UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

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

For the fiscal year ended December 31, 2008.

or

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

For the transition period from           to

PS BUSINESS PARKS, INC.

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

701 Western Avenue, Glendale, California 91201-2397
(Address of principal executive offices) (Zip Code)

818-244-8080
(Registrant’s telephone number, including area code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share		New York 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		New York 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		New York 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		New York 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		New York 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		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 7.375% Cumulative Preferred Stock, Series O, $0.01 par value per share		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 6.700% Cumulative Preferred Stock, Series P, $0.01 par value per share		New York 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 o   No þ

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   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. þ

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

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

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

     As of June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $775,075,602 based on the closing price as reported on that date.

     Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of June 12, 2009 (the latest practicable date): 20,542,511.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement in connection with the 2009 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 

EXPLANATORY NOTE

     PS Business Parks, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as originally filed with the SEC on February 26, 2009 (the “Original Filing”). The Amendment amends the cover page to reflect that the Company is not a well-known seasoned issuer. In addition, the Amendment amends Items 6, 7, 8 and 9A in Part II and Exhibit 12 of the Original Filing in their entirety to reflect the Company’s adoption and retroactive application of the following accounting pronouncements as of January 1, 2009: (1) Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51” and (2) Financial Accounting Standards Board Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. In addition, in connection with filing this Amendment, the Company is including currently dated certifications of its chief executive officer and chief financial officer and a consent from its independent registered public accounting firm. Item 15 of Part IV has also been amended to reflect the filing of the revised exhibits.

     This Amendment does not modify or update any other disclosures set forth in the Original Filing, except as required to reflect the amended information contained in this Form 10-K/A. Additionally, this Form 10-K/A, except for the amended information included in the cover page, Part II and Part IV, speaks as of the filing date of the Original Filing and does not update or discuss any other developments affecting the Company after the date of the Original Filing.

     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/A. See Note 3 to the consolidated financial statements included elsewhere in this Form 10-K/A for a discussion of income from discontinued operations.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(In thousands, except per share data)
Revenues:
Rental income		$	283,503			$	270,775			$	242,214			$	219,604			$	210,937
Facility management fees			728				724				625				579				624
Total operating revenues			284,231				271,499				242,839				220,183				211,561
Expenses:
Cost of operations			88,442				84,360				74,671				65,712				62,994
Depreciation and amortization			99,848				98,521				86,216				76,178				69,942
General and administrative			8,099				7,917				7,046				5,843				4,628
Total operating expenses			196,389				190,798				167,933				147,733				137,564
Other income and expenses:
Interest and other income			1,457				5,104				6,874				4,888				406
Interest expense			(3,952	)			(4,130	)			(2,575	)			(1,330	)			(3,054	)
Total other income and expenses			(2,495	)			974				4,299				3,558				(2,648	)
Asset impairment due to casualty loss			—				—				—				72				—
Income from continuing operations			85,347				81,675				79,205				75,936				71,349
Discontinued operations:
Income (loss) from discontinued operations			—				—				(125	)			2,769				5,337
Gain on disposition of real estate			—				—				2,328				18,109				15,462
Income from discontinued operations			—				—				2,203				20,878				20,799
Net income		$	85,347			$	81,675			$	81,408			$	96,814			$	92,148
Net income allocation:
Common shareholders		$	23,179			$	17,537			$	16,513			$	32,242			$	29,104
Preferred shareholders			46,630				50,937				47,933				43,011				33,020
Noncontrolling interests — common units			8,296				6,155				5,673				10,869				9,760
Noncontrolling interests — preferred units			7,007				6,854				11,155				10,651				20,245
Restricted stock unit holders			235				192				134				41				19
		$	85,347			$	81,675			$	81,408			$	96,814			$	92,148

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(In thousands, except per share data)
Per Common Share:
Cash Distribution		$	1.76			$	1.61			$	1.16			$	1.16			$	1.16
Net income — basic		$	1.13			$	0.82			$	0.77			$	1.48			$	1.34
Net income — diluted		$	1.12			$	0.81			$	0.77			$	1.47			$	1.33
Weighted average common shares — basic			20,443				21,313				21,335				21,826				21,767
Weighted average common shares — diluted			20,618				21,573				21,584				21,970				21,911
Balance Sheet Data:
Total assets		$	1,469,323			$	1,516,583			$	1,463,599			$	1,463,794			$	1,366,768
Total debt		$	59,308			$	60,725			$	67,048			$	25,893			$	11,367
Preferred stock called for redemption		$	—			$	—			$	50,000			$	—			$	—
Equity:
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock		$	706,250			$	716,250			$	572,500			$	593,350			$	510,850
Common stock		$	414,564			$	439,330			$	482,703			$	500,108			$	506,114
Noncontrolling interests:
Preferred units		$	94,750			$	94,750			$	82,750			$	135,750			$	127,750
Common units		$	148,023			$	154,470			$	165,469			$	169,451			$	169,295
Other Data:
Net cash provided by operating activities		$	189,337			$	184,094			$	166,134			$	148,828			$	152,166
Net cash (used in) provided by investing activities		$	(35,192	)		$	(180,188	)		$	(169,986	)		$	24,389			$	(26,108	)
Net cash used in financing activities		$	(134,171	)		$	(35,882	)		$	(129,694	)		$	(13,058	)		$	(91,971	)
Funds from operations (1)		$	131,323			$	122,213			$	106,101			$	102,422			$	97,195
Square footage owned at end of period			19,556				19,556				18,687				17,555				17,988

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/A.

     Forward-Looking Statements: Forward-looking statements are made throughout this Annual Report on Form 10-K/A. 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 the Original Filing. 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 except as required by law.

Overview

     As of December 31, 2008, the Company owned and operated approximately 19.6 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 from time to time 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.

     The Company successfully leased or re-leased 5.1 million square feet of space in 2008 and achieved an overall weighted average occupancy of 93.5% for 2008. During 2008, the Company experienced a modest increase in effective rental rates compared to 2007. Total net operating income increased by $8.6 million or 4.6% from the year ended December 31, 2007 to 2008. See further discussion of operating results below.

Critical Accounting Policies and Estimates:

     Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-K/A. We believe our most critical accounting policies relate to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, depreciation, accruals 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. 104 of the Securities and Exchange Commission, Revenue Recognition in Financial Statements (“SAB 104”), as amended. SAB 104 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 or 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 receivable represents 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.

     Property Acquisitions: In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” we allocate the purchase price of acquired properties to land, buildings and equipment and identified tangible and intangible assets and liabilities associated with in-place leases (including tenant improvements, unamortized lease commissions, value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values.

     In determining the fair value of the tangible assets of the acquired properties, management considers the value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in determining the value of assets acquired and liabilities assumed. Using different assumptions in the allocation of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. Amounts allocated to land are derived from comparable sales of land within the same region. Amounts allocated to buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market rate information.

     The value allocable to the above-market or below-market in-place lease values of acquired properties is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual rents 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 amounts allocated to above-market or below-market leases are included in other assets or other liabilities in the accompanying consolidated balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

     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 ongoing 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. Our 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 rent 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 long-term nature of these types of receivables, determination of the adequacy of the allowance for unbilled deferred rent receivable is based primarily on historical loss experience. Management evaluates the allowance for unbilled deferred rent 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 we evaluate our entire 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. Management must 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 sale of the property. These assumptions could differ materially from actual results in future periods. Since SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” provides that the future cash flows used in this analysis be considered on an undiscounted basis, our 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 five years, respectively. 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 overstated 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 and amount of expense recognized 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 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 2008, the weakening economic conditions were reflected in commercial real estate as the Company experienced a decrease in new rental rates over expiring rental rates as well as declining occupancy levels in the second half of 2008. It is uncertain what impact the current recession will have on the Company’s ability to maintain current occupancy levels and rental rates. A continued weakening in the economy may have a significant impact on the Company, potentially resulting in lower occupancy and reduced rental rates.

     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 when in bankruptcy. As of December 31, 2008, the Company had approximately 33,000 square feet occupied by tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. 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.

     Company Performance and Effect of Economic Conditions on Primary Markets: The Company has concentrated its operations in 10 regions. The Company’s assessment of these regions as of December 31, 2008 is summarized below. During the year ended December 31, 2008, rental rates on new and renewed leases within the Company’s overall portfolio decreased 0.9% over expiring rents. Each of the 10 regions in which the Company owns assets is subject to its own unique market influences. The Company has outlined the various market influences for each specific region 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 4.0 million square feet in Southern California in Los Angeles, Orange and San Diego Counties. Market vacancies have increased due to the continued weakening in the economy combined with the lack of credit availability and its effect on businesses. These factors have also created significantly more competition for tenants. Vacancy rates in Southern California range from 2.2% to 15.4%. The Company’s vacancy rate in this region at December 31, 2008 was 8.5%. For the year ended December 31, 2008, the overall market experienced negative net absorption of 0.6% for the reasons noted above as well as the completion of newly constructed space in 2008. The Company’s weighted average occupancy for the region decreased from 94.8% in 2007 to 93.8% in 2008. Realized rent per square foot increased 2.3% from $17.06 per square foot in 2007 to $17.46 per square foot in 2008.

     The Company owns approximately 1.8 million square feet in Northern California with concentrations in Sacramento, the East Bay (Hayward and San Ramon) and Silicon Valley (San Jose and Santa Clara). Vacancy rates in these submarkets are 16.6%, 19.4% and 14.7%, respectively. The Company’s vacancy rate in its Northern California portfolio at December 31, 2008 was 8.7%. Demand in these submarkets slowed measurably in the second half of 2008. The time necessary to execute a transaction has lengthened as tenants weigh their options and negotiate on concessions. During the second half of 2008, lease renewals and short-term leases were the most common leasing activity in the market as firms are seeking ways of reducing costs. For the year ended December 31, 2008, the combined submarkets noted above experienced negative net absorption of 0.1%. The Company’s weighted average occupancy in this region increased from 90.9% in 2007 to 92.0% in 2008. Realized rent per square foot increased 3.1% from $13.89 per square foot in 2007 to $14.32 per square foot in 2008.

     The Company owns approximately 1.2 million square feet in Southern Texas, specifically in the Austin and Houston markets. Market vacancy rates are 11.0% in the Austin market and 11.8% in the Houston market. The Company’s vacancy rate for these combined markets at December 31, 2008 was 7.5%. During the first half of 2008, job growth in both the Austin and Houston markets along with the strong oil and gas industry in the Houston market increased leasing activity. However, during the second half of 2008, demand eased in these markets. For the year ended December 31, 2008, the combined markets experienced positive net absorption of 1.0%. The Company’s weighted average occupancy in this region increased from 94.1% in 2007 to 94.6% in 2008. Realized rent per square foot increased 5.8% from $10.85 per square foot in 2007 to $11.48 per square foot in 2008.

     The Company owns approximately 1.7 million square feet in Northern Texas, primarily located in the Dallas Metroplex market. The market vacancy rate in Las Colinas, where significant concentrations of the Company’s properties are located, is 10.1%. The Company’s vacancy rate at December 31, 2008 in this market was 5.4%. For the year ended December 31, 2008, the market experienced positive net absorption of 1.2% as the result of modest job growth. During 2008, modest new construction continued, which included both speculative construction, as well as owner-user construction. Despite the new construction, the Company has experienced a modest level of leasing activity during 2008 generating rental rate growth and higher occupancy. The Company’s weighted average occupancy for the region increased from 86.3% in 2007 to 93.3% in 2008. Realized rent per square foot increased 3.6% from $10.40 per square foot in 2007 to $10.77 per square foot in 2008 as rental rates increased modestly over expiring leases. However, new construction schedule to be completed in 2009 and the broad economic recession could have an impact on the Company’s ability to maintain occupancy and generate rental rate growth within the Company’s portfolio.

     The Company owns approximately 3.6 million square feet in South Florida, which consists of MICC business park located in the Airport West submarket of Miami-Dade County and two multi-tenant flex parks located in Palm Beach County. While the saturation of the condominium and housing markets in Miami has negatively impacted its overall economy, it has had little impact on international trade-based assets, such as industrial and flex space, which constitutes the majority of the Company’s South Florida portfolio. MICC is located less than one mile from the cargo entrance of the Miami International Airport, which is one of the most active ports in the United States. The Company acquired two assets in Palm Beach County at the end of 2006, comprising 398,000 square feet. The downturn in the housing market and slowing economy have adversely affected Palm Beach County. Market vacancy rates for Miami-Dade County and Palm Beach County are 6.8% and 8.4%, respectively, compared with the Company’s South Florida vacancy rate of 3.2% at December 31, 2008. For the year ended December 31, 2008, the combined markets experienced negative net absorption of 0.7%. The Company’s weighted average occupancy in this region outperformed the market and remained strong, decreasing from 97.7% in 2007 to 96.4% in 2008. Realized rent per square foot increased 4.7% from $8.97 per square foot in 2007 to $9.39 per square foot in 2008 as a result of higher rental rates on leases executed in 2007 and early 2008 over in-place rents.

     The Company owns approximately 3.0 million square feet in the Northern Virginia submarket of Washington D.C., where the average market vacancy rate is 12.0%. The Company’s vacancy rate at December 31, 2008 was 5.7%. Vacancy rates in this market increased as new supply outpaced demand coupled with tenants downsizing their existing space due to the economic recession. The increase in sublease space and decrease in demand has lengthened the time of lease negotiation as tenants weigh their options and negotiate on tenant improvements. Higher concessions are more prevalent as landlords entice prospective tenants. Despite the recent trends and slowdown, the market experienced positive net absorption of 0.8%. The Company’s realized rent per square foot increased 4.2% from $19.49 per square foot in 2007 to $20.30 per square foot in 2008. The Company’s weighted average occupancy increased from 94.4% in 2007 to 96.6% in 2008.

     The Company owns approximately 1.8 million square feet in the Maryland submarket of Washington D.C. The Company’s vacancy rate in the region at December 31, 2008 was 6.1% compared to 11.5% for the market as a whole. The market vacancy rate increased as new developments are completed with limited preleasing activities combined with more companies contracting and reorganizing business operations. For the year ended December 31, 2008, the market experienced negative net absorption of 0.5%, which is attributed to a decrease in demand for large blocks of space due to the slowing economy. The Company’s weighted average occupancy decreased from 94.7% in 2007 to 91.8% in 2008. The decrease in occupancy was primarily related to a 67,000 square foot tenant vacating its space at the end of 2007. Realized rent per square foot increased 0.8% from $23.18 per square foot in 2007 to $23.36 per square foot in 2008.

     The Company owns approximately 1.3 million square feet in the Beaverton submarket of Portland, Oregon. The market vacancy rate in this region is 17.7%. The Company’s vacancy rate in the market was 17.6% at December 31, 2008. Recent economic trends and the economic recession have resulted in increases in both vacancy rates and rent concessions in the market. For the year ended December 31, 2008, the market experienced negative net absorption of 3.7%. The Company’s weighted average occupancy decreased from 89.0% in 2007 to 84.0% in 2008 primarily related to a 120,000 square foot tenant vacating its space during the second quarter of 2008. Despite the recent trends and slowdown, realized rent per square foot increased 7.1% from $15.63 per square foot in 2007 to $16.74 per square foot in 2008. The increase was primarily the result of the impact on 2007 realized rent per foot from write-offs related to business failures during the year ended December 31, 2007.

     The Company owns approximately 679,000 square feet in the Phoenix and Tempe submarkets of Arizona. Market vacancies increased significantly due in part to the number of housing-related tenants who have vacated space combined with companies contracting and reorganizing business operations, creating significantly more competition for tenants. During 2008, significant construction of buildings has impacted the Company’s portfolio and may result in higher lease concessions while limiting the Company’s ability to generate rental rate growth. The market vacancy rate is 11.1% compared to the Company’s vacancy rate of 12.7% at December 31, 2008. For the year ended December 31, 2008, despite the decrease in demand, the market experienced positive net absorption of 0.3%. Although demand for space has subsided, realized rent per square foot increased 3.4% from $11.49 per square foot in 2007 to $11.88 per square foot in 2008. The Company’s weighted average occupancy in the region decreased from 89.4% in 2007 to 86.9% in 2008.

     The Company owns approximately 521,000 square feet in the state of Washington. In 2007, the Company acquired Overlake Business Center, a 493,000 square foot multi-tenant office and flex business park located in Redmond, Washington. The weakened aerospace manufacturing industry and global economic slowdown has resulted in fewer imports and exports resulting in a softened demand in this market. Despite these factors, this market experienced positive net absorption of 0.8% for the year ended December 31, 2008 primarily due to the steady technology industry in the first half of 2008. The Company’s vacancy rate in this region at December 31, 2008 was 7.4% compared to 8.9% for the market as a whole. The Company’s weighted average occupancy increased from 89.5% in 2007 to 94.2% in 2008. Realized rent per square foot increased 9.5% from $17.62 per square foot in 2007 to $19.30 per square foot in 2008.

     Growth of the Company’s Operations and Acquisitions and Dispositions of Properties: The Company is focused on maximizing cash flow from its existing portfolio of properties by expanding its presence in existing and new markets through strategic acquisitions and the disposition of non-strategic assets. The Company has historically maintained a low-leverage-level approach intended to provide the Company with the flexibility for future growth.

     The Company made no acquisitions during the year ended December 31, 2008.

     In 2007, the Company acquired 870,000 square feet for an aggregate cost of $140.6 million. The Company acquired Overlake Business Center, a 493,000 square foot multi-tenant office and flex business park located in Redmond, Washington, for $76.0 million; Commerce Campus, a 252,000 square foot multi-tenant office and flex business park located in Santa Clara, California, for $39.2 million; and Fair Oaks Corporate Center, a 125,000 square foot multi-tenant office park located in Fairfax, Virginia, for $25.4 million.

     In 2006, the Company added 1.2 million square feet to its portfolio at an aggregate cost of $180.3 million. The Company acquired WesTech Business Park, a 366,000 square foot office and flex park in Silver Spring, Maryland, for $69.3 million; 88,800 square feet of multi-tenant flex buildings in Signal Hill, California, for $10.7 million; a 107,300 square foot multi-tenant flex park in Chantilly, Virginia, for $15.8 million; Meadows Corporate Park, a 165,000 square foot multi-tenant office park in Silver Spring, Maryland, for $29.9 million; Rogers Avenue, a 66,500 square foot multi-tenant industrial and flex park in San Jose, California, for $8.4 million; and Boca Commerce Park and Wellington Commerce Park, two multi-tenant industrial, flex and storage parks, aggregating 398,000 square feet, located in Palm Beach County, Florida, for $46.2 million. In connection with the Meadows Corporate Park purchase, the Company assumed a $16.8 million mortgage with a fixed interest rate of 7.20% through November, 2011, at which time it can be prepaid without penalty. In addition, in connection with the Palm Beach County purchases, the Company assumed three mortgages with a combined total of $23.8 million with a weighted average

fixed interest rate of 5.84%.

     During 2006, the Company sold a 30,500 square foot building located in Beaverton, Oregon, for $4.4 million, resulting in a net gain of $1.5 million. Additionally in 2006, the Company sold 32,400 square feet in Miami for a combined total of $3.7 million, resulting in a gain of $865,000.

     Scheduled Lease Expirations: In addition to the 1.4 million square feet, or 7.3%, of currently available space in our total portfolio, leases representing approximately 24.1% of the leased square footage of our total portfolio are scheduled to expire in 2009. Our ability to re-lease available space depends upon the market conditions in the specific submarkets in which our properties are located.

     Impact of Inflation: Although inflation has not been significant in recent years, it remains a factor in our economy, and the Company continues to seek ways to mitigate its potential 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 2007 and 2008, the Company experienced modest increases in certain operating costs, including repairs and maintenance, property insurance and utility costs affecting the Company’s overall profit margin.

     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 table) from continuing operations are summarized below for the year ended December 31, 2008 by major geographic region. 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 an 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 GAAP. The table below reflects rental income, operating expenses and NOI from continuing operations for the year ended December 31, 2008 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. As part of the table below, we have shown the effect of depreciation and amortization on NOI. We have reconciled NOI to income from continuing operations in the table under “Results of Operations” below. The percent of total by region reflects the actual contribution to rental income, cost of operations and NOI during the period (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			3,988				20.4	%		$	65,317				23.0	%		$	17,866				20.2	%		$	47,451				24.3	%
Northern California			1,818				9.3	%			23,939				8.4	%			6,862				7.8	%			17,077				8.8	%
Southern Texas			1,161				5.9	%			12,616				4.5	%			5,495				6.2	%			7,121				3.7	%
Northern Texas			1,689				8.6	%			16,964				6.0	%			6,011				6.8	%			10,953				5.6	%
South Florida			3,596				18.4	%			32,555				11.5	%			10,316				11.7	%			22,239				11.4	%
Virginia			3,020				15.4	%			59,192				20.9	%			17,250				19.5	%			41,942				21.5	%
Maryland			1,770				9.1	%			37,977				13.4	%			11,992				13.6	%			25,985				13.3	%
Oregon			1,314				6.7	%			18,466				6.5	%			7,019				7.9	%			11,447				5.9	%
Arizona			679				3.5	%			7,006				2.5	%			3,013				3.4	%			3,993				2.0	%
Washington			521				2.7	%			9,471				3.3	%			2,618				2.9	%			6,853				3.5	%
Total before depreciation and amortization			19,556				100.0	%			283,503				100.0	%			88,442				100.0	%			195,061				100.0	%
Depreciation and amortization											—								99,848								(99,848	)
Total based on GAAP										$	283,503							$	188,290							$	95,213

     Concentration of Credit Risk by Industry: The information below depicts the industry concentration of our tenant base as of December 31, 2008. The Company analyzes this concentration to minimize significant industry exposure risk.

		% of Total
		Annualized
Industry		Rental Income
Business services			13.2	%
Health services			10.3	%
Computer hardware, software and related services			9.3	%
Warehouse, distribution, transportation and logistics			8.7	%
Government			8.4	%
Insurance and financial services			7.8	%
Engineering and construction			7.7	%
Retail, food and automotive			6.3	%
Communications			5.7	%
Home furnishing			3.8	%
Electronics			3.5	%
Educational services			3.0	%
Aerospace/defense products and services			2.3	%
Total			90.0	%

     The information below depicts the Company’s top 10 customers by annualized rental income as of December 31, 2008 (in thousands):

										% of Total
						Annualized				Annualized
Tenants		Square Footage				Rental Income (1)				Rental Income
U.S. Government			486				$    12,684				4.4	%
Kaiser Permanente			186				4,302				1.5	%
Wells Fargo Bank			102				1,749				0.6	%
AARP			102				1,676				0.6	%
Northrop Grumman			57				1,649				0.6	%
Raytheon			82				1,495				0.5	%
American Intercontinental University			75				1,405				0.5	%
Verizon			72				1,350				0.5	%
Intel Corporation			94				1,348				0.5	%
Montgomery County Public School			47				1,329				0.5	%
Total			1,303				$    28,987				10.2	%

Comparison of 2008 to 2007

Results of Operations: Net income for the year ended December 31, 2008 was $85.3 million compared to $81.7 million for the year ended December 31, 2007. Net income allocable to common shareholders for the year ended December 31, 2008 was $23.2 million compared to $17.5 million for the year ended December 31, 2007. Net income per common share on a diluted basis was $1.12 for the year ended December 31, 2008 compared to $0.81 for the year ended December 31, 2007 (based on weighted average diluted common shares outstanding of 20,618,000 and 21,573,000, respectively). The increase in net income allocable to common shareholders was due to an increase in net operating income of $8.6 million combined with the net gain of $4.2 million on the repurchase of preferred stock offset by a decrease in interest and other income of $3.6 million and an increase in the allocation of net income to noncontrolling interests of $2.3 million.

     The following table presents the operating results of the properties for the years ended December 31, 2008 and 2007 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):

		For the Years Ended December 31,
		2008				2007				Change
Rental income:
Same Park (18.7 million rentable square feet) (1)		$	268,248			$	260,632				2.9	%
Non-Same Park (870,000 rentable square feet) (2)			15,255				10,143				50.4	%
Total rental income			283,503				270,775				4.7	%
Cost of operations:
Same Park			83,721				80,779				3.6	%
Non-Same Park			4,721				3,581				31.8	%
Total cost of operations			88,442				84,360				4.8	%
Net operating income (3):
Same Park			184,527				179,853				2.6	%
Non-Same Park			10,534				6,562				60.5	%
Total net operating income			195,061				186,415				4.6	%
Other income and expenses:
Facility management fees			728				724				0.6	%
Interest and other income			1,457				5,104				(71.5	%)
Interest expense			(3,952	)			(4,130	)			(4.3	%)
Depreciation and amortization			(99,848	)			(98,521	)			1.3	%
General and administrative			(8,099	)			(7,917	)			2.3	%
Income from continuing operations		$	85,347			$	81,675				4.5	%
Same Park gross margin (4)			68.8	%			69.0	%			(0.3	%)
Same Park weighted average for the period:
Occupancy			93.7	%			93.7	%			—
Realized rent per square foot (5)		$	15.32			$	14.89				2.9	%

     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 years (herein referred to as “Same Park”). Operating properties that the Company acquired subsequent to January 1, 2007 are referred to as “Non-Same Park.” For 2008 and 2007, the Same Park facilities constitute 18.7 million rentable square feet, which includes all assets the Company owned and operated from January 1, 2007 through December 31, 2008, representing approximately 95.5% of the total square footage of the Company’s portfolio for 2008.

     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 table) from continuing operations summarized for the years ended December 31, 2008 and 2007 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 GAAP.

     The following table summarizes the Same Park operating results by major geographic region for the years ended December 31, 2008 and 2007. 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, 2007, and the impact of such is included in Non-Same Park 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		2008				2007				(Decrease)				2008				2007				(Decrease)				2008				2007				(Decrease)
Southern California		$	65,317			$	64,474				1.3	%		$	17,866			$	17,483				2.2	%		$	47,451			$	46,991				1.0	%
Northern California			20,890				20,221				3.3	%			5,728				5,673				1.0	%			15,162				14,548				4.2	%
Southern Texas			12,616				11,848				6.5	%			5,495				5,153				6.6	%			7,121				6,695				6.4	%
Northern Texas			16,964				15,162				11.9	%			6,011				5,764				4.3	%			10,953				9,398				16.5	%
South Florida			32,555				31,514				3.3	%			10,316				10,060				2.5	%			22,239				21,454				3.7	%
Virginia			56,108				52,957				6.0	%			16,169				15,226				6.2	%			39,939				37,731				5.9	%
Maryland			37,977				38,873				(2.3	%)			11,992				11,746				2.1	%			25,985				27,127				(4.2	%)
Oregon			18,466				18,278				1.0	%			7,019				6,659				5.4	%			11,447				11,619				(1.5	%)
Arizona			7,006				6,976				0.4	%			3,013				2,904				3.8	%			3,993				4,072				(1.9	%)
Washington			349				329				6.1	%			112				111				0.9	%			237				218				8.7	%
Total Same Park			268,248				260,632				2.9	%			83,721				80,779				3.6	%			184,527				179,853				2.6	%
Non-Same Park			15,255				10,143				50.4	%			4,721				3,581				31.8	%			10,534				6,562				60.5	%
Total before depreciation and amortization			283,503				270,775				4.7	%			88,442				84,360				4.8	%			195,061				186,415				4.6	%
Depreciation and amortization			—				—				—				99,848				98,521				1.3	%			(99,848	)			(98,521	)			1.3	%
Total based on GAAP		$	283,503			$	270,775				4.7	%		$	188,290			$	182,881				3.0	%		$	95,213			$	87,894				8.3	%

     Revenues: Revenues increased $12.7 million for the year ended December 31, 2008 over the same period in 2007. The increase in revenue was due to an increase in Non-Same Park revenue of 50.4%, or $5.1 million, primarily due to higher rental and occupancy rates. In addition, Same Park revenue increased by 2.9%, or $7.6 million, primarily due to higher rental rates.

     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, 2008, $728,000 of revenue was recognized from facility management fees compared to $724,000 for the year ended December 31, 2007.

     Cost of Operations: Cost of operations for the year ended December 31, 2008 was $88.4 million compared to $84.4 million for the same period in 2007, an increase of $4.1 million, or 4.8%. Assets acquired in 2007 accounted for $1.1 million, or 27.9%, of the increase. The increase in cost of operations was primarily due to an increase in property taxes of $2.6 million as a result of increase in both rates and assessed values, higher utility costs of $1.1 million, higher payroll cost of $786,000 and repairs and maintenance costs of $319,000 offset by a decrease in other expenses of $432,000 due to a decrease in personnel procurement costs, marketing materials and third party services and a decrease in professional fees of $327,000.

     Depreciation and Amortization Expense: Depreciation and amortization expense was $99.8 million for the year ended December 31, 2008 compared to $98.5 million for the year ended December 31, 2007. The increase is primarily due to the acquisitions of 870,000 square feet during 2007, as well as depreciation expense on capital and tenant improvements made during 2008 and 2007.

     General and Administrative Expense: General and administrative expense was $8.1 million for the year ended December 31, 2008 compared to $7.9 million for the year ended December 31, 2007. The increase of $182,000, or 2.3%, was primarily a result of higher stock compensation expense related to the long-term incentive plan for the senior management.

     Interest and Other Income: Interest and other income reflect earnings on cash balances in addition to miscellaneous income items. Interest income was $1.4 million for the year ended December 31, 2008 compared to $4.9 million for the year ended December 31, 2007. The decrease is attributable to lower cash balances and lower effective interest rates. Average cash balances and effective interest rates for the year ended December 31, 2008 were $49.6 million and 2.7%, respectively, compared to $98.4 million and 5.0%, respectively, for the same period in 2007.

     Interest Expense: Interest expense was $4.0 million for the year ended December 31, 2008 compared to $4.1 million for the year ended December 31, 2007. The decrease is primarily attributable to the repayment of a mortgage note of $5.0 million during the first quarter of 2007.

     Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net income allocable to noncontrolling interests was $15.3 million ($7.0 million allocated to preferred unit holders and $8.3 million allocated to common unit holders) for the year ended December 31, 2008 compared to $13.0 million ($6.9 million allocated to preferred unit holders and $6.2 million allocated to common unit holders) for the year ended December 31, 2007. The increase was primarily due to an increase in net operating income combined with the net gain on the repurchase of preferred stock offset by a decrease in interest and other income.

Comparison of 2007 to 2006

     Results of Operations: Net income for the year ended December 31, 2007 was $81.7 million compared to $81.4 million for the year ended December 31, 2006. Net income allocable to common shareholders for the year ended December 31, 2007 was $17.5 million compared to $16.5 million for the year ended December 31, 2006. Net income per common share on a diluted basis was $0.81 for the year ended December 31, 2007 compared to $0.77 for the year ended December 31, 2006 (based on weighted average diluted common shares outstanding of 21,573,000 and 21,584,000, respectively). The increase in net income allocable to common shareholders was due to an increase in income from continuing operations of $2.5 million combined with a decrease in non-cash distributions reported in 2006 associated with preferred equity redemptions of $4.7 million partially offset by a higher level of preferred equity cash distributions of $3.2 million and a decrease in gain on disposition of real estate of $2.3 million.

     The following table presents the operating results of the properties for the years ended December 31, 2007 and 2006 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):

		For the Years Ended December 31,
		2007				2006				Change
Rental income:
Same Park (17.5 million rentable square feet) (1)		$	238,783			$	230,965				3.4	%
Non-Same Park (2.1 million rentable square feet) (2)			31,992				11,249				184.4	%
Total rental income			270,775				242,214				11.8	%
Cost of operations:
Same Park			72,995				70,707				3.2	%
Non-Same Park			11,365				3,964				186.7	%
Total cost of operations			84,360				74,671				13.0	%
Net operating income (3):
Same Park			165,788				160,258				3.5	%
Non-Same Park			20,627				7,285				183.1	%
Total net operating income			186,415				167,543				11.3	%
Other income and expenses:
Facility management fees			724				625				15.8	%
Interest and other income			5,104				6,874				(25.7	%)
Interest expense			(4,130	)			(2,575	)			60.4	%
Depreciation and amortization			(98,521	)			(86,216	)			14.3	%
General and administrative			(7,917	)			(7,046	)			12.4	%
Income from continuing operations		$	81,675			$	79,205				3.1	%
Same Park gross margin (4)			69.4%				69.4%				—
Same Park weighted average for the period:
Occupancy			93.8%				93.4%				0.4	%
Realized rent per square foot (5)		$	14.55			$	14.14				2.9	%

     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 (herein referred to as “Same Park”). Operating properties that the Company acquired subsequent to January 1, 2006 are referred to as “Non-Same Park.” For 2007 and 2006, the Same Park facilities constitute 17.5 million rentable square feet, which includes all assets in continuing operations that the Company owned and operated from January 1, 2006 through December 31, 2007, representing approximately 89.4% of the total square footage of the Company’s portfolio for 2007.

     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 table) from continuing operations are summarized for the years ended December 31, 2007 and 2006 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 GAAP.

     The following table summarizes the Same Park operating results by major geographic region for the years ended December 31, 2007 and 2006. 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, 2006, and the impact of such is included in Non-Same Park 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		2007				2006				(Decrease)				2007				2006				(Decrease)				2007				2006				(Decrease)
Southern California		$	63,570			$	60,803				4.6	%		$	17,115			$	17,362				(1.4	%)		$	46,455			$	43,441				6.9	%
Northern California			19,589				18,854				3.9	%			5,380				5,006				7.5	%			14,209				13,848				2.6	%
Southern Texas			11,849				10,472				13.1	%			5,156				4,668				10.5	%			6,693				5,804				15.3	%
Northern Texas			15,162				14,736				2.9	%			5,765				5,811				(0.8	%)			9,397				8,925				5.3	%
South Florida			25,899				24,316				6.5	%			7,869				8,041				(2.1	%)			18,030				16,275				10.8	%
Virginia			51,219				50,055				2.3	%			14,779				14,056				5.1	%			36,440				35,999				1.2	%
Maryland			25,909				25,868				0.2	%			7,251				6,616				9.6	%			18,658				19,252				(3.1	%)
Oregon			18,281				18,596				(1.7	%)			6,663				6,288				6.0	%			11,618				12,308				(5.6	%)
Arizona			6,976				7,001				(0.4	%)			2,907				2,746				5.9	%			4,069				4,255				(4.4	%)
Washington			329				264				24.6	%			110				113				(2.7	%)			219				151				45.0	%
Total Same Park			238,783				230,965				3.4	%			72,995				70,707				3.2	%			165,788				160,258				3.5	%
Non-Same Park			31,992				11,249				184.4	%			11,365				3,964				186.7	%			20,627				7,285				183.1	%
Total before depreciation and amortization			270,775				242,214				11.8	%			84,360				74,671				13.0	%			186,415				167,543				11.3	%
Depreciation and amortization			—				—				—				98,521				86,216				14.3	%			(98,521	)			(86,216	)			14.3	%
Total based on GAAP		$	270,775			$	242,214				11.8	%		$	182,881			$	160,887				13.7	%		$	87,894			$	81,327				8.1	%

     Revenues: Revenues increased $28.6 million for the year ended December 31, 2007, over the same period in 2006 driven primarily by an increase of $20.7 million from the Company’s Non-Same Park facilities which was due to higher rental rates. The Company’s Same Park portfolio accounted for $7.8 million of the increase which was due to a slight improvement in occupancy and higher rental rates.

     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, 2007, $724,000 of revenue was recognized from facility management fees compared to $625,000 for the year ended December 31, 2006.

     Cost of Operations: Cost of operations, excluding discontinued operations, was $84.4 million for the year ended December 31, 2007 compared to $74.7 million for the year ended December 31, 2006. The increase in property taxes, repairs and maintenance costs and payroll costs accounted for 57.9% of the increase in cost of operations. The increase was primarily due to 2.1 million square feet of assets acquired in 2007 and 2006. In addition, utility costs accounted for 26.6% of the increase to cost of operations as a result of an increase in usage and rates.

     Depreciation and Amortization Expense: Depreciation and amortization expense, excluding discontinued operations, was $98.5 million for the year ended December 31, 2007 compared to $86.2 million for the year ended December 31, 2006. The increase is primarily due to the acquisitions of 2.1 million square feet during 2006 and 2007, as well as depreciation expense on capital and tenant improvements made during 2007 and 2006.

     General and Administrative Expense: General and administrative expense was $7.9 million for the year ended December 31, 2007 compared to $7.0 million for the year ended December 31, 2006. The increase of $871,000, or 12.4%, was the result of higher compensation expense due to higher levels of salary and higher stock compensation expense related to the long-term incentive plan for senior management.

     Interest and Other Income: Interest and other income reflect earnings on cash balances in addition to miscellaneous income items. Interest income was $4.9 million for the year ended December 31, 2007 compared to $6.8 million for the year ended December 31, 2006. The decrease is attributable to lower cash balances. Average cash balances for the year ended December 31, 2007 were $97.4 million compared to $137.6 million for the same period in 2006.

     Interest Expense: Interest expense was $4.1 million for the year ended December 31, 2007 compared to $2.6 million for the year ended December 31, 2006. The increase is primarily attributable to $40.6 million in mortgages assumed in connection with the purchase of Meadows Corporate Park in Silver Spring, Maryland and Wellington Commerce Park and Boca Commerce Park in Palm Beach County, Florida during 2006.

     Gain on Disposition of Real Estate: Included in income from discontinued operations is gain on disposition of real estate for the year ended December 31, 2006 of $2.3 million. During the year ended December 31, 2006, the Company disposed of five properties, four in Miami and one in Oregon. The four properties in Miami generated an aggregate gain of $865,000 with the remaining one property in Oregon providing a net gain of $1.5 million.

     Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net income allocable to noncontrolling interests was $13.0 million ($6.9 million allocated to preferred unit holders and $6.2 million allocated to common unit holders) for the year ended December 31, 2007 compared to $16.8 million ($11.2 million allocated to preferred unit holders and $5.7 million allocated to common unit holders) for the year ended December 31, 2006. The reduction was primarily due to the reduction of higher rate preferred units and a decrease in non-cash distributions to the preferred unit holders for redemption of preferred partnership units.

Liquidity and Capital Resources

     Cash and cash equivalents increased $20.0 million from $35.0 million at December 31, 2007 to $55.0 million at December 31, 2008. The increase was primarily due to retained cash from operations partially offset by the $27.1 million of cash paid for repurchases of preferred and common stock in 2008.

     Net cash provided by operating activities for the years ended December 31, 2008 and 2007 was $189.3 million and $184.1 million, respectively. Management believes that the Company’s internally generated net cash provided by operating activities will be sufficient to enable it to meet its operating expenses, capital improvements, debt service requirements and distributions to shareholders in addition to providing additional cash for future growth and debt repayment.

     Net cash used in investing activities was $35.2 million and $180.2 million for the years ended December 31, 2008 and 2007, respectively. The change of $145.0 million was primarily due to $138.9 million of property acquisitions in Washington, California and Virginia made during 2007 million compared to no property acquisitions during 2008.

     Net cash used in financing activities was $134.2 million and $35.9 million for the years ended December 31, 2008 and 2007, respectively. The change of $98.3 million was primarily due to a decrease of $151.2 million in net proceeds from the issuance of preferred equity combined with a decrease of cash paid for preferred and common stock repurchases and redemptions of $51.4 million.

     The Company’s preferred equity outstanding increased to 38.1% of its market capitalization during the year ended December 31, 2008. The Company’s capital structure is characterized by a low level of leverage. As of December 31, 2008, the Company had six fixed-rate mortgages totaling $59.3 million, which represented 2.8% of its total market capitalization. The Company calculates market capitalization by adding (1) the liquidation preference of the Company’s outstanding preferred equity, (2) principal value of the Company’s outstanding mortgages and (3) the total number of common shares and common units outstanding at December 31, 2008 multiplied by the closing price of the stock on that date. The weighted average interest rate for the mortgages is approximately 5.9% per annum. The Company had approximately 7.7% of its properties, in terms of net book value, encumbered at December 31, 2008.

     The Company focuses on retaining cash for reinvestment as we believe that this provides the greatest level of financial flexibility. During the years ended December 31, 2008 and 2007, the Company generated approximately $48.8 million and $41.9 million, respectively, of retained cash. The Company defines retained cash as funds from operations less recurring capital expenditures, distributions and other non-cash adjustments. The amount of cash we retain depends in part on the amount of distributions we make to our shareholders, and, because the U.S. federal income tax rules applicable to REITs require us to distribute 90% of our taxable income to our shareholders, the amount of our distributions depends in part on the amount of our taxable income. Taxable income is a function of many factors which include, among others, the Company’s operating income, acquisition activity and preferred distributions. The Company takes these requirements into account when formulating strategies to increase the amount of its retained cash. As the Company continues to grow as a function of improving operating fundamentals and acquisitions, taxable income has and will likely continue to increase, requiring increased distributions to the

Company’s common shareholders. During the second quarter of 2007, the Company increased its quarterly dividend from $0.29 per common share to $0.44 per common share. With retained cash of $48.8 million for the year ended December 31, 2008, the Company believes it has sufficient cash flow to cover the increased dividend. Going forward, the Company will continue to monitor its taxable income and the corresponding dividend requirements.

     During 2007, the Company issued an aggregate of $155.8 million of preferred equity with a weighted average rate of 6.688%. Proceeds from the various offerings were used to redeem higher rate preferred equity aggregating $50.0 million with a rate of 8.750%. In addition, proceeds were used to provide permanent financing for the Company’s acquisitions made in 2007.

     During 2006, the Company issued an aggregate of $95.0 million of preferred equity with a rate of 7.375%. Proceeds from the various offerings were used to redeem higher rate preferred equity of $118.9 million with a weighted average rate of 9.389%.

     On July 30, 2008, the Company extended the term of its line of credit (the “Credit Facility”) with Wells Fargo Bank to August 1, 2010. The Credit Facility has a borrowing limit of $100.0 million. 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 0.70% to LIBOR plus 1.50% depending on the Company’s credit ratings and coverage ratios, as defined (currently LIBOR plus 0.85%). 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 $300,000, which is being amortized over the life of the Credit Facility. The Company had no balance outstanding as December 31, 2008 and 2007.

     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 minimum ratio of funds from operations (“FFO”) to combined fixed charges and preferred distributions of 2.6 to 1.0. Fixed charges include interest expense and capitalized interest. Preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders. For the year ended December 31, 2008, the FFO to fixed charges and preferred distributions coverage ratio was 3.1 to 1.0, excluding the $4.2 million net gain on the repurchase of preferred stock.

     Non-GAAP Supplemental Disclosure Measure: Funds from Operations: Management believes that 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 NAREIT. The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions and nonrecurring 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 affect the Company’s results of operations.

     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):

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
Net income allocable to common shareholders		$	23,179			$	17,537			$	16,513			$	32,242			$	29,104
Gain on disposition of real estate			—				—				(2,328	)			(18,109	)			(15,462	)
Depreciation and amortization			99,848				98,521				86,243				77,420				73,793
Net income allocable to noncontrolling interests — common units			8,296				6,155				5,673				10,869				9,760
Consolidated FFO allocable to common shareholders and noncontrolling interests — common units			131,323				122,213				106,101				102,422				97,195
FFO allocated to noncontrolling interests — common units			(34,407	)			(31,531	)			(26,950	)			(25,810	)			(24,396	)
FFO allocated to common shareholders		$	96,916			$	90,682			$	79,151			$	76,612			$	72,799

     FFO allocated to common shareholders and noncontrolling interests — common units for the year ended December 31, 2008 increased $9.1 million over the year ended December 31, 2007 primarily due to the net gain of $4.2 million on the repurchase of preferred stock combined with an increase in net operating income partially offset by the decrease in interest income.

     Capital Expenditures: During the years ended December 31, 2008, 2007 and 2006, the Company incurred $33.3 million, $37.4 million and $34.1 million, respectively, in recurring capital expenditures, or $1.70, $1.93 and $1.89 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 following table depicts actual capital expenditures (in thousands):

		For the Years Ended December 31,
		2008				2007				2006
Recurring capital expenditures		$	33,262			$	37,362			$	34,096
Property renovations and other capital expenditures			1,930				5,239				5,131
Total capital expenditures		$	35,192			$	42,601			$	39,227

     Stock Repurchase: The Company’s Board of Directors previously authorized the repurchase, from time to time, of up to 6.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. During the year ended December 31, 2008, the Company repurchased 370,042 shares of common stock at an aggregate cost of $18.3 million or an average cost per share of $49.52. Since inception of the program, the Company has repurchased an aggregate of 4.3 million shares of common stock at an aggregate cost of $152.8 million or an average cost per share of $35.84. As of December 31, 2008, the Company can repurchase an additional 2.2 million shares under existing board authorizations.

     Preferred Stock Repurchase: On December 1, 2008, the Company paid $5.5 million to repurchase 400,000 depositary shares, each representing 1/1,000 of a share of the 6.700% Cumulative Preferred Stock, Series P, for an average cost of $13.70 per depositary share. In accordance with Emerging Issues Task Force (“EITF”) Topic D-42, the purchase price discount, equaling the liquidation value of $25.00 per depositary share over the fair value, is reflected in the income statement, net of the original issue discount, and added to net income allocable to common shareholders. After the purchase, 5,350,000 depositary shares of Preferred Stock, Series P remained outstanding.

     Redemption of Preferred Equity: On December 15, 2006, the Company called 2.0 million depositary shares ($50.0 million) of its 8.750% Cumulative Preferred Stock, Series F for January, 2007 redemption. The Company reported the excess of the redemption amount over the carrying amount, $1.7 million, as an additional allocation of net income to preferred shareholders and a corresponding reduction of net income allocable to common shareholders and common unit holders for the year ended December 31, 2006. The Company redeemed the Series F units on January 29, 2007.

     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 the filing of its tax return.

     Related Party Transactions: At December 31, 2008, Public Storage (“PS”) owned 26.5% of the outstanding shares of the Company’s common stock and 26.3 % of the outstanding common units of the Operating Partnership (100.0% of the common units not owned by the Company). Assuming conversion of its partnership units, PS would own 45.8% 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 PS. Harvey Lenkin is a Director of both the Company and PS.

     Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS and affiliated entities for certain administrative services. These costs totaled $390,000 in 2008 and are allocated among PS 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 PS 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 $728,000 in 2008. In December, 2006, PS also began providing property management services for the mini storage component of two assets owned by the Company for a fee of 6% of the gross revenues of such properties in addition to reimbursement of certain costs. Management fee expense recognized under the management contracts with PS totaled approximately $45,000 for the year ended December 31, 2008.

     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, 2008 (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)			$    70,386				$    9,469				$ 26,478				$ 34,439				$        —
Total			$    70,386				$    9,469				$ 26,478				$ 34,439				$        —

     The Company is scheduled to pay cash dividends of $57.4 million per year on its preferred equity outstanding as of December 31, 2008. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company at December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 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.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports the Company files and submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognized 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 was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance.

     The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2008.

Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

     The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control Over Financial Reporting

     There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2008 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
PS Business Parks, Inc.

     We have audited PS Business Parks, Inc’s internal control over financial reporting as of December 31, 2008, 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 included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, PS Business Parks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 24, 2009, except for Note 2 “Summary of significant accounting policies – Noncontrolling interests, Net income allocation and Net income per common share,” and Note 7 “Noncontrolling interests,” as to which the date is June 16, 2009, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California
February 24, 2009

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.

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			25
Consolidated balance sheets as of December 31, 2008 and 2007			26
Consolidated statements of income for the years ended December 31, 2008, 2007 and 2006			27
Consolidated statements of equity for the years ended December 31, 2008, 2007 and 2006			28
Consolidated statements of cash flows for the years ended December 31, 2008, 2007 and 2006			29
Notes to consolidated financial statements			31
Schedule:
III — Real estate and accumulated depreciation			46

     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.

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, 2008 and 2007, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2008. 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, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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.

     As discussed in Note 2 to the consolidated financial statements, as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51” and FASB Staff Position EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” on January 1, 2009, the Company retrospectively adjusted its consolidated financial statements to reflect the presentation and disclosure requirements of these new accounting standards.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PS Business Parks, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California
February 24,   2009,   except for Note 2 “Summary of significant accounting policies – Noncontrolling interests, Net income allocation and Net income per common share,” and Note 7 “Noncontrolling interests,” as to which the date is June 16, 2009

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

		December 31,
		2008				2007
		(In thousands, except
		share data)
ASSETS
Cash and cash equivalents		$	55,015			$	35,041
Real estate facilities, at cost:
Land			494,849				494,849
Buildings and equipment			1,517,484				1,484,049
			2,012,333				1,978,898
Accumulated depreciation			(637,948	)			(539,857	)
			1,374,385				1,439,041
Land held for development			7,869				7,869
			1,382,254				1,446,910
Rent receivable			2,055				2,240
Deferred rent receivable			21,633				21,927
Other assets			8,366				10,465
Total assets		$	1,469,323			$	1,516,583
LIABILITIES AND EQUITY
Accrued and other liabilities		$	46,428			$	51,058
Mortgage notes payable			59,308				60,725
Total liabilities			105,736				111,783
Commitments and contingencies
Equity:
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 28,250 and 28,650 shares issued and outstanding at December 31, 2008 and 2007, respectively			706,250				716,250
Common stock, $0.01 par value, 100,000,000 shares authorized, 20,459,916 and 20,777,219 shares issued and outstanding at December 31, 2008 and 2007, respectively			204				207
Paid-in capital			363,587				371,267
Cumulative net income			622,113				552,069
Cumulative distributions			(571,340	)			(484,213	)
Total PS Business Parks, Inc.’s shareholders’ equity			1,120,814				1,155,580
Noncontrolling interests:
Preferred units			94,750				94,750
Common units			148,023				154,470
Total noncontrolling interests			242,773				249,220
Total equity			1,363,587				1,404,800
Total liabilities and equity		$	1,469,323			$	1,516,583

See accompanying notes.

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

		For the Years Ended December 31,
		2008				2007				2006
		(In thousands, except
		per share data)
Revenues:
Rental income		$	283,503			$	270,775			$	242,214
Facility management fees			728				724				625
Total operating revenues			284,231				271,499				242,839
Expenses:
Cost of operations			88,442				84,360				74,671
Depreciation and amortization			99,848				98,521				86,216
General and administrative			8,099				7,917				7,046
Total operating expenses			196,389				190,798				167,933
Other income and expenses:
Interest and other income			1,457				5,104				6,874
Interest expense			(3,952	)			(4,130	)			(2,575	)
Total other income and expenses			(2,495	)			974				4,299
Income from continuing operations			85,347				81,675				79,205
Discontinued operations:
Loss from discontinued operations			—				—				(125	)
Gain on disposition of real estate			—				—				2,328
Income from discontinued operations			—				—				2,203
Net income		$	85,347			$	81,675			$	81,408
Net income allocation:
Common shareholders		$	23,179			$	17,537			$	16,513
Preferred shareholders			46,630				50,937				47,933
Noncontrolling interests — common units			8,296				6,155				5,673
Noncontrolling interests — preferred units			7,007				6,854				11,155
Restricted stock unit holders			235				192				134
		$	85,347			$	81,675			$	81,408
Net income per common share — basic:
Continuing operations		$	1.13			$	0.82			$	0.70
Discontinued operations		$	—			$	—			$	0.08
Net income		$	1.13			$	0.82			$	0.77
Net income per common share — diluted:
Continuing operations		$	1.12			$	0.81			$	0.69
Discontinued operations		$	—			$	—			$	0.08
Net income		$	1.12			$	0.81			$	0.77
Weighted average common shares outstanding:
Basic			20,443				21,313				21,335
Diluted			20,618				21,573				21,584