships for non-core office properties, as investment opportunities for this type of property must be first presented by us to CalSTRS.

We must expand our business to establish additional strategic alliances to decrease our dependence on our relationship with CalSTRS or our prospects
for growth may be limited.

We intend to establish and extend our business to encompass strategic relationships beyond our joint venture
with CalSTRS. Our business strategy includes co-investing with third parties and earning revenues from fee services and property management. For the past three years, our only relationship where we serve as an investment advisor and portfolio
manager is with CalSTRS. In order to achieve our objectives of acting as an investment advisor and portfolio manager for others and decrease our dependence on our relationship with CalSTRS, we intend to establish new relationships and extend
existing relationships and alliances with institutional and other investors. Without adequate strategic partnerships and alliances in place, we may have to invest more equity than we desire in property acquisitions and incur greater risk than we
prefer on projects. In addition, our efforts with respect to projects may not be as effective as they would have been with the greater access to capital afforded by these strategic relationships. In many cases, the institutional investors with which
we intend to form alliances already have extensive relationships with other property developers, managers and investment advisors. If we fail to establish, and successfully manage and maintain these alliances, our ability to achieve business growth
and revenue diversification could suffer and our business and operating results could be harmed.

We depend on significant tenants, and their failure to
pay rent could seriously harm our operating results and financial condition.

As of March 31, 2007, the 20 largest tenants for
properties in which we hold an ownership interest collectively leased 44.2% of the rentable square feet of space, representing 59.5% of the total annualized rent generated by these properties. Consolidated Rail Corporation, together with its
wholly-owned subsidiary New York Central Lines, LLC (Conrail), leases the substantial majority of space at Two Commerce Square and accounted for approximately 18.5% of the total annualized rent generated by these properties as of
March 31, 2007. In addition, Conrails rental revenues and tenant reimbursements accounted for approximately 31.7% of total consolidated revenue for the year ended December 31, 2006. Our existing lease with Conrail expires in two
stages in 2008 and 2009. Conrail has subleased substantially all of its space under lease, and we have entered into direct lease agreements with many of these sublease tenants. However, these new leases are at lower rental rates, and we expect to
experience a substantial decline in rental revenues from Two Commerce Square when the existing lease with Conrail expires.

We rely on rent
payments from our tenants as a source of cash to finance our business. Any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease



31



---

##### Table of Contents

commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or
declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenants lease and material losses to our company.

In particular, if any of our significant tenants becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a
property and prevents us from leasing that property, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce
the payment obligations under the lease. In those circumstances, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that, if another
tenant were found, we would be able to enter into a new lease on favorable terms. We are not aware of an insolvency issue with any of our significant tenants.

Bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property. A tenant bankruptcy would delay our efforts to collect past due balances
under the relevant leases, and could ultimately preclude full collection of these amounts. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy amounts due under the lease must be paid to us in full. However, if a lease is rejected
by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all
other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims in the event of the bankruptcy of a large tenant, which would adversely impact our financial condition.

Our operating results depend upon the regional economies in which our properties are located and the demand for office and other mixed-use space and an economic
downturn in these regions could harm our operating results.

Our operating and development properties are located in three geographic
regions of the United States: the West Coast, Southwest and Mid-Atlantic regions. Historically, the largest part of our revenues has been derived from our ownership and management of properties consisting primarily of office buildings. A decrease in
the demand for office space in these geographic regions, and Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are
susceptible to adverse developments in these regions, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, increased telecommuting, terrorist targeting of high-rise structures, infrastructure
quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors, and the national and regional office space market such as oversupply of or reduced demand for office space.
Some of the regional issues we face include the more highly regulated and taxed economy of Southern California and high local and municipal taxes for our Philadelphia properties. Any adverse economic or real estate developments in a local region, or
any decrease in demand for office space resulting from the local regulatory environment, business climate or energy or fiscal problems, could adversely impact our revenue and profitability, thereby causing a significant downturn in our financial
condition, results of operations, cash flow, the trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our debt level reduces cash available to fund business growth and may expose us to the risk of default under our debt obligations.

As of March 31, 2007, our total consolidated indebtedness is approximately $334.5 million. In addition, we own interests in unconsolidated entities subject to total indebtedness in the amount of $1,210.7 million as of March 31,
2007. Mortgage loans, which comprise a portion of both the consolidated and unconsolidated indebtedness, are secured by first deeds of trust in the related real property. Mezzanine loans and other secured loans are secured by our direct or indirect
ownership interest in the entity that owns the related real property.



32



---

##### Table of Contents

Additionally, the Operating Partnership has guaranteed the loan on our Four Points Centre property up to a maximum amount
of $5.4 million. Furthermore, a subsidiary of the Operating Partnership pledged its preferred equity interest in Murano to a lender in the amount of $17,434,000. The Operating Partnership has guaranteed this loan. Mr. Thomas guarantees
approximately $7.5 million of the mezzanine loans for Two Commerce Square, and we have accordingly agreed to indemnify Mr. Thomas in the event his guarantees are called upon. We may incur significant additional debt to finance future
acquisition and development activities. It is possible the required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties profitably. Our level of debt and the limitations imposed on us by our
debt agreements could have significant adverse consequences, including the following:



| |  |  | our cash flow may be insufficient to meet our required principal and interest payments or to pay dividends;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to borrow additional funds as needed or on favorable terms;
| | - |  | ----------------------------------------------------------------------------



| |  |  | we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we anticipate that a significant portion of our debt will bear interest at variable rates, and in the event we do not purchase interest rate caps for floating rate
debt in the future, increases in interest rates could materially increase our interest expense;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to distribute funds from a property to our Operating Partnership or apply such funds to cover expenses related to another property;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we could be required to dispose of one or more of our properties, possibly on disadvantageous terms and/or at disadvantageous times;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we could default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and
leases;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we could violate covenants in our loan documents, including provisions that may limit our ability to further mortgage a property, make distributions, acquire
additional properties, repay indebtedness prior to a set date without payment of a premium or other pre-payment penalties, all of which would entitle the lenders to accelerate our debt obligations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a default under any one of our mortgage loans with cross default provisions could result in a default on other indebtedness; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | because we have agreed to use commercially reasonable efforts to maintain certain debt levels to provide the ability for Mr. Thomas and entities controlled by
him to guarantee debt of $210 million, including $11 million of debt available for guarantee by Mr. Edward Fox, one of our non-employee directors, and by Mr. Richard Gilchrist, an individual formerly affiliated with Maguire Thomas
Partners, we may not be able to refinance our debt when it would otherwise be advantageous to do so or to reduce our indebtedness when our board of directors thinks it is prudent.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If any one of these events were to occur, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial
condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations. In addition, foreclosures could also result in our being liable under the terms of our
indemnification agreement with Mr. Thomas if we were required to sell all or a portion of our interests in One Commerce Square or Two Commerce Square.

We have a substantial amount of debt which bears interest at variable rates. Our failure to hedge effectively against interest rate changes may adversely affect our results of operations.

As of March 31, 2007, $43.7 million of our consolidated debt and $744.8 million of our unconsolidated debt was at variable interest rates. As of
March 31, 2007, interest rate caps have been purchased for all of the floating rate loans for our unconsolidated debt except for two loans with a principal balance totaling 7.8 million.



33



---

##### Table of Contents

We intend to generally limit our exposure to interest rate volatility by using interest rate hedging
arrangements and swap agreements to cap our interest rate exposure. These arrangements involve risks, including that our hedging or swap transactions might not achieve the desired effect in eliminating the impact of interest rate fluctuations, or
that counterparties may fail to honor their obligations under these arrangements. As a result, these arrangements may not be effective in reducing our exposure to interest rate fluctuations and this could reduce our revenue, require us to modify our
leverage strategy, and adversely affect our expected investment returns.

We may be unable to complete acquisitions necessary to grow our business, and
even if consummated, we may fail to successfully operate these acquired properties.

Our planned growth strategy includes the
acquisition of additional properties as opportunities arise. We regularly evaluate the top 20 markets in the United States for office, mixed-use and other properties for strategic opportunities. Our ability to acquire properties on favorable terms
and successfully operate them is subject to the following significant risks:



| |  |  | we may be unable to acquire a desired property because of competition from other real estate investors with more available capital, including other real estate
operating companies, real estate investment trusts and investment funds;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity to consummate an acquisition or, if obtainable, it may not be
on favorable terms;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | competition from other potential acquirers may significantly increase the purchase price, even if we are able to acquire a desired property;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | agreements for the acquisition of office properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence
investigations, and we may spend significant time and money on a potential acquisition we eventually decide not to pursue;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | we may acquire properties subject to liabilities without any recourse, or with only limited recourse, for unknown liabilities such as clean-up of undisclosed
environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the
properties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we cannot complete property acquisitions on favorable terms, or operate acquired properties to meet our
expectations, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, trading price of our common stock, and impairing our ability to satisfy our debt service
obligations.

Our real estate acquisitions may result in disruptions to our business as a result of the burden in integrating operations placed on our
management.

Our business strategy includes acquisitions and investments in real estate on an ongoing basis. These acquisitions may
cause disruptions in our operations and divert managements attention from day-to-day operations, which could impair our relationships with our current tenants and employees. In addition, if we



34



---

##### Table of Contents

acquire real estate by acquiring another entity, we may be unable to effectively integrate the operations and personnel
of the acquired business. In addition, we may be unable to train, retain and motivate any key personnel from the acquired business. If our management is unable to effectively implement our acquisition strategy, we may experience disruptions to our
business.

As a result of the limited time during which we have to perform due diligence of many of our acquired properties, we may become subject to
significant unexpected liabilities and our properties may not meet projections.

When we enter into an agreement to acquire a property
or portfolio of properties, we often have limited time to complete our due diligence prior to acquiring the property. To the extent we underestimate or fail to investigate or identify risks and liabilities associated with the properties we acquire,
we may incur unexpected liabilities or the property may fail to perform as we expected. If we do not accurately assess the liabilities associated with properties prior to their acquisition, we may pay a purchase price that exceeds the current fair
value of the net identifiable assets of the acquired property. As a result, intangible assets would be required to be recorded, which could result in significant accounting charges in future periods. These charges, in addition to the financial
impact of significant liabilities that we may assume, could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations, trading price of our common stock and impairing our ability
to satisfy our debt service obligations.

We have a near-term expectation of significant growth, and we may not be able to adapt our management and
operational systems to respond to this growth, including the acquisition and integration of additional properties without unanticipated disruption or expense.

We purchased an interest in properties located in Houston, Texas with an aggregate of 1.5 million rentable square feet in 2006 and, in February 2007, an interest in properties in Fairfax, Virginia totaling
approximately 586,000 rentable square feet. In addition, we commenced construction of our Murano project in Philadelphia, a high-rise residential tower in 2006. We expect construction to be substantially complete in the second quarter of 2008. In
March 2007 we entered into an agreement through a joint venture to purchase an interest in properties located in Austin, Texas with an aggregate of 3.5 million square feet. In order to achieve desired and planned business growth, we intend to
continue to significantly expand our asset and property management activities, and acquire a significant number of properties in the next 12 to 24 months. With the expected growth of our portfolio, we cannot assure you that we will be able to adapt
our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate these properties into our portfolio and manage these additional properties without operating disruptions or
unanticipated costs. The acquisition of additional properties would generate additional operating expenses. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and
mortgage default. Our failure to successfully integrate any future acquisitions into our portfolio could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations, trading price
of our common stock and impairing our ability to satisfy our debt service obligations.

We may be unable to successfully complete and operate properties
under development, which would impair our financial condition and operating results.

A significant part of our business is devoted to
the development of office, mixed-use and other properties, including the redevelopment of core plus and value-add properties. Our development, construction and redevelopment activities involve the following significant risks:



| |  |  | we may be unable to obtain construction or redevelopment financing on favorable terms or at all;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | if we finance development projects through construction loans, we may be unable to obtain permanent financing at all or on advantageous terms;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not complete development projects on schedule or within budgeted amounts;
| | - |  | --------------------------------------------------------------------------------



| |  |  | we may underestimate the expected costs and time necessary to achieve the desired result with a redevelopment project;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



35



---

##### Table of Contents

| |  |  | we may discover structural, environmental or other feasibility issues with properties acquired as redevelopment projects following our acquisition, which may render
the redevelopment as planned not possible;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations;
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | occupancy rates and rents at newly developed or renovated properties may fluctuate depending on a number of factors, including market and economic conditions, and
may result in our investment not being profitable.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we are not successful in our property development initiatives,
including our Murano project, this could adversely impact our revenue and profitability, causing a significant downturn in our business, including our financial condition, results of operations, trading price of our common stock and impairing our
ability to satisfy our debt service obligations. Further, our Murano project is the development of a high-rise residential condominium building. Historically, our development and property management activities have centered on office properties. In
developing and managing a residential project, we may encounter unfamiliar problems that adversely impact our ability to complete the project on a timely basis and derive sustainable revenues from the property.

Our efforts to expand our geographic presence and diversify into other regional real estate markets may not be successful, thereby constraining our growth to markets
in which we currently operate.

We intend to expand our business to new geographic regions where we expect the development, ownership
and management of property to result in favorable risk-adjusted investment returns. In order for us to achieve economies of scale, we generally target ownership of 500,000 or more rentable square feet in a market. It may be difficult for us to
achieve this level of ownership and our initial entry into a particular market may result in higher administrative expenses for us initially. Presently, we do not possess the same level of familiarity with the development, ownership and management
of properties in locations other than the West Coast, Southwest and Mid-Atlantic regions in the United States, which could adversely affect our ability to develop properties outside these regions successfully or at all or to achieve expected
performance.

We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.

We face significant competition from other developers, managers and owners of office and mixed-use real estate, many of which own
properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services.
A number of our competitors are larger and better able to take advantage of efficiencies created by size, and have better financial resources, or increased access to capital at lower costs, and may be better known in regional markets in which we
compete. Our smaller size as compared to some of our competition may increase our susceptibility to economic downturns and pressures on rents. Our failure to compete successfully in our industry would materially affect our business prospects.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire resulting in increased vacancy rates, lower revenue and an
adverse effect on our operating results.

As of March 31, 2007, leases representing 8.3% and 9.3% of the rentable
square feet of the office and mixed-use properties in which we hold an ownership interest will expire in the remainder of 2007 and 2008, respectively. Further, an additional 15% of the square feet of these properties was available for lease on that
date. Rental rates above the current market rate at some of the properties in our office and mixed-use portfolio may require us to renew or re-lease some expiring leases at lower rates. If the rental rates for our properties decrease, our existing
tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our revenue and profitability, could be adversely impacted, causing a significant downturn in our financial
condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations. In particular, a significant amount of space at our Two Commerce Square property has
historically been leased to Conrail. This lease expires in two stages in 2008 and 2009. Conrail currently subleases substantially all of its space to a number of subtenants. While we have entered



36



---

##### Table of Contents

into agreements with many of the subtenants for direct leases once their sublease term expires, the rental rates are
lower than paid by the current tenant. As a result, we currently expect our aggregate revenues from this property will be lower following the expiration of the Conrail lease in 2008 and 2009. If we are unable to lease the remaining portion of the
space currently leased by Conrail in Two Commerce Square prior to the expiration of the lease and assuming all subtenants to the Conrail lease exercise no renewal options and exercise all early termination options, our rental revenue (excluding
tenant reimbursements revenue) computed in accordance with accounting principles generally accepted in the United States of America (GAAP) would decrease by $2.8 million in 2008 as compared to 2007, $2.5 million in 2009 as compared to
2008, and $1.7 million in 2010 as compared to 2009.

We may encounter problems during development and construction activities.

We are currently developing Murano, a high-rise residential condominium project in Philadelphia. We are also currently planning development projects at
Four Points Centre in Austin, Texas, Campus El Segundo in Southern California, and CityWest Place in Houston, Texas. These development projects, and others that we may undertake from time to time, are subject to significant development and
construction risks, any of which could cause unanticipated cost increases and delays. These include the following:



| |  |  | adverse weather that damages the project or causes delays;
| | - |  | ----------------------------------------------------------



| |  |  | delays in obtaining or inability to obtain necessary permits, licenses and approvals;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | changes to the plans or specifications;
| | - |  | ---------------------------------------



| |  |  | shortages of materials and skilled labor;
| | - |  | -----------------------------------------



| |  |  | increases in material and labor costs;
| | - |  | --------------------------------------



| |  |  | engineering problems;
| | - |  | ---------------------



| |  |  | environmental issues;
| | - |  | ---------------------



| |  |  | shortages of qualified employees;
| | - |  | ---------------------------------



| |  |  | fire, flooding and other natural disasters;
| | - |  | -------------------------------------------



| |  |  | expenditure of funds on, and the devotion of management time to, projects that may not be completed; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | geological, construction, excavation, regulatory and equipment problems.
| | - |  | ------------------------------------------------------------------------

We may not be able to complete the development of any projects we begin and, if completed, our development and construction activities may not be
completed in a timely manner or within budget, which would adversely impact our revenue and profitability, and may create cash flow difficulties for us.

Our growth depends on external sources of capital, some of which are outside of our control. If we are unable to access capital from external sources, we may not be able to implement our business strategy.

Our business strategy requires us to rely significantly on third-party sources to fund our capital needs. We may not be able to obtain debt or equity on
favorable terms or at all. Any additional debt we incur will increase our leverage. Any issuance of equity by our company will cause dilution to our existing stockholders, and could have a negative impact on our stock price for the short term. Our
access to third-party sources of capital depends, in part, on:



| |  |  | our current debt levels, which were $334.5 million of consolidated debt and $1,210.7 million of unconsolidated debt as of March 31, 2007;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our current cash flow from operating activities, which was $2.4 million for the three months ended March 31, 2007;
| | - |  | ------------------------------------------------------------------------------------------------------------------



37



---

##### Table of Contents

| |  |  | our current and expected future earnings;
| | - |  | -----------------------------------------



| |  |  | the markets perception of our growth potential;
| | - |  | ------------------------------------------------



| |  |  | the market price per share of our common stock;
| | - |  | -----------------------------------------------



| |  |  | the perception of the value of an investment in our common stock; and
| | - |  | ---------------------------------------------------------------------



| |  |  | general market conditions.
| | - |  | --------------------------

If we
cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or continue to fund operations.

We could incur significant costs related to government regulation and private litigation over environmental matters, including with respect to clean-up of
contaminated properties and litigation from any harm caused by environmental hazards on our properties.

Under various federal, state
and local environmental laws and regulations, a current or previous owner, manager or tenant of real estate may be required to investigate and clean up hazardous or toxic substances at the property, and may be held liable to a government entity or
to third parties for property damage and for investigation, clean-up and monitoring costs incurred by the parties in connection with the actual or threatened contamination. With respect to properties in which we hold an ownership interest, we have
not obtained any recent environmental reports regarding conditions at the properties, nor do we intend to. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant
knew of or caused the presence of the contamination. The liability under the laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a
party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs to the extent such contributions are possible to obtain. These costs may be substantial, and
may exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination on a property may limit the ability of the owner, operator or tenant to sell or rent that property or to borrow using the
property as collateral, and may cause our investment in that property to decline in value.

Federal regulations require building owners and
those exercising control over a buildings management to identify and warn, by signs and labels, of potential hazards posed by workplace exposure to installed asbestos- containing materials and potentially asbestos-containing materials in their
building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of
these regulations. Building owners and those exercising control over a buildings management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially
asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building incorporating asbestos-containing materials or potentially asbestos-containing materials that we own or manage.

We are aware of potentially environmentally hazardous or toxic materials at two of our properties in which we hold an ownership interest. At our 2100 JFK
Boulevard property, we engaged in remediation efforts as a result of a gasoline spill that occurred on the premises in April 2002, due to an accident caused by the former tenants agent. We undertook remedial procedures for the gasoline spill
and other contaminants, including removing contaminated soil. As of December 31, 2006, all soil remediation work has been completed. Our lease required the tenant (or its successor in interest) to indemnify us against all costs and expenses of
every kind relating directly or indirectly to the tenants use and occupancy of the premises. We have initiated litigation against the former tenant to enforce its obligation to us under the indemnity provisions of the lease. With respect to
asbestos materials present at our City National Plaza property, these materials have been removed or abated from certain tenant and common areas of the building structure. We continue to remove or abate asbestos materials from various areas of the
building structure and as of March 31, 2007, have accrued $4.0 million for such estimated future costs.



38



---

##### Table of Contents

Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance,
handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials. These laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potentially
asbestos-containing materials. In addition, fines may be imposed on owners or managers of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potentially asbestos-containing materials.

We are subject to high taxes relating to our Texas and Philadelphia properties that could negatively affect our operating results and may also be
adversely affected by new legislation.

In 2006, the Texas legislature enacted a change in that states tax structure that took
effect on January 1, 2007 and replaced the Texas franchise tax with a margin tax on gross receipts. The new tax is imposed on an extended base (including partnerships, joint ventures and other entities as well as corporations) and
will be calculated on a combined basis, taking into account the receipts of all members of an affiliated group when one or more members have business presence in the State of Texas. The taxable margin is calculated using one of three
methods and is then apportioned to Texas using a factor of Texas receipts to total receipts. The calculation methods to be used are not advantageous to capital intensive businesses such as large commercial property owners and therefore may
negatively impact such businesses. The new tax structure has been challenged by various groups and entities and may be changed or repealed. We have not evaluated the impact of this tax on our financial condition, results of operations or cash flow.

In Philadelphia, two downtown development sites of which a substantially-leased office tower has been built on one of the sites, have each
been designated as a Keystone Opportunity Improvement Zone site by the state of Pennsylvania. This designation confers upon occupants a 15-year abatement of all state and local taxes except the city wage tax. The second site, if developed, along
with the office tower already developed on the first site, could, depending on overall supply-demand fundamentals, have a negative impact on central business district Philadelphia rental rates and building values. Further, the transfer tax rate in
the City of Philadelphia, which we could incur upon a sale of one of our properties, is one of the highest in the United States and could be a very significant cost in the event of the sale of one of our Philadelphia properties. In Philadelphia,
transfers of fee title or partnership interests representing 90% or more of property ownership are subject to a tax of 4% of the transaction price. The 4% amount is comprised of a 3% levy by the City of Philadelphia and a 1% charge by the
Commonwealth of Pennsylvania. The transaction price, if not specifically disclosed to the taxing authorities, must be deemed reasonable, and is therefore typically the assessed value of the property for real estate tax purposes.

The risk of future terrorist attacks in the United States could harm the demand for and the value of our properties which are located in major metropolitan areas.

The risk of future terrorist attacks in the U.S. or war could harm the demand for and the value of our properties. We manage properties
that are well-known landmarks in high visibility metropolitan areas that may be perceived as more likely terrorist targets than lower profile properties in less commercial areas, which could potentially reduce the demand for and value of these
properties. A decrease in demand could make it difficult for us to renew leases or re-lease our properties at rates equal to or above historical lease rates.

Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs. Further, the availability of insurance for acts of terrorism may be limited or
may cost more. The three operating properties in which we own interests located in Philadelphia, Pennsylvania  One Commerce Square, Two Commerce Square and 2121 Market Street  are located within a three city block area. Together, these
three properties represented approximately 33.9% of the annualized rent for properties in which we hold an ownership interest as of March 31, 2007. Our Murano residential high-rise project which is currently under construction is also located
within the same three city block area. Because these properties are located closely together, a catastrophic event in this area could materially damage, destroy or impair the use by tenants of all of



39



---

##### Table of Contents

these properties. To the extent that our tenants and prospective buyers of condominium units are impacted by future
attacks, their ability to continue to honor obligations under their existing leases and purchase contracts with us could be adversely affected, including being unable to make timely rental payments and defaulting under existing leases and purchase
contracts. Additionally, some tenants have termination rights in respect of certain casualties. Under the terms of our financing documents, we may be required to apply casualty proceeds to repay loans and may not be able to rebuild or restore the
property unless we are able to obtain alternate financing. If we are entitled to receive casualty proceeds, we may not be able to rebuild or restore the property, and we may be forced to recognize taxable gain on the affected property. Failure to
reinvest casualty proceeds in the affected property or properties could also result in obligations under our tax indemnification agreement with Mr. Thomas.

Tax indemnification obligations that may arise in the event we or our Operating Partnership sell an interest in either of two of our properties could limit our operating flexibility.

We and our Operating Partnership agreed to indemnify Mr. Thomas against adverse direct and indirect tax consequences in the event that our Operating
Partnership or the underlying property joint venture directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in either One
Commerce Square or Two Commerce Square. These two properties represented 33.6% of annualized rent for properties in which we hold an ownership interest as of March 31, 2007. This indemnification period will expire in October 2008, unless
Mr. Thomas and related entities contribute the remaining 11% minority interest in each of One Commerce Square and Two Commerce Square to us prior to October 13, 2008 for not more than $4 million in the aggregate, in which event the
indemnification period will expire on October 13, 2013, which may be extended to October 13, 2016 provided Mr. Thomas and his controlled entities collectively retain at least 50% of the Operating Partnership units received by them in
connection with our formation transactions at the time of our initial public offering.

We have also agreed to use commercially reasonable
efforts to make approximately $210 million of debt available to be guaranteed by entities controlled by Mr. Thomas, by Mr. Fox, a non-employee member of our board of directors, and by Mr. Gilchrist, an individual formerly affiliated
with Maguire Thomas Partners. We agreed to make this debt available for guarantee in order to assist Mr. Thomas and these other persons in preserving their tax position after their contributions at the time of our initial public offering.

Risks Related to the Real Estate Industry

Illiquidity of real estate investments and the susceptibility of the real estate industry to economic conditions could significantly impede our ability to respond to adverse changes in the performance of our properties.

Our ability to achieve desired and projected results for growth of our business depends on our ability to generate revenues in excess of expenses, and
make scheduled principal payments on debt and fund capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may adversely impact results of operations and the
value of our properties. These events include:



| |  |  | vacancies or our inability to rent space on favorable terms;
| | - |  | ------------------------------------------------------------



| |  |  | inability to collect rent from tenants;
| | - |  | ---------------------------------------



| |  |  | inability to finance property development and acquisitions on favorable terms;
| | - |  | ------------------------------------------------------------------------------



| |  |  | increased operating costs, including real estate taxes, insurance premiums and utilities;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | local oversupply, increased competition or reduction in demand for office space;
| | - |  | --------------------------------------------------------------------------------



| |  |  | costs of complying with changes in governmental regulations;
| | - |  | ------------------------------------------------------------



| |  |  | the relative illiquidity of real estate investments; and
| | - |  | --------------------------------------------------------



| |  |  | changing submarket demographics.
| | - |  | --------------------------------



40



---

##### Table of Contents

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for
real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If any of these events were to happen, our revenue and profitability
could be impaired, causing a significant downturn in our financial condition, results of operations, cash flow, and trading price of our common stock and our ability to satisfy our debt service obligations could be impaired.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our
financial condition.

All of our commercial properties are required to comply with the Americans with Disabilities Act, or the ADA. The
ADA has separate compliance requirements for public accommodations and commercial facilities, but generally requires that buildings be made accessible to people with disabilities. Although we believe that the properties in
which we hold an ownership interest substantially comply with the requirements of the ADA, we have not conducted a portfolio-wide investigation to determine our compliance. Compliance with the ADA requirements could require removal of access
barriers. Non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. Typically, we are responsible for changes to a building structure that are required by the ADA, which can be
costly. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. We may be required to make substantial capital expenditures to comply with these
requirements thereby limiting the funds available to operate, develop and redevelop our properties and acquire additional properties. As a result, these expenditures could negatively impact our revenue and profitability.

Potential losses may not be covered by insurance and may result in our inability to repair damaged properties and we could lose invested capital.

We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, business interruption and rental loss insurance under our
blanket policy covering all of the properties which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the CalEPA headquarters building under our blanket policy
because the sole tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the
cost of the coverage and industry practice. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons as more specifically excluded under the
actual terrorism policies. Some of our policies, like those covering losses due to earthquakes and terrorism, are subject to limitations involving deductibles and policy limits which may not be sufficient to cover losses. We either own or have
interests in a number of properties in Southern California, an area especially prone to earthquakes.

Under their leases, tenants are
generally required to indemnify us from liabilities resulting from injury to persons, air, water, land or property, on or off the premises due to activities conducted by them on our properties. There is an exception for claims arising from the
negligence or intentional misconduct by us or our agents. Additionally, tenants are generally required, with the exception of governmental entities and other entities that are self-insured, to obtain and keep in force during the term of the lease
liability and property damage insurance policies issued by companies holding ratings at a minimum level at their own expense.

Although we
have not experienced such a loss to date, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property, including
lost revenue from unpaid rent from tenants. In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if this property was irreparably damaged. In the event of a significant
loss at one or more of the properties covered by the blanket policy, the remaining insurance under our policy, if any, could be insufficient to adequately insure our remaining properties. In this event, securing additional insurance, if possible,
could be significantly more expensive than our current policy.



41



---

##### Table of Contents

Risks Related to Our Organization and Structure

Our senior management has existing conflicts of interest with us and our public stockholders that could result in decisions adverse to our company.

As of April 25, 2007, following our offering of 9,200,000 shares of common stock, Mr. Thomas owns or controls a very significant interest in our
operating partnership consisting of 14,496,666 units, or a 40% interest including outstanding shares of common stock and units (including incentive units) as of such date. Mr. Thomas also owns 206,667 shares of restricted stock. In addition, our
senior executive officers collectively hold an interest in Operating Partnership units and incentive units aggregating a 40% interest in our company including outstanding shares of common stock and units (including incentive units).

The various terms of these equity and incentive interests could create conflicts of interest with our public stockholders. Members of executive
management could be required to make decisions that could have different implications for our Operating Partnership and for us, including:



| |  |  | potential acquisitions or sales of properties;
| | - |  | ----------------------------------------------



| |  |  | the issuance or disposition of shares of our common stock or units in our Operating Partnership; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the payment of dividends by us and other matters.
| | - |  | -------------------------------------------------

For example, an acquisition in exchange for the issuance by our Operating Partnership of additional Operating Partnership units would dilute the interests of members of our management team as limited partners in our
Operating Partnership. Dispositions could trigger our tax indemnification obligations with respect to Mr. Thomas. Dividends paid by us to our public stockholders would decrease our funds available to reinvest in our business.

We have a holding company structure and rely upon funds received from our Operating Partnership to pay liabilities.

We are a holding company. Our primary asset is our general partnership interest in our Operating Partnership. We have no independent means of generating
revenues. To the extent we require funds to pay taxes or other liabilities incurred by us, to pay dividends or for any other purpose, we must rely on funds received from our Operating Partnership. If our Operating Partnership should become unable to
distribute funds to us, we would be unable to continue operations after a short period. Most of the properties owned by our subsidiaries and joint ventures are encumbered by loans that restrict the distribution of funds to our Operating Partnership.
The loans generally contain lockbox arrangements, reserve requirements, financial covenants and other restrictions and provisions that prior to an event of default may prevent the distribution of funds from the subsidiaries who own these properties
to our Operating Partnership. In the event of a default under these loans, the defaulting subsidiary or joint venture would be prohibited from distributing cash to our Operating Partnership. As a result, our Operating Partnership may be unable to
distribute funds to us and we may be unable to use funds from one property to support the operation of another property. As we acquire new properties and refinance our existing properties, we may finance these properties with new loans that contain
similar provisions. Some of the loans to our subsidiaries and joint ventures may contain provisions that restrict us from loaning funds to our subsidiaries or joint ventures. If we are permitted to loan funds to our subsidiaries or joint ventures,
our loans generally will be subordinated to the existing debt on our properties.



42



---

##### Table of Contents

Mr. Thomas has a significant vote in certain matters as a result of his ownership of 100% of our limited voting
stock.

Each entity that received Operating Partnership units in our formation transactions received shares of our limited voting stock
that are paired with units in our Operating Partnership on a one-for-one basis. All of these entities are directly or indirectly controlled by Mr. Thomas, and, as a result, Mr. Thomas controls 100% of our outstanding limited voting stock,
or 37.5% of our outstanding voting stock as of April 25, 2007, after giving effect to our sale of 9,200,000 shares of common stock. Although not entitled to dividends or other distributions, these limited voting shares are entitled to one vote per
share in the election of directors, the approval of certain extraordinary transactions including any merger or sale of the company, amendments to our certificate of incorporation and any other matter required to be submitted to a separate class vote
under Delaware law. Mr. Thomas may have interests that differ from that of our public stockholders, including by reason of his interests held in Operating Partnership units, and may accordingly vote as a stockholder in ways that may not be
consistent with the interests of our public stockholders. This significant voting influence over certain matters may have the effect of delaying, preventing or deterring a change of control of our company, or could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our company.

Our success depends on key personnel, the loss of whom could
impair our ability to operate our business successfully.

We depend on the efforts of key personnel, particularly Mr. Thomas, our
Chairman, Chief Executive Officer, and President. Among the reasons that Mr. Thomas is important to our success is that he has an industry reputation developed over more than 25 years in the real estate industry that attracts business and
investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with these parties could diminish. In addition, Mr. Thomas is 70 and,
although he has informed us that he does not currently plan to retire, we cannot be certain how long he will continue working on a full-time basis.

Many of our other senior executives also have significant real estate industry experience. Mr. Scott has extensive development and management experience on several large-scale projects, including the development, construction and
management of One Commerce Square and Two Commerce Square. Mr. Sischo and Mr. Scott are jointly responsible for oversight of our relationship with CalSTRS. Mr. Sischo is responsible for our acquisition efforts. Mr. Ricci has been
extensively involved in the development of large, mixed-use and commercial projects. Ms. Laing has served as chief financial officer of two publicly-traded real estate investment trusts. While we believe that we could find acceptable
replacements for these executives, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel. A departure of either
Mr. Thomas or Mr. Sischo could also have adverse effects on our joint venture relationship with CalSTRS, including the possible sale of our joint venture interest to CalSTRS at 97% of fair value.

Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares
at a favorable price.

Some of the provisions of our certificate of incorporation and bylaws could make it more difficult for a third
party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to possibly sell their shares at a premium over the then market price. Our certificate of incorporation and bylaws contain
provisions including the following:



| |  |  | vacancies on our board of directors may only be filled by the remaining directors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | only the board of directors can change the number of directors;
| | - |  | ---------------------------------------------------------------



| |  |  | there is no provision for cumulative voting for directors;
| | - |  | ----------------------------------------------------------



| |  |  | directors may only be removed for cause; and
| | - |  | --------------------------------------------



| |  |  | our stockholders are not permitted to act by written consent.
| | - |  | -------------------------------------------------------------



43



---

##### Table of Contents

In addition, our certificate of incorporation authorizes the board of directors to issue up to 25,000,000
shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting
rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. No shares of preferred stock are outstanding and we have no present
plans to issue any preferred stock. The issuance of any preferred stock, however, could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more
costly to acquire or effect a change in control, thereby preserving the current stockholders control of our company.

Finally, we are
also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder.

The provisions of our certificate of incorporation and bylaws,
described above, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if these events would be in the
best interests of our stockholders.

We could authorize and issue stock without stockholder approval, which could cause our stock price to decline and
dilute the holdings of our existing stockholders.

Our certificate of incorporation authorizes our board of directors to issue
authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of the classified or unclassified
shares. Although our board of directors has no intention at the present time, it could establish a series of preferred stock that could, depending on the terms of the series, delay, defer or prevent a transaction or a change of control that might
involve a premium price for our common stock or otherwise be in the best interest of our stockholders.



44



---

##### Table of Contents

ITEM 6. EXHIBITS



|                                                                                                                                                                                                                                                                                           |  |                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------
|(a)                                                                                                                                                                                                                                                                                        |  | Exhibits                                                                                           
|                                                                                                                                                                                                                                                                                           | 
|31.1                                                                                                                                                                                                                                                                                       |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|                                                                                                                                                                                                                                                                                           | 
|31.2                                                                                                                                                                                                                                                                                       |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|                                                                                                                                                                                                                                                                                          
|In accordance with SEC Release 33-8212, the following exhibits are being furnished, and are not being filed as part of this report or asa separate disclosure document, and
are not being incorporated by reference into any registration statement filed under the SecuritiesAct of 1933.
|                                                                                                                                                                                                                                                                                           | 
|32.1                                                                                                                                                                                                                                                                                       |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                                                                                                                                                                                                                                                                                           | 
|32.2                                                                                                                                                                                                                                                                                       |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



45



---

##### Table of Contents

SIGNATURES

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

Dated:        May 10, 2007



THOMAS PROPERTIES GROUP, INC.By:

/s/ James A. ThomasJames A. ThomasChief Executive OfficerBy:

/s/ Diana M. LaingDiana M. LaingChief Financial Officer




46