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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005


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

For the transition period from to .

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)


MARYLAND		37-1470730
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7600 Wisconsin Avenue, 11^th Floor
Bethesda, MD
(Address of principal executive offices)

20814
(Zip Code)

(301) 986-9200
(Registrant’s telephone number, including area code)

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


Common Shares of beneficial interest, $0.001 par value per share		New York Stock Exchange
(Title of Class)		(Name of Exchange upon Which
		Registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act YES o NO þ

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

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 þ NO o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12b-2). o Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer

Indicate by check work whether the registrant is a shell company (as defined in Exchange Act Rule 126-2) YES o NO þ

The aggregate market value of the registrant’s Common Shares of beneficial interest, $0.001 par value per share, at June 30, 2005, held by those persons deemed by the registrant to be non-affiliates was approximately $406,785,100.

As of March 16, 2006, there were 20,427,755 Common Shares of beneficial interest, par value $0.001 per share, outstanding.

Documents Incorporated By Reference

Portions of the Company’s definitive proxy statement relating to the 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K as indicated herein.

FIRST POTOMAC REALTY TRUST
FORM 10-K

INDEX


		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		20
Item 2.	Properties		21
Item 3.	Legal Proceedings		22
Item 4.	Submission of Matters to a Vote of Security Holders		22

Part II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases		23
	of Equity Securities
Item 6.	Selected Financial Data		24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A.	Qualitative and Quantitative Disclosures About Market Risk		38
Item 8.	Financial Statements and Supplementary Data		38
Item 9.	Changes and Disagreements with Accountants on Accounting and Financial Disclosure		38
Item 9A.	Controls and Procedures		38
Item 9B.	Other Information		38

Part III
Item 10.	Directors and Executive Officers of the Registrant		41
Item 11.	Executive Compensation		41
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		41
Item 13.	Certain Relationships and Related Transactions		41
Item 14.	Principal Accountant Fees and Services		41

Part IV
Item 15.	Exhibits and Financial Statement Schedules		42

	Signatures		45

PART I

ITEM 1. BUSINESS

Overview

First Potomac Realty Trust (the “Company”) is a self-managed, self-administered Maryland real estate investment trust that focuses on owning and operating industrial and flex properties in the Washington, D.C. metropolitan area and other major markets in Virginia and Maryland, which we collectively refer to as the southern Mid-Atlantic region. The Company has elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code.

The Company was formed in July 2003 to be the successor general partner to First Potomac Realty Investment Trust, Inc., the general partner of First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company owns all of its properties and conducts its business through the Operating Partnership. The Company is the sole general partner of, and owns a 93.5% interest in, the Operating Partnership.

The Company focuses on acquiring properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio of properties contains a mix of single-tenant and multi-tenant industrial properties and flex properties. Industrial properties generally are used as warehouse, distribution and manufacturing facilities, while flex properties combine office building features with industrial property space. As of December 31, 2005, the Company owned 52 properties totaling approximately 8.3 million square feet, and the Company’s properties were approximately 89.3% leased (94.0% leased excluding 2000 Gateway Boulevard) to a total of 471 tenants. The Company’s largest tenant is the U.S. Government, which leases approximately 681,759 square feet under 23 leases, representing approximately 12.5% of the Company’s annualized base rent as of December 31, 2005.

Narrative Description of Business

The Operating Partnership was formed in 1997 to utilize management’s knowledge of and experience in the southern Mid-Atlantic real estate market to seek to create the leading industrial and flex property owner in the region. The Company believes that the large number of properties meeting its investment criteria and the fragmented ownership of industrial and flex property in the region creates an opportunity for it to achieve this goal. According to CoStar, a real estate market research firm, at December 31, 2005, First Potomac had become the largest owner of flex and industrial properties in the Washington, D.C. metropolitan area with a 2.3% share of the market.

The Company’s acquisition strategy focuses on industrial and flex properties in its target markets that generally meet the following investment criteria:

	•		established locations;

	•		below-market rents; and

	•		absentee ownership.

The Company also targets properties that it believes can be converted, in whole or in part, to a higher use. With flex property in particular, the Company has found that, over time, the property can be improved by converting space that is primarily warehouse space into space that contains more office use. Because office rents are generally higher than warehouse rents, the Company has been able to add revenue and value by converting space as market demand allows.

The Company uses its contacts, relationships and local market knowledge to identify and opportunistically acquire industrial and flex properties in its target markets. The Company also believes that its reputation for professional property management allows it to attract high-quality tenants to the properties that it acquires, enabling the Company to increase the properties’ profitability and value.

Significant 2005 Developments

During 2005, we completed the following:

	•		Acquired 13 properties totaling 3.0 million square feet at a contractual purchase price of $214.0 million;

	•		Completed our first Operating Partnership Unit Transaction as a Public Company;

	•		Raised $44.9 million through a direct placement of 2,050,000 common shares at a price of $21.95 per share;

	•		Raised net proceeds of approximately $79.1 million through an underwritten public offering of 3,450,000 common shares at a price of $24.23 per share;

	•		Entered into a first amendment to our unsecured revolving credit facility with KeyBank N.A. and Wells Fargo National Bank. The amendment reduced the applicable interest rate from a range of 1.70% to 2.50% to a range of 1.45% to 1.95% over LIBOR and increased the limit of consolidated total indebtedness that the Company can incur from 60% to 65% of consolidated gross asset value;

	•		Entered into a second amendment to our unsecured revolving credit facility, which increased the permitted borrowings from $75 million to $100 million, changed the maximum recourse debt covenant from $10 million to 10% of gross asset value, modified the process for adding eligible unencumbered properties to borrowing base and removed a restriction regarding additional unsecured corporate debt;

	•		Entered into a $100 million fixed-rate loan with Jackson National Life Insurance Company. The loan has a 10-year term with a fixed interest rate of 5.19%. The loan was funded in two stages, with the first $65 million funded on July 18, 2005. Borrowings pursuant to the first funding were used to repay all the Company’s floating rate mortgage debt and to reduce the balance outstanding on our unsecured credit facility. The second $35 million funding occurred on December 16, 2005 with the borrowings used to satisfy the obligation under a mortgage loan maturing in December 2007. The Company incurred debt retirement charges totaling approximately $2.9 million related to these financings;

	•		Recognized $1.2 million in termination fee income from two tenants for negotiated terminations effective September 30, 2005.

Total assets at December 31, 2005 were $727.8 million compared to $510.1 million at December 31, 2004.

Competitive Advantages

The Company believes that its business strategy and operating model distinguish it from other owners, operators and acquirers of real estate in a number of ways, including:

	•		Experienced Management Team. The Company’s senior management team averages more than 20 years of real estate experience in the Washington, D.C. metropolitan area.

	•		Focused Strategy. The Company is the only publicly traded REIT focused exclusively on industrial and flex properties in the southern Mid-Atlantic region, one of the largest, most stable markets for assets of this type.

	•		Value-Added Management Approach. Through the Company’s hands-on approach to management, leasing, renovation and repositioning, the Company endeavors to add significant value to the properties that it acquires from absentee institutional landlords and smaller, less sophisticated owners by improving tenant quality and increasing occupancy rates and net rent per square foot.

	•		Strong Market Dynamics. The Company’s target markets exhibit stable rental rates, frequent acquisition opportunities, and strong tenant bases, according to Delta Associates, a market research firm. The Company believes that additional U.S. Government spending for national defense and homeland security will continue to increase demand for industrial and flex space in its markets by both U.S. Government agencies and government contractors working on related projects.

	•		Local Market Knowledge. The Company has established relationships with local owners, the brokerage community, prospective tenants and property managers in its markets. The Company believes these relationships enhance its efforts to locate attractive acquisition opportunities and lease space in its properties.

	•		Favorable Lease Terms. As of December 31, 2005, 384 of the Company’s 581 leases (representing 73.1% of the leased space in our portfolio) were triple net leases, under which tenants are contractually obligated to reimburse the Company for virtually all costs of occupancy, including property taxes, utilities, insurance and maintenance. In addition, the Company’s leases generally provide for rent growth through contractual rent increases.

	•		Tenant Mix. As of December 31, 2005, the Company’s tenants included the U.S. Government (12.5% of its annualized base rent), government contractors (17.2%), Fortune 500 companies (14.7%) and more than 330 additional smaller tenants, most of which hold leases covering less than 15,000 square feet (55.6%). The Company believes its current tenant base provides a desirable mix of stability, diversity and growth potential.

Executive Officers of the Company

The following table sets forth information with respect to the Company’s executive officers:


Name	Age		Position
Douglas J. Donatelli		44	President, Chief Executive Officer and Trustee Douglas J. Donatelli is one of the co-founders of the Company and has served as President, Chief Executive Officer and Trustee since its predecessor’s founding in 1997. Prior to 1997, Mr. Donatelli served as Executive Vice President of Donatelli & Klein, Inc. (“D&K”) located in Washington, D.C. and President of D&K Management, D&K’s property management subsidiary, where he oversaw all of the major operational aspects of D&K’s property ownership activities. From 1985 to 1991, Mr. Donatelli also served as President of D&K Broadcasting, a communications-related subsidiary of D&K that owned Fox-network affiliated television stations. Mr. Donatelli holds a Bachelor of Science degree in Business Administration from Wake Forest University and is a member of the Urban Land Institute and National Association of Real Estate Investment Trusts.

Barry H. Bass		42	Executive Vice President, Chief Financial Officer Barry H. Bass served as Senior Vice President and Chief Financial Officer since joining the Company in 2002 and was elected Executive Vice President in February 2005. From 1999 to 2002, Mr. Bass was a senior member of the real estate investment banking group of Legg Mason Wood Walker, Inc. where he advised a number of public and private real estate companies in their capital raising efforts. From 1996 to 1999, Mr. Bass was Executive Vice President of the Artery Organization in Bethesda, Maryland, an owner and operator of real estate assets in the Washington, D.C. area, and prior to that a Vice President of Winthrop Financial Associates, a real estate firm with over $6 billion of assets under management, where he oversaw the Company’s asset management group. Mr. Bass is a cum laude graduate of Dartmouth College and is a member of the National Association of Real Estate Investment Trusts.

Joel F. Bonder		57	Executive Vice President, General Counsel and Secretary Joel F. Bonder has served as Executive Vice President, General Counsel and Secretary since joining the Company in January 2005. He was General Counsel of Apartment Investment and Management Company (AIMCO), one of the largest public apartment REITs in the country, from 1997 to 2002, and General Counsel of National Corporation for Housing Partnerships, the largest private owner of FHA-insured multifamily housing, and its parent, NHP Incorporated, from 1994 to 1997. Mr. Bonder was Counsel at Bryan Cave LLP from 1993 to 1994 in Washington, D.C., where he specialized in corporate, real estate and project finance. Mr. Bonder is a graduate of the University of Rochester and received his JD degree from Washington University School of Law. He is admitted to the bar in the District of Columbia, Massachusetts, and Illinois.


James H. Dawson	48	Executive Vice President, Chief Operating Officer James H. Dawson served as Senior Vice President and Chief Operating Officer of the Company since 1998 and was elected Executive Vice President in February 2005. Mr. Dawson has coordinated the Company’s management and leasing activities since joining the company in 1998. Prior to joining the Company, Mr. Dawson spent 18 years with Reico Distributors, a large user of industrial and flex product in the Baltimore/Washington corridor. At Reico, he was responsible for the construction and management of the firm’s warehouse portfolio. Mr. Dawson received his Bachelor of Science degree in Business Administration from James Madison University and is a member of the Northern Virginia Board of Realtors, the Virginia State Board of Realtors and the Institute of Real Estate Management.

Nicholas R. Smith	41	Executive Vice President, Chief Investment Officer Nicholas R. Smith is one of the co-founders of the Company and has served as Executive Vice President and Chief Investment Officer since its predecessor’s founding. He has over 15 years experience in commercial real estate in the Washington, D.C. area, including seven years with D&K and D&K Management from 1990 to 1997. Prior to joining D&K, Mr. Smith was with Garrett & Smith, Inc., a real estate investment and development firm based in McLean, Virginia and Transwestern/Carey Winston (formerly Barrueta & Associates, Inc.) a Washington-based commercial real estate brokerage and property management firm. Mr. Smith is a graduate of the Catholic University of America. He is a member of the District of Columbia Building Industry Association and the Urban Land Institute.

Michael H. Comer	40	Senior Vice President, Chief Accounting Officer Michael H. Comer served as the Company’s Vice President, Chief Accounting Officer since August 2003 and was elected Senior Vice President in February 2005. Prior to joining the Company, Mr. Comer was Controller at Washington Real Estate Investment Trust (WRIT), a Washington, D.C.-based, diversified real estate investment trust, where from 1999 to 2003 he was responsible for overseeing the Company’s accounting operations and its internal and external financial reporting. Prior to his tenure at WRIT, he was a manager in corporate accounting at The Federal Home Loan Mortgage Corp., and, prior to that position, was with KPMG LLP in Washington, D.C. where he performed audit, consultation and advisory services from 1990 to 1994. He is a CPA and a graduate of the University of Maryland where he received a Bachelor of Science in Accounting. Mr. Comer is a member of the American Institute of Certified Public Accountants and a member of the National Association of Real Estate Investment Trusts.

Timothy M. Zulick	42	Senior Vice President, Leasing Timothy M. Zulick has been the Senior Vice President, Leasing since August 2004. Prior to joining the Company, Mr. Zulick was Senior Vice President at Trammell Crow Company where, from 1998 to 2004, he concentrated on leasing, sales and development of flex and industrial properties in the Baltimore-Washington Corridor. From 1994 to 1998, he worked as a tenant and landlord representative with Casey ONCOR International where he also focused on leasing and sales of industrial properties. Prior to that, Mr. Zulick was with Colliers Pinkard and specialized in the valuation of commercial real estate in Maryland. He received a Bachelors degree in Business Administration from Roanoke College. Mr. Zulick is a licensed real estate person and an active member of the Society of Industrial and Office Realtors (SIOR).

The Company’s Market

Ownership of industrial and flex properties in the southern Mid-Atlantic region is highly fragmented. According to a report by Delta Associates, a real estate market research firm, the southern Mid-Atlantic region contains approximately 475 million square feet of industrial and flex property, which the Company estimates has an aggregate fair market value of more than $40 billion based on its knowledge of comparable per square foot sale prices of these property classes in this region. According to CoStar Group, these properties are owned by hundreds of different owners, ranging from large institutional investors to small investors and owner/occupants, with no single owner holding a significant share of the property market. For

example, in the Washington, D.C. metropolitan area, First Potomac has become the largest owner of industrial and flex property with 2.3% of the market by square footage.

The Washington, D.C. metropolitan area has the largest economy of the Company’s target markets. In addition to its size, the Washington, D.C. metropolitan area also boasts one of the most stable economies in the country, primarily attributable to the presence of the U.S. Government and the private contractors that service the U.S. Government. The private sector is supported by the procurement spending of the U.S. Government, which has enhanced the area’s technology industry and tempered the negative impact of national economic cycles. The Washington, D.C. area is the country’s eighth largest metropolitan area in population and sixth in jobs according to the Department of Labor, and fourth in economic output according to the Delta Associates.

The Company’s other primary markets are Hampton Roads, Virginia, the regional name given to the Norfolk–Virginia Beach–Newport News metropolitan area, Baltimore, Maryland and Richmond, Virginia. Hampton Roads is home to the largest military station in the world, according to the United States Navy, and has an even larger percentage of federal government employees than Washington, D.C. In addition, the Norfolk port is the second busiest port on the East Coast of the United States in terms of container volume. The Baltimore metropolitan area, with approximately 150 million square feet of industrial space, has recently strengthened its position as a major trade and distribution center with strong employment growth in wholesale and retail trade. Richmond, the capital of Virginia, maintains a market demand for smaller to mid-size tenants.

Recent increased U.S. Government spending relating to national defense, including increased military and defense spending by the Department of Defense and the creation of the Department of Homeland Security, has benefited the industrial and flex markets in the southern Mid-Atlantic region, and the Company believes that additional defense and homeland security related spending will continue to create further demand for industrial and flex property in its markets.

Competition

We compete with other REITs, other public and private real estate companies, private real estate investors and lenders in acquiring properties. Many of these entities have greater resources than we do or other competitive advantages. We also face competition in leasing or subleasing available properties to prospective tenants.

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. Such laws typically impose clean up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under such laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken. These costs may be substantial, and can exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination, on such property may adversely affect the ability of the owner, operator or tenant to sell or rent such property or to borrow using such property as collateral, and may adversely impact our investment on a property.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of the new regulations. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials.

Prior to closing any property acquisition, if appropriate, the Company obtains such environmental assessments as may be prudent in order to attempt to identify potential environmental concerns at such properties. These assessments are carried out in accordance with an appropriate level of due diligence and generally may include a physical site inspection, a review of

relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs. The Company may also conduct limited subsurface investigations and test for substances of concern where the results of the first phase of the environmental assessments or other information indicates possible contamination or where the Company’s consultants recommend such procedures.

The Company believes that its properties are in compliance in all material respects with all federal and state regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matter in connection with any of its properties.

In 1991, it was discovered that portions of the soil and groundwater under the Newington Business Park Center in Lorton, Virginia (“Site”) had been affected by one or more leaking underground storage tanks from an adjacent property owned by a third-party and operated by Waste Management of Virginia, Inc. The Virginia Department of Environmental Quality (DEQ), ordered the third-party to cleanup the petroleum-based free product (gasoline range petroleum hydrocarbons) on the adjacent property and the Site. A treatment system was designed to capture and monitor the contamination from both the adjacent property and the Site. The case was closed by the DEQ after risk-based levels of contamination were contained but re-opened when free petroleum product was again found on top of the groundwater under the Site. The third-party owner paid for further removal of free petroleum product directly from two groundwater wells at the Site and subsequently requested closure of the case. On August 24, 2004, the DEQ requested that three additional monitoring wells be installed on the Site since free petroleum product continued to be present in two of the monitoring wells. The three new monitoring wells were installed by Waste Management of Virginia, Inc. and sampling revealed no free petroleum product in those wells. However, free petroleum product was observed in 2005 in the two older wells. The water table beneath the site continues to be monitored. The Company believes that liability for future cleanup, if any, of this subsurface contamination will be imposed on the third-party owner and not the Company.

Employees

The Company had 99 employees as of March 16, 2006. The Company believes relations with its employees are good.

Availability of Reports

A copy of this annual report on Form 10-K, as well as the Company’s quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports are available, free of charge, on its Internet Web site (www.first-potomac.com). All of these reports are made available on the Company’s Web site as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. The Company’s Governance Guidelines and Code of Business Conduct and Ethics and the charters of the Audit, Compensation and Nominating and Governance Committees of the Board of Trustees are also available on the Company’s Web site at www.first-potomac.com, and are available in print to any shareholder upon request in writing to First Potomac Realty Trust, c/o Investor Relations, 7600 Wisconsin Avenue, 11^th Floor, Bethesda, MD 20814. The information on the Company’s Web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filing it makes with the Securities and Exchange Commission.

ITEM 1A. RISK FACTORS

Investing in our company involves various risks, including the risk that you might lose your entire investment. The following discussion concerns some of the risks associated with our business. These risks are interrelated, and you should treat them as a whole. The risks described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us or not identified below, may also materially and adversely affect our business, financial condition, results of operations and ability to make distributions to our shareholders.

Risks Related to Our Business and Properties

We have recently experienced rapid growth and may not be able to adapt our management and operational systems without unanticipated disruption or expense.

We are currently experiencing a period of rapid growth. As a result of our rapid growth, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate properties into our portfolio or manage any future acquisitions of properties without operating disruptions or unanticipated costs. Our acquisitions of properties will generate additional operating expenses that we will be required to pay. Our growth has required, and our growth will continue to require, increased investment in management personnel, professional fees, other personnel, financial and management systems and controls and facilities, which could cause our operating margins to decline from historical levels, especially in the absence of revenue growth. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. Our failure to successfully integrate acquisitions into our portfolio and manage our growth could have a material adverse effect on our results of operations and financial condition.

We are subject to the credit risk of our tenants, which may fail to make lease payments and thereby cause a significant decrease in our revenues.

We are subject to the credit risk of our tenants. We cannot assure you that our tenants will not default on their leases and fail to make rental payments to us. In particular, local economic conditions and factors affecting the industries in which our tenants operate may affect our tenants’ ability to make lease payments to us. Moreover, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms if a tenant defaults on its lease. The loss of rental revenues from a number of our tenants and our inability to replace such tenants may adversely affect our profitability and our ability to meet our financial obligations.

A majority of our tenants hold leases covering less than 10,000 square feet. Many of these tenants are small companies with nominal net worth. The loss of rental revenues from a number of our tenants may adversely affect our profitability and our ability to meet our financial obligations.

Loss of the U.S. Government as a tenant could lead to a substantial decrease in our cash flow and an impairment of the value of our properties.

The U.S. Government accounts for 12.5% of our annualized base rent as of December 31, 2005. On July 31, 2002, the United States Department of Defense issued the Unified Facilities Criteria (“UFC”), which establish minimum antiterrorism standards for the design and construction of new and existing buildings leased by the departments and agencies of the Department of Defense. The loss of the federal government as a tenant resulting from our inability to comply with the UFC standards or for any other reason or the loss of a future significant tenant would have an adverse effect on our financial results and the value of our affected properties. A reduction or elimination of rent from the U.S. Government or other significant tenants would reduce our cash flow and adversely affect our ability to make distributions to our shareholders.

Our debt level may have a negative impact on our ability to make distributions to our shareholders and pursue our business plan.

We have incurred indebtedness in connection with the acquisition of our properties, and we will incur new indebtedness in the future in connection with our acquisition, development and operating activities.

Our use of debt financing creates risks, including:

	•		that our cash flow will be insufficient to make required payments of principal and interest;

	•		that we will be unable to refinance some or all of our indebtedness or that any refinancing will not be on terms as favorable as those of the existing indebtedness;

	•		that required debt payments are not reduced if the economic performance of any property declines;

	•		that debt service obligations will reduce funds available for distribution to our shareholders and funds available for acquisitions; and

	•		that any default on our indebtedness could result in acceleration of those obligations and possible loss of property to foreclosure.

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

We do not have a policy limiting the amount of debt that we may incur, although we have established 55% to 65% as the target range for our total debt to market capitalization. Accordingly, our management and board of trustees have discretion to increase the amount of our outstanding debt at any time. Our leverage levels may make it difficult to obtain additional financing based on our current portfolio or to refinance existing debt on favorable terms or at all. In addition, the terms of our revolving credit facility limit the amount of indebtedness that we may incur. Failure to obtain additional financing could impede our ability to grow and develop our business. Our leverage levels also may adversely affect the market price of our common shares if an investment in our company is perceived to be more risky than an investment in our peers.

Our variable rate debt subjects us to interest rate risk.

We have a revolving credit facility with KeyBank and Wells Fargo that bears interest at a variable rate on any amounts drawn on the facility. We may incur additional variable rate debt in the future. Increases in interest rates on variable rate debt would increase our interest expense, which would adversely affect net earnings and cash available for payment of our debt obligations and distributions to our shareholders.

We compete with other parties for tenants and property acquisitions and many of these parties have substantially greater resources than we have.

Our business strategy contemplates expansion through acquisition. The commercial real estate industry is highly competitive, and we compete with substantially larger companies, including substantially larger REITs, for the acquisition, development and leasing of properties. Some of these companies are national or regional operators with far greater resources than we have. As a result, we may not be able or have the opportunity to make suitable investments on favorable terms in the future. Competition in a particular area also could adversely affect our ability to lease our properties or to increase or maintain rental rates.

Newly developed and acquired properties may not produce the cash flow that we expect, which could adversely affect our overall financial performance.

Over the last few years, we have focused our efforts on the acquisition and redevelopment of industrial and flex properties. We intend to continue to acquire, and may in the future develop, industrial and flex properties. In deciding whether to acquire or develop a particular property, we make assumptions regarding the expected future performance of that property. In particular, we estimate the return on our investment based on expected occupancy and rental rates. If our estimated return on investment proves to be inaccurate, and the property is unable to achieve the expected occupancy and rental rates, it may fail to perform as we expected in analyzing our investment. When we acquire a property, we often plan to reposition or redevelop that property with the goal of increasing profitability. Our estimate of the costs of repositioning or redeveloping an acquired property may prove to be inaccurate, which may result in our failure to meet our profitability goals. Additionally, we have acquired properties not fully leased, and the cash flow from existing operations may be insufficient to pay the operating expenses and debt service associated with that property until the property is more fully leased. If one or more of these new properties do not perform as expected or we are unable to successfully integrate new properties into our existing operations, our financial performance may be adversely affected.

All of our properties are located in the southern Mid-Atlantic region, making us vulnerable to changes in economic conditions in that region.

Economic conditions in the southern Mid-Atlantic region may significantly affect the occupancy and rental rates of our properties. A decline in occupancy and rental rates, in turn, may significantly affect our profitability and our ability to satisfy our financial obligations. The economic condition of the region may depend on one or more industries and, therefore, an economic downturn in one of these industry sectors may adversely affect our performance. Local real estate market conditions may include a large supply of competing space, and we compete for tenants based on rental rates, attractiveness and location of a property, and quality of maintenance and management services. As a result of the geographic concentration of our properties, our performance, our ability to make cash distributions, and the value of our properties will depend upon economic conditions in the region, including local real estate conditions and competition. There can be no assurance that these markets will continue to grow or that economic conditions will remain favorable. If unfavorable economic conditions occur in the region, our ability to make distributions to our shareholders could be adversely affected. In particular, we are directly affected by decreases in federal government spending.

Development and construction risks could adversely affect our profitability.

We expect to develop new properties or add to existing properties in the future. Our renovation, redevelopment, development and related construction activities may subject us to the following risks:

	•		we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased costs or our abandonment of these projects.

	•		we may incur construction costs for a property which exceed our original estimates due to increased costs for materials or labor or other costs that we did not anticipate.

	•		we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our development activities.

	•		we may be unable to complete construction and lease-up of a property on schedule, which could result in increased debt service expense or construction costs.

Additionally, the time frame required for development, construction and lease-up of these properties means that we may have to wait years for a significant cash return. Because we are required to make cash distributions to our shareholders, if the cash flow from operations or refinancing is not sufficient, we may be forced to borrow additional money to fund such distributions.

Failure to succeed in new markets may limit our growth.

We may make selected acquisitions outside our current geographic market from time to time as appropriate opportunities arise. Our historical experience is in the southern Mid-Atlantic region, and we may not be able to operate successfully in other market areas. We may be exposed to a variety of risks if we choose to enter new markets. These risks include:

	•		a lack of market knowledge and understanding of the local economies;

	•		an inability to identify promising acquisition or development opportunities;

	•		an inability to obtain construction trades people; and

	•		an unfamiliarity with local government and permitting procedures.

Any of these factors could adversely affect the profitability of projects outside our current markets and limit the success of our acquisition and development strategy. If our acquisition and development strategy is negatively affected, the profitability, growth, and development of our business may be impeded.

We may be unable to renew expiring leases or re-lease vacant space on a timely basis or on attractive terms, which could significantly decrease our cash flow.

Current tenants may not renew their leases upon the expiration of their terms. Alternatively, current tenants may attempt to terminate their leases prior to the expiration of their current terms. If non-renewals or terminations occur, we may not be able to locate qualified replacement tenants and, as a result, we would lose a significant source of revenue while remaining responsible for the payment of our obligations. Moreover, the terms of a renewal or new lease may be less favorable than the current lease terms. Any of these factors could cause a decline in lease revenue, which would have a negative impact on our profitability.

Under some of our leases, tenants have the right to terminate prior to the scheduled expiration of the lease.

Some of our leases for our current properties provide tenants with the right to terminate prior to the scheduled expiration of the lease. If a tenant terminates its lease with us prior to the expiration of the term, we may be unable to re-lease that space on as favorable terms, or at all, which could adversely affect our cash flow.

Property owned through joint ventures, or in limited liability companies and partnerships in which we are not the sole equity holder, may limit our ability to act exclusively in our interests.

We may make investments through partnerships, limited liability companies or joint ventures in the future. Partnership, limited liability company or joint venture investments may involve various risks, including the following:

	•		our partners or joint venturers might become bankrupt (in which event we and any other remaining general partners or joint venturers would generally remain liable for the liabilities of the partnership or joint venture);

	•		our partners, co-members or joint venturers might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals;

	•		our partners, co-members or joint venturers may be in a position to take action contrary to our instructions, requests, policies, or objectives, including our current policy with respect to maintaining our qualification as a real estate investment trust; and

	•		agreements governing joint ventures, limited liability companies and partnerships often contain restrictions on the transfer of a joint venturer’s, member’s or partner’s interest or “buy-sell” or other provisions that may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms.

Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies or joint ventures. The occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to make distributions with respect to, and the market price of, our common shares.

Risks Related to Our Organization and Structure

Our executive officers have agreements that provide them with benefits in the event of a change in control of our company or if their employment agreement is not renewed.

We have entered into employment agreements with our executive officers, Douglas J. Donatelli, Nicholas R. Smith, Barry H. Bass, James H. Dawson and Joel F. Bonder that provide them with severance benefits if their employment ends under certain circumstances following a change in control of our company or if the executive officer resigns for “good reason” as defined in the employment agreements. These benefits could increase the cost to a potential acquirer of our company and thereby prevent or deter a change in control of the company that might involve a premium price for our common shares or otherwise be in the interests of our shareholders.

We may experience conflicts of interest with several members of our board of trustees and our executive officers relating to their ownership of units of our operating partnership.

Our trustees and executive officers may have conflicting duties because, in their capacities as our trustees and executive officers, they have a duty to our Company, and in our capacity as general partner of our operating partnership, they have a fiduciary duty to the limited partners, and some of them are themselves limited partners. These conflicts of interest could lead to decisions that are not in your best interest. Conflicts may arise when the interests of our shareholders and the limited partners of our operating partnership diverge, particularly in circumstances in which there may be an adverse tax consequence to the limited partners, such as upon the sale of assets or the repayment of indebtedness.

We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

Our future success depends, to a significant extent, upon the continued services of our senior management team, including Douglas J. Donatelli and Nicholas R. Smith. In particular, the extent and nature of the relationships that Mr. Donatelli and Mr. Smith and the other members of our senior management team have developed in the real estate community in our markets is critically important to the success of our business. Although we have employment agreements with Mr. Donatelli and Mr. Smith and other key executive officers, there is no guarantee that Mr. Donatelli and Mr. Smith or these other key executive officers will remain employed with us. We do not maintain key person life insurance on any of our officers. The loss of services of one or more members of our senior management team, particularly Mr. Donatelli and Mr. Smith, would harm our business and prospects. Further, loss of a member of our senior management team could be negatively perceived in the capital markets, which could have an adverse effect on the market price of our common shares.

The chairman of our board of trustees, Louis T. Donatelli, has other business interests that may hinder his ability to allocate sufficient time to our operations and he and certain other of our trustees may have conflicts of interest with our company.

Our chairman, Louis T. Donatelli, has other business interests that may hinder his ability to spend adequate time on our business. Mr. Donatelli is also Chairman of Donatelli & Klein, Inc. (D&K), a real estate investment firm that focuses on the Washington, D.C. area. Mr. Donatelli continues to provide management and other services to D&K. The provision of those services may reduce the time Mr. Donatelli is able to devote to our business. In addition, consistent with his fiduciary duties to the Company, Mr. Donatelli may compete against us outside of a specific geographic area and outside of the industrial or flex property market.

One of our trustees, Terry L. Stevens, currently serves as Vice President and Chief Financial Officer of Highwoods Properties, Inc., a fully integrated, North Carolina-based REIT that owns, leases, manages, develops, and constructs office, industrial and retail properties, some of which are located in our target markets. As a result, conflicts may arise when our Company and Highwoods Properties, Inc. compete in the same markets for properties, tenants, personnel and other services.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Maryland law provides that a trustee has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our amended and restated declaration of trust authorizes us to indemnify our trustees and officers for actions taken by them in those capacities to the extent permitted by Maryland law. In addition, our declaration of trust limits the liability of our trustees and officers for money damages, except for liability resulting from:

	•		actual receipt of an improper benefit or profit in money, property or services; or

	•		a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist. Our amended and restated bylaws require us to indemnify each trustee or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our trustees and officers.

Our board of trustees may approve the issuance of preferred shares with terms that may discourage a third party from acquiring us.

Our declaration of trust permits our board of trustees initially to issue up to 50,000,000 preferred shares, issuable in one or more classes or series. Our board of trustees may increase the number of preferred shares authorized by our declaration of trust without shareholder approval. Our board of trustees may also classify or reclassify any unissued preferred shares and establish the preferences and rights (including the right to vote, participate in earnings and to convert into securities) of any such preferred shares, which rights may be superior to those of our common shares. Thus, our board of trustees could authorize the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of the common shares might receive a premium for their shares over the then current market price of our common shares.

Our ownership limitations may restrict business combination opportunities.

To qualify as a REIT under the Internal Revenue Code, no more than 50% of the value of our outstanding shares of beneficial interest may be owned, directly or under applicable attribution rules, by five or fewer individuals (as defined to include certain entities) during the last half of each taxable year (other than our first REIT taxable year). To preserve our REIT qualification, our declaration of trust generally prohibits direct or indirect ownership by any person of (i) more than 8.75% of the number or value of our outstanding common shares or (ii) more than 8.75% of the value of our outstanding shares of all classes. Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limitation. Our declaration of trust has created a special higher ownership limitation of no more than 14.9% for the group comprised of Louis T. Donatelli, Douglas J. Donatelli and certain related persons. Unless the applicable ownership limitation is waived by our board of trustees prior to transfer, any transfer of our common shares that would violate the ownership limitation will be null and void, and the intended transferee will acquire no rights in such shares. Common shares that would otherwise be held in violation of the ownership limit will be designated as “shares-in-trust” and transferred automatically to a trust effective on the day before the purported transfer or other event giving rise to such excess ownership. The beneficiary of the trust will be one or more charitable organizations named by us. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of common shares might receive a premium for their common shares over the then current market price or that such holders might believe to be otherwise in their best interests. The ownership limitation provisions also may make our common shares an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of (i) more than 8.75% of the number or value of our outstanding common shares or (ii) more than 8.75% in value of our outstanding shares of all classes.

Our board of trustees may change our investment and operational policies and practices without a vote of our common shareholders, which limits your control of our policies and practices.

Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification and distributions, are determined by our board of trustees. Although we have no present intention to do so, our board of trustees may amend or revise these and other policies from time to time without a vote of our shareholders. Accordingly, our shareholders will have limited control over changes in our policies.

Our declaration of trust and bylaws do not limit the amount of indebtedness that we or our operating partnership may incur. If we become highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and harm our financial condition.

Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.

Our declaration of trust provides that a trustee may only be removed upon the affirmative vote of holders of a majority of our outstanding common shares. Vacancies may be filled by the board of trustees. This requirement makes it more difficult to change our management by removing and replacing trustees.

Our bylaws may only be amended by our board of trustees, which could limit your control of certain aspects of our corporate governance.

Our board of trustees has the sole authority to amend our bylaws. Thus, the board is able to amend the bylaws in a way that may be detrimental to your interests.

Maryland law may discourage a third party from acquiring us.

Maryland law provides broad discretion to our board of trustees with respect to its fiduciary duties in considering a change in control of our company, including that our board is subject to no greater level of scrutiny in considering a change in control transaction than with respect to any other act by our board.

The Maryland Business Combination Act restricts mergers and other business combinations between our company and an interested shareholder. An “interested shareholder” is defined as any person who is the beneficial owner of 10% or more of the voting power of our common shares and also includes any of our affiliates or associates that, at any time within the two year period prior to the date of a proposed merger or other business combination, was the beneficial owner of 10% or more of our voting power. Additionally, the “control shares” provisions of the Maryland General Corporation Law, or MGCL, are applicable to us as if we were a corporation. These provisions eliminate the voting rights of shares acquired in quantities so as to constitute “control shares,” as defined under the MGCL. Our amended and restated declaration of trust and/or bylaws provide that we are not bound by the Business Combination Act or the control share acquisition statute. However, in the case of the control share acquisition statute, our board of trustees may opt to make this statute applicable to us at any time, and may do so on a retroactive basis.

Finally, the “unsolicited takeovers” provisions of the MGCL permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement takeover defenses that we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then current market price or would otherwise be in the interests of our shareholders.

Risks Related to the Real Estate Industry

Real estate investments are inherently risky, which could adversely affect our profitability and our ability to make distributions to our shareholders.

Real estate investments are subject to varying degrees of risk. If we acquire or develop properties and they do not generate sufficient operating cash flow to meet operating expenses, including debt service, capital expenditures and tenant improvements, our income and ability to make distributions to our shareholders will be adversely affected. Income from properties may be adversely affected by:

	§		decreases in rent and/or occupancy rates due to competition or other factors;

	§		increases in operating costs such as real estate taxes, insurance premiums, site maintenance and utilities;

	§		changes in interest rates and the availability of financing; and

	§		changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.

General economic conditions may adversely affect our financial condition and results of operations.

Periods of economic slowdown or recession in the United States and in other countries, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults by our tenants under existing leases, which could adversely affect our financial position, results of operations, cash flow, trading price of our common shares and our ability to satisfy our debt service obligations and to make distributions to our shareholders.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to adverse changes in the performance of such properties may be limited, thus harming our financial condition. The real estate market is affected by many factors that are beyond our control, including:

	§		adverse changes in national and local economic and market conditions;

	§		changes in interest rates and in the availability, cost and terms of debt financing;

	•		changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance with laws and regulations, fiscal policies and ordinances;

	•		the ongoing need for capital improvements, particularly in older buildings;

	•		changes in operating expenses; and

	•		civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. We may also acquire properties that are subject to a mortgage loan that may limit our ability to sell the properties prior to the loan’s maturity. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our shareholders.

The costs of compliance with or liabilities under environmental laws may harm our operating results.

Our operating expenses could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

	•		our knowledge of the contamination;

	•		the timing of the contamination;

	•		the cause of the contamination; or

	•		the party responsible for the contamination of the property.

There may be environmental problems associated with our properties of which we are unaware. Some of our properties contain, or may have contained in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.

The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition. In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could nonetheless be subject to strict liability by virtue of our ownership interest for environmental liabilities created by our tenants, and we cannot be sure that our tenants would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of material environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our shareholders.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or

irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

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

All of our properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. Government or an award of damages to private litigants, or both. While the tenants to whom we lease properties are obligated by law to comply with the ADA provisions, and typically under our leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition and our ability to make distributions to shareholders. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our ability to make distributions to our shareholders.

An uninsured loss or a loss that exceeds the policies on our properties could subject us to lost capital or revenue on those properties.

Under the terms and conditions of the leases currently in force on our properties, tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability and full replacement value property damage insurance policies. Our largest tenant, the federal government is not required to maintain property insurance at all. We have obtained comprehensive liability, casualty, flood and rental loss insurance policies on our properties. All of these policies may involve substantial deductibles and certain exclusions. In addition, we cannot assure you that our tenants will properly maintain their insurance policies or have the ability to pay the deductibles. Should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our shareholders.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect any market on which our common shares trade, the markets in which we operate, our operations and our profitability.

Terrorist attacks may negatively affect our operations. These attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. The terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. In addition, certain losses resulting from these types of events are uninsurable and others would not be covered by our current terrorism insurance. Additional terrorism insurance may not be available at a reasonable price or at all.

The United States may enter into armed conflicts in the future. The consequences of any armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.

Any of these events could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our shareholders, and may result in volatility in the market price for our common shares.

Tax Risks of our Business and Structure

If we fail to remain qualified as a REIT for federal income tax purposes, we will not be able to deduct our distributions, and our income will be subject to taxation.

We elected to be taxed as a REIT under the Internal Revenue Code commencing with our short taxable year ended December 31, 2003, which affords us significant tax advantages. The requirements for qualification as a REIT, however, are complex and our management has limited experience in operating a REIT. If we fail to meet these requirements and do not qualify for certain relief provisions, our distributions to our shareholders will not be deductible by us and we will be subject to a corporate level tax on our taxable income. This would substantially reduce our cash available to make distributions to our shareholders. In addition, incurring corporate income tax liability might cause us to borrow funds, liquidate some of our investments or take other steps that could negatively affect our operating results. Moreover, if our REIT status is terminated because of our failure to meet a REIT qualification requirement or if we voluntarily revoke our election, unless relief provisions applicable to certain REIT qualification failures apply, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost.

Distribution requirements relating to qualification as a REIT for federal income tax purposes limit our flexibility in executing our business plan.

Our business plan contemplates growth through acquisitions. To qualify and maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our shareholders at least 90% of our REIT taxable income each year. REIT taxable income is determined without regard to the deduction for dividends paid and by excluding net capital gains. We are also required to pay tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year. In addition, we are required to pay a 4% nondeductible excise tax on the amount, if any, by which certain distributions we pay with respect to any calendar year are less than the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year and any amount of our income that was not distributed in prior years.

We have distributed, and intend to distribute, to our shareholders all or substantially all of our taxable REIT income each year in order to comply with the distribution requirements of the Internal Revenue Code and to avoid federal income tax and the 4% nondeductible excise tax. Our distribution requirements limit our ability to fund acquisitions and capital expenditures through retained earnings. Thus, our ability to grow through acquisitions will be limited if we are unable to obtain debt or equity financing. In addition, differences in timing between the receipt of income and the payment of expenses in arriving at REIT taxable income and the effect of required debt amortization payments could require us to borrow funds to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

Moreover, even if we maintain our status as a REIT, the net income of the taxable REIT subsidiaries owned by our operating partnership will be subject to federal, state and local income taxes at regular corporate rates.

Our disposal of properties may have negative implications, including unfavorable tax consequences.

If we make a sale of a property directly or through an entity that is treated as a partnership or a disregarded entity, for federal income tax purposes, and it is deemed to be a sale of dealer property or inventory, the sale may be deemed to be a “prohibited transaction” under federal tax laws applicable to REITs, in which case our gain, or our share of the gain, from the sale would be subject to a 100% penalty tax. If we believe that a sale of a property might be treated as a prohibited transaction, we may dispose of that property through a taxable REIT subsidiary, in which case the gain from the sale would be subject to corporate income tax but not the 100% prohibited transaction tax. We cannot assure you, however, that the Internal Revenue Service will not assert successfully that sales of properties that we make directly or through an entity that is treated as a partnership or a disregarded entity, for federal income tax purposes, rather than through a taxable REIT subsidiary, are sales of dealer property or inventory, in which case the 100% penalty tax would apply.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or the market price of our securities.

If we or our predecessor entity failed to qualify as an S corporation for any of our tax years prior to our initial public offering, we may fail to qualify as a REIT.

To qualify as a REIT, we may not have at the close of any year undistributed “earnings and profits” accumulated in any non-REIT year, including undistributed “earnings and profits” accumulated in any non-REIT year for which we or our predecessor, First Potomac Realty Investment Trust, Inc., did not qualify as an S corporation. Although we believe that we and our predecessor corporation qualified as an S corporation for federal income tax purposes for all tax years prior to our initial public offering, if it is determined that we did not so qualify, we will not qualify as a REIT. Any such failure to qualify may also prevent us from qualifying as a REIT for any of the following four tax years.

If First Potomac Management, Inc. failed to qualify as an S corporation during any of its tax years, we may be responsible for any entity level taxes due.

On February 28, 2006, the Company entered into and closed under an Agreement and Plan of Merger with First Potomac Management, Inc., a Delaware S corporation (“FPM, Inc.”) owned solely by the Company’s Chairman, Louis T. Donatelli, four members of senior management, Douglas J. Donatelli, Nicholas R. Smith, James H. Dawson and Barry H. Bass, and a former member of senior management, Kyung Rhee (“Merger Agreement”). Pursuant to the Merger Agreement, FPM, Inc. merged into the Company in a merger under Section 368(a) of the Code (the “Merger”). Although we believe FPM, Inc. qualified as an S corporation for federal and state income tax purposes since its incorporation in 1997, the Company may be responsible for any entity level taxes due if FPM, Inc. did not qualify at any time as an S corporation. FPM, Inc. shareholders have severally indemnified the Company against any such loss, however, in the event one or more of the shareholders is unable to fulfill its indemnification obligation, the Company may not be reimbursed for a portion of the taxes.

Risks Related to an Investment in Our Common Shares

Our common shares trade in a limited market which could hinder your ability to sell our common shares.

Our equity market capitalization places us at the low end of market capitalization among all REITs. Because of our small market capitalization, many of our investors are individuals. Our common shares experience limited trading volume; relatively, many investors may not be interested in owning our common shares because of the inability to acquire or sell a substantial block of our common shares at one time. This illiquidity could have an adverse effect on the market price of our common shares. In addition, a shareholder may not be able to borrow funds using our common shares as collateral because lenders may be unwilling to accept the pledge of common shares having such a limited market. Any substantial sale of our common shares could have a material adverse effect on the market price of our common shares.

The market price and trading volume of our common shares may be volatile.

The market price of our common shares may become highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common shares include:

	§		actual or anticipated declines in our quarterly operating results or distributions;

	§		reductions in our funds from operations;

	§		increases in market interest rates that lead purchasers of our securities to demand a higher dividend yield;

	§		changes in market valuations of similar companies;

	§		adverse market reaction to any increased indebtedness we incur in the future;

	§		additions or departures of key management personnel;

	§		actions by institutional shareholders;

	§		speculation in the press or investment community; and

	§		general market and economic conditions.

Broad market fluctuations could negatively impact the market price of our common shares.

In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and prospects may be below the expectations of investors or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline in the market price of our common shares.

An increase in market interest rates may have an adverse effect on the market price of our common shares.

One of the factors that investors may consider in deciding whether to buy or sell our common shares is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution rate on our common shares or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings that we derive from rental income with respect to our properties and our related distributions to shareholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares. For instance, if interest rates rise without an increase in our distribution rate, the market price of our common shares could decrease because potential investors may require a higher yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and make distributions to our shareholders.

Shares eligible for future sale may have adverse effects on our share price.

We cannot predict the effect, if any, of future sales of common shares, or the availability of shares for future sales, on the market price of our common shares. Sales of substantial amounts of common shares, including up to approximately 2,000,000 common shares issuable upon (i) the redemption of units of our operating partnership, and (ii) exercise of options, or the perception that these sales could occur, may adversely affect prevailing market prices for our common shares and impede our ability to raise capital.

We also may issue from time to time additional common shares or preferred shares or units of our operating partnership in connection with the acquisition of properties, and we may grant demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of securities or the perception that these sales could occur may adversely affect the prevailing market price for our common shares. In addition, the sale of these shares could impair our ability to raise capital through a sale of additional equity securities.

Item 1B. Unresolved Staff Comments

We are not aware of any unresolved staff comments as of March 16, 2006.

ITEM 2: PROPERTIES

As of December 31, 2005, the Company owned in fee simple the following 52 properties totaling approximately 8.3 million square feet:


									Leased at
		No. of		Year of			Annualized		December
Property	Property Type	Bldgs.	Location	Acquisition	Square Footage		Rent		31, 2005¹			Primary Tenants
Plaza 500	Multi-tenant industrial	2	Alexandria, VA	1997		506,725	$	5,151,478		96.1	%	U.S. Government; Stock Building Supply, Inc.
Van Buren Business Park	Flex	5	Herndon, VA	1997		109,310		1,940,062		96.5	%	Fibertek
6600 Business Parkway	Single-tenant industrial	1	Elkridge, MD	1997		172,200		1,006,120		100.0	%	REICO Distributors
13129 Airpark Road	Multi-tenant industrial	1	Culpeper, VA	1997		150,400		748,224		100.0	%	Hoppmann, Packard Humanities Institute
Tech Court	Flex	2	Chantilly, VA	1998		64,064		747,102		77.0	%	Urban Engineering & Associates
Newington Business Park Center	Multi-tenant industrial	7	Lorton, VA	1999		254,114		2,468,514		98.3	%	U.S. Government
Crossways Commerce Center I	Multi-tenant industrial	1	Chesapeake, VA	1999		348,615		1,968,943		100.0	%	Anteon; Visteon
Crossways Commerce Center ll	Flex	2	Chesapeake, VA	1999		147,736		1,513,918		100.0	%	First Data
Coast Guard Building	Flex	1	Chesapeake, VA	1999		61,992		920,934		100.0	%	U.S. Government
Snowden Center	Flex	4	Columbia, MD	2002		140,438		1,812,534		88.9	%	Paratek Microwave
Rumsey Center	Flex	4	Columbia, MD	2002		134,654		1,135,251		78.0	%	Signal Perfection, LTD
Greenbrier Technology Center II	Flex	1	Chesapeake, VA	2002		79,684		913,677		90.1	%	AMSEC
Norfolk Business Center	Flex	1	Norfolk, VA	2002		90,682		723,515		87.7	%	Dataline; Verizon
Virginia Center	Flex	1	Glen Allen, VA	2003		119,324		1,286,903		86.8	%	Service Partners; GAC
Interstate Plaza	Single-tenant industrial	1	Alexandria, VA	2003		107,320		1,262,268		100.0	%	U.S. Government
Alexandria Corporate Park	Multi-tenant industrial	1	Alexandria, VA	2003		278,130		4,258,272		81.9	%	U.S. Government; CACI
Herndon Corporate Center	Flex	4	Herndon, VA	2004		127,353		2,671,710		100.0	%	U.S. Government
Aquia Commerce Center I & II	Flex	2	Stafford, VA	2004		64,488		1,496,700		100.0	%	U.S. Government
Deer Park	Flex	4	Randallstown, MD	2004		171,140		1,279,208		84.8	%	GT Brothers, Inc.
Gateway Center	Flex	2	Gaithersburg, MD	2004		44,307		646,157		100.0	%	Montgomery County Auto Parts
Gateway West	Flex	4	Westminster, MD	2004		110,147		921,723		79.4	%	Carroll County Public Library
Girard Business Center	Flex	3	Gaithersburg, MD	2004		123,900		1,169,690		87.1	%	Aspen Systems Corporation
Girard Place	Flex	4	Gaithersburg, MD	2004		175,217		1,424,016		100.0	%	Spirent Communications
15 Worman’s Mill Court	Flex	1	Frederick, MD	2004		39,966		377,810		100.0	%	Charles River Laboratories
20270 Goldenrod Lane	Flex	1	Germantown, MD	2004		24,468		347,812		75.2	%	RE/Max
6900 English Muffin Way	Multi-tenant industrial	1	Frederick, MD	2004		165,690		1,097,122		100.0	%	BP Solar; Capricorn Pharma
4451 Georgia Pacific Boulevard	Multi-tenant industrial	1	Frederick, MD	2004		169,750		1,138,557		100.0	%	Iron Mountain Information Management
7561 Lindbergh Drive	Single-tenant industrial	1	Gaithersburg, MD	2004		36,000		300,437		100.0	%	JK Moving and Storage
Patrick Center	Office	1	Frederick, MD	2004		66,706		1,297,063		95.5	%	Miles & Stockbridge; Merrill Lynch
West Park	Office	1	Frederick, MD	2004		28,950		437,602		83.8	%	U.S. Government; Batelle Memorial Institute
Woodlands Business Center	Office	1	Largo, MD	2004		37,940		451,678		60.1	%	Comcast Cable
Old Courthouse Square	Retail	1	Martinsburg, WV	2004		201,350		1,181,584		96.0	%	U.S. Government; Food Lion
Airpark Place	Flex	3	Gaithersburg, MD	2004		82,200		931,216		89.1	%	Dexall Biomedical Labs
15395 John Marshall Highway	Single-tenant industrial	1	Haymarket, VA	2004		123,777		1,147,413		100.0	%	Engineering Solutions & Products
Norfolk Commerce Park II	Flex	1	Norfolk, VA	2004		128,147		1,402,836		93.7	%	Verizon Virginia; Trader Publishing
Crossways II	Flex	1	Chesapeake, VA	2004		85,004		898,873		100.0	%	Wachovia Bank, N.A.
Windsor at Battlefield	Flex	2	Manassas, VA	2004		154,226		1,113,346		65.9	%	CRI/AHC; SAIC
Campus at Metro Park North	Flex	4	Rockville, MD	2004		190,238		4,172,716		100.0	%	Montgomery County Government
4612 Navistar Drive	Single-tenant industrial	1	Frederick, MD	2004		215,085		1,781,034		100.0	%	FKI Logistex
Reston Business Campus	Flex	4	Reston, VA	2005		83,000		1,436,263		91.6	%	PSC, Inc.
Enterprise Center	Flex	4	Chantilly, VA	2005		189,116		2,779,657		82.5	%	Harris Corporation
1400 Cavalier Boulevard	Multi-tenant Industrial	3	Chesapeake, VA	2005		299,963		1,275,593		100.0	%	The Burris Company
Glenn Dale Business Center	Multi-tenant Industrial	1	Glenn Dale, MD	2005		315,191		1,632,865		99.2	%	TVI Corporation, Home Depot
Gateway Centre	Flex	3	Manassas, VA	2005		99,607		967,872		91.4	%	GMRI, CACI
1434 Crossways Boulevard	Office	2	Chesapeake, VA	2005		220,501		2,447,394		100.0	%	Electronic Data Systems
2000 Gateway Boulevard	Multi-tenant Industrial	1	Hampton, VA	2005		421,100		—		0.0	%	—
403/405 Glenn Drive	Flex	2	Sterling, VA	2005		197,201		1,219,719		81.7	%	Iron Mountain
Diamond Hill Distribution Center	Multi-tenant Industrial	4	Chesapeake, VA	2005		712,550		2,780,781		99.8	%	TDS Logistics
Linden Business Center	Flex	3	Manassas, VA	2005		108,004		1,261,548		84.3	%	Automotive Resources
Owings Mills Business Center	Flex	4	Owings Mills, MD	2005		87,148		1,092,203		93.8	%	The Foundation Fighting Blindness
Prosperity Business Center	Multi-tenant Industrial	1	Merrifield, VA	2005		71,572		764,737		100.0	%	Prosperity Food Group
1000 Lucas Way	Flex	2	Hampton, VA	2005		182,175		1,390,595		91.5	%	Health Net Federal Services

TOTAL		114				8,318,565	$	74,593,245		89.3	%


¹		Leased percentage includes four leases totaling 17,184 square feet executed as of December 31, 2005 that commence in the first quarter of 2006.

Our principal executive offices are located at 7600 Wisconsin Avenue, 11^th Floor, Bethesda, Maryland 20814. The Company leases approximately 18,000 square feet at this location and believes this space is sufficient to meet our current needs. The Company relocated its corporate offices within Bethesda, Maryland on August 1, 2005. We have three other regional offices for our property management operations.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s Common Shares are listed on the New York Stock Exchange under the symbol “FPO.” The Company began trading on the New York Stock Exchange upon the closing of the initial public offering in October 2003. As of December 31, 2005, there were 30 shareholders of record and an estimated 5,717 beneficial owners.

The following table sets forth the high and low sales prices for the Company’s Common Shares and the distributions paid per share for 2005 and for 2004.


	Price Range				Dividends
2005	High		Low		Per Share
Fourth Quarter	$	28.04	$	23.87	$	0.300
Third Quarter		27.22		24.25		0.290
Second Quarter		25.35		21.77		0.275
First Quarter		24.34		20.85		0.260


	Price Range				Dividends
2004	High		Low		Per Share
Fourth Quarter	$	23.45	$	20.11	$	0.23
Third Quarter		20.90		19.00		0.21
Second Quarter		20.95		16.33		0.20
First Quarter		21.40		18.41		0.10

We will pay future distributions at the discretion of our board of trustees. Our ability to make cash distributions in the future will be dependent upon (i) the income and cash flow generated from our operations, (ii) cash generated or used by our financing and investing activities and (iii) the annual distribution requirements under the REIT provisions of the Code described above and such other factors as the board of trustees deems relevant. Our ability to make cash distributions will also be limited by the terms of our Operating Partnership Agreement and our financing arrangements as well as limitations imposed by state law and the agreements governing any future indebtedness.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2005 with respect to compensation plans under which equity securities of the Company are authorized for issuance. The Company has no equity compensation plans that were not approved by its security holders.


	Number of Securities to be		Number of Securities
	Issued upon Exercise of	Weighted-Average Exercise	Remaining Available for Future
	Outstanding Options, Warrants	Price of Outstanding Options,	Issuance Under Equity
Plan Category	and Rights	Warrants and Rights	Compensation Plan
Equity compensation plans approved by security holders	588,095	$16.70	832,863
Equity compensation plans not approved by security holders	—	—	—

The Company obtained approval from shareholders at its 2005 Annual Meeting of Shareholders to increase the authorized number of shares in the plan by 650,000.

The Company has not sold any of its unregistered equity securities or purchased any of its registered equity securities in the twelve months ended December 31, 2005. During 2005, 285,913 units were redeemed for common shares valued at $3.8 million, and 300,429 units valued at $7.8 million were issued with the acquisition of Owings Mills Business Center and Prosperity Business Center, resulting in 1,403,789 Operating Partnership units outstanding as of December 31, 2005.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial information of the Company. The financial information has been derived from the consolidated balance sheet and statement of operations of the Company and the combined balance sheets and statements of operations of the First Potomac Predecessor, the designation for the entities comprising the Company’s historical operations prior to the closing of the initial public offering. The First Potomac Predecessor’s historical operations include the activities of the Operating Partnership, First Potomac Realty Investment Trust, Inc. (the predecessor general partner of the Operating Partnership) and First Potomac Management, Inc. (the entity that formerly managed our properties for the periods prior to October 28, 2003, to date of completion of our initial public offering).

The following financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.


	Year Ended December 31,
(in thousands except per share amounts)	2005		2004		2003			2002			2001

Operating Data:
Rental revenue and tenant reimbursements	$	77,633	$	42,112	$	18,363		$	11,513		$	9,668
Income (loss) from continuing operations		1,350		586		(10,143	)		(6,126	)		(2,547	)
Income (loss) per share from continuing operations – basic and diluted	$	0.08	$	0.05	$	(0.73	)¹	$	—		$	—


	At December 31,
(in thousands except per share amounts)	2005		2004		2003		2002			2001

Balance Sheet Data:
Total assets	$	727,763	$	510,076	$	244,148	$	126,592		$	72,246
Mortgage loans and other debt		396,265		298,719		127,840		123,938			64,140
Shareholders’ equity and partners’ capital		289,331		177,693		92,132		(1,324	)		6,362
Dividends paid per share	$	1.125	$	0.740	$	—	$	—		$	—


¹		Loss per share from continuing operations for 2003 calculated based upon the loss incurred subsequent to the closing of the initial public offering on October 28, 2003.

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

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Form 10-K. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust.

The results of operations for the year ended December 31, 2005, represents the Company’s second full year of earnings and activities subsequent to its initial public offering completed in the fourth quarter of 2003. The results of operations for the years ended December 31, 2003 are based on the combined historical statements of operations of the First Potomac Predecessor.

The First Potomac Predecessor is not a legal entity but rather a combination of the following entities that comprised the historical operations of First Potomac Realty Trust:

	•		First Potomac Realty Investment Trust, Inc., the general partner of its Operating Partnership since 1997;

	•		First Potomac Realty Investment Limited Partnership, its Operating Partnership; and

	•		First Potomac Management, Inc., the property management company that managed all of its assets.

Significant 2005 Developments

During 2005, we completed the following:

	•		Acquired 13 properties totaling 3.0 million square feet at a contractual purchase price of $214.0 million;

	•		Completed our first Operating Partnership unit transaction as a public company.

	•		Raised $44.9 million through a private offering of 2,050,000 common shares at a price of $21.95 per share;

	•		Raised $79.1 million through an underwritten public offering of 3,450,000 common shares at a price of $24.23 per share;

	•		Entered into a first amendment with KeyBank N.A. and Wells Fargo National Bank regarding our unsecured revolving credit facility. The amendment reduced the applicable LIBOR margin from a range of 1.70% to 2.50% to a range of 1.45% to 1.95% and increased the limit of consolidated total indebtedness that the Company can incur from 60% to 65% of consolidated gross asset value. The facility maximum principal balance of $75.0 million was increased to $100.0 million during 2005.

	•		Secured financing on a $100.0 million fixed-rate loan with Jackson National Life Insurance Company. The loan has a 10-year term with a fixed rate of 5.19%. The loan was funded in two stages, with the first $65.0 million funding on July 18, 2005. Proceeds from the first funding were used to repay all the Company’s floating rate mortgage debt and to reduce the balance outstanding on our unsecured credit facility. The second $35.0 million funding occurred on December 16, 2005 with the proceeds used to satisfy the obligation under a mortgage loan maturing in December 2007. Seven properties served as collateral for the two funding.

Total assets at December 31, 2005 were $727.8 million compared to $510.1 million at December 31, 2004.

Critical Accounting Policies and Estimates

The Company’s consolidated and combined financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) that require the Company to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that the Company deems most important to the portrayal of its financial condition and results of operations. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our Consolidated Financial Statements. The Company’s critical accounting policies relate to revenue recognition, including evaluating the collectibility of accounts receivable, impairment of long-lived assets and purchase accounting for acquisitions of real estate.

The following section is a summary of certain aspects of these critical accounting policies.

Revenue Recognition

Rental income under leases with scheduled rent increases or rent abatement is recognized using the straight-line method over the term of the leases. Accrued straight-line rents included in the Company’s consolidated balance sheets represents the aggregate excess of rental revenue recognized on a straight-line basis over cash received under applicable lease provisions. The Company’s leases generally contain provisions under which the tenants reimburse the Company for a portion of incurred property operating expenses and real estate taxes. Such reimbursements are recognized in the period that the expenses are incurred. Lease termination fees are recognized on the date of termination when the related leases are canceled and the Company has no continuing obligation to provide services to such former tenants.

The Company must make estimates related to the collectibility of its accounts receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and other income. The Company specifically analyzes accounts receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on the Company’s net income because a higher required allowance for doubtful accounts receivable will result in lower net income.

Investments in Real Estate and Real Estate Entities

Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.

Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:


Buildings		39 years
Building improvements		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases
Furniture, fixtures, and equipment		5 to 15 years

The Company reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions or changes in management’s intended holding period indicate a possible impairment of the value of a property, an impairment analysis is performed. The Company assesses the recoverability based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. This estimate is based on projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly used by appraisers. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make subjective assessments as to whether there are impairments in the values of its investments in real estate.

The Company will classify a building as held for sale when the sale of the building is probable and will be completed within one year and that actions to complete the sale are unlikely to change or that a sale will be withdrawn. Accordingly, the Company classifies assets as held-for-sale when our Board of Trustees has made the decision to dispose of the building, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will record an impairment loss if the fair value reduced by selling costs is lower than the carrying amount of the building, and we will cease incurring depreciation. The Company will classify the impairment loss, together with the building’s operating results, as discontinued operations on its statement of operations and classify the assets and related liabilities as held-for-sale on the balance sheet. Interest expense is reclassified to discontinued operations only to the extent the property to be disposed of secures specific mortgage debt.

Purchase Accounting

The Company is required to make subjective assessments as to the fair value of assets acquired and liabilities assumed in connection with purchase accounting adjustments recorded related to rental properties and additional interests acquired in real estate entities acquired. Ownership interests acquired from related, common owners are accounted for at their historical cost basis. Acquisitions of ownership interests and rental property of other parties are accounted for at fair value. For purchases of rental property and additional interests that were consummated subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, the fair value of the real estate acquired was determined on an as-if-vacant basis. That value is allocated between land and building based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the net carrying value of the tenant improvements, which approximates their fair value. The difference between the purchase price and the fair value of the tangible assets on an as-if-vacant basis was allocated as follows:

	•		origination value of leases based on the unamortized capitalized leasing costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition;

	•		the value of above and below market in-place leases based on the present values (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual rent amounts and market rents over the remaining non-cancelable lease terms, ranging from one to eleven years;

	•		the intangible value of tenant or customer relationships; and

	•		the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred.

The Company’s determination of these values requires it to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, depreciation expense and amortization expense it recognizes for these leases and associated intangible assets and liabilities.

Results of Operations

Comparison of the Years Ended December 31, 2005, 2004 and 2003

The results of operations for the years ended December 31, 2005 and December 31, 2004, represent the Company’s initial and second complete years of earnings and activities subsequent to the initial public offering completed in the fourth quarter of 2003. The results of operations for the year ended December 31, 2003, are based on the combined historical statements of operations of the First Potomac Predecessor prior to the closing of the Company’s initial public offering on October 28, 2003.

The Company has completed $571.3 million in acquisitions comprised of 40 properties since October 2003 through December 31, 2005. The Company owned 52, 39 and 17 properties at December 31, 2005, 2004 and 2003, respectively. Operating results period over period are significantly affected by the volume and timing of acquisitions.

Outlined below is a summary of properties acquired during each of the years being compared.

2005 Acquisitions

The Company acquired the following 13 properties at an aggregate purchase cost of $224.7 million during 2005: Reston Business Campus, 1400 Cavalier Boulevard, Enterprise Center, Glenn Dale Business Center, Gateway Centre, 1434 Crossways Boulevard, 2000 Gateway Boulevard, 403/405 Glenn Drive, Diamond Hill Distribution Center, Linden Business Center, Prosperity Business Center, Owings Mills Business Center and 1000 Lucas Way. Collectively, the properties are referred to as the “2005 acquisitions.”

2004 Acquisitions

The Company acquired the following 23 properties at an aggregate purchase cost of $283.5 million during 2004: Herndon Corporate Center, Aquia Commerce Center I & II, Deer Park, 6900 English Muffin Way, Gateway Center, Gateway West, 4451 Georgia Pacific Boulevard, 20270 Goldenrod Lane, 15 Worman’s Mill Court, Girard Business Center, Girard Place, Old Courthouse Square, Patrick Center, 7561 Lindbergh Drive, West Park, Woodlands Business Center, Airpark Place Business Center, 15395 John Marshall Highway, Norfolk Commerce Park II, Crossways II, Windsor at Battlefield, 4612 Navistar Drive and Campus at Metro Park North. Collectively, the properties are referred to as the “2004 acquisitions.”

2003 Acquisitions

In October 2003, the Company acquired the remaining joint venture interest in the entities that owned interests in Rumsey Center, Snowden Center, Greenbrier Technology Center II and Norfolk Business Center. Acquisition of these ownership interests increased the Company’s ownership to 100 percent of the interests in these properties, and it therefore began consolidating the properties’ results of operations effective November 1, 2003. Prior to this date, the Company accounted for its interests in these properties using the equity method. The Company also acquired four properties in the fourth quarter of 2003 subsequent to the closing of its initial public offering at an aggregate purchase cost of $63.3 million: Virginia Center, Interstate Plaza, Alexandria Corporate Park and 6251 Ammendale Road. Virginia Center and Interstate Plaza were acquired on October 29, 2003 and December 1, 2003, respectively, and Alexandria Corporate Park and 6251 Ammendale Road were acquired in late December 2003. Collectively, these properties are referred to as the “2003 acquisitions.” The results of operations for 6251 Ammendale Road are reflected as discontinued operations in 2004 as the Company sold the property during the fourth quarter of 2004. The Company acquired this property on December 24, 2003, while only 38 percent leased, and as a result, the results of operations during 2003 were inconsequential.

The balance of the portfolio is referred to as the “Remaining Portfolio”.

Total Revenues

Rental revenue is summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
	2005		2004		Increase		Change			2004		2003		Increase		Change
Rental	$	65,310	$	36,486	$	28,824		79	%	$	36,486	$	15,341	$	21,145		138	%
Tenant reimbursements & other	$	12,323	$	5,626	$	6,697		119	%	$	5,626	$	3,022	$	2,604		86	%

Rental Revenues

Rental revenue is comprised of contractual rent, including the impacts of straight-line revenue, above and below market rental revenue. The $28.8 million increase in rental income in 2005 as compared to 2004 is primarily the result of recognizing a full year of operations for the 2004 acquisitions, which contributed, in the aggregate, $18.9 million in additional rental revenue in 2005 compared to 2004. In addition, the 2005 acquisitions generated rental revenue of $8.5 million in 2005. The remaining portfolio contributed to a majority of the additional increase in rental revenue as a result of increased occupancy and higher rental rates. During 2005, average rental rates on new and renewal leases increased 7.9% and 4.8%, respectively. The Company’s occupancy was 89.3% at December 31, 2005 compared to 93.8% at December 31, 2004 due to the acquisition of 2000 Gateway Boulevard, a vacant 421,100 square foot industrial facility. Excluding 2000 Gateway Boulevard, the Company’s occupancy improved to 94.0% at December 31, 2005.

The $21.1 million increase in rental income in 2004 as compared to 2003 is primarily the result of recognizing a full year of operations for the 2003 acquisitions, which contributed, in the aggregate, $10.7 million in rental revenue in 2004 over 2003. In addition, the 2004 acquisitions generated rental revenue of $9.7 million in 2004. The remaining portfolio contributed to a majority of the additional increase in rental revenue as a result of increased occupancy and higher rental rates. Average rental rates on new and renewal leases increased 2.3% during 2004. The Company’s occupancy increased to 93.8% at December 31, 2004 from 88.9% at December 31, 2003.

Tenant Reimbursement and Other Revenues

Tenant reimbursement revenue includes operating and common area maintenance costs reimbursed by the Company’s tenants as well as incidental other revenues such as late fees and lease termination fees. Tenant reimbursements and other revenues increased $6.7 million from 2005 to 2004, primarily due to the recognition of a full year’s operations of the 2004 acquisitions. These acquisitions collectively resulted in $3.7 million of additional tenant reimbursement revenue during 2005. In addition, the 2005 acquisitions contributed $1.8 million in tenant reimbursement revenue in 2005. The 2003 acquisitions

contributed the majority of the remaining increase in tenant reimbursement and other revenues. Termination fee income of $1.4 million was recognized during 2005 resulting in an increase of $1.3 million in termination fee income compared to 2004. The termination revenue was primarily attributable to two tenants that leased approximately 41,000 square feet with whom the Company negotiated terminations. In 2006, the Company leased approximately 16,000 of the 41,000 square feet at a higher rental rate.

Tenant reimbursements and other revenues increased $2.6 million from 2004 to 2003, primarily due to the recognition of a full year’s operations of the 2003 acquisitions. These acquisitions collectively resulted in $1.5 million of additional tenant reimbursement revenue during 2004. The 2004 acquisitions contributed the majority of the remaining increase in tenant reimbursement and other revenues.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
	2005		2004		Increase		Change			2004		2003		Increase		Change
Property operating expense	$	13,519	$	7,575	$	5,944		78	%	$	7,575	$	3,177	$	4,398		138	%
Real estate taxes and insurance	$	6,568	$	3,877	$	2,691		69	%	$	3,877	$	1,574	$	2,303		146	%

Property Expenses

The $5.9 million increase in property operating expense in 2005 as compared to 2004 is primarily the result of recognizing a full year of operating expenses for the 2004 acquisitions and the partial-year impact of the 2005 acquisitions, which contributed $4.0 million and $1.8 million, respectively, in additional property operating expense in 2005 compared to 2004. Occupancy in 2005, excluding the effects of 2000 Gateway Boulevard, trended at a higher average rate compared to 2004. This contributed to higher variable operating costs throughout 2005, including increased administrative and overhead costs, repairs and maintenance expense and higher utility costs.

The $4.4 million increase in property operating expenses from 2003 to 2004 was due primarily to $2.2 million and $1.9 million of property operating expenses from the 2003 and 2004 acquisitions, respectively. The increase in occupancy in 2004 also contributed to higher variable costs.

Real Estate Taxes and Insurance

Real estate taxes and insurance increased $2.7 million during 2005 compared to 2004, due primarily to $1.9 million in real estate taxes and insurance costs in 2005 for the 2004 acquisitions. The remaining increase is largely attributable to the 2005 acquisitions, which incurred $900 thousand of real estate taxes and insurance costs during 2005. The Company’s increased portfolio size distributed risk within the overall portfolio creating economies of scale that, in turn, resulted in lower insurance premiums and insurance expense during 2005 within the remaining portfolio.

Real estate taxes and insurance increased $2.3 million during 2004 compared to 2003, due primarily to $1.1 million in real estate taxes and insurance costs in 2004 for the 2003 acquisitions. The remaining increase is largely attributable to the 2004 acquisitions, which incurred $1.0 million of real estate taxes and insurance costs during 2004. Real estate taxes on the remaining portfolio increased as a result of generally higher assessed values and tax rates, and insurance costs were generally higher in 2004.

General and Administrative

General and administrative expenses are summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
	2005		2004		Increase		Change			2004		2003		Increase		Change
General and administrative	$	7,940	$	4,702	$	3,238		69	%	$	4,702	$	4,468	$	234		5	%

General and administrative expenses increased in 2005 from 2004 primarily due to increased personnel resulting in higher compensation and benefits-related expenses. The number of employees of the Company increased to 86 at December 31, 2005, compared to 44 at December 31, 2004, many of whom are included in corporate overhead. The relocation of our corporate offices also resulted in higher rent expense in 2005. These increases were partially offset by a decline in professional fees in 2005, as lower accounting, legal and consulting fees were incurred.

The increase in general and administrative expenses during 2004 compared to 2003 was also primarily due to increased personnel, resulting in additional compensation expense, increased professional fees, investor and shareholder-related costs and higher accounting services primarily as a result of the implementation of PCAOB Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. These increases were substantially offset by a $1.4 million charge incurred in 2003 arising from the acquisition of First Potomac Management LLC’s workforce subsequent to the Company’s initial public offering. First Potomac Management LLC was a wholly-owned subsidiary of First Potomac Management, Inc., the entity that managed the Company’s properties prior to the initial public offering. This $3.5 million acquisition was accounted for as a business combination, and $2.1 million of the purchase price was allocated to the value of the acquired in-place workforce (goodwill), and the remaining $1.4 million was treated as a termination charge related to extinguishment of the acquired management contracts.

Depreciation and Amortization Expense

Real estate depreciation and amortization expense is summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
	2005		2004		Increase		Change			2004		2003		Increase		Change
Depreciation and amortization expense	$	24,898	$	13,357	$	11,541		86	%	$	13,357	$	5,128	$	8,229		160	%

Depreciation and amortization expense includes depreciation of real estate assets, amortization of intangible assets and external and internal leasing commissions. Depreciation and amortization expense increased $11.5 million in 2005 from 2004 primarily due to depreciation and amortization expense from the 2004 acquisitions, which increased by $8.6 million. Depreciation expense further increased $4.1 million during 2005 as a result of the 2005 acquisitions. This was offset by lower depreciation and amortization expense on the remaining portfolio, primarily as a result of certain five-year personal property associated with the Company’s 1998 and 1999 acquisitions fully depreciating during 2004.

Depreciation and amortization expense increased $8.2 million in 2004 from 2003 primarily due to $4.9 million in depreciation and amortization expense in 2004 associated with the 2003 acquisitions. The remaining increase was due primarily to depreciation and amortization expense from the 2004 acquisitions.

Interest Expense

Interest expense is summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,						Percent
	2005		2004		Increase		Change			2004		2003		Increase		Change
Interest expense	$	20,516	$	11,428	$	9,088		80	%	$	11,428	$	11,075	$	353		3	%

Interest expense increased $9.1 million during 2005 from 2004 due largely to $4.9 million and $1.8 million of interest expense associated with mortgage debt assumed with the 2004 and 2005 acquisitions, respectively. The Company assumed mortgage debt on acquisitions with fair values of $79.7 million in 2005 and $140.1 million in 2004. Interest expense for our

variable rate borrowings on our unsecured credit facility associated with the 2005 acquisitions increased by $1.5 million as a result of higher average balances outstanding and higher short-term interest rates during 2005. The weighted average borrowings on the unsecured credit facility increased $32.0 million and the weighted average interest rate increased 1.2% during 2005 compared to 2004. By December 31, 2005, the Company’s average cost of borrowings declined to 5.37% compared to 5.69% at December 31, 2004, which can be attributed to the $100.0 million, 5.19% fixed-rate loan that closed in 2005 and is described more fully below. This loan replaced floating rate mortgage debt, borrowings under the credit facility and fixed-rate mortgage debt bearing interest at 7.26%.

Interest expense increased $353 thousand during 2004 from 2003. Increases of $3.6 million associated with mortgage debt assumed with the 2004 acquisitions and $1.5 million of additional mortgage interest expense associated with the 2003 acquisitions were substantially offset by the elimination of interest expense from mezzanine indebtedness and notes payable that were paid in full in October 2003 with proceeds from the Company’s initial public offering.

Loss From Early Retirement of Debt and Write-off of Assets

Loss from early retirement of debt is summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,							Percent
	2005		2004		Increase		Change			2004		2003		Decrease			Change
Loss from early retirement of debt	$	2,871	$	753	$	2,118		281	%	$	753	$	4,567	$	(3,814	)		(84	%)

The Company closed on a $100.0 million fixed-rate secured financing with Jackson National Life Insurance Company during the third and fourth quarter of 2005. The loan was funded in two stages with proceeds from the first funding used to repay all of the Company’s floating rate mortgage debt and reduce the balance outstanding on its revolving credit facility. The Company incurred a $95 thousand charge associated with the write-off of unamortized financing costs on the debt retired. Proceeds from the second funding were used to satisfy the obligation under a mortgage loan maturing in December 2007 and bearing interest at 7.26%. The Company incurred a $2.8 million charge related to the costs associated with satisfying the obligation under this loan and writing off unamortized financing costs.

The Company terminated its secured credit facility during the fourth quarter of 2004 and wrote off $617 thousand in unamortized deferred financing costs. The remainder of the 2004 loss can be attributed to the write-off of unamortized debt costs associated with the January 2004 repayment of $7.0 million of the $22.0 million first mortgage loan encumbering the Rumsey and Snowden properties.

The $4.6 million loss from early retirement of debt that was incurred in the fourth quarter of 2003 as a result of prepayment penalties and the write-off of unamortized debt costs associated with the repayment of $36.0 million in mezzanine financing.

Minority Interests

Minority interests are summarized as follows:

(Amounts in thousands)


	Years Ended December 31,						Percent			Years Ended December 31,							Percent
	2005		2004		Change		Change			2004		2003			Change		Change
Minority interests	$	109	$	48	$	61		127	%	$	48	$	(1,308	)	$	1,356		104	%

Minority interests reflect the ownership interests of the Operating Partnership held by parties other than the Company. At December 31, 2005, 6.5% of the interests were owned by limited partners compared to 8.9% at December 31, 2004. The reduction in minority interest ownership is attributable to the Company’s offerings of 2,050,000 and 3,450,000 common shares in March 2005 and October 2005, respectively, and 285,913 units redeemed for common shares during 2005, all of which increased the Company’s percentage ownership of the Operating Partnership. This was partially offset by the issuance of 300,429 operating partnership units for the Owings Mills Business Center and Prosperity Business Center acquisitions during 2005. Minority interest expense increased in 2005 as a result of the increase in net income, primarily driven by the impacts of the 2004 and 2005 acquisitions.

At December 31, 2004, 8.9% of the minority interests were owned by limited partners compared to 13.9% at December 31, 2003. The minority interests’ share of earnings from continuing operations was $48 thousand for the year ended December 31, 2004. Minority interests for 2003 prior to the initial public offering represented the allocation of net loss to the minority owners of the joint venture entities that owned Crossways Commerce Center I, Crossways Commerce Center II, the Coast Guard Building and Newington Business Park Center and the limited partners’ allocable share of losses in the Operating Partnership subsequent to the initial public offering.

Income from Discontinued Operations

(Amounts in thousands)


	2004
Income from operations of disposed property	$	155
Gain on sale of disposed property		2,092
Minority interest in discontinued operations		(203	)

	$	2,044

The Company sold 6251 Ammendale Road during the fourth quarter of 2004, and, accordingly, has presented the results of operations for this property as discontinued operations for the year ended December 31, 2004. The Company acquired this property on December 24, 2003, while only 38 percent leased, and the results of operations during 2003 were inconsequential. During 2004, the Company recognized income from operations of the disposed property of $154 thousand and a gain on sale of $2.1 million, net of the minority interests’ allocable share of the discontinued operations of $203 thousand.

Cash Flows

Consolidated cash flow information is summarized as follows:


	Years ended December 31,									Change
(in thousands)	2005			2004			2003			2005 vs. 2004			2004 vs. 2003
Cash and cash equivalents	$	3,356		$	2,532		$	16,307		$	824		$	(13,775	)
Cash provided by (used in) operating activities		25,012			13,596			(9,700	)		11,416			23,296
Cash used in investing activities		(142,011	)		(137,666	)		(49,592	)		(4,345	)		(88,074	)
Cash provided by financing activities		117,823			110,295			74,377			7,528			35,918

Comparison of the Years Ended December 31, 2005 and 2004

Net cash provided by operating activities increased $11.4 million in 2005. This increase was largely the result of the increased cash flow generated by the 2005 and 2004 acquisitions. The increased cash provided by these acquisitions in 2005 more than offset increases in escrows and reserves, accrued straight-line rents, and deferred costs, all of which resulted from a larger portfolio in 2005.

Net cash used in investing activities increased $4.3 million in 2005 primarily as a result of funding the cash portion of the 2005 acquisitions, which were acquired for a total purchase price of $224.7 million, net of mortgage debt assumed as part of the acquisitions with a total fair value of $79.7 million and the issuance of operating partnership units valued at $7.7 million. The cash funding of 2005 acquisitions was $5.6 million less than the cash funding of 2004 acquisitions. This was offset by the fact that $8.2 million in cash was received related to the sale of 6251 Ammendale Road in 2004. The Company also invested $4.6 million in capital and tenant improvement costs during the year ended December 31, 2005 compared to $3.0 million in 2004.

Net cash provided by financing activities increased $7.5 million in 2004 due primarily to borrowings of $286.9 under the Company’s credit facility incurred to finance the 2004 acquisitions. The Company incurred additional mortgage debt of $100.0 million and had net proceeds of $124.0 million from offerings of 2,050,000 and 3,450,000 common shares that closed on March 31, 2005 and October 26, 2005, respectively. The borrowings and offerings proceeds were used to repay mortgage and credit facility debt, including prepayment charges, of $271.5 million. Additionally, the Company paid $2.3 million in financing costs during 2005 for mortgage debt and related to amendments of the credit facility. The Company paid dividends to shareholders and distributions to minority interests of $20.4 million and received proceeds from employee stock option exercises of $1.1 million.

Comparison of the Years Ended December 31, 2004 and 2003

Net cash provided by operating activities increased $23.3 million in 2004. This increase was largely the result of the increased cash flow generated by the 2003 acquisitions and the 2004 acquisitions. The increased cash provided by these acquisitions in 2004 more than offset an increase in escrows and reserves, accounts receivable, prepaid expenses and other assets.

Net cash used in investing activities increased $88.1 million in 2004 primarily as a result of funding the cash portion of the 2004 acquisitions, which were acquired for a total purchase price of $283.5 million, net of mortgage debt assumed as part of the acquisitions with a total fair value of $140.1 million. In 2004, the Company received proceeds of $8.2 million from the sale of 6251 Ammendale Road. The proceeds from this sale were used toward the acquisition of Windsor at Battlefield. The Company also invested approximately $3.0 million in capital and tenant improvement costs during the year ended December 31, 2004, compared to $1.4 million during 2003.

Net cash provided by financing activities increased $35.9 million in 2004 due primarily to the $91.8 million net proceeds from the follow-on offering of 5,520,000 common shares that closed on June 23, 2004. In addition, borrowings of $66.7 million under the Company’s credit facilities were used to partially finance the 2004 acquisitions. During 2004, the Company repaid debt, of $36.4 million. Included in this debt repayment was a $7.0 million partial paydown of the $22.0 million of mortgage debt that encumbered the Company’s Rumsey Center and Snowden Center properties and $27.0 million to paydown the Company’s revolving credit facility. Additionally, the Company paid $1.8 million in financing costs during 2004 associated with the assumption of mortgage debt encumbering certain of the 2004 acquisitions, as well as costs associated with securing our revolving credit facility. Finally, the Company paid dividends to shareholders and distributions to minority interests of $9.9 million in 2004.

Liquidity and Capital Resources

The Company expects to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on its revolving credit facility. As a REIT, the Company is required to distribute at least 90% of its taxable income to its stockholders on an annual basis. The Company also regularly requires capital to invest in its existing portfolio of operating assets for capital projects. These capital projects include routine capital improvements and maintenance and leasing-related costs, including tenant improvements and leasing commissions.

On December 31, 2003, the Company entered into a $50.0 million secured revolving credit facility agreement with Fleet National Bank as managing administrative agent. The facility had a three-year term with a one-year extension option. The Company had the option to increase the facility by up to an additional $50.0 million prior to December 31, 2005. Availability under the facility was based upon the value of unencumbered assets that the Company pledged to secure the facility. Borrowings under the facility bore interest at 2.40% at December 31, 2004 plus 190 to 250 basis points on the amount of the facility.

On November 30, 2004, the Company terminated its secured credit facility and entered into a $75.0 million unsecured credit facility with KeyBank N.A. and Wells Fargo National Bank, with KeyBank N.A. as managing administrative agent. Availability under the facility is based upon the value of the Company’s unencumbered assets. The exact interest payable under the facility depends upon the ratio of our total indebtedness to total asset value.

On June 28, 2005, the Company entered into a first amendment to its unsecured credit facility. The amendment (i) reduced the applicable LIBOR margin from a range of 170 to 250 basis points to a range of 145 to 195 basis points and reduced the applicable base rate margin from a range of 0% to 0.50% to a range of 0% to 0.25% (the applicable margin depends upon the Company’s consolidated total leverage ratio); (ii) increased the limit of consolidated total indebtedness that the Company can incur from 60% to 65% of consolidated gross asset value; (iii) increased the Company’s tangible net worth requirement from $100.0 million to $200.0 million; (iv) reduced the restricted investments limitation from 30% to 20% of gross asset value; and (v) reduced the unhedged variable rate debt limitation from 25% to 20% of gross asset value. As part of the transaction, the Company paid an amendment fee to the lenders of five basis points on the amount of the facility.

On July 18, 2005, the Company closed on a $100.0 million fixed-rate secured financing with Jackson National Life Insurance Company. The loan has a 10-year term with a fixed rate of 5.19%, with interest only payments for the first five years and 30-year amortization thereafter. Terms of the financing allow the Company to substitute collateral as long as certain debt service coverage and loan-to-value ratios are maintained. The loan was funded in two stages, with the first $65.0 million funded at the initial closing. Proceeds from the first funding were used to repay the Company’s floating rate mortgage debt on

Greenbrier Technology Center, Norfolk Business Center, Rumsey Center and Snowden Center and to reduce the balance outstanding on its revolving credit facility. The Company incurred a $95 thousand charge associated with the write-off of unamortized financing costs from the retirement of debt. The second funding of $35.0 million occurred on December 16, 2005, with the proceeds used to satisfy the obligation under a mortgage loan bearing interest at 7.26% and scheduled to mature in December 2007. The Company incurred a one-time charge totaling approximately $2.8 million in the fourth quarter of 2005 related to the costs associated with satisfying the obligation under this loan and writing off unamortized deferred financing costs. Rumsey Center, Snowden Center, Greenbrier Technology Center, Norfolk Business Center and Alexandria Corporate Park served as the collateral for the first funding, and Plaza 500 and Van Buren Business Park were added to the collateral base with the second funding.

The Company intends to meet long-term liquidity requirements for the funding of property acquisitions and other non-recurring capital improvements through net cash from operations, long-term secured and unsecured indebtedness, including borrowings under its revolving credit facility, and the issuance of equity and debt securities. The Company’s ability to raise funds through sales of debt and equity securities is dependent on, among other things, general economic conditions, general market conditions for REITs, rental rates, occupancy levels, market perceptions and the trading price of the Company’s shares. The Company will continue to analyze which sources of capital are most advantageous to it at any particular point in time, but the capital markets may not be consistently available on terms that are attractive.

On October 28, 2003, the Company closed its initial public offering. The Company sold 7,500,000 common shares of beneficial interest at $15.00 per share, raising net proceeds of approximately $102.0 million. On November 21, 2003, the Company sold an additional 1,100,000 shares to cover over-allotments resulting in additional net proceeds of approximately $15.5 million. On June 23, 2004, the Company closed on a follow-on offering of 5,500,000 common shares at $17.60 per share, resulting in net proceeds of approximately $92.0 million. In November 2004, the Company filed an S-3 registration statement with the Securities and Exchange Commission to allow it to issue up to $300.0 million in debt and equity securities. On March 31, 2005, the Company sold 2,050,000 common shares of beneficial interest at $21.95 per share, generating net proceeds of approximately $44.9 million. The Company completed an offering of 3,450,000 common shares of beneficial interest at $24.23 per share, which closed on October 26, 2005, raising net proceeds of approximately $79.1 million. The Company used the net proceeds from these offerings to substantially pay down the balance on its revolving credit facility and acquire additional properties.

The Company has approximately $171.4 million available for issuance pursuant to its existing shelf registration statement described above and can file additional shelf registration statements as necessary.

The Company could also fund property acquisitions and other non-recurring capital improvements through additional borrowings, by refinancing properties or through joint ventures. The Company could also issue units of partnership interest in the Operating Partnership to fund a portion of the purchase price for some of its future property acquisitions. During 2005, the Company issued 300,429 Operating Partnership units as partial consideration for the acquisitions of Owings Mills and Prosperity Business Center.

Debt Financing

The following table sets forth certain information with respect to the Company’s indebtedness outstanding as of December 31, 2005.


				Principal
				Balance						Scheduled
	Effective Interest			December 31,		Annual Debt		Maturity		Balance at
(in thousands)	Rate			2005		Service		Date		Maturity
Fixed Rate Debt
4200 Tech Court		8.07	%	$	1,798	$	168		10/01/2009	$	1,705
4212 Tech Court		8.53	%		1,748		169		6/01/2010		1,654
Crossways Commerce Center		6.70	%		26,054		2,087		10/01/2012		23,313
Newington Business Park Center		6.70	%		16,435		1,316		10/01/2012		14,706
Interstate Plaza		5.30	%		8,546		726		1/01/2007		8,282
Herndon Corporate Center		5.66	%		8,764		603		4/01/2008		8,548
Aquia Commerce Center		6.50	%		931		165		2/01/2013		42
Suburban Maryland Portfolio¹		5.54	%		78,012		6,434		9/11/2008		71,825
Norfolk Commerce Park II		5.28	%		7,700		648		8/07/2008		7,034
4612 Navistar Drive		5.20	%		14,371		1,131		7/11/2011		11,921
Campus at Metro Park North		5.25	%		26,259		2,028		2/11/2012		21,581
Plaza 500		5.19	%		33,801		1,754		8/01/2015		33,801
Van Buren Office Park		5.19	%		7,580		393		8/01/2015		7,580
Rumsey Center		5.19	%		9,114		473		8/01/2015		9,114
Snowden Center		5.19	%		12,373		642		8/01/2015		12,373
Greenbrier Technology Center		5.19	%		4,972		258		8/01/2015		4,972
Norfolk Business Center		5.19	%		4,665		242		8/01/2015		4,665
Alexandria Corporate Park		5.19	%		27,495		1,428		8/01/2015		27,495
Enterprise Center		5.20	%		20,016		1,647		12/01/2010		16,712
Glenn Dale Business Center		5.13	%		9,128		780		5/01/2009		8,033
Gateway Centre Manassas		5.88	%		1,905		239		11/01/2016		—
1434 Crossways Boulevard		5.38	%		20,605		1,491		8/05/2012		16,463
403/405 Glenn Drive		5.50	%		9,265		746		7/01/2011		7,807
Linden Business Center		5.58	%		7,760		559		10/01/2013		6,596
Owings Mills Business Center		5.75	%		5,911		425		3/01/2014		5,066
Prosperity Business Center		5.75	%		4,058		332		1/01/2013		3,242

Subtotal				$	369,266	$	26,884			$	334,530

Floating Rate Debt
Credit Facility	LIBOR+1.70%			$	26,999	$	1,644		12/31/2006	$	26,999

Total				$	396,265	$	28,528			$	361,529


¹		Deer Park, Gateway Center, Gateway West, Girard Business Center, Girard Place, 15 Worman’s Mill Court, 20270 Goldenrod Lane, 6900 English Muffin Way, 4451 Georgia Pacific Blvd, 7561 Lindbergh Drive, Patrick Center, West Park, Woodlands Business Center and Old Courthouse Square collectively are referred to as the Suburban Maryland Portfolio.

All of our outstanding debt contains customary, affirmative covenants including financial reporting, standard lease requirements and certain negative covenants, all of which the Company was in compliance with as of December 31, 2005. The Company is also subject to cash management agreements with most of its mortgage lenders. These agreements require that revenue generated by the subject property be deposited into a clearing account and then swept into a cash collateral account for the benefit of the lender from which cash is distributed only after funding of improvement, leasing and maintenance reserves and payment of debt service, insurance, taxes, capital expenditures and leasing costs.

Derivative Financial Instruments

The Company used interest rate protection, or “cap” agreements to reduce the impact of interest rate changes on certain of its variable rate debt. Under the terms of these agreements, the Company made an initial premium payment to counter-party in exchange for the right to receive payments from the counter-party if interest rates exceed specified levels during the term of the agreement. The Company was subject to market risk for changes in interest rates and credit risk in the event of non-performance by the counterparty. The Company will only enter into these agreements with highly rated institutional counterparts and does not expect that any counterparties will fail to meet contractual obligations.

The Company had interest rate cap agreements with a notional amount of $25.5 million on floating rate mortgage debt that were repaid in July 2005. The cap agreements were not designated as cash flow hedges and were recorded at fair value as a component of prepaid and other assets. The Company recognized interest expense of approximately $7 thousand and $83 thousand during 2005 and 2004, respectively, related to the decline in fair market value of the caps. The fair value of the interest rate caps were fully written off in July 2005 upon retirement of the underlying mortgage debt.

Off-Balance Sheet Arrangements

The Company was not a party to any joint venture agreements and had no off-balance sheet arrangements as of December 31, 2005 or 2004. Prior to the initial public offering, the Company held joint venture interests in certain properties. The Company subsequently acquired the remaining interests in these joint ventures held by third parties using a combination of cash proceeds from the offering and limited partnership units in the Operating Partnership.

Disclosure of Contractual Obligations

The following table summarizes known material contractual obligations associated with investing and financing activities as of December 31, 2005.


(in thousands)			Payments due by period
			Less than		1 – 3		4 – 5		After 5
Contractual Obligations	Total		1 year		years		years		years
Mortgage and other loans payable	$	396,265	$	33,823	$	122,419	$	47,692	$	192,331
Interest expense		123,713		23,093		53,797		23,920		22,903
Operating leases		5,105		725		2,357		1,489		534

In addition to these obligations, the Company had tenant improvement cost obligations of $1.5 million that the Company expects to incur in 2006 on leases in place at December 31, 2005. The Company had no other material contractual obligations as of December 31, 2005.

Funds From Operations

Many investors and analysts following the real estate industry use funds from operations (“FFO”) as a supplemental performance measure. While the Company believes net income available to common shareholders as defined by GAAP is the most appropriate measure of operating results, management considers FFO an appropriate supplemental measure given its wide use by and relevance to investors and analysts. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume that the value of real estate diminishes predictably over time.

As defined by the National Association of Real Estate Investment Trusts, or NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company computes FFO in accordance with NAREIT’s definition, which may differ from the methodology for calculating FFO, or similarly titled measures, used by other companies and this may not be comparable to those presentations. FFO should not be viewed as a substitute to net income as a measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs that could materially impact the Company’s results of operations.

The following table presents a reconciliation of net income to FFO for the years ended December 31, 2005 and 2004 respectively. The Company has not presented FFO for 2003 since it does not consider full-year 2003 operating results indicative of results subsequent to its initial public offering and therefore not a meaningful supplemental performance measure.


	Funds From Operations
	Year Ended December 31,
(in thousands)	2005		2004
Net income	$	1,350	$	2,630
Add: Real estate depreciation and amortization		24,898		13,357
Discontinued operations depreciation and amortization		—		188
Minority interests		109		251
Deduct: Gain on sale of disposed property		—		(2,092	)


Funds from operations	$	26,357	$	14,334

Forward Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete current and future acquisitions; the Company’s ability to sell additional Common Shares; and other risks detailed under “Risk Factors.” Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.


ITEM 7A.		QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK (dollars in thousands)

The Company’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market interest rates. The Company uses derivative financial instruments to manage, or hedge, interest rate risks related to its borrowings. The Company does not use derivatives for trading or speculative purposes and only enters into contracts with major financial institutions based on their credit rating and other factors.

The Company had $27 million in variable rate debt, or 6.8%, of the total $396.3 million in debt outstanding as of December 31, 2005.

For fixed rate debt, changes in interest rates generally affect the fair value of debt but not the earnings or cash flow of the Company. The Company estimates the fair value of its fixed rate mortgage debt outstanding at December 31, 2005 to be $368.8 million compared to the $369.3 million carrying value at that date.

During 2004, the Company used interest rate protection, or “cap” agreements to seek to reduce the impact of interest rate changes on its variable rate debt. The Company had interest rate cap agreements in the notional amount of $25.5 million of December 31, 2004. Under the terms of these agreements, the Company made an initial premium payment to counter-party in exchange for the right to receive payments from the counterparty if interest rates exceed specified levels during the term of the agreement. The Company was subject to market risk for changes in interest rates and credit risk in the event of non-performance by the counterparty to the cap agreement. The Company will only enter into these agreements with highly rated institutional counterparts and does not expect that any counterparties will fail to meet contractual obligations. The Company recognized an increase in interest expense of $100 thousand for the year ended December 31, 2004 as a result of the decline in fair market value of these caps. Based on the Company’s variable-rate debt balances, including borrowings outstanding on the revolving credit facility, interest expense would have increased $500 thousand and $300 thousand in 2005 and 2004, respectively, if interest rates had been, on average, 1% higher or lower during those periods.

The following table represents the Company’s long-term debt obligations, principal cash flows by scheduled maturity and weighted average interest rates of fixed-rate mortgages at December 31, 2005.


	Years ended December 31,
	(in thousands)
	2006			2007			2008			2009			2010			Thereafter			Total
Mortgage debt	$	6,803		$	15,038		$	93,448		$	13,954		$	23,118		$	216,905		$	369,266
Credit facility		26,999			—			—			—			—			—			26,999
Weighted average interest rate - fixed rate debt		5.54	%		5.54	%		5.54	%		5.54	%		5.54	%		5.56	%		5.54	%


ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are filed with this Annual Report on Form 10-K immediately following the signature page of this Annual Report on Form 10-K.


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

None.


ITEM 9A.		CONTROLS AND PROCEDURES

The Company carried out an evaluation with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company 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, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.


ITEM 9B.		OTHER INFORMATION

None.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of trustees, 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:

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

	2.		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 trustees of the Company; and

	3.		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.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. The Company’s controls and procedures over financial reporting are designed to provide reasonable assurance of achieving their objectives.

Management has used the framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of the company’s internal control over financial reporting. Management has concluded that the company’s internal control over financial reporting was effective as of December 31, 2005, the end of the most recent fiscal year. KPMG LLP, our independent registered public accounting firm, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting.

Changes in Internal Controls Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
First Potomac Realty Trust:

We have audited Management’s Report on Internal Control Over Financial Reporting, included in the accompanying 2005 Annual Report on Form 10-K, that First Potomac Realty Trust (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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. Also, 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.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2005 and 2004 and the related consolidated and combined statements of operations, shareholders’ equity and partners’ capital and cash flows for each of the years in the three-year period ended December 31, 2005 of First Potomac Realty Trust and our report dated March 14, 2006 expressed an unqualified opinion on those consolidated and combined financial statements.

/s/KPMG LLP

McLean, Virginia
March 14, 2006

PART III


ITEM 10.		DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information is hereby incorporated by reference to the material appearing in the Company’s proxy statement to be filed in connection with the Company’s Annual Meeting of Shareholders to be held on May 26, 2006 (the “Proxy Statement”) under the headings “Proposal 1: Election of Trustees,” “Committees and Meetings of our Board of Trustees,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance”.


ITEM 11.		EXECUTIVE COMPENSATION

The information is hereby incorporated by reference to the Proxy Statement under the headings “Compensation of Trustees,” “Executive Compensation” and “Performance Graph”.


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

The information is incorporated by reference to Item 5 herein and to the Proxy Statement under the headings “Share Ownership of Trustees and Executive Officers” and “Share Ownership of Certain Beneficial Owners”.


ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information is incorporated by reference to the Proxy Statement under the heading “Certain Relationships and Related Transactions”.


ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information is incorporated by reference to the Proxy Statement under the heading “Audit Committee Report”.

PART IV


ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Schedules

Reference is made to the Index to Financial Statements and Schedules on page 44 for a list of the financial statements and schedules included in this report.

Exhibits

The following is a list of the exhibits included in this report:


Exhibit		Description of Document
3.1⁽¹⁾		Amended and Restated Declaration of Trust of the Registrant.
3.2⁽¹⁾		Amended and Restated Bylaws of the Registrant.
3.3⁽¹⁾		Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September 15, 2003.
10.1⁽¹⁾		Deed of Trust Note between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.2⁽¹⁾		Deed of Trust, Assignment of Leases and Rents and Security Agreement between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.3⁽¹⁾		Fixed Rate Note between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.4⁽¹⁾		Deed of Trust and Security Agreement between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.5⁽¹⁾		Fixed Rate Note between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.6⁽¹⁾		Deed of Trust and Security Agreement between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.7⁽¹⁾		Fixed Rate Note between Newington Terminal Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.8⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Newington Terminal Associates, LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.9⁽¹⁾		Fixed Rate Note between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.10⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.11⁽¹⁾		Promissory Note between Norfolk First LLC and GTC II First LLC, as borrowers, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.12⁽¹⁾		Deed of Trust and Security Agreement by and between GTC II First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.13⁽¹⁾		Deed of Trust and Security Agreement by and between Norfolk First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.14⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Rumsey/Snowden Holding LLC and First Potomac Realty Investment Limited Partnership.
10.15⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Greenbrier/Norfolk Holding LLC and First Potomac Realty Investment Limited Partnership.
10.16⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Kristina Way, LLC and Newington Terminal Associates LLC and First Potomac Realty Investment Limited Partnership.
10.17⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and FPM Management, LLC, as acquirer, dated July 18, 2003.
10.18⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and First Potomac Realty Investment Limited Partnership, as acquirer, dated July 18, 2003.
10.19⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Douglas J. Donatelli and the Registrant.


Exhibit		Description of Document
10.20⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Nicholas R. Smith and the Registrant.
10.21⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Barry H. Bass and the Registrant.
10.22⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between James H. Dawson and the Registrant.
10.23⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Louis T. Donatelli and the Registrant.
10.24⁽²⁾		Employment Agreement, dated February 14, 2005, by and between Joel F. Bonder and the Registrant.
10.25⁽³⁾		Summary of 2004 Cash Incentive Compensation, 2005 Base Salary Compensation and 2005 Restricted Stock Awards.
10.26⁽⁷⁾		Summary of 2006 Non-Employee Trustee Compensation.
10.27⁽¹⁾		2003 Equity Compensation Plan.
10.28⁽⁸⁾		Amendment No. 1 to Equity Compensation Plan.
10.29⁽¹⁾		Real Estate Purchase and Sale Agreement between Principal Life Insurance Company, as Seller, and First Potomac Realty Investment Limited Partnership as the Buyer, dated as of September 10, 2003.
10.30⁽¹⁾		Contract of Sale between Elman Alexandria Associates, LP, as Seller, and First Potomac Realty Trust, as Buyer, dated as of September 19, 2003.
10.31⁽⁹⁾		Agreement of Purchase and Sale for 4612 Navistar Drive and 400 East Gude Drive and 7300, 7301 and 7362 Calhoun Place, Rockville, MD by and between Navistar Management, LLC, T. Richard Butera, RIP Investments, LP, BP Gude Management, LLC, the Butera, LLLP, and RIP Investments, LP, as Sellers, and First Potomac Realty Investment Limited Partnership, as Buyer, dated as of October 22, 2004.
10.32⁽¹⁰⁾		Agreement of Purchase and Sale for Enterprise Center, by and between Enterprise Dulles, LLC, as Seller, and First Potomac Realty Investment Limited Partnership, as Buyer, dated as of January 27, 2005.
10.33⁽⁴⁾		Revolving Credit Agreement between First Potomac Realty Investment Limited Partnership and Fleet National Bank.
10.34⁽⁵⁾		First Amendment to Revolving Credit Agreement.
10.35⁽⁶⁾		Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association, as Managing Administrative Agent, and Wells Fargo Bank.
10.36⁽¹¹⁾		Consent to Sub-Sublease, by and among Bethesda Place II Limited Partnership, Informax, Inc. and the Registrant, dated March 31, 2005.
10.37⁽¹²⁾		First Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated June 28, 2005.
10.38⁽¹³⁾		Loan Agreement, by and among Jackson National Life Insurance Company, as lender, and Rumsey First LLC, Snowden First LLC, GTC II First LLC, Norfolk First LLC, Bren Mar, LLC, Plaza 500, LLC and Van Buren, LLC, as the borrowers, dated July 18, 2005.
10.39⁽¹⁴⁾		Second Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated October 12, 2005.
10.40⁽¹⁵⁾		Joinder Agreement, by and between, Gateway Hampton Roads, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.41⁽¹⁶⁾		Joinder Agreement, by and between FP Campostella Road, LLC, FP Diamond Hill, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.42⁽¹⁷⁾		Modification, Waiver and Consent between FPR Holdings Limited Partnership, as borrower, and JP Morgan Chase Bank, as trustee, dated December 15, 2005.
10.43⁽¹⁸⁾		Defeasance Pledge and Security Agreement among FPR Holding Limited Partnership, as pledgor, JP Morgan Chase Bank, as pledgee, Wachovia Bank, N.A., as servicer, and Wells Fargo Bank, N.A., as intermediary, dated December 15, 2005.
10.44⁽¹⁹⁾		Defeasance Assignment, Assumption and Release Agreement among FPR Holdings Limited Partnership, as pledgor, JP Morgan Chase Bank, as pledgee, SB FPR Holdings, LLC, as successor borrower, Wachovia Bank, N.A., as servicer, and Wells Fargo Bank, N.A., as intermediary, dated December 15, 2005.
21.1		Subsidiaries of the Registrant.
23.1		Consent of KPMG LLP (independent registered public accounting firm).
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer.
32.1		Section 906 Certification of Chief Executive Officer.
32.2		Section 906 Certification of Chief Financial Officer.


⁽¹⁾		Incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-11 (Registration No. 333-107172).

⁽²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽³⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽⁴⁾		Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.


⁽⁵⁾		Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

⁽⁶⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 6, 2004.

⁽⁷⁾		Incorporated by reference to Item 1.01 of the Company’s Current Report on Form 8-K filed on December 7, 2005.

⁽⁸⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2005.

⁽⁹⁾		Incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

⁽¹⁰⁾		Incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

⁽¹¹⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2005.

⁽¹²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 30, 2005.

⁽¹³⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2005.

⁽¹⁴⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁵⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁶⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁷⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 19, 2005.

⁽¹⁸⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 19, 2005.

⁽¹⁹⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 19, 2005.

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the state of Maryland on March 16, 2006.



		FIRST POTOMAC REALTY TRUST

		/s/ Douglas J. Donatelli
		Douglas J. Donatelli
		President and Chief Executive Officer

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 indicated on March 16, 2006.


Signature		Title

/s/ Louis T. Donatelli		Chairman of the Board of Trustees
Louis T. Donatelli

/s/ Douglas J. Donatelli Douglas J. Donatelli		President, Chief Executive Officer and Trustee

/s/ Barry H. Bass Barry H. Bass		Executive Vice President, Chief Financial Officer

/s/ Michael H. Comer Michael H. Comer		Senior Vice President, Chief Accounting Officer

/s/ Robert H. Arnold Robert H. Arnold		Trustee

/s/ Richard B. Chess Richard B. Chess		Trustee

/s/ J. Roderick Heller, III J. Roderick Heller, III		Trustee

/s/ R. Michael McCullough R. Michael McCullough		Trustee

/s/ Alan G. Merten Alan G. Merten		Trustee

/s/ Terry L. Stevens Terry L. Stevens		Trustee

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
First Potomac Realty Trust:

We have audited the accompanying consolidated balance sheets of First Potomac Realty Trust and subsidiaries as of December 31, 2005 and 2004, and the related consolidated and combined statements of operations, shareholders’ equity and partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated and combined financial statements, we also have audited financial statement schedule of real estate and accumulated depreciation. These consolidated and combined financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 and combined financial statements referred to above present fairly, in all material respects, the financial position of First Potomac Realty Trust and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated and combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First Potomac Realty Trust’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

McLean, Virginia
March 14, 2006

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004

(Amounts in thousands, except share amounts)


	2005			2004
Assets:
Rental property, net	$	669,134		$	463,937
Cash and cash equivalents		3,356			2,532
Escrows and reserves		9,818			6,301
Accounts and other receivables, net of allowance for doubtful accounts of $339 and $148, respectively		2,705			2,768
Accrued straight-line rents, net of allowance for doubtful accounts of $35 and $18, respectively		3,638			2,310
Deferred costs, net		6,676			4,196
Prepaid expenses and other assets		3,322			2,024
Intangible assets, net		29,114			26,008


Total assets	$	727,763		$	510,076


Liabilities:
Mortgage loans	$	369,266		$	259,039
Line of credit		26,999			39,680
Accounts payable and accrued expenses		4,734			4,058
Accrued interest		1,618			800
Rents received in advance		2,932			1,744
Tenant security deposits		3,973			2,804
Deferred market rent		7,281			5,267


Total liabilities		416,803			313,392


Minority interests		21,629			18,991

Shareholders’ equity:
Common shares, $0.001 par value, 100,000,000 shares authorized: 20,072,755 and 14,154,000 shares issued and outstanding, respectively		20			14
Additional paid-in capital		338,564			209,268
Dividends in excess of accumulated earnings		(49,253	)		(31,589	)


Total shareholders’ equity		289,331			177,693


Total liabilities and shareholders’ equity	$	727,763		$	510,076

See accompanying notes to consolidated and combined financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated and Combined Statements of Operations
Years ended December 31, 2005, 2004 and 2003

(Amounts in thousands, except per share amounts)


	2005			2004			2003
Revenues
Rental	$	65,310		$	36,486		$	15,341
Tenant reimbursements and other		12,323			5,626			3,022


Total revenues		77,633			42,112			18,363


Operating expenses
Property operating		13,519			7,575			3,177
Real estate taxes and insurance		6,568			3,877			1,574
General and administrative		7,940			4,702			4,468
Depreciation and amortization		24,898			13,357			5,128


Total operating expenses		52,925			29,511			14,347


Operating income		24,708			12,601			4,016


Other expenses (income)
Interest expense		20,516			11,428			11,075
Interest and other income		(138	)		(214	)		(222	)
Equity in earnings of investees		—			—			47
Loss from early retirement of debt		2,871			753			4,567


Total other expenses		23,249			11,967			15,467

Income (loss) from continuing operations before minority interests and discontinued operations		1,459			634			(11,451	)

Minority interests		(109	)		(48	)		1,308


Income (loss) from continuing operations		1,350			586			(10,143	)


Discontinued operations
Income from operations of disposed property		—			155			—
Gain on sale of disposed property		—			2,092			—

Minority interests in discontinued operations		—			(203	)		—


Income from discontinued operations		—			2,044			—


Net income (loss)	$	1,350		$	2,630		$	(10,143	)


Basic and diluted net income (loss) per share
Income (loss) from continuing operations	$	0.08		$	0.05		$	(0.73	)
Income from discontinued operations		—			0.18			—

Net income (loss) per share¹	$	0.08		$	0.23		$	(0.73	)


Weighted average common shares outstanding
- basic		16,595			11,530			8,177

Weighted average common shares outstanding
-diluted		16,805			11,662			8,177


¹		Net loss per share for 2003 is calculated on our loss of $5,938 incurred subsequent to the Company’s initial public offering, which closed on October 28, 2003.

See accompanying notes to consolidated and combined financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated and Combined Statements of Shareholders’ Equity and
Partners’ Capital
Years ended December 31, 2005, 2004 and 2003

(Amounts in thousands)


																		Total
						Dividends in												Shareholders’
			Additional			Excess of			Total			Partners’ Capital						Equity and
	Par		Paid-in			Accumulated			Shareholders’			General			Limited			Partners’
	Value		Capital			Earnings			Equity			Partners			Partners			Capital
Balances at January 1, 2003	$	—	$	2		$	(3,925	)	$	(3,923	)	$	25		$	2,574		$	(1,324	)

Sale of common stock		—		252			—			252			—			—			252
Dividends paid to shareholders		—		—			(1,419	)		(1,419	)		—			—			(1,419	)
Issuance of partnership units		—		—			—			—			—			2,693			2,693
Distributions to partners		—		—			—			—			—			(289	)		(289	)
Net loss		—		—			(576	)		(576	)		(36	)		(3,593	)		(4,205	)


Balances at October 28, 2003		—		254			(5,920	)		(5,666	)		(11	)		1,385			(4,292	)
Conversion of historical capital to minority interest upon the public offering of common stock		—		(254	)		(13,543	)		(13,797	)		11			(1,385	)		(15,171	)
Issuance of common stock		9		117,526			—			117,535			—			—			117,535
Net loss		—		—			(5,938	)		(5,938	)		—			—			(5,938	)


Balance at December 31, 2003		9		117,526			(25,401	)		92,134			—			—			92,134

Dividends paid to shareholders		—		—			(8,818	)		(8,818	)		—			—			(8,818	)
Redemption of partnership units		—		(39	)		—			(39	)		—			—			(39	)
Issuance of common stock		5		91,781			—			91,786			—			—			91,786
Net income		—		—			2,630			2,630			—			—			2,630


Balance at December 31, 2004		14		209,268			(31,589	)		177,693			—			—		$	177,693

Dividends paid to shareholders		—		—			(19,014	)		(19,014	)		—			—			(19,014	)
Redemption of partnership units		—		3,821			—			3,821			—			—			3,821
Exercise of stock options		1		1,168			—			1,169			—			—			1,169
Restricted stock expense		—		294			—			294			—			—			294
Issuance of common stock		5		124,013			—			124,018			—			—			124,018
Net income		—		—			1,350			1,350			—			—			1,350


Balance at December 31, 2005	$	20	$	338,564		$	(49,253	)	$	289,331		$	—		$	—		$	289,331

See accompanying notes to the consolidated and combined financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated and Combined Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003

(Amounts in thousands)


	2005			2004			2003
Cash flow from operating activities
Net income (loss)	$	1,350		$	2,630		$	(10,143	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Discontinued operations:
Gain on sale of property disposed		—			(2,092	)		—
Depreciation and amortization		—			188			—
Minority interests		—			203			—
Depreciation and amortization		25,013			14,381			5,523
Stock based compensation		430			56			105
Bad debt expense		340			—			—
Amortization of deferred market rent		(1,388	)		(563	)		(111	)
Amortization of deferred financing costs		783			—			—
Amortization of rent abatement		122			—			—
Minority interests		109			48			(1,308	)
Loss on early retirement of debt		2,871			753			4,567
Equity in losses of investees		—			—			47
Changes in assets and liabilities:
Escrows and reserves		(3,517	)		(2,879	)		(1,977	)
Accounts and other receivables		(230	)		(2,193	)		(41	)
Accrued straight-line rents		(1,376	)		(504	)		(138	)
Prepaid expenses and other assets		(1,315	)		(1,296	)		(375	)
Tenant security deposits		1,169			1,779			3
Accounts payable and accrued expenses		596			2,476			(2,786	)
Accrued interest		818			648			(2,230	)
Rent received in advance		1,188			942			360
Deferred costs		(1,951	)		(981	)		(1,196	)

Total adjustments		23,662			10,966			443


Net cash provided by (used in) operating activities		25,012			13,596			(9,700	)


Cash flows from investing activities
Purchase deposit on future acquisitions		(100	)		—			—
Additions to rental property		(4,595	)		(3,003	)		—
Distributions from investments in real estate entities		—			—			2,728
Proceeds from sale of real estate assets		—			8,240			—
Acquisition of rental property and associated intangible assets		(137,316	)		(142,903	)		(50,313	)
Acquisition of additional interest in subsidiaries, net		—			—			(2,007	)


Net cash used in investing activities		(142,011	)		(137,666	)		(49,592	)


Cash flows from financing activities
Financing costs		(2,286	)		(1,828	)		(681	)
Proceeds from debt		286,853			66,680			983
Repayments of debt		(271,496	)		(36,360	)		(41,646	)
Proceeds from issuance of shares, net		124,018			91,786			117,429
Redemption of partnership units		—			(132	)		—
Distributions to minority interests		(1,365	)		(1,033	)		—
Distributions to partners		—			—			(289	)
Dividends to shareholders		(19,014	)		(8,818	)		(1,419	)
Stock option exercises		1,113			—			—


Net cash provided by financing activities		117,823			110,295			74,377


Net increase (decrease) in cash and cash equivalents		824			(13,775	)		15,085

Cash and cash equivalents, beginning of year		2,532			16,307			1,222


Cash and cash equivalents, end of year	$	3,356		$	2,532		$	16,307

See accompanying notes to consolidated and combined financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(1) Summary of Significant Accounting Policies

(a) Description of Business

First Potomac Realty Trust (the “Company”) is a self-managed, self-administered Maryland real estate investment trust (“REIT”). The Company focuses on owning and operating industrial and flex properties in the Washington, D.C. metropolitan area and other major markets in Virginia and Maryland, which we collectively refer to as the southern Mid-Atlantic region.

The Company was formed in July 2003 to be the successor general partner to First Potomac Realty Investment Trust, Inc. (“Trust, Inc.”), the former general partner of First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The pre-IPO operations of Trust, Inc., the Operating Partnership and First Potomac Management, Inc. (“FPM”), the property management company that managed all of the Company’s assets prior to the initial public offering, are referred to herein as the First Potomac Predecessor. The results of operations for the years ended December 31, 2003, are based on the combined historical statements of operations of the First Potomac Predecessor (as defined below).

The Company owns all of its properties and conducts its business through the Operating Partnership. At December 31, 2005, the Company was the sole general partner of and owned a 93.5% interest in the Operating Partnership. The remaining interests in the Operating Partnership consist of limited partnership interests owned by third parties, including some of the Company’s executive officers and trustees who have contributed properties and other assets to the Company, and are presented as minority interests for accounting purposes.

As of December 31, 2005, the Company owned a 52-property portfolio consisting of 114-buildings totaling approximately 8.3 million square feet.

(b) Principles of Consolidation and Combination

The 2005 and 2004 consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, the subsidiaries of the Operating Partnership and FPM Management LLC, which succeeded to the business of FPM. All intercompany balances and transactions have been eliminated in consolidation.

Financial statements for the Company’s combined operations in 2003 relate to the Company and the First Potomac Predecessor. The combined financial statements of First Potomac Predecessor include the financial statements of Trust, Inc., the Operating Partnership and FPM as these entities were under the common control of a single group of owners, Louis and Douglas Donatelli, father and son (the “Control Group”). Prior to the initial public offering, Trust, Inc. was the sole general partner of the Operating Partnership. FPM managed all the properties held by the Operating Partnership. The Control Group owned 80 percent of Trust, Inc., 48 percent of the Operating Partnership (representing 100 percent of the voting interests) and 64 percent of FPM. Ownership interests acquired from the Control Group were recorded at their historical cost basis. Acquisitions of ownership interests of other parties were recorded at fair value and allocated between buildings, tenant improvements, intangible assets and in-place leases in accordance with SFAS No. 141 “Business Combinations.”

(c) Revenue Recognition

The Company generates substantially all of its revenue from leases on its industrial and flex properties. The Company recognizes rental revenue taking into account future contractual escalations and rent holidays on a straight-line basis over the life of the respective leases in accordance with SFAS No. 13, “Accounting for Leases.” Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. The Company considers current information and events regarding the tenants’ ability to pay their obligations in determining if accrued straight-line rents are ultimately collectible. The uncollectible portion of accrued straight-line rents is charged to earnings in the period in which the determination is made.

Tenant leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred by the Company. Such reimbursements are recognized in the period that the expenses are incurred. The Company records a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination.

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents.

(e) Escrows and Reserves

Escrows and reserves represent cash restricted for debt service, real estate taxes, insurance, capital items and tenant security deposits.

(f) Deferred Costs

Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using a method that approximates the interest method. Leasing costs related to the execution of tenant leases are deferred and amortized over the term of the related leases. Accumulated amortization of these combined costs was $1.7 million and $2.0 million at December 31, 2005 and 2004, respectively.

(g) Rental Property

Rental property is carried at cost less accumulated depreciation and impairment losses, where appropriate. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense incurred. Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of the Company’s assets by class are as follows:


Buildings		39 years
Building improvements		5 to 15 years
Tenant and leasehold improvements		Shorter of the terms of the related leases or useful lives of the assets
Furniture, fixtures and equipment		5 to 15 years

The Company reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market condition or changes in management’s intended holding period indicate a possible impairment of the value of a property, an impairment analysis is performed. The Company assesses the recoverability based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. This estimate is based on projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly used by appraisers. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value to the property. The Company is required to make subjective assessments as to whether there are impairments in the values of its investments in real estate.

(h)

Purchase Accounting for Acquisition of Rental Property and Additional Interests in Real Estate Entities

Purchase accounting is applied to the acquisition of rental property and to the assets and liabilities related to real estate entities in which the Company acquired additional interests. Ownership interests acquired from related, common owners are accounted for at their historical cost basis. Acquisitions of ownership interests and rental property of other parties are accounted for at fair value. For purchases of rental property and additional interests that were consummated subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, the fair value of the real estate acquired was determined on an as-if-vacant basis. That value is allocated between land and building based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the net carrying value of the tenant improvements, which approximates their fair value. The difference between the purchase price and the fair value of the tangible assets on an as-if-vacant basis was allocated as follows:

	•		origination value of leases based on the unamortized capitalized leasing costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition;

	•		the value of above and below market in-place leases based on the present values (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual rent amounts and market rents over the remaining non-cancelable lease terms, ranging from one to eleven years;

	•		the intangible value of tenant or customer relationships; and

	•		the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred.

(i) Intangible Assets

Intangible assets include the value of tenant or customer relationships and the origination value of leases in accordance with SFAS No. 141, ‘‘Business Combinations.’’ Customer relationship values are determined based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics we consider include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of customer relationship intangible assets is amortized to expense over the lesser of the initial lease term and any expected renewal periods or the remaining useful life of the building. We determine the fair value of the cost of acquiring existing tenants by estimating the leasing commissions avoided by having in-place tenants and the operating income that would have been lost during the estimated time required to lease the space occupied by existing tenants at the acquisition date. The cost of acquiring existing tenants is amortized to expense over the initial term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to expense on the date of termination.

Deferred market rent liability consists of the acquired leases with below-market rents at the date of acquisition. The effect of above-market rents acquired is recorded as a component of deferred costs. Above-market and below-market in-place lease values are determined on a lease-by-lease basis based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid under the lease and (b) our estimate of the fair market lease rate for the corresponding space over the remaining non-cancelable terms of the related leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any below-market renewal periods of the related leases. Capitalized above-market lease values are amortized as a decrease to rental income over the initial term of the related leases.

In conjunction with the initial public offering and related formation transactions, First Potomac Management, Inc. contributed all of the capital interests in FPM Management LLC, the entity that manages our properties, to the Operating Partnership. The $2.1 million fair value of the in-place workforce acquired has been classified as goodwill from third parties in accordance with SFAS No. 141, ‘‘Business Combinations” and is included as a component of intangible assets on the consolidated balance sheet. Goodwill is assessed for impairment annually at the end of our fiscal year and in interim periods if certain events, such as the loss of key personnel, occur indicating the carrying value is impaired. The Company performs its analysis for potential impairment of goodwill in accordance with SFAS No. 142, ‘‘Goodwill and Other Intangibles” (SFAS 142). SFAS 142 requires that a two-step impairment test be performed on goodwill. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed in order to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value then an impairment loss is recorded equal to the difference. No impairment losses were recognized during the three years ended December 31, 2005.

(j) Derivatives

The Company has used interest rate protection or “cap” agreements to reduce the impact of interest rate changes. Under the terms of these agreements, the Company will make an initial premium payment to a counter-party in exchange for the right to receive payments from them if interest rates exceed specified levels during the term of the agreement. The Company is subject to market risk for changes in interest rates and credit risk in the event of non-performance by the counterparty. The Company will only enter into these agreements with highly rated institutional counterparts and does not expect that any counterparties will fail to meet contractual obligations.

All derivatives are recognized as assets or liabilities at fair value with the offset to accumulated other comprehensive income in shareholders’ equity for effective hedging relationships. The Company had no accumulated other comprehensive income or loss related to derivatives or other activities during 2005, 2004 or 2003. For derivative financial instruments not designated as cash flow hedge instruments, realized and unrealized changes in fair value are recognized in current period earnings.

The Company had interest rate cap agreements with a notional amount of $25.5 million on floating rate mortgage debt that were repaid in July 2005. The cap agreements were not designated as cash flow hedges and were recorded at fair value as a component of prepaid and other assets. The Company recognized charges of approximately $7 thousand and $83 thousand during 2005 and 2004, respectively, related to the decline in fair market value of the caps. The remaining balances of the interest rate caps were fully written off in July 2005 upon retirement of the underlying mortgage debt.

(k) Income Taxes

Prior to the initial public offering, the combined companies operated as a limited partnership or elected to be taxed as subchapter S corporations for federal income tax purposes. As a result, the Company was not subject to federal income taxation at the corporate level as taxable income was the direct responsibility of the partners or shareholders. Accordingly, no provision was made for state or federal income taxes in the accompanying combined financial statements for periods prior to the IPO.

In conjunction with its initial public offering, the Company elected to be taxed as a REIT. To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income annually to its shareholders and meet other organizational and operational requirements. As a REIT, the Company will not be subject to federal income tax and any nondeductible excise tax if it distributes at least 90% of its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate tax rates. The Company had two taxable REIT subsidiaries (“TRS”) which generated taxable income during 2005, 2004 and 2003; however, the Company has determined any taxes resulting from TRS activities were inconsequential. The Company recognized an estimated tax liability of $65 thousand in 2005 as a result of the contribution of ownership interests by the TRS to the Operating Partnership. This elimination of the TRS ownership interest resulted in a taxable distribution of property. The estimated tax expense is included in general and administrative expenses in 2005.

For federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return of capital. The Company paid no dividends in 2003. The characterization of the Company’s dividends for 2005 and 2004 are as follows:


	2005			2004
	(unaudited)			(unaudited)
Ordinary income		40.03	%		59.4	%
Return of capital		57.25	%		40.6	%
Long-term capital gain		2.72	%		—

(l) Minority Interests

Minority interests relate to the interests in the Operating Partnership not owned by the Company. Interests in the Operating Partnership are owned by limited partners who contributed properties and other assets for the Operating Partnership in exchange for Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at the Company’s option, common shares of the Company on a one-for-one basis or an equivalent amount of cash. Unitholders receive distributions per unit equivalent to the dividend per common share. The Company owned 93.5%, 91.0% and 86.1% of the outstanding Operating Partnership units at December 31, 2005, 2004 and 2003, respectively. There were no redemptions of Operating Partnership units for common shares in 2004 or 2003. During 2004, 6,250 units were redeemed for $132 thousand in cash resulting in 1,389,273 operating units outstanding as of December 31, 2004. During 2005, 285,913 units were redeemed for common shares valued at $3.8 million, and 300,429 units valued at $7.7 million were issued with the acquisition of Owings Mills Business Center and Prosperity Business Centers, resulting in 1,403,789 Operating Partnership units outstanding as of December 31, 2005.

(m) Earnings Per Share

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted average number of the Company’s common shares outstanding. Diluted EPS is computed after adjusting the basic EPS computation for the effect of diluted common equivalent shares outstanding during the period. The Company has one common stock equivalent, share options issued under the 2003 Equity Compensation Plan. The effect of stock options, if dilutive, is computed using the treasury stock method.

The following table sets forth the computation of the Company’s basic and diluted earnings per share from continuing operations and income (loss) (dollars in thousands):


	2005		2004		2003
Numerator for basic and diluted per share calculations:
Income (loss) from continuing operations	$	1,350	$	586	$	(5,938	)¹
Income from discontinued operations		—		2,044		—

Net income (loss)	$	1,350	$	2,630	$	(5,938	)


	2005		2004		2003
Denominator for basic and diluted per share calculations:
Weighted average shares outstanding — basic		16,595		11,530		8,177
Effect of dilutive shares:
Employee stock option awards		210		132		—

Denominator for diluted per share amounts		16,805		11,662		8,177


Basic and diluted net income (loss) per share:
Continued operations	$	0.08	$	0.05	$	(0.73	)
Discontinued operations		—		0.18		—

Net income (loss)	$	0.08	$	0.23	$	(0.73	)


¹		Net loss per share for 2003 is calculated on our loss of $5,938 incurred subsequent to the Company’s initial public offering, which closed on October 28, 2003.

(n) Stock Based Compensation

In compliance with SFAS No. 123, “Accounting for Stock Based Compensation,” the Company has elected to follow the intrinsic value-based method of accounting prescribed by the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its fixed plan share options. As such, compensation expense would be recorded only if the current market price of the underlying shares on the date of grant exceeded the exercise price. In 2006, the Company will adopt SFAS No. 123(R) “Share Based Payment” using the modified prospective method and will recognize expense related to equity compensation .

Under SFAS No. 123, compensation expense of $658 thousand, $246 thousand and $129 thousand would have been recorded during 2005, 2004 and 2003, respectively, for our Equity Compensation Plan based upon the fair value of the awards.

Pro forma net income and net income per share would have been as follows (dollars in thousands):


	2005			2004			2003
Net income (loss), as reported	$	1,350		$	2,630		$	(5,938	)¹
Add: total stock-based compensation included in reported net income (loss)		401			50			90
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of minority interests		(658	)		(246	)		(129	)

Pro forma net income (loss)	$	1,093		$	2,434		$	(5,977	)

Net income (loss) per share, as reported – basic and diluted	$	0.08		$	0.23		$	(0.73	)
Pro forma net income (loss) per share – basic and diluted	$	0.07		$	0.21		$	(0.73	)


¹		Net loss per share for 2003 is calculated on our loss of $5,938 incurred subsequent to the Company’s initial public offering, which closed on October 28, 2003.

(o) Use of Estimates

The preparation of financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

(p) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

(q) Application of New Accounting Standards

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (“FAS 123R”), which requires that the cost resulting for all share-based payment transactions be recognized in the financial statements. FAS 123R requires a public company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee

is required to provide service in exchange for the award, defined as the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The provisions of FAS 123R are effective for fiscal years beginning after December 15, 2005. The Company will adopt this standard in 2006 using the modified prospective method and expects this will have a material effect on its consolidated financial position and results of operations. The Company will value all options using the Black-Scholes option-pricing model.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — A replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154). The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’s financial statements of a voluntary change in accounting principle unless it is impracticable. The provisions in SFAS 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Accordingly, the Company will adopt SFAS 154 effective January 1, 2006. The adoption of SFAS 154 is not expected to have a material effect on the results of operations of the Company.

In June 2005, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” This consensus establishes the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the consensus provides additional guidance. This consensus is currently applicable to the Company for new or modified partnerships, and will otherwise be applicable to existing partnerships in 2006. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. The Company does not believe the adoption of this EITF will have a material effect on its financial position, results of operations or cash flows.

In June 2005, the FASB ratified the consensus reached by the EITF regarding EITF 05-06, “Determining the Amortization Period of Leasehold Improvements.” The guidance requires that leasehold improvements acquired in a business combination, or purchased subsequent to the inception of a lease, be amortized over the lesser of the useful life of the assets or term that includes renewals that have been reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of this EITF did not have a material effect on the Company’s financial position, results of operations or cash flows.

(2) Rental Property

Rental property represents 52 and 39 industrial and flex rental properties as of December 31, 2005 and 2004, respectively, located in Maryland and Virginia. Rental property is comprised of the following (in thousands):


	December 31,
	2005			2004
Land	$	153,762		$	109,758
Buildings and improvements		530,246			361,025
Tenant improvements		17,558			10,542
Furniture, fixtures and equipment		9,794			9,706

		711,360			491,031
Less: accumulated depreciation		(42,226	)		(27,094	)

	$	669,134		$	463,937

(3) Acquisitions

The Company acquired the following properties in 2005:

Percent

Acquisition

Square

Leased at

Property

Location

Date

Property Type

Feet

12/31/05

Reston Business Campus

Reston, VA

3/17/05

Flex

83,000

1400 Cavalier Boulevard

Chesapeake, VA

4/07/05

Multi-tenant industrial

299,963

100

Enterprise Center

Chantilly, VA

4/14/05

Flex

189,116

Glenn Dale Business Center

Glenn Dale, MD

5/18/05

Multi-tenant industrial

315,191

Gateway Centre

Manassas, VA

7/19/05

Flex

99,607

1434 Crossways Boulevard

Chesapeake, VA

8/17/05

Office

220,501

100

2000 Gateway Boulevard

Hampton, VA

9/30/05

Multi-tenant industrial

421,100

403 & 405 Glenn Drive

Sterling, VA

10/07/05

Flex

197,201

Diamond Hill Distribution Center

Chesapeake, VA

10/12/05

Multi-tenant industrial

712,550

100

Linden Business Center

Manassas, VA

10/13/05

Flex

108,004

Prosperity Business Center

Merrifield, VA

11/03/05

Multi-tenant industrial

71,572

100

Owings Mills Business Center

Owings Mills, MD

11/03/05

Flex

87,148

1000 Lucas Way

Hampton, VA

12/08/05

Flex

182,175

The aggregate purchase cost of properties acquired in 2005 was allocated as follows (in thousands):


									Above
									(below)
			Acquired				In-place		market
			tenant		Building and		leases		leases
	Land		improvements		improvements		intangible		acquired			Total
Reston Business Campus	$	1,996	$	384	$	8,394	$	1,007	$	(15	)	$	11,766
1400 Cavalier Boulevard		1,387		24		11,338		824		(253	)		13,320
Enterprise Center		3,728		198		27,076		1,340		(151	)		32,191
Glenn Dale Business Center		3,369		206		14,298		860		(329	)		18,404
Gateway Centre Manassas		3,015		702		6,032		736		76			10,561
1434 Crossways Boulevard		4,447		2,211		22,528		2,022		(923	)		30,285
2000 Gateway Boulevard		4,132		—		10,674		—		—			14,806
403 & 405 Glenn Drive		3,940		240		12,307		884		(373	)		16,998
Diamond Hill Distribution Center		3,290		23		24,926		1,177		(146	)		29,270
Linden Business Center		4,829		327		10,651		742		(4	)		16,545
Prosperity Business Center		5,881		57		3,438		348		(325	)		9,399
Owings Mills Business Center		1,382		157		7,259		771		(558	)		9,011
1000 Lucas Way		2,592		901		7,662		1,053		(43	)		12,165


Total	$	43,988	$	5,430	$	166,583	$	11,764	$	(3,044	)	$	224,721

The Company acquired the following properties in 2004:


						Percent
		Acquisition		Square		Leased at
Property	Location	Date	Property Type	Feet		12/31/04
Herndon Corporate Center	Herndon, VA	4/27/04	Flex		127,353		98	%
Aquia Commerce Center I & II	Stafford, VA	6/04/04	Flex		64,488		100	%
Deer Park¹	Randallstown, MD	7/16/04	Flex		171,140		94	%
Gateway Center¹	Gaithersburg, MD	7/16/04	Flex		44,307		100	%
Gateway West¹	Westminster, MD	7/16/04	Flex		110,147		75	%
Girard Business Center¹	Gaithersburg, MD	7/16/04	Flex		123,900		97	%
Girard Place¹	Gaithersburg, MD	7/16/04	Flex		175,190		95	%
15 Worman’s Mill Court¹	Frederick, MD	7/16/04	Flex		39,966		93	%
20270 Goldenrod Lane¹	Germantown, MD	7/16/04	Flex		24,468		100	%
6900 English Muffin Way¹	Frederick, MD	7/16/04	Multi-tenant industrial		165,690		100	%
4451 Georgia Pacific Blvd.¹	Frederick, MD	7/16/04	Multi-tenant industrial		169,750		100	%
7561 Lindbergh Drive¹	Gaithersburg, MD	7/16/04	Single-tenant industrial		36,000		100	%
Patrick Center¹	Frederick, MD	7/16/04	Office		66,706		95	%
West Park¹	Frederick, MD	7/16/04	Office		28,950		89	%
Woodlands Business Center¹	Largo, MD	7/16/04	Office		37,940		80	%
Old Courthouse Square¹	Martinsburg, WV	7/16/04	Retail		201,350		95	%
Airpark Place	Gaithersburg, MD	8/05/04	Flex		82,200		90	%
15395 John Marshall Highway	Haymarket, VA	10/22/04	Single-tenant industrial		123,777		100	%
Norfolk Commerce Park II	Norfolk, VA	10/22/04	Flex		127,625		94	%
Crossways II	Chesapeake, VA	10/22/04	Flex		85,004		100	%
Windsor at Battlefield	Manassas, VA	12/21/04	Flex		154,226		59	%
Campus at Metro Park North	Rockville, MD	12/23/04	Flex		190,238		100	%
4612 Navistar Drive	Frederick, MD	12/23/04	Single-tenant industrial		215,085		100	%


¹		Properties were acquired as part of a portfolio collectively referred to as the Suburban Maryland Portfolio.

The aggregate purchase cost of properties acquired in 2004 was allocated as follows (in thousands):


			Acquired						Customer		Deferred
			tenant		Building and		In-place leases		relations		market
	Land		improvements		improvements		intangible		intangible		revenue, net			Total
Herndon Corporate Center	$	4,087	$	314		14,337		1,669		66		(30	)		20,443
Aquia Commerce Center I & II		1,795		63		8,626		1,025		49		(187	)		11,371
Suburban Maryland Portfolio		34,761		2,001		86,432		7,606		37		(2,188	)		128,649
Airpark Place		2,697		26		7,115		336		—		(157	)		10,017
15395 John Marshall Highway		2,736		459		6,842		916		—		—			10,953
Norfolk Commerce Park II		1,205		400		8,309		999		12		45			10,970
Crossways II		1,036		100		6,175		712		—		(39	)		7,984
Windsor at Battlefield		3,228		810		10,886		786		—		(340	)		15,370
4612 Navistar Drive		3,808		126		18,637		1,443		—		(215	)		23,799
Campus at Metro Park North		9,220		1,237		30,819		3,826		—		(1,196	)		43,906


Total	$	64,573	$	5,536	$	198,178	$	19,318	$	164	$	(4,307	)	$	283,462

The value of above and below market in-place leases is based on the present value of the difference between the contractual rent and the market rents over the remaining non-cancelable lease term (using a discount rate that reflects the risks associated with the leases acquired).

Pro Forma Financial Information

The pro forma financial information set forth below presents results as if all of the Company’s 2005 and 2004 acquisitions, dispositions and common share offerings had occurred on January 1, 2004. The pro forma information is not necessarily indicative of the results that actually would have occurred nor does it intend to indicate future operating results.


	For the Year Ended December 31,
	2005		2004
Pro forma total revenues	$	92,100	$	89,483
Pro forma net income		2,606		5,594
Pro forma basic and diluted earnings per share	$	0.13	$	0.28

(4) Intangible Assets

Intangible assets consisted of the following at December 31 (in thousands):


	2005			2004
In-place leases	$	38,449		$	28,105
Customer relations		504			504
Above market leases		1,675			885
Goodwill		2,100			2,100

		42,728			31,594
Less: accumulated amortization		(13,614	)		(5,586	)

	$	29,114		$	26,008

The Company recognized $8.2 million, $4.1 million and $1.5 million of amortization expense on intangible assets for the years ended December 31, 2005, 2004 and 2003, respectively. Losses due to termination of tenant leases and defaults were $737 thousand and $77 thousand during 2005 and 2004, respectively. No losses were incurred in 2003.

Estimated amortization of intangible assets as of December 31, 2005, for each of the five succeeding fiscal years is as follows (in thousands):


2006	$	9,010
2007		5,619
2008		3,973
2009		2,905
2010		1,934

(5) Discontinued Operations

Income from discontinued operations includes revenues and expenses associated with 6251 Ammendale Road. The Company classified this property as held for sale during 2004 and subsequently sold the property in November 2004. The Company recognized a gain of $2.1 million upon the sale of the property and has no continuing involvement with the property subsequent to its disposal. The Company acquired this property on December 24, 2003, while only 38 percent leased, and the results of operations during 2003 were inconsequential.

The following table summarizes the components of income from discontinued operations (in thousands):


Revenue	$	765
Property operating expenses		422
Depreciation and amortization		188

Income from operations		155
Gain on sale of disposed property		2,092
Minority interests in discontinued operations		(203	)

Income from discontinued operations	$	2,044

In November 2005, the Company’s Board of Trustees approved the Company’s plan to sell its 6600 Business Parkway property which the Company began actively marketing in January 2006. Subsequently, the Company signed a non-binding letter of intent to sell the property and anticipates a disposition in the first or second quarter of 2006. The Company has not classified the property as held for sale as it did not meet the criteria for reclassification under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, at December 31, 2005.

(6) Mortgage Loans and Other Debt

The Company’s borrowings consisted of the following (in thousands):


	December 31,
	2005		2004
Credit facility with a variable rate of LIBOR +1.70%	$	26,999	$	39,680
Mortgage debt with interest rates ranging from 5.13% to 8.53% maturing at various dates through November 2016		369,266		259,039

	$	396,265	$	298,719

(a) Credit Facility

On November 30, 2004, the Company entered into a $75 million unsecured credit facility with KeyBank N.A. and Wells Fargo National Bank, with KeyBank N.A. as managing administrative agent. Availability under the facility is based upon the value of the Company’s unencumbered assets. The exact interest payable under the facility depends upon the ratio of our total indebtedness to total asset value.

On June 28, 2005, the Company entered into a first amendment to its unsecured credit facility. The amendment (i) reduced the applicable LIBOR margin from a range of 170 to 250 basis points to a range of 145 to 195 basis points and reduced the applicable base rate margin from a range of 0% to 0.50% to a range of 0% to 0.25% (the applicable margin depends upon the Company’s consolidated total leverage ratio); (ii) increased the limit of consolidated total indebtedness that the Company can incur from 60% to 65% of consolidated gross asset value; (iii) increased the Company’s tangible net worth requirement from $100 million to $200 million; (iv) reduced the restricted investments limitation from 30% to 20% of gross asset value; and (v) reduced the unhedged variable rate debt limitation from 25% to 20% of gross asset value. As part of the transaction, the Company paid an amendment fee to the lenders of five basis points on the amount of the facility.

On October 12, 2005, the Company entered into a second amendment to its unsecured revolving credit facility, which increased the permitted borrowings under the revolving credit facility from $75 million to $100 million, changed the maximum recourse debt covenant from $10 million to 10% of gross asset value, modified the process for adding eligible unencumbered properties to the unsecured corporate debt and removed a restriction regarding additional unsecured corporate debt. The Company has the option to increase the facility up to an additional $75 million prior to December 31, 2006. The exact interest payable under the facility depends upon the ratio of our total indebtedness to total asset value, and this ratio cannot exceed 65%. The Company is required to pay annual commitment fees that vary from 0.15% to 0.25% based on the amount of unused capacity under the credit facility. The unsecured facility contains financial and other covenants. The Company met all requirements under these covenants as of December 31, 2005.

The weighted average borrowings outstanding on the credit facility during 2005 was $36.1 million with a weighted average interest rate of 5.01% associated with the borrowing, compared to $4.1 million and 3.83% during 2004. The Company’s maximum daily borrowings outstanding were $84.8 million and $39.7 million during 2005 and 2004, respectively. Outstanding borrowings under the credit facility at December 31, 2005 were $27 million. There were no borrowings outstanding under the credit facility at December 31, 2004. The Company had additional borrowing capacity from the credit facility of $73 million and $35 million as of December 31, 2005 and December 31, 2004, respectively. The weighted average interest rate was 6.30% on borrowings outstanding on the line of credit at December 31, 2005, compared to 4.2% at December 31, 2004.

(b) Mortgage Debt

At December 31, 2005 and 2004, the Company’s mortgage debt was as follows (in thousands):


	December 31,
	2005		2004
4200 Tech Court, 8.07%, matures October 2009.	$	1,798	$	1,818
4212 Tech Court, 8.53% matures June 2010.		1,748		1,765
Crossways Commerce Center, 6.70%, matures October 2012.		26,054		26,338
Newington Business Park Center, 6.70%, matures October 2012.		16,435		16,614
Interstate Plaza, 7.45%, effective interest rate of 5.30%, matures January 2007.		8,546		8,796
Herndon Corporate Center, 5.11%, effective interest rate of 5.66%, matures April 2008.		8,764		8,878
Aquia Commerce Center, 6.50%, matures February 2013.		931		1,023
Suburban Maryland Portfolio, 6.71%, effective interest rate of 5.54%, matures September 2008.		78,012		80,129


	December 31,
	2005		2004
Norfolk Commerce Park II, 6.90%, effective interest rate of 5.28%, matures August 2008.		7,700		7,805
4612 Navistar Drive, 7.48%, effective interest rate of 5.20%, matures July 2011.		14,371		14,753
Campus at Metro Park North, 7.11%, effective interest rate of 5.25%, matures February 2012.		26,259		26,900

Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center, Norfolk Business Center and Alexandria Corporate Park, 5.19%, matures August 2015.		100,000		—
Van Buren Business Park, 6600 Business Parkway, 13129 Airpark Road and Plaza 500, 7.26% repaid in December 2005.		—		38,720

Greenbrier Technology Center and Norfolk Business Center, floating rate of LIBOR + 2.45%, repaid in July 2005.		—		10,500
Rumsey Center and Snowden Center, floating rate of LIBOR + 2.35%, repaid in July 2005.		—		15,000
Enterprise Center, 8.03%, effective interest rate of 5.20%, matures December 2010.		20,016		—
Glenn Dale Business Center, 7.83%, effective interest rate of 5.13%, matures May 2009.		9,128		—
Gateway Centre Manassas, 7.35%, effective interest rate of 5.88%, matures November 2016.		1,905		—
1434 Crossways Blvd, 6.25% and 7.05%, effective interest rate of 5.38%, matures March 2013 and August 2012.		20,605		—
403 and 405 Glenn Drive, 7.60%, effective interest rate of 5.50%, matures July 2011.		9,265		—
Linden Business Center, 6.01%, effective interest rate of 5.58%, matures October 2013.		7,760		—
Owings Mills Business, Center 5.85%, effective interest rate of 5.75%, matures March 2014.		5,911		—
Prosperity Business Center, 6.25%, effective interest rate of 5.75%, matures January 2013.		4,058		—

	$	369,266	$	259,039

On July 18, 2005, the Company closed on a $100 million fixed-rate secured financing with Jackson National Life Insurance Company. The loan has a 10-year term with a fixed rate of 5.19%, with interest only payments for the first five years and based on a 30-year amortization thereafter. Terms of the financing allow the Company to substitute collateral as long as certain debt service coverage and loan-to-value ratios are maintained. The loan was funded in two stages, with the first $65 million funded at the initial closing. Proceeds from the first funding were used to repay the Company’s floating rate mortgage debt on Greenbrier Technology Center, Norfolk Business Center, Rumsey Center and Snowden Center and to reduce the balance outstanding on its revolving credit facility. The Company incurred a $95 thousand charge associated with the write-off of unamortized financing costs from the retirement of debt. The second funding of $35 million, occurred on December 16, 2005, with the proceeds used to satisfy the obligation of a mortgage loan bearing interest at 7.26% and scheduled to mature in December 2007. The Company incurred a one-time charge totaling approximately $2.8 million in the fourth quarter of 2005 related to the costs associated with satisfying the obligation under this loan and writing off unamortized deferred financing costs. Rumsey Center, Snowden Center, Greenbrier Technology Center, Norfolk Business Center and Alexandria Corporate Park served as the collateral for the first funding, and Plaza 500 and Van Buren Business Park were added to the collateral base with the second funding.

On January 30, 2004, the Company repaid $7.0 million of the loan encumbering our Rumsey Center and Snowden Center properties. As part of this transaction, the Company negotiated a reduction in the loan’s interest rate and extended the loan’s maturity date by one year. As a result of this restructuring, the outstanding principal balance was reduced to $15.0 million. The loan’s maturity date was extended to December 31, 2006 and the effective interest rate was reduced from 4.57% to 3.47% (by reducing the LIBOR floor from 2.0% to 1.1% and reducing the spread from 257 basis points to 235 basis points). No prepayment penalties were incurred as a result of this transaction, and the Company incurred at $0.1 million charge as a result of writing-off a portion of the deferred financing costs associated with this mortgage.

During 2003, in conjunction with acquisitions of rental property and ownership interests, the Company assumed $32.5 million in debt encumbering Rumsey Center, Snowden Center, Greenbrier Technology Center II and Norfolk Business Center and $9.1 million related to the acquisition of Interstate Plaza.

The Company’s mortgage debt is recourse solely to specific assets. The Company had 39 and 32 properties that secured mortgage debt at December 31, 2005 and 2004, respectively.

Future minimum principal payments on the Company’s mortgage loans and credit facility as of December 31, 2005, are as follows (in thousands):


2006	$	33,802
2007		15,038
2008		93,448
2009		13,954
2010		23,118
Thereafter		216,905

	$	396,265

(7) Commitments and Contingencies

(a) Operating Leases

The Company’s rental properties are subject to non-cancelable operating leases generating future minimum rental payments based on contractual rental revenue as of December 31, 2005, as follows (in thousands):


			Percent of square
	Future		feet under leases
	minimum rents		expiring
2006	$	70,503		18	%
2007		60,140		15	%
2008		49,498		10	%
2009		39,828		16	%
2010		28,046		11	%
Thereafter		19,192		30	%

Total	$	267,207		100	%

At December 31, 2005, our portfolio was approximately 89% leased to 471 tenants.

The Company rents office space for its corporate office under a non-cancelable operating lease, which it entered upon relocating its corporate offices effective August 1, 2005. The Company subleased the majority of its former corporate office space to two tenants, including one related party as discussed below, in 2005. The Company remains the primary obligor under the terms of the original lease on its former corporate office space through the end of the lease term in 2010.

Rent expense incurred under the terms of the corporate office leases was $413 thousand, $238 thousand and $75 thousand for the years ended December 31, 2005, 2004 and 2003, respectively, net of subleased revenue (see Note 8).

Future minimum rental payments under the corporate office leases and contractual rent from the two subleases of the former corporate office space are summarized as follows (in thousands):


Future Minimum Rent Expense
			Contractual			Future
	Corporate		Sublease			Minimum Rent
	Offices		Revenue			Expense, net
2006	$	725	$	(218	)	$	507
2007		752		(225	)		527
2008		779		(231	)		548
2009		825		(239	)		586
2010		871		(246	)		625
Thereafter		1,153		—			1,153

Total	$	5,105	$	(1,159	)	$	3,946

(b) Legal Proceedings

The Company is subject to legal proceeds and claims arising in the ordinary course of its business. In the opinion of management and the Company’s legal counsel, the amount of ultimate liability with respect to these actions will not have a material effect on the results of operations or financial position of the Company.

(8) Related Party Transaction

In September 2005, the Company subleased a portion of its former corporate office space to Donatelli & Klein, a real estate investment firm that develops multifamily properties, which is owned by the Chairman of the Company’s Board of

Trustees. The rental rate under the sublease is representative of market rates, and rent due under the terms of the sublease approximates $200 thousand annually over the remaining five-year term of the original lease. The Company remains obligated as primary lessee under the terms of the original lease.

(9) Fair Value of Financial Instruments

The carrying amounts of cash, accounts and other receivables and accounts payable approximate their fair values because of their short-term maturities. Certain mortgage notes and our line of credit are carried at values that represent their fair values due to the variable nature of the associated interest rate. We calculate fair value by discounting future contractual principal and interest payments using prevailing market rates at the balance sheet date. Fair value information relating to our fixed-rate mortgage debt as of December 31 is as follows (in thousands):


	2005				2004
	Fair Value		Carrying Value		Fair Value		Carrying Value
Fixed-rate mortgage debt	$	368,817	$	369,266	$	268,119	$	259,039

(10) Shareholders’ Equity

On October 28, 2003, the Company closed its initial public offering. The Company sold 7.5 million common shares of beneficial interest at $15.00 per share, raising net proceeds of approximately $102 million. On November 21, 2003, the Company sold an additional 1.1 million shares to cover over-allotments resulting in additional net proceeds of approximately $15.5 million. The Company fully used the net proceeds from the IPO and follow-on offering to acquire additional properties, repay borrowings, accrued interest and prepayment fees and acquire joint venture interests held by an institutional partner in four of the Company’s properties.

On June 23, 2004, the Company closed on a follow-on offering of 5.5 million common shares at $17.60 per share, resulting in net proceeds of approximately $92 million. The Company used the proceeds to repay borrowings outstanding on the Company’s revolving credit facility.

On March 31, 2005, the Company sold 2.1 million common shares of beneficial interest to an investor for $21.95 per share. The transaction generated net proceeds of approximately $44.9 million. The Company completed another follow-on offering of 3.5 million common shares that closed on October 26, 2005, raising net proceeds of approximately $79.1 million. The Company used the net proceeds from both offerings to substantially pay down the balance outstanding on its revolving credit facility.

(11) Benefit Plans

(a) Stock-based compensation

The Company adopted the 2003 Equity Compensation Plan (“the Plan”) during 2003. The Plan provides for the issuance of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Options granted under the plan are non-qualified, and all employees and non-employee trustees are eligible to receive grants. The Plan originally authorized the issuance of 911 thousand common share equity awards. An additional 650 thousand common shares of equity awards were authorized in 2005. At December 31, 2005, 674 thousand options had been awarded of which 588 thousand remained outstanding. Options vest 25 percent on the first anniversary of the date of grant and 6.25 percent in each subsequent calendar quarter thereafter until fully vested. In addition, the Company had awarded 70 thousand restricted share grants, of which 66 thousand remained outstanding. Share grants to Company management vest based on achieving certain total shareholder return thresholds or, in any event, after seven years. Share grants to trustees vest immediately. There were 833 thousand shares available for equity awards available as of December 31, 2005.

The following summarizes the activity in the Plan for the period from October 28, 2003 (date of adoption of plan) through December 31, 2005 (dollars in thousands except per share and share amounts):


	2005				2004				2003
			Weighted				Weighted				Weighted
			Average				Average				Average
			Exercise				Exercise				Exercise
	Shares		Price		Shares		Price		Shares		Price
Options outstanding, beginning of year		575,000	$	15.49		505,000	$	15.00		—	$	—
Options granted		98,500		22.48		70,000		19.01		505,000		15.00
Options exercised		74,218		15.00		—		—		—		—
Options forfeited		11,187		16.73		—		—		—		—

Options outstanding, end of year		588,095		16.70		575,000		15.49		505,000		15.00
Options exercisable, end of year		244,220		15.46		126,250		15.00		—		—

Weighted average fair value of options granted during the year (calculated as of the grant date):	$	1.93			$	1.67			$	1.62

The following table summarizes information about stock options at December 31, 2005:


	Options Outstanding					Options Exercisable
			Weighted Average	Weighted				Weighted
Range of			Remaining	Average				Average
Exercise Prices	Shares		Contractual Life	Exercise Price		Shares		Exercise Price
$15.00		423,282	7.8 years	$	15.00		215,470	$	15.00
18.70 — 19.78		67,813	8.6 years		19.02		28,750		18.93
22.42 — 22.54		97,000	9.0 years		22.48		—		—

		588,095					244,220

The fair value determination was calculated using the Black-Scholes option-pricing model to value all stock options granted in 2005, 2004 and 2003 using the following assumptions:


	2005			2004			2003
Weighted average risk free interest rate		3.68	%		3.82	%		3	%
Expected volatility		15.4	%		15.4	%		20	%
Expected dividend yield		5	%		5	%		5	%
Weighted average expected life of options	5 years			5 years			5 years

On January 3, 2005, the Company granted 60,171 restricted common shares to executive officers. The Company measured the value of the awards and recorded expense based on vesting at the end of each accounting period during 2005 until the vesting terms of the awards were fixed in September. The fair value of these awards was $26.40 at the date vesting terms were fixed. These grants will vest at the end of the seven-year award period, or earlier upon achieving certain total shareholder return performance measures over the term of the award. In September 2005, 4,047 of the restricted common shares were forfeited by a former officer of the Company as discussed below. At December 31, 2005, none of the performance measures had been achieved. In February 2006, 25% of the restricted shares vested upon achievement of certain performance thresholds.

The Company also grants common shares to non-executive trustees annually as a component of compensation for serving on the Company’s Board of Trustees. Non-executive trustees collectively received 2,500 shares in 2005 (for 2004) and 7,000 shares in 2003, with grant date fair values of $22.54 and $15.00, respectively. The Company recognized $40 thousand, $50 thousand and $90 thousand of stock-based compensation expense for officer and trustee restricted share awards, net of minority interests, during 2005, 2004 and 2003, respectively.

During the third quarter of 2005, certain stock option awards were deemed vested as part of a severance agreement negotiated with a former officer of the Company. Under the terms of this agreement, the vesting of 8,438 options was accelerated, resulting in additional compensation expense of approximately $80 thousand based on the intrinsic value of the accelerated awards at the date of modification. All remaining unvested stock options and restricted common share awards granted to this individual were forfeited as of the date of separation.

(b) 401(k) Plan

The Company has a 401(k) defined contribution plan covering all employees. The maximum employer or employee contribution cannot exceed the IRS limits for the plan year. Employees are eligible to contribute after one year of consecutive service. The Company matches employee contributions after one year of service up to 7.5% of a participant’s annual compensation. Employee and employer contributions vest immediately. The Company funds all matching contributions with cash. The Company’s plan does not allow for the Company to make additional discretionary contributions. The Company’s contributions for each of the three years ended December 31, 2005, 2004 and 2003 were $166 thousand, $98 thousand and $61 thousand, respectively. The 401(k) plan is fully funded at December 31, 2005.

(12) Segment Information

The Company operates in one segment, industrial and flex office properties. All of the Company’s properties are located in the southern Mid-Atlantic region of the United States of America. As of December 31, 2005 and 2004, the Company’s tenant base contained one significant tenant, the United States Government, which leased 8% and 13% of the Company’s total rentable square feet, respectively.

(13) Supplemental Disclosure of Cash Flow Information

Supplemental disclosures of cash flow information for the years ended December 31 are as follows (in thousands):


	2005		2004		2003
Cash paid for interest on indebtedness	$	19,958	$	10,393	$	9,785
Non-cash investing and financing activities:
Issuance of common shares to trustees		56		—		—
Debt assumed in connection with acquisitions of real estate		79,690		140,559		—
Conversion of operating partnership units		3,821		—		—
Issuance of units in exchange for limited partnership interests		7,715		—		20,759

During 2005, the Company acquired 13 properties for $224.7 million, including the assumption of mortgages with a fair value at the transaction date of $79.7 million. During 2004, the Company acquired properties at an aggregate purchase cost of $283.5 million, net of the assumption of mortgages with acquisition date fair values of $140.6 million. The additions to rental property and other assets are net of the non-cash assumption of these mortgages. On November 3, 2005, the Company acquired Prosperity Business Center and Owings Mills Business Center through the assumption of mortgage debt and the issuance of 300,429 limited partnership interests in the Company’s Operating Partnership. The units were valued at $7.7 million based on the closing price of the Company’s common shares on the date of acquisition. Amounts related to the loss on early retirement of debt in 2003 were reclassified to conform to the 2005 presentation.

(14) Quarterly Financial Information (unaudited)


	2005
	First		Second		Third		Fourth
(Dollars in thousands except per share information)	Quarter		Quarter		Quarter		Quarter
Revenue	$	16,428	$	18,032	$	20,713	$	22,460
Operating expenses		11,350		12,266		13,595		15,714
Net income (loss)		526		1,038		1,562		(1,776)	*
Income from continuing operations and net income (loss) per share — basic and diluted	$	0.04	$	0.06	$	0.09	$	(0.09	)

*Includes $2.8 million loss on early retirement of debt.

On March 31, 2005, and October 26, 2005, the Company sold 2.0 million and 3.5 million common shares, respectively.


	2004
	First			Second			Third		Fourth
(Dollars in thousands except share information)	Quarter			Quarter			Quarter		Quarter
Revenue	$	7,513		$	8,210		$	12,183	$	14,207
Operating expenses		5,480			6,079			8,310		9,642
(Loss) income from continuing operations		(182	)		(71	)		592		246
Income from discontinued operations		11			13			65		1,956
Net (loss) income		(171	)		(58	)		657		2,202

Basic net income (loss) per share

(Loss) income from continuing operations	$	(0.02	)	$	(0.01	)	$	0.04	$	0.02
Income from discontinued operations		—			—			0.01		0.14

Net (loss) income	$	(0.02	)	$	(0.01	)	$	0.05	$	0.16


Diluted net income (loss) per share

(Loss) income from continuing operations	$	(0.02	)	$	(0.01	)	$	0.04	$	0.02
Income from discontinued operations		—			—			0.01		0.13

Net (loss) income	$	(0.02	)	$	(0.01	)	$	0.05	$	0.15

The Company issued 5.5 million common shares in June 2004. Earnings per share in the third and fourth quarter receive more weighting when compared to the full year earnings per share, and as a result, the sum of the quarters does not equate to the full year calculation.

(15) Subsequent Events

On January 19, 2006, the Company acquired a six-building portfolio of Class A warehouse properties totaling 632,790 square feet in the Richmond, Virginia market for $40 million in cash.

On February 13, 2006, the Company acquired Crossways I, a 143,398 square foot flex/office property in Chesapeake, Virginia for $15.5 million in cash.

On February 27, 2006, the Company entered into a $50 million Term Loan Agreement with KeyBank, N.A. The loan has a 5-year term maturing in March 2011 and bears interest at a variable interest rate of LIBOR plus a spread determined by the Company’s leverage levels. Proceeds from the loan were used to fund recent acquisitions and partially pay down the Company’s credit facility.

On February 27, 2006, the Company acquired Sterling Park Business Center for $30.9 million in cash. The property is comprised of Sterling Park One and Two, two one-story flex/office buildings totaling 127,814 square feet, and an additional 42.5 acres of developable land. The purchase price was funded with borrowings under the $50 million term loan referred to above.

SCHEDULE III

FIRST POTOMAC REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005

(Amounts in thousands)


						Initial Costs							Gross Amount at End of Year
				Encumbrances at				Building And		Net Improvements					Building And				Accumulated
Description	Location	Date Acquired	Type	December 31, 2005		Land		Improvements		Since Acquisition			Land		Improvements		Total		Depreciation
13129 Airpark Road	Culpeper, VA	December 1997	Industrial	$	—	$	443	$	3,103	$	1,137		$	443	$	4,240	$	4,683	$	(838	)
Plaza 500	Alexandria, VA	December 1997	Industrial		33,801		6,265		35,433		1,432			6,265		36,865		43,130		(7,871	)
6600 Business Parkway	Elkridge, MD	December 1997	Industrial		—		2,614		5,111		149			2,614		5,260		7,874		(1,104	)
Van Buren Business Park	Herndon, VA	December 1997	Flex		7,580		3,592		7,652		1,498			3,592		9,150		12,742		(2,052	)
4200 Technology Court	Chantilly, VA	October 1998	Flex		1,798		528		2,421		204			528		2,625		3,153		(514	)
4212 Technology Court	Chantilly, VA	October 1998	Flex		1,748		528		2,423		243			528		2,666		3,194		(485	)
Crossways Commerce Center	Chesapeake, VA	December 1999	Industrial		26,054		5,160		23,660		2,098			5,160		25,758		30,918		(6,375	)
Newington Business Park	Lorton, VA	December 1999	Industrial		16,435		3,135		10,354		3,994			3,135		14,348		17,483		(3,117	)
Greenbrier Technology Center	Chesapeake, VA	October 2002	Flex		4,972		1,365		5,119		109			1,365		5,228		6,593		(1,261	)
Norfolk Business Center	Norfolk, VA	October 2002	Flex		4,665		1,323		4,967		94			1,323		5,061		6,384		(1,229	)
Rumsey Center	Columbia, MD	October 2002	Flex		9,114		2,675		10,196		498			2,675		10,694		13,369		(1,741	)
Snowden Center	Columbia, MD	October 2002	Flex		12,373		3,404		12,824		808			3,404		13,632		17,036		(2,049	)
Virginia Ctr Technology Park	Glen Allen, VA	October 2003	Flex		—		1,922		7,026		595			1,922		7,621		9,543		(957	)
Interstate Plaza	Alexandria, VA	December 2003	Industrial		8,546		2,185		8,972		67			2,185		9,039		11,224		(610	)
Alexandria Corporate Park	Alexandria, VA	December 2003	Industrial		27,495		10,046		27,243		380			10,046		27,623		37,669		(1,558	)
Herndon Corporate Center	Herndon, VA	April 2004	Flex		8,764		4,087		14,651		217			4,087		14,868		18,955		(732	)
Aquia Commerce Center	Stafford, VA	June 2004	Flex		931		1,795		8,689		(35	)		1,795		8,654		10,449		(384	)
6900 English Muffin Way	Frederick, MD	July 2004	Industrial		7,159		3,139		8,726		(9	)		3,139		8,717		11,856		(352	)
Deer Park	Randallstown, MD	July 2004	Flex		7,907		3,680		7,697		95			3,680		7,792		11,472		(333	)
Gateway Center	Gaithersburg, MD	July 2004	Flex		4,068		1,717		3,943		39			1,717		3,982		5,699		(175	)
Gateway West	Westminster, MD	July 2004	Flex		6,141		891		6925		289			891		7,214		8,105		(360	)
4451 Georgia Pacific Boulevard	Frederick, MD	July 2004	Industrial		6,909		3,448		8,978		(2	)		3,448		8,976		12,424		(362	)
2027 Goldenrod Lane	Germantown, MD	July 2004	Flex		2,149		1,416		2,060		—			1,416		2,060		3,476		(96	)
Girard Business Center	Gaithersburg, MD	July 2004	Flex		7,830		4,675		7,151		119			4,675		7,270		11,945		(339	)
Girard Place	Gaithersburg, MD	July 2004	Flex		9,979		5,170		9,507		136			5,170		9,643		14,813		(403	)
Old Courthouse Square	Martinsburg, WV	July 2004	Retail		7,677		3,489		12,989		67			3,489		13,056		16,545		(617	)
Patrick Center	Frederick, MD	July 2004	Office		8,136		1,778		8,721		129			1,778		8,850		10,628		(384	)
15 Worman’s Mill Court	Frederick, MD	July 2004	Flex		2,687		546		3,329		38			546		3,367		3,913		(147	)
7561 Lindberg Drive	Gaithersburg, MD	July 2004	Industrial		1,996		2,969		311		11			2,969		322		3,291		(18	)
West Park	Frederick, MD	July 2004	Office		2,764		520		5,177		93			520		5,270		5,790		(217	)
Woodland Business Center	Largo, MD	July 2004	Office		2,610		1,323		2,920		73			1,323		2,993		4,316		(145	)
Airpark Place	Gaithersburg, MD	August 2004	Flex		—		2,697		7,141		125			2,697		7,266		9,963		(264	)
15395 John Marshall Highway	Haymarket, VA	October 2004	Industrial		—		2,736		7,301		40			2,736		7,341		10,077		(272	)
Crossways II	Chesapeake, VA	October 2004	Flex		—		1,036		6,275		12			1,036		6,287		7,323		(241	)
Norfolk Commerce Center II	Norfolk, VA	October 2004	Flex		7,700		1,221		8,693		202			1221		8,895		10,116		(405	)
Windsor at Battlefield	Manassas, VA	December 2004	Flex		—		3,228		11,696		125			3,228		11,821		15,049		(479	)
4612 Navistar Drive	Frederick, MD	December 2004	Industrial		14,371		3,808		18,762		1			3,808		18,763		22,571		(489	)
Campus at Metro Park North	Rockville, MD	December 2004	Flex		26,259		9,220		32,056		(61	)		9,220		31,995		41,215		(1,034	)
Reston Business Campus	Reston, VA	March 2005	Flex		—		1,996		8,778		85			1,996		8,863		10,859		(203	)
1400 Cavalier Boulevard	Chesapeake, VA	April 2005	Industrial		—		1,387		11,362		31			1,387		11,393		12,780		(227	)
Enterprise Center	Chantilly, VA	April 2005	Flex		20,016		3,728		27,274		16			3,728		27,290		31,018		(573	)
Glenn Dale Business Center	Glenn Dale, MD	May 2005	Industrial		9,128		3,369		14,504		184			3,369		14,688		18,057		(242	)
Gateway Centre Manassas	Manassas, VA	July 2005	Industrial		1,905		3,015		6,734		54			3,015		6,788		9,803		(149	)
1434 Crossways Boulevard	Chesapeake, VA	August 2005	Office		20,605		4,447		24,739		1			4,447		24,740		29,187		(319	)
Gateway Hampton Roads	Hampton, VA	September 2005	Flex		—		4,132		10,674		—			4,132		10,674		14,806		(68	)
403/405 Glenn Drive	Sterling, VA	October 2005	Industrial		9,265		3,940		12,547		2			3,940		12,549		16,489		(93	)
Diamond Hill Distribution Center	Chesapeake, VA	October 2005	Industrial		—		3,290		24,949		—			3,290		24,949		28,239		(165	)
Linden Business Center	Manassas, VA	October 2005	Office		7,760		4,829		10,978		—			4,829		10,978		15,807		(88	)
Owings Mills Business Center	Owings Mills, MD	November 2005	Office		5,911		1,382		7,416		1			1,382		7,417		8,799		(39	)
Prosperity Business Center	Merrifield, VA	November 2005	Flex		4,058		5,881		3,495		(1	)		5,881		3,494		9,375		(16	)
1000 Lucas Way	Hampton, VA	December 2005	Office		—		2,592		8,563		—			2,592		8,563		11,155		(35	)

				$	369,266	$	153,762	$	542,215	$	15,383		$	153,762	$	557,598	$	711,360	$	(42,226	)

Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets range from 5 to 39 years. The tax basis of the assets above is $716,446 at December 31, 2005.

Exhibit Index


Exhibit		Description of Document
3.1⁽¹⁾		Amended and Restated Declaration of Trust of the Registrant.
3.2⁽¹⁾		Amended and Restated Bylaws of the Registrant.
3.3⁽¹⁾		Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September 15, 2003.
10.1⁽¹⁾		Deed of Trust Note between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.2⁽¹⁾		Deed of Trust, Assignment of Leases and Rents and Security Agreement between FPR Holdings Limited Partnership, as borrower, and Credit Suisse First Boston Mortgage Capital LLC, as lender, dated December 23, 1997.
10.3⁽¹⁾		Fixed Rate Note between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.4⁽¹⁾		Deed of Trust and Security Agreement between Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated September 17, 1999.
10.5⁽¹⁾		Fixed Rate Note between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.6⁽¹⁾		Deed of Trust and Security Agreement between 4212 Techcourt, LLC, as borrower, and Morgan Guaranty Trust Company of New York, as lender, dated May 23, 2000.
10.7⁽¹⁾		Fixed Rate Note between Newington Terminal Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.8⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Newington Terminal Associates, LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.9⁽¹⁾		Fixed Rate Note between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.10⁽¹⁾		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between Crossways Associates LLC, as borrower, and Salomon Brothers Realty Corp., as assignee of Suburban Capital Markets, Inc., as lender, dated September 6, 2002.
10.11⁽¹⁾		Promissory Note between Norfolk First LLC and GTC II First LLC, as borrowers, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.12⁽¹⁾		Deed of Trust and Security Agreement by and between GTC II First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.13⁽¹⁾		Deed of Trust and Security Agreement by and between Norfolk First LLC, as borrower, and JP Morgan Chase Bank, as lender, dated October 17, 2002.
10.14⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Rumsey/Snowden Holding LLC and First Potomac Realty Investment Limited Partnership.
10.15⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Greenbrier/Norfolk Holding LLC and First Potomac Realty Investment Limited Partnership.
10.16⁽¹⁾		Contribution Agreement, dated July 18, 2003, by and between the Investors in Kristina Way, LLC and Newington Terminal Associates LLC and First Potomac Realty Investment Limited Partnership.
10.17⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and FPM Management, LLC, as acquirer, dated July 18, 2003.
10.18⁽¹⁾		Contribution Agreement between First Potomac Management, Inc., as contributor, and First Potomac Realty Investment Limited Partnership, as acquirer, dated July 18, 2003.
10.19⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Douglas J. Donatelli and the Registrant.
10.20⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Nicholas R. Smith and the Registrant.
10.21⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Barry H. Bass and the Registrant.
10.22⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between James H. Dawson and the Registrant.
10.23⁽¹⁾		Employment Agreement, dated October 8, 2003, by and between Louis T. Donatelli and the Registrant.
10.24⁽²⁾		Employment Agreement, dated February 14, 2005, by and between Joel F. Bonder and the Registrant.
10.25⁽³⁾		Summary of 2004 Cash Incentive Compensation, 2005 Base Salary Compensation and 2005 Restricted Stock Awards.
10.26⁽⁷⁾		Summary of 2006 Non-Employee Trustee Compensation.


Exhibit		Description of Document
10.27⁽¹⁾		2003 Equity Compensation Plan.
10.28⁽⁸⁾		Amendment No. 1 to Equity Compensation Plan.
10.29⁽¹⁾		Real Estate Purchase and Sale Agreement between Principal Life Insurance Company, as Seller, and First Potomac Realty Investment Limited Partnership as the Buyer, dated as of September 10, 2003.
10.30⁽¹⁾		Contract of Sale between Elman Alexandria Associates, LP, as Seller, and First Potomac Realty Trust, as Buyer, dated as of September 19, 2003.
10.31⁽⁹⁾		Agreement of Purchase and Sale for 4612 Navistar Drive and 400 East Gude Drive and 7300, 7301 and 7362 Calhoun Place, Rockville, MD by and between Navistar Management, LLC, T. Richard Butera, RIP Investments, LP, BP Gude Management, LLC, the Butera, LLLP, and RIP Investments, LP, as Sellers, and First Potomac Realty Investment Limited Partnership, as Buyer, dated as of October 22, 2004.
10.32⁽¹⁰⁾		Agreement of Purchase and Sale for Enterprise Center, by and between Enterprise Dulles, LLC, as Seller, and First Potomac Realty Investment Limited Partnership, as Buyer, dated as of January 27, 2005.
10.33⁽⁴⁾		Revolving Credit Agreement between First Potomac Realty Investment Limited Partnership and Fleet National Bank.
10.34⁽⁵⁾ 10.35⁽⁶⁾		First Amendment to Revolving Credit Agreement. Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association, as Managing Administrative Agent, and Wells Fargo Bank.
10.36⁽¹¹⁾		Consent to Sub-Sublease, by and among Bethesda Place II Limited Partnership, Informax, Inc. and the Registrant, dated March 31, 2005.
10.37⁽¹²⁾		First Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated June 28, 2005.
10.38⁽¹³⁾		Loan Agreement, by and among Jackson National Life Insurance Company, as lender, and Rumsey First LLC, Snowden First LLC, GTC II First LLC, Norfolk First LLC, Bren Mar, LLC, Plaza 500, LLC and Van Buren, LLC, as the borrowers, dated July 18, 2005.
10.39⁽¹⁴⁾		Second Amendment to Revolving Credit Agreement among First Potomac Realty Investment Limited Partnership and KeyBank National Association and Wells Fargo Bank, dated October 12, 2005.
10.40⁽¹⁵⁾		Joinder Agreement, by and between, Gateway Hampton Roads, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.41⁽¹⁶⁾		Joinder Agreement, by and between FP Campostella Road, LLC, FP Diamond Hill, LLC, First Potomac Realty Investment Limited Partnership and KeyBank National Association, dated October 12, 2005.
10.42⁽¹⁷⁾		Modification, Waiver and Consent between FPR Holdings Limited Partnership, as borrower, and JP Morgan Chase Bank, as trustee, dated December 15, 2005.
10.43⁽¹⁸⁾		Defeasance Pledge and Security Agreement among FPR Holding Limited Partnership, as pledgor, JP Morgan Chase Bank, as pledgee, Wachovia Bank, N.A., as servicer, and Wells Fargo Bank, N.A., as intermediary, dated December 15, 2005.
10.44⁽¹⁹⁾		Defeasance Assignment, Assumption and Release Agreement among FPR Holdings Limited Partnership, as pledgor, JP Morgan Chase Bank, as pledgee, SB FPR Holdings, LLC, as successor borrower, Wachovia Bank, N.A., as servicer, and Wells Fargo Bank, N.A., as intermediary, dated December 15, 2005.
21.1		Subsidiaries of the Registrant.
23.1		Consent of KPMG LLP (independent registered public accounting firm).
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer.
32.1		Section 906 Certification of Chief Executive Officer.
32.2		Section 906 Certification of Chief Financial Officer.


⁽¹⁾		Incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-11 (Registration No. 333-107172).

⁽²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽³⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2005.

⁽⁴⁾		Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

⁽⁵⁾		Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

⁽⁶⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 6, 2004.


⁽⁷⁾		Incorporated by reference to Item 1.01 of the Company’s Current Report on Form 8-K filed on December 7, 2005.

⁽⁸⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2005.

⁽⁹⁾		Incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

⁽¹⁰⁾		Incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

⁽¹¹⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2005.

⁽¹²⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 30, 2005.

⁽¹³⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2005.

⁽¹⁴⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁵⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁶⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 14, 2005.

⁽¹⁷⁾		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 19, 2005.

⁽¹⁸⁾		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 19, 2005.

⁽¹⁹⁾		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 19, 2005.


	Page
Report of independent registered public accounting firm		47
Consolidated balance sheets as of December 31, 2005 and 2004		48
Consolidated and combined statements of operations for the years ended December 31, 2005, 2004 and 2003		49
Consolidated and combined statements of shareholders’ equity and partners’ capital for the years ended December 31, 2005, 2004 and 2003		50
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		51
Notes to consolidated and combined financial statements		52

FINANCIAL STATEMENT SCHEDULES

Schedule III: Real Estate and Accumulated Depreciation		68


NAME		SATE OF ORGANIZATION
1400 Cavalier, LLC		Delaware
1434 Crossways Boulevard I, LLC		Delaware
1434 Crossways Boulevard II, LLC		Delaware
1441 Crossways Boulevard II, LLC		Delaware
15395 John Marshall Highway, LLC		Delaware
403 & 405 Glenn Drive Manager, LLC		Virginia
403 & 405 Glenn Drive, LLC		Virginia
4212 Tech Court, LLC		Virginia
Airpark Place Holdings, LLC		Delaware
Airpark Place, LLC		Delaware
Aquia One, LLC		Delaware
Aquia Two, LLC		Delaware
Bren Mar Holdings, LLC		Delaware
Bren Mar, LLC		Delaware
Columbia Holdings Associates LLC		Delaware
Crossways Associates LLC		Delaware
Crossways II LLC		Delaware
Crossways Land, LLC		Virginia
Enterprise Center I, LLC		Delaware
Enterprise Center Manager, LLC		Delaware
First Potomac Realty Investment Limited Partnership		Delaware
First Rumsey LLC		Delaware
First Snowden LLC		Delaware
First Potomac Management LLC		Delaware
Greenbrier Holding Associates LLC		Delaware
Greenbrier/Norfolk Holding LLC		Delaware
Greenbrier/Norfolk Investment LLC		Delaware
GTC II First LLC		Delaware
Herndon Corporate Center, LLC		Delaware
Interstate Plaza Holding LLC		Delaware
Interstate Plaza Operating LLC		Delaware
Newington Terminal Associates, LLC		Virginia
Newington Terminal LLC		Delaware
Kristina Way Investments LLC		Delaware
Norfolk First LLC		Delaware
Rumsey First LLC		Delaware
Rumsey/Snowden Holding LLC		Delaware
Rumsey/Snowden Investment LLC		Delaware
Snowden First LLC		Delaware
Tech Court, LLC		Virginia
First Potomac TRS Holdings, Inc		Virginia
FP Campostella Road, LLC		Delaware
FP Diamond Hill, LLC		Delaware
FP Gateway Center, LLC		Maryland
FP Gateway West II, LLC		Maryland
FP Girard Business Center, LLC		Maryland
FP Girard Place, LLC		Maryland
FP Goldenrod Lane, LLC		Maryland
FP Gude Manager, LLC		Maryland
FP Gude, LLC		Maryland
FP Navistar Investors, LLC		Maryland
FP Navistar Manager, LLC		Delaware
FP Northridge, LLC		Virginia
FP Patrick Center, LLC		Maryland
FP Properties II, LLC		Maryland
FP Properties, LLC		Delaware
FP Prosperty, LLC		Virginia
FP Realty Investment Manager, LLC		Delaware
FP Rivers Bend, LLC		Virginia
FP Van Buren, LLC		Delaware
FP West Park, LLC		Maryland
FPR General Partner, LLC		Delaware
FPR Holdings Limited Partnership		Delaware
Gateway Hampton Roads, LLC		Virginia
Gateway Manassas I, LLC		Delaware
Gateway Manassas II, LLC		Delaware
Glenn Dale Business Center, LLC		Maryland
Greenbrier Land, LLC		Virginia
Landover Owings Mills, LLC		Delaware
Linden I Managers, LLC		Delaware
Linden I, LLC		Delaware
Linden II, LLC		Delaware
Linden III, LLC		Virginia
Lucas Way Hampton, LLC		Virginia
Norfolk Commerce Park LLC		Delaware
Norfolk Land, LLC		Virginia
Plaza 500, LLC		Delaware
Reston Business Campus, LLC		Delaware
Virginia Center, LLC		Delaware

1.		I have reviewed this annual report on Form 10-K of First Potomac Realty Trust;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: March 16, 2006	/s/ Douglas J. Donatelli
	Douglas J. Donatelli
	Chief Executive Officer



Date: March 16, 2006	/s/ Barry H. Bass
	Barry H. Bass
	Chief Financial Officer