10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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.
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from         to

Commission File Number 1-10709

PS BUSINESS PARKS, INC.

(Exact name of registrant as specified in its charter)

California	95-4300881
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

701 Western Avenue, Glendale, California 91201-2397

(Address of principal executive offices) (Zip Code)

818-244-8080

(Registrant’s telephone number, including area code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 9.500% Cumulative Preferred Stock, Series D, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 8.750% Cumulative Preferred Stock, Series F, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 7.000% Cumulative Preferred Stock, Series H, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 6.875% Cumulative Preferred Stock, Series I, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 7.950% Cumulative Preferred Stock, Series K, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 7.600% Cumulative Preferred Stock, Series L, $0.01 par value per share	American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 7.200% Cumulative Preferred Stock, Series M, $0.01 par value per share	American Stock Exchange

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

None

(Title of class)

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

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange 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 Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.    Large Accelerated Filer þ    Accelerated Filer o    Non-accelerated Filer o

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

     As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $732,449,989 based on the closing price as reported on the American Stock Exchange.

     Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 28, 2006 (the latest practicable date): 21,466,067.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2006 are incorporated by reference into Part III of this Annual Report on Form 10-K.

PART I.

ITEM 1.  BUSINESS

The Company

      PS Business Parks, Inc. (“PSB”) is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that acquires, develops, owns and operates commercial properties, primarily multi-tenant flex, office and industrial space. As of December 31, 2005, PSB owned approximately 75% of the common partnership units of PS Business Parks, L.P. (the “Operating Partnership” or “OP”). The remaining common partnership units were owned by Public Storage, Inc. (“PSI” or “Public Storage”). PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references to “the Company,” “we,” “us,” “our,” and similar references mean PS Business Parks, Inc. and its subsidiaries, including the Operating Partnership.

      As of December 31, 2005, the Company owned and operated approximately 17.6 million net rentable square feet of commercial space located in eight states: Arizona, California, Florida, Maryland, Oregon, Texas, Virginia, and Washington. The Company also manages approximately 1.2 million net rentable square feet on behalf of PSI and its affiliated entities.

      History of the Company: The Company was formed in 1990 as a California corporation under the name Public Storage Properties XI, Inc. In a March 17, 1998 merger with American Office Park Properties, Inc. (“AOPP”) (the “Merger”), the Company acquired the commercial property business previously operated by AOPP and was renamed “PS Business Parks, Inc.” Prior to the merger in January 1997, AOPP was reorganized to succeed to the commercial property business of PSI, becoming a fully integrated, self advised and self managed REIT.

      From 1998 through 2001, the Company added 9.7 million square feet in Virginia, Maryland, Texas, Oregon, California, and Arizona, acquiring 9.2 million square feet of commercial space from unaffiliated third parties and developing an additional 500,000 square feet.

      During 2002, the economy and real estate fundamentals softened. This resulted in an environment in which the Company was unable to identify acquisitions at prices that met its investment criteria. The Company disposed of four properties totaling 386,000 square feet that no longer met its investment criteria.

      In the year ended December 31, 2003, the Company acquired 4.1 million square feet of commercial space from unaffiliated third parties, including a 3.4 million square foot property located in Miami, Florida, which represented a new market for the Company. The Miami property represented approximately 18% of the Company’s aggregate net rentable square footage at December 31, 2003. The cost of these acquisitions was approximately $282.4 million. The Company also disposed of four properties totaling 226,000 square feet as well as a one acre plot of land that no longer met its investment criteria.

      During 2004 and 2005, increased competition for properties in the Company’s target markets resulted in a challenging acquisition environment with assets frequently trading at yields below levels that management believed provided growth opportunities commensurate with the risks associated with acquiring assets. As a result, in 2004 the Company made only one acquisition, a 165,000 square foot asset in Fairfax, Virginia for $24.1 million. During 2004, the Company sold two significant assets, comprising approximately 400,000 square feet in Maryland resulting in a gain of $15.2 million. Additionally in 2004, the Company sold approximately 91,000 square feet in Texas, Oregon and Miami. In 2005, the Company acquired one asset, a 233,000 square foot multi-tenant flex space in San Diego, California. The asset, which was 94.6% leased at the time of acquisition, was purchased for $35.1 million. In connection with the acquisition, the Company assumed a $15.0 million mortgage which bears interest at a fixed rate of 5.73%. During 2005, the Company sold Woodside Corporate Park, a 574,000 square foot flex and office park in Beaverton, Oregon for approximately $64.5 million resulting in a gain of $12.5 million. The park was 76.8% leased at the time of the sale. Additionally in 2005, the Company sold approximately 100,000 square feet and some parcels of land in Miami and Oregon.

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      The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 1990. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is currently distributed to its shareholders.

      The Company’s principal executive offices are located at 701 Western Avenue, Glendale, California 91201-2397. The Company’s telephone number is (818) 244-8080. The Company maintains a website with the address www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

      Business of the Company: The Company is in the commercial property business, with properties consisting of multi-tenant flex, industrial, and office space. The Company owns approximately 10.4 million square feet of flex space. The Company defines “flex” space as buildings that are configured with a combination of warehouse and office space and can be designed to fit a wide variety of uses. The warehouse component of the flex space has a number of uses including light manufacturing and assembly, storage and warehousing, showroom, laboratory, distribution and research and development activities. The office component of flex space is complementary to the warehouse component by enabling businesses to accommodate management and production staff in the same facility. The Company owns approximately 3.9 million square feet of industrial space that have characteristics similar to the warehouse component of the flex space. In addition, the Company owns approximately 3.2 million square feet of low-rise office space, generally either in business parks that combine office and flex space or in submarkets where the economics of the market demand an office build-out.

      The Company’s commercial properties typically consist of low-rise buildings, ranging from one to over fifty buildings per property, located on up to 216 acres and comprising from approximately 20,000 to 3,300,000 aggregate square feet of rentable space. Facilities are managed through either on-site management or area offices central to the facilities. Parking is generally open but in some instances is covered. The ratio of parking spaces to rentable square feet ranges from two to six per thousand square feet depending upon the use of the property and its location. Office space generally requires a greater parking ratio than most industrial uses. The Company may acquire properties that do not have these characteristics.

      The tenant base for the Company’s facilities is diverse. The portfolio can be bifurcated into those facilities that service small to medium-sized businesses and those that service larger businesses. Approximately 39.9% of in-place rents from the portfolio are from facilities that serve small to medium-sized businesses. A property in this facility type is typically divided into units ranging in size from 500 to 4,999 square feet and leases generally range from one to three years. The remaining 60.1% of the in-place rents are derived from facilities that serve larger businesses, with units greater than or equal to 5,000 square feet. The Company also has several tenants that lease space in multiple buildings and locations. The U.S. Government is the largest tenant with leases encompassing 473,000 square feet, in 13 separate locations, or approximately 5.7% of the Company’s annual revenue.

      The Company intends to continue acquiring commercial properties located in its target markets within the United States. The Company’s policy of acquiring commercial properties may be changed by its Board of Directors without shareholder approval. However, the Board of Directors has no intention of changing this policy at this time. Although the Company currently owns properties in eight states, it may expand its operations to other states or reduce the number of states in which it operates. Properties are acquired for both income and potential capital appreciation; there is no limitation on the amount that can be invested in any specific property. Although there are no restrictions on our ability to expand our operations into foreign markets, we currently operate solely within the United States and have no foreign operations.

      The Company has acquired land for the development of commercial properties. The Company owned approximately 6.4 acres of land in Northern Virginia, 14.9 acres in Portland, Oregon, 1.0 acre in Rockville, Maryland and 10.0 acres in Dallas, Texas as of December 31, 2005.

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Operating Partnership

      The properties in which the Company has an equity interest will generally be owned by the Operating Partnership. The Company has the ability to acquire interests in additional properties in transactions that could defer the contributors’ tax consequences by causing the Operating Partnership to issue equity interests in return for interests in properties.

      As the general partner of the Operating Partnership, the Company has the exclusive responsibility under the Operating Partnership Agreement to manage and conduct the business of the Operating Partnership. The Board of Directors directs the affairs of the Operating Partnership by managing the Company’s affairs. The Operating Partnership will be responsible for, and pay when due, its share of all administrative and operating expenses of the properties it owns.

      The Company’s interest in the Operating Partnership entitles it to share in cash distributions from, and the profits and losses of, the Operating Partnership in proportion to the Company’s economic interest in the Operating Partnership (apart from tax allocations of profits and losses to take into account pre-contribution property appreciation or depreciation).

Summary of the Operating Partnership Agreement

      The following summary of the Operating Partnership Agreement is qualified in its entirety by reference to the Operating Partnership Agreement as amended, which is incorporated by reference as an exhibit to this report.

      Issuance of Additional Partnership Interests: As the general partner of the Operating Partnership, the Company is authorized to cause the Operating Partnership from time to time to issue to partners of the Operating Partnership or to other persons additional partnership units in one or more classes, and in one or more series of any of such classes, with such designations, preferences and relative, participating, optional, or other special rights, powers and duties (which may be senior to the existing partnership units), as will be determined by the Company, in its sole and absolute discretion, without the approval of any limited partners, except to the extent specifically provided in the agreement. No such additional partnership units, however, will be issued to the Company unless (i) the agreement to issue the additional partnership interests arises in connection with the issuance of shares of the Company, which shares have designations, preferences and other rights, such that the economic interests are substantially similar to the designations, preferences and other rights of the additional partnership units that would be issued to the Company and (ii) the Company agrees to make a capital contribution to the Operating Partnership in an amount equal to the proceeds raised in connection with the issuance of such shares of the Company.

      Capital Contributions: No partner is required to make additional capital contributions to the Operating Partnership, except that the Company as the general partner is required to contribute the proceeds of the sale of equity interests in the Company to the Operating Partnership in return for additional partnership units. A limited partner may be required to pay to the Operating Partnership any taxes paid by the Operating Partnership on behalf of that limited partner. No partner is required to pay to the Operating Partnership any deficit or negative balance which may exist in its capital account.

      Distributions: The Company, as general partner, is required to distribute at least quarterly the “available cash” (as defined in the Operating Partnership Agreement) generated by the Operating Partnership for such quarter. Distributions are to be made (i) first, with respect to any class of partnership interests having a preference over other classes of partnership interests; and (ii) second, in accordance with the partners’ respective percentage interests on the “partnership record date” (as defined in the Operating Partnership Agreement). Commencing in 1998, the Operating Partnership’s policy has been to make distributions per unit (other than preferred units) that are equal to the per share distributions made by the Company with respect to its Common Stock.

      Preferred Units: As of December 31, 2005, the Operating Partnership had an aggregate of 5.4 million preferred units owned by third parties with distribution rates ranging from 7.125% to 9.250% (per annum) with an aggregate stated value of $135.8 million. The Operating Partnership has the right to redeem each series of preferred units on or after the fifth anniversary of the issuance date of the series at the original capital contribution plus the cumulative priority return, as defined, to the redemption date to the extent not previously distributed.

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Each series of preferred units is exchangeable for Cumulative Redeemable Preferred Stock of the respective series of PS Business Parks, Inc. on or after the tenth anniversary of the date of issuance at the option of the Operating Partnership or a majority of the holders of the applicable series of preferred units.

      As of December 31, 2005, in connection with the Company’s issuance of publicly traded Cumulative Preferred Stock, the Company owned 23.7 million preferred units of various series with a stated value of $593.4 million with terms substantially identical to the terms of the publicly traded depositary shares each representing 1/1,000 of a share of 6.875% to 9.500% Cumulative Preferred Stock of the Company. The holders of all series of Preferred Stock may combine to elect two additional directors if the Company fails to make dividend payments for six quarterly dividend payment periods, whether or not consecutive.

      Redemption of Partnership Interests: Subject to certain limitations described below, each limited partner (other than the Company and holders of preferred units) has the right to require the redemption of such limited partner’s units. This right may be exercised on at least 10 days notice at any time or from time to time, beginning on the date that is one year after the date on which such limited partner is admitted to the Operating Partnership (unless otherwise contractually agreed by the general partner).

      Unless the Company, as general partner, elects to assume and perform the Operating Partnership’s obligation with respect to a redemption right, as described below, a limited partner that exercises its redemption right will receive cash from the Operating Partnership in an amount equal to the “redemption amount” (as defined in the Operating Partnership Agreement generally to reflect the average trading price of the Common Stock of the Company over a specified 10 day trading period) for the units redeemed. In lieu of the Operating Partnership redeeming the units for cash, the Company, as the general partner, has the right to elect to acquire the units directly from a limited partner exercising its redemption right, in exchange for cash in the amount specified above as the “redemption amount” or by issuance of the “shares amount” (as defined in the Operating Partnership Agreement, generally to mean the issuance of one share of the Company Common Stock for each unit of limited partnership interest redeemed).

      A limited partner cannot exercise its redemption right if delivery of shares of Common Stock would be prohibited under the articles of incorporation of the Company or if in the opinion of counsel to the general partner there is a significant risk that delivery of shares of Common Stock would cause the general partner to no longer qualify as a REIT, would cause a violation of the applicable securities or certain antitrust laws, or would result in the Operating Partnership no longer being treated as a partnership for federal income tax purposes.

      Limited Partner Transfer Restrictions: Limited partners generally may not transfer partnership interests (other than to their estates, immediate family or certain affiliates) without the prior written consent of the Company as general partner, which consent may be given or withheld in its sole and absolute discretion. The Company, as general partner has a right of first refusal to purchase partnership interests proposed to be sold by the limited partners. Transfers must comply with applicable securities laws and regulations. Transfers of partnership interests generally are not permitted if the transfer would be made through certain trading markets or adversely affect the Company’s ability to qualify as a REIT or could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code.

      Management: The Operating Partnership is organized as a California limited partnership. The Company, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership, except as provided in the Operating Partnership Agreement and by applicable law. The limited partners of the Operating Partnership have no authority to transact business for, or participate in the management activities or decisions of, the Operating Partnership except as provided in the Operating Partnership Agreement and as permitted by applicable law. The Operating Partnership Agreement provides that the general partner may not be removed by the limited partners. In exercising its authority under the agreement, the general partner may take into account (but is not required to do so) the tax consequences to any partner of actions or inaction and is under no obligation to consider the separate interests of the limited partners.

      However, the consent of the limited partners holding a majority of the interests of the limited partners (including limited partnership interests held by the Company) generally will be required to amend the Operating

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Partnership Agreement. Further, the Operating Partnership Agreement cannot be amended without the consent of each partner adversely affected if, among other things, the amendment would alter the partner’s rights to distributions from the Operating Partnership (except as specifically permitted in the Operating Partnership Agreement), alter the redemption right, or impose on the limited partners an obligation to make additional capital contributions.

      The consent of all limited partners will be required to (i) take any action that would make it impossible to carry on the ordinary business of the Operating Partnership, except as otherwise provided in the Operating Partnership Agreement; or (ii) possess Operating Partnership property, or assign any rights in specific Operating Partnership property, for other than an Operating Partnership purpose, except as otherwise provided in the Operating Partnership Agreement. In addition, without the consent of any adversely affected limited partner, the general partner may not perform any act that would subject a limited partner to liability as a general partner in any jurisdiction or any other liability except as provided in the Operating Partnership Agreement or under California law.

      Extraordinary Transactions: The Operating Partnership Agreement provides that the Company may not engage in any business combination, defined to mean any merger, consolidation or other combination with or into another person or sale of all or substantially all of its assets, any reclassification, any recapitalization (other than certain stock splits or stock dividends) or change of outstanding shares of common stock, unless (i) the limited partners of the Operating Partnership will receive, or have the opportunity to receive, the same proportionate consideration per unit in the transaction as shareholders of the Company (without regard to tax considerations); or (ii) limited partners of the Operating Partnership (other than the general partner) holding at least 60% of the interests in the Operating Partnership held by limited partners (other than the general partner) vote to approve the business combination. In addition, the Company, as general partner of the Operating Partnership, has agreed in the Operating Partnership Agreement with the limited partners of the Operating Partnership that it will not consummate a business combination in which the Company conducted a vote of shareholders unless the matter is also submitted to a vote of the partners.

      The foregoing provision of the Operating Partnership Agreement would under no circumstances enable or require the Company to engage in a business combination which required the approval of shareholders if the shareholders of the Company did not in fact give the requisite approval. Rather, if the shareholders did approve a business combination, the Company would not consummate the transaction unless the Company as general partner first conducts a vote of partners of the Operating Partnership on the matter. For purposes of the Operating Partnership vote, the Company shall be deemed to vote its partnership interest in the same proportion as the shareholders of the Company voted on the matter (disregarding shareholders who do not vote). The Operating Partnership vote will be deemed approved if the votes recorded are such that if the Operating Partnership vote had been a vote of shareholders, the business combination would have been approved by the shareholders. As a result of these provisions of the Operating Partnership, a third party may be inhibited from making an acquisition proposal for the Company that it would otherwise make, or the Company, despite having the requisite authority under its articles of incorporation, may not be authorized to engage in a proposed business combination.

      Tax Protection Provision Affecting Certain Properties: The Operating Partnership Agreement provides that, until 2007, the Operating Partnership may not sell 11 designated properties in a transaction that would produce taxable gain for the contributing partner without the prior written consent of PSI. The Operating Partnership is not required to obtain PSI’s consent if PSI and its affiliated partnerships do not continue to hold at the time of the sale at least 30% of their original interest in the Operating Partnership. Since PSI’s consent is required only in connection with a taxable sale of a designated property, the Operating Partnership will not be required to obtain PSI’s consent in connection with a “like-kind” exchange or other nontaxable transaction involving these properties. Since formation of the Operating Partnership, the Company has asked for and received PSI’s consent to sell one property. The 10 remaining properties represent 6.1% of the square footage in the Company’s portfolio.

      Indemnification: The Operating Partnership Agreement generally provides that the Company and its officers and directors and the limited partners of the Operating Partnership will be indemnified and held harmless by the Operating Partnership for matters that relate to the operations of the Operating Partnership unless it is established that (i) the act or omission of the indemnified person was material to the matter giving rise to the

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proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the indemnified person actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. The termination of any proceeding by judgment, order or settlement does not create a presumption that the indemnified person did not meet the requisite standards of conduct set forth above. The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the indemnified person did not meet the requisite standard of conduct set forth above. Any indemnification so made shall be made only out of the assets of the Operating Partnership or through insurance obtained by the Operating Partnership. The general partner shall not be liable for monetary damages to the partnership, any partners or any assignees for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or of any act or omissions if the general partner acted in good faith.

      Duties and Conflicts: The Operating Agreement allows the Company to operate the Operating Partnership in a manner that will enable the Company to satisfy the requirements for being classified as a REIT. The Company intends to conduct all of its business activities, including all activities pertaining to the acquisition, management and operation of properties, through the Operating Partnership. However, the Company may own, directly or through subsidiaries, interests in Operating Partnership properties that do not exceed 1% of the economic interest of any property, and if appropriate for regulatory, tax or other purposes, the Company also may own, directly or through subsidiaries, interests in assets that the Operating Partnership otherwise could acquire, if the Company grants to the Operating Partnership the option to acquire the assets within a period not to exceed three years in exchange for the number of partnership units that would be issued if the Operating Partnership had acquired the assets at the time of acquisition by the Company.

      Term: The Operating Partnership will continue in full force and effect until December 31, 2096 or until sooner dissolved upon the withdrawal of the general partner (unless the limited partners elect to continue the Operating Partnership), or by the election of the general partner (with the consent of the holders of a majority of the partnerships interests if such vote is held before January 1, 2056), in connection with a merger or the sale or other disposition of all or substantially all of the assets of the Operating Partnership, or by judicial decree.

      Other Provisions: The Operating Partnership Agreement contains other provisions affecting its operations and management, limited partner access to certain business records, responsibility for expenses and reimbursements, tax allocations, distribution of certain reports, winding-up and liquidation, the granting by the limited partners of powers of attorney to the general partner, the rights of holders of particular series of preferred units, and other matters.

Cost Allocation and Administrative Services

      Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PSI and affiliated entities for certain administrative services. These services include employee relations, administration, management information systems, legal, corporate tax and office services. Under this agreement, costs are allocated to the Company in accordance with its proportionate share of these costs. These allocated costs totaled $335,000, $327,000, and $335,000 for the years ended December 31, 2005, 2004 and 2003, respectively. In addition, in November 2002, the former Chief Executive Officer of the Company, Ronald L. Havner, Jr. was appointed Chief Executive Officer of PSI. Mr. Havner resigned as Chief Executive Officer of the Company in August 2003 and was succeeded by Joseph D. Russell, Jr. Mr. Havner remains Chairman of the Company.

Common Officers and Directors with PSI

      Ronald L. Havner, Jr., Chairman of the Company, is the Chief Executive Officer and President of PSI. Harvey Lenkin, retired president of PSI, is a Director of both the Company and PSI. The Company engages additional executive personnel who render services exclusively for the Company. However, it is expected that certain officers of PSI will continue to render services for the Company as requested.

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Property Management

      The Company continues to manage commercial properties owned by PSI and its affiliates, which are generally adjacent to mini-warehouses, for a fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. The property management contract with PSI is for a seven-year term with the agreement automatically extending for successive one-year terms (unless cancelled by either party). PSI can cancel the property management contract upon 60 days notice while the Operating Partnership can cancel it upon seven years notice. Management fee revenue derived from these management contracts with PSI and its affiliates totaled approximately $579,000, $562,000 and $581,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Management

      Joseph D. Russell, Jr. (46) leads the Company’s senior management team. Mr. Russell is President and Chief Executive Officer of the Company. The Company’s executive management includes: John Petersen (42), Executive Vice President and Chief Operating Officer; Edward A. Stokx (40), Executive Vice President and Chief Financial Officer; Brett Franklin (41), Senior Vice President, Acquisitions and Dispositions; Maria R. Hawthorne (46), Senior Vice President (East Coast); Joseph E. Miller (42), Senior Vice President and CFO of Operations; Coby Holley (36), Vice President (Pacific Northwest Division), Robin E. Mather (43), Vice President (Southern California Division); William A. McFaul (40), Vice President (Maryland Division); and Viola Sanchez (43) Vice President (Southeast Division).

REIT Structure

      If certain detailed conditions imposed by the Code and the related Treasury Regulations are met, an entity, such as the Company, that invests principally in real estate and that otherwise would be taxed as a corporation may elect to be treated as a REIT. The most important consequence to the Company of being treated as a REIT for federal income tax purposes is that the Company can deduct dividend distributions (including distributions on preferred stock) to its shareholders, thus effectively eliminating the “double taxation” (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends.

      The Company believes that it has operated, and intends to continue to operate, in such a manner as to qualify as a REIT under the Code, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders.

Operating Strategy

      The Company believes its operating, acquisition and finance strategies combined with its diversified portfolio produces a lower risk, higher growth business model. The Company’s primary objective is to grow shareholder value. Key elements of the Company’s growth strategy include:

      Maximize Net Cash Flow of Existing Properties: The Company seeks to maximize the net cash flow generated by its properties by (i) maximizing average occupancy rates, (ii) achieving higher levels of realized monthly rents per occupied square foot, and (iii) reducing its operating cost structure by improving operating efficiencies and economies of scale. The Company believes that its experienced property management personnel and comprehensive systems combined with increasing economies of scale will enhance the Company’s ability to meet these goals. The Company seeks to increase occupancy rates and realized monthly rents per square foot by providing its field personnel with incentives to lease space to higher credit tenants and to maximize the return on investment in each lease transaction. The Company seeks to reduce its cost structure by controlling capital expenditures associated with re-leasing space by acquiring and owning properties with easily reconfigured space that appeal to a wide range of tenants.

      Focus on Targeted Markets: The Company intends to continue investing in markets that have characteristics which enable them to be competitive economically. The Company believes that markets with some

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combination of above average population growth, education levels and personal income will produce better overall economic returns. As of December 31, 2005, substantially all of the Company’s square footage was located in these targeted core markets. The Company targets individual properties in those markets that are close to important services and universities and have easy access to major transportation arteries.

      Reduce Expenditures and Increase Occupancy Rates by Providing Flexible Properties and Attracting a Diversified Tenant Base: By focusing on properties with easily reconfigured space, the Company believes it can offer facilities that appeal to a wide range of potential tenants, which aids in reducing the capital expenditures associated with re-leasing space. The Company believes this property flexibility also allows it to better serve existing tenants by accommodating their inevitable expansion and contraction needs. In addition, the Company believes that a diversified tenant base and property flexibility helps it maintain high occupancy rates during periods when market demand is weak, by enabling it to attract a greater number of potential users to its space.

      Provide Superior Property Management: The Company seeks to provide a superior level of service to its tenants in order to achieve high occupancy and rental rates, as well as minimal customer turnover. The Company’s property management offices are primarily located on-site or regionally located, providing tenants with convenient access to management and helping the Company maintain its properties and convey a sense of quality, order and security. The Company has significant experience in acquiring properties managed by others and thereafter improving tenant satisfaction, occupancy levels, renewal rates and rental income by implementing established tenant service programs.

Financing Strategy

      The Company’s primary objective in its financing strategy is to maintain financial flexibility and a low risk capital structure using permanent capital to finance its growth. Key elements of this strategy are:

      Retain Operating Cash Flow: The Company seeks to retain significant funds (after funding its distributions and capital improvements) for additional investments. During the year ended December 31, 2005, the Company distributed 33.0% of its funds from operations (“FFO”) to common shareholders/unitholders. During the year ended December 31, 2004, the Company distributed 34.7% of its FFO to common shareholders/unitholders. The increase in retained cash was a result of lower transaction costs and a higher level of FFO. FFO is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with generally accepted accounting principles (“GAAP”), before depreciation, amortization, minority interest in income, and extraordinary items. FFO is a non-GAAP financial measure and should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results from operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other real estate companies’ funds from operations. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Non-GAAP Supplemental Disclosure Measure: Funds from Operations,” for a reconciliation of FFO and net income allocable to common shareholders and for information on why the Company presents FFO.

      Perpetual Preferred Stock/ Units: The primary source of leverage in the Company’s capital structure is perpetual preferred stock or equivalent preferred units in the operating partnership. This method of financing eliminates interest rate and refinancing risks because the dividend rate is fixed and the stated value or capital contribution is not required to be repaid. In addition, the consequences of defaulting on required preferred distributions is less severe than with debt. The preferred shareholders may elect additional two directors if six quarterly distributions go unpaid, whether or not consecutive.

      Debt Financing: The Company has used debt financing to a limited degree. The primary source of debt that the Company relies upon to provide short term capital is its $100.0 million unsecured line of credit with Wells Fargo. In the past, the Company also had an unsecured term loan in the amount of $50.0 million. This term loan was repaid in 2004. From time to time, the Company has also borrowed funds on a short term basis from PSI.

9

      Access to Acquisition Capital: The Company seeks to maintain a ratio of FFO to combined fixed charges and preferred distributions paid of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest. Preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unitholders. As of the year ended December 31, 2005, the FFO to combined fixed charges and preferred distributions paid ratio was 2.9 to 1.0, excluding the effects of Emerging Issues Task Force (“EITF”) Topic D-42. The fixed charge ratio was below the Company’s objective of 3.0x as the Company issued preferred equity in 2005 in anticipation of redeeming higher rate preferred equity in 2006. The Company believes that its financial position will enable it to access capital to finance its future growth. Subject to market conditions, the Company may add leverage to its capital structure. Throughout this Form 10-K, we use the term “preferred equity” to mean both the preferred stock issued by the Company and the preferred partnership units issued by the Operating Partnership and the term “preferred distributions” to mean dividends and distributions on the preferred stock and preferred partnership units.

Competition

      Competition in the market areas in which many of the Company’s properties are located is significant and has reduced the occupancy levels and rental rates of, and increased the operating expenses of, certain of these properties. Competition may be accelerated by any increase in availability of funds for investment in real estate. Barriers to entry are relatively low for those with the necessary capital and the Company competes for property acquisitions and tenants with entities that have greater financial resources than the Company. Recent increases in sublease space and unleased developments are expected to further intensify competition among operators in certain market areas in which the Company operates.

      The Company’s properties compete for tenants with similar properties located in its markets primarily on the basis of location, rent charged, services provided and the design and condition of improvements. The Company believes it possesses several distinguishing characteristics that enable it to compete effectively in the flex, office and industrial space markets. The Company believes its personnel are among the most experienced in these real estate markets. The Company’s facilities are part of a comprehensive system encompassing standardized procedures and integrated reporting and information networks. The Company believes that the significant operating and financial experience of its executive officers and directors combined with the Company’s capital structure, national investment scope, geographic diversity and economies of scale should enable the Company to compete effectively.

Investments in Real Estate Facilities

      As of December 31, 2005, the Company owned and operated approximately 17.6 million net rentable square feet compared to 18.0 million net rentable square feet at December 31, 2004. The net decrease in net rentable square feet was due to the disposition of facilities that were identified by management as not meeting the Company’s ongoing investment strategy, partially offset by the acquisition of the property in San Diego, California.

Summary of Business Model

      The Company has a diversified portfolio. It is diversified geographically in eight states and has a diversified customer mix by size and industry concentration. The Company believes that this diversification combined with a conservative financing strategy, focus on markets with strong demographics for growth and operating strategy gives the Company a business model that mitigates risk and provides strong long-term growth opportunities.

Restrictions on Transactions with Affiliates

      The Company’s Bylaws provide that the Company may engage in transactions with affiliates provided that a purchase or sale transaction with an affiliate is (i) approved by a majority of the Company’s independent directors and (ii) fair to the Company based on an independent appraisal or fairness opinion.

10

Borrowings

      As of December 31, 2005, the Company had outstanding mortgage notes payable of approximately $25.9 million. See Notes 5 and 6 to the consolidated financial statements for a summary of the Company’s outstanding borrowings as of December 31, 2005.

      In August of 2005, the Company modified the term of its line of credit (the “Credit Facility”) with Wells Fargo Bank. The Credit Facility has a borrowing limit of $100.0 million and matures on August 1, 2008. Interest on outstanding borrowings is payable monthly. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.50% to LIBOR plus 1.20% depending on the Company’s credit ratings and coverage ratios, as defined (currently LIBOR plus 0.65%). In addition, the Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% of the borrowing limit (currently 0.20%). In connection with the modification of the Credit Facility, the Company paid a fee of $450,000, which will be amortized over the life of the Credit Facility. The Company had no balance outstanding on its Credit Facility at December 31, 2005 and 2004.

      The Credit Facility requires the Company to meet certain covenants including (i) maintain a balance sheet leverage ratio (as defined) of less than 0.45 to 1.00, (ii) maintain interest and fixed charge coverage ratios (as defined) of not less than 2.25 to 1.00 and 1.75 to 1.00, respectively, (iii) maintain a minimum tangible net worth (as defined) and (iv) limit distributions to 95% of funds from operations (as defined) for any four consecutive quarters. In addition, the Company is limited in its ability to incur additional borrowings (the Company is required to maintain unencumbered assets with an aggregate book value equal to or greater than two times the Company’s unsecured recourse debt; the Company did not have any unsecured recourse debt at December 31, 2005) or sell assets. The Company was in compliance with the covenants of the Credit Facility at December 31, 2005.

      In February 2004, the Company repaid, in full, the $50.0 million outstanding on a $50.0 million unsecured term note agreement with Fleet National Bank. The Company incurred interest at LIBOR plus 1.45% per annum. During July 2002, the Company entered into an interest rate swap transaction which resulted in a fixed LIBOR rate of 3.01% for the term loan resulting in an all in rate of 4.46% per annum on the term loan. The unsecured note required the Company to meet covenants that were substantially the same as the covenants in the Credit Facility.

      The Company has broad powers to borrow in furtherance of the Company’s objectives. The Company has incurred in the past, and may incur in the future, both short-term and long-term indebtedness to increase its funds available for investment in real estate, capital expenditures and distributions.

Employees

      As of December 31, 2005, the Company employed 137 individuals, primarily personnel engaged in property operations. The Company believes that its relationship with its employees is good and none of the employees are represented by a labor union.

Insurance

      The Company believes that its properties are adequately insured. Facilities operated by the Company have historically been covered by comprehensive insurance, including fire, earthquake, liability and extended coverage from nationally recognized carriers.

Environmental Matters

      Compliance with laws and regulations relating to the protection of the environment, including those regarding the discharge of material into the environment, has not had any material effects upon the capital expenditures, earnings or competitive position of the Company.

      Substantially all of the Company’s properties have been subjected to Phase I environmental reviews. Such reviews have not revealed, nor is management aware of, any probable or reasonably possible environmental costs that management believes would have a material adverse effect on the Company’s business, assets or results of operations, nor is the Company aware of any potentially material environmental liability.

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ITEM 1A. RISK FACTORS

      In addition to the other information in this Form 10-K, the following factors should be considered in evaluating our company and our business.

Public Storage has significant influence over us.

      At December 31, 2005, Public Storage and its affiliates owned 25.1% of the outstanding shares of our common stock and 25.3% of the outstanding common units of our operating partnership (100% of the common units not owned by us). Assuming conversion of its partnership units PSI would own 44.1% of the outstanding shares of our common stock. Also, Ronald L. Havner, Jr., our Chairman of the Board, is also Chief Executive Officer, President and a Director of Public Storage and Harvey Lenkin, one of our Directors, is also a Director of Public Storage. Consequently, Public Storage has the ability to significantly influence all matters submitted to a vote of our shareholders, including electing directors, changing our articles of incorporation, dissolving and approving other extraordinary transactions such as mergers, and all matters requiring the consent of the limited partners of the operating partnership. In addition, Public Storage’s ownership may make it more difficult for another party to take over our company without Public Storage’s approval.

Provisions in our organizational documents may prevent changes in control.

      Our articles generally prohibit owning more than 7% of our shares: Our articles of incorporation restrict the number of shares that may be owned by any other person, and the partnership agreement of our operating partnership contains an anti-takeover provision. No shareholder (other than Public Storage and certain other specified shareholders) may own more than 7% of the outstanding shares of our common stock, unless our board of directors waives this limitation. We imposed this limitation to avoid, to the extent possible, a concentration of ownership that might jeopardize our ability to qualify as a REIT. This limitation, however, also makes a change of control much more difficult (if not impossible) even if it may be favorable to our public shareholders. These provisions will prevent future takeover attempts not approved by Public Storage even if a majority of our public shareholders consider it to be in their best interests because they would receive a premium for their shares over the shares’ then market value or for other reasons.

      Our board can set the terms of certain securities without shareholder approval: Our board of directors is authorized, without shareholder approval, to issue up to 50,000,000 shares of preferred stock and up to 100,000,000 shares of equity stock, in each case in one or more series. Our board has the right to set the terms of each of these series of stock. Consequently, the board could set the terms of a series of stock that could make it difficult (if not impossible) for another party to take over our company even if it might be favorable to our public shareholders. Our articles of incorporation also contain other provisions that could have the same effect. We can also cause our operating partnership to issue additional interests for cash or in exchange for property.

      The partnership agreement of our operating partnership restricts mergers: The partnership agreement of our operating partnership generally provides that we may not merge or engage in a similar transaction unless the limited partners of our operating partnership are entitled to receive the same proportionate payments as our shareholders. In addition, we have agreed not to merge unless the merger would have been approved had the limited partners been able to vote together with our shareholders, which has the effect of increasing Public Storage’s influence over us due to Public Storage’s ownership of operating partnership units. These provisions may make it more difficult for us to merge with another entity.

Our operating partnership poses additional risks to us.

      Limited partners of our operating partnership, including Public Storage, have the right to vote on certain changes to the partnership agreement. They may vote in a way that is against the interests of our shareholders. Also, as general partner of our operating partnership, we are required to protect the interests of the limited partners of the operating partnership. The interests of the limited partners and of our shareholders may differ.

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We cannot sell certain properties without Public Storage’s approval.

      Prior to 2007, we are prohibited from selling 10 specified properties without Public Storage’s approval. Since Public Storage would be taxed on a sale of these properties, the interests of Public Storage and our other shareholders may differ as to the best time to sell such properties.

We would incur adverse tax consequences if we fail to qualify as a REIT.

      Our cash flow would be reduced if we fail to qualify as a REIT: While we believe that we have qualified since 1990 to be taxed as a REIT, and will continue to be so qualified, we cannot be certain. To continue to qualify as a REIT, we need to satisfy certain requirements under the federal income tax laws relating to our income, assets, distributions to shareholders and shareholder base. In this regard, the share ownership limits in our articles of incorporation do not necessarily ensure that our shareholder base is sufficiently diverse for us to qualify as a REIT. For any year we fail to qualify as a REIT, we would be taxed at regular corporate tax rates on our taxable income unless certain relief provisions apply. Taxes would reduce our cash available for distributions to shareholders or for reinvestment, which could adversely affect us and our shareholders. Also we would not be allowed to elect REIT status for five years after we fail to qualify unless certain relief provisions apply.

      We may need to borrow funds to meet our REIT distribution requirements: To qualify as a REIT, we must generally distribute to our shareholders 90% of our taxable income. Our income consists primarily of our share of our Operating Partnership’s income. We intend to make sufficient distributions to qualify as a REIT and otherwise avoid corporate tax. However, differences in timing between income and expenses and the need to make nondeductible expenditures such as capital improvements and principal payments on debt could force us to borrow funds to make necessary shareholder distributions.

Since we buy and operate real estate, we are subject to general real estate investment and operating risks.

      Summary of real estate risks: We own and operate commercial properties and are subject to the risks of owning real estate generally and commercial properties in particular. These risks include:

•  the national, state and local economic climate and real estate conditions, such as oversupply of or reduced demand for space and changes in market rental rates;

•  how prospective tenants perceive the attractiveness, convenience and safety of our properties;

•  our ability to provide adequate management, maintenance and insurance;

•  our ability to collect rent from tenants on a timely basis;

•  the expense of periodically renovating, repairing and reletting spaces;

•  environmental issues;

•  compliance with the Americans with Disabilities Act and other federal, state, and local laws and regulations;

•  increasing operating costs, including real estate taxes, insurance and utilities, if these increased costs cannot be passed through to tenants;

•  changes in tax, real estate and zoning laws;

•  increase in new commercial properties in our market;

•  tenant defaults and bankruptcies;

•  tenant’s right to sublease space; and

•  concentration of properties leased to non-rated private companies.

      Certain significant costs, such as mortgage payments, real estate taxes, insurance and maintenance, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest

13

rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial space fluctuates with market conditions.

      If our properties do not generate sufficient income to meet operating expenses, including any debt service, tenant improvements, leasing commissions and other capital expenditures, we may have to borrow additional amounts to cover fixed costs, and we may have to reduce our distributions to shareholders.

      New acquisitions and developments may fail to perform as expected: We continue to seek to acquire and develop flex, industrial and office properties where they meet our criteria and we believe that they will enhance our future financial performance and the value of our portfolio. Our belief, however, is based on and is subject to risks, uncertainties and other factors, many of which are forward-looking and are uncertain in nature or are beyond our control. In addition, some of these properties may have unknown characteristics or deficiencies or may not complement our portfolio of existing properties. Real property development is subject to a number of risks, including construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits, cost overruns, financing risks, and the possible inability to meet expected occupancy and rent levels. If any of these problems occur, development costs for a project may increase, and there may be costs incurred for projects that are not completed. As a result of the foregoing, some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of acquisition or development, negatively affecting our operating results. In addition, we may be unable to successfully integrate and effectively manage the properties we do acquire and develop, which could adversely affect our results of operations.

      We may encounter significant delays and expense in reletting vacant space, or we may not be able to relet space at existing rates, in each case resulting in losses of income: When leases expire, we will incur expenses in retrofitting space and we may not be able to release the space on the same terms. Certain leases provide tenants with the right to terminate early. Our properties as of December 31, 2005 generally have lower vacancy rates than the average for the markets in which they are located, and leases accounting for 20.1% of our annual rental income expire in 2006 and 19.4% in 2007. While we have estimated our cost of renewing leases that expire in 2006 and 2007, our estimates could be wrong. If we are unable to release space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce our distributions to shareholders.

      Tenant defaults and bankruptcies may reduce our cash flow and distributions: We may have difficulty in collecting from tenants in default, particularly if they declare bankruptcy. This could affect our cash flow and distributions to shareholders. Since many of our tenants are non-rated private companies, this risk may be enhanced. While the Company historically has experienced a low level of write-offs due to bankruptcy, there is inherent uncertainty in a tenant’s ability to continue paying rent if they are in bankruptcy. As of December 31, 2005 the Company had approximately 37,000 square feet occupied by tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. Given the historical uncertainty of a tenant’s ability to meet its lease obligations, we will continue to reserve any income that would have been realized on a straight line basis. Several other tenants have contacted us, requesting early termination of their lease, reduction in space under lease, rent deferment or abatement. At this time, the Company cannot anticipate what impact, if any, the ultimate outcome of these discussions will have on our operating results.

      We may be adversely affected by significant competition among commercial properties: Many other commercial properties compete with our properties for tenants. Some of the competing properties may be newer and better located than our properties. We also expect that new properties will be built in our markets. Also, we compete with other buyers, many of which are larger than us, for attractive commercial properties. Therefore, we may not be able to grow as rapidly as we would like.

      We may be adversely affected if casualties to our properties are not covered by insurance: We carry insurance on our properties that we believe is comparable to the insurance carried by other operators for similar properties. However, we could suffer uninsured losses or losses in excess of policy limits for such occurrences such as earthquakes that adversely affect us or even result in loss of the property. We might still remain liable on any mortgage debt or other unsatisfied obligations related to that property.

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      The illiquidity of our real estate investments may prevent us from adjusting our portfolio to respond to market changes: There may be delays and difficulties in selling real estate. Therefore, we cannot easily change our portfolio when economic conditions change. Also, tax laws limit a REIT’s ability to sell properties held for less than four years.

      We may be adversely affected by changes in laws: Increases in income and service taxes may reduce our cash flow and ability to make expected distributions to our shareholders. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and safety codes. If we fail to comply with these requirements, governmental authorities could fine us or courts could award damages against us. We believe our properties comply with all significant legal requirements. However, these requirements could change in a way that would reduce our cash flow and ability to make distributions to shareholders.

      We may incur significant environmental remediation costs: Under various federal, state and local environmental laws, an owner or operator of real estate may have to clean spills or other releases of hazardous or toxic substances on or from a property. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may exceed the value of the property. The presence of toxic substances, or the failure to properly remedy any resulting contamination, may make it more difficult for the owner or operator to sell, lease or operate its property or to borrow money using its property as collateral. Future environmental laws may impose additional material liabilities on us.

We are affected by the Americans with Disabilities Act.

      The Americans with Disabilities Act of 1990 requires that access and use by disabled persons of all public accommodations and commercial properties be facilitated. Existing commercial properties must be made accessible to disabled persons. While we have not estimated the cost of complying with this act, we do not believe the cost will be material. We have an ongoing program to bring our properties into what we believe is compliance with the Americans with Disabilities Act.

We depend on external sources of capital to grow our company.

      We are generally required under the Internal Revenue Code to distribute at least 90% of our taxable income. Because of this distribution requirement, we may not be able to fund future capital needs, including any necessary building and tenant improvements, from operating cash flow. Consequently, we may need to rely on third-party sources of capital to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Access to third-party sources of capital depends, in part, on general market conditions, the market’s perception of our growth potential, our current and expected future earnings, our cash flow, and the market price per share of our common stock. If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, satisfy any debt service obligations, or make cash distributions to shareholders.

Our ability to control our properties may be adversely affected by ownership through partnerships and joint ventures.

      We own most of our properties through our operating partnership. Our organizational documents do not prevent us from acquiring properties with others through partnerships or joint ventures. This type of investment may present additional risks. For example, our partners may have interests that differ from ours or that conflict with ours, or our partners may become bankrupt. During 2001, we entered into a joint venture arrangement that held property subject to debt. This joint venture has been liquidated and all debts paid; however, we may enter into similar arrangements with the same partner or other partners.

We can change our business policies and increase our level of debt without shareholder approval.

      Our board of directors establishes our investment, financing, distribution and our other business policies and may change these policies without shareholder approval. Our organizational documents do not limit our level of debt. A change in our policies or an increase in our level of debt could adversely affect our operations or the price of our common stock.

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We can issue additional securities without shareholder approval.

      We can issue preferred, equity and common stock without shareholder approval. Holders of preferred stock have priority over holders of common stock, and the issuance of additional shares of stock reduces the interest of existing holders in our company.

Increases in interest rates may adversely affect the market price of our common stock.

      One of the factors that influences the market price of our common stock is the annual rate of distributions that we pay on our common stock, as compared with interest rates. An increase in interest rates may lead purchasers of REIT shares to demand higher annual distribution rates, which could adversely affect the market price of our common stock.

Shares that become available for future sale may adversely affect the market price of our common stock.

      Substantial sales of our common stock, or the perception that substantial sales may occur, could adversely affect the market price of our common stock. As of December 31, 2005, Public Storage owned 25.1% of the outstanding shares of our common stock (44.1% upon conversion of its interest in our operating partnership). These shares, as well as shares of common stock held by certain other significant shareholders, are eligible to be sold in the public market, subject to compliance with applicable securities laws.

We depend on key personnel.

      We depend on our key personnel, including Ronald L. Havner, Jr., our Chairman of the Board, and Joseph D. Russell, Jr., our President and Chief Executive Officer. The loss of Mr. Havner, Mr. Russell, or other key personnel could adversely affect our operations. We maintain no key person insurance on our key personnel.

Terrorist attacks and the possibility of wider armed conflict may have an adverse impact on our business and operating results and could decrease the value of our assets.

      Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or its businesses or interests. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for all losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the United States to enter into a wider armed conflict which could further impact our business and operating results.

Change in taxation of corporate dividends may adversely affect the value of our shares.

      The Jobs and Growth Tax Relief Reconciliation Act of 2003, enacted on May 28, 2003, generally reduces to 15% the maximum marginal rate of federal tax payable by individuals on dividends received from a regular C corporation. This reduced tax rate, however, will not apply to dividends paid to individuals by a REIT on its shares except for certain limited amounts. The earnings of a REIT that are distributed to its shareholders still will generally be subject to less federal income taxation on an aggregate basis than earnings of a non-REIT C corporation that are distributed to its shareholders net of corporate-level income tax. The Jobs and Growth Tax Act, however, could cause individual investors to view stocks of regular C corporations as more attractive relative to shares of REITs than was the case prior to the enactment of the legislation because the dividends from regular C corporations, which previously were taxed at the same rate as REIT dividends, now will be taxed at a maximum marginal rate of 15% while REIT dividends will be taxed at a maximum marginal rate of 35%. We cannot predict what effect, if any, the enactment of this legislation may have on the value of our common stock, either in terms of price or relative to other investments.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

      None.

ITEM 2.  PROPERTIES

      As of December 31, 2005, the Company owned approximately 10.4 million square feet of flex space, 3.9 million square feet of industrial space, and 3.2 million square feet of office space concentrated primarily in eight major markets consisting of Southern and Northern California, Southern and Northern Texas, Florida, Virginia, Maryland and Oregon. Additionally, the Company owned 43,000 square feet of flex space in Florida classified as properties held for disposition at December 31, 2005. The weighted average occupancy rate throughout 2005 was 92.2% and the average realized rental revenue per square foot was $13.76, both of which exclude the effect of assets classified as held for disposition.

      The following table contains information about all properties (excluding those classified as assets held for disposition) owned by the Company as of December 31, 2005 and the weighted average occupancy rates throughout 2005 (except as set forth below, all of the properties are held in fee simple interest, in thousands):

	Rentable Square Footage								Weighted
									Average
Location	Flex		Industrial		Office		Total		Occupancy Rate
Arizona
Mesa		78		—		—		78		98.8	%
Phoenix		310		—		—		310		93.3	%
Tempe		291		—		—		291		94.7	%
		679		—		—		679		94.5	%
Northern California
Hayward		—		407		—		407		87.2	%
Monterey		—		—		12		12		100.0	%
Sacramento		—		—		366		366		92.1	%
San Jose		391		—		—		391		95.7	%
San Ramon		—		—		52		52		100.0	%
Santa Clara		178		—		—		178		98.9	%
So. San Francisco		94		—		—		94		97.5	%
		663		407		430		1,500		93.2	%
Southern California
Buena Park		—		317		—		317		100.0	%
Carson		77		—		—		77		95.5	%
Cerritos		—		395		31		426		95.0	%
Culver City		146		—		—		146		96.2	%
Irvine		—		—		160		160		98.2	%
Laguna Hills		614		—		—		614		98.7	%
Lake Forest		297		—		—		297		97.0	%
Monterey Park		199		—		—		199		94.6	%
Orange		—		—		108		108		90.7	%
San Diego(2)		768		—		—		768		95.4	%
Santa Ana		—		—		437		437		81.3	%
Signal Hill		178		—		—		178		97.1	%
Studio City		22		—		—		22		98.0	%
Torrance		147		—		—		147		93.9	%
		2,448		712		736		3,896		94.8	%
Maryland
Beltsville		309		—		—		309		97.2	%
Gaithersburg		—		—		29		29		85.2	%
Rockville		212		—		688		900		95.1	%
		521		—		717		1,238		95.4	%

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	Rentable Square Footage								Weighted
									Average
Location	Flex		Industrial		Office		Total		Occupancy Rate
Oregon
Beaverton		1,055		—		187		1,242		84.9	%
Milwaukee		102		—		—		102		85.0	%
		1,157		—		187		1,344		84.9	%
Northern Texas
Dallas		237		—		—		237		79.2	%
Farmers Branch		112		—		—		112		84.6	%
Garland		36		—		—		36		66.7	%
Irving(1)		714		231		—		945		91.3	%
Mesquite		57		—		—		57		83.7	%
Plano		184		—		—		184		81.6	%
Richardson		117		—		—		117		71.4	%
		1,457		231		—		1,688		85.9	%
Southern Texas
Austin		792		—		—		792		84.1	%
Houston		177		—		131		308		87.6	%
Missouri City		66		—		—		66		100.0	%
		1,035		—		131		1,166		85.9	%
Florida
Miami		619		2,556		12		3,187		92.9	%
		619		2,556		12		3,187		92.9	%
Virginia
Alexandria		155		—		54		209		98.2	%
Chantilly(2)		456		—		38		494		99.1	%
Fairfax		—		—		166		166		91.5	%
Herndon		—		—		244		244		99.5	%
Lorton		246		—		—		246		100.0	%
Merrifield		303		—		355		658		86.9	%
Springfield		269		—		90		359		98.1	%
Sterling		296		—		—		296		97.0	%
Woodbridge		114		—		—		114		97.1	%
		1,839		—		947		2,786		95.4	%
Washington
Renton		28		—		—		28		73.4	%
		28		—		—		28		73.4	%
Totals		10,446		3,906		3,160		17,512		92.2	%

(1)	The Company owns one property that is subject to a ground lease in Las Colinas, Texas.
(2)	Three commercial properties, one in San Diego and two in Chantilly, serve as collateral to mortgage notes payable. For more information, see Note 6 of the Consolidated Financial Statements.

      Each of these properties will continue to be used for its current purpose. Competition exists in the market areas in which these properties are located. Barriers to entry are relatively low for competitors with the necessary capital and the Company will be competing for properties and tenants with entities that have greater financial resources than the Company. The Company believes that while overall demand for commercial space softened in 2005 and 2004, there is sufficient demand to maintain healthy occupancy rates. For information regarding general competitive conditions to which the Company’s properties are or may be subject, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Effect of Economic Conditions on the Company’s Primary Markets.”

18

      The Company has no present plans for any material renovation, improvement or development of its properties. The Company typically renovates its properties in connection with the releasing of space to tenants and expects that it will pay the costs of such renovations from rental income.

      The Company has risks that tenants will default on leases and declare bankruptcy. Management believes these risks are mitigated through the Company’s geographic diversity and diverse tenant base.

19

      The Company evaluates the performance of its properties primarily based on net operating income (“NOI”). NOI is defined by the Company as rental income as defined by GAAP less cost of operations as defined by GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Concentration of Portfolio by Region” below for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The following information illustrates rental income, cost of operations and NOI generated for the Company’s total portfolio in 2005, 2004 and 2003 by geographic region and by property classifications. As a result of acquisitions and dispositions, certain properties were not held for the full year.

      The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with generally accepted accounting principles. The tables below also include a reconciliation of NOI to the most comparable amounts based on GAAP (in thousands):

	For the Year Ended December 31, 2005								For the Year Ended December 31, 2004								For the Year Ended December 31, 2003
	Flex		Office		Industrial		Total		Flex		Office		Industrial		Total		Flex		Office		Industrial		Total
Rental Income:
Southern California	$	36,093	$	13,748	$	4,878	$	54,719	$	33,605	$	13,062	$	5,129	$	51,796	$	33,784	$	7,534	$	5,106	$	46,424
Northern California		9,427		6,505		3,039		18,971		10,576		6,131		2,786		19,493		11,275		6,577		2,824		20,676
Southern Texas		7,906		1,709		—		9,615		7,971		1,682		—		9,653		10,150		2,084		—		12,234
Northern Texas		14,585		—		1,127		15,712		13,209		—		953		14,162		16,664		—		859		17,523
Florida		5,786		185		16,109		22,080		5,293		159		14,834		20,286		—		—		98		98
Virginia		28,804		19,895		—		48,699		35,312		10,813		—		46,125		33,277		9,319		—		42,596
Maryland		7,576		16,613		—		24,189		6,823		17,598		—		24,421		6,660		16,375		—		23,035
Oregon		15,943		2,805		—		18,748		15,158		3,320		—		18,478		14,858		2,855		—		17,713
Other		6,936		—		—		6,936		6,588		—		—		6,588		5,872		—		—		5,872
		133,056		61,460		25,153		219,669		134,535		52,765		23,702		211,002		132,540		44,744		8,887		186,171
Cost of Operations:
Southern California		8,142		5,881		974		14,997		7,807		5,422		922		14,151		7,689		3,063		899		11,651
Northern California		1,969		2,005		609		4,583		2,025		1,983		568		4,576		2,094		1,917		525		4,536
Southern Texas		3,182		933		—		4,115		3,314		875		—		4,189		3,505		824		—		4,329
Northern Texas		5,076		—		261		5,337		5,197		—		269		5,466		4,862		—		302		5,164
Florida		1,996		82		5,689		7,767		1,708		74		5,408		7,190		—		—		40		40
Virginia		7,176		6,705		—		13,881		9,172		3,733		—		12,905		8,988		2,960		—		11,948
Maryland		1,703		4,787		—		6,490		1,546		4,716		—		6,262		1,525		4,616		—		6,141
Oregon		4,763		1,216		—		5,979		4,340		1,232		—		5,572		4,202		1,204		—		5,406
Other		2,659		—		—		2,659		2,758		—		—		2,758		2,413		—		—		2,413
		36,666		21,609		7,533		65,808		37,867		18,035		7,167		63,069		35,278		14,584		1,766		51,628
NOI:
Southern California		27,951		7,867		3,904		39,722		25,798		7,640		4,207		37,645		26,095		4,471		4,207		34,773
Northern California		7,458		4,500		2,430		14,388		8,551		4,148		2,218		14,917		9,181		4,660		2,299		16,140
Southern Texas		4,724		776		—		5,500		4,657		807		—		5,464		6,645		1,260		—		7,905
Northern Texas		9,509		—		866		10,375		8,012		—		684		8,696		11,802		—		557		12,359
Florida		3,790		103		10,420		14,313		3,585		85		9,426		13,096		—		—		58		58
Virginia		21,628		13,190		—		34,818		26,140		7,080		—		33,220		24,289		6,359		—		30,648
Maryland		5,873		11,826		—		17,699		5,277		12,882		—		18,159		5,135		11,759		—		16,894
Oregon		11,180		1,589		—		12,769		10,818		2,088		—		12,906		10,656		1,651		—		12,307
Other		4,277		—		—		4,277		3,830		—		—		3,830		3,459		—		—		3,459
	$	96,390	$	39,851	$	17,620	$	153,861	$	96,668	$	34,730	$	16,535	$	147,933	$	97,262	$	30,160	$	7,121	$	134,543

20

     The following table is provided to reconcile NOI to consolidated income from continuing operations before minority interests and equity in income of liquidated joint venture as determined by GAAP (in thousands):

	For the Year Ended December 31,
	2005			2004			2003
Property net operating income	$	153,861		$	147,933		$	134,543
Facility management fees		579			624			742
Gain on sale of marketable equity securities		—			—			2,043
Interest and other income		4,888			406			1,125
Depreciation and amortization		(76,285	)		(70,086	)		(56,332	)
General and administrative		(5,843	)		(4,628	)		(4,683	)
Interest expense		(1,330	)		(3,054	)		(4,015	)
Asset impairment due to casualty loss		(72	)		—			—
Income from continuing operations before minority interests and equity in income of liquidated joint venture	$	75,798		$	71,195		$	73,423

Significant Properties

      As of and for the year ended December 31, 2005, one of the Company’s properties had a book value of more than 10% of the Company’s total assets. The property, known as Miami International Commerce Center (“MICC”), is a business park in Miami, Florida consisting of 53 buildings (3.2 million square feet) consisting of flex (619,000 square feet), industrial (2.6 million square feet), and office (12,000 square feet) space. The property was purchased on December 30, 2003 and has a net book value of $184.9 million, representing approximately 12.6% of the Company’s total assets at December 31, 2005.

      During 2005, the Company sold approximately 100,000 square feet and a small parcel of land at MICC for a combined sales price of approximately $18.0 million.

      MICC property taxes for the year ended December 31, 2005 were approximately $3.4 million at a rate of 2.1% of the respective parcel value.

      The following table sets forth information with respect to occupancy and rental rates at Miami International Commerce Center for each of the last five years, including a 56,000 square foot retail center and 104,000 square feet of flex space disposed of and held for disposition:

	2001			2002			2003			2004			2005
Weighted average occupancy rate		89.3	%		86.3	%		81.7	%		83.8	%		91.8	%
Realized rent per square foot	$	7.06		$	6.96		$	7.12		$	7.75		$	7.47

      There is no one tenant that occupies ten percent or more of the rentable square footage at Miami International Commerce Center.

      The following table sets forth information with respect to lease expirations at Miami International Commerce Center (in thousands, except number of leases expiring):

							Percentage of Total
			Rentable Square		Annual Base Rents		Annual Base Rents
	Number of Leases		Footage Subject to		Under Expiring		Represented by
Year of Lease Expiration	Expiring		Expiring Leases		Leases		Expiring Leases
2006		92		597	$	4,687		19.6	%
2007		93		680		5,497		22.9	%
2008		89		847		6,467		27.0	%
2009		33		285		2,286		9.5	%
2010		36		525		3,989		16.6	%
Thereafter		7		120		1,036		4.4	%
Total		350		3,054	$	23,962		100.0	%

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      The following table sets forth information with respect to tax depreciation at Miami International Commerce Center (in thousands, except year data):

			Rate of					Life In		Accumulated
	Tax Basis		Depreciation			Method		Years		Depreciation
Land Improvements	$	46,038		8.8	%		MACRS, 150%		15	$	9,338
Improvements		25,110		22.3	%		VARIOUS		5		16,310
Tenant Buildings		83,892		2.4	%		MACRS, SL		VAR		5,059
Total	$	155,040								$	30,707

      Accumulated depreciation for personal property shown in the preceding table was derived using the mid-quarter convention.

Portfolio Information

      Approximately 60.1% of the Company’s annual rents are derived from large tenants, which consist of tenants with leases averaging greater than or equal to 5,000 square feet. These tenants generally sign longer leases, require more generous tenant improvements, are typically represented by a broker and are more creditworthy tenants. The remaining 39.9% of the Company’s annual rents are derived from small tenants with average space requirements of less than 5,000 square feet and a shorter lease term duration. Tenant improvements are relatively less for these tenants and most of these tenants are not represented by brokers and therefore the Company does not pay lease commissions. The following tables set forth the lease expirations for the entire portfolio of properties owned as of December 31, 2005 in addition to bifurcating the lease expirations for properties serving primarily small businesses and those properties serving primarily larger businesses (in thousands):

Lease Expirations (Entire Portfolio) as of December 31, 2005

					Percentage of Total
	Rentable Square		Annual Base Rents		Annual Base Rents
	Footage Subject to		Under Expiring		Represented by
Year of Lease Expiration	Expiring Leases		Leases		Expiring Leases
2006		3,518	$	42,697		20.1	%
2007		3,422		41,199		19.4	%
2008		3,319		43,387		20.5	%
2009		1,900		21,761		10.3	%
2010		1,860		25,385		12.0	%
Thereafter		2,389		37,588		17.7	%
Total		16,408	$	212,017		100.0	%

Lease Expirations (Small Tenant Portfolio) as of December 31, 2005

      The Company’s small tenant portfolio consists of properties with average leases less than 5,000 square feet.

					Percentage of Small
					Tenant Annual
	Rentable Square		Annual Base Rents		Base Rents
	Footage Subject to		Under Expiring		Represented by
Year of Lease Expiration	Expiring Leases		Leases		Expiring Leases
2006		1,822	$	23,506		27.8	%
2007		1,639		21,985		26.0	%
2008		1,111		16,998		20.1	%
2009		608		9,664		11.4	%
2010		392		6,522		7.7	%
Thereafter		291		5,901		7.0	%
Total		5,863	$	84,576		100.0	%

22

Lease Expirations (Large Tenant Portfolio) as of December 31, 2005

      The Company’s large tenant portfolio consists of properties with leases averaging greater than or equal to 5,000 square feet.

					Percentage of Large
					Tenant Annual
	Rentable Square		Annual Base Rents		Base Rents
	Footage Subject to		Under Expiring		Represented by
Year of Lease Expiration	Expiring Leases		Leases		Expiring Leases
2006		1,696	$	19,191		15.1	%
2007		1,783		19,214		15.1	%
2008		2,208		26,389		20.7	%
2009		1,292		12,097		9.4	%
2010		1,468		18,863		14.8	%
Thereafter		2,098		31,687		24.9	%
Total		10,545	$	127,441		100.0	%

ITEM 3.  LEGAL PROCEEDINGS

      We are not presently subject to material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine actions for negligence and other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance or third party indemnifications and all of which collectively we do not expect to have a material adverse effect on our financial condition, results of operations, or liquidity.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      The Company did not submit any matter to a vote of security holders in the fourth quarter of the fiscal year ended December 31, 2005.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

      The following is a biographical summary of the executive officers of the Company:

      Joseph D. Russell, Jr., age 46, has been President since September 2002 and was named Chief Executive Officer and elected as a Director in August 2003. Mr. Russell joined Spieker Partners in 1990 and became an officer of Spieker Properties when it went public as a REIT in 1993. Prior to its merger with Equity Office Properties (“EOP”) in 2001, Mr. Russell was President of Spieker Properties’ Silicon Valley Region from 1999 to 2001. Mr. Russell earned a Bachelor of Science degree from the University of Southern California and a Masters of Business Administration from the Harvard Business School. Prior to entering the commercial real estate business, Mr. Russell spent approximately six years with IBM in various marketing positions. Mr. Russell is a member and past President of the National Association of Industrial and Office Parks, Silicon Valley Chapter.

      John Petersen, age 42, has been Executive Vice President and Chief Operating Officer since he joined the Company in December 2004. Prior to joining the Company, Mr. Petersen was Senior Vice President, San Jose Region, for Equity Office Properties from July 2001 to December 2004, responsible for 11.3 million square feet of multi-tenant office, industrial and R&D space in Silicon Valley. Prior to EOP, Mr. Petersen was Senior Vice President with Spieker Properties, from 1995 to 2001 overseeing the growth of that company’s portfolio in San Jose, through acquisition and development of nearly three million square feet. Mr. Petersen is a graduate of The Colorado College in Colorado Springs, Colorado, and was recently the President of National Association of Industrial and Office Parks, Silicon Valley Chapter.

      Edward A. Stokx, age 40, a certified public accountant, has been Chief Financial Officer and Secretary of the Company since December 2003 and Executive Vice President since March 2004. Mr. Stokx has overall responsibility for the Company’s finance and accounting functions. In addition he has responsibility for executing the Company’s financial initiatives. Mr. Stokx joined Center Trust, a developer, owner, and operator of retail shopping centers in 1997. Prior to his promotion to Chief Financial Officer and Secretary in 2001 he served as

23

Senior Vice President, Finance and Controller. After Center Trust’s merger in January 2003 with another public REIT, Mr. Stokx provided consulting services to various entities. Prior to joining Center Trust, Mr. Stokx was with Deloitte and Touche from 1989 to 1997, with a focus on real estate clients. Mr. Stokx earned a Bachelor of Science degree in Accounting from Loyola Marymount University.

      Brett Franklin, age 41, is Senior Vice President, Acquisitions & Dispositions. Mr Franklin joined the Company as Vice President of Acquisitions in December 1997. Since joining the Company, Mr. Franklin has been involved in acquiring over 12.5 million square feet of commercial real estate in Northern and Southern California, Arizona, Texas, Maryland, Virginia, Oregon and Miami. Prior to joining, Mr. Franklin worked for Public Storage Pickup & Delivery as Vice President of Acquisitions from 1996 to 1997. His duties included acquiring and leasing over 1.5 million square feet of industrial properties in 16 cities across the country. From 1995 to October 1996, Mr. Franklin was a business consultant to San Diego and Los Angeles based real estate firms. From 1992 until 1995, Mr. Franklin held various positions for FORCE, Inc., an environmental remediation and technology company located in Camarillo, California. His positions included Director of Marketing and Chief Operating Officer. From 1987 until 1992, he managed and operated a real estate brokerage company in western Los Angeles. Mr. Franklin received his Bachelor of Science degree from the University of California at Los Angeles. He is a member of the Urban Land Institute.

      Maria R. Hawthorne, age 46, was promoted to Senior Vice President of the Company in March 2004, with responsibility for property operations on the East Coast, which include Northern Virginia, Maryland and Florida. Ms. Hawthorne has been with the Company and its predecessors for eighteen years. From June 2001 through March 2004, Ms. Hawthorne was Vice President of the Company, responsible for property operations in Northern Virginia. From July 1994 to June 2001, Ms. Hawthorne was a Regional Manager of the Company in Northern Virginia. From August 1988 to July 1994, Ms. Hawthorne was the Director of Leasing and Property Manager for American Office Park Properties. Ms. Hawthorne earned a Bachelor of Arts Degree in International Relations from Pomona College.

      Joseph E. Miller, age 42, was promoted to Senior Vice President, CFO of Operations in August 2004. Mr. Miller has overall responsibility for accounting, compliance, and internal reporting systems for the Company’s property operations. Mr Miller previously served as Vice President, Corporate Controller with responsibilities for financial and operational accounting, reporting, and analysis. Mr. Miller joined the Company in August 2001 as Vice President, Property Operations Controller focusing on operational systems and processes. Previously, Mr. Miller was Corporate Controller for Maguire Partners, a Los Angeles commercial real estate developer, owner, and manager, from May 1997 to August 2001. Prior to joining Maguire Partners, Mr. Miller was an audit manager at Ernst & Young with a focus on real estate clients. Mr. Miller is a certified public accountant and has earned a Bachelor of Science degree in Business Administration from California State University, Northridge, and a Masters of Business Administration from the University of Southern California.

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PART II

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

a. Market Price of the Registrant’s Common Equity:

      The Common Stock of the Company trades on the American Stock Exchange under the symbol PSB. The following table sets forth the high and low sales prices of the Common Stock on the American Stock Exchange for the applicable periods:

	Range
Three Months Ended	High		Low
March 31, 2004	$	46.35	$	41.30
June 30, 2004	$	46.60	$	35.38
September 30, 2004	$	41.30	$	38.51
December 31, 2004	$	45.95	$	39.83
March 31, 2005	$	44.90	$	39.70
June 30, 2005	$	44.45	$	38.85
September 30, 2005	$	46.70	$	43.38
December 31, 2005	$	49.20	$	42.99

      As of February 28, 2006, there were 562 holders of record of the Common Stock.

b. Dividends

      Holders of Common Stock are entitled to receive distributions when, as and if declared by the Company’s Board of Directors out of any funds legally available for that purpose. The Company is required to distribute at least 90% of its taxable income prior to the filing of the Company’s tax return to maintain its REIT status for federal income tax purposes. It is management’s intention to pay distributions of not less than these required amounts.

      Distributions paid per share of Common Stock for 2005 and 2004 amounted to $1.16 per year. In 2005, the Company continued to pay quarterly dividends of $0.29 per common share. The Board of Directors has established a distribution policy to maximize the retention of operating cash flow and distribute the minimum amount required for the Company to maintain its tax status as a REIT. Pursuant to restrictions contained in the Company’s Credit Facility with Wells Fargo Bank, distributions may not exceed 95% of funds from operations, as defined, for any four consecutive quarters. For more information on the Credit Facility, see Note 5 to the consolidated financial statements.

c. Issuer Repurchases of Equity Securities:

      The Company’s Board of Directors has authorized the repurchase, from time to time, of up to 4.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. The program does not expire.

      The following table contains information regarding the Company’s repurchase of its common stock during the three months ended December 31, 2005:

					Total Number of		Maximum Number
	Total Number				Shares Repurchased as		of Shares that May
	of Shares		Average Price		Part of Publicly		Yet Be Repurchased
Period Covered	Repurchased		Paid per Share		Announced Program		Under the Program
October 1 through October 31, 2005		95,800	$	44.17		95,800		1,659,389
November 1 through November 30, 2005		—	$	—		—		1,659,389
December 1 through December 31, 2005		142,500	$	48.95		142,500		1,516,889
Total		238,300	$	47.03		238,300		1,516,889

      See Note 9 to the consolidated financial statements for additional information on repurchases and redemptions of equity securities.

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ITEM 6.  SELECTED FINANCIAL DATA

      The following sets forth selected consolidated and combined financial and operating information on a historical basis of the Company. The following information should be read in conjunction with the consolidated financial statements and notes thereto of the Company included elsewhere in this Form 10-K. Note that historical results from 2001 through 2004 were reclassified to conform with 2005 presentation for discontinued operations. See Note 3 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K for a discussion of income from discontinued operations.

			For the Years Ended December 31,
			2005			2004			2003			2002			2001
			(In thousands, except per share and square footage data)
Revenues:
	Rental income		$	219,669		$	211,002		$	186,171		$	181,836		$	146,456
	Facility management fees primarily from affiliates			579			624			742			763			683
	Total operating revenues			220,248			211,626			186,913			182,599			147,139
Expenses:
	Property operations			65,808			63,069			51,628			49,039			39,157
	Depreciation and amortization			76,285			70,086			56,332			52,150			34,768
	General and administrative			5,843			4,628			4,683			5,125			4,892
	Total operating expenses			147,936			137,783			112,643			106,314			78,817
Other income and expenses:
	Gain on sale of marketable securities			—			—			2,043			41			8
	Interest and other income			4,888			406			1,125			959			2,621
	Interest expense			(1,330	)		(3,054	)		(4,015	)		(5,324	)		(1,715	)
	Total other income and expenses			3,558			(2,648	)		(847	)		(4,324	)		914
Asset impairment due to casualty loss				72			—			—			—			—
Income from continuing operations before minority interests and equity in income of liquidated joint venture				75,798			71,195			73,423			71,961			69,236
Equity in income of liquidated joint venture				—			—			2,296			1,978			25
Minority interests in continuing operations:
	Minority interest in income — preferred units:
		Distributions paid to preferred unitholders		(10,350	)		(17,106	)		(19,240	)		(17,927	)		(14,107	)
		Redemption of preferred operating partnership units		(301	)		(3,139	)		—			—			—
	Minority interest in income — common units			(5,576	)		(4,501	)		(10,336	)		(10,281	)		(11,333	)
	Total minority interests in continuing operations			(16,227	)		(24,746	)		(29,576	)		(28,208	)		(25,440	)
Income from continuing operations				59,571			46,449			46,143			45,731			43,821
Discontinued operations:
	Income from discontinued operations			2,907			5,491			6,972			7,538			8,098
	Impairment charge			—			—			(5,907	)		(900	)		—
	Gain on disposition of real estate			18,109			15,462			2,897			9,023			—
	Minority interest in earnings attributable to discontinued operations — common units			(5,293	)		(5,259	)		(1,009	)		(3,962	)		(2,049	)
	Income from discontinued operations			15,723			15,694			2,953			11,699			6,049
Net Income				75,294			62,143			49,096			57,430			49,870
Net income allocable to preferred shareholders:
	Preferred stock distributions
		Preferred stock distributions paid		43,011			31,154			15,784			15,412			8,854
		Redemptions of preferred stock		—			1,866			—			—			—
	Total preferred stock distributions			43,011			33,020			15,784			15,412			8,854
Net income allocable to common shareholders			$	32,283		$	29,123		$	33,312		$	42,018		$	41,016

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	For the Years Ended December 31,
	2005			2004			2003			2002			2001
	(In thousands, except per share and square footage data)
Per Common Share:
Cash Distribution(1)	$	1.16		$	1.16		$	1.16		$	1.16		$	1.31
Net income — Basic	$	1.48		$	1.34		$	1.56		$	1.95		$	1.84
Net income — Diluted	$	1.47		$	1.33		$	1.54		$	1.93		$	1.83
Weighted average common shares — Basic		21,826			21,767			21,412			21,552			22,350
Weighted average common shares — Diluted		22,018			21,960			21,565			21,743			22,435
Balance Sheet Data:
Total assets	$	1,463,678		$	1,366,052		$	1,358,861		$	1,156,802		$	1,169,955
Total debt	$	25,893		$	11,367		$	264,694		$	70,279		$	165,145
Minority interest — preferred units	$	135,750		$	127,750		$	217,750		$	217,750		$	197,750
Minority interest — common units	$	169,451		$	169,295		$	169,888		$	167,469		$	162,141
Redeemable Preferred stock	$	593,350		$	510,850		$	168,673		$	170,813		$	121,000
Common shareholders’ equity	$	500,108		$	506,114		$	502,155		$	493,589		$	478,731
Other Data:
Net cash provided by operating activities	$	149,428		$	151,958		$	132,410		$	134,926		$	126,677
Net cash (used in) provided by investing activities	$	24,389		$	(26,108	)	$	(294,885	)	$	5,776		$	(318,367	)
Net cash (used in) provided by financing activities	$	(13,058	)	$	(91,971	)	$	123,472		$	(98,966	)	$	145,471
Funds from operations(2)	$	102,463		$	97,214		$	97,448		$	104,543		$	95,472
Square footage owned at end of period		17,555			17,988			18,322			14,426			14,817

(1)

In each of the years ended December 31, 2005, 2004, 2003, 2002 and 2001, the annual distribution was $1.16 per common share. In December 2001, the Board of Directors declared a one-time special distribution of $0.15 per common share.

(2)

Funds From Operations (“FFO”) is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with generally accepted accounting principles (“GAAP”), before depreciation, amortization, minority interest in income, and extraordinary items. FFO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results from operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other real estate companies. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Funds from Operations,” for a reconciliation of FFO and net income allocable to common shareholders and for information on why the Company presents FFO.

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

      The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the selected financial data and the Company’s consolidated financial statements and notes thereto included elsewhere in the Form 10-K.

      Forward-Looking Statements: Forward-looking statements are made throughout this Annual Report on Form 10-K. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Item 1A. Risk Factors.” In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of the information contained in such forward-looking statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Overview

      As of December 31, 2005, the Company owned and operated 17.6 million rentable square feet of multi-tenant flex, industrial and office properties located in eight states.

      The Company focuses on increasing profitability and cash flow aimed at maximizing shareholder value. The Company strives to maintain high occupancy levels while increasing rental rates when market conditions allow. The Company also acquires properties it believes will create long-term value, and disposes of properties which no longer fit within the Company’s strategic objectives or in situations where the Company believes it can optimize cash proceeds. Operating results are driven by income from rental operations and are therefore substantially influenced by rental demand for space within our properties.

      In 2005, the Company continued to experience challenging commercial real estate conditions in a number of markets including Dallas, Texas; Portland, Oregon; Austin, Texas and Northern California. These markets continued to experience weak demand and over-supply resulting in persistent downward pressure on rental rates combined with higher levels of concessions. While these markets continued to experience challenges throughout the year, there have been signs that these markets may be slowly recovering as market activity has accelerated slightly. The balance of the Company’s markets such as Southern California, Virginia, Maryland and Miami, Florida demonstrated improving market conditions. During 2005, the Company still faced rental rate roll downs primarily on leases originally signed at a high market point prior to 2002. As of December 31, 2005, less than 10% of the Company’s leases were executed prior to December 31, 2002. In these markets, conditions demonstrated steady improvement over the course of the year.

      The Company successfully leased or re-leased 5.2 million square feet of space in 2005 and achieved an overall occupancy of 93.6%, as of December 31, 2005. Overall, the Company continued to experience transaction costs at higher than historical levels. Total net operating income increased from the year ended December 31, 2004 to 2005 by $5.9 million or 4.0%. See further discussion of operating results below.

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Critical Accounting Policies and Estimates:

      Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-K. We believe our most critical accounting policies relate to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, depreciation, accrual of operating expenses and accruals for contingencies, each of which we discuss below.

      Revenue Recognition: We recognize revenue in accordance with Staff Accounting Bulletin No. 101 of the Securities and Exchange Commission, Revenue Recognition in Financial Statements (“SAB 101”), as amended. SAB 101 requires that the following four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual increases in rent that are not included on the Company’s credit watch list. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred.

      Allowance for Doubtful Accounts: Rental revenue from our tenants is our principal source of revenue. We monitor the collectibility of our receivable balances including the deferred rent receivable on an on-going basis. Based on these reviews, we maintain an allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to make required rent payments to us. Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible tenant receivables and deferred rent. As discussed below, determination of the adequacy of these allowances requires significant judgments and estimates. Estimate of the required allowance is subject to revision as the factors discussed below change and is sensitive to the effect of economic and market conditions on our tenants.

      Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from tenants. Determination of the adequacy of the allowance for uncollectible current tenant receivables is performed using a methodology that incorporates specific identification, aging analysis, an overall evaluation of the historical loss trends and the current economic and business environment. The specific identification methodology relies on factors such as the age and nature of the receivables, the payment history and financial condition of the tenant, the assessment of the tenant’s ability to meet its lease obligations, and the status of negotiations of any disputes with the tenant. The allowance also includes a reserve based on historical loss trends not associated with any specific tenant. This reserve as well as the specific identification reserve is reevaluated quarterly based on economic conditions and the current business environment.

      Deferred rents receivable represents the amount that the cumulative straight-line rental income recorded to date exceeds cash rents billed to date under the lease agreement. Given the longer-term nature of these types of receivables, determination of the adequacy of the allowance for unbilled deferred rents receivables is based primarily on historical loss experience. Management evaluates the allowance for unbilled deferred rents receivable using a specific identification methodology for significant tenants designed to assess their financial condition and ability to meet their lease obligations.

      Impairment of Long-Lived Assets: The Company evaluates a property for potential impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. On a quarterly basis, the Company evaluates the whole portfolio for impairment based on current operating information. In the event that these periodic assessments reflect that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. The estimation of expected future net cash flows is inherently uncertain and relies on subjective assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. It requires management to make assumptions related to the property such as future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future

29

sale of the property. These assumptions could differ materially from actual results in future periods. Since Statement of Financial Accounting Standards (“SFAS”) No. 144 provides that the future cash flows used in this analysis be considered on an undiscounted basis, our historically established intent to hold properties over the long term directly decreases the likelihood of recording an impairment loss. If our strategy changes or if market conditions otherwise dictate an earlier sale date, an impairment loss could be recognized and such loss could be material.

      Depreciation: We compute depreciation on our buildings and equipment using the straight-line method based on estimated useful lives of generally 30 and 5 years. A significant portion of the acquisition cost of each property is allocated to building and building components. The allocation of the acquisition cost to building and building components, as well as, the determination of their useful lives are based on estimates. If we do not appropriately allocate to these components or we incorrectly estimate the useful lives of these components, our computation of depreciation expense may not appropriately reflect the actual impact of these costs over future periods, which will affect net income. In addition, the net book value of real estate assets could be over or understated. The statement of cash flows, however, would not be affected.

      Accruals of Operating Expenses: The Company accrues for property tax expenses, performance bonuses and other operating expenses each quarter based on historical trends and anticipated disbursements. If these estimates are incorrect, the timing of expense recognition will be affected.

      Accruals for Contingencies: The Company is exposed to business and legal liability risks with respect to events that may have occurred, but in accordance with U.S. generally accepted accounting principles (“GAAP”) has not accrued for such potential liabilities because the loss is either not probable or not estimable. Future events and the result of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations.

      Effect of Economic Conditions on the Company’s Operations: During 2004 and 2005, despite improving economic conditions in the United States, the Company continued to experience downward pressure on market rental rates and demand for greater rent concessions and tenant improvement allowances in certain markets. Increasing demand for commercial space, however, has partially mitigated this effect with improving occupancy rates in most of the Company’s markets.

      While the Company historically has experienced a low level of write-offs due to bankruptcy, there is inherent uncertainty in a tenant’s ability to continue paying rent if they are in bankruptcy. As of December 31, 2005 the Company had approximately 37,000 square feet occupied by tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. Given the historical uncertainty of a tenant’s ability to meet its lease obligations, we will continue to reserve any income that would have been realized on a straight line basis. Several other tenants have contacted us, requesting early termination of their lease, reduction in space under lease, rent deferment or abatement. At this time, the Company cannot anticipate what impact, if any, the ultimate outcome of these discussions will have on our operating results.

      Effect of Economic Conditions on the Company’s Primary Markets: The Company has concentrated its operations in nine markets. Each of these markets has been affected by changing economic conditions in some way. The Company’s overall view of these markets as of December 31, 2005 is summarized below. During the year ended December 31, 2005, the Company has seen rental rates on executed leases decrease by an average of 1.1% from the most recent in-place rents. Each of the nine markets that the Company owns assets in is subject to its own unique market influences. The Company has outlined the various market influences for each specific market below. In addition, the Company has compiled market occupancy information using third party reports for each of the respective markets. These sources are deemed to be reliable by the Company, but there can be no assurance that these reports are accurate.

      The Company owns approximately 3.9 million square feet in Southern California. While this is one of the more stable markets in the country, in 2005 the market continued to experience relatively flat rental rates. Vacancy rates have decreased slightly throughout Southern California with an average market vacancy rate of 5.9% for 2005. The rental rates for the Company’s properties improved slightly over the past year as economic conditions

30

have improved and the supply of competing product has diminished. The Company’s vacancy rate at December 31, 2005 was approximately 4.1%.

      The Company owns approximately 2.8 million square feet in the Northern Virginia submarket of Washington D.C., where the average market vacancy rate was 9.4% for 2005. Washington D.C. submarkets have continued to be positively impacted by increased federal government spending and a vibrant government contracting trend. The Company’s vacancy rate at December 31, 2005 was approximately 3.4%.

      The Company owns approximately 1.2 million square feet in the Maryland submarket of Washington D.C. The portfolio is located primarily in the Montgomery County submarket which remains stable, with signs of increasing rental rates. The Company expects the business of the federal government, defense contractors and the biotech industry to remain strong in 2006. The Company’s vacancy rate at December 31, 2005 was approximately 2.4% compared to the 2005 market average of 9.9%.

      The Company owns approximately 1.5 million square feet in Northern California with a concentration in Sacramento, the East Bay (Hayward and San Ramon) and the Silicon Valley (San Jose). The vacancy rates in these submarkets stand at 9.7%, 9.3% and 8.9%, respectively. Market rental rates dropped dramatically in 2005 and 2004 as a result of an oversupply of commercial space and weak demand. This is a continued result of the technology crash in prior years. The Company’s vacancy rate at December 31, 2005 was approximately 5.9%.

      The Company owns approximately 1.3 million square feet in the Beaverton submarket of Portland, Oregon. While market conditions have not changed dramatically from 2004, the Company has experienced some improvement in lease terms as a result of increasing lease activity. The vacancy rate in this market is over 20%. On the supply side, the Company does not believe significant new construction starts will occur during 2006 as light demand and general availability has had a negative impact on the market rental rates. Leasing activity in the market is occurring generally at rates 25% to 40% below in-place rents. The Company’s vacancy rate at December 31, 2005 was approximately 13.2%.

      The Company owns approximately 1.7 million square feet in the Dallas Metroplex market. The vacancy rate in Las Colinas, where most of the Company’s properties are located, is 13.2%. Over the last two years, the number of new properties coming on-line has decreased; however some new construction continued, which included both speculative construction, as well as owner user construction. The Company believes that any such new construction could cause vacancy rates to rise and limit opportunities to increase rental rates. The Company’s vacancy rate at December 31, 2005 was approximately 15.3%.

      The Company owns approximately 1.2 million square feet in the Austin and Greater Houston markets. The Austin market has been adversely affected by downturns in the technology industry. These conditions have resulted in increased competition for tenants, resulting in lower rental rates and increased rent concessions, tenant improvement allowances and lease commissions. Unlike the Austin market, Houston continues to stabilize occupancy and rental rates. With a more diverse tenant base, this market has not been as significantly impacted as other parts of Texas that were more reliant on the telecommunications and technology industries which have contracted over the last several years. In addition, the strong oil and gas industry has helped stabilize and improve the Houston market. The Company’s vacancy rate at December 31, 2005 was approximately 8.4%.

      In December, 2003, the Company acquired a 3.4 million square foot property located in the Airport West submarket of Miami-Dade County in Florida. The property’s vacancy rate upon acquisition was approximately 16.6%, compared to a vacancy rate of approximately 12.7% for the submarket. The property is located less than one mile from the cargo entrance of the Miami International Airport, which is recognized as one of the nation’s busiest cargo and passenger airports. The Company has improved occupancy to 95.9% at December 31, 2005.

      The Company owns approximately 679,000 square feet in the Phoenix market. Overall, the Phoenix market has been characterized by steady growth. However, average market rental rates have declined over the past several years as demand for space subsided. The vacancy rate in this market is over 6%. The Company’s vacancy rate at December 31, 2005 was approximately 5.9%.

      Growth of the Company’s Operations and Acquisitions and Dispositions of Properties: During 2004 and 2005, the Company focused on maximizing cash flow from its existing core portfolio of properties and through

31

acquisitions and dispositions of properties, expanding its presence in existing markets through strategic acquisitions and strengthening its balance sheet, primarily through the issuance of preferred equity. The Company has historically maintained low levels of debt. The primary leverage used by the Company has been through the issuance of preferred equity; this approach is intended to provide the Company with the flexibility for future growth without the need to issue additional common stock.

      During 2005, the Company acquired a 233,000 square foot, multi-tenant flex and office property in San Diego for $35.1 million including the assumption of a $15.0 million mortgage which bears an interest rate of 5.73% and matures on March 1, 2013. During 2004, the Company acquired a 165,000 square foot office complex in Fairfax, Virginia, for $24.1 million. During 2003, the Company added approximately 4.1 million square feet to its portfolio at an aggregate cost of approximately $282.4 million. The Company acquired 544,000 square feet in Southern California for $60.0 million, 113,000 square feet in Northern Texas for $7.8 million, 3.4 million square feet in Florida for $205.0 million, and 110,000 square feet in Phoenix, Arizona for $9.6 million. The Company plans to continue to build its presence in existing markets by acquiring high quality facilities in selected markets. The Company targets properties with below market rents which may offer it growth in rental rates above market averages, and which offer the Company the ability to achieve economies of scale resulting in more efficient operations.

      Subsequent to December 31, 2005 the Company acquired WesTech Business Park, a 366,000 square foot multi-tenant flex and office building park in Silver Spring, Maryland for approximately $69.6 million. The park, which had occupancy of approximately 95% at the time of acquisition, consists of nine single story buildings. The park’s major tenant is Kaiser Permanente, which currently leases approximately 158,000 square feet in five of the nine buildings. Leases for Kaiser Permanente expire on various dates from September 2006 to November 2011. The remaining buildings had 16 tenants ranging in size from 2,000 square feet to 26,000 square feet.

      In 2005, the Company sold Woodside Corporate Park located in Beaverton, Oregon. Net proceeds from the sales were approximately $64.5 million and the Company reported a gain of $12.5 million. The sale consisted of 13 buildings comprising approximately 574,000 square feet and approximately 3.3 acres of adjacent land. The park was 76.8% leased at the time of the sale. In addition, the Company sold 8.2 acres of land in the Beaverton area for approximately $3.6 million resulting in a gain of $1.8 million. Six units totaling approximately 44,000 square feet and a small parcel of land at Miami International Commerce Center (“MICC”) were sold for a combined sale price of approximately $5.8 million. The Company sold a retail center located at MICC consisting of 56,000 square feet for a sales price of $12.2 million resulting in a gain of $967,000.

      In 2004, the Company sold a 43,000 square foot flex facility in Austin, Texas, for gross proceeds of approximately $1.2 million, a 30,500 square foot building in Beaverton, Oregon for gross proceeds of $3.1 million, a 10,000 and 7,100 square foot unit at MICC, with combined gross proceeds of $1.9 million and two flex parks totaling approximately 400,000 square feet in Maryland for combined gross proceeds of approximately $44.2 million. In connection with these sales, the Company reported an aggregate gain of $15.5 million.

      During the first half of 2003, the Company identified a property in Lakewood, California with 57,000 square feet, two buildings in Nashville, Tennessee totaling 138,000 square feet, and five office and flex buildings totaling 342,000 square feet and a 4.5 acre parcel of vacant land in Beaverton, Oregon as assets the Company intended to sell. The sale of Lakewood, California was completed early in the second quarter of 2003 with net proceeds of approximately $6.3 million. The sale of the Nashville properties was completed in June, 2003 with net proceeds of $5.1 million. A gain on the Lakewood and Nashville properties of $3.5 million was recognized in the second quarter of 2003. During the third quarter of 2003, the Company sold a one-acre parcel of land located in Beaverton, Oregon with net proceeds of approximately $733,000 resulting in a gain of approximately $14,000. During the fourth quarter of 2003, the Company sold a 31,000 square foot flex facility in Beaverton, Oregon with net proceeds of approximately $2.4 million. The transaction was completed in December, 2003 at a loss of approximately $601,000.

      Impact of Inflation: Although inflation has not been significant in recent years, it is still a factor in our economy and the Company continues to seek ways to mitigate its impact. A substantial portion of the Company’s leases require tenants to pay operating expenses, including real estate taxes, utilities, and insurance, as well as increases in common area expenses, partially reducing the Company’s exposure to inflation. During 2005, the

32

Company experienced a significant inflationary increase in its utility costs impacting the Company’s overall profit margin. The Company anticipates that this inflationary pressure will likely continue in 2006 with potential increases in utility costs as high as 10%.

      Concentration of Portfolio by Region: Rental income, cost of operations and rental income less cost of operations, excluding depreciation and amortization or net operating income prior to depreciation and amortization (defined as “NOI” for purposes of the following tables) from continuing operations are summarized for the year ended December 31, 2005 by major geographic region below. The Company uses NOI and its components as a measurement of the performance of its commercial real estate. Management believes that these financial measures provide them as well as the investor the most consistent measurement on a comparative basis of the performance of the commercial real estate and its contribution to the value of the Company. Depreciation and amortization have been excluded from these financial measures as they are generally not used in determining the value of commercial real estate by management or the investment community. Depreciation and amortization are generally not used in determining value as they consider the historical costs of as asset compared to its current value; therefore, to understand the effect of the assets’ historical cost on the Company’s results, investors should look at GAAP financial measures, such as total operating costs including depreciation and amortization. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with generally accepted accounting principles. The table below reflects rental income, operating expenses and NOI from continuing operations for the year ended December 31, 2005 based on geographical concentration. The total of all regions is equal to the amount of rental income and cost of operations recorded by the Company in accordance with GAAP. We have also included the most comparable GAAP measure which includes total depreciation and amortization. The percent of totals by region reflects the actual contribution to rental income, cost of operations and NOI during the period from properties included in continuing operations (in thousands):

	Weighted
	Square		Percent of			Rental		Percent of			Cost of		Percent of						Percent of
Region	Footage		Total			Income		Total			Operations		Total			NOI			Total
Southern California		3,706		21.4	%	$	54,719		24.9	%	$	14,997		22.8	%	$	39,722			25.8	%
Northern California		1,500		8.7	%		18,971		8.6	%		4,583		7.0	%		14,388			9.4	%
Southern Texas		1,166		6.7	%		9,615		4.4	%		4,115		6.2	%		5,500			3.6	%
Northern Texas		1,688		9.8	%		15,712		7.1	%		5,337		8.1	%		10,375			6.7	%
Florida		3,187		18.4	%		22,080		10.1	%		7,767		11.8	%		14,313			9.3	%
Virginia		2,786		16.1	%		48,699		22.2	%		13,881		21.1	%		34,818			22.6	%
Maryland		1,238		7.1	%		24,189		11.0	%		6,490		9.9	%		17,699			11.5	%
Oregon		1,372		7.9	%		18,748		8.5	%		5,979		9.1	%		12,769			8.3	%
Arizona		679		3.9	%		6,936		3.2	%		2,659		4.0	%		4,277			2.8	%
Total before depreciation and amortization		17,322		100	%		219,669		100	%		65,808		100	%		153,861			100	%
Depreciation and amortization							—					76,285					(76,285	)
Total						$	219,669				$	142,093				$	77,576

      Concentration of Credit Risk by Industry: The information below depicts the industry concentration of our tenant base as of December 31, 2005. The Company analyzes this concentration to minimize significant industry exposure risk.

Business services	12.7	%
Government	11.7	%
Contractors	9.9	%
Computer hardware, software and related service	9.4	%
Financial services	9.4	%
Warehouse, transportation, logistics	9.3	%
Retail	6.2	%
Home furnishing	4.7	%
Communications	4.1	%
Electronics	3.0	%
	80.4	%

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      The information below depicts the Company’s top ten customers by annual rents as of December 31, 2005 (in thousands):

					% of Total
Tenants	Square Footage		Annual Rents (1)		Annual Rents
U.S. Government		473	$	12,667		5.7	%
Intel		214		3,524		1.6	%
County of Santa Clara		97		3,069		1.4	%
Axcelis Technologies		89		1,740		0.8	%
Wells Fargo		102		1,571		0.7	%
AARP		102		1,490		0.7	%
Welch Allen Protocol, Inc		91		1,475		0.7	%
TRW Systems		58		1,448		0.7	%
CitiGroup		262		1,398		0.6	%
MCI Worldcom		72		1,168		0.5	%
		1,560	$	29,550		13.4	%

(1) For leases expiring prior to December 31, 2006, annualized rental income represents income to be received under existing leases from December 31, 2005 through the date of expiration.

Comparison of 2005 to 2004

      Results of Operations: Net income for the year ended December 31, 2005 was $75.3 million compared to $62.1 million for the year ended December 31, 2004. Net income allocable to common shareholders (net income less preferred stock distributions) for the year ended December 31, 2005 was $32.3 million compared to $29.1 million for the year ended December 31, 2004. Net income per common share on a diluted basis was $1.47 for the year ended December 31, 2005 compared to $1.33 for the year ended December 31, 2004 (based on weighted average diluted common shares outstanding of 22,018,000 and 21,960,000, respectively). The increase was due to the increase in rental income of $8.7 million and interest income of $4.5 million partially offset by an increase in cost of operations of $2.7 million and depreciation of $6.2 million.

      The following table presents the operating results of the properties for the years ended December 31, 2005 and 2004 in addition to other income and expense items affecting income from continuing operations. The Company

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breaks out Same Park operations to provide information regarding trends for properties the Company has held for the periods being compared (in thousands, except per square foot data):

		Years Ended December 31,
		2005			2004			Change
Rental income:
	Same Park (17.1 million net rentable square feet)(1)	$	215,780		$	209,256			3.1	%
	Other facilities (398,000 net rentable square feet)(2)		3,889			1,746			122.7	%
Total rental income			219,669			211,002			4.1	%
Cost of operations:
	Same Park		64,412			62,363			3.3	%
	Other facilities		1,396			706			97.7	%
Total cost of operations			65,808			63,069			4.3	%
Net operating income(3):
	Same Park		151,368			146,893			3.0	%
	Other facilities		2,493			1,040			139.7	%
Total net operating income			153,861			147,933			4.0	%
Other income and expenses:
	Facility management fees		579			624			(7.2	)%
	Interest and other income		4,888			406			1103.9	%
	Interest expense		(1,330	)		(3,054	)		(56.5	)%
	Depreciation and amortization		(76,285	)		(70,086	)		8.8	%
	General and administrative		(5,843	)		(4,628	)		26.3	%
	Asset impairment due to casualty loss		(72	)		—			100.0	%
Income before discontinued operations and minority interest		$	75,798		$	71,195			6.5	%
Same Park gross margin(4)			70.1	%		70.2	%		(0.1	)%
Same Park weighted average for period:
	Occupancy		92.2	%		89.1	%		3.5	%
	Realized rent per square foot(5)	$	13.73		$	13.76			(0.2	)%

(1)	See below for a definition of Same Park.
(2)	Represents operating properties owned by the Company as of December 31, 2005 that are not included in Same Park.
(3)	Net operating income (“NOI”) is an important measurement in the commercial real estate industry for determining the value of the real estate generating the NOI. See “Concentration of Portfolio by Region” above for more information on NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with GAAP.
(4)	Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.
(5)	Same Park realized rent per square foot represents the Same Park rental income earned per occupied square foot.

      Supplemental Property Data and Trends: In order to evaluate the performance of the Company’s overall portfolio over two given years, management analyzes the operating performance of a consistent group of properties owned and operated throughout both those years. The Company refers to those properties as the Same Park facilities. For 2005 and 2004, the Same Park facilities constitute 17.1 million net rentable square feet, which includes all assets in continuing operations that the Company owned and operated from January 1, 2004 through December 31, 2005, representing approximately 98.8% of the weighted average square footage of the Company’s portfolio for 2005.

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      Rental income, cost of operations and rental income less cost of operations, excluding depreciation and amortization, or net operating income prior to depreciation and amortization (defined as “NOI” for purposes of the following tables) from continuing operations are summarized for the years ended December 31, 2005 and 2004 by major geographic region below. See “Concentration of Portfolio by Region” above for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with generally accepted accounting principles.

      The following table summarizes the Same Park operating results by major geographic region for the years ended December 31, 2005 and 2004. In addition, the table reflects the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2004 and the impact of such is included in Other Facilities in the table below (in thousands):

								Cost of		Cost of
	Rental Income		Rental Income					Operations		Operations					NOI			NOI
	December 31,		December 31,		Increase			December 31,		December 31,		Increase			December 31,			December 31,			Increase
Region	2005		2004		(Decrease)			2005		2004		(Decrease)			2005			2004			(Decrease)
Southern California	$	54,099	$	51,796		4.4	%	$	14,850	$	14,151		4.9	%	$	39,249		$	37,645			4.3	%
Northern California		18,971		19,493		(2.7	)%		4,583		4,576		0.2	%		14,388			14,917			(3.5	)%
Southern Texas		9,615		9,653		(0.4	)%		4,115		4,189		(1.8	)%		5,500			5,464			0.7	%
Northern Texas		15,712		14,162		10.9	%		5,337		5,466		(2.4	)%		10,375			8,696			19.3	%
Florida		22,080		20,286		8.8	%		7,767		7,190		8.0	%		14,313			13,096			9.3	%
Virginia		45,430		44,379		2.4	%		12,632		12,199		3.5	%		32,798			32,180			1.9	%
Maryland		24,189		24,421		(1.0	)%		6,490		6,262		3.6	%		17,699			18,159			(2.5	)%
Oregon		18,748		18,478		1.5	%		5,979		5,572		7.3	%		12,769			12,906			(1.1	)%
Arizona		6,936		6,588		5.3	%		2,659		2,758		(3.6	)%		4,277			3,830			11.7	%
Total Same Park		215,780		209,256		3.1	%		64,412		62,363		3.3	%		151,368			146,893			3.0	%
Other Facilities		3,889		1,746		122.7	%		1,396		706		97.7	%		2,493			1,040			139.7	%
Total before depreciation and amortization		219,669		211,002		4.1	%		65,808		63,069		4.3	%		153,861			147,933			4.0	%
Depreciation and amortization		—		—		—			76,285		70,086		8.8	%		(76,285	)		(70,086	)		8.8	%
Total based on GAAP	$	219,669	$	211,002		4.1	%	$	142,093	$	133,155		6.7	%	$	77,576		$	77,847			(0.3	)%

      The following information provides information regarding the geographical regions in which the Company has operations:

Southern California

      This region includes San Diego, Orange and Los Angeles Counties. Rental income and NOI for 2005 were slightly higher than 2004 due to an increase in weighted average occupancy and increasing rental rates. Weighted average occupancies have increased from 93.0% in 2004 to 94.8% in 2005. Realized rent per square foot has increased 2.4% from $15.21 per square foot for 2004 to $15.57 per square foot in 2005. The increases in this market are reflective of the general strength of the Southern California real estate market.

Northern California

      This region includes Sacramento, South San Francisco, the East Bay and the Silicon Valley, a market that continues to be impacted by an over supply of commercial space due in part to failed technology companies. Rental income and NOI decreased from 2004 to 2005 primarily due to the loss of a large tenant in the San Jose portfolio. Weighted average occupancies outperformed the market, yet they have decreased from 95.0% in 2004 to 93.2% in 2005 primarily due to a bankruptcy and early termination of a 91,000 square foot tenant in the San Ramon portfolio. Realized rent per square foot has decreased 0.8% from $13.68 per square foot in 2004 compared to $13.57 per square foot in 2005.

Southern Texas

      This region, which includes Austin, is one of the Company’s markets that has faced challenging market conditions with the Company’s operating results continuing to be impacted by the effects of sharply reduced market rental rates, higher vacancies and business failures. These effects on rental revenue were mitigated by

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reduced operating costs, primarily in payroll. Weighted average occupancies increased from 83.2% in 2004 to 85.9% in 2005. Despite an increase in occupancy, realized rent per square foot decreased 3.5% from $9.95 per square foot in 2004 to $9.60 per square foot in 2005.

Northern Texas

      This region includes the Dallas area. The increase in rental income and NOI are due primarily to increased occupancies and rental rates. This market continues to be impacted by high vacancy levels due to general availability of space, modest economic drivers and ongoing development. Weighted average occupancies have increased from 82.8% in 2004 to 85.9% in 2005. Realized rent per square foot has increased 6.8% from $10.14 per square foot in 2004 to $10.83 per square foot in 2005.

Florida

      This region includes the Miami area. The Company’s assets continue to outperform the market. Rental income and net operating income increases are a result of occupancy increases. Weighted average occupancies have increased from 84.0% in 2004 to 92.9% in 2005. Realized rent per square foot decreased 1.6% from $7.58 in 2004 to $7.46 in 2005.

Virginia

      This region includes all major Northern Virginia suburban submarkets surrounding the Washington D.C. metropolitan area. The Washington DC Metro market is considered one of the Company’s strongest markets driven largely by increased government contracting and defense spending. In many situations the Company has been able to reduce tenant concessions and increase rental rates, yet the Company still has a number of leases executed prior to 2002, which was considered a high point in the market. This has and will continue to result in some rental rate roll downs in the Virginia submarket. The increase in revenue was offset by increasing operating expenses, primarily utilities, resulting in a slight increase in NOI. Weighted average occupancies have decreased from 96.5% in 2004 to 95.6% in 2005. Realized rent per square foot has increased 3.4% from $17.54 per square foot in 2004 to $18.13 per square foot in 2005.

Maryland

      This region consists primarily of facilities in Prince Georges County and Montgomery County. Weighted average occupancies have increased from 91.2% in 2004 to 95.4% in 2005. Considered part of the Washington DC Metro market, Maryland is experiencing improving market conditions due primarily to higher levels of government contracting. Realized rent per square foot has decreased 5.3% from $21.63 per square foot in 2004 to $20.49 per square foot in 2005. The decrease in rental rates is a result of certain large tenants releasing at rates below expiring rental rates. The higher rental rates were tied to leases transacted during a high point in this commercial real estate market prior to 2002.

Oregon

      This region consists primarily of two business parks in the Beaverton submarket of Portland. Oregon has been one of the markets hardest hit by the technology slowdown. In 2003 and 2004, the slowdown resulted in early lease terminations, low levels of tenant retention and significant declines in rental rates. During 2005, the market experienced higher levels of leasing activity, with rental rates declining significantly from in-place rents and higher leasing concessions. Weighted average occupancies have increased from 78.7% in 2004 to 84.7% in 2005. Realized rent per square foot has decreased 5.7% from $17.11 per square foot in 2004 to $16.13 per square foot in 2005.

      Facility Management Operations: The Company’s facility management operations account for a small portion of the Company’s net income. During the year ended December 31, 2005, $579,000 of revenue was recognized from facility management fees compared to $624,000 for the year ended December 31, 2004.

      Cost of Operations: Cost of operations, excluding discontinued operations, was $65.8 million for the year ended December 31, 2005 compared to $63.1 million for the year ended December 31, 2004. The increase is due

37

primarily to the growth in the square footage of the Company’s portfolio of properties. Cost of operations as a percentage of rental income increased slightly from 29.9% in 2004 to 30.0% in 2005. Cost of operations for the year ended December 31, 2005 consisted mainly of the following items: property taxes ($19.5 million); property maintenance ($14.7 million); utilities ($12.7 million); and direct payroll ($10.4 million) as compared to cost of operations for the year ended December 31, 2004 which consisted of the following items: property taxes ($19.2 million); property maintenance ($14.2 million); utilities ($11.3 million); and direct payroll ($10.5 million).

      Depreciation and Amortization Expense: Depreciation and amortization expense, excluding discontinued operations, was $76.3 million for the year ended December 31, 2005 compared to $70.1 million for the year ended December 31, 2004. The increase is primarily due to depreciation expense on capital put in place in 2005 and at the end of 2004.

      General and Administrative Expense: General and administrative expense was $5.8 million for the year ended December 31, 2005 compared to $4.6 million for the year ended December 31, 2004. General and administrative expenses for the year ended December 31, 2005 consisted mainly of the following items: expenses which relate to the accounting, finance, and executive divisions of the Company, which primarily consist of payroll expenses ($3.2 million); professional fees, including expenses related to outside accounting, tax, legal and investor services ($1.0 million); expenses which relate to issuances and exercises of stock options and restricted stock ($572,000); and other various expenses. General and administrative expenses for the year ended December 31, 2004 consisted mainly of the following items: expenses which relate to the accounting, finance, and executive divisions of the Company, which primarily consist of payroll expenses ($2.4 million); professional fees, including expenses related to Sarbanes Oxley Section 404 (“SOX 404”) Compliance, outside accounting, tax, legal and investor services ($1.3 million); expenses which relate to issuances and exercises of stock options and restricted stock ($93,000); and other various expenses. During 2004, the Company incurred approximately $600,000 related to its efforts to ensure compliance with SOX 404. While management experienced the ongoing costs of ensuring compliance with SOX 404 during 2005, the amount has decreased substantially as a significant portion of the work that was previously performed by third parties was performed by company employees. The increase in payroll expenses was due to higher levels of salary and related costs resulting from the changes to the Company’s senior management team.

      Interest and Other Income: Interest and other income reflects earnings on cash balances and dividends on marketable securities in addition to miscellaneous income items. Interest and other income was $4.9 for the year ended December 31, 2005 compared to $406,000 for the year ended December 31, 2004. Interest and other income for the year ended December 31, 2005 primarily related to interest earned on cash balances which generally earned approximately 3.4% interest compared to less than 2% in 2004. Additionally, based on the preferred equity activity and property dispositions during 2005, the Company’s average cash on hand of $95.9 million was significantly more than the average cash on hand during 2004 of $22.7 million.

      Interest Expense: Interest expense was $1.3 million for the year ended December 31, 2005 compared to $3.1 million for the year ended December 31, 2004. The decrease is attributable to the payoff of the line of credit, a mortgage note payable and an affiliate loan in 2004. No interest expense was capitalized as part of building costs associated with properties under development during the years ended December 31, 2005 and 2004.

      Gain on Disposition of Real Estate: Included in income from discontinued operations are gains on dispositions of real estate for the year ended December 31, 2005 of $18.1 million compared to $15.5 million for the year ended December 31, 2004. In 2005, the Company disposed of eight properties, one in Oregon and seven in Miami, as well as, three parcels of land in Oregon and a small parcel of land in Miami. The property in Oregon generated a gain of $12.5 million and with the remaining properties and land providing a net gain of approximately $5.6 million. During the year ended December 31, 2004, the Company disposed of six properties, two in Maryland, two in Miami, one in Texas and one in Oregon. The two properties in Maryland generated a gain of $15.2 million with the remaining four properties providing a net gain of approximately $300,000.

      Minority Interest in Income: Minority interest in income reflects the income allocable to equity interests in the Operating Partnership that are not owned by the Company. Minority interest in income was $21.5 million ($10.7 million allocated to preferred unitholders and $10.9 million allocated to common unitholders) for the year

38

ended December 31, 2005 compared to $30.0 million ($20.2 million allocated to preferred unitholders and $9.8 million allocated to common unitholders) for the year ended December 31, 2004. The decrease in minority interest in income is due primarily to the redemptions of preferred operating partnership units during 2004.

Comparison of 2004 to 2003

      Results of Operations: Net income for the year ended December 31, 2004 was $62.1 million compared to $49.1 million for the year ended December 31, 2003. Net income allocable to common shareholders (net income less preferred stock distributions) for the year ended December 31, 2004 was $29.1 million compared to $33.3 million for the year ended December 31, 2003. Net income per common share on a diluted basis was $1.33 for the year ended December 31, 2004 compared to $1.54 for the year ended December 31, 2003 (based on weighted average diluted common shares outstanding of 21,960,000 and 21,565,000, respectively). The decrease was due primarily to the increase in preferred equity distributions of $17.2 million partially offset by the increase of $12.6 million in gain on disposition of real estate.

      The Company’s property operations account for almost all of the net operating income earned by the Company. The following table presents the operating results of the properties for the years ended December 31, 2004 and 2003 in addition to other income and expense items affecting income from continuing operations. The Company breaks out Same Park operations to provide information regarding trends for properties the Company has held for the periods being compared (in thousands, except per square foot data):

		Years Ended December 31,
		2004			2003			Change
Rental income:
	Same Park (13.2 million net rentable square feet)(1)	$	178,333		$	181,489			(1.7	)%
	Other facilities (4.1 million net rentable square feet)(2)		32,669			4,682			597.8	%
Total rental income			211,002			186,171			13.3	%
Cost of operations:
	Same Park		50,103			49,272			1.7	%
	Other facilities		12,966			2,356			450.3	%
Total cost of operations			63,069			51,628			22.2	%
Net operating income(3):
	Same Park		128,230			132,217			(3.0	)%
	Other facilities		19,703			2,326			747.1	%
Total net operating income			147,933			134,543			10.0	%
Other income and expenses:
	Facility management fees		624			742			(15.9	)%
	Interest and other income		406			1,125			(63.9	)%
	Interest expense		(3,054	)		(4,015	)		(23.9	)%
	Gain on sale of marketable securities		—			2,043			(100.0	)%
	Depreciation and amortization		(70,086	)		(56,332	)		24.4	%
	General and administrative		(4,628	)		(4,683	)		(1.2	)%
Income before discontinued operations and minority interest		$	71,195		$	73,423			(3.0	)%
Same Park gross margin(4)			71.9	%		72.9	%		(1.4	)%
Same Park weighted average for period:
	Occupancy		90.9	%		93.2	%		(2.5	)%
	Realized rent per square foot(5)	$	14.91		$	14.80			0.7	%

(1)	See below for a definition of Same Park.
(2)	Represents operating properties owned by the Company as of December 31, 2004 that are not included in Same Park.

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(3)	Net operating income (“NOI”) is an important measurement in the commercial real estate industry for determining the value of the real estate generating the NOI. See “Concentration of Portfolio by Region” above for more information on NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with GAAP.
(4)	Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.
(5)	Same Park realized rent per square foot represents the Same Park rental income earned per occupied square foot.

      Supplemental Property Data and Trends: In order to evaluate the performance of the Company’s overall portfolio over two given years, management analyzes the operating performance of a consistent group of properties owned and operated throughout both those years. The Company refers to those properties as the Same Park facilities. For 2004 and 2003, the Same Park facilities constitute 13.2 million net rentable square feet, which includes all assets in continuing operations that the Company owned and operated from January 1, 2003 through December 31, 2004, representing approximately 76.2% of the weighted average square footage of the Company’s portfolio for 2004.

      Rental income, cost of operations and rental income less cost of operations, excluding depreciation and amortization, or net operating income prior to depreciation and amortization (defined as “NOI” for purposes of the following tables) from continuing operations are summarized for the years ended December 31, 2004 and 2003 by major geographic region below. See “Concentration of Portfolio by Region” above for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with generally accepted accounting principles.

      The following table summarizes the Same Park operating results by major geographic region for the years ended December 31, 2004 and 2003. In addition, the table reflects the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2003 and the impact of such is included in Other Facilities in the table below (in thousands):

								Cost of		Cost of
	Rental Income		Rental Income					Operations		Operations					NOI			NOI
	December 31,		December 31,		Increase			December 31,		December 31,		Increase			December 31,			December 31,			Increase
Region	2004		2003		(Decrease)			2004		2003		(Decrease)			2004			2003			(Decrease)
Southern California	$	42,957	$	43,078		(0.3	)%	$	10,234	$	10,036		2.0	%	$	32,723		$	33,042			(1.0	)%
Northern California		19,401		20,644		(6.0	)%		4,543		4,518		0.6	%		14,858			16,126			(7.9	)%
Southern Texas		9,668		12,215		(20.9	)%		4,159		4,291		(3.1	)%		5,509			7,924			(30.5	)%
Northern Texas		13,276		16,511		(19.6	)%		5,012		4,830		3.8	%		8,264			11,681			(29.3	)%
Virginia		44,372		42,530		4.3	%		12,095		11,796		2.5	%		32,277			30,734			5.0	%
Maryland		24,455		23,000		6.3	%		6,217		6,124		1.5	%		18,238			16,876			8.1	%
Oregon		18,784		17,967		4.5	%		5,519		5,374		2.7	%		13,265			12,593			5.3	%
Arizona		5,420		5,544		(2.2	)%		2,324		2,303		0.9	%		3,096			3,241			(4.5	)%
Total Same Park		178,333		181,489		(1.7	)%		50,103		49,272		1.7	%		128,230			132,217			(3.0	)%
Other Facilities		32,669		4,682		597.8	%		12,966		2,356		450.3	%		19,703			2,326			747.1	%
Total before depreciation and amortization		211,002		186,171		13.3	%		63,069		51,628		22.2	%		147,933			134,543			10.0	%
Depreciation and amortization		—		—		—			70,086		56,332		24.4	%		(70,086	)		(56,332	)		24.4	%
Total	$	211,002	$	186,171		13.3	%	$	133,155	$	107,960		23.3	%	$	77,847		$	78,211			(0.5	)%

      The following information provides information regarding the geographical regions in which the Company has operations:

Southern California

      This region includes San Diego, Orange and Los Angeles Counties. Rental income and NOI for 2004 were slightly lower than 2003 due to a reduction in weighted average occupancy and greater leasing concessions associated with the properties that were acquired in 2003. Weighted average occupancies decreased from 97.3% in 2003 to 95.9% in 2004. Realized rent per square foot increased 1.2% from $14.20 per square foot for 2003 to

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$14.37 per square foot in 2004. The increase is due primarily to the inclusion of the acquisition properties for all of 2004.

Northern California

      This region includes Sacramento, South San Francisco, the East Bay and the Silicon Valley, a market that has been devastated by the technology slump. Rental income and NOI decreased from 2003 to 2004 primarily due to a restructuring of a lease in the San Jose portfolio. Weighted average occupancies outperformed the market, yet they decreased from 96.0% in 2003 to 95.0% in 2004. Realized rent per square foot decreased 5.0% from $14.37 per square foot for 2003 compared to $13.65 per square foot in 2004.

Southern Texas

      This region, which includes Austin, is considered one of the Company’s challenged markets, and the Company’s operating results continue to the effects of sharply reduced market rental rates, higher vacancies and business failures. Weighted average occupancies decreased from 91.8% in 2003 to 83.2% in 2004. Realized rent per square foot decreased 12.6% from $11.44 per square foot in 2003 to $10.00 per square foot in 2004.

Northern Texas

      This region includes the Dallas area. The significant reduction in rental income and NOI are primarily due to reduced rents, increased leasing concessions and the loss of certain tenants to bankruptcy or downsizing. Weighted average occupancies decreased from 93.7% in 2003 to 82.7% in 2004. Realized rent per square foot decreased 8.9% from $11.17 per square foot in 2003 to $10.18 per square foot in 2004.

Virginia

      This region includes all major Northern Virginia suburban submarkets surrounding the Washington D.C. metropolitan area. The Washington DC Metro market is considered one of the Company’s strongest markets, which is indicated by the significant increase in rental income and NOI. The Company’s properties in this market have successfully increased rental rates, reduced leasing concessions, and increased occupancy. Weighted average occupancies increased from 94.7% in 2003 to 96.5% in 2004. Realized rent per square foot increased 2.4% from $17.13 per square foot in 2003 to $17.54 per square foot in 2004.

Maryland

      This region consists primarily of facilities in Prince Georges County and Montgomery County. While these markets have been relatively stable, weighted average occupancies have increased from 90.4% in 2003 to 91.2% in 2004. Considered part of the Washington DC Metro market, Maryland, like Virginia, has experienced significant increase in rental income and NOI, without proportionate increase in operating expenses. This market has also increased rental rates, reduced concessions, and increased occupancy. Realized rent per square foot increased 5.3% from $20.49 per square foot in 2003 to $21.58 per square foot in 2004.

Oregon

      This region consists primarily of two business parks in the Beaverton submarket of Portland. Oregon has been one of the markets hardest hit by the technology slowdown. The full effect of this slowdown began to take effect in 2004 with lease terminations and expirations resulting in significant declines in rental revenue. Weighted average occupancies decreased from 80.3% in 2003 to 78.7% in 2004. Realized rent per square foot increased 6.6% from $16.32 per square foot in 2003 to $17.39 per square foot in 2004.

      Facility Management Operations: The Company’s facility management operations account for a small portion of the Company’s net income. During the year ended December 31, 2004, $624,000 of revenue was recognized from facility management fees compared to $742,000 for the year ended December 31, 2003.

      Cost of Operations: Cost of operations, excluding discontinued operations, was $63.1 million for the year ended December 31, 2004 compared to $51.6 million for the year ended December 31, 2003. The increase is due

41

primarily to the growth in the square footage of the Company’s portfolio of properties. Cost of operations as a percentage of rental income increased from 27.7% in 2003 to 29.9% in 2004. Cost of operations for the year ended December 31, 2004 consisted mainly of the following items: property taxes ($19.2 million); property maintenance ($14.2 million); utilities ($11.3 million); and direct payroll ($10.5 million) as compared to cost of operations for the year ended December 31, 2003 which consisted of the following items: property taxes ($15.5 million); property maintenance ($12.2 million); utilities ($8.7 million); and direct payroll ($8.3 million).

      Depreciation and Amortization Expense: Depreciation and amortization expense was $70.1 million for the year ended December 31, 2004 compared to $56.3 million for the year ended December 31, 2003. The increase is primarily due to depreciation expense on real estate facilities acquired in 2004 and at the end of 2003.

      General and Administrative Expense: General and administrative expense was $4.6 million for the year ended December 31, 2004 compared to $4.7 million for the year ended December 31, 2003. General and administrative expenses for the year ended December 31, 2004 consisted mainly of the following items: expenses which relate to the accounting, finance, and executive divisions of the Company, which primarily consist of payroll expenses ($2.4 million); professional fees, including expenses related to Sarbanes Oxley Section 404 (“SOX 404”) Compliance, outside accounting, tax, legal and investor services ($1.3 million); expenses which relate to issuances and exercises of stock options and restricted stock ($93,000); and other various expenses. General and administrative expenses for the year ended December 31, 2003 consisted mainly of the following items: expenses which relate to the accounting, finance, and executive divisions of the Company, which primarily consist of payroll expenses ($1.9 million); internal acquisitions costs ($585,000); professional fees, including expenses related to outside accounting, tax, legal and investor services ($773,000); expenses which relate to issuances and exercises of stock options and restricted stock ($852,000); and other various expenses. During 2004, the Company incurred approximately $600,000 related to its efforts to ensure compliance with SOX 404. The increase in payroll expenses was a result of costs resulting from the changes to the Company’s senior management team.

      Interest and Other Income: Interest and other income reflects earnings on cash balances and dividends on marketable securities in addition to miscellaneous income items. Interest and other income was $406,000 for the year ended December 31, 2004 compared to $1.1 million for the year ended December 31, 2003. Interest and other income for the year ended December 31, 2004 primarily related to interest earned on cash balances which generally earned less than 2% interest. Based on the preferred equity activity during 2004, the Company’s cash on hand varied significantly throughout the year although it was significantly less then the average cash on hand during 2003 as the Company purchased approximately $70.0 million of assets in the second half of 2003 with retained cash. In addition to interest on cash on hand, during 2003 interest and other income also included approximately $400,000 of construction management fees.

      Interest Expense: Interest expense was $3.1 million for the year ended December 31, 2004 compared to $4.0 million for the year ended December 31, 2003. The decrease is primarily attributable to the pay down on the line of credit, notes payable and declining mortgage balances as a result of the preferred equity issued in 2004. No interest expense was capitalized as part of building costs associated with properties under development during the years ended December 31, 2004 and 2003.

      Equity in Income of Liquidated Joint Venture: Equity in income of liquidated joint venture reflects the Company’s share of net income from its joint venture. There was no equity in income of the liquidated joint venture for the year ended December 31, 2004 compared to $2.3 million for the same period in 2003. The decrease is due to the joint venture being liquidated in 2003.

      Gain on Disposition of Real Estate: Included in income from discontinued operations are gains on dispositions of real estate for the year ended December 31, 2004 of $15.5 million compared to $2.9 million for the year ended December 31, 2003. In 2004, the Company disposed of six properties, two in Maryland, two in Miami, one in Texas and one in Oregon. The two properties in Maryland generated a gain of $15.2 million with the remaining four properties providing a net gain of approximately $300,000. During the year ended December 31, 2003 the Company disposed of three properties, one in Lakewood and two in Nashville for a gain of $3.2 million and $300,000, respectively. A property in Beaverton was sold during the fourth quarter of 2003, resulting in a loss of approximately $601,000.

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      Impairment Charge: There was no impairment charge recognized during the year ended December 31, 2004. Included in income from discontinued operations is an impairment charge of $5.9 million recognized during the year ended December 31, 2003 specific to five office and flex buildings and a 4.5 acre parcel of land in Beaverton, Oregon.

      Minority Interest in Income: Minority interest in income reflects the income allocable to equity interests in the Operating Partnership that are not owned by the Company. Minority interest in income was $30.0 million ($20.2 million allocated to preferred unitholders and $9.8 million allocated to common unitholders) for the year ended December 31, 2004 compared to $30.6 million ($19.2 million allocated to preferred unitholders and $11.3 million allocated to common unitholders) for the year ended December 31, 2003. The decrease in minority interest in income is due primarily to the redemptions of preferred operating partnership units during 2004.

Liquidity and Capital Resources

      Net cash provided by operating activities for the years ended December 31, 2005 and 2004 was $149.4 million and $152.0 million, respectively. Management believes that the Company’s internally generated net cash provided by operating activities will continue to be sufficient to enable it to meet its operating expenses, capital improvements and debt service requirements and to maintain the current level of distributions to shareholders in addition to providing additional retained cash for future growth, debt repayment, and stock repurchases.

      Net cash provided by investing activities was $24.4 million for the year ended December 31, 2005 compared to cash used in investing activities of $26.1 million for the year ended December 31, 2004. The change between years was $50.5 million or 193.4% and was primarily due to proceeds from the disposition of real estate facilities being $36.5 million higher in 2005 than 2004. Cash paid for acquisitions for the year ended December 31, 2005 was $20.1 million compared to $22.3 million in the prior year. During the years ended December 31, 2005 and 2004 the Company used $40.3 million and $52.1 million for capital improvements to real estate facilities, respectively. The decrease of $11.7 million or 22.5% resulted from decreased transaction costs.

      Net cash used in financing activities was $13.1 million and $92.0 million for the year ended December 31, 2005 and 2004. In 2005, the Company redeemed or repurchased $26.5 million of preferred equity and common stock while it received $99.1 million from preferred equity offerings compared to 2004, in which the Company repaid or refinanced $576.9 million of debt and preferred equity while it received $560.7 million from preferred equity offerings and short term borrowings. As a result of the 2005 transactions, the Company increased its preferred equity outstanding to 33.5% of its market capitalization at December 31, 2005 from 32.5% at December 31, 2004. Additionally, the Company paid preferred equity holders $53.4 million in distributions for the year ended December 31, 2005 compared to $48.8 million for the year ended December 31, 2004.

      The Company’s capital structure is characterized by a low level of leverage. As of December 31, 2005, the Company had three fixed rate mortgage notes payable totaling $25.9 million, which represented approximately 1.2% of its total capitalization (based on book value, including minority interest and debt). The weighted average interest rate for the mortgage notes is approximately 6.6% per annum. The Company had approximately 4.2% of its properties, based on net book value, encumbered at December 31, 2005.

      During 2005, the Company issued an aggregate of $102.5 million of preferred equity with an average rate of 7.19%. Proceeds from the various offerings were used to redeem higher rate preferred equity of $12.0 million at a rate of 8.875%. As of December 31, 2005, the Company had $200.4 million of cash on its balance sheet. The significant cash balance, which has been accumulated as a result of continuing operations, asset sales and preferred equity offerings, will be used to fund $118.9 million of potential 2006 preferred equity redemptions, asset acquisitions and general corporate purposes.

      In August of 2005, the Company modified the term of its line of credit (the “Credit Facility”) with Wells Fargo Bank. The Credit Facility has a borrowing limit of $100.0 million and matures on August 1, 2008. Interest on outstanding borrowings is payable monthly. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.50% to LIBOR plus 1.20% depending on the Company’s credit ratings and coverage ratios, as defined (currently LIBOR plus 0.65%). In addition, the Company is required to pay an annual commitment fee ranging from 0.15% to 0.30%

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of the borrowing limit (currently 0.20%). In connection with the modification of the Credit Facility, the Company paid a fee of $450,000, which will be amortized over the life of the Credit Facility. The Company had no balance outstanding on its Credit Facility at December 31, 2005 and 2004. The Company repaid in full the $95.0 million outstanding on its line of credit in January, 2004, and subsequently borrowed $138.0 million on its line of credit in 2004 which was repaid in full prior to December 31, 2004.

      As of December 31, 2003, the Company had $100.0 million in short-term borrowings from PSI. The note bore interest at 1.4% and was due on March 9, 2004. The Company repaid the note in full during the first quarter of 2004.

      In February 2002, the Company entered into a seven year $50.0 million term loan agreement with Fleet National Bank. The interest on the note was at LIBOR plus 1.45% and it had an original maturity of February 20, 2009. The Company paid a one-time fee of 0.35% or $175,000 for the facility. In July 2002, the Company entered into an interest rate swap transaction which had the effect of fixing the rate on the term loan through July 2004 at 4.46% per annum. In February 2004, the Company repaid in full the $50.0 million outstanding on the term loan.

      The Company used its short-term borrowing capacity from time to time to complete acquisitions totaling approximately $282.4 million in 2003. The Company borrowed $95.0 million from its line of credit and $100.0 million from PSI. The remaining balance was funded with cash from operations.

      During 2004, the Company issued an aggregate of $437.8 million of preferred equity with an average rate of 7.23%. Proceeds from the various offerings were used to redeem higher rate preferred equity aggregating $185.6 million with an average rate of 8.93%. In addition, proceeds were used to provide permanent financing for the Company’s acquisitions made in 2003 and 2004 by enabling the Company to repay, in full, the balances outstanding on the Company’s note with PSI, the Credit Facility and the term loan.

      During May 2003 and September 2003, the Company repurchased 7,300 and 78,300 depositary shares, each representing 1/1,000 of a share of Series A preferred stock at $26.00 and $25.65 per depositary share, for $190,000 and $2.0 million, respectively. The stated value of the stock was $25 per depository share. The premium and original issuance costs were recorded as an additional distribution to preferred shareholders. The aggregate effect was a reduction of $127,000 of net income and funds from operations allocable to common shareholders and unitholders.

      The Company’s funding strategy has been to use permanent capital, including common and preferred stock, and internally generated retained cash flows. In addition, the Company may sell properties that no longer meet its investment criteria. The Company may finance acquisitions on a temporary basis with borrowings from its Credit Facility. The Company targets a ratio of Funds from Operations (“FFO”) to combined fixed charges and preferred distributions of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest. Preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unitholders. As of the year ended December 31, 2005, the FFO to fixed charges and preferred distributions coverage ratio was 2.9 to 1.0, excluding the effects of Emerging Issues Task Force (“EITF”) Topic D-42.

      Non-GAAP Supplemental Disclosure Measure: Funds from Operations: Management believes that Funds From Operations (“FFO”) is a useful supplemental measure of the Company’s operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, minority interest in income, and extraordinary items. Management believes that FFO provides a useful measure of the Company’s operating performance and when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income.

      FFO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results from operations.

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      Management believes FFO provides useful information to the investment community about the Company’s operating performance when compared to the performance of other real estate companies as FFO is generally recognized as the industry standard for reporting operations of REITs. Other REITs may use different methods for calculating FFO and, accordingly, our FFO may not be comparable to other real estate companies.

      FFO for the Company is computed as follows (in thousands):

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net income allocable to common shareholders		$	32,283		$	29,123		$	33,312		$	42,018		$	41,016
	Gain on sale of marketable and other securities		—			—			(2,043	)		(41	)		(8	)
	Gain on disposition of real estate		(18,109	)		(15,462	)		(2,897	)		(9,023	)		—
	Equity income from sale of joint venture properties		—			—			(1,376	)		(861	)		—
	Depreciation and amortization		77,420			73,793			59,107			58,144			41,067
	Depreciation from joint venture		—			—			—			63			15
	Minority interest in income — common units		10,869			9,760			11,345			14,243			13,382
Consolidated FFO allocable to common shareholders and minority interests			102,463			97,214			97,448			104,543			95,472
FFO allocated to minority interests — common units			(25,810	)		(24,401	)		(24,657	)		(26,291	)		(23,018	)
FFO allocated to common shareholders		$	76,653		$	72,813		$	72,791		$	78,252		$	72,454

      FFO allocated to common shareholders and minority interests for the year ended December 31, 2005 increased $5.2 million over the year ended December 31, 2004. FFO for the years ended December 31, 2005 and 2004 included non-cash distributions of $301,000 and $5.0 million, respectively, related to the application of EITF Topic D-42 and the redemption of preferred equity. Excluding these non-cash adjustments, the slight increase in FFO was a result of increased income from operations.

      Capital Expenditures: During the years ended December 31, 2005, 2004 and 2003, the Company incurred approximately $35.8 million, $43.6 million and $23.0 million, respectively, in recurring capital expenditures or $2.01, $2.42 and $1.61 per weighted average square foot, respectively. The Company defines recurring capital expenditures as those necessary to maintain and operate its commercial real estate at its current economic value. The Company expects the higher levels of transactions to continue into 2006 as a result of competition in difficult markets. The following depicts actual capital expenditures for the stated periods: (in thousands)

	Year Ended		Year Ended		Year Ended
	December 31, 2005		December 31, 2004		December 31, 2003
Recurring capital expenditures	$	35,821	$	43,614	$	22,954
First generation tenant improvements and leasing commissions on developed projects		—		—		838
Property renovations and other capital expenditures		4,519		8,455		15,984
Total capital expenditures	$	40,340	$	52,069	$	39,776

      Stock Repurchase: The Company’s Board of Directors has authorized the repurchase, from time to time, of up to 4.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. During the year ended December 31, 2005, the Company repurchased 361,400 shares of common stock at a cost of approximately $16.6 million. No shares were repurchased in 2004. Since inception through December 31, 2005, the Company has repurchased an aggregate of 3.0 million shares of common stock at an aggregate cost of approximately $86.5 million (average cost of $29.00 per share).

      Redemption of Preferred Stock: The Company did not repurchase any preferred stock in 2005.

      Distributions: The Company has elected and intends to qualify as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must meet, among other tests, sources of income, share ownership and certain asset tests. As a REIT, the Company is not taxed on that portion of its taxable income that is distributed to its shareholders provided that at least 90% of its taxable income is distributed to its shareholders prior to filing of its tax return.

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      Related Party Transactions: At December 31, 2005, PSI owned 25.1% of the outstanding shares of the Company’s common stock and 25.3% of the outstanding common units of the operating partnership (100% of the common units not owned by us). Assuming conversion of its partnership units PSI would own 44.1% of the outstanding shares of the Company’s common stock. Ronald L. Havner, Jr., the Company’s chairman, is also the Chief Executive Officer, President and a Director of PSI. Harvey Lenkin is a Director of both the Company and PSI.

      Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PSI and affiliated entities for certain administrative services. These costs totaled $335,000 in 2005 and are allocated among PSI and its affiliates in accordance with a methodology intended to fairly allocate those costs. In addition, the Company provides property management services for properties owned by PSI and its affiliates for a fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. These management fee revenues recognized under management contracts with affiliated parties totaled approximately $579,000 in 2005.

      Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements.

      Contractual Obligations: The table below summarizes projected payments due under our contractual obligations as of December 31, 2005 (in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 — 3 years		3 — 5 years		More than 5 years
Mortgage notes payable (principal and interest)	$	33,465	$	2,277	$	8,393	$	7,372	$	15,423
Total	$	33,465	$	2,277	$	8,393	$	7,372	$	15,423

      The Company is scheduled to pay cash dividends of approximately $60.4 million per year on its preferred equity outstanding as of December 31, 2005. Dividends are paid when and if declared by the Company’s Board of Directors and accumulate if not paid. Shares and units of preferred equity are redeemable by the Company in order to preserve its status as a REIT and are also redeemable five years after issuance.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      To limit the Company’s exposure to market risk, the Company principally finances its operations and growth with permanent equity capital consisting either of common stock or preferred equity. At December 31, 2005, the Company’s debt as a percentage of shareholders’ equity and minority interest (based on book values) was 1.9%.

      The Company’s market risk sensitive instruments include mortgage notes payable of $25.9 million at December 31, 2005. All of the Company’s mortgage notes payable bear interest at fixed rates. See Notes 2, 5, and 6 to Consolidated Financial Statements for the terms, valuations and approximate principal maturities of the Company’s mortgage notes payable and the line of credit as of December 31, 2005. Based on borrowing rates currently available to the Company, combined with the amount of fixed rate debt outstanding, the difference between the carrying amount of debt and its fair value is insignificant.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements of the Company at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 and the report of Ernst & Young LLP, Independent Registered Public Accounting Firm, thereon and the related financial statement schedule, are included elsewhere herein. Reference is made to the Index to Consolidated Financial Statements and Schedules in Item 15.

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

      Not Applicable.

ITEM 9A.  CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

      The Company maintains disclosure controls and procedures as defined in SEC Rule 13a-15(e) that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

      As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of December 31, 2005. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded, as of that time, that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

      There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company may make changes in its internal control processes from time to time in the future.

Management’s Report on Internal Control over Financial Reporting

      Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is 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.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

      Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 using the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2005, the Company’s internal control over financial reporting was effective based on those criteria.

      Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements. Ernst & Young LLP’s report on management’s assessment of the Company’s internal control over financial reporting appears below.

ITEM 9B. OTHER INFORMATION

      None.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PS Business Parks, Inc.

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that PS Business Parks, Inc. (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 (the COSO criteria). PS Business Parks, Inc.’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 PS Business Parks, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, PS Business Parks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of PS Business Parks, Inc. and our report dated March 3, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

March 3, 2006

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item with respect to directors is hereby incorporated by reference to the material appearing in the Company’s definitive proxy statement to be filed in connection with the annual shareholders’ meeting to be held in 2006 (the “Proxy Statement”) under the caption “Election of Directors — Nominees for Director.”

      Information required by this item with respect to executive officers is provided in Item 4A of this report. See “Executive Officers of the Registrant.”

      Information required by this item with respect to an audit committee financial expert and identification of the Audit Committee of the Board of Directors is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Election of Directors — Directors and Committee Meetings.”

      Information required by this item with respect to a code of ethics is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Election of Directors — Directors and Committee Meetings.” We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, which is filed as an exhibit to this Annual Report on Form 10-K and available on our website at www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. Any amendments to or waivers of the code of ethics granted to the Company’s executive officers or the controller will be published promptly on our website or by other appropriate means in accordance with SEC rules.

ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Compensation”, “Compensation Committee Interlocks and Insider Participation,” “Report of the Compensation Committee on Executive Compensation” and “Stock Price Performance Graph.”

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this item with respect to security ownership of certain beneficial owners and management is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Election of Directors — Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management.”

      The following table sets forth information as of December 31, 2005 on the Company’s equity compensation plans:

	(a)			(b)			(c)
							Number of Securities
							Remaining Available for
	Number of Securities to			Weighted Average			Future Issuance under
	be Issued Upon			Exercise Price of			Equity Compensation
	Exercise of Outstanding			Outstanding Options,			Plans (Excluding
	Options, Warrants, and			Warrants, and			Securities Reflected in
Plan Category	Rights			Rights			Column(a))
Equity compensation plans approved by security holders		727,871		$	36.92			1,457,211
Equity compensation plans not approved by security holders		—		$	—			—
Total		727,871	*	$	36.92	*		1,457,211	*

*  Amounts include restricted stock units

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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Compensation Committee Interlocks and Insider Participation — Certain Relationships and Related Transactions.”

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Audit Fees: Audit fees include fees generated by all services performed by Ernst & Young LLP to comply with generally accepted auditing standards or for services related to the audit and review of the Company’s financial statements. Audit fees billed (or expected to be billed) to the Company by Ernst & Young LLP for audit of the Company’s consolidated financial statements and internal control over financial reporting, review of the consolidated financial statements included in the Company’s quarterly reports on Form 10-Q and services in connection with the Company’s registration statements and securities offerings totaled $322,000 for 2005 and $468,000 for 2004.

      Audit-Related Fees: During 2005 and 2004, Ernst & Young LLP did not bill the Company for audit related services

      Tax Fees: Tax fees billed (or expected to be billed) to the Company by Ernst & Young LLP for tax compliance and consulting services totaled $165,000 for 2005 and $143,000 for 2004.

      All Other Fees: During 2005 and 2004, Ernst & Young LLP did not bill the Company for any services other than audit and tax services.

      The Audit Committee of the Company approves in advance all services performed by Ernst & Young LLP. The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee provided that the Chairman shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a. 1. Financial Statements

      The financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.

      2. Financial Statements Schedule

      The financial statements schedule listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.

      3. Exhibits

      The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or incorporated by reference in this report.

b. Exhibits

      The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or incorporated by reference in this report.

c. Financial Statement Schedules

      Not applicable.

50

PS BUSINESS PARKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

(Item 15(a)(1) and Item 15(a)(2))

	Page
Report of Independent Registered Public Accounting Firm		52
Consolidated balance sheets as of December 31, 2005 and 2004		53
Consolidated statements of income for the years ended December 31, 2005, 2004 and 2003		54
Consolidated statements of shareholders’ equity for the years ended December 31, 2005, 2004 and 2003		55
Consolidated statements of cash flows for the years ended December 31, 2005, 2004 and 2003		56
Notes to consolidated financial statements		58
Schedule:
III — Real estate and accumulated depreciation		75
Exhibit 10.33
Exhibit 10.34
Exhibit 10.35
Exhibit 12
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

      All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PS Business Parks, Inc.

      We have audited the accompanying consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 consolidated 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of PS Business Parks, Inc. at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the 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 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 PS Business Parks, Inc.’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 and our report dated March 3, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

March 3, 2006

52

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

				December 31,
				2005			2004
				(In thousands, except
				share data)
ASSETS
Cash and cash equivalents				$	200,447		$	39,688
Real estate facilities, at cost:
	Land				383,684			368,764
	Buildings and equipment				1,193,223			1,135,772
					1,576,907			1,504,536
	Accumulated depreciation				(356,623	)		(280,215	)
					1,220,284			1,224,321
Properties held for disposition, net					3,433			67,632
Land held for development					9,011			11,583
					1,232,728			1,303,536
Rent receivable					2,678			2,079
Deferred rent receivables					18,650			15,470
Other assets					9,175			5,279
			Total assets	$	1,463,678		$	1,366,052
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accrued and other liabilities				$	39,126		$	40,676
Mortgage notes payable					25,893			11,367
		Total liabilities			65,019			52,043
Minority interest:
		Preferred units			135,750			127,750
		Common units			169,451			169,295
Commitments and Contingencies
Shareholders’ equity:
	Preferred stock, $0.01 par value, 50,000,000 shares authorized, 23,734 and 20,434 shares issued and outstanding at December 31, 2005 and 2004, respectively				593,350			510,850
	Common stock, $0.01 par value, 100,000,000 shares authorized, 21,560,593 and 21,839,667 shares issued and outstanding at December 31, 2005 and 2004, respectively				215			218
	Paid-in capital				407,380			420,351
	Cumulative net income				418,823			343,529
	Cumulative distributions				(326,310	)		(257,984	)
		Total shareholders’ equity			1,093,458			1,016,964
			Total liabilities and shareholders’ equity	$	1,463,678		$	1,366,052

See accompanying notes.

53

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

			For the Years Ended December 31,
			2005			2004			2003
			(In thousands, except
			per share data)
Revenues:
	Rental income		$	219,669		$	211,002		$	186,171
	Facility management fees primarily from affiliates			579			624			742
	Total operating revenues			220,248			211,626			186,913
Expenses:
	Cost of operations			65,808			63,069			51,628
	Depreciation and amortization			76,285			70,086			56,332
	General and administrative			5,843			4,628			4,683
	Total operating expenses			147,936			137,783			112,643
Other income and expenses:
	Gain on sale of marketable securities			—			—			2,043
	Interest and other income			4,888			406			1,125
	Interest expense			(1,330	)		(3,054	)		(4,015	)
	Total other income and expenses			3,558			(2,648	)		(847	)
Asset impairment due to casualty loss				72			—			—
Income from continuing operations before minority interests and equity in income of liquidated joint venture				75,798			71,195			73,423
Equity in income of liquidated joint venture				—			—			2,296
Minority interests in continuing operations:
	Minority interest in income — preferred units
		Distributions paid to preferred unitholders		(10,350	)		(17,106	)		(19,240	)
		Redemption of preferred operating partnership units		(301	)		(3,139	)		—
	Minority interest in income — common units			(5,576	)		(4,501	)		(10,336	)
	Total minority interests in continuing operations			(16,227	)		(24,746	)		(29,576	)
Income from continuing operations				59,571			46,449			46,143
Discontinued operations:
	Income from discontinued operations			2,907			5,491			6,972
	Impairment charge			—			—			(5,907	)
	Gain on disposition of real estate			18,109			15,462			2,897
	Minority interest in earnings attributable to discontinued operations — common units			(5,293	)		(5,259	)		(1,009	)
	Income from discontinued operations			15,723			15,694			2,953
Net Income				75,294			62,143			49,096
Net income allocable to preferred shareholders:
	Preferred stock distributions
		Preferred stock distributions paid		43,011			31,154			15,784
		Redemptions of preferred stock		—			1,866			—
	Total preferred stock distributions			43,011			33,020			15,784
Net income allocable to common shareholders			$	32,283		$	29,123		$	33,312
Net income per common share — basic:
	Continuing operations		$	0.76		$	0.62		$	1.42
	Discontinued operations		$	0.72		$	0.72		$	0.14
	Net income		$	1.48		$	1.34		$	1.56
Net income per common share — diluted:
	Continuing operations		$	0.75		$	0.61		$	1.41
	Discontinued operations		$	0.71		$	0.71		$	0.14
	Net income		$	1.47		$	1.33		$	1.54
Weighted average common shares outstanding:
	Basic			21,826			21,767			21,412
	Diluted			22,018			21,960			21,565

See accompanying notes.

54

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

			Preferred Stock						Common Stock									Cumulative		Other
															Paid-in			Net		Comprehensive			Cumulative			Shareholders’
			Shares			Amount			Shares			Amount			Capital			Income		Income/(Loss)			Distributions			Equity
			(In thousands, except share data)
Balances at December 31, 2002				6,833		$	170,813			21,531,419		$	215		$	420,372		$	232,290	$	(260	)	$	(159,028	)	$	664,402
	Repurchase of common stock			—			—			(261,200	)		(2	)		(8,117	)		—		—			—			(8,119	)
	Redemption of preferred stock			(86	)		(2,140	)		—			—			69			—		—			—			(2,071	)
	Exercise of stock options			—			—			293,309			3			7,618			—		—			—			7,621
	Stock compensation			—			—			2,000			—			386			—		—			—			386
	Comprehensive income:
		Unrealized gain — appreciation in marketable securities		—			—			—			—			—			—		(834	)		—			(834	)
		Unrealized gain on interest rate swap		—			—			—			—			—			—		559			—			559
		Net income		—			—			—			—			—			49,096		—			—			49,096
	Comprehensive income			—			—			—			—			—			—		—			—			48,821
	Distributions paid:
		Preferred stock		—			—			—			—			—			—		—			(15,784	)		(15,784	)
		Common stock		—			—			—			—			—			—		—			(24,878	)		(24,878	)
		Adjustment to reflect minority interest to underlying ownership interest		—			—			—			—			450			—		—			—			450
Balances at December 31, 2003				6,747			168,673			21,565,528			216			420,778			281,386		(535	)		(199,690	)		670,828
	Issuance of preferred stock, net of costs			15,800			395,000			—			—			(13,870	)		—		—			—			381,130
	Redemption of preferred stock			(2,113	)		(52,823	)		—			—			1,866			—		—			(1,866	)		(52,823	)
	Exercise of stock options			—			—			269,710			2			6,956			—		—			—			6,958
	Stock compensation			—			—			4,429			—			1,365			—		—			—			1,365
	Shelf registration			—			—			—			—			(101	)		—		—			—			(101	)
	Comprehensive income:
		Change in unrealized loss on interest rate swap		—			—			—			—			—			—		535			—			535
		Net income		—			—			—			—			—			62,143		—			—			62,143
	Comprehensive income			—			—			—			—			—			—		—			—			62,678
	Distributions paid:
		Preferred stock		—			—			—			—			—			—		—			(31,154	)		(31,154	)
		Common stock		—			—			—			—			—			—		—			(25,274	)		(25,274	)
	Adjustment to reflect minority interest to underlying ownership interest			—			—			—			—			3,357			—		—			—			3,357
Balances at December 31, 2004				20,434			510,850			21,839,667			218			420,351			343,529		—			(257,984	)		1,016,964
	Issuance of preferred stock, net of costs			3,300			82,500			—			—			(2,873	)		—		—			—			79,627
	Repurchase of common stock			—			—			(361,400	)		(4	)		(16,628	)		—		—			—			(16,632	)
	Exercise of stock options			—			—			70,364			1			1,936			—		—			—			1,937
	Stock compensation			—			—			11,962			—			2,588			—		—			—			2,588
		Net income		—			—			—			—			—			75,294		—			—			75,294
	Distributions paid:
		Preferred stock		—			—			—			—			—			—		—			(43,011	)		(43,011	)
		Common stock		—			—			—			—			—			—		—			(25,315	)		(25,315	)
	Adjustment to reflect minority interest to underlying ownership interest			—			—			—			—			2,006			—		—			—			2,006
Balances at December 31, 2005				23,734		$	593,350			21,560,593		$	215		$	407,380		$	418,823	$	—		$	(326,310	)	$	1,093,458

See accompanying notes.

55

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

DECEMBER 31, 2005

					For the Years Ended December 31,
					2005			2004			2003
					(In thousands)
Cash flows from operating activities:
	Net income				$	75,294		$	62,143		$	49,096
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization expense				77,420			73,793			59,107
		In-place rent adjustment				155			156			—
		Lease incentives				144			—			—
		Minority interest in income				21,520			30,005			30,585
		Equity in income of discontinued joint venture				—			—			(2,296	)
		Gain on sale of marketable equity securities				—			—			(2,043	)
		Gain on disposition of properties				(18,109	)		(15,462	)		(2,897	)
		Impairment charge				—			—			5,907
		Impairment of assets from casualty loss				72			—			—
		Stock compensation expense				1,060			914			386
		Increase in receivables and other assets				(5,004	)		(4,172	)		(1,615	)
		Increase (decrease) in accrued and other liabilities				(3,124	)		4,581			(3,820	)
				Total adjustments		74,134			89,815			83,314
			Net cash provided by operating activities			149,428			151,958			132,410
Cash flows from investing activities:
		Capital improvements to real estate facilities				(40,340	)		(52,069	)		(38,938	)
		Proceeds from liquidation of investments in marketable securities				—			—			7,600
		Acquisition of marketable securities				—			—			(1,396	)
		Acquisition of real estate facilities				(20,073	)		(22,323	)		(279,137	)
		Proceeds from disposition of real estate				84,802			48,284			14,498
		Development of real estate facilities				—			—			(838	)
		Distribution from investment in joint venture				—			—			3,326
			Net cash provided by (used in) investing activities			24,389			(26,108	)		(294,885	)
Cash flows from financing activities:
		Borrowings on credit facility				—			138,000			95,000
		Repayments of borrowings on credit facility				—			(233,000	)		—
		Borrowings from an affiliate				—			—			100,000
		Repayment of borrowings from an affiliate				—			(100,000	)		—
		Principal payments on mortgage notes payable				(472	)		(8,327	)		(585	)
		Repayment of unsecured notes payable				—			(50,000	)		—
		Net proceeds from the issuance of preferred stock				79,627			381,130			—
		Net proceeds from the issuance of preferred units				19,465			41,533			—
		Exercise of stock options				1,937			6,958			7,621
		Shelf registration costs				—			(101	)		—
		Repurchase of common stock				(14,465	)		—			(8,119	)
		Redemption of preferred units				(12,000	)		(132,750	)		—
		Redemption of preferred stock				—			(52,823	)		(2,198	)
		Distributions paid to preferred shareholders				(43,011	)		(31,154	)		(15,657	)
		Distributions paid to minority interests — preferred units				(10,350	)		(17,689	)		(19,240	)
		Distributions paid to common shareholders				(25,315	)		(25,274	)		(24,878	)
		Distributions paid to minority interests — common units				(8,474	)		(8,474	)		(8,472	)
			Net cash (used in) provided by financing activities			(13,058	)		(91,971	)		123,472
Net increase (decrease) in cash and cash equivalents						160,759			33,879			(39,003	)
Cash and cash equivalents at the beginning of the period						39,688			5,809			44,812
Cash and cash equivalents at the end of the period					$	200,447		$	39,688		$	5,809
Supplemental disclosures:
		Interest paid, net of interest capitalized			$	1,330		$	3,434		$	4,607

See accompanying notes.

56

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

DECEMBER 31, 2005

		For the Years Ended December 31,
		2005			2004			2003
		(In thousands)
Supplemental schedule of non cash investing and financing activities:
Adjustment to reflect minority interest to underlying ownership interest:
	Minority interest — common units	$	(2,240	)	$	(218	)	$	(450	)
	Paid-in capital	$	2,240		$	218		$	450
Effect of EITF Topic D-42
	Cumulative Distributions	$	—		$	(1,866	)	$	—
	Minority Interest — Common Units	$	(301	)	$	(3,139	)	$	—
	Paid in capital	$	301		$	5,005		$	—
Mortgage note payable assumed in property acquisition:
	Real estate facilities	$	14,998		$	—		$	—
	Mortgage notes payable	$	(14,998	)	$	—		$	—
Accrued lease inducements:
	Other assets	$	1,985		$	—		$	—
	Accrued and other liabilities	$	(1,985	)	$	—		$	—
Accrued stock repurchase:
	Additional paid in capital	$	2,167		$	—		$	—
	Accrued and other liabilities	$	(2,167	)	$	—		$	—
Unrealized gain:
	Marketable securities	$	—		$	—		$	834
	Other comprehensive income (loss)	$	—		$	—		$	(834	)
Unrealized loss:
	Comprehensive (income) loss on interest rate swap	$	—		$	(535	)	$	(559	)
	Other comprehensive income (loss)	$	—		$	535		$	559

See accompanying notes.

57

PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

1.  Organization and description of business

Organization

      PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of December 31, 2005, PSB owned approximately 75% of the common partnership units of PS Business Parks, L.P. (the “Operating Partnership” or “OP”). The remaining common partnership units were owned by Public Storage, Inc. (“PSI”). PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership. PSB and the Operating Partnership are collectively referred to as the “Company.”

Description of business

      The Company is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that acquires, develops, owns and operates commercial properties, primarily multi-tenant flex, office and industrial space. As of December 31, 2005, the Company owned and operated approximately 17.6 million net rentable square feet of commercial space located in eight states including approximately 43,000 square feet of property held for disposition. The Company also manages approximately 1.2 million net rentable square feet on behalf of PSI and its affiliated entities.

2.  Summary of significant accounting policies

Basis of presentation

      The accompanying consolidated financial statements include the accounts of PSB and the Operating Partnership. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.

Use of estimates

      The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from estimates.

Allowance for doubtful accounts

      We monitor the collectibility of our receivable balances including the deferred rent receivable on an on-going basis. Based on these reviews, we maintain an allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to make required rent payments to us. A provision for doubtful accounts is recorded during each period. The allowance for doubtful accounts, which represents the cumulative allowances less write-offs of uncollectible rent, is netted against tenant and other receivables on our consolidated balance sheets. Tenant receivables are net of an allowance for uncollectible accounts totaling $300,000 and $550,000 at December 31, 2005 and 2004, respectively.

Financial instruments

      The methods and assumptions used to estimate the fair value of financial instruments are described below. The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.

58

      In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities,” (SFAS No. 133, as amended by SFAS No. 138). The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

      In July 2002, the Operating Partnership entered into an interest rate swap agreement, which was accounted for as a cash flow hedge, in order to reduce the impact of changes in interest rates on a portion of its floating rate debt. The agreement, which covered $50.0 million of debt through July 2004, effectively changed the interest rate exposure from floating rate to a fixed rate of 4.46%. Market gains and losses on the value of the swap were deferred and included in income over the life of the swap or related debt. The differences paid on the interest rate swap of approximately $0, $557,000 and $904,000 for the years ended December 31, 2005, 2004 and 2003, respectively, were recorded in interest expense as incurred.

      Net interest differentials paid or received related to these contracts were accrued as incurred or earned. There was no unrealized loss related to the interest rate swap included in other comprehensive income as of December 31, 2005 or 2004 and the swap agreement was eliminated in 2004.

      The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Due to the short period to maturity of the Company’s cash and cash equivalents, accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value. Based on borrowing rates currently available to the Company, the carrying amount of debt approximates fair value.

      Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and receivables. Cash and cash equivalents, which consist primarily of short-term investments, including commercial paper, are only invested in entities with an investment grade rating. Receivables are comprised of balances due from a large number of customers. Balances that the Company expects to become uncollectable are reserved for or written off.

Real estate facilities

      Real estate facilities are recorded at cost. Costs related to the renovation or improvement of the properties are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are expected to benefit a period greater than 24 months and exceed $2,000 are capitalized and depreciated over the estimated useful life. Buildings and equipment are depreciated on the straight-line method over the estimated useful lives, which are generally 30 and 5 years, respectively. Leasing costs in excess of $1,000 for leases with terms greater than two years are capitalized and depreciated/amortized over their estimated useful lives. Leasing costs for leases of less than two years or less than $1,000 are expensed as incurred.

      Interest cost and property taxes incurred during the period of construction of real estate facilities are capitalized. The Company did not capitalize any interest expense in 2005, 2004 or 2003. The Company capitalized $0, $46,000 and $33,000 of property taxes during the years ended December 31, 2005, 2004 and 2003, respectively.

Properties Held for Disposition

      The Company accounts for properties held for disposition in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. An asset is classified as an asset held for disposition when it meets the requirements of SFAS No. 144, which include, among other criteria, the approval of the sale of the asset, the asset has been marketed for sale and the Company expects that the sale will likely occur within the next twelve months. Upon classification of an asset as held for disposition, the net book value of the asset is included on the balance sheet as properties held for disposition, depreciation of the asset is ceased and the operating results of the asset are included in discontinued operations.

59

Investment in joint venture

      In October 2001, the Company formed a joint venture with an unaffiliated investor to own and operate an industrial park consisting of 14 buildings in the City of Industry submarket of Los Angeles County. The park, consisting of 294,000 square feet of industrial space, was acquired by the Company in December 2000 at a cost of approximately $14.4 million. The property was contributed to the joint venture at its original cost. The partnership was capitalized with equity capital consisting of 25% from the Company and 75% from the unaffiliated investor in addition to a mortgage note payable.

      During 2002, the joint venture sold eight of the buildings totaling approximately 170,000 square feet. The Company recognized gains of approximately $861,000 on the disposition of these eight buildings. In addition, the Company’s interest in cash distributions from the joint venture increased from 25% to 50% as a result of meeting its performance measures. Therefore, the Company recognized additional income of $1.0 million in 2002. The gains and the additional income are included in equity in income of joint venture. As of December 31, 2002, the joint venture held six buildings totaling 124,000 square feet. During January, 2003, five of the remaining six buildings were sold and the Company recognized gains of approximately $1.1 million as a result of these sales and additional income of approximately $700,000. The remaining building, with approximately 29,000 square feet was sold in April, 2003. The Company recognized a gain of approximately $300,000 and additional income of approximately $200,000 during the second quarter of 2003.

      The Company’s investment was accounted for under the equity method in accordance with Accounting Principles Board (“APB”) 18, “Equity Method of Accounting for Investments.” In accordance with APB 18, the Company’s share of the debt was netted against its share of the assets in determining the investment in the joint venture and was not included in the Company’s total liabilities. The accounting policies of the joint venture were consistent with the Company’s accounting policies.

      Summarized below is financial data for the joint venture for the year ended December 31, 2003 (in thousands):

Operating revenues		$	20
Gain on sale of real estate			3,668
	Total revenues		3,688
Cost of operations			48
Interest and other expenses			4
	Total expenses		52
	Net income	$	3,636

      As of December 31, 2003, the joint venture had sold all of its properties, extinguished all of its debt, and distributed any remaining cash to the joint venture partners.

Intangible assets

      Intangible assets consist of property management contracts for properties managed, but not owned, by the Company. The intangible assets were being amortized over seven years. Intangible assets were fully amortized at December 31, 2005 and 2004.

Evaluation of asset impairment

      The Company evaluates its assets used in operations by identifying indicators of impairment and by comparing the sum of the estimated undiscounted future cash flows for each asset to the asset’s carrying value. When indicators of impairment are present and the sum of the undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset’s current carrying value and its value based on discounting its estimated future cash flows. In addition, the Company evaluates its assets held for disposition for impairment. Assets held for disposition are reported at the lower of their carrying value or fair value, less cost of disposition. During 2003, the Company identified certain assets that were impaired and recognized an impairment loss of $5.9 million.

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Asset impairment due to casualty loss

      It is the Company’s policy to record as a casualty loss or gain, in the period the casualty occurs, the differential between (a) the book value of assets destroyed and (b) any insurance proceeds that we expect to receive in accordance with our insurance contracts. Potential proceeds from insurance that are subject to any uncertainties, such as interpretation of deductible provisions of the governing agreements, the estimation of costs of restoration, or other such items, are treated as a contingent proceeds in accordance with SFAS No. 5, and not recorded until the uncertainties are satisfied.

      For the year ended December 31, 2005, several of our real estate assets located in Florida were damaged as a result of a series of hurricanes. We have estimated that the costs to restore these facilities will approximate $2.3 million. We have third-party insurance, subject to certain deductibles, that covers restoration of physical damage and the loss of income due to the physical damage incurred. We expect our insurers to pay approximately $1.6 million of the physical damage, and the net book value of the assets destroyed was approximately $1.1 million combined with approximately $510,000 of non-capitalized expense incurred in 2005. Accordingly, we have recorded a casualty loss of $72,000 for the year ended December 31, 2005. No casualty losses were recorded for the year ended December 31, 2004.

      These amounts are based upon estimates and are subject to change as we and our insurers (i) more fully evaluate the extent of physical damage, which may not be fully determinable until commencement of repairs, (ii) develop detailed restoration plans and (iii) evaluate the impact of local conditions in the building labor and supplies markets for restoration costs.

Borrowings from affiliate

      As of December 31, 2003, the Company had $100.0 million in short-term borrowings from PSI. The note bore interest at 1.4% and was due on March 9, 2004. The Company repaid the note in full during the first quarter of 2004.

Stock-based compensation

      Prior to December 31, 2001, the Company elected to adopt the disclosure requirements of SFAS No. 123, but continued to account for stock-based compensation under APB 25. Effective January 1, 2002, the Company adopted the Fair Value Method of accounting for stock options. As required by the transition requirements of SFAS No. 123, amended by SFAS No. 148, the Company will recognize compensation expense in the income statement using the Fair Value Method only with respect to stock options issued after January 1, 2002, but continue to disclose the pro-forma impact of utilizing the Fair Value Method on stock options issued prior to January 1, 2002. See note 10.

Revenue and expense recognition

      Revenue is recognized in accordance with Staff Accounting Bulletin No. 101 of the Securities and Exchange Commission, Revenue Recognition in Financial Statements (“SAB 101”), as amended. SAB 101 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual increases in rent that are not included on the Company’s credit watch list. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenues in the period the applicable costs are incurred.

      Costs incurred in connection with leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period.

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Gains/Losses from sales of real estate

      The Company recognizes gains from sales of real estate at the time of sale using the full accrual method, provided that various criteria related to the terms of the transactions and any subsequent involvement by us with the properties sold are met. If the criteria are not met, the Company defers the gains and recognizes them when the criteria are met or using the installment or cost recovery methods as appropriate under the circumstances.

General and administrative expense

      General and administrative expense includes executive compensation, office expense, professional fees, state income taxes, cost of acquisition personnel and other such administrative items.

Related party transactions

      Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PSI and affiliated entities for certain administrative services. These costs totaled $335,000, $327,000 and $335,000 in 2005, 2004 and 2003, respectively, and are allocated among PSI and its affiliates in accordance with a methodology intended to fairly allocate those costs. In addition, the Company provides property management services for properties owned by PSI and its affiliates for a fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. These management fee revenues recognized under management contracts with affiliated parties totaled approximately $579,000, $562,000 and $581,000 in 2005, 2004 and 2003, respectively. Through the first quarter of 2004, the Company combined its insurance purchasing power with PSI through a captive insurance company controlled by PSI, STOR-Re Mutual Insurance Corporation (“Stor-Re”). Stor-Re provided limited property and liability insurance to the Company. The Company and PSI also utilized unaffiliated insurance carriers to provide property and liability insurance in excess of Stor-Re’s limitations.

Income taxes

      The Company qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its taxable income to its shareholders. A REIT must distribute at least 90% of its taxable income each year. In addition, REITs are subject to a number of organizational and operating requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) based on its taxable income using corporate income tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company believes it met all organization and operating requirements to maintain its REIT status during 2005, 2004 and 2003 and intends to continue to meet such requirements. Accordingly, no provision for income taxes has been made in the accompanying financial statements.

Accounting for preferred equity issuance costs

      In accordance with Emerging Issues Task Force (“EITF”) Topic D-42, the Company records its issuance costs as a reduction to Paid-in Capital on its balance sheet at the time the preferred securities are issued and reflects the carrying value of the preferred stock at the stated value. The Company reduces the carrying value of preferred stock by the issuance costs at the time it notifies the holders of preferred stock or units of its intent to redeem such shares or units.

Net income per common share

      Per share amounts are computed using the weighted average common shares outstanding. “Diluted” weighted average common shares outstanding include the dilutive effect of stock options and restricted stock units under the

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treasury stock method. “Basic” weighted average common shares outstanding excludes such effect. Earnings per share has been calculated as follows (in thousands, except per share data):

		For the Years Ended December 31,
		2005		2004		2003
Net income allocable to common shareholders		$	32,283	$	29,123	$	33,312
Weighted average common shares outstanding:
	Basic weighted average common shares outstanding		21,826		21,767		21,412
	Net effect of dilutive stock options and restricted stock units — based on treasury stock method using average market price		192		193		153
	Diluted weighted average common shares outstanding		22,018		21,960		21,565
Net income per common share — Basic		$	1.48	$	1.34	$	1.56
Net income per common share — Diluted		$	1.47	$	1.33	$	1.54

      Options to purchase approximately 80,000, 80,000 and 68,000 shares for the years ended December 31 2005, 2004, and 2003, respectively were not included in the computation of diluted net income per share because such options were considered anti-dilutive.

Segment Reporting

      The Company views its operations as one segment.

Reclassifications

      Certain reclassifications have been made to the consolidated financial statements for 2004 and 2003 in order to conform to the 2005 presentation.

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3.  Real estate facilities

      The activity in real estate facilities for the years ended December 31, 2005, 2004, and 2003 is as follows (in thousands):

								Accumulated
		Land			Buildings			Depreciation			Total
Balances at December 31, 2002		$	260,906		$	872,997		$	(155,076	)	$	978,827
	Acquisition of real estate		112,718			170,137			—			282,855
	Disposition of real estate		—			(85	)		279			194
	Developed projects		—			838			—			838
	Capital improvements, net		—			38,938			—			38,938
	Lease termination write-off		—			(1,766	)		1,041			(725	)
	Depreciation expense		—			—			(59,107	)		(59,107	)
	Transfer to properties held for Disposition		(9,529	)		(11,488	)		4,452			(16,565	)
Balances at December 31, 2003			364,095			1,069,571			(208,411	)		1,225,255
	Acquisition of real estate		4,669			19,419			—			24,088
	Disposition of real estate		—			(2,063	)		1,046			(1,017	)
	Capital improvements, net		—			49,933			—			49,933
	In-place rent adjustment		—			—			(156	)		(156	)
	Depreciation expense		—			—			(73,793	)		(73,793	)
	Transfer to properties held for Disposition		—			(1,088	)		1,099			11
Balances at December 31, 2004			368,764			1,135,772			(280,215	)		1,224,321
	Acquisition of real estate		15,129			20,054			—			35,183
	Disposition of real estate		—			(1,526	)		1,135			(391	)
	Asset impairment due to casualty loss		—			(1,135	)		—			(1,135	)
	Capital improvements, net		—			40,132			—			40,132
	In-place rent adjustment		—			—			(155	)		(155	)
	Depreciation expense		—			—			(77,420	)		(77,420	)
	Transfer to properties held for Disposition		(209	)		(74	)		32			(251	)
Balances at December 31, 2005		$	383,684		$	1,193,223		$	(356,623	)	$	1,220,284

      The unaudited basis of real estate facilities for federal income tax purposes was approximately $1.2 billion at December 31, 2005. The Company had approximately 4.2% of its properties, in terms of net book value, encumbered by mortgage debt at December 31, 2005.

      Subsequent to December 31, 2005, the Company acquired WesTech Business Park, a 366,000 square foot office and flex park in Silver Spring, Maryland, for approximately $69.6 million. The park consists of nine single story buildings.

      On October 25, 2005, the Company acquired a 233,000 square foot multi-tenant flex space in San Diego, California for $35.1 million. In connection with the acquisition, the Company assumed a $15.0 million mortgage which bears interest at a fixed rate of 5.73%.

      On May 27, 2004, the Company acquired Fairfax Executive Park, a 165,000 square foot office complex in Fairfax, Virginia, for $24.1 million.

      During the year ended December 31, 2003, the Company completed the following acquisitions: Westwood Business Park, containing 113,000 square feet of flex space in the Farmer’s Branch submarket of Dallas, Texas for $7.8 million; Orange County Business Center containing five low-rise office buildings and 437,000 square feet for approximately $45.1 million; four buildings in the Metro/Black Canyon submarket of Phoenix, Arizona, totaling 110,000 square feet of flex space for approximately $9.6 million; two office buildings in the Central Orange County submarket of Orange, California, totaling 107,000 square feet for approximately $14.9 million; and Miami International Commerce Center, consisting of 3.3 million square feet of industrial and flex space and 56,000 square feet of retail space for approximately $205.0 million. The values assigned to the assets acquired were determined

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using traditional real estate valuation methodologies. In accordance with SFAS No. 141, the Company assesses the market value of in-place leases based upon their best estimate of current market rents.

      During the year ended December 31, 2003, the Company incurred approximately $838,000 in development costs. The Company did not incur any development costs in 2005 or 2004. There were no new development properties in 2003, 2004, or 2005 although the Company continued to incur first generation leasing costs on three of its developments in 2003.

      For acquisitions that were consummated subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards No. 141, Business Combinations, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values.

      The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including tenant improvements and leasing commissions.

      In allocating the fair value of the identified net intangible assets of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above and below-market lease values (included in building and equipment in the accompanying consolidated balance sheet) are amortized, net, to rental income over the remaining non-cancelable terms of the respective leases.

      The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the additional interests in real estate entities acquired, because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

      On January 31, 2005, the Company closed on the sale of 8.2 acres of land within the Cornell Oaks project in Beaverton, Oregon. The sales price for the land was $3.6 million, resulting in a gain of $1.8 million.

      On August 8, 2005, the Company closed on the sale of a 7,100 square foot unit at Miami International Commerce Center (“MICC”) for $750,000, resulting in a gain of $137,000. On February 15, 2005, the Company sold a 56,000 square foot retail center located at MICC. The sales price was approximately $12.2 million, resulting in a gain of $967,000. In addition, on January 20, 2005, the Company closed on the sale of a 7,100 square foot unit at MICC for $740,000, resulting in a gain of $142,000.

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      On September 30, 2005, the Company completed the sale of Woodside Corporate Park located in Beaverton, Oregon. The park consists of 13 buildings comprising approximately 574,000 square feet and a 3.3 acre parcel of land. Net proceeds from the sale, after transaction costs, were approximately $64.5 million. In connection with the sale, the Company recognized a gain of $12.5 million.

      During the three months ended December 31, 2005, the Company sold four units at MICC aggregating 30,200 square feet and a 13,000 square foot parcel of land with a combined gross sale price of $4.3 million. In connection with the sales, the Company recognized gains of $1.6 million.

      As of December 31, 2005, the Company had five separate units, aggregating 43,000 square feet, at MICC that it anticipates selling and has therefore classified such units as assets held for disposition.

      The Company realized a gain of approximately $1.0 million from the November 2004 sale of Largo 95 in Largo, Maryland. The gain was previously deferred due to the Company’s obligation to complete certain leasing related items satisfied during the second quarter of 2005.

      In April, 2004, the Company sold a 43,000 square foot flex facility in Austin, Texas, for net proceeds of approximately $1.1 million. During the third quarter of 2004, the Company sold a 30,500 square foot building in Beaverton, Oregon for gross proceeds of $3.1 million and closed on a sale of a 10,000 square foot unit in Miami, Florida with gross proceeds of $1.1 million. Additionally, during the third quarter of 2004, the Company concluded that it would likely sell as many as 12 separate units, aggregating 94,000 square feet as well as a 56,000 square foot retail center of its MICC property and classified such properties as held for disposition. In November 2004, one of the 12 units was sold for net proceeds of approximately $720,000. During the fourth quarter, the Company also sold two flex parks totaling approximately 400,000 square feet in Maryland for gross proceeds of approximately $44.2 million.

      During 2003, the Company sold a property in Lakewood, California for net proceeds of approximately $6.3 million. The Company also completed the sale of two Nashville properties in June, 2003 with net proceeds of $5.l million. A gain on the Lakewood and Nashville properties of $3.5 million was recognized in the second quarter of 2003. During the third quarter of 2003, the Company sold a one-acre parcel of land located in Beaverton, Oregon with net proceeds of approximately $733,000. The transaction was completed in July, 2003 at a gain of approximately $14,000. During the fourth quarter of 2003, the Company sold a building located in Beaverton, Oregon with net proceeds of approximately $2.4 million. The transaction was completed in December, 2003, at a loss of approximately $601,000.

      The following summarizes the condensed results of operations of the properties held for disposition at December 31, 2005 and properties sold during 2005, 2004 and 2003 (in thousands):

	For the Years Ended December 31,
	2005			2004			2003
Rental income	$	5,764		$	13,408		$	13,558
Cost of operations		(1,722	)		(3,979	)		(3,811	)
Depreciation		(1,135	)		(3,707	)		(2,775	)
Debt extinguishing costs		—			(231	)		—
Income from discontinued operations	$	2,907		$	5,491		$	6,972

      In addition to minimum rental payments, tenants reimburse the Company for their pro rata share of specified operating expenses, which amounted to $755,000, $1.6 million, and $1.6 million, for the years ended December 31, 2005, 2004 and 2003, respectively. These amounts are included as rental income and cost of operations in the table presented above for those assets sold or classified as held for disposition.

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4.  Leasing activity

      The Company leases space in its real estate facilities to tenants primarily under non-cancelable leases generally ranging from one to ten years. Future minimum rental revenues excluding recovery of expenses as of December 31, 2005 under these leases are as follows (in thousands):

2006	$	187,677
2007		150,390
2008		109,538
2009		73,311
2010		50,806
Thereafter		80,333
	$	652,055

      In addition to minimum rental payments, tenants reimburse the Company for their pro rata share of specified operating expenses, which amounted to $25.5 million, $25.2 million, and $24.5 million, for the years ended December 31, 2005, 2004 and 2003, respectively. These amounts are included as rental income and cost of operations in the accompanying consolidated statements of income.

      Leases for approximately 8% of the leased square footage are subject to termination options which include leases for approximately 3% of the leased square footage having termination options exercisable through December 31, 2006 (unaudited). In general, these leases provide for termination payments should the termination options be exercised. The above table is prepared assuming such options are not exercised.

5.  Bank Loans

      In August of 2005, the Company modified the term of its line of credit (the “Credit Facility”) with Wells Fargo Bank. The Credit Facility has a borrowing limit of $100.0 million and matures on August 1, 2008. Interest on outstanding borrowings is payable monthly. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.50% to LIBOR plus 1.20% depending on the Company’s credit ratings and coverage ratios, as defined (currently LIBOR plus 0.65%). In addition, the Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% of the borrowing limit (currently 0.20%). In connection with the modification of the Credit Facility, the Company paid a fee of $450,000, which will be amortized over the life of the Credit Facility. The Company had no balance outstanding on its Credit Facility at December 31, 2005 and 2004.

      The Credit Facility requires the Company to meet certain covenants including (i) maintain a balance sheet leverage ratio (as defined) of less than 0.45 to 1.00, (ii) maintain interest and fixed charge coverage ratios (as defined) of not less than 2.25 to 1.00 and 1.75 to 1.00, respectively, (iii) maintain a minimum tangible net worth (as defined) and (iv) limit distributions to 95% of funds from operations (as defined) for any four consecutive quarters. In addition, the Company is limited in its ability to incur additional borrowings (the Company is required to maintain unencumbered assets with an aggregate book value equal to or greater than two times the Company’s unsecured recourse debt; the Company did not have any unsecured recourse debt at December 31, 2005) or sell assets. The Company was in compliance with the covenants of the Credit Facility at December 31, 2005.

      In February 2002, the Company entered into a seven year $50.0 million unsecured term note agreement with Fleet National Bank. The note bore interest at LIBOR plus 1.45% per annum and was due on February 20, 2009. The Company paid a one-time facility fee of 0.35% or $175,000 for the loan. The Company used the proceeds from the loan to reduce the amount drawn on the Credit Facility. In July 2002, the Company entered into an interest rate swap transaction which had the effect of fixing the rate on the term loan through July 2004 at 4.46% per annum. In February 2004, the Company repaid, in full, the $50.0 million outstanding on the term loan.

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6.  Mortgage notes payable

      Mortgage notes consist of the following (in thousands):

	December 31,		December 31,
	2005		2004
8.190% mortgage note, secured by one commercial property with an approximate carrying amount of $10.6 million, principal and interest payable monthly, due March 2007	$	5,302	$	5,578
7.290% mortgage note, secured by one commercial property with an approximate carrying amount of $6.5 million, principal and interest payable monthly, due February 2009		5,645		5,789
5.730% mortgage note, secured by one commercial property with an approximate carrying amount of $34.8 million, principal and interest payable monthly, due March 2013		14,946		—
	$	25,893	$	11,367

      The mortgage notes have a weighted average interest rate of 6.57% and an average maturity of 5.1 years. At December 31, 2005, approximate principal maturities of mortgage notes payable are as follows (in thousands):

2006	$	658
2007		5,402
2008		423
2009		5,405
2010		277
Thereafter		13,728
	$	25,893

7.  Minority interests

Common partnership units

      The Company presents the accounts of PSB and the Operating Partnership on a consolidated basis. Ownership interests in the Operating Partnership that can be redeemed for common stock, other than PSB’s interest, are classified as minority interest — common units in the consolidated financial statements. Minority interest in income common units consists of the minority interests’ share of the consolidated operating results after allocation to preferred units and shares.

      Beginning one year from the date of admission as a limited partner (common units) and subject to certain limitations described below, each limited partner other than PSB has the right to require the redemption of its partnership interest.

      A limited partner (common units) that exercises its redemption right will receive cash from the Operating Partnership in an amount equal to the market value (as defined in the Operating Partnership Agreement) of the partnership interests redeemed. In lieu of the Operating Partnership redeeming the partner for cash, PSB, as general partner, has the right to elect to acquire the partnership interest directly from a limited partner exercising its redemption right, in exchange for cash in the amount specified above or by issuance of one share of PSB common stock for each unit of limited partnership interest redeemed.

      A limited partner cannot exercise its redemption right if delivery of shares of PSB common stock would be prohibited under the applicable articles of incorporation, or if the general partner believes that there is a risk that delivery of shares of common stock would cause the general partner to no longer qualify as a REIT, would cause a violation of the applicable securities laws, or would result in the Operating Partnership no longer being treated as a partnership for federal income tax purposes.

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      At December 31, 2005, there were 7,305,355 common units owned by PSI, which are accounted for as minority interests. On a fully converted basis, assuming all 7,305,355 minority interest common units were converted into shares of common stock of PSB at December 31, 2005, the minority interest units would convert into approximately 25.3% of the common shares outstanding. At the end of each reporting period, the Company determines the amount of equity (book value of net assets) which is allocable to the minority interest based upon the ownership interest and an adjustment is made to the minority interest, with a corresponding adjustment to paid-in capital, to reflect the minority interests’ equity in the Company.

Preferred partnership units

      Through the Operating Partnership, the Company has the following preferred units outstanding as of December 31, 2005 and 2004 (in thousands):

							December 31,
							2005				2004
			Date Redeemed or
			Earliest Potential		Dividend		Units				Units
Series	Issuance Date		Redemption Date		Rate		Outstanding		Amount		Outstanding		Amount
Series E		September, 2001		September, 2006		9.250%		2,120	$	53,000		2,120	$	53,000
Series G		October, 2002		October, 2007		7.950%		800		20,000		800		20,000
Series J		May & June, 2004		May, 2009		7.500%		1,710		42,750		1,710		42,750
Series N		December, 2005		December, 2010		7.125%		800		20,000		—		—
Series Y		July, 2000		July, 2005		8.875%		—		—		480		12,000
								5,430	$	135,750		5,110	$	127,750

      On July 12, 2005 the Company redeemed 480,000 units of its 8.875% Series Y Cumulative Redeemable Preferred Operating Partnership Units for approximately $12.0 million. In accordance with EITF D-42, the redemptions resulted in a reduction of net income allocable to common shareholders of approximately $301,000 for the year ended December 31, 2005, and a corresponding increase in the allocation of income to minority interests equal to the excess of the redemption amount over the carrying amount of the redeemed securities.

      During the fourth quarter of 2005, the Company completed a private placement of approximately $20.0 million of preferred units through its operating partnership. The 7.125% Series N Cumulative Redeemable Preferred Units are non-callable for five years and have no mandatory redemption. The net proceeds from the placements were approximately $19.5 million and will be used to fund future property acquisitions, preferred equity redemptions and for general corporate purposes.

      The Operating Partnership has the right to redeem preferred units on or after the fifth anniversary of the applicable issuance date at the original capital contribution plus the cumulative priority return, as defined, to the redemption date to the extent not previously distributed. The preferred units are exchangeable for Cumulative Redeemable Preferred Stock of the respective series of PSB on or after the tenth anniversary of the date of issuance at the option of the Operating Partnership or a majority of the holders of the respective preferred units. The Cumulative Redeemable Preferred Stock will have the same distribution rate and par value as the corresponding preferred units and will otherwise have equivalent terms to the other series of preferred stock described in Note 9. As of December 31, 2005 and 2004, the Company had approximately $3.7 million and $3.5 million of deferred costs in connection with the issuance of preferred units, which the Company will report as additional distributions upon notice of redemption.

8.  Property management contracts

      The Operating Partnership manages industrial, office and retail facilities for PSI and affiliated entities. These facilities, all located in the United States, operate under the “Public Storage” or “PS Business Parks” names. In addition, the Operating Partnership previously managed properties for third party owners.

      The property management contracts provide for compensation of a percentage of the gross revenues of the facilities managed. Under the supervision of the property owners, the Operating Partnership coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Operating

69

Partnership assists and advises the property owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including property managers and leasing, billing and maintenance personnel.

      The property management contract with PSI is for a seven year term with the term being automatically extended one year on each anniversary. At any time, either party may notify the other that the contract is not to be extended, in which case the contract will expire on the first anniversary of its then scheduled expiration date. For PSI affiliate owned properties, PSI can cancel the property management contract upon 60 days notice while the Operating Partnership can cancel upon seven years notice. Management fee revenues under these contracts totaled $579,000, $562,000, and $581,000 for the years ended December 31, 2005, 2004 and 2003 respectively. Management fee revenue from unaffiliated third parties and the joint venture were $0, $62,000, and $161,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

9.  Shareholders’ equity

Preferred stock

      As of December 31, 2005 and December 31, 2004, the Company had the following series of preferred stock outstanding (in thousands):

							December 31, 2005				December 31, 2004
			Earliest Potential		Dividend		Shares				Shares
Series	Issuance Date		Redemption Date		Rate		Outstanding		Amount		Outstanding		Amount
Series D		May, 2001		May, 2006		9.500%		2,634	$	65,850		2,634	$	65,850
Series F		January, 2002		January, 2007		8.750%		2,000		50,000		2,000		50,000
Series H		January & October, 2004		January, 2009		7.000%		8,200		205,000		8,200		205,000
Series I		April, 2004		April, 2009		6.875%		3,000		75,000		3,000		75,000
Series K		June, 2004		June, 2009		7.950%		2,300		57,500		2,300		57,500
Series L		August, 2004		August, 2009		7.600%		2,300		57,500		2,300		57,500
Series M		May, 2005		May, 2010		7.200%		3,300		82,500		—		—
								23,734	$	593,350		20,434	$	510,850

      In May of 2005, the Company issued 3.3 million depositary shares each representing 1/1,000 of a share of the 7.200% Cumulative Preferred Stock, Series M, at $25.00 per depositary share. The Company intends to use the proceeds from the offering to fund future property acquisitions, preferred equity redemptions and for general corporate purposes.

      The Company paid approximately $43.0 million, $31.2 million and $15.8 million in distributions to its preferred shareholders for the years ended December 31, 2005, 2004 and 2003, respectively.

      Holders of the Company’s preferred stock will not be entitled to vote on most matters, except under certain conditions. In the event of a cumulative arrearage equal to six quarterly dividends, the holders of the preferred stock will have the right to elect two additional members to serve on the Company’s Board of Directors until all events of default have been cured. At December 31, 2005, there were no dividends in arrears.

      Except under certain conditions relating to the Company’s qualification as a REIT, the preferred stock is not redeemable prior to the previously noted redemption dates. On or after the respective redemption dates, the respective series of preferred stock will be redeemable, at the option of the Company, in whole or in part, at $25 per depositary share, plus any accrued and unpaid dividends. As of December 31, 2005 and 2004, the Company had approximately $20.1 million and $17.3 million of deferred costs in connection with the issuance of preferred stock, which the Company will report as additional non-cash distributions upon notice of its intent to redeem such shares.

Common Stock

      The Company’s Board of Directors has authorized the repurchase, from time to time, of up to 4.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. During the year

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ended December 31, 2005, the Company repurchased 361,400 shares of common stock at a cost of approximately $16.6 million. No shares were repurchased in 2004. In 2003, the Company repurchased 261,200 shares of common stock and no common units in its operating partnership at an aggregate cost of approximately $8.1 million. Since inception through December 31, 2005, the Company has repurchased an aggregate of 3.0 million shares of common stock at an aggregate cost of approximately $86.5 million (average cost of $29.00 per share).

      The Company paid $25.3 million ($1.16 per common share), $25.3 million ($1.16 per common share) and $24.9 million ($1.16 per common share) in distributions to its common shareholders for the years ended December 31, 2005, 2004 and 2003, respectively. The portion of the distributions classified as ordinary income was 95.5%, 91.3% and 94.4% for the years ended December 31, 2005, 2004 and 2003, respectively. The portion of the distributions classified as long-term capital gain income was 4.5%, 8.7% and 5.6% for the years ended December 31, 2005, 2004 and 2003, respectively. Percentages in the two preceding sentences are unaudited. Pursuant to restrictions imposed by the Credit Facility, distributions may not exceed 95% of funds from operations, as defined.

      On January 10, 2003, the Company issued 2,000 shares of common stock to Joseph D. Russell, Jr., President and Chief Executive Officer of the Company, as a bonus under his employment agreement for services rendered during 2002. The shares were issued in reliance on Section 4(2) under the Securities Act of 1933. Mr. Russell represented that he was acquiring the shares for investment and not for resale.

Equity stock

      In addition to common and preferred stock, the Company is authorized to issue 100.0 million shares of Equity Stock. The Articles of Incorporation provide that the Equity Stock may be issued from time to time in one or more series and give the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock.

10.  Stock-based compensation

      PSB has a 1997 Stock Option and Incentive Plan (the “1997 Plan”) covering 1.5 million shares of PSB’s common stock. Also, in March 2003, the Board of Directors approved the 2003 Stock Option and Incentive Plan (the “2003 Plan”) covering 1.5 million shares of PSB’s common stock. Shareholders approved adoption of the 2003 Plan in May, 2003. Generally, options under the 1997 Plan vest over a three-year period from the date of grant at the rate of one third per year and expire ten years after the date of grant. Options under the 2003 Plan vest over a five-year period from the date of grant at the rate of one fifth per year and expire ten years after the date of grant. Under the 1997 Plan and 2003 Plan, PSB has granted non-qualified options to certain directors, officers and key employees to purchase shares of PSB’s common stock at a price no less than the fair market value of the common stock at the date of grant.

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      At December 31, 2005, there were a combined total of 1.5 million options and restricted stock units authorized to grant. Information with respect to the 1997 Plan and 2003 Plan is as follows:

		Number of			Weighted Average
		Options			Exercise Price
Outstanding at December 31, 2002			1,038,756		$	27.36
	Granted		167,000		$	34.77
	Exercised		(293,309	)	$	25.98
	Forfeited		(60,834	)	$	27.61
Outstanding at December 31, 2003			851,613		$	29.27
	Granted		90,000		$	44.46
	Exercised		(269,710	)	$	27.33
	Forfeited		(77,668	)	$	31.69
Outstanding at December 31, 2004			594,235		$	34.23
	Granted		85,000		$	42.41
	Exercised		(70,364	)	$	27.96
	Forfeited		(9,000	)	$	31.66
Outstanding at December 31, 2005			599,871		$	36.25
Exercisable at:
	December 31, 2003		391,264		$	25.17
	December 31, 2004		347,630		$	29.02
	December 31, 2005		317,671		$	31.69

      Information about PSB stock options outstanding at December 31, 2005 is summarized as follows:

					Weighted
	Number		Weighted		Average		Number		Weighted
	Outstanding		Average		Remaining		Exercisable		Average
Exercise Price Per Share	as of 2005		Exercise Price		Contract Life		as of 2005		Exercise Price
$22.88 — $24.69		19,000	$	23.51		3.03 Years		19,000	$	23.51
$26.13 — $29.08		160,204	$	26.72		5.00 Years		160,204	$	26.72
$31.11 — $34.34		178,000	$	33.26		6.85 Years		88,800	$	33.55
$35.43 — $39.95		57,667	$	39.21		8.41 Years		15,667	$	37.74
$40.30 — $45.51		185,000	$	43.42		8.80 Years		34,000	$	42.66
$22.88 — $45.51		599,871	$	36.25		7.30 Years		317,671	$	31.69

      Through December 31, 2001, the Company elected to adopt the disclosure requirements of SFAS No. 123, but continued to account for stock-based compensation under APB 25. Effective January 1, 2002, the Company adopted the Fair Value Method of accounting for stock options. As required by the transition requirements of SFAS No. 123 as amended by SFAS No. 148, the Company has recognized compensation expense in the income statement using the Fair Value Method only with respect to stock options issued after January 1, 2002, but continue to disclose the pro-forma impact of utilizing the Fair Value Method on stock options issued prior to January 1, 2002. As a result, included in the Company’s income statement for the years ended December 31, 2005, 2004 and 2003 are approximately $406,000, $241,000 and $322,000, respectively, in stock option compensation expense related to options granted after January 1, 2002.

      The weighted average fair value of the options granted in 2005, 2004 and 2003 were $6.98, $6.80 and $4.57, respectively. Had compensation cost for the 1997 Plan for options granted prior to December 31, 2001 been determined based on the fair value at the grant date for awards under the 1997 Plan consistent with the method

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prescribed by SFAS No. 123, the Company’s pro forma net income available to common shareholders would have been:

		For the Years Ended December 31,
		2005		2004			2003
		(In thousands, except per share data)
Net income allocable to common shareholders, as reported		$	32,283	$	29,123		$	33,312
Deduct: Total stock-based employee compensation expense determined under fair value based method of all awards			—		(215	)		(628	)
Net income allocable to common shareholders, as adjusted		$	32,283	$	28,908		$	32,684
Earnings per share:
	Basic as reported	$	1.48	$	1.34		$	1.56
	Basic as adjusted	$	1.48	$	1.33		$	1.53
	Diluted as reported	$	1.47	$	1.33		$	1.54
	Diluted as adjusted	$	1.47	$	1.32		$	1.52

      In determining the fair value of each option grant, the Company has used on the date of grant, the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005, 2004 and 2003, respectively; dividend rate of 2.6%, 2.6% and 3.6%; expected volatility of 17.6%, 17.5% and 16.7%, expected lives of five years; and risk-free interest rates of 4.2%, 3.6% and 3.6%. The pro forma effect on net income allocable to common shareholders during 2005, 2004 and 2003 may not be representative of the pro forma effect on net income allocable to common shareholders in future years.

      The Company has granted 233,700 restricted stock units under the 1997 Plan and 2003 Plan since inception, of which 128,000 restricted stock units were outstanding at December 31, 2005. The restricted stock units were granted at a zero exercise price. The fair market value of the restricted stock units at the date of grant ranged from $24.02 to $45.51 per restricted stock unit. The restricted stock units granted prior to August, 2002 (88,000 units) are subject to a five-year vesting schedule, at 30% in year three, 30% in year four and 40% in year five. Restricted stock units granted subsequent to August, 2002 (145,700 units) are subject to a six year vesting schedule, none in year one and 20% for each of the next five years. The Company granted 38,200 restricted stock units at a weighted average fair value of $41.43 during the year ended December 31, 2005. Net compensation expense related to restricted stock of $626,000, $673,000 and $670,000 was recognized during the years ended December 31, 2005, 2004 and 2003, respectively. During 2005, 19,250 restricted stock units vested; of this amount, 11,962 shares were issued, net of shares applied to payroll taxes. During 2004, the Company redeemed 7,621 of the 12,050 shares of restricted stock that vested during 2004 for approximately $321,000 and issued 4,429 shares. During 2003, the Company redeemed 5,550 shares of restricted stock that vested during 2003 for approximately $198,000.

      In May of 2004, the shareholders of the Company approved the issuance of up to 70,000 shares of common stock under the Retirement Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan the Company grants 1,000 shares of common stock for each year served as a director up to a maximum of 5,000 shares issued upon retirement. The Company recognizes compensation expense with regards to grants to be issued in the future under the Director Plan. As a result, included in the Company’s income statement for the year ended December 31, 2005, is approximately $28,000 in compensation expense.

11.  Recent accounting pronouncements

      On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of

73

employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on January 1, 2006. Due to the Company adopting the Fair Value Method of accounting for stock options, the adoption of this standard will not have a material impact on the results of operations or the financial position of the Company.

12.  Supplementary quarterly financial data (unaudited)

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2004		2004		2004		2004
	(In thousands, except per share data)
Revenues(1)	$	51,850	$	52,008	$	53,162	$	54,606
Cost of operations(1)	$	15,701	$	15,335	$	15,891	$	16,142
Net income allocable to common shareholders	$	4,158	$	5,206	$	2,847	$	16,912
Net income per share:
Basic	$	0.19	$	0.24	$	0.13	$	0.77
Diluted	$	0.19	$	0.24	$	0.13	$	0.77

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2005		2005		2005		2005
Revenues(1)	$	54,005	$	55,501	$	54,799	$	55,943
Cost of operations(1)	$	15,898	$	16,646	$	16,204	$	17,060
Net income allocable to common shareholders	$	7,324	$	5,772	$	14,264	$	4,923
Net income per share:
Basic	$	0.34	$	0.26	$	0.65	$	0.23
Diluted	$	0.33	$	0.26	$	0.65	$	0.22

(1)  Discontinued operations are excluded.

13.  Commitments and contingencies

      Substantially all of the Company’s properties have been subjected to Phase I environmental reviews. Such reviews have not revealed, nor is management aware of, any probable or reasonably possible environmental costs that management believes would have a material adverse effect on the Company’s business, assets or results of operations, nor is the Company aware of any potentially material environmental liability.

      The Company currently is neither subject to any other material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than routine litigation and administrative proceedings arising in the ordinary course of business.

14.  401(K) Plan

      The Company has a 401(K) savings plan (the “Plan”) which all eligible employees may participate. The Plan provides for the Company to make matching contributions to all eligible employees up to 4% of their annual salary dependent on the employee’s level of participation. For the years ended December 31, 2005, 2004 and 2003, approximately $203,000, $219,000 and $209,000, respectively, was charged as expense related to this plan.

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PS BUSINESS PARKS, INC.

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2005

(DOLLARS IN THOUSANDS)

									Cost
									Capitalized
									Subsequent
									to		Gross Amount at Which Carried at
					Initial Cost to Company				Acquisition		December 31, 2005
							Buildings		Buildings				Buildings								Depreciable
							and		and				and				Accumulated		Date		Lives
Description	Location		Encumbrances		Land		Improvements		Improvements		Land		Improvements		Totals		Depreciation		Acquired		(Years)
Produce		San Francisco, CA		—	$	776	$	1,886	$	107	$	776	$	1,993	$	2,769	$	545		03/17/98		5-30
Crenshaw II		Torrance, CA		—		2,318		6,069		1,450		2,318		7,519		9,837		2,507		04/12/97		5-30
Airport		San Francisco, CA		—		899		2,387		356		899		2,743		3,642		806		04/12/97		5-30
Christopher Ave		Gaithersburg, MD		—		475		1,203		304		475		1,507		1,982		502		04/12/97		5-30
Monterey Park		Monterey Park, CA		—		3,078		7,862		886		3,078		8,748		11,826		2,801		01/01/97		5-30
Calle Del Oaks		Monterey, CA		—		288		706		208		288		914		1,202		318		01/01/97		5-30
Milwaukie I		Milwaukie, OR		—		1,125		2,857		866		1,125		3,723		4,848		1,249		01/01/97		5-30
Edwards Road		Cerritos, CA		—		450		1,217		549		450		1,766		2,216		580		01/01/97		5-30
Rainier		Renton, WA		—		330		889		243		330		1,132		1,462		381		01/01/97		5-30
Lusk		San Diego, CA		—		1,500		3,738		1,075		1,500		4,813		6,313		1,675		01/01/97		5-30
Eisenhower		Alexandria, VA		—		1,440		3,635		1,438		1,440		5,073		6,513		1,659		01/01/97		5-30
McKellips		Tempe, AZ		—		195		522		347		195		869		1,064		339		01/01/97		5-30
Old Oakland Rd		San Jose, CA		—		3,458		8,765		1,717		3,458		10,482		13,940		3,423		01/01/97		5-30
Junipero		Signal Hill, CA		—		900		2,510		328		900		2,838		3,738		855		01/01/97		5-30
Northgate Blvd.		Sacramento, CA		—		1,710		4,567		2,001		1,710		6,568		8,278		2,251		01/01/97		5-30
Uplander		Culver City, CA		—		3,252		8,157		3,373		3,252		11,530		14,782		4,223		01/01/97		5-30
University		Tempe, AZ		—		2,160		5,454		3,207		2,160		8,661		10,821		3,403		01/01/97		5-30
E. 28th Street		Signal Hill, CA		—		1,500		3,749		903		1,500		4,652		6,152		1,542		01/01/97		5-30
W. Main		Mesa, AZ		—		675		1,692		1,003		675		2,695		3,370		1,099		01/01/97		5-30
S. Edward		Tempe, AZ		—		645		1,653		1,257		645		2,910		3,555		1,113		01/01/97		5-30
Leapwood Ave		Carson, CA		—		990		2,496		922		990		3,418		4,408		1,215		01/01/97		5-30
Great Oaks		Woodbridge, VA		—		1,350		3,398		1,012		1,350		4,410		5,760		1,499		01/01/97		5-30
Ventura Blvd. II		Studio City, CA		—		621		1,530		247		621		1,777		2,398		592		01/01/97		5-30
Gunston		Lorton, VA		—		4,146		17,872		1,996		4,146		19,868		24,014		7,172		06/17/98		5-30
Canada		Lake Forest, CA		—		5,508		13,785		3,174		5,508		16,959		22,467		5,148		12/23/97		5-30
Ridge Route		Laguna Hills, CA		—		16,261		39,559		2,533		16,261		42,092		58,353		11,966		12/23/97		5-30
Lake Forest Commerce Park		Laguna Hills, CA		—		2,037		5,051		3,282		2,037		8,333		10,370		3,057		12/23/97		5-30
Buena Park Industrial Center		Buena Park, CA		—		3,245		7,703		1,289		3,245		8,992		12,237		2,972		12/23/97		5-30
Cerritos Business Center		Cerritos, CA		—		4,218		10,273		2,259		4,218		12,532		16,750		3,808		12/23/97		5-30
Parkway Commerce Center		Hayward, CA		—		4,398		10,433		2,197		4,398		12,630		17,028		3,738		12/23/97		5-30
Northpointe E		Sterling, VA		—		1,156		2,957		704		1,156		3,661		4,817		1,169		12/10/97		5-30
Ammendale		Beltsville, MD		—		4,278		18,380		5,603		4,278		23,983		28,261		9,962		01/13/98		5-30
Shaw Road		Sterling, VA		—		2,969		10,008		3,034		2,969		13,042		16,011		5,310		03/09/98		5-30
Creekside-Phase 1		Beaverton, OR		—		2,733		7,779		1,411		2,733		9,190		11,923		3,466		05/04/98		5-30
Creekside-Phase 2 Bldg-4		Beaverton, OR		—		807		2,542		1,545		807		4,087		4,894		1,331		05/04/98		5-30
Creekside-Phase 2 Bldg-5		Beaverton, OR		—		521		1,603		552		521		2,155		2,676		830		05/04/98		5-30
Creekside-Phase 2 Bldg-1		Beaverton, OR		—		1,326		4,035		1,191		1,326		5,226		6,552		1,986		05/04/98		5-30
Creekside-Phase 3		Beaverton, OR		—		1,353		4,101		945		1,353		5,046		6,399		2,118		05/04/98		5-30
Creekside-Phase 5		Beaverton, OR		—		1,741		5,301		1,279		1,741		6,580		8,321		2,622		05/04/98		5-30

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									Cost
									Capitalized
									Subsequent
									to		Gross Amount at Which Carried at
					Initial Cost to Company				Acquisition		December 31, 2005
							Buildings		Buildings				Buildings								Depreciable
							and		and				and				Accumulated		Date		Lives
Description	Location		Encumbrances		Land		Improvements		Improvements		Land		Improvements		Totals		Depreciation		Acquired		(Years)
Creekside-Phase 6		Beaverton, OR		—		2,616		7,908		2,295		2,616		10,203		12,819		3,876		05/04/98		5-30
Creekside-Phase 7		Beaverton, OR		—		3,293		9,938		3,795		3,293		13,733		17,026		5,148		05/04/98		5-30
Creekside-Phase 8		Beaverton, OR		—		1,140		3,644		548		1,140		4,192		5,332		1,560		05/04/98		5-30
Northpointe G		Sterling, VA		—		824		2,964		1,282		824		4,246		5,070		1,786		06/11/98		5-30
Las Plumas		San Jose, CA		—		4,379		12,889		3,222		4,379		16,111		20,490		6,625		12/31/98		5-30
Lafayette		Chantilly, VA		—		671		4,179		359		671		4,538		5,209		1,558		01/29/99		5-30
CreeksideVII		Beaverton, OR		—		358		3,232		137		358		3,369		3,727		705		04/17/00		5-30
Dulles South		Chantilly, VA		—		599		3,098		518		599		3,616		4,215		1,225		06/30/99		5-30
Sullyfield Circle		Chantilly, VA		—		774		3,712		667		774		4,379		5,153		1,580		06/30/99		5-30
Park East I & II		Chantilly, VA		5,302		2,324		10,875		1,516		2,324		12,391		14,715		4,090		06/30/99		5-30
Park East III		Chantilly, VA		5,645		1,527		7,154		449		1,527		7,603		9,130		2,672		06/30/99		5-30
Northpointe Business Center A		Sacramento, CA		—		729		3,324		790		729		4,114		4,843		1,594		07/29/99		5-30
Corporate Park Phoenix		Phoenix, AZ		—		2,761		10,269		1,020		2,761		11,289		14,050		3,492		12/30/99		5-30
Santa Clara Technology Park		Santa Clara, CA		—		7,673		15,645		653		7,673		16,298		23,971		5,139		03/28/00		5-30
Corporate Pointe		Irvine, CA		—		6,876		18,519		2,490		6,876		21,009		27,885		6,768		09/22/00		5-30
Lafayette II/Pleasant Valley Rd		Chantilly, VA		—		1,009		9,219		2,269		1,009		11,488		12,497		4,421		08/15/01		5-30
Northpointe Business Center B		Sacramento, CA		—		717		3,269		1,140		717		4,409		5,126		1,635		07/29/99		5-30
Northpointe Business Center C		Sacramento, CA		—		726		3,313		976		726		4,289		5,015		1,640		07/29/99		5-30
Northpointe Business Center D		Sacramento, CA		—		427		1,950		220		427		2,170		2,597		792		07/29/99		5-30
Northpointe Business Center E		Sacramento, CA		—		432		1,970		163		432		2,133		2,565		700		07/29/99		5-30
I-95 Building I		Springfield, VA		—		1,308		5,790		209		1,308		5,999		7,307		1,958		12/20/00		5-30
I-95 Building II		Springfield, VA		—		1,308		5,790		929		1,308		6,719		8,027		2,266		12/20/00		5-30
I-95 Building III		Springfield, VA		—		919		4,092		7,318		919		11,410		12,329		5,338		12/20/00		5-30
2700 Prosperity Avenue		Fairfax, VA		—		3,404		9,883		92		3,404		9,975		13,379		2,804		06/01/01		5-30
2701 Prosperity Avenue		Fairfax, VA		—		2,199		6,374		1,079		2,199		7,453		9,652		2,076		06/01/01		5-30
2710 Prosperity Avenue		Fairfax, VA		—		969		2,844		255		969		3,099		4,068		904		06/01/01		5-30
2711 Prosperity Avenue		Fairfax, VA		—		1,047		3,099		551		1,047		3,650		4,697		1,032		06/01/01		5-30
2720 Prosperity Avenue		Fairfax, VA		—		1,898		5,502		848		1,898		6,350		8,248		1,930		06/01/01		5-30
2721 Prosperity Avenue		Fairfax, VA		—		576		1,673		763		576		2,436		3,012		968		06/01/01		5-30
2730 Prosperity Avenue		Fairfax, VA		—		3,011		8,841		1,628		3,011		10,469		13,480		3,069		06/01/01		5-30
2731 Prosperity Avenue		Fairfax, VA		—		524		1,521		355		524		1,876		2,400		542		06/01/01		5-30
2740 Prosperity Avenue		Fairfax, VA		—		890		2,732		29		890		2,761		3,651		899		06/01/01		5-30
2741 Prosperity Avenue		Fairfax, VA		—		786		2,284		198		786		2,482		3,268		778		06/01/01		5-30
2750 Prosperity Avenue		Fairfax, VA		—		4,203		12,190		3,071		4,203		15,261		19,464		4,513		06/01/01		5-30
2751 Prosperity Avenue		Fairfax, VA		—		3,640		10,632		342		3,640		10,974		14,614		3,076		06/01/01		5-30
Greenbrier Court		Beaverton, OR		—		2,771		8,403		1,305		2,771		9,708		12,479		2,626		11/20/01		5-30
Parkside		Beaverton, OR		—		4,348		13,502		1,011		4,348		14,513		18,861		4,324		11/20/01		5-30
The Atrium		Beaverton, OR		—		5,535		16,814		1,671		5,535		18,485		24,020		4,813		11/20/01		5-30
Waterside		Beaverton, OR		—		4,045		12,419		1,507		4,045		13,926		17,971		4,078		11/20/01		5-30
Ridgeview		Beaverton, OR		—		2,478		7,531		111		2,478		7,642		10,120		2,065		11/20/01		5-30
The Commons		Beaverton, OR		—		1,439		4,566		1,495		1,439		6,061		7,500		1,956		11/20/01		5-30
OCBC Center 1		Santa Ana, CA		—		734		2,752		507		734		3,259		3,993		873		06/10/03		5-30
OCBC Center 2		Santa Ana, CA		—		2,154		8,093		1,011		2,154		9,104		11,258		2,633		06/10/03		5-30
OCBC Center 3		Santa Ana, CA		—		3,019		11,348		3,156		3,019		14,504		17,523		4,136		06/10/03		5-30
OCBC Center 4		Santa Ana, CA		—		1,655		6,243		5,359		1,655		11,602		13,257		3,676		06/10/03		5-30
OCBC Center 5		Santa Ana, CA		—		1,843		7,310		543		1,843		7,853		9,696		2,346		06/10/03		5-30

76

									Cost
									Capitalized
									Subsequent
									to		Gross Amount at Which Carried at
					Initial Cost to Company				Acquisition		December 31, 2005
							Buildings		Buildings				Buildings								Depreciable
							and		and				and				Accumulated		Date		Lives
Description	Location		Encumbrances		Land		Improvements		Improvements		Land		Improvements		Totals		Depreciation		Acquired		(Years)
Metro Business Park		Phoenix, AZ		—		2,369		7,245		502		2,369		7,747		10,116		1,048		12/17/03		5-30
Orangewood Corp. Plaza		Orange, CA		—		2,637		12,291		1,173		2,637		13,464		16,101		1,807		12/24/03		5-30
Fairfax Executive Park		Fairfax, VA		—		4,647		19,492		1,531		4,647		21,023		25,670		2,285		05/27/04		5-30
Rose Canyon		San Diego, CA		14,946		15,129		20,054		35		15,129		20,089		35,218		425		10/25/05		5-30
Westwood		Farmers Branch, TX		—		941		6,884		941		941		7,825		8,766		1,338		02/12/03		5-30
MICC — Center 1		Miami, FL		—		6,502		7,409		826		6,502		8,235		14,737		1,287		12/30/03		5-30
MICC — Center 2		Miami, FL		—		6,502		7,409		1,328		6,502		8,737		15,239		1,233		12/30/03		5-30
MICC — Center 3		Miami, FL		—		7,015		7,993		774		7,015		8,767		15,782		1,368		12/30/03		5-30
MICC — Center 4		Miami, FL		—		4,837		5,511		1,247		4,837		6,758		11,595		998		12/30/03		5-30
MICC — Center 5		Miami, FL		—		6,209		5,939		739		6,209		6,679		12,888		1,223		12/30/03		5-30
MICC — Center 6		Miami, FL		—		6,371		7,259		612		6,371		7,871		14,242		1,234		12/30/03		5-30
MICC — Center 7		Miami, FL		—		5,011		5,710		395		5,011		6,105		11,116		968		12/30/03		5-30
MICC — Center 8		Miami, FL		—		5,398		6,150		677		5,398		6,827		12,225		1,093		12/30/03		5-30
MICC — Center 9		Miami, FL		—		7,392		8,424		486		7,392		8,910		16,302		1,390		12/30/03		5-30
MICC — Center 10		Miami, FL		—		9,341		10,644		892		9,341		11,536		20,877		1,809		12/30/03		5-30
MICC — Center 12		Miami, FL		—		3,025		3,447		236		3,025		3,683		6,708		550		12/30/03		5-30
MICC — Center 13		Miami, FL		—		2,342		2,669		191		2,342		2,860		5,202		445		12/30/03		5-30
MICC — Center 14		Miami, FL		—		5,900		6,723		1,234		5,900		7,957		13,857		1,217		12/30/03		5-30
MICC — Center 15		Miami, FL		—		3,295		3,755		503		3,295		4,258		7,553		639		12/30/03		5-30
MICC — Center 16		Miami, FL		—		1,263		1,439		1,584		1,263		3,023		4,286		262		12/30/03		5-30
MICC — Center 17		Miami, FL		—		1,896		1,249		16		1,896		1,265		3,161		164		12/30/03		5-30
MICC — Center 18		Miami, FL		—		322		367		42		322		409		731		65		12/30/03		5-30
MICC — Center 19		Miami, FL		—		2,335		2,662		839		2,335		3,501		5,836		516		12/30/03		5-30
MICC — Center 20		Miami, FL		—		2,674		3,044		383		2,674		3,427		6,101		494		12/30/03		5-30
Lamar Boulevard		Austin, TX		—		2,528		6,596		3,188		2,528		9,784		12,312		3,552		01/01/97		5-30
N. Barker’s Landing		Houston, TX		—		1,140		3,003		3,295		1,140		6,298		7,438		2,441		01/01/97		5-30
La Prada		Mesquite, TX		—		495		1,235		245		495		1,480		1,975		462		01/01/97		5-30
NW Highway		Garland, TX		—		480		1,203		265		480		1,468		1,948		447		01/01/97		5-30
Quail Valley		Missouri City, TX		—		360		918		366		360		1,284		1,644		456		01/01/97		5-30
Business Parkway I		Richardson, TX		—		799		3,568		1,190		799		4,758		5,557		1,786		05/04/98		5-30
The Summit		Plano, TX		—		1,536		6,654		1,728		1,536		8,382		9,918		3,334		05/04/98		5-30
Northgate II		Dallas, TX		—		1,274		5,505		1,288		1,274		6,793		8,067		2,777		05/04/98		5-30
Empire Commerce		Dallas, TX		—		304		1,545		331		304		1,876		2,180		708		05/04/98		5-30
Royal Tech — Digital		Irving, TX		—		319		1,393		298		319		1,691		2,010		739		05/04/98		5-30
Royal Tech — Springwood		Irving, TX		—		894		3,824		1,193		894		5,017		5,911		2,017		05/04/98		5-30
Royal Tech — Regent		Irving, TX		—		606		2,615		1,680		606		4,295		4,901		1,729		05/04/98		5-30
Royal Tech — Bldg 7		Irving, TX		—		246		1,061		137		246		1,198		1,444		453		05/04/98		5-30
Royal Tech — NFTZ		Irving, TX		—		1,517		6,499		1,375		1,517		7,874		9,391		3,084		05/04/98		5-30
Royal Tech — Olympus		Irving, TX		—		1,060		4,531		302		1,060		4,833		5,893		1,756		05/04/98		5-30
Royal Tech — Honeywell		Irving, TX		—		548		2,347		172		548		2,519		3,067		990		05/04/98		5-30
Royal Tech — Bldg 12		Irving, TX		—		1,466		6,263		1,540		1,466		7,803		9,269		2,576		05/04/98		5-30
Royal Tech — Bldg 13		Irving, TX		—		955		4,080		369		955		4,449		5,404		1,664		05/04/98		5-30
Royal Tech — Bldg 14		Irving, TX		—		2,010		10,242		645		2,010		10,887		12,897		4,062		05/04/98		5-30
Royal Tech — Bldg 15		Irving, TX		—		1,307		5,600		495		1,307		6,095		7,402		2,099		11/04/98		5-30
Westchase Corporate Park		Houston, TX		—		2,173		7,338		466		2,173		7,804		9,977		2,541		12/30/99		5-30
Ben White 1		Austin, TX		—		789		3,571		247		789		3,818		4,607		1,315		12/31/98		5-30

77

									Cost
									Capitalized
									Subsequent
									to		Gross Amount at Which Carried at
					Initial Cost to Company				Acquisition		December 31, 2005
							Buildings		Buildings				Buildings								Depreciable
							and		and				and				Accumulated		Date		Lives
Description	Location		Encumbrances		Land		Improvements		Improvements		Land		Improvements		Totals		Depreciation		Acquired		(Years)
Ben White 5		Austin, TX		—		761		3,444		239		761		3,683		4,444		1,332		12/31/98		5-30
McKalla 3		Austin, TX		—		662		2,994		588		662		3,582		4,244		1,346		12/31/98		5-30
McKalla 4		Austin, TX		—		749		3,390		583		749		3,973		4,722		1,440		12/31/98		5-30
Waterford A		Austin, TX		—		597		2,752		742		597		3,494		4,091		1,163		01/06/99		5-30
Waterford B		Austin, TX		—		367		1,672		387		367		2,059		2,426		654		05/20/99		5-30
Waterford C		Austin, TX		—		1,144		5,225		502		1,144		5,727		6,871		1,854		05/20/99		5-30
McNeil 6		Austin, TX		—		437		2,013		957		437		2,970		3,407		972		01/06/09		5-30
Rutland 11		Austin, TX		—		325		1,536		33		325		1,569		1,894		537		01/06/99		5-30
Rutland 12		Austin, TX		—		535		2,487		313		535		2,800		3,335		996		01/06/99		5-30
Rutland 13		Austin, TX		—		469		2,190		116		469		2,306		2,775		803		01/06/99		5-30
Rutland 14		Austin, TX		—		535		2,422		222		535		2,644		3,179		990		12/31/98		5-30
Rutland 19		Austin, TX		—		158		762		1,431		158		2,193		2,351		541		01/06/99		5-30
Royal Tech — Bldg 16		Irving, TX		—		2,464		2,703		2,017		2,464		4,720		7,184		1,038		07/01/99		5-30
Royal Tech — Bldg 17		Irving, TX		—		1,832		6,901		1,577		1,832		8,478		10,310		1,734		08/15/01		5-30
Monroe Business Center		Herndon, VA		—		5,926		13,944		4,971		5,926		18,915		24,841		6,626		08/01/97		5-30
Lusk II-R&D		San Diego, CA		—		1,077		2,644		282		1,077		2,926		4,003		850		03/17/98		5-30
Lusk II-Office		San Diego, CA		—		1,230		3,005		963		1,230		3,968		5,198		1,308		03/17/98		5-30
Norris Cn-Office		San Ramon, CA		—		1,486		3,642		752		1,486		4,394		5,880		1,434		03/17/98		5-30
Northpointe D		Sterling, VA		—		787		2,857		1,296		787		4,153		4,940		1,861		06/11/98		5-30
Monroe II		Herndon, VA		—		811		4,967		612		811		5,579		6,390		2,055		01/29/99		5-30
Metro Park I		Rockville, MD		—		5,383		15,404		1,326		5,383		16,730		22,113		4,399		12/27/01		5-30
Metro Park I R&D		Rockville, MD		—		5,404		15,748		4,087		5,404		19,835		25,239		5,446		12/27/01		5-30
Metro Park II		Rockville, MD		—		1,223		3,490		620		1,223		4,110		5,333		1,153		12/27/01		5-30
Metro Park II		Rockville, MD		—		2,287		6,533		1,233		2,287		7,766		10,053		2,352		12/27/01		5-30
Metro Park III		Rockville, MD		—		4,555		13,039		3,217		4,555		16,256		20,811		4,719		12/27/01		5-30
Metro Park IV		Rockville, MD		—		4,188		12,035		554		4,188		12,589		16,777		3,269		12/27/01		5-30
Metro Park V		Rockville, MD		—		9,813		28,214		3,251		9,813		31,465		41,278		8,098		12/27/01		5-30
Kearny Mesa-Office		San Diego, CA		—		785		1,933		876		785		2,809		3,594		956		03/17/98		5-30
Kearny Mesa-R&D		San Diego, CA		—		2,109		5,156		481		2,109		5,637		7,746		1,612		03/17/98		5-30
Bren Mar-Office		Alexandria, VA		—		572		1,401		1,510		572		2,911		3,483		1,061		03/17/98		5-30
Lusk III		San Diego, CA		—		1,904		4,662		580		1,904		5,242		7,146		1,524		03/17/98		5-30
Bren Mar-R&D		Alexandria, VA		—		1,625		3,979		516		1,625		4,495		6,120		1,272		03/17/98		5-30
Alban Road-Office		Springfield, VA		—		988		2,418		2,418		988		4,836		5,824		1,592		03/17/98		5-30
Alban Road-R&D		Springfield, VA		—		947		2,318		461		947		2,779		3,726		873		03/17/98		5-30
			$	25,893	$	383,684	$	998,899	$	194,324	$	383,684	$	1,193,223	$	1,576,907	$	356,623

78

SIGNATURES

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

Dated: March 6, 2006

PS Business Parks, Inc.

By:  /s/ Joseph D. Russell, Jr.

Joseph D. Russell, Jr.

President and Chief Executive Officer

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

Signature	Title	Date
/s/ Ronald L. Havner, Jr. Ronald L. Havner, Jr.	Chairman of the Board	March 6, 2006
/s/ Joseph D. Russell, Jr. Joseph D. Russell, Jr.	President, Director and Chief Executive Officer (principal executive officer)	March 6, 2006
/s/ Edward A. Stokx Edward A. Stokx	Chief Financial Officer (principal financial officer and principal accounting officer)	March 6, 2006
/s/ Vern O. Curtis Vern O. Curtis	Director	March 6, 2006
/s/ Arthur M. Friedman Arthur M. Friedman	Director	March 6, 2006
/s/ James H. Kropp James H. Kropp	Director	March 6, 2006
/s/ Harvey Lenkin Harvey Lenkin	Director	March 6, 2006
/s/ Alan K. Pribble Alan K. Pribble	Director	March 6, 2006
/s/ Jack D. Steele Jack D. Steele	Director	March 6, 2006
/s/ R. Wesley Burns R. Wesley Burns	Director	March 6, 2006

79

PS BUSINESS PARKS, INC.

EXHIBIT INDEX

(Items 15(a)(3) and 15(b))

2	.1	Amended and Restated Agreement and Plan of Reorganization among Registrant, American Office Park Properties, Inc. (“AOPP”) and Public Storage, Inc. (“PSI”) dated as of December 17, 1997. Filed with Registrant’s Registration Statement on Form S-4 (No. 333-45405) and incorporated herein by reference.
3	.1	Restated Articles of Incorporation. Filed with Registrant’s Registration Statement on Form S-3 (No. 333-78627) and incorporated herein by reference.
3	.2	Certificate of Determination of Preferences of 8.75% Series C Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (SEC File No. 001-10709) and incorporated herein by reference.
3	.3	Certificate of Determination of Preferences of 8.875% Series X Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (SEC File No. 001-10709) and incorporated herein by reference.
3	.4	Amendment to Certificate of Determination of Preferences of 8.875% Series X Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (SEC File No. 001-10709) and incorporated herein by reference.
3	.5	Certificate of Determination of Preferences of 8.875% Series Y Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (SEC File No. 001-10709) and incorporated herein by reference.
3	.6	Certificate of Determination of Preferences of 9.50% Series D Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated May 7, 2001 and incorporated herein by reference.
3	.7	Amendment to Certificate of Determination of Preferences of 9.50% Series D Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (SEC File No. 001-10709) and incorporated herein by reference.
3	.8	Certificate of Determination of Preferences of 91/4% Series E Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (SEC File No. 001-10709) and incorporated herein by reference.
3	.9	Certificate of Determination of Preferences of 8.75% Series F Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated January 18, 2002 and incorporated herein by reference.
3	.10	Certificate of Determination of Preferences of 7.95% Series G Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
3	.11	Certificate of Determination of Preferences of 7.00% Series H Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. filed with Registrant’s Current Report on Form 8-K dated January 16, 2004 and incorporated herein by reference.
3	.12	Certificate of Determination of Preferences of 6.875% Series I Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated March 31, 2004 and incorporated herein by reference.
3	.13	Certificate of Determination of Preferences of 7.50% Series J Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
3	.14	Certificate of Determination of Preferences of 7.950% Series K Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated June 24, 2004 and incorporated herein by reference.
3	.15	Certificate of Determination of Preferences of 7.60% Series L Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated August 23, 2004 and incorporated herein by reference.

80

3	.16	Certificate of Correction of Certificate of Determination of Preferences for the 7.00% Cumulative Preferred Stock, Series H of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated October 18, 2004 and incorporated herein by reference.
3	.17	Amendment to Certificate of Determination of Preferences for the 7.00% Cumulative Preferred Stock, Series H of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated October 18, 2004 and incorporated herein by reference.
3	.18	Certificate of Determination of Preferences of 7.20% Cumulative Preferred Stock, Series M of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated April 29, 2005 and incorporated herein by reference.
3	.19	Certificate of Determination of Preferences of 71/8% Series N Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated December 16, 2005 and incorporated herein by reference.
3	.20	Restated Bylaws. Filed with Registrant’s Current Report on Form 8-K dated March 17, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
3	.21	Amendments to Bylaws of PS Business Parks, Inc. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
4	.1	Deposit Agreement Relating to 9.60% Cumulative Preferred Stock, Series D of PS Business Parks, Inc., dated as of May 7, 2001. Filed with Registrant’s Current Report on Form 8-K dated May 7, 2001 and incorporated herein by reference.
4	.2	Specimen Stock Certificate for Registrant’s 9.60% Cumulative Preferred Stock, Series D. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
4	.3	Deposit Agreement Relating to 8.75% Cumulative Preferred Stock, Series F of PS Business Parks, Inc., dated as of January 18, 2002. Filed with Registrant’s Current Report on Form 8-K dated January 18, 2002 and incorporated herein by reference.
4	.4	Specimen Stock Certificate for Registrant’s 8.75% Cumulative Preferred Stock, Series F. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
4	.5	Deposit Agreement Relating to 7.00% Cumulative Preferred Stock, Series H of PS Business Parks, Inc., dated as of January 15, 2004. Filed with Registrant’s Current Report on Form 8-K dated January 15, 2004 and incorporated herein by reference.
4	.6	Specimen Stock Certificate for Registrant’s 7.00% Cumulative Preferred Stock, Series H. Filed with Registrant’s Current Report on Form 8-K dated January 15, 2004 and incorporated herein by reference.
4	.7	Deposit Agreement Relating to 6.875% Cumulative Preferred Stock, Series I of PS Business Parks, Inc., dated as of March 31, 2004. Filed with Registrant’s Current Report on Form 8-K dated March 31, 2004 and incorporated herein by reference.
4	.8	Specimen Stock Certificate for Registrant’s 6.875% Cumulative Preferred Stock, Series I. Filed with Registrant’s Current Report on Form 8-K dated March 31, 2004 and incorporated herein by reference.
4	.9	Deposit Agreement Relating to 7.95% Cumulative Preferred Stock, Series K of PS Business Parks, Inc., dated as of June 24, 2004. Filed with Registrant’s Current Report on Form 8-K dated June 24, 2004 and incorporated herein by reference.
4	.10	Specimen Stock Certificate for Registrant’s 7.95% Cumulative Preferred Stock, Series K. Filed with Registrant’s Current Report on Form 8-K dated June 24, 2004 and incorporated herein by reference.
4	.11	Deposit Agreement Relating to 7.60% Cumulative Preferred Stock, Series L of PS Business Parks, Inc., dated as of August 23, 2004. Filed with Registrant’s Current Report on Form 8-K dated August 23, 2004 and incorporated herein by reference.
4	.12	Specimen Stock Certificate for Registrant’s 7.60% Cumulative Preferred Stock, Series L. Filed with Registrant’s Current Report on Form 8-K dated August 23, 2004 and incorporated herein by reference.
4	.13	Deposit Agreement Relating to 7.20% Cumulative Preferred Stock, Series M of PS Business Parks, Inc., dated as of April 27, 2005. Filed with Registrant’s Current Report on Form 8-K dated April 29, 2005 and incorporated herein by reference.

81

4	.14	Specimen Stock Certificate for Registrant’s 7.20% Cumulative Preferred Stock, Series M. Filed with Registrant’s Current Report on Form 8-K dated April 29, 2005 and incorporated herein by reference.
10	.1	Amended Management Agreement between Storage Equities, Inc. and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995. Filed with PSI’s Annual Report on Form 10-K for the year ended December 31, 1994 (SEC File No. 001-08389) and incorporated herein by reference.
10	.2	Agreement of Limited Partnership of PS Business Parks, L.P. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10	.3	Agreement Among Shareholders and Company dated as of December 23, 1997 among Acquiport Two Corporation, AOPP, American Office Park Properties, L.P. (“AOPP LP”) and PSI. Filed with Registrant’s Registration Statement on Form S-4 (No. 333-45405) and incorporated herein by reference.
10	.4	Amendment to Agreement Among Shareholders and Company dated as of January 21, 1998 among Acquiport Two Corporation, AOPP, AOPP LP and PSI. Filed with Registrant’s Registration Statement No. on Form S-4 (333-45405) and incorporated herein by reference.
10	.5	Non-Competition Agreement dated as of December 23, 1997 among PSI, AOPP, AOPP LP and Acquiport Two Corporation. Filed with Registrant’s Registration Statement on Form S-4 (No. 333-45405) and incorporated herein by reference.
10	.6**	Offer Letter/ Employment Agreement between Registrant and Joseph D. Russell, Jr., dated as of September 6, 2002. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.
10	.7	Form of Indemnity Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10	.8*	Form of Indemnification Agreement for Executive Officers. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10	.9	Cost Sharing and Administrative Services Agreement dated as of November 16, 1995 by and among PSCC, Inc. and the owners listed therein. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10	.10	Amendment to Cost Sharing and Administrative Services Agreement dated as of January 2, 1997 by and among PSCC, Inc. and the owners listed therein. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10	.11	Accounts Payable and Payroll Disbursement Services Agreement dated as of January 2, 1997 by and between PSCC, Inc. and AOPP LP. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10	.12	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 8.875% Series B Cumulative Redeemable Preferred Units, dated as of April 23, 1999. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No. 001- 10709) and incorporated herein by reference.
10	.13	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 9.25% Series A Cumulative Redeemable Preferred Units, dated as of April 30, 1999. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No. 001-10709) and incorporated herein by reference.
10	.14	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 8.75% Series C Cumulative Redeemable Preferred Units, dated as of September 3, 1999. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (SEC File No. 001-10709) and incorporated herein by reference.
10	.15	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 8.875% Series X Cumulative Redeemable Preferred Units, dated as of September 7, 1999. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (SEC File No. 001-10709) and incorporated herein by reference.
10	.16	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to Additional 8.875% Series X Cumulative Redeemable Preferred Units, dated as of September 23, 1999. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (SEC File No. 001-10709) and incorporated herein by reference.

82

10	.17	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 8.875% Series Y Cumulative Redeemable Preferred Units, dated as of July 12, 2000. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.
10	.18	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 9.50% Series D Cumulative Redeemable Preferred Units, dated as of May 10, 2001. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
10	.19	Amendment No. 1 to Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 9.50% Series D Cumulative Redeemable Preferred Units, dated as of June 18, 2001. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.
10	.20	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 91/4% Series E Cumulative Redeemable Preferred Units, dated as of September 21, 2001. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.
10	.21	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 8.75% Series F Cumulative Redeemable Preferred Units, dated as of January 18, 2002. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (SEC File No. 001-10709) and incorporated herein by reference.
10	.22	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.95% Series G Cumulative Redeemable Preferred Units, dated as of October 30, 2002. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
10	.23	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.00% Series H Cumulative Redeemable Preferred Units, dated as of January 16, 2004. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
10	.24	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 6.875% Series I Cumulative Redeemable Preferred Units, dated as of April 21, 2004. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.
10	.25	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.50% Series J Cumulative Redeemable Preferred Units, dated as of May 27, 2004. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
10	.26	Amendment No. 1 to Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.50% Series J Cumulative Redeemable Preferred Units, dated as of June 17, 2004. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
10	.27	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.95% Series K Cumulative Redeemable Preferred Units, dated as of June 30, 2004, filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10	.28	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.60% Series L Cumulative Redeemable Preferred Units, dated as of August 31, 2004. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.
10	.29	Amendment No. 1 to Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.00% Series H Cumulative Redeemable Preferred Units, dated as of October 25, 2004. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.
10	.30	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 7.20% Series M Cumulative Redeemable Preferred Units, dated as of May 2, 2005. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference.
10	.31	Amendment No. 1 to Amendment to Agreement of Limited Partnership Relating to 7.20% Series M Cumulative Redeemable Preferred Units, dated as of May 9, 2005. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.

83

10	.32	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. Relating to 71/8% Series N Cumulative Redeemable Preferred Units, dated as of December 12, 2005. Filed with Registrant’s Current Report on Form 8-K dated December 16, 2005 and incorporated herein by reference.
10	.33	Registration Rights Agreement by and between PS Business Parks, Inc. and GSEP 2001 Realty Corporation, dated as of September 21, 2001, relating to 91/4% Series E Cumulative Redeemable Preferred Units. Filed herewith.
10	.34	Registration Rights Agreement by and between PS Business Parks, Inc. and GSEP 2002 Realty Corp., dated as of October 30, 2002, relating to 7.95% Series G Cumulative Redeemable Preferred Units. Filed herewith.
10	.35	Amended and Restated Registration Rights Agreement by and between PS Business Parks, Inc. and GSEP 2004 Realty Corp., dated as of June 17, 2004, relating to 7.50% Series J Cumulative Redeemable Preferred Units. Filed herewith.
10	.36	Registration Rights Agreement by and between PS Business Parks, Inc. and GSEP 2005 Realty Corp., dated as of December 12, 2005. Filed with Registrant’s Current Report on Form 8-K dated December 16, 2005 and incorporated herein by reference.
10	.37	Term Loan Agreement dated as of February 20, 2002 among PS Business Parks, L.P. and Fleet National Bank, as Agent. Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
10	.38	Amended and Restated Revolving Credit Agreement dated as of October 29, 2002 among PS Business Parks, L.P., Wells Fargo Bank, National Association, as Agent, and the Lenders named therein. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10	.39	Modification Agreement, dated as of December 29, 2003. Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. This exhibit modifies the Amended and Restated Revolving Credit Agreement dated as of October 29, 2002 and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10	.40	Modification Agreement, dated as of January 23, 2004. Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. This exhibit modifies the Modification Agreement dated as of December 29, 2003 and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
10	.41	Third Modification Agreement, dated as of August 5, 2005. Filed with the Registrant’s Current Report on Form 8-K dated August 5, 2005 and incorporated herein by reference. This exhibit modifies the Modification Agreement dated as of January 23, 2004 and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
10	.42	Letter Agreement, dated as of December 29, 2003, between Public Storage, Inc. and PS Business Parks, L.P. Filed with the Registrant’s Current Report on Form 8-K dated January 14, 2004 and incorporated herein by reference.
10	.43*	Registrant’s 1997 Stock Option and Incentive Plan. Filed with Registrant’s Registration Statement on Form S-8 (No. 333-48313) and incorporated herein by reference.
10	.44*	Registrant’s 2003 Stock Option and Incentive Plan. Filed with Registrant’s Registration Statement on Form S-8 (No. 333-104604) and incorporated herein by reference.
10	.45*	Retirement Plan for Non-Employee Directors. Filed with Registrant’s Registration Statement on Form S-8 (No. 333-129463) and incorporated herein by reference.
10	.46*	Form of PS Business Parks, Inc. Restricted Stock Unit Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.
10	.47*	Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Non-Qualified Stock Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.

84

10	.48*	Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Stock Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.
12		Statement re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
14		Code of Ethics for Senior Financial Officers. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
21		List of Subsidiaries. Filed herewith.
23		Consent of Independent Registered Public Accounting Firm. Filed herewith.
31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32	.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

*  Compensatory benefit plan.

**  Management contract.

85 EX-10.33 2 a18058exv10w33.htm EXHIBIT 10.33

Exhibit 10.33

REGISTRATION RIGHTS AGREEMENT

     THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of this 21st day of September, 2001 by and between PS Business Parks, Inc., a California corporation (the “Company”), and GSEP 2001 Realty Corporation, a Delaware corporation (“Holder”).

RECITALS

     A. In connection with the offering of 2,120,000 “9¹/4% Series E Cumulative Redeemable Preferred Units” (the “Series E Preferred Units”), Holder will contribute to PS Business Parks, L.P. (the “Operating Partnership”) cash in return for which the Operating Partnership will issue the Series E Preferred Units to the Holder on terms and conditions set forth in the Contribution Agreement, dated as of September 21, 2001 (the “Contribution Agreement”), by and among the Company, the Operating Partnership, the Holder and Goldman Sachs 2001 Exchange Fund, L.P. All capitalized terms used but not defined herein have the meanings given them in the Contribution Agreement.

     B. Each of the parties hereto agree that the rights, benefits and obligations under this Agreement shall be fully assignable to any Person to whom the Holder transfers its Series E Preferred Units pursuant to the terms and conditions of the Partnership Agreement;

     C. Pursuant to the Partnership Agreement, the Series E Preferred Units owned by the Holder will be redeemable for cash or exchangeable for shares of the Company’s 9¹/4% Series E Cumulative Redeemable Preferred Stock (the “Preferred Stock”) upon the terms and subject to the conditions contained therein; and

     D. To induce the Holder and the Contributor to enter into the Contribution Agreement, the Company has agreed to provide the registration rights set forth herein to the Holder, and any subsequent holder or holders of the Series E Preferred Units, with respect to the Holder’s Preferred Stock and any securities of the Company that may be issued or distributed with respect to, in exchange or substitution for, or upon conversion of such Holder’s Preferred Stock, or on account of such Holder’s Preferred Stock as a result of any stock dividend, stock split, reverse split or other distribution, merger, combination, consolidation, recapitalization or reclassification or otherwise (collectively, “Registrable Securities”).

AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     1. Underwritten Offerings.

          1.1 Demand by Holder.

               (a) At the request of Holder, the Company shall prepare and file a “shelf registration statement (the “Registration Statement”) with respect to the Registrable Securities covering the resale thereof by the Holder on an appropriate form for an offering to be made on a continuous or delayed basis pursuant to Rule 415 within 60 days after receipt of such request (provided that the Registrable Securities subject to such request have been issued by the Company on or before the date of such request) and shall use its best efforts to cause such Registration Statement to be declared effective within 120 days after the date of such request. The Company shall use its best efforts to keep the Registration Statement continuously effective until the earliest of (A) such time as all of the Registrable Securities have been sold pursuant to the Registration Statement or Rule 144 of the Securities Act, (B) the date on which all of the Registrable Securities may be sold without volume restrictions in accordance with Rule 144 of the Securities Act and (C) 24 months following the effective date of the Registration Statement. The Company’s registration obligations under this Section 1.1 shall include, in addition to those set forth elsewhere in this Agreement, an obligation to effect (A) appropriate qualification under applicable blue sky or other state securities laws in those jurisdictions selected by the managing underwriter or underwriters designated pursuant to Section 1.2 or, if no such managing underwriter or underwriters is designated, in those jurisdictions reasonably selected by Holder, (B) appropriate compliance with applicable federal and state laws, requirements and regulations, and (C) such steps as are reasonably necessary to permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request.

               (b) At the request of Holder, Company shall effect an underwritten offering to cover such amount of Registrable Securities as Holder elects; provided, however, Holder shall not sell in such underwritten offering at any one time less than an amount of Registrable Securities representing in the aggregate the Registrable Securities issuable upon the exchange of 25% of the originally issued Series E Preferred Units (the “Minimum Share Amount”), except in the event the balance of unsold Registrable Securities is less than the Minimum Share Amount, in which case, Holder shall be permitted to sell the entire remaining balance of the Registrable Securities in the underwritten offering; provided further, however, the number of times which the Company must effect such underwritten offerings is limited to 3 times.

               (c) In the event that all of the Series E Preferred Units have not been exchanged as of the date of expiration of the Registration Statement filed pursuant to Section 1.1(a), the Company shall prepare and file another Registration Statement (covering the remaining Registrable Securities) subject to the same terms and conditions delineated in Section 1.1(a).

               (d) Notwithstanding anything to the contrary contained in this Agreement, the Holder shall not have the right to request registration or inclusion in any registration pursuant to Section 1.1 of this Agreement for the period during which all shares of Registrable Securities then held or entitled to be held upon exchange of Series E Preferred Units by such Holder may immediately be sold under Rule 144 of the Securities Act without regard to any volume limitation.

          1.2 Selection of Underwriters by Holder.

               (a) In the case of an underwritten offering requested by Holder pursuant to Section 1.1, Holder shall have the right to approve the investment banker(s), and/or manager(s), selected by the Company to administer the offering, which shall be a nationally recognized investment bank with experience in underwriting

securities of companies in the Company’s field. The approval by Holder of the Company’s selection shall not unreasonably be withheld or delayed.

               (b) Such Holder(s) shall have the right to negotiate with the underwriters and to determine the financial terms of the underwriting relating to the gross price and net price at which the included Registrable Securities are to be sold. The Company shall (together with the Holders) enter into an underwriting agreement in customary form with the underwriter or underwriters selected as set forth above; provided that (i) if, in the opinion of an outside nationally recognized independent counsel, Holder is deemed to be an underwriter, as such term in defined in the Securities Act for purposes of a distribution effected pursuant to Section 1.1 of this Agreement, all of the representations and warranties by the Company that are customarily made to and for the underwriters shall also be made to and for the benefit of Holder, (ii) any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such Holders of Registrable Securities, and (iii) no Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than the representations, warranties or agreements regarding such Holder, the Registrable Securities of such Holder and such Holder’s intended method of distribution and any other representations required by law or reasonably required by the underwriter or underwriters.

               (c) At its expense, the Company will enter into a written underwriting agreement in customary form and substance reasonably satisfactory to the Company, the Holders and the managing underwriter or underwriters of the public offering of such securities, if the offering is to be underwritten, in whole or in part.

               (d) At its expense, the Company will use its commercially reasonable efforts to furnish, at the request of any Holder requesting registration of Registrable Securities, if the method of distribution is by means of an underwriting, on the date that the shares of Registrable Securities are delivered to the underwriters for sale pursuant to such registration, or if such Registrable Securities are not being sold through underwriters, on the date that the Registration Statement becomes effective, (i) a signed opinion, dated as of such date, of the independent legal counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request, as to such matters as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction; and (ii) letters dated such date and the date the offering is completed from the independent certified public accountants of the Company, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request and, if such accountants refuse to deliver such letters to such Holders, then to the Company (A) stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included in the Registration Statement or the prospectus related to the Registration Statement (the “Prospectus”), or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and (B) covering such other financial matters (including information as to the most recently ended calendar quarter prior to the date of such letters) with respect to the registration in respect of which letter is being given as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction.

          1.3 Transfer of Registration Rights. The rights to cause the Company to register Registrable Securities granted to Holder by the Company under Section 1.1 hereof may be assigned, in whole or in part, by a Holder to a transferee of such Holder’s Series E Preferred Units in accordance with the provisions of the Partnership Agreement or to a transferee of Registrable Securities held by such Holder. Any such assignment shall be conditioned upon the transferee’s agreeing to be bound by the provisions of this Agreement. Any such transferee shall be deemed to be a “Holder” under this Agreement and shall be entitled to all of the rights afforded to a Holder herein, and shall assume all obligations for which a Holder is responsible herein.

     2. Certain Registration Procedures. The following additional registration procedures shall apply with respect to the Registration Statement or Prospectus required to be filed pursuant to Section 1 above:

     At its expense, the Company will use its best effort to keep such registration, and any qualification under state securities laws which the Company determines to obtain, effective through the time provided in Section 1.1(a) above.

          2.1 Suspension of Offering.

               (a) The Company shall be entitled, from time to time, to require the Holder not to sell under the Registration Statement if the negotiation or consummation of a transaction by the Company or its subsidiaries is pending or circumstances have arisen, which negotiation, consummation or circumstances would require additional disclosure by the Company in the Registration Statement of material information which the Company has a bona fide business purpose for keeping confidential and the nondisclosure of which in the Registration Statement might cause the Registration Statement to fail to comply with applicable disclosure requirements; provided, however, that the Company may not prohibit sales for more than 120 days during any twelve (12) month period; provided further, however, that the Company’s obligation under Section 1.1(a) or 1.1(c) to keep the Registration Statement continuously effective for the 24-month period set forth in the second sentence of Section 1.1(a) shall be extended by an equivalent amount of time.

               (b) Subject to the limitations as to frequency and duration set forth in Section 2.1(a), upon receipt of any notice from the Company of the happening of any event which is of a type specified in Section 2.1(a), Holder agrees that it will immediately discontinue offers and sales of securities under the Registration Statement until Holder receives copies of a supplemented or amended Registration Statement which addresses the disclosure issues referred to above, after which the Holder shall be free to resume offering and selling activities. The Company agrees to promptly prepare any such supplemented or amended Registration Statement and to use best efforts to cause such supplemented or amended Registration Statement to be declared effective by the Commission as soon as practicable. If so directed by the Company, Holder will deliver to the Company all copies of any Prospectus in its possession at the time of receipt of such notice.

          2.2 Obligations of the Company with Respect to Registration Statements. In connection with the Registration Statement and the Registrable Securities to be sold thereunder (the “Covered Securities”), the Company agrees to:

               (a) furnish to Holder such number of copies of the Registration Statement, each amendment, post-effective amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the Prospectus included in the Registration Statement (including each preliminary Prospectus) in compliance with the requirements of the Securities Act, and such other documents as Holder may reasonably request in order to facilitate the disposition of the Covered Securities owned by Holder; the Company consents to the use of the Prospectus for the Registration Statement, including each preliminary Prospectus, by Holder in connection with the offering and sale of Covered Securities;

               (b) use commercially reasonable efforts to register or qualify, or obtain exemption from registration or qualification for, such Covered Securities under such other securities or blue sky laws of such jurisdictions as Holder reasonably requests, keep each such registration or qualification or exemption effective during the period the Registration Statement is required to be kept effective, and do any and all other acts and things which may be reasonably necessary or advisable to enable Holder to consummate the disposition in such jurisdictions of the Covered Securities, provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any jurisdiction where it would not otherwise be subject to taxation but for this subparagraph, or (iii) consent to general service of process in any such jurisdiction where it would not otherwise be subject to service of process but for this subparagraph (except as may be required by the Securities Act);

               (c) cause all such Covered Securities to be listed and qualified for trading on each securities exchange, or qualified for quotation on each automatic quotation system, on which similar securities issued by the Company are then listed and qualified for trading or quotation;

               (d) provide a transfer agent and registrar for all such Covered Securities not later than the effective date of the Registration Statement applicable thereto, and thereafter maintain such a transfer agent and registrar; and otherwise cooperate with the sellers to facilitate the timely preparation and delivery of certificates representing Covered Securities to be sold and not bearing any Securities Act legends;

               (e) otherwise use its best efforts to comply with the Securities Act and all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first day of the Company’s first full calendar quarter after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 1 l(a) of the Securities Act and Rule 158 thereunder;

               (f) promptly notify Holder in writing (i) of the effectiveness of the Registration Statement and of any amendments or supplements to the Registration Statement, (ii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of the Registration Statement, or any part thereof, or of any order suspending or preventing the use of any related Prospectus or the initiation of any proceedings for that purpose, or (iii) if the Company receives any notification with respect to the suspension of the qualification of any Registrable Securities for offer or sale in any jurisdiction or the initiation of any proceedings for that purpose; in the event the Company shall give notice as to the occurrence of any event described in this Section 2.2(f)(ii) and 2.2(f)(iii), the Company shall extend the period during which such Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of such notice to the date the Company delivers notice that disposition may be made;

               (g) in the event of the issuance of any stop order suspending the effectiveness of the Registration Statement, or any part thereof, or of any order suspending or preventing the use of any related Prospectus or suspending the qualification of any Registrable Securities for sale in any jurisdiction, the Company will use its best efforts to promptly obtain the withdrawal of such order;

               (h) use commercially reasonable efforts to cause the Covered Securities to be registered with or approved by such other governmental agencies or authorities, including the National Association of Securities Dealers, as may be necessary by virtue of the business and operations of the Company to enable the Holder to consummate the disposition of such Covered Securities;

               (i) promptly notify Holder, at any time when a Prospectus relating to Covered Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in the Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the Prospectus and any preliminary Prospectus, in light of the circumstances under which they were made) not misleading when such Prospectus was delivered; the Company will, as soon as practicable, prepare and furnish to Holder a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Covered Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in the event the Company shall give notice as to the occurrence of any event described in this Section 2.2(1) the Company shall extend the period during which such Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of such notice to the date the Company delivers notice that disposition may be made;

               (j) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of securities covered by the Registration Statement;

               (k) to the extent permitted by the professional standards governing the accounting profession at the time, obtain cold comfort letters and updates thereof from the independent public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the

Company or of any business acquired by the Company for which financial statements and financial data are, or are requested to be, included in the Registration Statement) who have certified the Company’s financial statements included or incorporated by reference in the Registration Statement addressed to the Holder in customary form and covering such matters of the type customarily covered by cold comfort letters;

               (l) make available for inspection by any Holder of such Registrable Securities, any underwriter participating in any disposition pursuant to the Registration Statement and any attorney, accountant or other professional retained by any such Holder or underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information reasonably requested by any Inspector in connection with the Registration Statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the Registration Statement, (ii) the release of such records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (iii) such Records have been generally made available to the public. Each Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its affiliates or otherwise disclosed by it unless and until such is made generally available to the public. Each Holder further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company, if legally permitted to do so, and allow the Company, at its sole expense, to undertake appropriate action to prevent disclosure of the Records that are deemed confidential, provided the same shall not subject Holder to civil or criminal liability or penalty; and

               (m) use its best efforts to obtain CUSIP numbers for the Preferred Stock not later than the effective date of the Registration Statement.

          2.3 Obligations of Holder with Respect to Registration Statement. Holder agrees to provide promptly following any written request therefor, any information reasonably requested by the Company in connection with the preparation of and for inclusion in the Registration Statement (including, without limitation, if applicable, information regarding the proposed distribution by Holder of the Covered Securities).

          2.4 Review of Registration Statements. No Registration Statement, Prospectus or related materials, and no supplement or amendment to any Registration Statement, Prospectus or related materials shall be filed unless and until all of the following conditions have been satisfied; provided, however, that, by implementing the following conditions, Holder shall not be deemed to have made any representation or warranty of any kind or nature whatsoever with respect to any matter set forth, contained or addressed in the Registration Statement, Prospectus or related materials, including but not limited to the accuracy, adequacy or completeness thereof:

               (a) A complete and accurate copy of the Registration Statement, Prospectus and all related material, and of each proposed supplement or amendment to the Registration Statement, Prospectus or related materials (all individually and collectively referred to herein as “Filing Material”) shall be provided to each person or entity designated herein to receive the original or copies of notices directed to Holder (each a “Notice Party”) sufficiently in advance of that proposed Filing Material being filed with the Commission or any other federal or state agency having jurisdiction over securities offerings (a “Filing”) so as to allow the Notice Parties a reasonable opportunity to review and comment on such proposed Filing Material prior to Filing.

               (b) Promptly upon receipt of any comments or requested revisions or amendments to any Filing Material from the Commission or any other federal or state agency (collectively “Agency Comments”), the Company shall provide a complete and accurate copy of the Agency Comments to each Notice Party.

               (c) Promptly upon making any addition, deletion or revision to any Filing Material not previously provided to all Notice Parties, including but not limited to any addition, deletion or revision in response to Agency Comments, the Company shall provide each Notice Party with a complete and accurate copy of the revised Filing Material, with the changes highlighted therein, sufficiently In advance of Filing any such addition,

deletion or revision so as to allow the Notice Parties a reasonable opportunity to review and comment thereon prior to Filing.

               (d) Prior to each Filing the Company shall certify to Holder in writing that the Company, both through the devotion of the necessary time and attention of capable Company personnel and Company resources, and through the engagement of and collaboration with qualified legal, accounting, underwriting, appraisal, environmental and other experts, exercised good faith and due care in the preparation of the Filing Materials, both as to form and content.

     3. Term of Agreement. The Company shall be relieved of its duties under Sections 1 and 2 on the date contemplated in the second sentence of Section 1.1(a) hereof, as such date may be extended pursuant to the terms hereof.

     4. Indemnification; Contribution.

          4.1 Indemnification by the Company. The Company agrees to indemnify, defend and hold harmless the Holder (and each nominee or assignee of the Holder permitted pursuant to Section 6.5), any underwriter of Registrable Securities under the Registration Statement, each of their respective officers, directors, employees and agents, and each Person, if any, who controls the Holder or any such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as follows:

               (a) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto) pursuant to which securities held by Holder were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto), including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (collectively a “Material Misstatement”);

               (b) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel) to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever arising out of or based upon any Material Misstatements or alleged Material Misstatement, if such settlement is effected with the written consent of the Company; and

               (c) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not a party, or of any claim whatsoever arising out of or based upon any Material Misstatement or alleged Material Misstatement, to the extent that any such loss, liability, claim, damage or expense is not paid under subparagraph (a) or (b) above;

provided, however, that the indemnity provided pursuant to this Section 4.1 shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by Holder expressly for use in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto).

          4.2 Indemnification by Holder. Holder agrees to indemnify, defend and hold harmless the Company, severally and not jointly, and each of its directors, officers, employees and agents, and each Person, if

any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as the indemnity contained in Section 4.1 hereof (except that any settlement described in Section 4.1(b) shall be effected with the written consent of Holder), but only insofar as such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or omission, or alleged untrue statement or omission, or a material fact made in reliance upon and in conformity with written information furnished to the Company by Holder expressly for use in any Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto) pursuant to which securities held by Holder (or permitted assignees) were registered under the Securities Act. In no event shall the liability of Holder hereunder (or other indemnifying party under this Section 4.2) be greater in amount that the gross dollar amount of the proceeds received by Holder upon the sale of the Registerable Shares giving rise to such indemnification obligation.

          4.3 Conduct of Indemnification Proceedings. The indemnified party under any indemnity contained in this Agreement shall give reasonably prompt notice to the indemnifying party of any action or proceedings commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify the indemnifying party (a) shall not relieve it from any liability which it may have under the indemnity agreements provided in this Agreement, unless and to the extent it did not otherwise learn of such action and the lack of notice by the indemnified party results in the forfeiture by the indemnifying party of substantial rights and defenses, and (b) shall not, in any event, relieve the indemnifying party from any obligations to the indemnified party other than the indemnification obligations provided under this Agreement. If the indemnifying party so elects within a reasonable time after receipt of such notice, the indemnifying party may assume the defense of such action or proceeding with counsel chosen by the indemnifying party and approved by the indemnified party, which approval shall not be unreasonably withheld; provided, however, that the indemnifying party will not settle any such action or proceeding without the written consent of the indemnified party unless, as a condition to such settlement, the indemnifying party secures the unconditional release of the indemnified party; and provided further, that if the defendants in any such action or proceeding include both the indemnified party and the indemnifying party and the indemnified party reasonably determines, upon advice of counsel, that a conflict of interest exists or that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, then the indemnified party shall be entitled to one separate counsel, the reasonable fees and expenses of which shall be paid by the indemnifying party. If the indemnifying party does not assume the defense of such action or proceeding, after having received the notice referred to in the first sentence of this Section 5.3, the indemnifying party will pay the reasonable fees and expenses of counsel (which shall be limited to a single law firm) for the indemnified party. In such event, however, the indemnifying party will not be liable for any settlement effected without the written consent of the indemnifying party. If an indemnifying party is entitled to assume, and assumes, the defense of such action or proceeding in accordance with this Section, the indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified party incurred thereafter in connection with such action or proceeding except as set forth in the second proviso in the second sentence of this Section 4.3.

          4.4 Contribution.

               (a) In order to provide for just and equitable contribution in circumstances in which the indemnity agreements provided for in this Agreement are for any reason held to be unenforceable by the indemnified party in accordance with its terms, the Company and Holder shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company and Holder, (a) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and Holder on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative fault of but also the relative benefits to the Company on the one hand and Holder on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits to the indemnifying party and indemnified party shall be determined by reference to, among other things, the total proceeds received by the indemnifying party and indemnified party in connection with the offering to which such losses, claims, damages, liabilities or expenses relate. The relative fault of the indemnifying party and indemnified party shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has

been made by, or relates to information supplied by, the indemnifying party or the indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action.

               (b) The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in subparagraph (a) above. Notwithstanding the provisions of this Section 4.4, Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the securities of such Holder were offered to the public exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

               (c) Notwithstanding subparagraphs (a) and (b) above, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 4.4, each Person, if any, who controls Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as Holder, and each director of the Company, each officer of the Company who signed a Registration Statement and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company.

          4.5 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the Commission which may permit the sale of Registrable Securities to the public without registration, the Company agrees to:

               (a) make and keep adequate current public information available, as those terms are understood and defined in Rule 144 of the Securities Act; and

               (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

               (c) furnish to any Holder, so long as such Holder owns any Registrable Securities, forthwith upon written request a written statement by the Company that it has complied with the reporting requirements of said Rule 144, the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission permitting Holder to sell any such securities without registration; and

               (d) take all such further actions as any Holder may reasonably request to satisfy the requirements imposed by Rule 144, or any successor rule, on the Company from time to time to enable resales under said Rule 144 or successor rule.

     5. Holdback Agreements.

          5.1 Holder Holdback Agreement. Upon receipt of 17-day prior written notice, Holder shall not effect any sale or distribution of Registrable Securities or any securities convertible into or exchangeable or exercisable for Registrable Securities, including a sale pursuant to Rule 144 of the Securities Act (or any similar provision then in force) under the Securities Act, if and to the extent required by the managing underwriter of an underwritten offering being undertaken by the Company; provided, however, that such restriction on sales or distributions shall not apply (a) for a period exceeding the fourteen (14) days prior to, and the ninety (90) day period beginning on, the effective date of the Registration Statement filed in connection with such underwritten offering; (b) to any sale as a part of or in conjunction with such underwritten offering; or (c) unless all officers, directors and other Persons with registration rights with respect to securities of the Company enter into or are restricted by similar holdback agreements; and, provided, further, however, that such restrictions shall not apply more than once in any twelve month period; and provided, further however that the Company’s obligation under Section 1.1(a) or 1.1(c) to

keep the Registration Statement continuously effective for the 24-month period set forth in the second sentence of Section 1.1(a) shall be extended by an equivalent amount of time.

          5.2 Company Holdback Agreement. Company shall not effect any sale or distribution of (other than in connection with Company employee, Company consultant or Company director stock options), or assist in an underwritten offering by any other Person of, any securities of the Company or securities convertible into or exchangeable or exercisable for securities of the Company, if and to the extent required by the managing underwriter of the underwritten offering contemplated herein; provided, however, that such restriction on public sales or distributions shall not apply for a period exceeding the fourteen (14) days prior to, and the one hundred eighty (180) day period beginning on, the effective date of the Registration Statement filed in connection with such underwritten offering.

     6. Miscellaneous.

          6.1 Expenses of Registration. All reasonable expenses (the “Registration Expenses”) incurred in connection with any registration, qualification or compliance obligations set forth in Sections 1 and 2 hereof, including, without limitation, (i) all stock exchange. Commission and state securities registration, listing and filing fees, (ii) all expenses incurred in connection with the preparation, printing and distributing of any Registration Statement and Prospectus (and any supplement or amendment thereto), (iii) fees and disbursements of counsel for the Company and of the independent public accountants of the Company, and (iv) legal fees and disbursements for one counsel for the Holders shall be borne by the Company. Notwithstanding anything to the contrary herein, Holder shall select 3 law firms, the names of which Holder shall provide to Company, Company, together with Holder, shall consult with the Holder’s choices of law firms and Company shall select the law firm to be used by Holder as counsel for the Holders. Holder shall be responsible for the payment of any underwriters’ discounts and/or commissions.

          6.2 Authorization; No Conflicts. Each party to this Agreement represents and warrants to the other parties to this Agreement that the execution and delivery of this Agreement by such party and the performance by such party of its covenants and agreements under this Agreement have been, or at the time of such performance will have been, duly authorized by all necessary corporate action on the part of such party, and all required consents to the transactions contemplated hereby have been obtained by such party, or at the time of such performance will have been received by such party. The execution, delivery and performance by such party of this Agreement, the fulfillment of and compliance with the terms and provisions hereof, and the consummation by such party of the transactions contemplated hereby, do not and will not: (a) conflict with, or violate any provisions of, the Articles of Incorporation, Bylaws or other governing documents of such party; (b) conflict with, or violate any provision of, any statute, law, ordinance, regulation, rule, order, writ or injunction having applicability to such party or any of its assets; (c) result in a breach or acceleration of the maturity of any loan or credit agreement to which such party is a party or by which any of its assets may be affected; or (d) conflict with, result in any breach of, or constitute a default under any agreement to which such party is a party or by which it or any of its assets are bound.

          6.3 Integration; Amendment. This Agreement, together with its exhibits and the other agreements referred to herein, constitutes the entire agreement among the parties hereto with respect to the matters relating to registration rights set forth herein and supersedes and renders of no force and effect all prior oral or written agreements, commitments and understandings among the parties with respect to the matters relating to registration rights set forth herein. Except as otherwise expressly provided in this Agreement, no amendment, modification or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by each of the parties hereto. The parties hereto agree to amend this Agreement as necessary to provide the parties with substantially similar (and in no event no less favorable) rights in the event of the enactment by the SEC of changes to the rules and regulations promulgated under the Securities Act and the Exchange Act to the extent such change modifies the current existing registration scheme; provided that such amendment does not impose upon the Company any burdens, duties or liabilities that are materially more substantial than those contemplated under this Agreement.

          6.4 Waivers. No waiver by a party hereto shall be effective unless made in a written instrument duly executed by the party against whom such waiver is sought to be enforced, and only to the extent set

forth in such instrument. Neither the waiver by any of the parties hereto of a breach or a default under any of the provisions of this Agreement, nor the failure of any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder.

          6.5 Assignment; Successors and Assigns. Holder may elect to have a nominee take title to any or all of the Registrable Securities, in which event the benefits of this Agreement shall run directly to such nominee. This Agreement shall be binding upon and inure to the benefit of the Company and its successors by merger. Except as provided in this Section and as provided in Section 1.3, no party hereto shall assign its rights and/or obligations under this Agreement, in whole or in part, whether by operation of law or otherwise.

          6.6 Burden and Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and, subject to Section 6.5 above, assigns.

          6.7 Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, delivered by nationally recognized overnight courier with proof of delivery thereof, sent by United States registered or certified mail (postage prepaid, return recipe requested) addressed as hereinafter provided or via telephonic facsimile transmission with proof of delivery in the form of a telecopier’s confirmation report. Notice shall be sent and deemed given (a) if personally delivered or via nationally recognized overnight courier, then one business day following receipt by the receiving party, or (b) if mailed, then three (3) business days after being postmarked, or (c) if sent via telephonic facsimile transmission, then one business day following the date of confirmed receipt set forth in the telecopier’s transmission confirmation report.

          Any part listed below may change its address hereunder by notice to the other party listed below. Until further notice, notice and other communications hereunder shall be addressed to the parties listed below as follows:

If to Holder:	GSEP 2001 Realty Corp.
	c/o Goldman Sachs 2001 Exchange Place Fund, L.P.
	85 Broad Street
	New York, New York 10004
	Attention: Eric Lane
	Fax: (212)357-9429
with a copy to:	Fried, Frank, Harris, Shriver & Jacobson
	One New York Plaza
	New York, New York 10004
	Attention: Lawrence N. Barshay
	Fax: (212)859-4000
If to Company:	c/o PS Business Parks, Inc.
	701 Western Avenue
	Glendale, California 91201
	Attention: Jack Corrigan
	Fax:(818)242-0566
with a copy to:	Hale and Dorr LLP
	1455 Pennsylvania Avenue, N.W.
	Washington, D.C. 20004
	Attention: Steven S. Snider, Esq.
	Fax: (202) 942-8484

or such other address or telephone number as any party may from time to time specify in writing to the others; provided, however, that the foregoing addresses and numbers shall remain in effect unless and until notice of and change is deemed to have been given in the manner required by this Section.

          6.8 Specific Performance. The parties hereto acknowledge that the obligations undertaken by them hereunder are unique and that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to (a) compel specific performance of the obligations, covenants and agreements of any other party under this Agreement in accordance with the terms and conditions of this Agreement; and (b) obtain preliminary injunctive relief to secure specific performance and to prevent a breach or contemplated breach of this Agreement. Each party waives the requirement of the posting of any bond or security in connection with any proceedings or any injunction issued in connection with this Section.

          6.9 Governing Law. Notwithstanding that California law, with respect to choice of law, or the Constitution, laws or treaties of the United States of America, may dictate that this Agreement should be governed by or construed in accordance with the laws of another jurisdiction, this Agreement, and all documents and instruments executed and delivered in connection herewith shall be governed by and construed in accordance with the laws of the State of California.

          6.10 Enforcement. If any party hereto institutes any action or proceeding to interpret or enforce any provision of this Agreement or for an alleged breach of any provision of this Agreement, the prevailing party shall be entitled to recover its actual attorneys’ fees and all fees, costs and expenses incurred in connection with such action or proceeding. Such attorneys’ fees, fees, costs and expenses shall include post judgment attorneys’ fees, fees, costs and expenses incurred on appeal or in collection of any judgment. This provision is separate and several and shall survive the merger of this provision into any judgment on this Agreement. No person or entity other than the parties hereto is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and the covenants and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns as permitted hereunder.

          6.11 Headings. Section and subsection headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

          6.12 Pronouns. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity may require.

          6.13 Execution in Counterparts. To facilitate execution, this Agreement may be executed in as many counterparts as may be required. It shall not be necessary that the signature of or on behalf of each party appears on each counterpart, but it shall be sufficient that the signature of or on behalf of each party appears on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of or on behalf of all of the parties.

          6.14 Severability. If fulfillment of any provision of this Agreement, at the time such fulfillment shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision contained in this Agreement operates or would operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be held ineffective, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect.

          6.15 Time of the Essence. Time is of the essence in the performance of this Agreement.

          6.16 [Intentionally Left Blank]

          6.17 Further Assurances. Each party agrees to cooperate fully with the other parties and to prepare, execute, and deliver such further instruments of conveyance, contribution, assignment, or transfer and shall take or cause to be taken such other or further action as either party shall reasonably request at any time or from time to time in order to consummate the terms and provisions and to carry into effect the intents and purposes of this Agreement.

          6.18 Legal Representation and Construction. Each party hereto has been represented by legal counsel in connection with the negotiation and drafting of this Agreement. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement, and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

          6.19 Piggyback on Shelf Registrations. As of the date hereof, neither the Company nor any securityholder of the Company (other than the Holder) has any right to include any securities of the Company in any registration effected pursuant to Sections 1.1(a) or 1.1(c) hereunder. In the event that a registration pursuant to Sections 1.1(a) or 1.1(c) involves an underwritten offering and the managing underwriter advises the Company and the Holders in writing that, in its opinion, the inclusion in the registration statement of some or all of the Registrable Securities sought to be registered by such Holders creates a substantial risk that the price per share that such Holders will derive from such registration will be materially and adversely affected or that the offering would otherwise be materially and adversely affected, then the Company will include in such registration statement such number of Registrable Securities as the Company and such Holders are so advised can be sold in such offering without such an effect (the “Demand Maximum Number”), as follows and in the following order of priority: (i) first, the Registrable Securities of GSEP 2001 Realty Corp., and (ii) second, if and to the extent that the number of Registrable Securities to be registered under clause (i) is less than the Demand Maximum Number, the other securities sought to be registered by any other Holders (other than GSEP 2001 Realty Corp., pro rata in proportion to the number sought to be registered by each such Holder (other than GSEP 2001 Realty Corp.) relative to the number sought to be registered by all the Holders (other than GSEP 2001 Realty Corp.); provided, however, that the Company shall be permitted to grant to any securityholder of the Company “piggyback” registration rights with respect to any registration other than the registrations effected pursuant to Sections 1.1(a) and 1.1(c).

     IN WITNESS WHEREOF, each of the parties hereto has caused this Registration Rights Agreement to be duly executed on its behalf as of the date first hereinabove set forth.

COMPANY:
PS BUSINESS PARKS, INC.,
a California corporation
By:	/s/ David Goldberg
David Goldberg, Vice President
(Print Name and Title)

     IN WITNESS WHEREOF, each of the parties hereto has caused this Registration Rights Agreement to be duly executed on its behalf as of the date first hereinabove set forth.

COMPANY:
PS BUSINESS PARKS, INC.,
a California corporation
By:
(Print Name and Title)
HOLDER:
GSEP 2001 REALTY CORP., a Delaware corporation
By:	/s/ Eric Lane
Eric Lane, CEO & President
(Print Name and Title)

EX-10.33

exv10w33

EX-10.34

Exhibit 10.34

REGISTRATION RIGHTS AGREEMENT

     THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of this 30^th day of October, 2002, by and between PS Business Parks, Inc., a California corporation (the “Company”), and GSEP 2002 Realty Corp., a Delaware corporation (“Holder”).

RECITALS

     A. In connection with the offering of 800,000 “7.95% Series G Cumulative Redeemable Preferred Units” (the “Series G Preferred Units”), Holder will contribute to PS Business Parks, L.P. (the “Operating Partnership”) cash in return for which the Operating Partnership will issue the Series G Preferred Units to the Holder on terms and conditions set forth in the Contribution Agreement, dated as of October 30, 2002 (the “Contribution Agreement”), by and among the Company, the Operating Partnership, the Holder and Goldman Sachs 2002 Exchange Place Fund, L.P. All capitalized terms used but not defined herein have the meanings given them in the Contribution Agreement.

     B. Each of the parties hereto agree that the rights, benefits and obligations under this Agreement shall be fully assignable to any Person to whom the Holder transfers its Series G Preferred Units pursuant to the terms and conditions of the Partnership Agreement;

     C. Pursuant to the Partnership Agreement, the Series G Preferred Units owned by the Holder will be redeemable for cash or exchangeable for shares of the Company’s 7.95% Series G Cumulative Redeemable Preferred Stock (the “Preferred Stock”) upon the terms and subject to the conditions contained therein; and

     D. To induce the Holder and the Contributor to enter into the Contribution Agreement, the Company has agreed to provide the registration rights set forth herein to the Holder, and any subsequent holder or holders of the Series G Preferred Units, with respect to the Holder’s Preferred Stock and any securities of the Company that may be issued or distributed with respect to, in exchange or substitution for, or upon conversion of such Holder’s Preferred Stock, or on account of such Holder’s Preferred Stock as a result of any stock dividend, stock split, reverse split or other distribution, merger, combination, consolidation, recapitalization or reclassification or otherwise (collectively, “Registrable Securities”).

AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     1. Underwritten Offerings.

          1.1 Demand by Holder.

               (a) At the request of Holder, the Company shall prepare and file a “shelf” registration statement (the “Registration Statement”) with respect to the Registrable Securities covering the resale thereof by the Holder on an appropriate form for an offering to be made on a continuous or delayed basis pursuant to Rule 415 within 60 days after receipt of such request (provided that the Registrable Securities subject to such request have been issued by the Company on or before the date of such request) and shall use its best efforts to cause such Registration Statement to be declared effective within 120 days after the date of such request. The Company shall use its best efforts to keep the Registration Statement continuously effective until the earliest of (A) such time as all of the Registrable Securities have been sold pursuant to the Registration Statement or Rule 144 of the Securities Act, (B) the date on which all of the Registrable Securities may be sold without volume restrictions in accordance with Rule 144 of the Securities Act and (C) 24 months following the effective date of the Registration Statement. The Company’s registration obligations under this Section 1.1 shall include, in addition to those set forth elsewhere in this Agreement, an obligation to effect (A) appropriate qualification under applicable blue sky or other state securities laws in those jurisdictions selected by the managing underwriter or underwriters designated pursuant to Section 1.2 or, if no such managing underwriter or underwriters is designated, in those jurisdictions reasonably selected by Holder, (B) appropriate compliance with applicable federal and state laws, requirements and regulations, and (C) such steps as are reasonably necessary to permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request.

               (b) At the request of Holder, Company shall effect an underwritten offering to cover such amount of Registrable Securities as Holder elects; provided, however, Holder shall not sell in such underwritten offering at any one time less than an amount of Registrable Securities representing in the aggregate the Registrable Securities issuable upon the exchange of 25% of the originally issued Series G Preferred Units (the “Minimum Share Amount”), except in the event the balance of unsold Registrable Securities is less than the Minimum Share Amount, in which case, Holder shall be permitted to sell the entire remaining balance of the Registrable Securities in the underwritten offering; provided further, however, the number of times which the Company must effect such underwritten offerings is limited to 3 times.

               (c) In the event that all of the Series G Preferred Units have not been exchanged as of the date of expiration of the Registration Statement filed pursuant to Section 1.1(a), the Company shall prepare and file another Registration Statement (covering the remaining Registrable Securities) subject to the same terms and conditions delineated in Section 1.1(a).

               (d) Notwithstanding anything to the contrary contained in this Agreement, the Holder shall not have the right to request registration or inclusion in any registration pursuant to Section 1.1 of this Agreement for the period during which all shares of Registrable Securities then held or entitled to be held upon exchange of Series G Preferred Units by such Holder may immediately be sold under Rule 144 of the Securities Act without regard to any volume limitation.

          1.2 Selection of Underwriters by Holder.

               (a) In the case of an underwritten offering requested by Holder pursuant to Section 1.1, Holder shall have the right to approve the investment banker(s), and/or manager(s), selected by the Company to administer the offering, which shall be a nationally recognized investment bank with experience in underwriting securities of companies in the Company’s field. The approval by Holder of the Company’s selection shall not unreasonably be withheld or delayed.

               (b) Such Holder(s) shall have the right to negotiate with the underwriters and to determine the financial terms of the underwriting relating to the gross price and net price at which the included Registrable Securities are to be sold. The Company shall (together with the Holders) enter into an underwriting agreement in customary form with the underwriter or underwriters selected as set forth above; provided that (i) if, in the opinion of an outside nationally recognized independent counsel, Holder is deemed to be an underwriter, as such term is defined in the Securities Act for purposes of a distribution effected pursuant to Section 1.1 of this Agreement, all of the representations and warranties by the Company that are customarily made to and for the underwriters shall also be made to and for the benefit of Holder, (ii) any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such Holders of Registrable Securities, and (iii) no Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than the representations, warranties or agreements regarding such Holder, the Registrable Securities of such Holder and such Holder’s intended method of distribution and any other representations required by law or reasonably required by the underwriter or underwriters.

               (c) At its expense, the Company will enter into a written underwriting agreement in customary form and substance reasonably satisfactory to the Company, the Holders and the managing underwriter or underwriters of the public offering of such securities, if the offering is to be underwritten, in whole or in part.

               (d) At its expense, the Company will use its commercially reasonable efforts to furnish, at the request of any Holder requesting registration of Registrable Securities, if the method of distribution is by means of an underwriting, on the date that the shares of Registrable Securities are delivered to the underwriters for sale pursuant to such registration, or if such Registrable Securities are not being sold through underwriters, on the date that the Registration Statement becomes effective, (i) a signed opinion, dated as of such date, of the independent legal counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request, as to such matters as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction; and (ii) letters dated such date and the date the offering is completed from the independent certified public accountants of the Company, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request and, if such accountants refuse to deliver such letters to such Holders, then to the Company (A) stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included in the Registration Statement or the prospectus related to the Registration Statement (the “Prospectus”), or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and (B) covering such other financial matters (including information as to the most recently ended calendar quarter prior to the date of such letters) with respect to the registration in respect of which letter is being given as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction.

          1.3 Transfer of Registration Rights. The rights to cause the Company to register Registrable Securities granted to Holder by the Company under Section 1.1 hereof may be assigned, in whole or in part, by a Holder to a transferee of such Holder’s Series G Preferred Units in accordance with the provisions of the Partnership Agreement or to a transferee of Registrable Securities held by such Holder. Any such assignment shall be conditioned upon the transferee’s agreeing to be bound by the provisions of this Agreement. Any such transferee shall be deemed to be a “Holder” under this Agreement and shall be entitled to all of the rights afforded to a Holder herein, and shall assume all obligations for which a Holder is responsible herein.

     2. Certain Registration Procedures. The following additional registration procedures shall apply with respect to the Registration Statement or Prospectus required to be filed pursuant to Section 1 above:

     At its expense, the Company will use its best effort to keep such registration, and any qualification under state securities laws which the Company determines to obtain, effective through the time provided in Section 1.1(a) above.

          2.1 Suspension of Offering.

               (a) The Company shall be entitled, from time to time, to require the Holder not to sell under the Registration Statement if the negotiation or consummation of a transaction by the Company or its subsidiaries is pending or circumstances have arisen, which negotiation, consummation or circumstances would require additional disclosure by the Company in the Registration Statement of material information which the Company has a bona fide business purpose for keeping confidential and the nondisclosure of which in the Registration Statement might cause the Registration Statement to fail to comply with applicable disclosure requirements; provided, however, that the Company may not prohibit sales for more than 120 days during any twelve (12) month period; provided further, however, that the Company’s obligation under Section 1.1(a) or 1.1(c) to keep the Registration Statement continuously effective for the 24-month period set forth in the second sentence of Section 1.1(a) shall be extended by an equivalent amount of time.

               (b) Subject to the limitations as to frequency and duration set forth in Section 2.1(a), upon receipt of any notice from the Company of the happening of any event which is of a type specified in Section 2.1(a), Holder agrees that it will immediately discontinue offers and sales of securities under the Registration Statement until Holder receives copies of a supplemented or amended Registration Statement which addresses the disclosure issues referred to above, after which the Holder shall be free to resume offering and selling activities. The Company agrees to promptly prepare any such supplemented or amended Registration Statement and to use best efforts to cause such supplemented or amended Registration Statement to be declared effective by the Commission as soon as practicable. If so directed by the Company, Holder will deliver to the Company all copies of any Prospectus in its possession at the time of receipt of such notice.

          2.2 Obligations of the Company with Respect to Registration Statements. In connection with the Registration Statement and the Registrable Securities to be sold thereunder (the “Covered Securities”), the Company agrees to:

               (a) furnish to Holder such number of copies of the Registration Statement, each amendment, post-effective amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the Prospectus included in the Registration Statement (including each preliminary Prospectus) in compliance with the requirements of the Securities Act, and such other documents as Holder may reasonably request in order to facilitate the disposition of the Covered Securities owned by Holder; the Company consents to the use of the Prospectus for the Registration Statement, including each preliminary Prospectus, by Holder in connection with the offering and sale of Covered Securities;

               (b) use commercially reasonable efforts to register or qualify, or obtain exemption from registration or qualification for, such Covered Securities under such other securities or blue sky laws of such jurisdictions as Holder reasonably requests, keep each such registration or qualification or exemption effective during the period the Registration Statement is required to be kept effective, and do any and all other acts and things which may be reasonably necessary or advisable to enable Holder to consummate the disposition in such jurisdictions of the Covered Securities, provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any jurisdiction where it would not otherwise be subject to taxation but for this subparagraph, or (iii) consent to general service of process in any such jurisdiction where it would not otherwise be subject to service of process but for this subparagraph (except as may be required by the Securities Act);

               (c) cause all such Covered Securities to be listed and qualified for trading on each securities exchange, or qualified for quotation on each automatic quotation system, on which similar securities issued by the Company are then listed and qualified for trading or quotation;

               (d) provide a transfer agent and registrar for all such Covered Securities not later than the effective date of the Registration Statement applicable thereto, and thereafter maintain such a transfer agent and registrar; and otherwise cooperate with the sellers to facilitate the timely preparation and delivery of certificates representing Covered Securities to be sold and not bearing any Securities Act legends;

               (e) otherwise use its best efforts to comply with the Securities Act and all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first day of

the Company’s first full calendar quarter after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;

               (f) promptly notify Holder in writing (i) of the effectiveness of the Registration Statement and of any amendments or supplements to the Registration Statement, (ii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of the Registration Statement, or any part thereof, or of any order suspending or preventing the use of any related Prospectus or the initiation of any proceedings for that purpose, or (iii) if the Company receives any notification with respect to the suspension of the qualification of any Registrable Securities for offer or sale in any jurisdiction or the initiation of any proceedings for that purpose; in the event the Company shall give notice as to the occurrence of any event described in this Section 2.2(f) (ii) and 2.2 (f)(iii), the Company shall extend the period during which such Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of such notice to the date the Company delivers notice that disposition may be made;

               (g) in the event of the issuance of any stop order suspending the effectiveness of the Registration Statement, or any part thereof, or of any order suspending or preventing the use of any related Prospectus or suspending the qualification of any Registrable Securities for sale in any jurisdiction, the Company will use its best efforts to promptly obtain the withdrawal of such order;

               (h) use commercially reasonable efforts to cause the Covered Securities to be registered with or approved by such other governmental agencies or authorities, including the National Association of Securities Dealers, as may be necessary by virtue of the business and operations of the Company to enable the Holder to consummate the disposition of such Covered Securities;

               (i) promptly notify Holder, at any time when a Prospectus relating to Covered Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in the Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the Prospectus and any preliminary Prospectus, in light of the circumstances under which they were made) not misleading when such Prospectus was delivered; the Company will, as soon as practicable, prepare and furnish to Holder a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Covered Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in the event the Company shall give notice as to the occurrence of any event described in this Section 2.2(i) the Company shall extend the period during which such Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of such notice to the date the Company delivers notice that disposition may be made;

               (j) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of securities covered by the Registration Statement;

               (k) to the extent permitted by the professional standards governing the accounting profession at the time, obtain cold comfort letters and updates thereof from the independent public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are requested to be, included in the Registration Statement) who have certified the Company’s financial statements included or incorporated by reference in the Registration Statement addressed to the Holder in customary form and covering such matters of the type customarily covered by cold comfort letters;

               (l) make available for inspection by any Holder of such Registrable Securities, any underwriter participating in any disposition pursuant to the Registration Statement and any attorney, accountant or other professional retained by any such Holder or underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers,

directors and employees to supply all information reasonably requested by any Inspector in connection with the Registration Statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the Registration Statement, (ii) the release of such records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (iii) such Records have been generally made available to the public. Each Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its affiliates or otherwise disclosed by it unless and until such is made generally available to the public. Each Holder further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company, if legally permitted to do so, and allow the Company, at its sole expense, to undertake appropriate action to prevent disclosure of the Records that are deemed confidential, provided the same shall not subject Holder to civil or criminal liability or penalty; and

               (m) use its best efforts to obtain CUSIP numbers for the Preferred Stock not later than the effective date of the Registration Statement.

          2.3 Obligations of Holder with Respect to Registration Statement. Holder agrees to provide promptly following any written request therefor, any information reasonably requested by the Company in connection with the preparation of and for inclusion in the Registration Statement (including, without limitation, if applicable, information regarding the proposed distribution by Holder of the Covered Securities).

          2.4 Review of Registration Statements. No Registration Statement, Prospectus or related materials, and no supplement or amendment to any Registration Statement, Prospectus or related materials shall be filed unless and until all of the following conditions have been satisfied; provided, however, that, by implementing the following conditions, Holder shall not be deemed to have made any representation or warranty of any kind or nature whatsoever with respect to any matter set forth, contained or addressed in the Registration Statement, Prospectus or related materials, including but not limited to the accuracy, adequacy or completeness thereof:

               (a) A complete and accurate copy of the Registration Statement, Prospectus and all related material, and of each proposed supplement or amendment to the Registration Statement, Prospectus or related materials (all individually and collectively referred to herein as “Filing Material”) shall be provided to each person or entity designated herein to receive the original or copies of notices directed to Holder (each a “Notice Party”) sufficiently in advance of that proposed Filing Material being filed with the Commission or any other federal or state agency having jurisdiction over securities offerings (a “Filing”) so as to allow the Notice Parties a reasonable opportunity to review and comment on such proposed Filing Material prior to Filing.

               (b) Promptly upon receipt of any comments or requested revisions or amendments to any Filing Material from the Commission or any other federal or state agency (collectively “Agency Comments”), the Company shall provide a complete and accurate copy of the Agency Comments to each Notice Party.

               (c) Promptly upon making any addition, deletion or revision to any Filing Material not previously provided to all Notice Parties, including but not limited to any addition, deletion or revision in response to Agency Comments, the Company shall provide each Notice Party with a complete and accurate copy of the revised Filing Material, with the changes highlighted therein, sufficiently in advance of Filing any such addition, deletion or revision so as to allow the Notice Parties a reasonable opportunity to review and comment thereon prior to Filing.

               (d) Prior to each Filing the Company shall certify to Holder in writing that the Company, both through the devotion of the necessary time and attention of capable Company personnel and Company resources, and through the engagement of and collaboration with qualified legal, accounting, underwriting, appraisal, environmental and other experts, exercised good faith and due care in the preparation of the Filing Materials, both as to form and content.

     3. Term of Agreement. The Company shall be relieved of its duties under Sections 1 and 2 on the date contemplated in the second sentence of Section 1.1(a) hereof, as such date may be extended pursuant to the terms hereof.

     4. Indemnification; Contribution.

          4.1 Indemnification by the Company. The Company agrees to indemnify, defend and hold harmless the Holder (and each nominee or assignee of the Holder permitted pursuant to Section 6.5), any underwriter of Registrable Securities under the Registration Statement, each of their respective officers, directors, employees and agents, and each Person, if any, who controls the Holder or any such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as follows:

               (a) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto) pursuant to which securities held by Holder were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto), including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (collectively a “Material Misstatement”);

               (b) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel) to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever arising out of or based upon any Material Misstatements or alleged Material Misstatement, if such settlement is effected with the written consent of the Company; and

               (c) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not a party, or of any claim whatsoever arising out of or based upon any Material Misstatement or alleged Material Misstatement, to the extent that any such loss, liability, claim, damage or expense is not paid under subparagraph (a) or (b) above;

provided, however, that the indemnity provided pursuant to this Section 4.1 shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by Holder expressly for use in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto).

          4.2 Indemnification by Holder. Holder agrees to indemnify, defend and hold harmless the Company, severally and not jointly, and each of its directors, officers, employees and agents, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as the indemnity contained in Section 4.1 hereof (except that any settlement described in Section 4.1(b) shall be effected with the written consent of Holder), but only insofar as such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or omission, or alleged untrue statement or omission, of a material fact made in reliance upon and in conformity with written information furnished to the Company by Holder expressly for use in any Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto) pursuant to which securities held by Holder (or permitted assignees) were registered under the Securities Act. In no event shall the liability of Holder hereunder (or other indemnifying party under this Section 4.2) be greater in amount than the gross dollar amount of the proceeds received by Holder upon the sale of the Registerable Shares giving rise to such indemnification obligation.

          4.3 Conduct of Indemnification Proceedings. The indemnified party under any indemnity contained in this Agreement shall give reasonably prompt notice to the indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify the indemnifying party (a) shall not relieve it from any liability which it may have under the indemnity agreements

provided in this Agreement, unless and to the extent it did not otherwise learn of such action and the lack of notice by the indemnified party results in the forfeiture by the indemnifying party of substantial rights and defenses, and (b) shall not, in any event, relieve the indemnifying party from any obligations to the indemnified party other than the indemnification obligations provided under this Agreement. If the indemnifying party so elects within a reasonable time after receipt of such notice, the indemnifying party may assume the defense of such action or proceeding with counsel chosen by the indemnifying party and approved by the indemnified party, which approval shall not be unreasonably withheld; provided, however, that the indemnifying party will not settle any such action or proceeding without the written consent of the indemnified party unless, as a condition to such settlement, the indemnifying party secures the unconditional release of the indemnified party; and provided further, that if the defendants in any such action or proceeding include both the indemnified party and the indemnifying party and the indemnified party reasonably determines, upon advice of counsel, that a conflict of interest exists or that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, then the indemnified party shall be entitled to one separate counsel, the reasonable fees and expenses of which shall be paid by the indemnifying party. If the indemnifying party does not assume the defense of such action or proceeding, after having received the notice referred to in the first sentence of this Section 4.3, the indemnifying party will pay the reasonable fees and expenses of counsel (which shall be limited to a single law firm) for the indemnified party. In such event, however, the indemnifying party will not be liable for any settlement effected without the written consent of the indemnifying party. If an indemnifying party is entitled to assume, and assumes, the defense of such action or proceeding in accordance with this Section, the indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified party incurred thereafter in connection with such action or proceeding except as set forth in the second proviso in the second sentence of this Section 4.3.

          4.4 Contribution.

               (a) In order to provide for just and equitable contribution in circumstances in which the indemnity agreements provided for in this Agreement are for any reason held to be unenforceable by the indemnified party in accordance with its terms, the Company and Holder shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company and Holder, (a) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and Holder on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative fault of but also the relative benefits to the Company on the one hand and Holder on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits to the indemnifying party and indemnified party shall be determined by reference to, among other things, the total proceeds received by the indemnifying party and indemnified party in connection with the offering to which such losses, claims, damages, liabilities or expenses relate. The relative fault of the indemnifying party and indemnified party shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, the indemnifying party or the indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action.

               (b) The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in subparagraph (a) above. Notwithstanding the provisions of this Section 4.4, Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the securities of such Holder were offered to the public exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

               (c) Notwithstanding subparagraphs (a) and (b) above, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 4.4, each Person, if any, who controls Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as Holder, and each director of the Company, each officer of the Company who signed a Registration Statement and each Person, if any, who controls the Company within the

meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company.

          4.5 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the Commission which may permit the sale of Registrable Securities to the public without registration, the Company agrees to:

               (a) make and keep adequate current public information available, as those terms are understood and defined in Rule 144 of the Securities Act; and

               (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

               (c) furnish to any Holder, so long as such Holder owns any Registrable Securities, forthwith upon written request a written statement by the Company that it has complied with the reporting requirements of said Rule 144, the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission permitting Holder to sell any such securities without registration; and

               (d) take all such further actions as any Holder may reasonably request to satisfy the requirements imposed by Rule 144, or any successor rule, on the Company from time to time to enable resales under said Rule 144 or successor rule.

     5. Holdback Agreements.

          5.1 Holder Holdback Agreement. Upon receipt of 17-day prior written notice, Holder shall not effect any sale or distribution of Registrable Securities or any securities convertible into or exchangeable or exercisable for Registrable Securities, including a sale pursuant to Rule 144 of the Securities Act (or any similar provision then in force) under the Securities Act, if and to the extent required by the managing underwriter of an underwritten offering being undertaken by the Company; provided, however, that such restriction on sales or distributions shall not apply (a) for a period exceeding the fourteen (14) days prior to, and the ninety (90) day period beginning on, the effective date of the Registration Statement filed in connection with such underwritten offering; (b) to any sale as a part of or in conjunction with such underwritten offering; or (c) unless all officers, directors and other Persons with registration rights with respect to securities of the Company enter into or are restricted by similar holdback agreements; and, provided, further, however, that such restrictions shall not apply more than once in any twelve month period; and provided, further however that the Company’s obligation under Section 1.1(a) or 1.1(c) to keep the Registration Statement continuously effective for the 24-month period set forth in the second sentence of Section 1.1(a) shall be extended by an equivalent amount of time.

          5.2 Company Holdback Agreement. Company shall not effect any sale or distribution of (other than in connection with Company employee, Company consultant or Company director stock options), or assist in an underwritten offering by any other Person of, any securities of the Company or securities convertible into or exchangeable or exercisable for securities of the Company, if and to the extent required by the managing underwriter of the underwritten offering contemplated herein; provided, however, that such restriction on public sales or distributions shall not apply for a period exceeding the fourteen (14) days prior to, and the one hundred eighty (180) day period beginning on, the effective date of the Registration Statement filed in connection with such underwritten offering.

     6. Miscellaneous.

          6.1 Expenses of Registration. All reasonable expenses (the “Registration Expenses”) incurred in connection with any registration, qualification or compliance obligations set forth in Sections 1 and 2 hereof, including, without limitation, (i) all stock exchange, Commission and state securities registration, listing and filing fees, (ii) all expenses incurred in connection with the preparation, printing and distributing of any Registration

Statement and Prospectus (and any supplement or amendment thereto), (iii) fees and disbursements of counsel for the Company and of the independent public accountants of the Company, and (iv) legal fees and disbursements for one counsel for the Holders shall be borne by the Company. Notwithstanding anything to the contrary herein, Holder shall select 3 law firms, the names of which Holder shall provide to Company, Company, together with Holder, shall consult with the Holder’s choices of law firms and Company shall select the law firm to be used by Holder as counsel for the Holders. Holder shall be responsible for the payment of any underwriters’ discounts and/or commissions.

          6.2 Authorization; No Conflicts. Each party to this Agreement represents and warrants to the other parties to this Agreement that the execution and delivery of this Agreement by such party and the performance by such party of its covenants and agreements under this Agreement have been, or at the time of such performance will have been, duly authorized by all necessary corporate action on the part of such party, and all required consents to the transactions contemplated hereby have been obtained by such party, or at the time of such performance will have been received by such party. The execution, delivery and performance by such party of this Agreement, the fulfillment of and compliance with the terms and provisions hereof, and the consummation by such party of the transactions contemplated hereby, do not and will not: (a) conflict with, or violate any provisions of, the Articles of Incorporation, Bylaws or other governing documents of such party; (b) conflict with, or violate any provision of, any statute, law, ordinance, regulation, rule, order, writ or injunction having applicability to such party or any of its assets; (c) result in a breach or acceleration of the maturity of any loan or credit agreement to which such party is a party or by which any of its assets may be affected; or (d) conflict with, result in any breach of, or constitute a default under any agreement to which such party is a party or by which it or any of its assets are bound.

          6.3 Integration; Amendment. This Agreement, together with its exhibits and the other agreements referred to herein, constitutes the entire agreement among the parties hereto with respect to the matters relating to registration rights set forth herein and supersedes and renders of no force and effect all prior oral or written agreements, commitments and understandings among the parties with respect to the matters relating to registration rights set forth herein. Except as otherwise expressly provided in this Agreement, no amendment, modification or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by each of the parties hereto. The parties hereto agree to amend this Agreement as necessary to provide the parties with substantially similar (and in no event no less favorable) rights in the event of the enactment by the SEC of changes to the rules and regulations promulgated under the Securities Act and the Exchange Act to the extent such change modifies the current existing registration scheme; provided that such amendment does not impose upon the Company any burdens, duties or liabilities that are materially more substantial than those contemplated under this Agreement.

          6.4 Waivers. No waiver by a party hereto shall be effective unless made in a written instrument duly executed by the party against whom such waiver is sought to be enforced, and only to the extent set forth in such instrument. Neither the waiver by any of the parties hereto of a breach or a default under any of the provisions of this Agreement, nor the failure of any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder.

          6.5 Assignment; Successors and Assigns. Holder may elect to have a nominee take title to any or all of the Registrable Securities, in which event the benefits of this Agreement shall run directly to such nominee. This Agreement shall be binding upon and inure to the benefit of the Company and its successors by merger. Except as provided in this Section and as provided in Section 1.3, no party hereto shall assign its rights and/or obligations under this Agreement, in whole or in part, whether by operation of law or otherwise.

          6.6 Burden and Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and, subject to Section 6.5 above, assigns.

          6.7 Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, delivered by nationally recognized overnight courier with proof of delivery thereof, sent by United States registered or certified

mail (postage prepaid, return recipe requested) addressed as hereinafter provided or via telephonic facsimile transmission with proof of delivery in the form of a telecopier’s confirmation report. Notice shall be sent and deemed given (a) if personally delivered or via nationally recognized overnight courier, then one business day following receipt by the receiving party, or (b) if mailed, then three (3) business days after being postmarked, or (c) if sent via telephonic facsimile transmission, then one business day following the date of confirmed receipt set forth in the telecopier’s transmission confirmation report.

          Any part listed below may change its address hereunder by notice to the other party listed below. Until further notice, notice and other communications hereunder shall be addressed to the parties listed below as follows:

If to Holder:	GSEP 2002 Realty Corp.
	c/o Goldman Sachs 2002 Exchange Place Fund, L.P.
	85 Broad Street
	New York, New York 10004
	Attention: Mr. Eric S. Lane
	Fax: (212) 357-9429
with a copy to:	Fried, Frank, Harris, Shriver & Jacobson
	One New York Plaza
	New York, New York 10004
	Attention: Lawrence N. Barshay, Esq.
	Fax: (212) 859-4000
If to Company:	c/o PS Business Parks, Inc.
	701 Western Avenue
	Glendale, California 91201
	Attention: Mr. Jack Corrigan
	Fax: (818) 242-0566
with a copy to:	Hale and Dorr LLP
	1455 Pennsylvania Avenue, N.W.
	Washington, D.C. 20004
	Attention: Steven S. Snider, Esq.
	Fax: (202) 942-8484

or such other address or telephone number as any party may from time to time specify in writing to the others; provided, however, that the foregoing addresses and numbers shall remain in effect unless and until notice of and change is deemed to have been given in the manner required by this Section.

          6.8 Specific Performance. The parties hereto acknowledge that the obligations undertaken by them hereunder are unique and that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to (a) compel specific performance of the obligations, covenants and agreements of any other party under this Agreement in accordance with the terms and conditions of this Agreement; and (b) obtain preliminary injunctive relief to secure specific performance and to prevent a breach or contemplated breach of this Agreement. Each party waives the requirement of the posting of any bond or security in connection with any proceedings or any injunction issued in connection with this Section.

          6.9 Governing Law. Notwithstanding that California law, with respect to choice of law, or the Constitution, laws or treaties of the United States of America, may dictate that this Agreement should be governed by or construed in accordance with the laws of another jurisdiction, this Agreement, and all documents and instruments executed and delivered in connection herewith shall be governed by and construed in accordance with the laws of the State of California.

          6.10 Enforcement. If any party hereto institutes any action or proceeding to interpret or enforce any provision of this Agreement or for an alleged breach of any provision of this Agreement, the prevailing party shall be entitled to recover its actual attorneys’ fees and all fees, costs and expenses incurred in connection with such action or proceeding. Such attorneys’ fees, fees, costs and expenses shall include post judgment attorneys’ fees, fees, costs and expenses incurred on appeal or in collection of any judgment. This provision is separate and several and shall survive the merger of this provision into any judgment on this Agreement. No person or entity other than the parties hereto is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and the covenants and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns as permitted hereunder.

          6.11 Headings. Section and subsection headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

          6.12 Pronouns. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity may require.

          6.13 Execution in Counterparts. To facilitate execution, this Agreement may be executed in as many counterparts as may be required. It shall not be necessary that the signature of or on behalf of each party appears on each counterpart, but it shall be sufficient that the signature of or on behalf of each party appears on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of or on behalf of all of the parties.

          6.14 Severability. If fulfillment of any provision of this Agreement, at the time such fulfillment shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision contained in this Agreement operates or would operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be held ineffective, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect.

          6.15 Time of the Essence. Time is of the essence in the performance of this Agreement.

          6.16 [Intentionally Left Blank]

          6.17 Further Assurances. Each party agrees to cooperate fully with the other parties and to prepare, execute, and deliver such further instruments of conveyance, contribution, assignment, or transfer and shall take or cause to be taken such other or further action as either party shall reasonably request at any time or from time to time in order to consummate the terms and provisions and to carry into effect the intents and purposes of this Agreement.

          6.18 Legal Representation and Construction. Each party hereto has been represented by legal counsel in connection with the negotiation and drafting of this Agreement. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement, and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

          6.19 Piggyback on Shelf Registrations. As of the date hereof, neither the Company nor any securityholder of the Company (other than the Holder) has any right to include any securities of the Company in any registration effected pursuant to Sections 1.1(a) or 1.1(c) hereunder. In the event that a registration pursuant to Sections 1.1(a) or 1.1(c) involves an underwritten offering and the managing underwriter advises the Company and the Holders in writing that, in its opinion, the inclusion in the registration statement of some or all of the Registrable Securities sought to be registered by such Holders creates a substantial risk that the price per share that such Holders will derive from such registration will be materially and adversely affected or that the offering would otherwise be

materially and adversely affected, then the Company will include in such registration statement such number of Registrable Securities as the Company and such Holders are so advised can be sold in such offering without such an effect (the “Demand Maximum Number”), as follows and in the following order of priority: (i) first, the Registrable Securities of GSEP 2002 Realty Corp., and (ii) second, if and to the extent that the number of Registrable Securities to be registered under clause (i) is less than the Demand Maximum Number, the other securities sought to be registered by any other Holders (other than GSEP 2002 Realty Corp., pro rata in proportion to the number sought to be registered by each such Holder (other than GSEP 2002 Realty Corp.) relative to the number sought to be registered by all the Holders (other than GSEP 2002 Realty Corp.); provided, however, that the Company shall be permitted to grant to any securityholder of the Company “piggyback” registration rights with respect to any registration other than the registrations effected pursuant to Sections 1.1(a) and 1.1(c).

     IN WITNESS WHEREOF, each of the parties hereto has caused this Registration Rights Agreement to be duly executed on its behalf as of the date first hereinabove set forth.

COMPANY: PS BUSINESS PARKS, INC., a California corporation
By:	/s/ Jack Corrigan
	Jack Corrigan, Vice President (Print Name and Title)

Signature Page to Series G Registration Rights Agreement

HOLDER: GSEP 2002 REALTY CORP., a Delaware corporation
By:	/s/ Eric Lane
	Eric Lane – President and CEO (Print Name and Title)

Signature Page to Series G Registration Rights Agreement

EX-10.35

Exhibit 10.35

AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT

     THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of this 17^th day of June, 2004, by and between PS Business Parks, Inc., a California corporation (the “Company”), and GSEP 2004 Realty Corp., a Delaware corporation (“Holder”).

RECITALS

     A. In connection with a previous issuance of “7.50% Series J Cumulative Redeemable Preferred Units” (the “Series J Preferred Units”), the Holder contributed to PS Business Parks, L.P. (the “Operating Partnership”) cash in return for which the Operating Partnership issued Series J Preferred Units to the Holder on terms and conditions set forth in the Contribution Agreement, dated as of May 27, 2004 (the “Original Contribution Agreement”), by and among the Company, the Operating Partnership, the Holder and Goldman Sachs 2004 Exchange Place Fund, L.P. (the “Fund”). In connection with such purchase, the Company and the Holder entered into a Registration Rights Agreement, dated May 27, 2004, (the “Original Registration Rights Agreement”) pursuant to which the Company provided registration rights to the Holder and any subsequent holder or holders of the Series J Preferred Units. It is the parties’ intention that this Agreement supersede in its entirety the Original Registration Rights Agreement.

     B. In connection with a subsequent issuance of 310,000 Series J Preferred Units, Holder will contribute to the Operating Partnership cash in return for which the Operating Partnership will issue additional Series J Preferred Units to the Holder on terms and conditions set forth in the Contribution Agreement, dated as of June 17, 2004 (the “Contribution Agreement”), by and among the Company, the Operating Partnership, the Holder and the Fund. All capitalized terms used but not defined herein have the meanings given them in the Contribution Agreement.

     C. Each of the parties hereto agree that the rights, benefits and obligations under this Agreement shall be fully assignable to any Person to whom the Holder transfers its Series J Preferred Units pursuant to the terms and conditions of the Partnership Agreement;

     D. Pursuant to the Partnership Agreement, the Series J Preferred Units owned by the Holder will be redeemable for cash or exchangeable for shares of the Company’s 7.50% Series J Cumulative Redeemable Preferred Stock (the “Preferred Stock”) upon the terms and subject to the conditions contained therein; and

     E. To induce the Holder and the Contributor to enter into the Contribution Agreement, the Company has agreed to provide the registration rights set forth herein to the Holder, and any subsequent holder or holders of the Series J Preferred Units, with respect to the Holder’s Preferred Stock and any securities of the Company that may be issued or distributed with respect to, in exchange or substitution for, or upon conversion of such Holder’s Preferred Stock, or on account of such Holder’s Preferred Stock as a result of any stock dividend, stock split, reverse split or other distribution, merger, combination, consolidation, recapitalization or reclassification or otherwise (collectively, “Registrable Securities”).

AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     1. Underwritten Offerings.

          1.1 Demand by Holder.

               (a) At the request of Holder, the Company shall prepare and file a “shelf” registration statement (the “Registration Statement”) with respect to the Registrable Securities covering the resale thereof by the Holder on an appropriate form for an offering to be made on a continuous or delayed basis pursuant to Rule 415 within 60 days after receipt of such request (provided that the Registrable Securities subject to such request have been issued by the Company on or before the date of such request) and shall use its best efforts to cause such Registration Statement to be declared effective within 120 days after the date of such request. The Company shall use its best efforts to keep the Registration Statement continuously effective until the earliest of (A) such time as all of the Registrable Securities have been sold pursuant to the Registration Statement or Rule 144 of the Securities Act, (B) the date on which all of the Registrable Securities may be sold without volume restrictions in accordance with Rule 144 of the Securities Act and (C) 24 months following the effective date of the Registration Statement. The Company’s registration obligations under this Section 1.1 shall include, in addition to those set forth elsewhere in this Agreement, an obligation to effect (A) appropriate qualification under applicable blue sky or other state securities laws in those jurisdictions selected by the managing underwriter or underwriters designated pursuant to Section 1.2 or, if no such managing underwriter or underwriters is designated, in those jurisdictions reasonably selected by Holder, (B) appropriate compliance with applicable federal and state laws, requirements and regulations, and (C) such steps as are reasonably necessary to permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request.

               (b) At the request of Holder, Company shall effect an underwritten offering to cover such amount of Registrable Securities as Holder elects; provided, however, Holder shall attempt to sell in such underwritten offering at any one time at least an amount of Registrable Securities representing in the aggregate the Registrable Securities issuable upon the exchange of 427,500 Series J Preferred Units issued pursuant to the Original Contribution Agreement and the Contribution Agreement (as adjusted for stock splits, reverse stock splits, stock dividends, mergers, reclassifications, recapitalizations, reorganizations, stock sales or other similar events, the “Minimum Share Amount”), except in the event the balance of unsold Registrable Securities is less than the Minimum Share Amount, in which case, Holder shall be permitted to sell the entire remaining balance of the Registrable Securities in the underwritten offering; provided further, however, the number of times which the Company must effect such underwritten offerings is limited to 3 times.

               (c) In the event that all of the Series J Preferred Units have not been exchanged as of the date of expiration of the Registration Statement filed pursuant to Section 1.1(a), the Company shall prepare and file another Registration Statement (covering the remaining Registrable Securities) subject to the same terms and conditions delineated in Section 1.1(a).

               (d) Notwithstanding anything to the contrary contained in this Agreement, the Holder shall not have the right to request registration or inclusion in any registration pursuant to Section 1.1 of this Agreement for the period during which all shares of Registrable Securities then held or entitled to be held upon exchange of Series J Preferred Units by such Holder may immediately be sold under Rule 144 of the Securities Act without regard to any volume limitation.

          1.2 Selection of Underwriters by Holder.

               (a) In the case of an underwritten offering requested by Holder pursuant to Section 1.1, Holder shall have the right to approve the investment banker(s), and/or manager(s), selected by the Company to administer the offering, which shall be a nationally recognized investment bank with experience in underwriting

securities of companies in the Company’s field. The approval by Holder of the Company’s selection shall not unreasonably be withheld or delayed.

               (b) Such Holder(s) shall have the right to negotiate with the underwriters and to determine the financial terms of the underwriting relating to the gross price and net price at which the included Registrable Securities are to be sold. The Company shall (together with the Holders) enter into an underwriting agreement in customary form with the underwriter or underwriters selected as set forth above; provided that (i) if, in the opinion of an outside nationally recognized independent counsel, Holder is deemed to be an underwriter, as such term is defined in the Securities Act for purposes of a distribution effected pursuant to Section 1.1 of this Agreement, all of the representations and warranties by the Company that are customarily made to and for the underwriters shall also be made to and for the benefit of Holder, (ii) any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such Holders of Registrable Securities, and (iii) no Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than the representations, warranties or agreements regarding such Holder, the Registrable Securities of such Holder and such Holder’s intended method of distribution and any other representations required by law or reasonably required by the underwriter or underwriters.

               (c) At its expense, the Company will enter into a written underwriting agreement in customary form and substance reasonably satisfactory to the Company, the Holders and the managing underwriter or underwriters of the public offering of such securities, if the offering is to be underwritten, in whole or in part.

               (d) At its expense, the Company will use its commercially reasonable efforts to furnish, at the request of any Holder requesting registration of Registrable Securities, if the method of distribution is by means of an underwriting, on the date that the shares of Registrable Securities are delivered to the underwriters for sale pursuant to such registration, or if such Registrable Securities are not being sold through underwriters, on the date that the Registration Statement becomes effective, (i) a signed opinion, dated as of such date, of the independent legal counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request, as to such matters as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction; and (ii) letters dated such date and the date the offering is completed from the independent certified public accountants of the Company, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request and, if such accountants refuse to deliver such letters to such Holders, then to the Company (A) stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included in the Registration Statement or the prospectus related to the Registration Statement (the “Prospectus”), or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and (B) covering such other financial matters (including information as to the most recently ended calendar quarter prior to the date of such letters) with respect to the registration in respect of which letter is being given as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction.

          1.3 Transfer of Registration Rights. The rights to cause the Company to register Registrable Securities granted to Holder by the Company under Section 1.1 hereof may be assigned, in whole or in part, by a Holder to a transferee of such Holder’s Series J Preferred Units in accordance with the provisions of the Partnership Agreement or to a transferee of Registrable Securities held by such Holder. Any such assignment shall be conditioned upon the transferee’s agreeing to be bound by the provisions of this Agreement. Any such transferee shall be deemed to be a “Holder” under this Agreement and shall be entitled to all of the rights afforded to a Holder herein, and shall assume all obligations for which a Holder is responsible herein.

     2. Certain Registration Procedures. The following additional registration procedures shall apply with respect to the Registration Statement or Prospectus required to be filed pursuant to Section 1 above:

     At its expense, the Company will use its best effort to keep such registration, and any qualification under state securities laws which the Company determines to obtain, effective through the time provided in Section 1.1(a) above.

          2.1 Suspension of Offering.

               (a) The Company shall be entitled, from time to time, to require the Holder not to sell under the Registration Statement if the negotiation or consummation of a transaction by the Company or its subsidiaries is pending or circumstances have arisen, which negotiation, consummation or circumstances would require additional disclosure by the Company in the Registration Statement of material information which the Company has a bona fide business purpose for keeping confidential and the nondisclosure of which in the Registration Statement might cause the Registration Statement to fail to comply with applicable disclosure requirements; provided, however, that the Company may not prohibit sales for more than 120 days during any twelve (12) month period; provided further, however, that the Company’s obligation under Section 1.1(a) or 1.1(c) to keep the Registration Statement continuously effective for the 24-month period set forth in the second sentence of Section 1.1(a) shall be extended by an equivalent amount of time.

               (b) Subject to the limitations as to frequency and duration set forth in Section 2.1(a), upon receipt of any notice from the Company of the happening of any event which is of a type specified in Section 2.1(a), Holder agrees that it will immediately discontinue offers and sales of securities under the Registration Statement until Holder receives copies of a supplemented or amended Registration Statement which addresses the disclosure issues referred to above, after which the Holder shall be free to resume offering and selling activities. The Company agrees to promptly prepare any such supplemented or amended Registration Statement and to use best efforts to cause such supplemented or amended Registration Statement to be declared effective by the Commission as soon as practicable. If so directed by the Company, Holder will deliver to the Company all copies of any Prospectus in its possession at the time of receipt of such notice.

          2.2 Obligations of the Company with Respect to Registration Statements. In connection with the Registration Statement and the Registrable Securities to be sold thereunder (the “Covered Securities”), the Company agrees to:

               (a) furnish to Holder such number of copies of the Registration Statement, each amendment, post-effective amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the Prospectus included in the Registration Statement (including each preliminary Prospectus) in compliance with the requirements of the Securities Act, and such other documents as Holder may reasonably request in order to facilitate the disposition of the Covered Securities owned by Holder; the Company consents to the use of the Prospectus for the Registration Statement, including each preliminary Prospectus, by Holder in connection with the offering and sale of Covered Securities;

               (b) use commercially reasonable efforts to register or qualify, or obtain exemption from registration or qualification for, such Covered Securities under such other securities or blue sky laws of such jurisdictions as Holder reasonably requests, keep each such registration or qualification or exemption effective during the period the Registration Statement is required to be kept effective, and do any and all other acts and things which may be reasonably necessary or advisable to enable Holder to consummate the disposition in such jurisdictions of the Covered Securities, provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any jurisdiction where it would not otherwise be subject to taxation but for this subparagraph, or (iii) consent to general service of process in any such jurisdiction where it would not otherwise be subject to service of process but for this subparagraph (except as may be required by the Securities Act);

               (c) cause all such Covered Securities to be listed and qualified for trading on each securities exchange, or qualified for quotation on each automatic quotation system, on which similar securities issued by the Company are then listed and qualified for trading or quotation;

               (d) provide a transfer agent and registrar for all such Covered Securities not later than the effective date of the Registration Statement applicable thereto, and thereafter maintain such a transfer agent and registrar; and otherwise cooperate with the sellers to facilitate the timely preparation and delivery of certificates representing Covered Securities to be sold and not bearing any Securities Act legends;

               (e) otherwise use its best efforts to comply with the Securities Act and all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first day of the Company’s first full calendar quarter after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;

               (f) promptly notify Holder in writing (i) of the effectiveness of the Registration Statement and of any amendments or supplements to the Registration Statement, (ii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of the Registration Statement, or any part thereof, or of any order suspending or preventing the use of any related Prospectus or the initiation of any proceedings for that purpose, or (iii) if the Company receives any notification with respect to the suspension of the qualification of any Registrable Securities for offer or sale in any jurisdiction or the initiation of any proceedings for that purpose; in the event the Company shall give notice as to the occurrence of any event described in this Section 2.2(f) (ii) and 2.2 (f)(iii), the Company shall extend the period during which such Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of such notice to the date the Company delivers notice that disposition may be made;

               (g) in the event of the issuance of any stop order suspending the effectiveness of the Registration Statement, or any part thereof, or of any order suspending or preventing the use of any related Prospectus or suspending the qualification of any Registrable Securities for sale in any jurisdiction, the Company will use its best efforts to promptly obtain the withdrawal of such order;

               (h) use commercially reasonable efforts to cause the Covered Securities to be registered with or approved by such other governmental agencies or authorities, including the National Association of Securities Dealers, as may be necessary by virtue of the business and operations of the Company to enable the Holder to consummate the disposition of such Covered Securities;

               (i) promptly notify Holder, at any time when a Prospectus relating to Covered Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in the Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the Prospectus and any preliminary Prospectus, in light of the circumstances under which they were made) not misleading when such Prospectus was delivered; the Company will, as soon as practicable, prepare and furnish to Holder a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Covered Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in the event the Company shall give notice as to the occurrence of any event described in this Section 2.2(i) the Company shall extend the period during which such Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of such notice to the date the Company delivers notice that disposition may be made;

               (j) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of securities covered by the Registration Statement;

               (k) to the extent permitted by the professional standards governing the accounting profession at the time, obtain cold comfort letters and updates thereof from the independent public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are

requested to be, included in the Registration Statement) who have certified the Company’s financial statements included or incorporated by reference in the Registration Statement addressed to the Holder in customary form and covering such matters of the type customarily covered by cold comfort letters;

               (l) make available for inspection by any Holder of such Registrable Securities, any underwriter participating in any disposition pursuant to the Registration Statement and any attorney, accountant or other professional retained by any such Holder or underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information reasonably requested by any Inspector in connection with the Registration Statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the Registration Statement, (ii) the release of such records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (iii) such Records have been generally made available to the public. Each Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its affiliates or otherwise disclosed by it unless and until such is made generally available to the public. Each Holder further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company, if legally permitted to do so, and allow the Company, at its sole expense, to undertake appropriate action to prevent disclosure of the Records that are deemed confidential, provided the same shall not subject Holder to civil or criminal liability or penalty; and

               (m) use its best efforts to obtain CUSIP numbers for the Preferred Stock not later than the effective date of the Registration Statement.

          2.3 Obligations of Holder with Respect to Registration Statement. Holder agrees to provide promptly following any written request therefor, any information reasonably requested by the Company in connection with the preparation of and for inclusion in the Registration Statement (including, without limitation, if applicable, information regarding the proposed distribution by Holder of the Covered Securities).

          2.4 Review of Registration Statements. No Registration Statement, Prospectus or related materials, and no supplement or amendment to any Registration Statement, Prospectus or related materials shall be filed unless and until all of the following conditions have been satisfied; provided, however, that, by implementing the following conditions, Holder shall not be deemed to have made any representation or warranty of any kind or nature whatsoever with respect to any matter set forth, contained or addressed in the Registration Statement, Prospectus or related materials, including but not limited to the accuracy, adequacy or completeness thereof:

               (a) A complete and accurate copy of the Registration Statement, Prospectus and all related material, and of each proposed supplement or amendment to the Registration Statement, Prospectus or related materials (all individually and collectively referred to herein as “Filing Material”) shall be provided to each person or entity designated herein to receive the original or copies of notices directed to Holder (each a “Notice Party”) sufficiently in advance of that proposed Filing Material being filed with the Commission or any other federal or state agency having jurisdiction over securities offerings (a “Filing”) so as to allow the Notice Parties a reasonable opportunity to review and comment on such proposed Filing Material prior to Filing.

               (b) Promptly upon receipt of any comments or requested revisions or amendments to any Filing Material from the Commission or any other federal or state agency (collectively “Agency Comments”), the Company shall provide a complete and accurate copy of the Agency Comments to each Notice Party.

               (c) Promptly upon making any addition, deletion or revision to any Filing Material not previously provided to all Notice Parties, including but not limited to any addition, deletion or revision in response to Agency Comments, the Company shall provide each Notice Party with a complete and accurate copy of the revised Filing Material, with the changes highlighted therein, sufficiently in advance of Filing any such addition, deletion or revision so as to allow the Notice Parties a reasonable opportunity to review and comment thereon prior to Filing.

               (d) Prior to each Filing the Company shall certify to Holder in writing that the Company, both through the devotion of the necessary time and attention of capable Company personnel and Company resources, and through the engagement of and collaboration with qualified legal, accounting, underwriting, appraisal, environmental and other experts, exercised good faith and due care in the preparation of the Filing Materials, both as to form and content.

     3. Term of Agreement. The Company shall be relieved of its duties under Sections 1 and 2 on the date contemplated in the second sentence of Section 1.1(a) hereof, as such date may be extended pursuant to the terms hereof.

     4. Indemnification; Contribution.

          4.1 Indemnification by the Company. The Company agrees to indemnify, defend and hold harmless the Holder (and each nominee or assignee of the Holder permitted pursuant to Section 6.5), any underwriter of Registrable Securities under the Registration Statement, each of their respective officers, directors, employees and agents, and each Person, if any, who controls the Holder or any such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as follows:

               (a) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto) pursuant to which securities held by Holder were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto), including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (collectively a “Material Misstatement”);

               (b) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel) to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever arising out of or based upon any Material Misstatements or alleged Material Misstatement, if such settlement is effected with the written consent of the Company; and

               (c) against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not a party, or of any claim whatsoever arising out of or based upon any Material Misstatement or alleged Material Misstatement, to the extent that any such loss, liability, claim, damage or expense is not paid under subparagraph (a) or (b) above;

provided, however, that the indemnity provided pursuant to this Section 4.1 shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by Holder expressly for use in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto).

          4.2 Indemnification by Holder. Holder agrees to indemnify, defend and hold harmless the Company, severally and not jointly, and each of its directors, officers, employees and agents, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as the indemnity contained in Section 4.1 hereof (except that any settlement described in Section 4.1(b) shall be effected with the written consent of Holder), but only insofar as such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or omission, or alleged untrue

statement or omission, of a material fact made in reliance upon and in conformity with written information furnished to the Company by Holder expressly for use in any Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto) pursuant to which securities held by Holder (or permitted assignees) were registered under the Securities Act. In no event shall the liability of Holder hereunder (or other indemnifying party under this Section 4.2) be greater in amount than the gross dollar amount of the proceeds received by Holder upon the sale of the Registerable Shares giving rise to such indemnification obligation.

          4.3 Conduct of Indemnification Proceedings. The indemnified party under any indemnity contained in this Agreement shall give reasonably prompt notice to the indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify the indemnifying party (a) shall not relieve it from any liability which it may have under the indemnity agreements provided in this Agreement, unless and to the extent it did not otherwise learn of such action and the lack of notice by the indemnified party results in the forfeiture by the indemnifying party of substantial rights and defenses, and (b) shall not, in any event, relieve the indemnifying party from any obligations to the indemnified party other than the indemnification obligations provided under this Agreement. If the indemnifying party so elects within a reasonable time after receipt of such notice, the indemnifying party may assume the defense of such action or proceeding with counsel chosen by the indemnifying party and approved by the indemnified party, which approval shall not be unreasonably withheld; provided, however, that the indemnifying party will not settle any such action or proceeding without the written consent of the indemnified party unless, as a condition to such settlement, the indemnifying party secures the unconditional release of the indemnified party; and provided further, that if the defendants in any such action or proceeding include both the indemnified party and the indemnifying party and the indemnified party reasonably determines, upon advice of counsel, that a conflict of interest exists or that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, then the indemnified party shall be entitled to one separate counsel, the reasonable fees and expenses of which shall be paid by the indemnifying party. If the indemnifying party does not assume the defense of such action or proceeding, after having received the notice referred to in the first sentence of this Section 4.3, the indemnifying party will pay the reasonable fees and expenses of counsel (which shall be limited to a single law firm) for the indemnified party. In such event, however, the indemnifying party will not be liable for any settlement effected without the written consent of the indemnifying party. If an indemnifying party is entitled to assume, and assumes, the defense of such action or proceeding in accordance with this Section, the indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified party incurred thereafter in connection with such action or proceeding except as set forth in the second proviso in the second sentence of this Section 4.3.

          4.4 Contribution.

               (a) In order to provide for just and equitable contribution in circumstances in which the indemnity agreements provided for in this Agreement are for any reason held to be unenforceable by the indemnified party in accordance with its terms, the Company and Holder shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company and Holder, (a) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and Holder on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative fault of but also the relative benefits to the Company on the one hand and Holder on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits to the indemnifying party and indemnified party shall be determined by reference to, among other things, the total proceeds received by the indemnifying party and indemnified party in connection with the offering to which such losses, claims, damages, liabilities or expenses relate. The relative fault of the indemnifying party and indemnified party shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, the indemnifying party or the indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action.

               (b) The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in subparagraph (a) above. Notwithstanding the

provisions of this Section 4.4, Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the securities of such Holder were offered to the public exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

               (c) Notwithstanding subparagraphs (a) and (b) above, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 4.4, each Person, if any, who controls Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as Holder, and each director of the Company, each officer of the Company who signed a Registration Statement and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company.

          4.5 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the Commission which may permit the sale of Registrable Securities to the public without registration, the Company agrees to:

               (a) make and keep adequate current public information available, as those terms are understood and defined in Rule 144 of the Securities Act; and

               (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

               (c) furnish to any Holder, so long as such Holder owns any Registrable Securities, forthwith upon written request a written statement by the Company that it has complied with the reporting requirements of said Rule 144, the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission permitting Holder to sell any such securities without registration; and

               (d) take all such further actions as any Holder may reasonably request to satisfy the requirements imposed by Rule 144, or any successor rule, on the Company from time to time to enable resales under said Rule 144 or successor rule.

     5. Holdback Agreements.

          5.1 Holder Holdback Agreement. Upon receipt of 17-day prior written notice, Holder shall not effect any sale or distribution of Registrable Securities or any securities convertible into or exchangeable or exercisable for Registrable Securities, including a sale pursuant to Rule 144 of the Securities Act (or any similar provision then in force) under the Securities Act, if and to the extent required by the managing underwriter of an underwritten offering being undertaken by the Company; provided, however, that such restriction on sales or distributions shall not apply (a) for a period exceeding the fourteen (14) days prior to, and the ninety (90) day period beginning on, the effective date of the Registration Statement filed in connection with such underwritten offering; (b) to any sale as a part of or in conjunction with such underwritten offering; or (c) unless all officers, directors and other Persons with registration rights with respect to securities of the Company enter into or are restricted by similar holdback agreements; and, provided, further, however, that such restrictions shall not apply more than once in any twelve month period; and provided, further however that the Company’s obligation under Section 1.1(a) or 1.1(c) to keep the Registration Statement continuously effective for the 24-month period set forth in the second sentence of Section 1.1(a) shall be extended by an equivalent amount of time.

          5.2 Company Holdback Agreement. Company shall not effect any sale or distribution of (other than in connection with Company employee, Company consultant or Company director stock options), or assist in an underwritten offering by any other Person of, any securities of the Company or securities convertible into or exchangeable or exercisable for securities of the Company, if and to the extent required by the managing

underwriter of the underwritten offering contemplated herein; provided, however, that such restriction on public sales or distributions shall not apply for a period exceeding the fourteen (14) days prior to, and the one hundred eighty (180) day period beginning on, the effective date of the Registration Statement filed in connection with such underwritten offering.

     6. Miscellaneous.

          6.1 Expenses of Registration. All reasonable expenses (the “Registration Expenses”) incurred in connection with any registration, qualification or compliance obligations set forth in Sections 1 and 2 hereof, including, without limitation, (i) all stock exchange, Commission and state securities registration, listing and filing fees, (ii) all expenses incurred in connection with the preparation, printing and distributing of any Registration Statement and Prospectus (and any supplement or amendment thereto), (iii) fees and disbursements of counsel for the Company and of the independent public accountants of the Company, and (iv) legal fees and disbursements for one counsel for the Holders shall be borne by the Company. Notwithstanding anything to the contrary herein, Holder shall select 3 law firms, the names of which Holder shall provide to Company, Company, together with Holder, shall consult with the Holder’s choices of law firms and Company shall select the law firm to be used by Holder as counsel for the Holders. Holder shall be responsible for the payment of any underwriters’ discounts and/or commissions.

          6.2 Authorization; No Conflicts. Each party to this Agreement represents and warrants to the other parties to this Agreement that the execution and delivery of this Agreement by such party and the performance by such party of its covenants and agreements under this Agreement have been, or at the time of such performance will have been, duly authorized by all necessary corporate action on the part of such party, and all required consents to the transactions contemplated hereby have been obtained by such party, or at the time of such performance will have been received by such party. The execution, delivery and performance by such party of this Agreement, the fulfillment of and compliance with the terms and provisions hereof, and the consummation by such party of the transactions contemplated hereby, do not and will not: (a) conflict with, or violate any provisions of, the Articles of Incorporation, Bylaws or other governing documents of such party; (b) conflict with, or violate any provision of, any statute, law, ordinance, regulation, rule, order, writ or injunction having applicability to such party or any of its assets; (c) result in a breach or acceleration of the maturity of any loan or credit agreement to which such party is a party or by which any of its assets may be affected; or (d) conflict with, result in any breach of, or constitute a default under any agreement to which such party is a party or by which it or any of its assets are bound.

          6.3 Integration; Amendment. This Agreement, together with its exhibits and the other agreements referred to herein, constitutes the entire agreement among the parties hereto with respect to the matters relating to registration rights set forth herein and supersedes and renders of no force and effect all prior oral or written agreements (including, without limitation, the Original Registration Rights Agreement), commitments and understandings among the parties with respect to the matters relating to registration rights set forth herein. Except as otherwise expressly provided in this Agreement, no amendment, modification or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by each of the parties hereto. The parties hereto agree to amend this Agreement as necessary to provide the parties with substantially similar (and in no event no less favorable) rights in the event of the enactment by the SEC of changes to the rules and regulations promulgated under the Securities Act and the Exchange Act to the extent such change modifies the current existing registration scheme; provided that such amendment does not impose upon the Company any burdens, duties or liabilities that are materially more substantial than those contemplated under this Agreement.

          6.4 Waivers. No waiver by a party hereto shall be effective unless made in a written instrument duly executed by the party against whom such waiver is sought to be enforced, and only to the extent set forth in such instrument. Neither the waiver by any of the parties hereto of a breach or a default under any of the provisions of this Agreement, nor the failure of any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder.

          6.5 Assignment; Successors and Assigns. Holder may elect to have a nominee take title to any or all of the Registrable Securities, in which event the benefits of this Agreement shall run directly to such

nominee. This Agreement shall be binding upon and inure to the benefit of the Company and its successors by merger. Except as provided in this Section and as provided in Section 1.3, no party hereto shall assign its rights and/or obligations under this Agreement, in whole or in part, whether by operation of law or otherwise.

          6.6 Burden and Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and, subject to Section 6.5 above, assigns.

          6.7 Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, delivered by nationally recognized overnight courier with proof of delivery thereof, sent by United States registered or certified mail (postage prepaid, return recipe requested) addressed as hereinafter provided or via telephonic facsimile transmission with proof of delivery in the form of a telecopier’s confirmation report. Notice shall be sent and deemed given (a) if personally delivered or via nationally recognized overnight courier, then one business day following receipt by the receiving party, or (b) if mailed, then three (3) business days after being postmarked, or (c) if sent via telephonic facsimile transmission, then one business day following the date of confirmed receipt set forth in the telecopier’s transmission confirmation report.

          Any part listed below may change its address hereunder by notice to the other party listed below. Until further notice, notice and other communications hereunder shall be addressed to the parties listed below as follows:

If to Holder:	GSEP 2004 Realty Corp.
	c/o Goldman Sachs 2004 Exchange Place Fund, L.P.
	85 Broad Street
	New York, New York 10004
	Attention: Mr. Eric S. Lane
	Fax: (212) 357-9429
with a copy to:	Fried, Frank, Harris, Shriver & Jacobson LLP
	One New York Plaza
	New York, New York 10004
	Attention: Lawrence N. Barshay, Esq.
	Fax: (212) 859-4000
If to Company:	c/o PS Business Parks, Inc.
	701 Western Avenue
	Glendale, California 91201
	Attention: Mr. Edward A. Stokx
	Fax: (818) 242-0566
with a copy to:	Wilmer Cutler Pickering Hale and Dorr LLP
	1455 Pennsylvania Avenue, N.W.
	Washington, D.C. 20004
	Attention: Steven S. Snider, Esq.
	Fax: (202) 942-8484

or such other address or telephone number as any party may from time to time specify in writing to the others; provided, however, that the foregoing addresses and numbers shall remain in effect unless and until notice of and change is deemed to have been given in the manner required by this Section.

          6.8 Specific Performance. The parties hereto acknowledge that the obligations undertaken by them hereunder are unique and that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to (a) compel specific performance of the obligations, covenants and agreements of any other party under this Agreement in accordance with the terms and conditions of this Agreement;

and (b) obtain preliminary injunctive relief to secure specific performance and to prevent a breach or contemplated breach of this Agreement. Each party waives the requirement of the posting of any bond or security in connection with any proceedings or any injunction issued in connection with this Section.

          6.9 Governing Law. Notwithstanding that California law, with respect to choice of law, or the Constitution, laws or treaties of the United States of America, may dictate that this Agreement should be governed by or construed in accordance with the laws of another jurisdiction, this Agreement, and all documents and instruments executed and delivered in connection herewith shall be governed by and construed in accordance with the laws of the State of California.

          6.10 Enforcement. If any party hereto institutes any action or proceeding to interpret or enforce any provision of this Agreement or for an alleged breach of any provision of this Agreement, the prevailing party shall be entitled to recover its actual attorneys’ fees and all fees, costs and expenses incurred in connection with such action or proceeding. Such attorneys’ fees, fees, costs and expenses shall include post judgment attorneys’ fees, fees, costs and expenses incurred on appeal or in collection of any judgment. This provision is separate and several and shall survive the merger of this provision into any judgment on this Agreement. No person or entity other than the parties hereto is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and the covenants and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns as permitted hereunder.

          6.11 Headings. Section and subsection headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

          6.12 Pronouns. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity may require.

          6.13 Execution in Counterparts. To facilitate execution, this Agreement may be executed in as many counterparts as may be required. It shall not be necessary that the signature of or on behalf of each party appears on each counterpart, but it shall be sufficient that the signature of or on behalf of each party appears on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of or on behalf of all of the parties.

          6.14 Severability. If fulfillment of any provision of this Agreement, at the time such fulfillment shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision contained in this Agreement operates or would operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be held ineffective, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect.

          6.15 Time of the Essence. Time is of the essence in the performance of this Agreement.

          6.16 [Intentionally Left Blank]

          6.17 Further Assurances. Each party agrees to cooperate fully with the other parties and to prepare, execute, and deliver such further instruments of conveyance, contribution, assignment, or transfer and shall take or cause to be taken such other or further action as either party shall reasonably request at any time or from time to time in order to consummate the terms and provisions and to carry into effect the intents and purposes of this Agreement.

          6.18 Legal Representation and Construction. Each party hereto has been represented by legal counsel in connection with the negotiation and drafting of this Agreement. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement, and that the normal rule of construction to the effect that

any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

          6.19 Piggyback on Shelf Registrations. As of the date hereof, neither the Company nor any securityholder of the Company (other than the Holder) has any right to include any securities of the Company in any registration effected pursuant to Sections 1.1(a) or 1.1(c) hereunder. In the event that a registration pursuant to Sections 1.1(a) or 1.1(c) involves an underwritten offering and the managing underwriter advises the Company and the Holders in writing that, in its opinion, the inclusion in the registration statement of some or all of the Registrable Securities sought to be registered by such Holders creates a substantial risk that the price per share that such Holders will derive from such registration will be materially and adversely affected or that the offering would otherwise be materially and adversely affected, then the Company will include in such registration statement such number of Registrable Securities as the Company and such Holders are so advised can be sold in such offering without such an effect (the “Demand Maximum Number”), as follows and in the following order of priority: (i) first, the Registrable Securities of GSEP 2004 Realty Corp., and (ii) second, if and to the extent that the number of Registrable Securities to be registered under clause (i) is less than the Demand Maximum Number, the other securities sought to be registered by any other Holders (other than GSEP 2004 Realty Corp., pro rata in proportion to the number sought to be registered by each such Holder (other than GSEP 2004 Realty Corp.) relative to the number sought to be registered by all the Holders (other than GSEP 2004 Realty Corp.); provided, however, that the Company shall be permitted to grant to any securityholder of the Company “piggyback” registration rights with respect to any registration other than the registrations effected pursuant to Sections 1.1(a) and 1.1(c).

     IN WITNESS WHEREOF, each of the parties hereto has caused this Registration Rights Agreement to be duly executed on its behalf as of the date first hereinabove set forth.

COMPANY:
PS BUSINESS PARKS, INC.,
a California corporation
By:	/s/ Edward A., Stokx
	Edward A. Stokx Executive Vice President, Chief Financial Officer
	(Print Name and Title)

Signature Page to Series J Registration Rights Agreement

HOLDER:
GSEP 2004 REALTY CORP.,
a Delaware corporation
By:	/s/ [illegible signature]
	(Print Name and Title)

Signature Page to Series J Registration Rights Agreement

EX-12

Exhibit 12

PS BUSINESS PARKS, INC.

STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio data)

	2005		2004		2003		2002		2001
Income from continuing operations	$	59,571	$	46,449	$	46,143	$	45,731	$	43,821
Minority interest in continuing operations		16,227		24,746		29,576		28,208		25,440
Interest expense		1,330		3,054		4,015		5,324		1,715
Earnings from continuing operations available to cover fixed charges	$	77,128	$	74,249	$	79,734	$	79,263	$	70,976
Fixed charges (2)	$	1,330	$	3,054	$	4,015	$	5,612	$	2,806
Preferred stock dividends		43,011		33,020		15,784		15,412		8,854
Preferred partnership distributions		10,651		20,245		19,240		17,927		14,107
Combined fixed charges and preferred distributions	$	54,992	$	56,319	$	39,039	$	38,951	$	25,767
Ratio of earnings from continuing operations to fixed charges		58.0		24.3		19.9		14.1		25.3
Ratio of earnings from continuing operations to combined fixed charges and preferred distributions		1.4		1.3		2.0		2.0		2.8

Supplemental disclosure of Ratio of Funds from Operations (“FFO”) to fixed charges:

	2005		2004		2003		2002		2001
FFO (1)	$	102,463	$	97,214	$	97,448	$	104,543	$	95,472
Interest expense		1,330		3,054		4,015		5,324		1,715
Minority interest in income — preferred units		10,651		20,245		19,240		17,927		14,107
Preferred stock dividends		43,011		33,020		15,784		15,412		8,854
FFO available to cover fixed charges	$	157,455	$	153,533	$	136,487	$	143,206	$	120,148
Fixed charges (2)	$	1,330	$	3,054	$	4,015	$	5,612	$	2,806
Preferred stock dividends (3)		43,011		31,154		15,784		15,412		8,854
Preferred partnership distributions (3)		10,651		17,106		19,240		17,927		14,107
Combined fixed charges and preferred distributions paid	$	54,992	$	51,314	$	39,039	$	38,951	$	25,767
Ratio of adjusted FFO to fixed charges		118.4		50.3		34.0		25.5		42.8
Ratio of adjusted FFO to combined fixed charges and preferred distributions paid		2.9		3.0		3.5		3.7		4.7

(1)	FFO has been adjusted to include the effect of impairment charges
(2)	Fixed charges include interest expense plus capitalized interest
(3)	Excludes EITF Topic D-42 distributions.

EX-21

Exhibit 21

List of Subsidiaries

The following sets forth the subsidiaries of the Registrant and their respective states of incorporation or organization:

Name	State
American Office Park Properties, TPGP, Inc.	California
PSBP QRS, Inc.	California
Hernmore, Inc.	Maryland
AOPP Acquisition Corp. Two	California
Tenant Advantage, Inc.	California
PS Business Parks, L.P.	California
TPLP Office Park Properties	Texas
PSBP Northpointe D, L.L.C.	Virginia
PSBP Monroe, L.L.C.	Virginia
Monroe Parkway, L.L.C.	Virginia
Metro Park I, L.L.C.	Delaware
Metro Park II, L.L.C.	Delaware
Metro Park III, L.L.C.	Delaware
Metro Park IV, L.L.C.	Delaware
Metro Park V, L.L.C.	Delaware
Metro Park Gude, L.L.C.	Delaware
PSBP Westwood GP, L.L.C.	Delaware
PSBP Westwood, L.P.	Delaware
PSBP Industrial, L.L.C.	Delaware
Miami International Commerce Center	Florida
REVX-098, L.L.C.	Delaware
PS Rose Canyon, L.L.C.	Delaware

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-48313) of PS Business Parks, Inc. pertaining to the PS Business Parks, Inc. 1997 Stock Option and Incentive Plan, the Registration Statement on Form S-8 (No. 333-50274) of PS Business Parks, Inc. pertaining to the PS 401(k)/Profit Sharing Plan, the Registration Statement on Form S-8 (No. 333-104604) of PS Business Parks, Inc. pertaining to the PS Business Parks, Inc. 2003 Stock Option and Incentive Plan, the Registration Statement on Form S-8 (No. 333-129463) of PS Business Parks, Inc. pertaining to the PS Business Parks, Inc. Retirement Plan for Non-Employee Directors, the Registration Statement on Form S-3 (No. 333-78627) and in the related prospectus, the Registration Statement on Form S-3 (No. 333-50463) and in the related prospectus, and the Registration Statement on Form S-3 (No. 333-112969) and the related prospectus of our reports dated March 3, 2006 with respect to the consolidated financial statements and related financial statement schedule of PS Business Parks, Inc., PS Business Parks, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of PS Business Parks, Inc., included in this Annual Report on Form 10-K for the year ended December 31, 2005.

/s/ Ernst & Young LLP  

Los Angeles, California
March 6, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph D. Russell, Jr. certify that:

1.	I have reviewed this annual report on Form 10-K of PS Business Parks, Inc.;
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; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(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.

/s/ Joseph D. Russell, Jr.

Name: Joseph D. Russell, Jr.

Title: Chief Executive Officer

Date: March 6, 2006

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Edward A. Stokx certify that:

1.	I have reviewed this annual report on Form 10-K of PS Business Parks, Inc.;
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; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(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.

/s/ Edward A. Stokx

Name: Edward A. Stokx

Title: Chief Financial Officer

Date: March 6, 2006

EX-32.1

Exhibit 32.1

Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of PS Business Parks, Inc. (the “Company”) for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Joseph D. Russell Jr., as Chief Executive Officer of the Company, and Edward A. Stokx, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Joseph D. Russell, Jr.
Name:	Joseph D. Russell, Jr.
Title:	Chief Executive Officer
Date:	March 6, 2006
/s/ Edward A. Stokx
Name:	Edward A. Stokx
Title:	Chief Financial Officer
Date:	March 6, 2006

A signed original of this written statement required by Section 906 has been provided to PS Business Parks, Inc. and will be retained by PS Business Parks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.