• sell assets to third parties or contribute properties to joint ventures; and

• continue to grow its portfolio through acquisition of new properties, potentially through joint ventures.

The Company owns all of its properties and conducts its business through First Potomac Realty Investment Limited Partnership; the Company's operating partnership (the "Operating Partnership"). At September 30, 2008, the Company was the sole general partner of and owned a 97.2% interest in the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as minority interests in the accompanying unaudited consolidated financial statements, are limited partnership interests owned by some of the Company's executive officers and trustees, who contributed properties and other assets to the Company upon its formation, and other unrelated parties. Executive Summary
During the third quarter of 2008, the Company improved its liquidity position with the refinancing of the $72.1 million mortgage loan on its Suburban Maryland portfolio and the issuance of 2.5 million common shares at a price of $16 per share. As of September 30, 2008, approximately $38 million, or 5.9%, of the Company's debt matures prior to January 1, 2011.
For the third quarter of 2008, the Company's funds from operations ("FFO") were $9.8 million, or $0.39 per diluted share, compared with $10.1 million, or $0.41 per diluted share, during the third quarter of 2007. The Company's net income for the third quarter of 2008 increased to $0.6 million, or $0.03 per diluted share, compared with net income of $0.2 million, or $0.01 per diluted share, for the third quarter of 2007.
The Company's FFO for the first nine months of 2008 increased 15% over the prior-year period to $34.8 million, or $1.39 per diluted share, compared with $30.3 million, or $1.21 per diluted share, for the first nine months of 2007. The Company's net income for the first nine months of 2008 increased to $20.5 million, or $0.85 per diluted share, compared with net income of $20 thousand for the first nine months of 2007. In June 2008, the Company sold its Alexandria Corporate Park property for a gain on sale of $14.3 million, or $0.57 per diluted share after minority interests. Also, for the nine months ended September 30, 2008, the Company repurchased $34.0 million of its Exchangeable Senior Notes at a discount, resulting in a net gain of $4.7 million, or $0.19 per diluted share after allocating a portion of the realized gain to minority interests.

Significant Third Quarter Transactions
• During the third quarter of 2008, the Company executed 307,000 square feet of new leases, including 75,000 square feet at Diamond Hill Distribution Center, 47,000 square feet at Cavalier Industrial Park and 46,000 square feet at River's Bend Center. Rent is expected to commence for all new leases by the end of the first quarter of 2009;

• During the third quarter of 2008, the Company executed 246,000 square feet of renewal leases, including 120,000 square feet at Frederick Industrial Park and 69,000 square feet at Sterling Park Business Center;

• On August 11, 2008, the Company refinanced a $72.1 million mortgage loan on its Suburban Maryland Portfolio. The mortgage was prepaid through the issuance of a $35.0 million secured term loan with KeyBank, N.A. and a $37.5 million draw on the Company's unsecured revolving credit facility. The term loan, which matures in August 2010, has a one-year extension, at the Company's option, with the payment of a 25 basis point extension fee. Borrowings on the loan bear interest at a rate of LIBOR plus 225 basis points. In August 2008, the Company entered into an interest rate swap agreement that fixed the interest rate on the term loan at 5.58%. The refinancing allows certain assets formerly encumbered by the Suburban Maryland Portfolio loan to be included in the Company's unencumbered borrowing base, allowing the Company to make full use of its unsecured revolving credit facility, while also facilitating the possible sale of those assets;

• The Company acquired Triangle Business Center, a four-building, 73,456 square foot business park in Baltimore, Maryland, for $4.4 million in cash;

• The Company acquired River's Park I & II, a six-building, 306,356 square foot business park in Columbia, Maryland, for $42.3 million. The acquisition was financed with a $28.0 million mortgage loan from U.S. Bank N.A., a draw of $13.0 million on the Company's unsecured revolving credit facility and available cash. Borrowings on the loan bear interest at a rate of LIBOR plus 250 basis points. On September 29, 2008, the Company entered into an interest rate swap agreement that fixed the underlying interest rate on the loan at 5.97% for its initial three year term; and

• In September 2008, the Company completed a follow-on public offering of 2,500,000 common shares at a public offering price of $16.00 per share with an option for the underwriters to purchase an additional 375,000 common shares to cover any over-allotments. On October 2, 2008, the underwriters exercised their option to purchase the additional 375,000 common shares at the offering price of $16.00 per share. In total, the Company sold 2,875,000 common shares, which generated net proceeds of approximately $43.9 million. The Company used the proceeds to pay down a portion of the outstanding balance on its unsecured revolving credit facility.

Development and Redevelopment Activity
As of September 30, 2008, the Company continued development of several parcels of land, including land adjacent to previously acquired properties and land acquired with the intent to develop. The Company intends to construct industrial buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. The Company also continued to redevelop several of its assets to attract new tenants.
As of September 30, 2008, the Company had incurred development and redevelopment expenditures for several buildings, of which the more significant projects are noted below:
Development
• Greenbrier Technology Center III - a 48,000 square foot three-story office building is currently in the design phase. Civil site plans have been completed and submitted for permit and the other construction documents are 70% complete; and

• Sterling Park Business Center, Lot 7 - a 57,000 square foot office building, adjacent to the recently completed building, is in design development. Costs to date are for civil site preparation work as well as construction documents.

Redevelopment
• Ammendale Business Park - a 76,000 square foot business park redevelopment. Design costs incurred to date include construction documents and permits. Construction costs include gutting of the entire interior (floors, walls, doors, ceiling, mechanical and electrical), completion of roofing and roof top unit demolition and concrete, metal framing, drywall, plumbing, mechanical and electrical rough-in work. The entire space has been fully pre-leased to a tenant that is expected to take possession in the fourth quarter of 2008 upon completion of tenant improvements;

• Enterprise Parkway - a 71,000 square foot multi-tenanted office redevelopment. Costs incurred to date include building, lobby and common corridor renovation as well as schematic architectural and engineering design for future tenant layouts;

• Gateway 270 - a 55,000 square foot business park redevelopment. Costs incurred to date include architectural and engineering design and permitting; demolition, metal framing, plumbing, mechanical and electrical rough-in work, and

• Interstate Plaza - a 56,000 square foot multi-tenanted office and warehouse redevelopment. Costs incurred to date include schematic architectural design for multi-tenant layouts and exterior renovation work.

The Company will commence redevelopment efforts on unfinished vacant space through the investment of capital in electrical, plumbing and other capital improvements in order to expedite the leasing of unfinished space. The Company anticipates development and redevelopment efforts on these projects will continue throughout 2008 and into 2009. At September 30, 2008, the Company owned developable land, which can accommodate approximately 1.4 million square feet of building space, which includes 0.1 million square feet in its Maryland region; 0.6 million square feet in its Northern Virginia region; and 0.7 million square feet in its Southern Virginia region.
Critical Accounting Policies and Estimates The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") that require the Company to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that the Company deems most important to the portrayal of its financial condition and results of operations. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in its consolidated financial statements. The Company's critical accounting policies relate to revenue recognition, including evaluation of the collectability of accounts receivable, impairment of long-lived assets, purchase accounting for acquisitions of real estate and share-based compensation.
The following is a summary of certain aspects of these critical accounting policies.
Revenue Recognition
Rental revenue under leases with scheduled rent increases or rent abatements is recognized ratably over the term of the leases. Accrued straight-line rents included in the Company's consolidated balance sheets represent the aggregate excess of rental revenue recognized on a straight-line basis over contractual rent under applicable lease provisions. The Company's leases generally contain provisions under which the tenants reimburse the Company for a portion of the Company's property operating expenses and real estate taxes. Such reimbursements are recognized in the period that the expenses are incurred. Lease termination fees are recognized on the date of termination when the related leases are canceled and the Company has no continuing obligation to provide services to such former tenants.
The Company must make estimates of the collectability of its accounts receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and other income. The Company specifically analyzes accounts receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of its allowance for doubtful accounts receivable. These estimates have a direct impact on the Company's net income as a higher required allowance for doubtful accounts receivable will result in lower net income. The uncollectible portion of the amounts due from tenants, including accrued straight-line rents, is charged to property operating expense in the period in which the determination is made.

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

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

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

The Company reviews market conditions for possible impairment of a property's carrying value. When circumstances such as adverse market conditions or changes in management's intended holding period indicate a possible impairment of the value of a property, an impairment analysis is performed. The Company assesses the recoverability based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the real estate investment's use and eventual disposition. This estimate is based on projections of future revenues, expenses and capital improvement costs. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make subjective assessments as to whether there are impairments in the values of its investments in real estate.
The Company will classify a building as held for sale in the period in which it has made the decision to dispose of the building, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, assuming no continuing involvement with the property after the sale, the Company will record an impairment loss if the fair value of the building, less anticipated selling costs, is lower than its carrying amount. The Company will classify any impairment loss, together with the building's operating results, as discontinued operations in its statements of operations and classify the assets and related liabilities as held for sale on the current period balance sheet. Interest expense is reclassified to discontinued operations only to the extent the property to be disposed of secures specific mortgage debt.
Purchase Accounting
Acquisitions of rental property from third parties are accounted for at fair value, which is allocated between land and building (on an as-if vacant basis) based on management's estimate of the fair value of those components for each type of property and to tenant improvements based on the depreciated replacement cost of the tenant improvements, which approximates the fair value. The purchase price is also allocated as follows:
† value of leases in-place on the date of acquisition based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred;

† the value of above and below market in-place leases based on the present values (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual rent amounts to be paid under the lease and the estimated fair market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to nineteen years; and

† the intangible value of tenant or customer relationships.

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

Share-Based Compensation
The Company follows the fair value recognition provisions of SFAS No. 123R, Share-Based Payment, which require that the cost for all share-based payment transactions be recognized as a component of income from continuing operations. The standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period).
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2008 to the Three and Nine Months Ended September 30, 2007 Acquisitions
The Company acquired the following buildings at an aggregate purchase cost of $46.6 million during the third quarter of 2008: four buildings at Triangle Business Center; and six buildings at River's Park I & II. The completion of these acquisitions in late third quarter resulted in minimal impact on the results of operations for the three and nine months ended September 30, 2008.
The Company acquired the following buildings at an aggregate purchase cost of $88.6 million during 2007: three buildings at Greenbrier Business Center; one building at Chesterfield Business Center; two buildings at Ammendale Business Park; two buildings at River's Bend Center; and two buildings at Annapolis Commerce Park East. Collectively, the 2008 and 2007 properties are referred to as the "Current Acquisitions."
The balance of the portfolio is referred to as the "Remaining Portfolio." Total Revenues
Total revenues are summarized as follows:

                                Three Months Ended                 Nine Months Ended                 Three Months                  Nine Months
                                   September 30,                     September 30,                             Percent                       Percent
(dollars in thousands)         2008             2007             2008             2007          Increase       Change        Increase        Change
Rental                       $ 25,491         $ 25,029         $ 75,316         $ 73,537          $ 462             2 %       $ 1,779             2 %

Tenant reimbursements
& other                         5,577            5,033           16,304           15,010            544            11 %         1,294             9 %

Rental Revenue
Rental revenue is comprised of contractual rent, the impacts of straight-line revenue and the amortization of intangible assets and liabilities representing above and below market leases. Rental revenue increased $0.5 million for the three months ended September 30, 2008 compared to the same period in 2007, primarily due to higher market rental rates realized by the Company's Remaining Portfolio, which resulted in additional rental revenue of $0.4 million. The Company's Current Acquisitions contributed a slight increase in rental revenue for the three months ended September 30, 2008. Rental revenue increased $1.8 million for the nine months ended September 30, 2008 compared to the same period in 2007, primarily due to the Current Acquisitions, which contributed additional revenue of $1.6 million. The Company's Remaining Portfolio contributed additional revenue of $0.2 million for the nine months ended September 30, 2008, compared to the same period in 2007.
The increase in rental revenue for the three and nine months ended September 30, 2008 includes $0.1 million and $1.2 million, respectively, for the Company's Maryland reporting segment and $0.5 million and $1.2 million, respectively, for the Southern Virginia reporting segment. The increase in Maryland and Southern Virginia reflects higher market rental rates, with Southern Virginia offset in part by an increase in vacancy, while vacancy in Maryland remained relatively unchanged. The increases in rental revenue for the three and nine months ended September 30, 2008 compared to 2007 were partially offset by a decrease of $0.1 million and $0.6 million, respectively, in rental revenue for the Company's Northern Virginia reporting segment driven by increased vacancy.

Tenant Reimbursements and Other Revenues Tenant reimbursements and other revenues include operating and common area maintenance costs reimbursed by the Company's tenants as well as incidental other revenues such as lease termination fees and late fees. Tenant reimbursements and other revenues increased $0.5 million and $1.3 million during the three and nine months ended September 30, 2008, respectively, compared with the same periods in 2007. The Remaining Portfolio contributed an increase in tenant reimbursements and other revenues of $0.5 million and $1.1 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. The increase in the Remaining Portfolio can be partially attributed to termination fee income resulting from the negotiated departure of certain tenants, which resulted in an increase of $0.5 million during the nine months ended September 30, 2008 compared to the same period in 2007. The Company subsequently renewed and expanded other existing tenants into a majority of the terminated space with rent commencing in the third and fourth quarters of 2008. Tenant reimbursement and other revenue also increased for the Remaining Portfolio due to an increase in tenant reimbursements as a result of higher property operating expenses incurred during 2008. The remaining increase in tenant reimbursement and other revenues was due to the Current Acquisitions.
The increases in tenant reimbursements and other revenues for the three and nine months ended September 30, 2008 include $0.3 million and $0.6 million, respectively, for the Northern Virginia reporting segment and $0.3 million and $1.0 million, respectively, for the Southern Virginia reporting segment. The increase in Northern Virginia and Southern Virginia in part reflects an increase in triple-net tenants that generally results in higher reimbursement of property operating expenses. Revenue was also higher in 2008 as a result of annual common area maintenance reconciliation impacts incurred in third quarter 2007 that resulted in lower reimbursement revenue. Tenant reimbursements and other revenues decreased $0.1 million and $0.3 million for the Company's Maryland reporting segment for the three and nine months ended September 30, 2008, respectively, as a result of slightly lower reimbursement revenue, lower termination fee income and reduced ancillary income such as late fee revenue. Total Expenses
Property Operating Expenses
Property operating expenses are summarized as follows:

                              Three Months Ended             Nine Months Ended               Three Months                Nine Months
                                September 30,                  September 30,                           Percent                     Percent
(amounts in thousands)       2008           2007            2008            2007         Increase      Change       Increase       Change
Property operating          $ 7,160        $ 6,576        $ 20,091        $ 18,987         $ 584            9 %      $ 1,104            6 %

Real estate taxes &
insurance                     3,173          2,845           9,122           8,102           328           12 %        1,020           13 %

Property operating expenses increased $0.6 million and $1.1 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. The overall increase in property operating expenses is primarily due to higher utility costs associated with the Remaining Portfolio, which resulted in $0.5 million and $0.6 million of additional property operating expenses during the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. The increase in property operating expenses can also be attributed to the Current Acquisitions, which increased $0.1 million and $0.5 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007.
The increase in total property operating expenses for the three and nine months ended September 30, 2008 includes $0.2 million and $0.4 million, respectively, for the Company's Maryland reporting segment, $0.2 million and $0.1 million, respectively, for the Company's Northern Virginia reporting segment and $0.1 million and $0.5 million, respectively, for the Southern Virginia reporting segment.
Real estate taxes and insurance expense increased $0.3 million and $1.0 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. Real estate taxes and insurance for the three and nine months ended September 30, 2008 increased $0.1 million and $0.2 million, respectively, for the Company's Maryland reporting segment, $0.2 million and $0.6 million, respectively, for the Northern Virginia reporting segment and $0.1 million and $0.2 million, respectively, for the Southern Virginia reporting segment. A larger portion of the increase can be attributed to higher real estate assessments and real estate tax rates on the Company's Northern Virginia properties located in Loudon County, Stafford County and Fairfax County, Virginia.

Other Operating Expenses . . .