UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark One)☒
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the fiscal year ended December 31, 2008





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




For
the transition period from __________ to __________.




Commission
File No. 000-52559




FSP
Phoenix Tower Corp.


(Exact
name of registrant as specified in its charter)





Delaware
            20-3965390(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)401 Edgewater Place,
      Suite 200, Wakefield, Massachusetts
            01880-6210(Address
      of principal executive offices)
            (Zip
      Code)





Registrant’s telephone number,
including area code:(781) 557-1300




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




Securities
registered pursuant to Section 12(g) of the Act:




Preferred
Stock, $.01 par value per share




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




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




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 ☒  No ☐.




Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.☒




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




Large accelerated filer ☐
            Accelerated filer ☐Non-accelerated
      filer   ☐(Do not
      check if a smaller reporting company)
            Smaller reporting company ☒




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




As of June 30, 2008, the aggregate fair
market value of Common Stock held by non-affiliates of the registrant was
$0.




The number of shares of Common Stock
outstanding was 1 and the number of shares of Preferred Stock outstanding was
1,050, each as of February 28, 2009.







Documents incorporated by reference:
None.





TABLE
OF CONTENTS





PART
      I
            
            1Item
      1.
            Business.
            1Item
      1A.
            Risk
      Factors.
            5Item
      1B.
            Unresolved
      Staff Comments.
            5Item
      2.
            Properties.
            6Item
      3.
            Legal
      Proceedings.
            7Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            7PART
      II
            
            8Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities...
            8Item
      6.
            Selected
      Financial Data.
            9Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            9Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            15Item
      8.
            Financial
      Statements and Supplementary Data.
            15Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            15Item
      9A.
            Controls
      and Procedures.
            15Item
      9A(T).
            Controls
      and Procedures.
            15Item
      9B.
            Other
      information.
            16PART
      III
            
            17Item
      10.
            Directors,
      Executive Officers and Corporate Governance
            17Item
      11.
            Executive
      Compensation.
            18Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            19Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.
            20Item
      14.
            Principal
      Accountant Fees and Services.
            20PART
      IV
            
            22Item
      15.
            Exhibits
      and Financial Statement Schedules.
            22SIGNATURES
            23










PART
I




Item 1.
            Business





History





Our company, FSP Phoenix Tower Corp.,
which individually or together with its subsidiaries, we refer to as the
Company, is a Delaware corporation formed to purchase, own, operate, improve and
reposition in the marketplace a thirty-four story multi-tenant office building
containing approximately 629,054 rentable square feet of space located on
approximately 2.1 acres of land in Houston, Texas, which we refer to as the
Property.  The Company operates in a manner intended to qualify as a
real estate investment trust, or REIT, for federal income tax
purposes.





The Company was organized in December
2005 by FSP Investments LLC (member, FINRA and SIPC), a wholly-owned subsidiary
of Franklin Street Properties Corp., which we refer to as Franklin Street (NYSE
Alternext US: FSP).  FSP Investments LLC acted as a real estate
investment firm and broker/dealer with respect to (a) the organization of the
Company, (b) the acquisition of the Property by the Company and (c) the sale of
equity interests in the Company.





The Company purchased the Property from
an unaffiliated third party for $74,500,000 on February 22, 2006.  The
purchase price, which was determined based on arm’s-length negotiations, was
financed entirely by a loan from Franklin Street collateralized by a first
mortgage, which we refer to as the First Mortgage Loan.  The First
Mortgage Loan was repaid in its entirety on August 22, 2006 from the proceeds of
the sale of equity interests in the Company.  Total interest and loan
fees incurred on the First Mortgage Loan were approximately
$6,840,000.  The Company acquired the Property through a limited
partnership, FSP Phoenix Tower Limited Partnership, of which the Company is the
sole limited partner and of which FSP Phoenix Tower LLC, a wholly-owned
subsidiary of the Company, is the sole general partner.  The sole
business of FSP Phoenix Tower Limited Partnership is to own and operate the
Property; the sole business of each of FSP Phoenix Tower LLC and the Company is
to hold the equity interests of FSP Phoenix Tower Limited
Partnership.





The Company commenced operations in
February 2006.





Franklin Street holds the sole share of
the Company’s common stock, $.01 par value per share, which we refer to as the
Common Stock.  Between March 2006 and September 2006, FSP Investments
LLC completed the sale of equity interests in the Company through the offering
on a best efforts basis of 1,050 shares of preferred stock, $.01 par value per
share, which we refer to as the Preferred Stock.  We sold the
Preferred Stock for an aggregate consideration of approximately $104,316,000 in
a private placement offering to 789 “accredited investors” within the meaning of
Regulation D under the Securities Act of 1933. Between March 31, 2006 and
September 22, 2006, the Company held 10 investor closings, at each of which
shares of Preferred Stock were sold and funds were received.  On
September 22, 2006, Franklin Street purchased 48 shares of Preferred Stock
(approximately 4.6% of the 1,050 shares sold) of the Company for $4,116,000,
representing $4,800,000 at the offering price net of commissions of $384,000 and
fees of $300,000 that were excluded.  Prior to purchasing any shares
of Preferred Stock, Franklin Street agreed to vote any shares held by it on any
matter presented to the holders of Preferred Stock in a manner that approximates
as closely as possible the votes cast in favor of and opposed to such matter by
the holders of the Preferred Stock other than Franklin Street and its
affiliates.  For purposes of determining how Franklin Street votes its
shares of Preferred Stock, abstentions and non-votes by stockholders other than
Franklin Street are not considered.  Funds from each individual
closing were used to repay the First Mortgage Loan and associated fees as well
as other expenses payable to Franklin Street’s wholly-owned subsidiary, FSP
Investments LLC.  The use of proceeds from the offerings of Preferred
Stock received and affiliates receiving payments are set forth in the table
below:





Use of
      proceeds:Type
              Affiliate
      paid
              AmountOperating/Capital Reserve
      (1)
              
              $15,012,500Organizational, Offering
      andOther Expenditures for the
      Company(2)(6)
              FSP Investments
      LLC
              525,000Selling
      Commissions(3)
              FSP Investments
      LLC
              8,016,000Acquisition-Related
      Costs:Purchase Price of the
      Property(4)
              Franklin Street Properties
      Corp.
              74,500,000Loan Fee Paid to Franklin Street
      (5)
              Franklin Street Properties
      Corp.
              5,761,500Acquisition
      Fee(6)
              FSP Investments
      LLC
              501,000Total Uses of Gross Offering
      Proceeds
              
              $104,316,000





1





(1)
            The Operating/Capital Reserve
      proceeds were retained by the Company for operating and capital
      uses.


(2)
            Organizational, Offering and Other
      Expenditures were paid for various expenses, including legal, accounting,
      appraisal, engineering and organizational expenses allocable to the
      offering, incurred in connection with the organization and syndication of
      the Company.


(3)
            Selling Commissions were paid to
      FSP Investments LLC, as Selling
Agent.


(4)
            The Purchase Price of the Property
      was financed by the First Mortgage Loan, which was repaid from proceeds of
      the offering.


(5)
            The Loan Fee Paid to Franklin
      Street was a fee (or points) payable to Franklin Street to obtain the
      First Mortgage Loan to purchase the Property in the amount of $5,762,000
      .  The First Mortgage Loan was in an original principal amount
      equal to the purchase price of the Property, and had a term of two years,
      which was prepayable at any time without premium or penalty and carried an
      interest rate equal to the rate payable by Franklin Street on borrowings
      under its line of credit with its
bank.


(6)
            The Acquisition Fee was paid for
      various services in connection with identifying and acquiring the
      Property.





Transactions between the Company and
Franklin Street and/or its affiliates were entered into without the benefit of
arm’s-length bargaining and involved conflicts of interest.  Although
Franklin Street sponsors the syndication of other REITs similar to the Company
and has in the past acquired some of those REITs, Franklin Street is under no
obligation to acquire or to offer to acquire the Company or the outstanding
shares of Preferred Stock, and any acquisition transaction would need to be
approved by the Company’s stockholders and the boards of directors of Franklin
Street and the Company.  Please see “Item 13. Certain Relationships
and Related Transactions, and Director Independence”.





Our
Business





Our sole business is to own, operate,
improve and reposition in the marketplace the Property and we do not intend to
invest in or purchase any additional properties.  We derive rental
revenue from income paid to us by the tenants of the Property.  Asset
and property management services are provided by third
parties.





The Property was completed in 1984 and
is a 34-story multi-tenant office building containing approximately 629,054
rentable square feet of space located on approximately 2.1 acres of land in
Houston, Texas.  The Property includes approximately 1,649 parking
spaces located inside a glass-enclosed fully-integrated attached eight-level
parking garage and approximately seventeen on-site surface parking
spaces.  The Property also has the right to use approximately 190
additional uncovered off-site parking spaces at an adjacent property pursuant to
a lease that expires on February 28, 2019.





The Property underwent a remeasurement
of space in 1997.  This remeasurement concluded that the rentable
space in the Property should be increased from approximately 618,578 square feet
to approximately 629,054 square feet.  This Annual Report on Form 10-K
makes reference to the more recently determined 629,054 square foot number in
all of its general descriptions of the Property.  Because lease
payments are calculated on per square foot basis, the Company believes that the
potential exists in the future to gain greater amounts of rental income from
leasing this extra space.  However, the Company also believes that any
such potential gains will not come immediately as existing tenants and their
respective leases are mostly based upon the previous 618,578 square foot
measurement.  Accordingly, all tenant and lease descriptions set forth
in this Annual Report on Form 10-K reflect the terms and conditions of the
respective lease documents, which generally are based on the 618,578 square foot
measurement instead of the 629,054 square foot number.





Since
its completion in 1984, the Property has competed within the office market in
Houston, Texas.  Management believes that the Property is still
competitive with other office buildings, but that at approximately twenty-five
years in age, the Property needed improvements in several important areas in
order to maintain or enhance its prominent position in the
marketplace.  Accordingly, management has provided for a cash reserve
in order to reposition the Property in the marketplace.  The
improvements include, but are not limited to, remediation of the glass façade
and upgrades to the garage, ground floor lobby, ninth floor sky lobby and
terrace, streetscape and landscape.  If successful, management
believes that such a repositioning could increase the value of the Property and
lead to higher future rent and occupancy levels. To date, management has
completed common area improvements (upgrades to the ground floor lobby, ninth
floor sky lobby, streetscape and landscape) and improvements to the garage
facility, ninth floor sky terrace and many upgrades and enhancements to the
Property’s operating systems. Through December 31, 2008, management had incurred
costs of approximately $10.5 million and anticipates that approximately $0.6
million in additional funds will be required to complete these specific
improvements.  If conditions warrant, Management may elect to make
additional improvements at additional cost in order to further enhance the
Property.


2


On
September 13, 2008, as the repositioning of the Property was nearing completion
and leasing activity was gaining momentum, Hurricane Ike made a direct hit on
Houston’s core business areas inside the 610 Loop, causing significant property
damage.  The Property sustained significant water damage primarily
from approximately 50 shattered windows, roof damage and leaking
windows.  As of December 31, 2008, the Property had been substantially
restored to its pre-hurricane condition at an approximate cost of
$2,762,000.  Of this total cost, a hurricane/named-windstorm insurance
policy deductible of $250,000 was funded from operating funds of the Property,
$2,094,000 was funded by the insurance carrier and the balance of $418,000 was
paid by the insurance carrier in the first quarter of 2009.  Due to
delays caused by Hurricane Ike, the final phase of the façade remediation that
had been scheduled for completion by December 31, 2008 is now scheduled to be
substantially complete by March 31, 2009 (weather permitting).





The Property is occupied by a diverse
group of tenants, including financial institutions, energy firms, law firms and
other professional service organizations.  On February 29, 2008, the
lease with the Property’s largest tenant, Washington Mutual Bank, or WAMU,
expired and WAMU vacated the majority of its leased
premises.  However, WAMU continued to occupy five floors, or
approximately 103,954 square feet (17%) of the Property’s rentable space,
pursuant to the holdover provisions of its lease until March 27,
2008.  Prior to the expiration of its lease on February 29, 2008, WAMU
leased approximately 239,339 square feet (39%) of the Property’s rentable
space.  As of December 31, 2008, the Property was approximately 68.9%
leased and Management is aggressively working to lease all vacant
space.  Management believes that any tenant that leases 10% or more of
the Property’s rentable space is material.  As of December 31, 2008,
Permian Mud Service, Inc., an energy-related firm d/b/a Champion Technologies,
leased approximately 77,654 square feet (12%) of the Property’s rentable space
through February 2018.  Other prominent additional tenants include
Phillips & Akers, a Texas professional corporation (law firm), which leases
approximately 26,939 square feet (4%) through November 2011 and Allen Boone
Humphries Robinson LLP, (law firm), which leases approximately 51,153 square
feet (8%) through July 2018.  Permian Mud Service, Inc., Phillips
& Akers, and Allen Boone Humphries Robinson LLP account for approximately
155,746 square feet (25%) of the rentable area of the Property.  Other
well-known tenants include Morgan Stanley, Sprint Communications and the United
States Army.  There are currently approximately 39 tenants leasing
office space at the Property





Most of the Property’s leases are
structured on a full-service base year system, where tenants reimburse the
landlord for operating expenses above an initial base year.  However,
as of July 2007, for new leases, management initiated a conversion from
full-service base year leases to net leases, where tenants pay annual base net
rent, plus the tenant’s proportionate share of operating
expenses.  Normal operating expenses at the Property include, but are
not limited to, maintenance, repairs, real estate taxes, insurance, utilities
and management costs.  The landlord is generally obligated, at its
expense, to maintain and replace, if necessary, all structural components of the
Property, including walls, roof, slab and foundation.





FSP Property Management LLC, a
wholly-owned subsidiary of Franklin Street, provides the Company with asset
management and financial reporting services, which include but are not limited
to, selecting and supervising a local property management company and local
leasing brokers, approving lease transactions, evaluating performance of the
asset, and recommending appropriate stockholder distributions to the Board of
Directors of the Company.  The asset management agreement between the
Company and FSP Property Management LLC requires the Company to pay FSP Property
Management LLC a monthly fee equal to one percent (1%) of that month’s gross
revenues of the Property.  The asset management agreement between the
Company and FSP Property Management LLC may be terminated by either party
without cause at any time, upon at least thirty (30) days written
notice.





Hines Interests Limited Partnership
provides the Company with local, on-site property management and building
maintenance services and periodic financial, operating and budget reports
relating to the operation of the Property for review by FSP Property Management
LLC.  Hines Interests Limited Partnership is a third-party service
provider that is not related to or affiliated with Franklin
Street.  The management agreement between the Company and Hines
Interests Limited Partnership requires the Company to pay Hines Interests
Limited Partnership a monthly fee equal to three percent (3%) of the net
operating receipts collected in the preceding month.  The management
agreement between the Company and Hines Interests Limited Partnership may be
terminated by either party without cause at any time, upon at least thirty (30)
days written notice.


3


Investment
Objectives





The Company’s objectives are to (i)
improve and reposition the Property in the marketplace, (ii) obtain cash
available to pay dividends through rental receipts from operations of the
Property, (iii) have that cash increase over time as a result of rental rate
step increases in existing leases, (iv) have our rental revenue potentially
increase over time if rental rates increase for new leases, (v) provide
increased equity in the Property to our holders of Preferred Stock as a result
of appreciation in market value, and (vi) preserve and protect the capital
invested by the holders of our Preferred Stock.  We cannot be sure of
meeting our objectives.





Our policy is not to make loans to other
persons, not to invest in the securities of other issuers for the purpose of
exercising control, not to underwrite the securities of other issuers, not to
offer securities in exchange for property and not to purchase or otherwise
reacquire our securities.  These policies may be changed by our
directors without a vote of the holders of shares of our Preferred
Stock.





We have issued our shares of Preferred
Stock in the 2006 offering described above.  No additional shares of
Preferred Stock are authorized by our charter, and authorization of any increase
in the number of authorized shares or the creation of any new series or class of
stock would require the affirmative vote of the holders of 66.67% of the
outstanding shares of Preferred Stock.





We intend to dispose of the Property at
a time determined by our directors, which we currently expect to be within
approximately one to three years.  We do not intend to reinvest the
proceeds and would distribute cash proceeds to stockholders following such
disposition.  We also do not intend to list our shares of Preferred
Stock on an exchange and therefore do not expect any trading market to develop
in such shares.





We have the right to obtain a line of
credit as described below.





Revolving
Line of Credit





The Company may, without the consent of
any holder of shares of our Preferred Stock, obtain a revolving line of credit
of up to $29,000,000 on commercially reasonable terms to be used for capital
improvements or to pay operating expenses of the Property, if
needed.  Given the uncertainty surrounding the timing of insurance
reimbursements relating to Hurricane Ike, the amount of currently vacant space
that needs to be leased and the potential for increased tenant improvement
allowances and leasing commissions, on December 4, 2008, the Company entered
into a revolving line of credit with Franklin Street, which we refer to as the
Phoenix Revolver, for up to $15,000,000.  Advances under the Phoenix
Revolver bear interest at a rate equal to the 30-day LIBOR rate plus 300 basis
points and each advance thereunder requires a 50 basis point draw
fee.  The Phoenix Revolver matures on November 30, 2011 and is secured
by a mortgage on the Property.  The Company anticipates that any
advances made under the Phoenix Revolver will be repaid at maturity or earlier
from a long-term financing of the Property, cash flows from the Property or a
capital event.  On January 22, 2009, Franklin Street funded an advance
in the amount of $3,600,000, which advance was outstanding as of February 28,
2009.





Competition





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


4


The Property is an office building
located in Houston, Texas.  The Property may encounter substantial
competition from the other office buildings which are or may become available in
the general area in which the Property is located and which may be priced at
rental levels lower than those for space in the Property or which may otherwise
be more attractive to tenants.  In order to maintain or increase
rental revenues following the expiration of our leases, the Property must be
competitive, in regards to cost and amenities, with other buildings of similar
use near our location.  Some of our competitors may have significantly
more resources than we do and may be able to offer more attractive rental rates
or services.  On the other hand, some of our competitors may be
smaller or have lower fixed overhead costs, less cash or other resources that
make them willing or able to accept lower rents in order to maintain a certain
occupancy level.  If there is no currently significant existing
property competition, our competitors may decide to enter the market and build
new buildings to compete with our Property.  Our competition is not
only with other developers, but also with property users who choose to own their
building or a portion of the building in the form of an office condominium,
larger market forces (including the current disruptions in the U.S. economy
described above, changes in interest rates and tax treatment) that increase
competition among landlords for quality tenants and individual decisions beyond
our control.  Given that the Property is a multi-tenant office
building that is leased to a diverse group of tenants with staggered lease
expirations, we cannot predict which competitive factors will be relevant to
prospective future tenants at this time.





Since its completion in 1984, the
Property has competed within the office market in Houston,
Texas.  Management believes that at approximately twenty-five years in
age, the Property needed improvements in several important areas in order to
maintain or enhance its prominent position in the
marketplace.  Accordingly, management has provided for a cash reserve
in order to reposition the Property in the marketplace.  Please see
“Part I, Item 2. Properties” for additional information on the improvements to
the Property.





Employees





We had no employees as of December 31,
2008.





Available
Information





We aresubject to the informational
requirements of the Securities Exchange Act of 1934, and, in accordance
therewith, we file reports and other information with the Securities and
Exchange Commission (SEC).  This Annual Report on Form 10-K and other
reports and other information we file can be inspected and copied at the SEC
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Such
reports and other information may also be obtained from the web site that the
SEC maintains at http://www.sec.gov.  Further information about the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.





We will make available and voluntarily
provide, free of charge upon written request at the address on the cover of this
Annual Report on Form 10-K, a copy of our Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or
furnish such material to, the SEC.   We do not maintain a
website.





Item 1A.
            Risk
      Factors





Not applicable.





Item
      1B.
            Unresolved
      Staff Comments





Not applicable.


5


Item 2.
            Properties





Set
forth below is information regarding the Property as of December 31,
2008:





PercentDate
      of
            Approx.
            Leased
      as
            NumberProperty
      Location
            Purchase
            Square
      Feet
            of
      12/31/08
            of
      Tenants
            Name of Major
      Tenant3200
      Southwest Freeway
            02/22/06
            629,054
            68.9%
            39
            Permian
      Mud Service, Inc.Houston,
      TX 77027





Weacquired the Property on
February 22, 2006 through a limited partnership, all of whose equity interest is
owned, directly or indirectly, by the Company.  In the opinion of our management, the
Property is adequately covered by insurance.





The Property was completed in 1984 and
is a 34-story multi-tenant office building containing approximately 629,054
rentable square feet of space located on approximately 2.1 acres of land in
Houston, Texas.  The Property includes approximately 1,649 parking
spaces located inside a glass-enclosed fully-integrated attached eight-level
parking garage and approximately 17 on-site surface parking
spaces.  The Property also has the right to use approximately 190
additional uncovered off-site parking spaces at an adjacent property pursuant to
a lease that expires on February 28, 2019.





The Property underwent a remeasurement
of space in 1997.  This remeasurement concluded that the rentable
space in the Property should be increased from approximately 618,578 square feet
to approximately 629,054 square feet.  Holders of our Preferred Stock
should note that this Annual Report on Form 10-K makes reference to the newly
determined 629,054 square foot number in all of its general descriptions of the
Property.  Because lease payments are calculated on a per square foot
basis, the Company believes that the potential exists in the future to gain
greater amounts of rental income from leasing this extra
space.  However, the Company also believes that any such potential
gains will not come immediately as existing tenants and their respective leases
are based for the most part upon the previous 618,578 square foot
measurement.  Accordingly, holders of our Preferred Stock should note
that all tenant and lease descriptions set forth in this Annual Report on Form
10-K reflect the terms and conditions of their respective lease documents, which
in most cases are based on the 618,578 square foot measurement instead of the
629,054 square foot number.





Since
its completion in 1984, the Property has competed within the office market in
Houston, Texas.  Management believes that the Property is still
competitive with other office buildings, but that at approximately twenty-five
years in age, the Property needed improvements in several important areas in
order to maintain or enhance its prominent position in the
marketplace.  Accordingly, management has provided for a cash reserve
in order to reposition the Property in the marketplace.  The
improvements include, but are not limited to, remediation of the glass façade
and upgrades to the garage, ground floor lobby, ninth floor sky lobby and
terrace, streetscape and landscape.  If successful, management
believes that such a repositioning could increase the value of the Property and
lead to higher future rent and occupancy levels. To date, management has
completed common area improvements (upgrades to the ground floor lobby, ninth
floor sky lobby, streetscape and landscape) and improvements to the garage
facility, ninth floor sky terrace and many upgrades and enhancements to the
Property’s operating systems.  Through December 31, 2008, management
had incurred costs of approximately $10.5 million and anticipates that
approximately $0.6 million in additional funds will be required to complete
these specific improvements.  If conditions warrant, Management may
elect to make additional improvements at additional cost in order to further
enhance the Property.





On
September 13, 2008, as the repositioning of the Property was nearing completion
and leasing activity was gaining momentum, Hurricane Ike made a direct hit on
Houston’s core business areas inside the 610 Loop, causing significant property
damage.  The Property sustained significant water damage primarily
from approximately 50 shattered windows, roof damage and leaking
windows.  As of December 31, 2008, the Property had been substantially
restored to its pre-hurricane condition at an approximate cost of
$2,762,000.  Of this total cost, a hurricane/named-windstorm insurance
policy deductible of $250,000 was funded from operating funds of the Property,
$2,094,000 was funded by the insurance carrier and the balance of $418,000 was
paid by the insurance carrier in the first quarter of 2009.  Due to
delays caused by Hurricane Ike, the final phase of the façade remediation that
had been scheduled for completion by December 31, 2008 is now scheduled to be
substantially complete by March 31, 2009 (weather permitting).


6


Below is certain information with
respect to the Property’s tenants and leases.





Tenants





The Property is occupied by a diverse
group of tenants, including financial institutions, energy firms, law firms and
other professional service organizations.  On February 29, 2008, the
lease with the Property’s largest tenant, Washington Mutual Bank, or WAMU,
expired and WAMU vacated the majority of its leased
premises.  However, WAMU continued to occupy five floors, or
approximately 103,954 square feet (17%) of the Property’s rentable space,
pursuant to the holdover provisions of its lease until March 27,
2008.  Prior to the expiration of its lease on February 29, 2008, WAMU
leased approximately 239,339 square feet (39%) of the Property’s rentable
space.  As of December 31, 2008, the Property was approximately 68.9%
leased and Management is aggressively working to lease all vacant
space.  Management believes that any tenant that leases 10% or more of
the Property’s rentable space is material.  As of December 31, 2008,
Permian Mud Service, Inc., an energy-related firm d/b/a Champion Technologies,
leased approximately 77,654 square feet (12%) of the Property’s rentable space
through February 2018.  Other prominent additional tenants include
Phillips & Akers, a Texas professional corporation (law firm), which leases
approximately 26,939 square feet (4%) through November 2011 and Allen Boone
Humphries Robinson LLP, (law firm), which leases approximately 51,153 square
feet (8%) through July 2018.  Permian Mud Service, Inc., Phillips
& Akers, and Allen Boone Humphries Robinson LLP account for approximately
155,746 square feet (25%) of the rentable area of the Property.  Other
well-known tenants include Morgan Stanley, Sprint Communications and the United
States Army.  There are currently approximately 39 tenants leasing
office space at the Property





Permian Mud Service, Inc.
(d/b/a Champion Technologies)





Champion
Technologies is a specialty chemical company that offers innovative and
environmentally acceptable solutions to oil and gas production
problems.  Champion Technologies delivers technical solutions that
enhance productivity and improve well economics.  The information
contained in the preceding sentences is from Champion Technologies’ website and
has not been independently verified by us.  Additional information is
available on Permian Mud Service, Inc.’s website at http://www.permianmud.com or
Champion Technologies’ website at http://www.champ-tech.com.





Leases





Most of the Property’s leases are
structured on a full-service base year system, where tenants reimburse the
landlord for operating expenses above an initial base year.  However,
as of July 2007, for new leases, management initiated a conversion from
full-service base year leases to net leases, where tenants pay annual base net
rent, plus the tenant’s proportionate share of operating
expenses.  Normal operating expenses at the Property include, but are
not limited to, maintenance, repairs, real estate taxes, insurance, utilities
and management costs.  The landlord is generally obligated, at its
expense, to maintain and replace, if necessary, all structural components of the
Property, including walls, roof, slab and foundation.





Additional Operating
Data





Additional information regarding the
amount of the Property’s annual realty taxes and insurance can be found in the
Statements of Operations that are included with this Annual Report on Form
10-K.  Additional information regarding the Property’s Federal tax
basis, rate, method and life claimed for purposes of depreciation can be found
in the Notes to Financial Statements that are included with this Annual Report
on Form 10-K.





Item 3.
            Legal
      Proceedings





There are no material legal proceedings
to which the Company is a party. The Company from time to time may be involved
in lawsuits including, but not limited to, lawsuits relating to the real
property it owns for liability for slips and falls, damage to automobiles in the
parking garage, minor theft or similar matters.   The Company
expects that most of these suits will be covered by insurance, subject to
customary deductions. In addition, in the ordinary course of business, the
Company may become involved in litigation to collect rents or other income due
to it from tenants.





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





No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.




7


PART
II







Item 5.
            Market
      For Registrant’s Common Equity,  Related Stockholder Matters and
      Issuer Purchases of Equity Securities





There is no established public trading
market for the Company’s Common Stock or Preferred Stock.





As of March 4, 2009, Franklin Street was
the sole holder of record of the Common Stock and there were 783 holders of
record of the Preferred Stock.  This computation is based upon the
number of record holders reflected in our corporate records.  The
final sale of Preferred Stock occurred on September 22, 2006 and following that
date no further distributions have been or will be declared on the Common
Stock.  The last Common Stock distribution was declared on September
21, 2006 and was paid on September 29, 2006.





Set forth below are the distributions
made to Preferred Stockholders in respect of each quarter from the last two
fiscal years.  Distributions are determined based on the Company’s
Board of Directors’ review of cash available for distribution and distribution
requirements necessary for the Company to continue to qualify as a real estate
investment trust.  We cannot guarantee the future payment of dividends
or the amount of any such dividends.  See Note 4 of the Notes to
Consolidated Financial Statements for additional
information.





Distributionspaid toQuarter
                
                PreferredEnded
                
                StockholdersMarch 31,
    2007
                
                2,399,250June 30,
    2007
                
                1,899,450September 30,
      2007
                
                1,838,550December 31,
      2007
                
                1,818,600March 31,
    2008
                
                1,924,650June 30,
    2008
                
                1,580,250September 30,
      2008
                
                252,000December 31,
      2008
                
                -





The following schedule summarizes tax
components of the distributions paid for the years ended December
31:





(dollars in
      thousands)
                    
                    2008
                    
                    
                    2007Preferred
                    
                    
                    %
                    
                    
                    Preferred
                    
                    
                    %Ordinary
    income
                    
                    $
                    1,042
                    
                    
                    
                    28
                    %
                    
                    $
                    6,021
                    
                    
                    
                    76
                    %Return
      of Capital
                    
                    
                    2,715
                    
                    
                    
                    72
                    %
                    
                    
                    1,935
                    
                    
                    
                    24
                    %Total
                    
                    $
                    3,757
                    
                    
                    
                    100
                    %
                    
                    $
                    7,956
                    
                    
                    
                    100
                    %





The Company does not have an equity
compensation plan or any outstanding stock options or other securities
convertible into the Company’s Common Stock.




8


Item 6.
            Selected
      Financial Data





Not
applicable.





Item 7.
            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.  Historical
results and percentage relationships set forth in the consolidated financial
statements, including trends which might appear, should not be taken as
necessarily indicative of future operations.  The following discussion
and other parts of this Annual Report on Form 10-K may also contain
forward-looking statements based on current judgments and current knowledge of
management, which are subject to certain risks, trends and uncertainties that
could cause actual results to differ materially from those indicated in such
forward looking statements.  Accordingly, readers are cautioned not to
place undue reliance on forward-looking statements.  Investors are
cautioned that our forward-looking statements involve risks and uncertainty,
including without limitation, economic conditions in the United States and in
the market where we own the Property, continued disruptions in the debt markets,
risks related to completion of the ongoing improvements to the Property, risks
of a lessening of demand for the type of real estate owned by us, changes in
government regulations, and expenditures that cannot be anticipated such as
utility rate and usage increases, unanticipated repairs, additional staffing,
insurance increases and real estate tax valuation
reassessments.  Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.  We may not update
any of the forward-looking statements after the date this Annual Report on Form
10-K is filed to conform them to actual results or to changes in our
expectations that occur after such date, other than as required by
law.





Overview





We
operate in one business segment, which is real estate operations, and own a
single property.  Our real estate operations involve real estate
rental operations, leasing services and property management
services.  The main factor that affects our real estate operations is
the broad economic market conditions in the United States and, more
specifically, the economic conditions in Houston, Texas, the relevant
submarket.  These market conditions affect the occupancy levels and
the rent levels on both a national and local level.  We have no
influence on national or local market conditions.





Trends and
Uncertainties





Economic
Conditions





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





Real Estate
Operations





The Property is occupied by a diverse
group of tenants, including financial institutions, energy firms, law firms and
other professional service organizations.  On February 29, 2008, the
lease with the Property’s largest tenant, Washington Mutual Bank, or WAMU,
expired and WAMU vacated the majority of its leased
premises.  However, WAMU continued to occupy five floors, or
approximately 103,954 square feet (17%) of the Property’s rentable space,
pursuant to the holdover provisions of its lease until March 27,
2008.  Prior to the expiration of its lease on February 29, 2008, WAMU
leased approximately 239,339 square feet (39%) of the Property’s rentable
space.  As of December 31, 2008, the Property was approximately 68.9%
leased and Management is aggressively working to lease all vacant
space.  Management believes that any tenant that leases 10% or more of
the Property’s rentable space is material.  As of December 31, 2008,
Permian Mud Service, Inc., an energy-related firm d/b/a Champion Technologies,
leased approximately 77,654 square feet (12%) of the Property’s rentable space
through February 2018.  Other prominent additional tenants include
Phillips & Akers, a Texas professional corporation (law firm), which leases
approximately 26,939 square feet (4%) through November 2011 and Allen Boone
Humphries Robinson LLP, (law firm), which leases approximately 51,153 square
feet (8%) through July 2018.  Permian Mud Service, Inc., Phillips
& Akers, and Allen Boone Humphries Robinson LLP account for approximately
155,746 square feet (25%) of the rentable area of the Property.  Other
well-known tenants include Morgan Stanley, Sprint Communications and the United
States Army.  There are currently approximately 39 tenants leasing
office space at the Property.


9


Since its completion in 1984, the
Property has competed within the office market in Houston,
Texas.  Management believes that the Property is still competitive
with other office buildings, but that at approximately twenty-five years in age,
the Property needed improvements in several important areas in order to maintain
or enhance its prominent position in the marketplace.  Accordingly,
management has provided for a cash reserve in order to reposition the Property
in the marketplace.  The improvements include, but are not limited to,
remediation of the glass façade and upgrades to the garage, ground floor lobby,
ninth floor sky lobby and terrace, streetscape and landscape.  If
successful, management believes that such a repositioning could increase the
value of the Property and lead to higher future rent and occupancy levels. To
date, management has completed common area improvements (upgrades to the ground
floor lobby, ninth floor sky lobby, streetscape and landscape) and improvements
to the garage facility, ninth floor sky terrace and many upgrades and
enhancements to the Property’s operating systems.  Through December
31, 2008, management had incurred costs of approximately $10.5 million and
anticipates that approximately $0.6 million in additional funds will be required
to complete these specific improvements.  If conditions warrant,
Management may elect to make additional improvements at additional cost in order
to further enhance the Property.





On
September 13, 2008, as the repositioning of the Property was nearing completion
and leasing activity was gaining momentum, Hurricane Ike made a direct hit on
Houston’s core business areas inside the 610 Loop, causing significant property
damage.  The Property sustained significant water damage primarily
from approximately 50 shattered windows, roof damage and leaking
windows.  As of December 31, 2008, the Property had been substantially
restored to its pre-hurricane condition at an approximate cost of
$2,762,000.  Of this total cost, a hurricane/named-windstorm insurance
policy deductible of $250,000 was funded from operating funds of the Property,
$2,094,000 was funded by the insurance carrier and the balance of $418,000 was
paid by the insurance carrier in the first quarter of 2009.  Due to
delays caused by Hurricane Ike, the final phase of the façade remediation that
had been scheduled for completion by December 31, 2008 is now scheduled to be
substantially complete by March 31, 2009 (weather permitting).





It is difficult for management to
predict what will happen to occupancy and rents at our Property because the need
for space and the price tenants are willing to pay are tied to both the local
economy and to the larger trendsin the national economy, such as job
growth, interest rates, the availability of credit and corporate earnings, which
in turn are tied to even larger macroeconomic and political factors, such as
recessionary concerns, volatility in energy pricing and therisk of terrorism.  In addition
to the difficulty of predicting macroeconomic factors, it is difficult to
predict how our local market or tenants (existing and potential) will suffer or
benefit from changes in the larger economy.  In addition, because theProperty is in a single geographical
market, these macroeconomic trends may have a different effect on the Property
and on its tenants (existing and potential), some of which may operate on a
national level.  Although we cannot predict how long it will
taketo lease vacant space at the Property
or what the terms and conditions of any new leases will be, we expect to sign
new leases at current market rates which may be below the expiring
rates.Until the existing vacancy is re-leased, it is likely
that we will continue to see lower occupancy rates and, as a consequence, lower
dividend yields.





For
the twelve months ended December 31, 2008, we believe that vacancy rates for
buildings in the Houston office market remained relatively stable and rental
rates continued to increase, but at a slower pace than during
2007.  This trend may continue or worsen in the
future.  Local impact from Hurricane Ike, combined with continuing
turmoil in the global financial markets and substantially lower oil prices
burdening the oil and gas industry, a significant driver of the Houston economy,
has slowed the pace of leasing activity in the Houston market and will likely
prolong the time it takes to lease the vacant space at the Property.  
However, management believes that the repositioning of the Property in the
marketplace, combined with a dwindling supply of large blocks of available Class
A office space in the area, will continue to result in increased inquiries from
prospective tenants.  Management also believes that the position of
the Property within the city’s office market is strong, and management is
optimistic that the existing vacant space will ultimately be leased to new
tenants.





Given
the current economic downturn, the potential for any of our tenants to default
on its lease or to seek the protection of bankruptcy laws has
increased.  If any of our tenants defaults on its lease, we may
experience delays in enforcing our rights as a landlord and may incur
substantial costs in protecting our investment.  In addition, at any
time, a tenant may seek the protection of bankruptcy laws, which could result in
the rejection and termination of such tenant’s lease and thereby cause a
reduction in cash available for distribution to our
stockholders.  Bankruptcy or a material adverse change in the
financial condition of a material tenant would likely have a material adverse
effect on our results of operations.


10


Critical Accounting
Policies





We have certain critical accounting
policies that are subject to judgments and estimates by our management and
uncertainties of outcome that affect the application of these
policies.  We base our estimates on historical experience and on
various other assumptions we believe to be reasonable under the
circumstances.  On an ongoing basis, we evaluate our
estimates.  In the event estimates or assumptionsproveto be different from actual results,
adjustments are made in subsequent periods to reflect more current
information.  The accounting policies that we believe are most
critical to the understanding of our financial position and results of
operations, and that require significant management estimates and judgments, are
discussed below.





Critical accounting policies are those
that have the most impact on the reporting of our financial condition and
results of operations and those requiring significant judgments andestimates.  We believe that our
judgments and estimates are consistently applied and produce financial
information that fairly presents our results of
operations.   These policies affect our:





·
            our
      recognition of rental income and depreciation and amortization expense;
      and


·
            assessment
      of the carrying values and impairments of long-lived
    assets.





Depreciation
and Amortization





We compute depreciation expense using
the straight-line method over estimated useful lives of up to 39 years for the
building and improvements, and up to 15 years for personal
property.  The allocated cost of land is not
depreciated.The
value of above or below-market leases are amortized over the remaining
non-cancelable periods of the leases as an adjustment to rental
income.The
value of in-place leases, exclusive of the value of above-market and
below-market in-place leases, is also amortized over the remaining
non-cancelable periods of the respective leases.  If a lease is
terminated prior to its stated expiration, all unamortized amounts relating to
that lease would be written off.  Inappropriate allocation of
acquisition costs, or incorrect estimates of useful lives, could result in
depreciation and amortization expenses which do not appropriately reflect the
allocation of our capital expenditures over future periods, as is required by
generally accepted accounting principles.





Impairment





We periodically evaluate the Property
for impairment indicators.  These indicators may include declining
tenant occupancy, weak or declining tenant profitability, cash flow or
liquidity, our decision to dispose of an asset before the end of its estimated
useful life or legislative, economic or market changes that permanently reduce
the value of our investment.  If indicators of impairment are present,
we evaluate the carrying value of the Property by comparing it to its expected
future undiscounted cash flows.  If the sum of these expectedfuturecash flows is less than the carrying
value, we reduce the net carrying value of the Property to the present value of
these expected future cash flows. This analysis requires us to judge whether
indicators of impairment exist and to estimate likely future cash
flows.  If we misjudge or estimate incorrectly or if future tenant
profitability, market or industry factors differ from our expectations, we may
record an impairment charge which is inappropriate or fail to record a charge
when we should have done so, or the amount of such charges may be
inaccurate.





Lease
Classification





Each time we enter a new lease or
materially modify an existing lease we evaluate whether it is appropriately
classified as a capital lease or as an operating lease.  Theclassificationof a lease as capital or operating
affects the carrying value of a property, as well as our recognition of rental
payments as revenue.  These evaluations require us to make estimates
of, among other things, the remaining useful life and market value of a
property, discount rates and future cash flows.  Incorrect assumptions
or estimates may result in misclassification of our
leases.


11


Recent
Accounting Standards





In September 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value
Measurements”, and in February 2008 amended SFAS No. 157 with FASB Staff
Position SFAS 157-1 (“FSP FAS 157-1”), “Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13” and was amended later with FASB Staff Position SFAS 157-2, “
Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). SFAS 157 defines
fair value, establishes a framework for measuring fair value in GAAP and
provides for expanded disclosure about fair value measurements. SFAS 157 is
applied prospectively, including to all other accounting pronouncements that
require or permit fair value measurements. FSP FAS 157-1 amends SFAS 157 to
exclude from the scope of SFAS 157 certain leasing transactions accounted for
under Statement of Financial Accounting Standards No. 13, “Accounting for
Leases” for purposes of measurements and classifications. SFAS No. 157 and FSP
FAS 157-1 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years.  The adoption of SFAS No. 157 and FSP FAS 157-1 did not have a
material impact on the Company’s financial position, operations or cash
flows.  FSP FAS 157-2 amends SFAS 157 to defer the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis to fiscal years beginning after November 15,
2008.  The Company is currently assessing the potential impact that
the adoption of FSP FAS 157-2 will have on our financial position, results of
operations or cash flows.





In February 2007, the FASB issued
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB Statement No. 115”, which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The adoption of this standard did not have a material impact the Company’s
financial position, results of operations or cash flows.





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





Results of
Operations





The
Property is occupied by a diverse group of tenants, including financial
institutions, energy firms, law firms and other professional service
organizations.





Comparison
of the year ended December 31, 2008 to the year ended December 31,
2007.





Revenue





Total
revenue decreased $2.9 million, to $11.3 million for the year ended December 31,
2008, as compared to $14.2 million for the year ended December 31,
2007.  This decrease was primarily due to a decrease in revenue from
scheduled rents of $4.1 million resulting from the WAMU lease, which expired on
February 29, 2008, and a decrease in termination fees of $0.3 million, and was
partially offset by an increase in recovery expenses of approximately $1.5
million.





Expenses





Total expensesincreasedapproximately $0.1 million to $10.7
million for the year ended December 31, 2008 as compared to $10.6 million for
the year ended December 31, 2007.  This increase was attributable to a
$0.2 million increase in rental operating expenses, and an increase
of$0.1 in real estate taxes and insurance,
and was partially offset by a $0.2 million decrease in depreciation and
amortization.


12


Liquidity and Capital
Resources





Cash and cash equivalents decreased $9.1
million to $3.6 million at December 31, 2008 from $12.7 million at December 31,
2007.  The decrease was primarily attributable to $1.4 million
provided by operating activities, offset by $6.7 million used for investing
activities and $3.8 million used for financing activities.





For the years ended December 31, 2008 and 2007, our cash
provided by operating activities was $1.4 million and $7.5 million,
respectively, lower than distributions paid and were funded by our cash
balance.  We cannot predict if distributions will exceed cash provided
by operatingactivities in the future; however,
management believes that the existing cash and cash equivalents as of December
31, 2008 of $3.6 million and cash anticipated to be generated internally by
operations and borrowings will be sufficient to meet working capital requirements, distributions and
anticipated capital expenditures for at least the next 12
months.





Operating Activities





The cash provided by operating
activities of $1.4 million is primarily attributable to net income of
approximately $0.7 million, plus non-cash items of $3.1 million
consisting primarily of depreciation and amortization, and was partially offset
by uses arising from other current accounts of $1.0 million and in payments of
deferred leasing costs of $1.4 million.





Investing Activities





Cash used for investing activities for
the year ended December 31, 2008 of approximately $6.7 million was primarily for
capital expenditures.





Financing Activities





Cash used for financing activities for
the year ended December 31, 2008 of $3.8 millionwas attributable to distributions to
stockholders.





Revolving Line of
Credit





On December 4, 2008, we entered into a
revolving line of credit with Franklin Street, which we refer to as the Phoenix
Revolver, for up to $15,000,000.  Advances under the Phoenix Revolver
bear interest at a rate equal to the 30-day LIBOR rate plus 300 basis points and
each advance thereunder requires a 50 basis point draw fee.  The
Phoenix Revolver matures on November 30, 2011 and is secured by a mortgage on
the Property.  We anticipate that any advances made under the Phoenix
Revolver will be repaid at maturity or earlier from a long-term financing of the
Property, cash flows from the Property or a capital event.  As of
December 31, 2008, no amounts had been advanced under the Phoenix
Revolver.





Sources and Uses of
Funds





The Company’s principal demands on liquidity are
cash for operations, capital expenditures, and distributions to equity
holders.  As of December 31, 2008, we had approximately $5.3 million
in accrued liabilities and
no long-term debt.  In the near term, liquidity is generated by cash
from operations.





Contingencies





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





Related
Party Transactions





We have in the past engaged in and
currently engage in transactions with a related party, Franklin Street and its
subsidiaries FSP Investments LLC and FSP Property Management LLC, which we
collectively refer to as FSP.  We expect to continue to have related
party transactions with FSP in the form of management fees paid to FSP to manage
the Company on behalf of our stockholders.  FSP Property Management
LLC currently provides the Company with asset management and financial reporting
services.  The asset management agreement between the Company and FSP
Property Management LLC requires the Company to pay FSP Property Management LLC
a monthly fee equal to one percent (1%) of the gross revenues of the Property
for the corresponding month.  The asset management agreement between
the Company and FSP Property Management LLC may be terminated by either party
without cause at any time, upon at least thirty (30) days’ written
notice.  For the years ended December 31, 2008 and 2007, management
fees paid were $111,000 and $143,000, respectively.


13


On December 4, 2008, we entered into the
Phoenix Revolver with Franklin Street for up to $15,000,000.  Advances
under the Phoenix Revolver bear interest at a rate equal to the 30-day LIBOR
rate plus 300 basis points and each advance thereunder requires a 50 basis point
draw fee.  The Phoenix Revolver matures on November 30, 2011 and is
secured by a mortgage on the Property.  We anticipate that any
advances made under the Phoenix Revolver will be repaid at maturity or earlier
from a long-term financing of the Property, cash flows from the Property or a
capital event.  As of December 31, 2008, no amounts had been advanced
under the Phoenix Revolver.





Franklin Street is the sole holder of
the Company’s one share of Common Stock that is issued and
outstanding.    Subsequent to the completion of the private
placement of the Preferred Stock in September 2006, Franklin Street has not been
entitled to share in any earnings or any dividend related to the Common Stock of
the Company.





Rental
Income Commitments





Our
commercial real estate operations consist of the leasing of the
Property.  Approximate future minimum rental income under
non-cancelable operating leases as of December 31, 2008 is:





Year
              Amount
                (in thousands)2009
              $              5,3022010
              4,9362011
              4,7252012
              3,8902013
              2,781Thereafter
              11,157$            32,791





Off
Balance Sheet Arrangements





The
Company is not party to any off balance sheet arrangements.  The
Company is a party to management, construction management and leasing agreements
with an unaffiliated third party management company, Hines Interests Limited
Partnership, to provide property management, construction management and leasing
services, and is party to an asset management agreement with an affiliate, FSP
Property Management LLC, to provide asset management and financial reporting
services, all of which agreements may be terminated by either party without
cause at any time, upon at least thirty (30) days’ written
notice.  The asset management agreement between the Company and FSP
Property Management LLC requires the Company to pay FSP Property Management LLC
a monthly fee equal to one percent (1%) of the gross revenues of the Property
for the corresponding month. Since its completion in 1984, the Property has
competed within the office market in Houston, Texas.  Management
believes that the Property is still competitive with other office buildings, but
that at approximately twenty-five years in age, the Property needed improvements
in several important areas in order to maintain or enhance its prominent
position in the marketplace.  Accordingly, management has provided for
a cash reserve in order to reposition the Property in the
marketplace.  The improvements include, but are not limited to,
remediation of the glass façade and upgrades to the garage, ground floor lobby,
ninth floor sky lobby and terrace, streetscape and landscape.  If
successful, management believes that such a repositioning could increase the
value of the Property and lead to higher future rent and occupancy levels. To
date, management has completed common area improvements (upgrades to the ground
floor lobby, ninth floor sky lobby, streetscape and landscape) and improvements
to the garage facility, ninth floor sky terrace and many upgrades and
enhancements to the Property’s operating systems.  Through December
31, 2008, management had incurred costs of approximately $10.5 million and
anticipates that approximately $0.6 million in additional funds will be required
to complete these specific improvements.  If conditions warrant,
Management may elect to make additional improvements at additional cost in order
to further enhance the Property.


14


Item
7A.                Quantitative and Qualitative
Disclosure About Market Risk





Not applicable.





Item
8.                   Financial
Statements and Supplementary Data




The
information required by this item is included elsewhere herein and incorporated
herein by reference.  Reference is made to the Index to Consolidated
Financial Statements in Item 15 of Part IV.




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




Not applicable.




Item 9A.
            Controls
      and Procedures




Not applicable.





Item
9A(T).           Controls and
Procedures





Disclosure
Controls and Procedures




Our management, with the participation
of our principal executive officer and principal financial officer, evaluated
the effectiveness of our disclosure controls and procedures as of December 31,
2008. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the
Exchange Act, means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.  Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.  Based on the evaluation of our disclosure controls and
procedures as of December 31, 2008, our principal executive officer and
principal financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance
level.





Management’s Annual Report on Internal
Control Over Financial Reporting





The management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting.  Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange
Act of 1934 as a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officer and effected by the
Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:





•           Pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company;





•           Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company;
and





•           Provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial
statements.





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.


15





The Company’s management assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008.  In making this assessment, the Company’s
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.





Based on our assessment, management
concluded that, as of December 31, 2008, the Company’s internal control over
financial reporting is effective based on those criteria.





This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report. This report shall not be deemed to be filed for the
purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section.





Changes
in Internal Control Over Financial Reporting




No
change in our internal control over financial reporting occurred during the year
ended December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





Item
9B.                      Other
Information


16


PART
III




Item 10.
            Directors,
      Executive Officers and Corporate
  Governance




Directors
and Executive Officers




Information regarding the executive
officers and directors of the Company as of February 28, 2009 is set forth
below:





George J. Carter, age 60, is President
and a director of the Company.  Since 1996 he has also been President
and Chief Executive Officer and a director of Franklin Street and is responsible
for all aspects of the business of Franklin Street and its affiliates, with
special emphasis on the evaluation, acquisition and structuring of real estate
investments.  From 1992 through 1996 he was President of Boston
Financial Securities, Inc. (“Boston Financial”).  Prior to joining
Boston Financial, Mr. Carter was owner and developer of Gloucester Dry Dock, a
commercial shipyard in Gloucester, Massachusetts.  From 1979 to 1988,
Mr. Carter served as Managing Director in charge of marketing of First Winthrop
Corporation, a national real estate and investment banking firm headquartered in
Boston, Massachusetts.  Prior to that, he held a number of positions
in the brokerage industry including those with Merrill Lynch & Co. and Loeb
Rhodes & Co.  Mr. Carter is a graduate of the University of Miami
(B.S.).  Mr. Carter is a FINRA General Securities Principal (Series
24) and holds a FINRA Series 7 general securities license.





Barbara J. Fournier, age 53, is the Vice
President, Chief Operating Officer, Treasurer and Secretary and a director of
the Company.  Since 1996, she has also been Chief Operating Officer,
Treasurer and Secretary and a director of Franklin Street.  In 2008,
Ms. Fournier became an Executive Vice President of Franklin
Street.  Ms. Fournier has as her primary responsibility, together with
Mr. Carter, the management of all operating business affairs of Franklin Street
and its affiliates.  From 1993 through 1996, she was Director of
Operations for the private placement division of Boston
Financial.  Prior to joining Boston Financial, Ms. Fournier served as
Director of Operations for Schuparra Securities Corp. and as the Sales
Administrator for Weston Financial Group.  From 1979 through 1986, Ms.
Fournier worked at First Winthrop Corporation in administrative and management
capacities, including Office Manager, Securities Operations and Partnership
Administration.  Ms. Fournier attended Northeastern University and the
New York Institute of Finance.  Ms. Fournier is a FINRA General
Securities Principal (Series 24).  She also holds other FINRA
supervisory licenses including Series 4 and Series 53, and a FINRA Series 7
general securities license.





William W. Gribbell, age 49, is an
Executive Vice President and a director of the Company.  Since 1996,
he has been an Executive Vice President of Franklin Street and has as his
primary responsibility the direct equity placement of Franklin Street-sponsored
investment programs.  From 1993 through 1996 he was an executive
officer of Boston Financial.  From 1989 to 1993, Mr. Gribbell worked
at Winthrop Financial Associates.  Mr. Gribbell is a graduate of
Boston University (B.A.).  Mr. Gribbell holds a FINRA Series 7 general
securities license.





R. Scott MacPhee, age 51, is an
Executive Vice President and a director of the Company.  Since 1996,
he has been an Executive Vice President of Franklin Street and has as his
primary responsibility the direct equity placement of Franklin Street-sponsored
investment programs.  From 1993 through 1996 he was an executive
officer of Boston Financial.  From 1985 to 1993, Mr. MacPhee worked at
Winthrop Financial Associates.  Mr. MacPhee attended American
International College.  Mr. MacPhee holds a FINRA Series 7 general
securities license.





Janet Prier Notopoulos, age 61, is a
Vice President and a director of the Company.  In addition, she is
President of FSP Property Management LLC and an Executive Vice President and a
director of Franklin Street and has as her primary responsibility the oversight
of the management of the real estate assets of Franklin Street and its
affiliates.  Prior to joining Franklin Street in 1997, Ms. Notopoulos
was a real estate and marketing consultant for various clients.  From
1975 to 1983, she was Vice President of North Coast Properties, Inc., a Boston
real estate investment company.  Between 1969 and 1973, she was a real
estate paralegal at Goodwin, Procter & Hoar.  Ms. Notopoulos is a
graduate of Wellesley College (B.A.) and the Harvard School of Business
Administration (M.B.A).





Each of our directors holds office from
the time of his or her election until the next annual meeting and until a
successor is elected and qualified, or until such director’s earlier death,
resignation or removal.  Each of the above persons has been associated
with us since our inception in 2005.  Each of them is an employee of
FSP Investments, a wholly-owned subsidiary of Franklin Street, which is the sole
owner of the Common Stock.  Each of our officers serves in that
capacity at the request of Franklin Street.


17


Mr. Carter, Ms. Fournier, Mr. MacPhee,
Mr. Gribbell and Ms. Notopoulos also serve as directors of FSP Galleria North
Corp., FSP 50 South Tenth Street Corp. and FSP 303 East Wacker Drive Corp.,
which are public reporting companies sponsored by Franklin Street.  In
their capacities as directors of FSP Galleria North Corp., FSP 50 South Tenth
Street Corp. and FSP 303 East Wacker Drive Corp., Mr. Carter, Ms. Fournier, Mr.
MacPhee, Mr. Gribbell and Ms. Notopoulos each holds office from the time of his
or her election until the next annual meeting and until a successor is elected
and qualified, or until such director's earlier death, resignation or
removal.





Sections
16(a) Beneficial Ownership Reporting Compliance





Based
solely on its review of copies of reports filed by the directors and executive
officers of the Company pursuant to Section 16(a) of the Exchange Act, the
Company believes that during 2008 all filings required to be made by its
reporting persons were timely made in accordance with the requirements of the
Exchange Act.





Corporate
Governance





Our
board of directors does not have standing compensation, nominating and corporate
governance or audit committees. Our officers are compensated by Franklin Street
in connection with their employment by Franklin Street and serve as our
executive officers at Franklin Street’s request.  Our directors are
officers of Franklin Street and we do not consider it necessary to establish a
nominating committee or a policy for reviewing nominees recommended by
stockholders.  We do not have a director who qualifies as an “audit
committee financial expert” under the regulations of the SEC.  We have
not adopted a code of business conduct or code of ethics for our executive
officers because all of our officers are officers of Franklin Street and are
governed by Franklin Street’s code of business conduct and ethics.





Item 11.
            Executive
      Compensation





Each of the executive officers of the
Company is compensated by Franklin Street in connection with his or her
employment by Franklin Street and serves as an executive officer of the Company
at Franklin Street’s request without compensation.Franklin Street is subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
files reports and other information with the Securities and Exchange Commission
(SEC).  Franklin Street’s common stock is traded on the NYSE Alternext
US under the symbol “FSP”.





18


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





The following tables set forth the
beneficial ownership of the Company’s Common Stock and Preferred Stock as of
February 28, 2009 by each holder who beneficially owns more than five percent of
the Company’s Common Stock or Preferred Stock, by each director, by each of the
Company’s executive officers and by all current directors and executive officers
as a group.  To the Company’s knowledge, no person or group, other
than as set forth below, beneficially owns more than five percent of the
Company’s Common Stock or Preferred Stock.





Common Stock
                Number of
      Shares
                
                Percentage ofBeneficially
                
                OutstandingName of Holder
                Owned
                
                Common StockFranklin Street Properties Corp.
      (1)
                1
                
                100%George J.
      Carter(2)
                -
                
                0%Barbara J.
      Fournier(2)
                -
                
                0%R. Scott
      MacPhee(2)
                -
                
                0%William W.
      Gribbell(2)
                -
                
                0%Janet P.
      Notopoulos(2)
                -
                
                0%All Directors and Executive
      Officers as a Group(consisting of 5
      persons)(2)
                -
                
                0%










Preferred
Stock
              Number of
      Shares
              
              Percentage ofBeneficially
              
              OutstandingName of
    Holder
              Owned
              
              Preferred
    StockFranklin Street Properties Corp.
      (1)
              48
              
              4.6%George J.
      Carter(2)
              -
              
              0%Barbara J.
      Fournier(2)
              -
              
              0%R. Scott
      MacPhee(2)
              -
              
              0%William W.
      Gribbell(2)(3)
              0.25
              
              0.02%Janet P.
      Notopoulos(2)
              -
              
              0%Edward Darman Company Limited
      Partnership(4)
              98
              
              9.33%All Directors and Executive
      Officers as a Group(consisting of 5
      persons)
              0.25
              
              0.02%







(1)
            The address of Franklin Street
      Properties Corp. is401 Edgewater Place, Suite 200, Wakefield,
      Massachusetts 01880-6210.




(2)
            Each of the Executive Officers is
      employed by FSP Investments LLC, a subsidiary of Franklin Street
      Properties Corp.  Franklin Street Properties Corp. owns 100% of
      the issued and outstanding Common Stock of the
    Company.




19


(3)
            The fractional share is held by
      Mr. Gribbell’s spouse.




(4)
            Edward Darman is the President and
      Chief Executive Officer of Edward Darman Company Limited Partnership, or
      the Partnership, and, in such capacity, has sole voting and dispositive
      power over the shares of Preferred Stock held by the
      Partnership.  The address of the Partnership is c/o Saxon Real
      Estate Partners, 200 Oak Point Drive, Middleboro, Massachusetts
      02346-1325.





Equity Compensation Plan
Information





The
Company does not have any equity compensation plans.





Item
      13.
            Certain Relationships
      and Related Transactions and Director
  Independence





Certain Relationships and Related
Transactions





Messrs. Carter, MacPhee and Gribbell and
Mses. Fournier and Notopoulos, each of whom is an executive officer of the
Company, are executive officers of Franklin Street and, except for Messrs.
MacPhee and Gribbell, are directors of Franklin Street.  None of such
persons received any remuneration from the Company for their
services.





We have in the past engaged in and
currently engage in transactions with a related party, Franklin Street and its
subsidiaries FSP Investments LLC and FSP Property Management LLC, which we
collectively refer to as “FSP”.  We expect to continue to have related
party transactions with FSP in the form of management fees paid to FSP to manage
the Company on behalf of our stockholders.  FSP Property Management
LLC currently provides the Company with asset management and financial reporting
services.  The asset management agreement between the Company and FSP
Property Management LLC requires the Company to pay FSP Property Management LLC
a monthly fee equal to one percent (1%) of the gross revenues of the Property
for the corresponding month.  The asset management agreement between
the Company and FSP Property Management LLC may be terminated by either party
without cause at any time, upon at least thirty (30) days’ written
notice.  For the years ended December 31, 2008 and 2007, management
fees paid were $111,000 and $143,000, respectively.





On December 4, 2008, we entered into the
Phoenix Revolver with Franklin Street for up to $15,000,000.  Advances
under the Phoenix Revolver bear interest at a rate equal to the 30-day LIBOR
rate plus 300 basis points and each advance thereunder requires a 50 basis point
draw fee.  The Phoenix Revolver matures on November 30, 2011 and is
secured by a mortgage on the Property.  We anticipate that any
advances made under the Phoenix Revolver will be repaid at maturity or earlier
from a long-term financing of the Property, cash flows from the Property or a
capital event.  As of December 31, 2008, no amounts had been advanced
under the Phoenix Revolver.





Franklin Street is the sole holder of
the Company’s one share of Common Stock that is issued and outstanding.
Subsequent to the completion of the private placement of the Preferred Stock in
September 2006, Franklin Street has not been entitled to share in any earnings
or any dividend related to the Common Stock of the Company.





Director
Independence





Our securities are not listed on a
national securities exchange or in an inter-dealer quotation
system.  None of our directors qualifies as “independent” under the
standards of the NYSE Alternext US, where Franklin Street is
listed.





Item 14.
            Principal
      Accountant Fees and Services





Independent
Auditor Fees and Other Matters





The following tables summarize the
aggregate fees billed by the Company’s independent registered public accounting
firm, Braver PC, for audit services for each of the last two fiscal years and
for other services rendered to the Company in each of the last two fiscal
years.




20




Fee
      Category
                    
                    2008
                    
                    
                    2007Audit Fees
    (1)
                    
                    $
                    61,000
                    
                    
                    $
                    61,000Audit-Related Fees
      (2)Tax Fees
(3)
                    
                    
                    5,000
                    
                    
                    
                    3,000All Other Fees
      (4)Total
      Fees
                    
                    $
                    66,000
                    
                    
                    $
                    64,000





(1)
            Audit fees consist of fees for the
      audit of our financial statements, the review of the interim financial
      statements included in our quarterly reports on Form 10-Q, and other
      professional services provided in connection with statutory and regulatory
      filings or engagements.




(2)
            Audit-related fees consist of fees
      for assurance and related services that are reasonably related to the
      performance of the audit and the review of our financial statements and
      which are not reported under “Audit
  Fees”.




(3)
            Tax fees consist of fees for tax
      compliance, tax advice and tax planning services. Tax compliance services,
      which relate to the preparation of tax returns, claims for refunds and tax
      payment-planning services, accounted for $5,000 and $3,000 of the total
      tax fees incurred in 2008 and 2007,
  respectively.




(4)
            The Company was not billed by its
      independent registered public accounting firm in 2008 or 2007 for any
      other fees.





Pre-Approval
Policy and Procedures







The
Company has not adopted policies and procedures relating to the pre-approval of
audit and non-audit services that are to be performed by the Company’s
independent registered public accounting firm.




21


PART IV





Item
15.                      Exhibits and Financial
Statement Schedules





(a)           The following documents are filed as
part of this report.





1.
            Financial Statements: The
      Financial Statements listed in the accompanying Index to Consolidated
      Financial Statements are filed as part of this Annual Report on Form
      10-K.





2.
            Financial Statement Schedule: The
      Financial Statement Schedule listed on the accompanying Index to
      Consolidated Financial Statements is filed as part of this Annual Report
      on Form 10-K.





3.
            Exhibits: The Exhibits listed in
      the Exhibit Index are filed as part of this Annual Report on Form
      10-K.








22


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf as
of March 12, 2009 by the undersigned, thereunto duly authorized.





FSP
      PHOENIX TOWER CORP.By:
                /s/ George J.
      CarterGeorge
      J. CarterPresident





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









Signature
                Title
                Date/s/ George J.
      Carter
                  George
      J. Carter
                President
      and Director
                  (Principal
      Executive Officer)
                March
      12, 2009/s/ Barbara J.
      Fournier
                  Barbara
      J. Fournier
                Vice
      President, Chief Operating Officer,
                  Treasurer,
      Secretary and Director
                  (Principal
      Financial Officer and
                  Principal
      Accounting Officer)
                March
      12, 2009/s/ R. Scott
      MacPhee
                  R.
      Scott MacPhee
                Director,
      Executive Vice President
                March
      12, 2009/s/ William W.
      Gribbell
                  William
      W. Gribbell
                Director,
      Executive Vice President
                March
      12, 2009/s/ Janet P.
      Notopoulos
                  Janet
      P. Notopoulos
                Director,
      Vice President
                March
      12, 2009







23


EXHIBIT
INDEX




Exhibit
      No.
              Description3.1
              Amended
      and Restated Certificate of Incorporation, incorporated herein by
      reference to Exhibit 3.1 to FSP Phoenix Tower Corp.’s Registration
      Statement on Form 10, as amended (File No. 000-52559)3.2
              By-Laws,
      incorporated herein by reference to Exhibit 3.2 to FSP Phoenix Tower
      Corp.’s Registration Statement on Form 10, as amended (File No.
      000-52559)10.1
              Permian
      Mud Service, Inc. d/b/a Champion Technologies Lease, as amended,
      incorporated herein by reference to Exhibit 10.4 to FSP Phoenix Tower
      Corp.’s Annual Report on Form 10-K for the year ended December 31, 2008
      (File No. 000-52559)10.2
              Asset
      Management Agreement, incorporated herein by reference to Exhibit 10.2 to
      FSP Phoenix Tower Corp.’s Registration Statement on Form 10, as amended
      (File No. 000-52559)10.3
              Voting
      Agreement, incorporated herein by reference to Exhibit 10.3 to FSP Phoenix
      Tower Corp.’s Registration Statement on Form 10, as amended (File No.
      000-52559)10.4
              Secured
      Promissory Note (Revolving), dated December 4, 2008, from FSP Phoenix
      Tower Limited Partnership in favor of Franklin Street Properties Corp.,
      incorporated herein by reference to Exhibit 10.1 to FSP Phoenix Tower
      Corp.’s Current Report on Form 8-K filed on December 9, 2008 (File No.
      000-52559)10.5
              Deed
      of Trust, Assignment of Rents and Leases, Security Agreement and Fixture
      Filing, dated December 4, 2008, from FSP Phoenix Tower Limited Partnership
      in favor of Franklin Street Properties Corp., incorporated herein by
      reference to Exhibit 10.2 to FSP Phoenix Tower Corp.’s Current Report on
      Form 8-K filed on December 9, 2008 (File No. 000-52559)21.1
              Subsidiaries
      of the Registrant, incorporated herein by reference to Exhibit 21.1 to FSP
      Phoenix Tower Corp.’s Registration Statement on Form 10, as amended (File
      No. 000-52559)31.1
              Certification
      of FSP Phoenix Tower Corp.'s principal executive officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
              Certification
      of FSP Phoenix Tower Corp.'s principal financial officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
              Certification
      of FSP Phoenix Tower Corp.'s principal executive officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              Certification
      of FSP Phoenix Tower Corp.'s principal financial officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002


24


FSP
Phoenix Tower Corp.


Index
to Consolidated Financial Statements





Table
of Contents





PageConsolidated
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
            F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2007
            F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2008 and 2007
            F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2008
            F-6Notes
      to Consolidated Financial Statements
            F-7Financial
      Statement Schedule – Schedule III
            F-16


F-1


[LETTERHEAD
OF BRAVER PC]








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To
the Stockholders


FSP
Phoenix Tower Corp.


Wakefield,
Massachusetts








We
have audited the accompanying consolidated balance sheets of FSP Phoenix Tower
Corp. as of December 31, 2008 and 2007, and the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for the years then
ended.  Our audits also included the financial statement schedule
listed in the Index at Item 15(a)(2).  These consolidated financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.





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





In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FSP Phoenix Tower
Corp. as of December 31, 2008 and 2007, and the results of its operations and
its cash flows for the years then ended  in conformity with accounting
principles generally accepted in the United States of America.  Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.








/s/
Braver PC


Newton,
Massachusetts


March
12, 2009


F-2


FSP
Phoenix Tower Corp.


Consolidated
Balance Sheets





December
      31,(in
      thousands, except share and par value amounts)
                      
                      2008
                      
                      
                      2007Assets:Real
      estate investments, at cost:Land
                      
                      $
                      3,300
                      
                      
                      $
                      3,300Buildings
      and improvements
                      
                      
                      81,201
                      
                      
                      
                      74,856Furniture
      and fixtures
                      
                      
                      187
                      
                      
                      
                      4284,688
                      
                      
                      
                      78,198Less
      accumulated depreciation
                      
                      
                      5,518
                      
                      
                      
                      3,311Real
      estate investments, net
                      
                      
                      79,170
                      
                      
                      
                      74,887Acquired
      real estate leases, net of accumulated amortization of $1,177 and
      $2,286
                      
                      
                      1,430
                      
                      
                      
                      2,011Acquired
      favorable real estate leases, net of accumulated amortization of $229 and
      $1,031
                      
                      
                      345
                      
                      
                      
                      512Cash
      and cash equivalents
                      
                      
                      3,602
                      
                      
                      
                      12,718Tenant
      rent receivable less allowance for doubtful accounts of $6 and $36,
      respectively
                      
                      
                      657
                      
                      
                      
                      535Step
      rent receivable
                      
                      
                      1,210
                      
                      
                      
                      569Deferred
      leasing costs, net of accumulated amortization of $311 and
    $98
                      
                      
                      2,096
                      
                      
                      
                      967Prepaid
      expenses and other assets
                      
                      
                      472
                      
                      
                      
                      68Total
      assets
                      
                      $
                      88,982
                      
                      
                      $
                      92,267Liabilities
      and Stockholders’ Equity:Liabilities:Accounts
      payable and accrued expenses
                      
                      $
                      4,999
                      
                      
                      $
                      5,122Tenant
      security deposits
                      
                      
                      237
                      
                      
                      
                      213Acquired
      unfavorable real estate leases, net of accumulated amortization of $266
      and $221
                      
                      
                      489
                      
                      
                      
                      590Total
      liabilities
                      
                      
                      5,725
                      
                      
                      
                      5,925Commitments
      and Contingencies:
                      
                      
                      -
                      
                      
                      
                      -Stockholders’
      Equity:Preferred
      Stock, $.01 par value, 1,050 shares authorized, 1,050 issued and
      outstanding at December 31, 2008 and 2007, aggregate liquidation
      preference $105,000
                      
                      
                      -
                      
                      
                      
                      -Common
      Stock, $.01 par value, 1 share authorized, issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Additional
      paid-in capital
                      
                      
                      96,188
                      
                      
                      
                      96,188Retained
      earnings (deficit) and distributions in excess of earnings
                      
                      
                      (12,931
                      )
                      
                      
                      (9,846
                      )Total
      Stockholders’ Equity
                      
                      
                      83,257
                      
                      
                      
                      86,342Total
      Liabilities and Stockholders’ Equity
                      
                      $
                      88,982
                      
                      
                      $
                      92,267See
      accompanying notes to financial statements.


F-3





FSP
Phoenix Tower Corp.


Consolidated
Statements of Operations





For
      the Year Ended December 31,(in
      thousands, except per share and share amounts)
                    
                    2008
                    
                    
                    2007Revenues:Rental
                    
                    $
                    11,254
                    
                    
                    $
                    14,219Total
      revenue
                    
                    
                    11,254
                    
                    
                    
                    14,219Expenses:Rental
      operating expenses
                    
                    
                    5,697
                    
                    
                    
                    5,461Real
      estate taxes and insurance
                    
                    
                    2,030
                    
                    
                    
                    1,885Depreciation
      and amortization
                    
                    
                    3,022
                    
                    
                    
                    3,278Total
      expenses
                    
                    
                    10,749
                    
                    
                    
                    10,624Net
      income before interest income
                    
                    
                    505
                    
                    
                    
                    3,595Interest
      income
                    
                    
                    167
                    
                    
                    
                    773Net
      income
                    
                    
                    672
                    
                    
                    
                    4,368Distributions
      paid to common stockholder
                    
                    
                    -
                    
                    
                    
                    -Net
      income attributable to preferred stockholders
                    
                    $
                    672
                    
                    
                    $
                    4,368Weighted
      average number of preferred shares outstanding, basic and
      diluted
                    
                    
                    1,050
                    
                    
                    
                    1,050Net
      income per preferred share, basic and diluted
                    
                    $
                    640
                    
                    
                    $
                    4,160See
      accompanying notes to financial statements.


F-4


FSP
Phoenix Tower Corp.


Consolidated
Statements of Changes in Stockholders’ Equity


For
the Years ended December 31, 2007 and 2008





(in
      thousands, except per share amounts)
                  
                  Preferred
                    Stock
                  
                  
                  Common
                    Stock
                  
                  
                  Additional
                    Paid-in
                    Capital
                  
                  
                  Retained Earnings
                    (Deficit)
      and
                    Distributions
                    in
      Excess of
                    Earnings
                  
                  
                  Total
                    Stockholders'
                    EquityBalance,
      January 1, 2007
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  96,188
                  
                  
                  $
                  (6,258
                  )
                  
                  $
                  89,930Distributions
      - preferred stockholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (7,956
                  )
                  
                  
                  (7,956
                  )or
      $7,577 per preferred shareNet
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,368
                  
                  
                  
                  4,368Balance,
      December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  96,188
                  
                  
                  
                  (9,846
                  )
                  
                  
                  86,342Distributions
      - preferred stockholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,757
                  )
                  
                  
                  (3,757
                  )or
      $3,578 per preferred shareNet
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  672
                  
                  
                  
                  672Balance,
      December 31, 2008
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  96,188
                  
                  
                  $
                  (12,931
                  )
                  
                  $
                  83,257See
      accompanying notes to financial statements.





F-5


FSP
Phoenix Tower Corp.


Consolidated
Statements of Cash Flows





For
      the Year Ended December 31,(in
      thousands)
                    
                    2008
                    
                    
                    2007Cash
      flows from operating activities:Net
      income
                    
                    $
                    672
                    
                    
                    $
                    4,368Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                    
                    
                    3,022
                    
                    
                    
                    3,278Amortization
      of favorable real estate leases
                    
                    
                    167
                    
                    
                    
                    574Amortization
      of unfavorable real estate leases
                    
                    
                    (101
                    )
                    
                    
                    (121
                    )Bad
      debt expense
                    
                    
                    (30
                    )
                    
                    
                    36Changes
      in operating assets and liabilities:Tenant
      rent receivable
                    
                    
                    (92
                    )
                    
                    
                    81Step
      rent receivable
                    
                    
                    (641
                    )
                    
                    
                    (230
                    )Prepaid
      expenses and other assets
                    
                    
                    (404
                    )
                    
                    
                    64Accounts
      payable and accrued expenses
                    
                    
                    99
                    
                    
                    
                    286Tenant
      security deposits
                    
                    
                    24
                    
                    
                    
                    68Payment
      of deferred leasing costs
                    
                    
                    (1,363
                    )
                    
                    
                    (876
                    )Net
      cash provided by operating activities
                    
                    
                    1,353
                    
                    
                    
                    7,528Cash
      flows from investing activities:Purchase
      of real estate assets
                    
                    
                    (6,712
                    )
                    
                    
                    (5,690
                    )Net
      cash used for investing activities
                    
                    
                    (6,712
                    )
                    
                    
                    (5,690
                    )Cash
      flows from financing activities:Distributions
      to stockholders
                    
                    
                    (3,757
                    )
                    
                    
                    (7,956
                    )Net
      cash used for financing activities
                    
                    
                    (3,757
                    )
                    
                    
                    (7,956
                    )Net
      decrease in cash and cash equivalents
                    
                    
                    (9,116
                    )
                    
                    
                    (6,118
                    )Cash
      and cash equivalents, beginning of year
                    
                    
                    12,718
                    
                    
                    
                    18,836Cash
      and cash equivalents, end of year
                    
                    $
                    3,602
                    
                    
                    $
                    12,718Supplemental disclosure of cash
      flow information:Disclosure
      of non-cash investing activities:Accrued
      costs for purchase of real estate assets
                    
                    $
                    1,634
                    
                    
                    $
                    1,856See
      accompanying notes to financial statements.





F-6


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements




1.
            Organization





FSP Phoenix Tower Corp. (the “Company”)
was organized on December 20, 2005 as a corporation under the laws of the State
of Delaware to purchase, own and operate, improve, and reposition a thirty-four
story mulit-tenant office building containing approximately 629,054 rentable
square feet of space located on approximately 2.1 acres of land in Houston,
Texas (the “Property”).  The Company acquired the Property and
commenced operations on February 22, 2006.   Franklin Street
Properties Corp. (“Franklin Street”) (NYSE Alternext US: FSP) holds the sole
share of the Company’s common stock, $.01 par value per share (the “Common
Stock”).  Between March 2006 and September 2006, FSP Investments LLC
(member, FINRA and SIPC), a wholly-owned subsidiary of Franklin Street,
completed the sale on a best efforts basis of 1,050 shares of preferred stock,
$.01 par value per share (the “Preferred Stock”) in the Company.  FSP
Investments LLC sold the Preferred Stock in a private placement offering to
“accredited investors” within the meaning of Regulation D under the Securities
Act of 1933.





All references to the Company refer to
FSP Phoenix Tower Corp. and its consolidated subsidiaries, collectively, unless
the context otherwise requires.





2.
            Summary
      of Significant Accounting Policies





BASIS OF
PRESENTATION





The accompanying consolidated financial
statements include all of the accounts of the Company and its wholly-ownedsubsidiaries.  All significant
intercompany accounts and transactions have been eliminated in
consolidation.





ESTIMATES
AND ASSUMPTIONS





The
Company prepares its consolidated financial statements and related notes in
conformity with accounting principles generally accepted in the United States of
America (“GAAP”).  These principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Actual results could differ from those
estimates.





REAL ESTATE AND
DEPRECIATION




Real estate assets are stated at the
lower of cost or fair value, as appropriate, less accumulated
depreciation.




Costs related to property acquisition
and improvements are capitalized.  Typical capital items include new
roofs, site improvements, various exterior building improvements and major
interior renovations.  Funding for capital improvements typically is
provided by cash set aside at the time the Property was
purchased.




Routine replacements and ordinary
maintenance and repairs that do not extend the life of the asset are expensed as
incurred.  Funding for repairs and maintenance items typically is
provided by cash flows from operating activities.




Depreciation is computed using the
straight-line method over the assets’ estimated useful lives as
follows:





Category
                YearsBuilding -
      Commercial
                39Building
      Improvements
                15-39Furniture &
      Equipment
                5-7





The Company reviews the Property to
determine if the carrying amount will be recovered from future cash flows if
certain indicators of impairment are identified at the Property.  The
evaluation of anticipated cash flows is highly subjective and is based in part
on assumptions regarding future occupancy, rental rates and capital requirements
that could differ materially from actual results in future
periods.  When indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying value of such asset, an
impairment loss is recorded equal to the difference between the asset’s current
carrying value and its fair value based on discounting its estimated future cash
flows.  At December 31, 2008 and 2007, no such indicators of
impairment were identified.




Depreciation expense of $2,207,000 and
$1,845,000 is included in Depreciation and Amortization in the Company’s
Consolidated Statements of Operations for the years ended December 31, 2008 and
2007, respectively.




F-7


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements





2.
            Summary of Significant Accounting
      Policies (continued)





ACQUIRED
REAL ESTATE LEASES





The
acquired real estate leases represents the estimated value of legal and leasing
costs related to the acquired leases that was included in the purchase price
when the Company acquired the Property.  Under Statement of Financial
Accounting Standards (“SFAS”) No. 141 “Business Combinations”, which was
approved by the Financial Accounting Standards Board (“FASB”) in June 2001, the
Company is required to segregate these costs from its investment in real
estate.  The Company subsequently amortizes these costs on a
straight-line basis over the remaining life of the related
leases.  Amortization expense of $581,000 and $1,357,000 is included
in Depreciation and Amortization in the Company’s Consolidated Statements of
Operations for the years ended December 31, 2008 and 2007,
respectively.





Acquired
real estate lease costs included in the purchase price of the Property were
$4,516,000 and are being amortized over the weighted-average period of five
years in respect of the leases assumed.  Detail of the acquired real
estate leases is as follows:





December
31,(in
      thousands)
                
                2008
                
                
                2007Cost
                
                $
                2,607
                
                
                $
                4,297Accumulated
      amortization
                
                
                (1,177
                )
                
                
                (2,286
                )Book value
                
                $
                1,430
                
                
                $
                2,011








The
estimated annual amortization for the five years succeeding December 31, 2008 is
as follows:





(in
      thousands)2009
                  $          3822010
                  $          2842011
                  $          2432012
                  $          1822013
                  $          152





ACQUIRED
FAVORABLE REAL ESTATE LEASES





Acquired
favorable real estate leases represents the value related to the lease when the
lease payments due under a tenant’s lease exceed the market rate of the lease at
the date the Property was acquired.  Under SFAS No. 141 the Company is
required to report this value separately from its investment in real
estate.  The Company subsequently amortizes this amount on a
straight-line basis over the remaining life of the related
lease.  Amortization of $167,000 and $574,000 is shown as a reduction
of rental income in the Company’s Consolidated Statements of Operations for the
years ended December 31, 2008 and 2007, respectively.




The
acquired favorable real estate lease costs included in the purchase price of the
property was $1,568,000 and is being amortized over a weighted-average period of
five years in respect of the leases assumed.  Detail of the acquired
favorable real estate lease is as follows:





December
31,(in
      thousands)
                
                2008
                
                
                2007Cost
                
                $
                574
                
                
                $
                1,543Accumulated
      amortization
                
                
                (229
                )
                
                
                (1,031
                )Book value
                
                $
                345
                
                
                $
                512







F-8


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements





2.
            Summary of Significant Accounting
      Policies (continued)





ACQUIRED
FAVORABLE REAL ESTATE LEASES (continued)





The
estimated annual amortization for the five years succeeding December 31, 2008 is
as follows:





(in
      thousands)2009
                $            792010
                $            702011
                $            662012
                $            642013
                $            43





ACQUIRED
UNFAVORABLE REAL ESTATE LEASES





The
Company accounts for leases acquired via direct purchase of real estate assets
under the provisions of SFAS No. 141.  Acquired unfavorable real
estate leases represent the value relating to leases with rents below the market
rate.  Amortization is computed using the straight-line method over
the remaining life of the related leases.  Amortization of $101,000
and $121,000 is included with rental revenue in the Company’s Consolidated
Statements of Operations for the years ended December 31, 2008 and 2007,
respectively.




The
acquired unfavorable real estate lease costs included in the purchase price of
the property was  $826,000 and the weighted average amortization
period is six years in respect of the leases assumed.  Detail of the
acquired unfavorable real estate leases are as follows:





December 31(in
      thousands)
                
                2008
                
                
                2007Cost
                
                $
                755
                
                
                $
                811Accumulated
      amortization
                
                
                (266
                )
                
                
                (221
                )Book value
                
                $
                489
                
                
                $
                590





The
estimated annual amortization for the five years succeeding December 31, 2008 is
as follows:





(in
      thousands)2009
                $            912010
                $            812011
                $            752012
                $            752013
                $            67





CASH AND CASH
EQUIVALENTS





The Company considers all highly liquid
debt instruments with an initial maturity of three months or less to be cash
equivalents.





CONCENTRATION
OF CREDIT RISKS





Cash, cash equivalents and short-term
investments are financial instruments that potentially subject the Company to a
concentration of credit risk.   The Company maintains its cash
balances and short-term investments principally in banks which the Company
believes to be creditworthy.  The Company periodically assesses the
financial condition of the banks and believes that the risk of loss is
minimal.  Cash balances held with various financial institutions
frequently exceed the insurance limit of $250,000 provided by the Federal
Deposit Insurance Corporation.


F-9


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements





2.
            Summary of Significant Accounting
      Policies (continued)





CONCENTRATION
OF CREDIT RISKS (continued)





For
the years ended December 31, 2008 and 2007, rental income was derived from
various tenants.  As such, future receipts are dependent upon the
financial strength of the lessees and their ability to perform under the lease
agreements.





The
following tenants represent greater than 10% of rental revenue as of December
31, 2008 and 2007:





Tenant
              2008
              2007Washington
      Mutual
              0%
              47%Permian Mud d/b/a
      Champion
              13%
              6%Allen, Boone and
      Humphries
              12%
              5%





Washington
Mutual’s lease expired on February 29, 2008.





FINANCIAL
INSTRUMENTS





The
Company estimates that the carrying value of cash and cash equivalents
approximate their fair values based on their short-term maturity and prevailing
interest rates.





STEP
RENT RECEIVABLE





The
leases provides for fixed rental increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements.  Step rent receivable, which is
the cumulative revenue recognized in excess of amounts billed by the Company, is
$1,210,000 and $569,000 at December 31, 2008 and 2007,
respectively.





TENANT
RENT RECEIVABLE





Tenant
rent receivable is reported at the amount the Company expects to collect on
balances outstanding at year-end.  Management monitors outstanding
balances and tenant relationships and concluded that an allowance of $6,000 and
$36,000 as of December 31, 2008 and 2007, respectively, is
sufficient.





DEFERRED LEASING
COSTS





Deferred leasing commissions represent
direct and incremental external leasing costs incurred in the leasing of
commercial space.  These costs are capitalized and are amortizedon a straight-line basis over a weighted average period of seven years in
respect of the terms of the related lease agreement.  Amortization expense was $234,000 and
$76,000 for the years ended December 31, 2008 and 2007,
respectively.  Detail of the deferred leasing costsare as
follows:





December 31(in
      thousands)
                
                2008
                
                
                2007Cost
                
                $
                2,407
                
                
                $
                1,065Accumulated
      amortization
                
                
                (311
                )
                
                
                (98
                )Book value
                
                $
                2,096
                
                
                $
                967





The
estimated annual amortization for the five years succeeding December 31, 2008 is
as follows:





(in
      thousands)2009
                $     3132010
                $     2962011
                $     2842012
                $     2452013
                $     166





F-10


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements





2.
            Summary of Significant Accounting
      Policies (continued)





SYNDICATION FEES





Syndication fees are selling commissions
and other costs that were associated with the initial offering of shares of the
Company’s Preferred Stock.  Such costs, in the amount of $8,138,000
are included as a reduction in Stockholders’ Equity in the Company’s
Consolidated Balance Sheets.





REVENUE
      RECOGNITION





The Company has retained substantially
all of the risks and benefits of ownership of the Company’s commercial property
and accounts for its leases as operating leases. Rental income from the leases,
which may include rent concession (including free rent and tenant improvement
allowances) and scheduled increases in rental rates during the lease term, is
recognized on a straight-line basis. The Company does not have any percentage
rent arrangements with its commercial property tenants. Reimbursable costs are
included in rental income in the period earned.  A schedule showing
the components of rental revenue is shown below.





Year Ended
                  December
31,(in
    thousands)
                
                2008
                
                
                2007Income from
      leases
                
                $
                6,401
                
                
                $
                10,590Straight-line rent
      adjustment
                
                
                456
                
                
                
                210Reimbursable
      expenses
                
                
                4,463
                
                
                
                3,872Amortization of favorable
      leases
                
                
                (167
                )
                
                
                (574
                )Amortization of unfavorable
      leases
                
                
                101
                
                
                
                121Total
                
                $
                11,254
                
                
                $
                14,219





INTEREST INCOME





Interest income is recognized when the
earnings process is complete.





INCOME TAXES





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





NET INCOME PER SHARE




The Company follows SFAS No. 128
“Earnings per Share”, which specifies the computation, presentation and
disclosure requirements for the Company’s net income per share. Basic net income
per share of Preferred Stock is computed by dividing net income by the weighted
average number of shares of Preferred Stock outstanding during the period.
Diluted net income per share of Preferred Stock reflects the potential dilution
that could occur if securities or other contracts to issue shares were exercised
or converted into shares.  There were no potential dilutive shares
outstanding at December 31, 2008 and 2007. Subsequent to the completion of
the offering of shares of Preferred Stock, the holders of Common Stock are not
entitled to share in any income nor in any related dividend.




F-11


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements





2.
            Summary of Significant Accounting
      Policies (continued)





RECENT
ACCOUNTING PRONOUNCEMENTS





In September 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value
Measurements”, and in February 2008 amended SFAS No. 157 with FASB Staff
Position SFAS 157-1 (“FSP FAS 157-1”), “Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13” and was amended later with FASB Staff Position SFAS 157-2, “
Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). SFAS 157 defines
fair value, establishes a framework for measuring fair value in GAAP and
provides for expanded disclosure about fair value measurements. SFAS 157 is
applied prospectively, including to all other accounting pronouncements that
require or permit fair value measurements. FSP FAS 157-1 amends SFAS 157 to
exclude from the scope of SFAS 157 certain leasing transactions accounted for
under Statement of Financial Accounting Standards No. 13, “Accounting for
Leases” for purposes of measurements and classifications. SFAS No. 157 and FSP
FAS 157-1 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years.  The adoption of SFAS No. 157 and FSP FAS 157-1 did not have a
material impact on the Company’s financial position, operations or cash
flows.  FSP FAS 157-2 amends SFAS 157 to defer the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis to fiscal years beginning after November 15,
2008.  The Company is currently assessing the potential impact that
the adoption of FSP FAS 157-2 will have on our financial position, results of
operations or cash flows.





In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities —
Including an amendment of FASB Statement No. 115”, which permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The adoption of this standard did not have a material impact on the Company’s
financial position, results of operations or cash flows.





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





3.
            Income
  Taxes




The Company files as a REIT under
Sections 856-860 of the Internal Revenue Code of 1986, as amended.  In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to stockholders and to meet certain asset and income tests
as well as certain other requirements.  The Company will generally not
be liable for federal income taxes, provided it satisfies these
requirements.  Even as a qualified REIT, the Company is subject to
certain state and local taxes on its income and property.





The Company’s adoption of the provisions
of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”,
(“FIN 48”) effective January 1, 2007 did not result in recording a liability,
nor was any accrued interest and penalties recognized with the adoption of FIN
48.  Accrued interest and penalties will be recorded as income tax
expense, if the Company records a liability in the future.  The
Company’s effective tax rate was not affected by the adoption of FIN
48.  The Company files income tax returns in the U.S federal
jurisdiction and the state of Texas.  The statute of limitations for
the Company’s income tax returns is generally three years and as such, the
Company’s returns that remain subject to examination would be from 2006 and
thereafter.





For
the period ended December 31, 2006, the Company incurred a net operating loss
for income tax purposes of approximately $2,267,000 that can be carried forward
until it expires in the year 2026.


At
December 31, 2008, the Company’s net tax basis of its real estate assets was
$84,355,000.


F-12


FSP
Phoenix Tower Corp.


Notes
to Consolidated Financial Statements





3.
            Income Taxes
      (continued)





The
following schedule reconciles net income to taxable income subject to dividend
requirements, which are calculated annually:





Year Ended December
      31,(in
    thousands)
                    
                    2008
                    
                    
                    2007Net Income
                    
                    $
                    672
                    
                    
                    $
                    4,368Add:  Book depreciation
      and amortization
                    
                    
                    3,022
                    
                    
                    
                    3,278Amortization of favorable real
      estate leases
                    
                    
                    167
                    
                    
                    
                    574Deferred
    rent
                    
                    
                    (13
                    )
                    
                    
                    30Less:  Tax depreciation
      and amortization
                    
                    
                    (2,329
                    )
                    
                    
                    (1,965
                    )Amortization of unfavorable real
      estate lease
                    
                    
                    (101
                    )
                    
                    
                    (121
                    )Straight-line
      rents
                    
                    
                    (487
                    )
                    
                    
                    (234
                    )Taxable
    income
                    
                    $
                    931
                    
                    
                    $
                    5,930







The
following schedule summarizes the tax components of the distributions paid,
which are calculated annually, for the years ended December 31:





(dollars in
      thousands)
                      
                      2008
                      
                      
                      2007Preferred
                      
                      
                      %
                      
                      
                      Preferred
                      
                      
                      %Ordinary
    income
                      
                      $
                      1,042
                      
                      
                      
                      28
                      %
                      
                      $
                      6,021
                      
                      
                      
                      76
                      %Return of
      Capital
                      
                      
                      2,715
                      
                      
                      
                      72
                      %
                      
                      
                      1,935
                      
                      
                      
                      24
                      %Total
                      
                      $
                      3,757
                      
                      
                      
                      100
                      %
                      
                      $
                      7,956
                      
                      
                      
                      100
                      %





4.
            Capital
      Stock





PREFERRED
STOCK





Generally,
each holder of shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available.  The right to receive dividends is non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has been
declared in any prior year.  Each holder of shares of Preferred Stock
will be entitled to receive, to the extent that funds are available therefore,
$100,000 per share of Preferred Stock, before any payment to the holder of
Common Stock, out of distributions to stockholders upon liquidation, dissolution
or the winding up of the Company; the balance of any such funds available for
distribution will be distributed among the holders of shares of Preferred Stock
and the holder of Common Stock, pro rata based on the number of shares held by
each; provided, however, that for these purposes, one share of Common Stock will
be deemed to equal one-tenth of a share of Preferred Stock.





In
addition to certain rights to remove and replace directors, the holders a
majority of the then outstanding shares of Preferred Stock shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter.  A vote of the holders of not less than 66.67% of then
outstanding shares of Preferred Stock is required for the issuance of any
additional shares of capital stock.  Holders of shares of Preferred
Stock have no redemption or conversion rights.





COMMON
STOCK





Franklin Street is the sole holder of
the Company’s Common Stock.  Franklin Street has the right to vote to
elect the directors of the Company and to vote on all matters, subject to the
voting rights of the Preferred Stock set forth above.  Subsequent to
the completion of the offering of the shares of Preferred Stock in September
2006, Franklin Street, as the holder of Common Stock, was not entitled to share
in any earnings nor any related dividend.




F-13


FSP Phoenix Tower
Corp.


Notes
to Consolidated Financial Statements





5.
            Related Party
      Transactions





The Company has in the past engaged in
and currently engages in transactions with a related party, Franklin Street and
its subsidiaries FSP Investments LLC and FSP Property Management LLC
(collectively “FSP”).  We expect to continue to have related party
transactions with FSP in the form of management fees paid to FSP to manage the
Company on behalf of our stockholders.  FSP Property Management LLC
currently provides the Company with asset management and financial reporting
services.  The asset management agreement between the Company and FSP
Property Management LLC requires the Company to pay FSP Property Management LLC
a monthly fee equal to one percent (1%) of the gross revenues of the Property
for the corresponding month.  The asset management agreement between
the Company and FSP Property Management LLC may be terminated by either party
without cause at any time, upon at least thirty (30) days’ written
notice.  For the years ended December 31, 2008 and 2007, management
fees paid were $111,000 and $143,000, respectively.





On December 4, 2008, the Company entered
into a revolving line of credit (the “Phoenix Revolver”) with Franklin Street
for up to $15,000,000.  Advances under the Phoenix Revolver bear
interest at a rate equal to the 30-day LIBOR rate plus 300 basis points and each
advance thereunder requires a 50 basis point draw fee.  The Phoenix
Revolver matures on November 30, 2011 and is secured by a mortgage on the
Property.  The Company anticipates that any advances made under the
Phoenix Revolver will be repaid at maturity or earlier from a long-term
financing of the Property, cash flows from the Property or a capital
event.  As of December 31, 2008, no amounts had been advanced under
the Phoenix Revolver.





Franklin Street is the sole holder of
the Company’s one share of Common Stock that is issued and outstanding.
Subsequent to the completion of the private placement of the Preferred Stock in
September 2006, Franklin Street has not been entitled to share in any earnings
or any dividend related to the Common Stock of the Company.





6.
            Commitments and
      Contingencies





The
Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:





Year Ending(in
    thousands)
                  December
31,
                  
                  Amount2009
                  
                  $
                  5,3022010
                  
                  
                  4,9362011
                  
                  
                  4,7252012
                  
                  
                  3,8902013
                  
                  
                  2,781Thereafter
                  
                  
                  11,157$
                  32,791





In addition, the lessees are liable for
real estate taxes and certain operating expenses of the
Property.




Upon acquiring the commercial rental
property on February 22, 2006, the Company was assigned the lease agreements
between the seller of the Property and the existing tenants.




Upon
acquiring the commercial rental property on February 22, 2006, the Company was
assigned a lease agreement to lease parking spaces at an adjacent property for
approximately 190 additional uncovered off-site parking spaces.  The
lease expires on February 28, 2019.  Future minimum lease payments
payable by the Company are as follows:





Year Ending(in
    thousands)
                      December
31,
                      
                      Amount2009
                      
                      $
                      1942010
                      
                      
                      1942011
                      
                      
                      1942012
                      
                      
                      1942013
                      
                      
                      194Thereafter
                      
                      
                      1,164$
                      2,134





F-14


FSP
Phoenix Tower Corp.


Notes to ConsolidatedFinancial Statements





6.
            Commitments and Contingencies
      (continued)





During
the year ended December 31, 2007, the Company entered into construction
agreements with Haley-Greer, Inc. for approximately $5.5 million of glass façade
remediation in conjunction with the repositioning of the Property in the
marketplace with completion projected for 2008.  As of December 31,
2008, $4.9 million of work has been completed under the construction
agreements.





7.
            Segment
      Reporting





The
Company operates in one industry segment – real estate ownership of commercial
property.  As of December 31, 2008 and 2007 the Company owned and
operated a thirty-four story office tower in that one segment.





8.
            Accounts Payable and Accrued
      Expenses





Accounts
payable and accrued expenses consists of accounts payable, accrued property tax,
deferred rental income and other accrued expenses.  A schedule showing
these components is as follows:





December
31,(in
    thousands)
                
                2008
                
                
                2007Accrued property
      tax
                
                $
                1,907
                
                
                $
                1,745Deferred rental
      income
                
                
                348
                
                
                
                903Accrued capital
      expenditures
                
                
                1,458
                
                
                
                1,541Accounts payable and other accrued
      expenses
                
                
                1,087
                
                
                
                618Due to tenant - tenant
      improvements
                
                
                199
                
                
                
                315Total
                
                $
                4,999
                
                
                $
                5,122





9.
            Subsequent
      Events





On
January 16, 2009, the Board of Directors of the Company declared a cash
distribution of $519,750 payable on February 20, 2009 to stockholders of record
on January 30, 2009.





On
January 22, 2009, the Company borrowed under the Phoenix Revolver in the amount
of $3,600,000.





F-15


SCHEDULE
III





FSP
Phoenix Tower Corp.


Real
Estate and Accumulated Depreciation


December
31, 2008





Initial
      Cost
                        
                        Historical
      CostsDescription
                        Encumbrances
      (1)
                        Land
                        Buildings
                          Improvements
                            and
                            Equipment
                        Costs
                            Capitalized
                            (Disposals)
                            Subsequent to
                            Acquisition
                        
                        Land
                        Buildings
                          Improvements
                            and
                            Equipment
                        Total
      (2)
                        Accumulated
                            Depreciation
                        Total
      Costs,
                            Net
      of
                            Accumulated
                            Depreciation
                        Depreciable
                            Life
                            (Years)
                        Date
      of
                            Acquisition(dollars
      in thousands)Phoenix Tower,
      Houston, Texas
                        $0
                        $3,300
                        $66,806
                        $14,582
                        
                        $3,300
                        $81,388
                        $84,688
                        $5,518
                        $79,170
                        5-39
                        2006





(1)
                On
      December 4, 2008, the Company entered into a revolving line of credit (the
      “Phoenix Revolver”) with Franklin Street Properties Corp. for up to
      $15,000. The Phoenix Revolver is secured by a mortgage on the
      Property.  As of December 31, 2008, no amounts had been advanced
      under the Phoenix Revolver.
 
 (2)
                The
      aggregate cost for Federal Income Tax purposes is
  $89,946.








F-16


FSP
Phoenix Tower Corp.





The
following table summarizes the changes in the Company's real estate investments
and accumulated depreciation:





December
      31,
                    
                    
                    December
      31,(in
      thousands)
                    
                    2008
                    
                    
                    2007Real
      estate investments, at cost:Balance,
      beginning of year
                    
                    $
                    78,198
                    
                    
                    $
                    71,351Acquisitions
                    
                    
                    
                    
                    
                    
                    -Improvements
                    
                    
                    6,490
                    
                    
                    
                    6,847Balance,
      end of year
                    
                    $
                    84,688
                    
                    
                    $
                    78,198Accumulated
      depreciation:Balance,
      beginning of year
                    
                    $
                    3,311
                    
                    
                    $
                    1,466Depreciation
                    
                    
                    2,207
                    
                    
                    
                    1,845Balance,
      end of year
                    
                    $
                    5,518
                    
                    
                    $
                    3,311





F-17