Edgar Filing: PS BUSINESS PARKS INC/CA

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2001.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition period from to
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Commission File Number 1-10709
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PS BUSINESS PARKS, INC.
-----------------------
(Exact name of registrant as specified in its charter)

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

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

Registrant's telephone number, including area code: (818) 244-8080
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Securities registered pursuant to Section 12(b) of the Act

Title of each class Name of each exchange on which registered
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Common Stock, $0.01 par value................................... American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of
91/4% Cumulative Preferred Stock, Series A, $0.01 par value... American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of
91/2% Cumulative Preferred Stock, Series D, $0.01 par value... American Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of
83/4% Cumulative Preferred Stock, Series F, $0.01 par value... American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act
None
----
(Title of class)

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 X No
---

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. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 2002:

Common Stock, $0.01 par value, $341,188,658 (computed on the basis of $34.39 per
share which was the reported closing sale price of the Company's Common Stock on
the American Stock Exchange on March 12, 2002).

The number of shares outstanding of the registrant's class of common stock, as
of March 14, 2002:

Common Stock, $0.01 par value, 21,546,449 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement to be filed in connection with the annual
shareholders' meeting to be held in 2002 are incorporated by reference into Part
III.

PART I.

ITEM 1. BUSINESS

THE COMPANY
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PS Business Parks, Inc. ("PSB") is a fully-integrated, self-advised and
self-managed real estate investment trust ("REIT") that acquires, develops, owns
and operates commercial properties, primarily flex, multi-tenant office and
industrial space. As of December 31, 2001, PSB owned approximately 75% of the
common partnership units of PS Business Parks, L.P. (the "Operating Partnership"
or "OP"). The remaining common partnership units were owned by Public Storage,
Inc. ("PSI") and its affiliated entities. PSB, as the sole general partner of
the Operating Partnership, has full, exclusive and complete responsibility and
discretion in managing and controlling the Operating Partnership. Unless
otherwise indicated or unless the context requires otherwise, all references to
"the Company" mean PS Business Parks, Inc. and its subsidiaries, including the
Operating Partnership.

As of December 31, 2001, the Company owned and operated approximately
14.8 million net rentable square feet of commercial space located in 9 states,
representing a 17.5% increase in commercial square footage from December 31,
2000. The Company also managed approximately 1.7 million net rentable square
feet on behalf of PSI and its affiliated entities, third party owners and a
joint venture in which the Company held a 25% ownership interest.

HISTORY OF THE COMPANY: In a March 17, 1998 merger (the "Merger") of
American Office Park Properties, Inc. ("AOPP") with and into the Company (which
was formerly named "Public Storage Properties XI, Inc."), the Company acquired
the commercial property business previously operated by AOPP and was renamed "PS
Business Parks, Inc." Concurrent with the Merger, the Company exchanged 11
mini-warehouses and two properties that combined mini-warehouse and commercial
space for 11 commercial properties owned by PSI. For financial accounting
purposes, the Merger was accounted for as a reverse acquisition whereby AOPP was
deemed to have acquired Public Storage Properties XI, Inc. However, PS Business
Parks, Inc. (formerly Public Storage Properties XI, Inc.) is the continuing
legal entity and registrant for both Securities and Exchange Commission filing
purposes and income tax reporting purposes.

AOPP was originally organized in 1986 as a California corporation to
serve as the manager of the commercial properties owned by PSI and its
affiliated entities. In January 1997, AOPP was reorganized to succeed to the
commercial property business of PSI, becoming a fully integrated, self-advised
and self-managed REIT. AOPP conducted substantially all of its business as the
sole general partner of the Operating Partnership. In 1997, as part of a
reorganization, PSI and its consolidated partnerships contributed properties
containing 2.9 million square feet of commercial space to AOPP and the Operating
Partnership. During the remainder of 1997, AOPP acquired approximately 2 million
square feet of additional commercial space from the Acquiport Corporations,
subsidiaries of the New York State Common Retirement Fund, and approximately 0.6
million square feet of additional commercial space from other unaffiliated third
parties.

During 1998, the Company completed the Merger and acquired
approximately 4.9 million square feet of commercial space, including 2.3 million
square feet of commercial space located in Oregon and Texas from Principal
Mutual Life Insurance Company and 1.8 million square feet of commercial space
located in California, Maryland, Virginia and Texas from other unaffiliated
third parties.

During 1999, the Company acquired approximately 1.3 million square feet
of commercial space from unaffiliated third parties: 483,000 square feet in
Texas, 405,000 square feet in Northern Virginia and Maryland, 211,000 square
feet in Northern California and 200,000 square feet in Arizona. In addition, the
Company completed a 61,000 square foot development in Texas and a 66,000 square
foot development in Oregon.

During 2000, the Company acquired 0.3 million square feet of commercial
space from Acquiport Two Corporation and 0.5 million square feet of commercial
space from unaffiliated third parties: 454,000 square feet in Southern
California, 210,000 square feet in Northern Virginia and 178,000 square feet in
Northern California. In addition, the Company completed a 22,000 square foot
development in Oregon. During 2000, the Company also disposed of 627,000 square
feet of properties that did not meet its ongoing strategy. These dispositions
resulted in aggregate net proceeds of $23.8 million.

During 2001, the Company acquired 2.2 million square feet from
unaffiliated third parties: 658,000 square feet in Northern Virginia, 685,000
square feet in Oregon and 905,000 square feet in Maryland. In addition, the
Company completed a 97,000 square foot development in Oregon, a 141,000 square
foot development in Northern Virginia and a 102,000 square foot development in
Texas. During 2001, the Company also disposed of a 77,000 square foot property
in San Diego, California and contributed 294,000 square feet of industrial space
in Southern California to a joint venture.

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

The Company's principal executive offices are located at 701 Western
Avenue, Glendale, California 91201-2397. The Company's telephone number is (818)
244-8080.

BUSINESS OF THE COMPANY: The commercial properties owned by the Company
consist of flex space, office space and industrial space. The Company owns
approximately 11.2 million square feet of flex space. The Company defines "flex"
space as buildings that are configured with a combination of part warehouse
space and part office space and can be designed to fit a wide variety of uses.
The warehouse component of the flex space has a variety of uses including light
manufacturing and assembly, storage and warehousing, showroom, laboratory,
distribution and research and development activities. The office component of
flex space is complementary to the warehouse component by enabling businesses to
accommodate management and production staff in the same facility. The Company
also owns approximately 2.5 million square feet of low-rise suburban office
space generally either in business parks that combine office and flex space or
in desirable submarkets where the economics of the market demand an office
build-out and approximately 1.1 million square feet of industrial space that
have characteristics similar to the warehouse component of the flex space.

The Company's commercial properties typically consist of one to ten
low-rise buildings located on three to fifty acres and containing from
approximately 20,000 to 700,000 square feet of rentable space in the aggregate.
Facilities are managed through either on-site management or area offices central
to the facilities. Parking is open or covered. The ratio of parking spaces to
rentable square feet ranges from two to six per thousand square feet depending
upon the use of the property and its location. Office space generally requires a
greater parking ratio than most industrial uses. The Company may acquire
properties that do not have these characteristics.

The tenant base for the Company's facilities is diverse. The facilities
can be bifurcated into those facilities that service small to medium-sized
businesses and those that service larger businesses. Approximately 30% of the
annual rents from the portfolio are from facilities that serve small to
medium-sized businesses. A property in this facility type is typically divided
into units ranging in size from 500 to 5,000 square feet and leases generally
range from one to three years. The remaining 70% of the income is derived from
facilities that serve larger businesses, with units ranging from 5,000 square
feet to multiple buildings leased to a single tenant. The U.S. Government is the
largest tenant and leases 361,000 square feet or approximately 3.7% of the
Company's portfolio.

The Company intends to continue acquiring commercial properties located
throughout the United States. The Company's policy of acquiring commercial
properties may be changed by its Board of Directors without shareholder
approval. However, the Board of Directors has no intention of changing this
policy at this time. Although the Company currently owns properties in nine
states, it may expand its operations to other states. Properties are acquired

for both income and potential capital appreciation; there is no limitation on
the amount that can be invested in any specific property.

The Company may acquire land for the development of commercial
properties. In general, the Company expects to acquire land that is adjacent to
commercial properties that the Company already owns or is acquiring. The Company
completed development of three facilities in 2001 and currently has no projects
under development. The Company owned approximately 6.4 acres of land held for
development in Northern Virginia, 27.3 acres in Portland, Oregon and 10.0 acres
in Dallas, Texas as of December 31, 2001.

OPERATING PARTNERSHIP
---------------------

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

As the general partner of the Operating Partnership, the Company has
the exclusive power under the Operating Partnership Agreement to manage and
conduct the business of the Operating Partnership. The Board of Directors
directs the affairs of the Operating Partnership by managing the Company's
affairs. The Operating Partnership will be responsible for, and pay when due,
its share of all administrative and operating expenses of the properties it owns
under the terms of a cost sharing and administrative services agreement with PSI
and affiliated entities. See "Cost Allocation and Administrative Services."

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

SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT
----------------------------------------------

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

ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS: As the general partner of
the Operating Partnership, the Company is authorized to cause the Operating
Partnership from time to time to issue to partners of the Operating Partnership
or to other persons additional partnership units in one or more classes, and in
one or more series of any of such classes, with such designations, preferences
and relative, participating, optional, or other special rights, powers and
duties (which may be senior to the existing partnership units), as will be
determined by the Company, in its sole and absolute discretion. No such
additional partnership units, however, will be issued to the Company unless (i)
the agreement to issue the additional partnership interests arises in connection
with the issuance of shares of the Company, which shares have designations,
preferences and other rights, such that the economic interests are substantially
similar to the designations, preferences and other rights of the additional
partnership units that would be issued to the Company and (ii) the Company
agrees to make a capital contribution to the Operating Partnership in an amount
equal to the net proceeds raised in connection with the issuance of such shares
of the Company.

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

DISTRIBUTIONS: The Company, as general partner, is required to
distribute at least quarterly the "available cash" (as defined in the Operating
Partnership Agreement) generated by the Operating Partnership for such quarter.

Distributions are to be made (i) first, with respect to any class of partnership
interests having a preference over other classes of partnership interests; and
(ii) second, in accordance with the partners' respective percentage interests on
the "partnership record date" (as defined in the Operating Partnership
Agreement). Commencing in 1998, the Operating Partnership's policy has been to
make distributions per unit (other than preferred units) that are equal to the
per share distributions made by the Company with respect to its Common Stock.

PREFERRED UNITS: As of December 31, 2001, the Operating Partnership had
7,910,000 preferred units owned by third parties with distribution rates ranging
from 8 3/4% to 9 1/4% (per annum) with an aggregate stated value of
$197,750,000. The Operating Partnership has the right to redeem the preferred
units on or after the fifth anniversary of the issuance date at the original
capital contribution plus the cumulative priority return, as defined, to the
redemption date to the extent not previously distributed. Each series of
preferred units is exchangeable for Cumulative Redeemable Preferred Stock of the
respective series of PS Business Parks, Inc. on or after the tenth anniversary
of the date of issuance at the option of the Operating Partnership or a majority
of the holders of the applicable series of preferred units.

As of December 31, 2001, the Company owned 2,200,000 preferred units
with a stated value of $55 million with terms substantially identical to the
terms of the publicly traded depositary shares each representing 1/1,000 of a
share of 9 1/4% Cumulative Preferred Stock, Series A of the Company and
2,640,000 preferred units with a stated value of $66 million with terms
substantially identical to the terms of the publicly traded depositary shares
each representing 1/1,000 of a share of 9 1/2% Cumulative Preferred Stock,
Series D of the Company. In addition, during January 2002, the Company acquired
2,000,000 preferred units with a stated value of $50 million with terms
substantially identical to the terms of the publicly traded depositary shares
each representing 1/1,000 of a share of 8 3/4% Cumulative Preferred Stock,
Series F of the Company.

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

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

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

MANAGEMENT: The Operating Partnership is organized as a California
limited partnership. The Company, as the sole general partner of the Operating
Partnership, has full, exclusive and complete responsibility and discretion in
managing and controlling the Operating Partnership, except as provided in the
Operating Partnership Agreement and by applicable law. The limited partners of
the Operating Partnership have no authority to transact business for, or
participate in the management activities or decisions of, the Operating
Partnership except as provided in the Operating Partnership Agreement and as
permitted by applicable law.

However, the consent of the limited partners holding a majority of the
interests of the limited partners (including limited partnership interests held
by the Company) generally will be required to amend the Operating Partnership
Agreement. Further, the Operating Partnership Agreement cannot be amended
without the consent of each partner adversely affected if, among other things,
the amendment would alter the partner's rights to distributions from the
Operating Partnership (except as specifically permitted in the Operating
Partnership Agreement), alter the redemption right, or impose on the limited
partners an obligation to make additional capital contributions.

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

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

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

TAX PROTECTION PROVISIONS: The Operating Partnership Agreement provides
that, until 2007, the Operating Partnership may not sell any of 12 designated
properties in a transaction that will produce taxable gain for the contributing
partner without the prior written consent of PSI. The Operating Partnership is
not required to obtain PSI's consent if PSI and its affiliated partnerships do
not continue to hold at the time of the sale at least 30% of their original
interest in the Operating Partnership. Since PSI's consent is required only in
connection with a taxable sale of one of the 12 designated properties, the
Operating Partnership will not be required to obtain PSI's consent in connection
with a "like-kind" exchange or other nontaxable transaction involving one of
these properties.

INDEMNIFICATION: The Operating Partnership Agreement provides that the
Company and its officers and directors and the limited partners of the Operating
Partnership will be indemnified and held harmless by the Operating Partnership
for any act performed for, or on behalf of, the Operating Partnership, or in

furtherance of the Operating Partnership's business unless it is established
that (i) the act or omission of the indemnified person was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the indemnified person
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the indemnified person had
reasonable cause to believe that the act or omission was unlawful. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the indemnified person did not meet the requisite standards of
conduct set forth above. The termination of any proceeding by conviction or upon
a plea of nolo contendere or its equivalent, or an entry of an order of
probation prior to judgment, creates a rebuttable presumption that the
indemnified person did not meet the requisite standard of conduct set forth
above. Any indemnification so made shall be made only out of the assets of the
Operating Partnership.

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

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

COST ALLOCATION AND ADMINISTRATIVE SERVICES
-------------------------------------------

Pursuant to a cost sharing and administrative services agreement, the
Company shares costs with PSI and affiliated entities for certain administrative
services. These services include employee relations, insurance, administration,
management information systems, legal, income tax and office services. Under
this agreement, costs are allocated to the Company in accordance with its
proportionate share of these costs.

COMMON OFFICERS AND DIRECTORS
-----------------------------

Harvey Lenkin, the President of PSI, is a Director of both the Company
and PSI. Ronald L. Havner, Jr., the Chairman and Chief Executive Officer of the
Company, was Senior Vice President and Chief Financial Officer of PSI until
December 1996 and is currently an employee of PSI. The Company engages
additional executive personnel who render services exclusively for the Company.
However, it is expected that officers of PSI will continue to render services
for the Company as requested.

PROPERTY MANAGEMENT
-------------------

The Company continues to manage commercial properties owned by PSI and
its affiliates, which are generally adjacent to mini-warehouses, for a fee of 5%
of the gross revenues of such properties in addition to reimbursement of direct
costs. The property management contract with PSI is for a seven-year term with
the term extended one year upon each anniversary date. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty days
notice.

MANAGEMENT
----------

Ronald L. Havner, Jr. (44), President, Chairman and Chief Executive
Officer, heads the Company's senior management team. Mr. Havner has been
President and Chief Executive Officer of the Company or AOPP since December
1996. He became Chairman of the Company in March 1998. He was Senior Vice
President and Chief Financial Officer of PSI from 1992 until December 1996. The
Company's executive management includes: Jack Corrigan (41), Vice President and
Chief Financial Officer; Michael Lynch (49), Vice President-Acquisitions and
Development; Stephen King (45), Vice President and Chief Operating Officer;
Jeffrey Reinstein (38), Vice President-Business Services; Joseph Miller (38)
Vice President and Corporate Controller; Angelique Benschneider (39), Vice
President (Midwest Division); David Bischoff (50), Vice President (Eastern
Division); Maria Hawthorne (42), Vice President (Northern Virginia Division);
Bill McFaul (36) Vice President (Maryland Division); and Eileen Newkirk (53),
Vice President (Pacific Northwest Division).

REIT STRUCTURE
--------------

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

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

GROWTH STRATEGY
---------------

The Company's primary objective is to maximize shareholder value by
achieving long-term growth in net asset value per share. Key elements of the
Company's growth strategy include:

INCREASE NET CASH FLOW OF EXISTING PROPERTIES: The Company seeks to
increase the net cash flow generated by its existing properties by (i)
maximizing average occupancy rates, (ii) achieving higher levels of realized
monthly rents per occupied square foot, and (iii) reducing its operating cost
structure by improving operating efficiencies and economies of scale. The
Company believes that its experienced property management personnel and
comprehensive systems combined with increasing economies of scale will enhance
the Company's ability to meet these goals. The Company seeks to increase
occupancy rates and realized monthly rents per square foot by providing its
field personnel with incentives to lease space to higher credit tenants and to
maximize the return on investment in each lease transaction. The return for
these incentive purposes is measured by the internal rate of return on each
lease transaction after deducting tenant improvements and lease commissions. The
Company seeks to reduce its cost structure by controlling capital expenditures
associated with re-leasing space by acquiring and owning properties with easily
reconfigured space that appeal to a wide range of tenants.

FOCUS ON TARGETED MARKETS: The Company intends to continue investing in
markets that have characteristics which enable them to be competitive
economically in the short and long-term. The Company believes that markets with
above average population growth, education levels and personal income will
produce better economic returns. As of December 31, 2001, 95% of the Company's
square footage was located in these targeted core markets. Based on information
provided by Claritas Inc., these markets have experienced over twice the
population growth of the United States average over the past decade. In
addition, these markets, on average, have 35% more college graduates and 23%
more household income than the United States average. The Company targets
individual properties in those markets that are close to important services and
universities and have easy access to major transportation arteries.

USE KNOWLEDGE OF CORE MARKETS TO MAKE OPPORTUNISTIC ACQUISITIONS IN A
FRAGMENTED INDUSTRY: The Company believes its knowledge of its core markets
enhances its ability to identify attractive acquisition opportunities and
capitalize on the overall fragmentation in the "flex" space industry. The
Company maintains local market information on rates, occupancies and competition
in each of its core markets. According to Torto Wheaton Research, there was
approximately 1.4 billion square feet of "flex" space facilities in the United
States as of December 31, 2001. The Company as one of the largest operators of
flex space owns less than 1% of the total market. The Company believes that the
fragmented nature of this market creates opportunities for the Company to use
its knowledge to make acquisitions on favorable terms. The Company expects that
acquisitions from third parties will be its most significant source of growth in
assets, revenue and funds from operations during fiscal 2002, if attractive
investment opportunities continue to be available.

REDUCE EXPENDITURES AND INCREASE OCCUPANCY RATES BY PROVIDING FLEXIBLE
PROPERTIES AND ATTRACTING A DIVERSIFIED TENANT BASE: By focusing on properties
with easily reconfigured space, the Company can offer facilities that appeal to
a wide range of potential tenants, which aids in reducing the capital
expenditures associated with re-leasing space. Such property flexibility also
allows the Company to better serve existing tenants by accommodating their
inevitable expansion and contraction needs. In addition, the Company believes
that a diversified tenant base and property flexibility helps it maintain high
occupancy rates during periods when market demand is weak.

DEVELOP NEW AMENITIES FOR TENANTS: During 2000, the Company formed a
new division to focus on developing and providing enhanced business service
programs for tenants to increase tenant retention and revenues. These programs
enable tenant access to sophisticated technology and telecommunications
services. In addition, the Company created Tenant Advantage to allow its small
and medium-sized business customers to purchase products and services directly
from national suppliers at discounts usually reserved for large companies. The
Company intends to continue to identify creative ways to develop and offer new
services for its tenants.

PROVIDE SUPERIOR PROPERTY MANAGEMENT: The Company seeks to provide a
superior level of service to its tenants in order to achieve high occupancy and
rental rates, as well as minimize customer turnover. The Company's property
management offices are primarily located on-site, providing tenants with
convenient access to management. On-site staff enables the Company's properties
to be well maintained and to convey a sense of quality, order and security. The
Company has significant experience in acquiring properties managed by others and
thereafter improving tenant satisfaction, occupancy levels, renewal rates and
rental income by implementing established tenant service programs.

DEVELOP NEW PROPERTIES IN EXISTING CORE MARKETS: The Company's
development strategy is to selectively construct new properties next to business
parks in which it already owns properties. The Company develops these properties
using the expertise of local development companies. The Company plans to keep
development properties to less than 5% of its portfolio on a book value basis
before deducting accumulated depreciation. In addition, the Company plans to
limit development activity in 2002 to existing developments and developments
that have been pre-leased.

FINANCING STRATEGY
------------------

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

RETAIN OPERATING CASH FLOW: The Company seeks to retain significant
funds (after funding its distributions and capital improvements) for additional
investments and debt reduction. During the year ended December 31, 2001, the
Company distributed 41% of its funds from operations ("FFO") to common
shareholders/unitholders and retained $43.3 million for principal payments on
debt, repurchasing its common stock and reinvestment into real estate assets.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

PERPETUAL PREFERRED STOCK/UNITS: The primary source of leverage in the
capital structure is perpetual preferred stock or the equivalent units in the
operating partnership. This method of financing eliminates interest rate and
refinancing risks because the dividend rate is fixed and the stated value or
capital contribution is not required to be repaid.

DEBT FINANCING: The Company uses debt financing to a limited degree.
This debt financing comes in three forms. 1) An unsecured $100 million revolving
line of credit with Wells Fargo Bank is used as a temporary short term source of
acquisition financing, 2) the Company entered into a seven year unsecured $50
million term loan facility with Fleet National Bank to provide flexibility under
the line of credit but also continue to take advantage of the short-term
interest rate environment and 3) the Company assumes mortgage debt in connection
with property acquisitions.

ACCESS TO ACQUISITION CAPITAL: The Company believes that its strong
financial position will enable it to access capital to finance its acquisitions.
The Company targets a leverage ratio of 40% (defined as debt and preferred
equity as a percentage of market capitalization). Market capitalization includes
debt, preferred equity and the fair market value of the common shares and
partnership units based upon the quoted market price. In addition, the Company
targets a ratio of FFO to combined fixed charges and preferred distributions of
2.5 to 1.0. Fixed charges include interest expense and capitalized interest.
Preferred distributions include amounts paid to preferred shareholders and
preferred Operating Partnership unitholders. As of December 31, 2001 and for the
year then ended, the leverage ratio was 35% and the FFO to combined fixed
charges and preferred distributions ratio was 4.6 to 1.0. Subject to market
conditions, the Company intends to add leverage to its capital structure
primarily through the issuance of preferred stock or partnership units.

COMPETITION
-----------

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

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

INVESTMENTS IN REAL ESTATE FACILITIES
-------------------------------------

As of December 31, 2001, the Company owned and operated approximately
14.8 million net rentable square feet compared to 12.6 million net rentable
square feet at December 31, 2000. The net increase in net rentable square feet
was due to the acquisitions of facilities and the development of three
properties, partially offset by property dispositions and the contribution of an
industrial park to a joint venture.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
--------------------------------------------

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

BORROWINGS
----------

As of December 31, 2001, the Company had outstanding mortgage notes
payable balances of approximately $30 million, $100 million outstanding on the
Credit Facility and $35 million in short term borrowings from PSI. See Notes 5
and 6 to the consolidated financial statements for a summary of the Company's
borrowings at December 31, 2001.

In September 2000, the Company extended its Credit Facility with Wells
Fargo Bank. The Credit Facility has a borrowing limit of $100 million and a
maturity date of August 6, 2003. The maturity date may be extended by one year
on each anniversary of the Credit Facility upon request by the Company and
approval by Wells Fargo Bank. 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 0.75% to LIBOR plus 1.35% depending on the Company's credit
rating and coverage ratios, as defined (currently LIBOR plus 1.00%). In
addition, the Company is required to pay an annual commitment fee of 0.25% of
the borrowing limit.

Under covenants of the Credit Facility, the Company is required to (i)
maintain a balance sheet leverage ratio (as defined) of less than 0.50 to 1.00,
(ii) maintain interest and fixed charge coverage ratios (as defined) of not less
than 2.25 to 1.00 and 1.75 to 1.00, respectively, (iii) maintain a minimum total
shareholders' equity (as defined) and (iv) limit distributions to 95% of funds
from operations. In addition, the Company is limited in its ability to incur
additional borrowings (the Company is required to maintain unencumbered assets
with an aggregate book value equal to or greater than two times the Company's
unsecured recourse debt) or sell assets. The Company was in compliance with the
covenants of the Credit Facility at December 31, 2001.

On February 28, 2002, the Company entered into a seven year $50 million
term loan agreement with Fleet National Bank. The note bears interest at LIBOR
plus 1.45% and is due on February 20, 2009. The Company paid a one-time fee of
0.35% or $175,000 for the facility. The Company expects to use the proceeds of
the loan to reduce the amount drawn on its line of credit with Wells Fargo Bank.

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

EMPLOYEES
---------

As of December 31, 2001, the Company employed 130 individuals,
primarily personnel engaged in property operations. The Company believes that
its relationship with its employees is good and none of the employees are
represented by a labor union.

INSURANCE
---------

The Company believes that its properties are adequately insured.
Facilities operated by the Company have historically been covered by
comprehensive insurance, including fire, earthquake, liability and extended
coverage from nationally recognized carriers. The Company also anticipates a
25%-50% increase in insurance costs when its current policies expire in April
2002 due to the terrorist attacks of September 11, 2001. Because the Company's
financing strategy generally does not include mortgage debt and because its
facilities are generally not located in central business districts, the Company
does not expect to incur the cost of insuring against terrorist acts.

ITEM 1A. RISK FACTORS

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

PSI HAS SIGNIFICANT INFLUENCE OVER US.
--------------------------------------

PSI owns a substantial number of our shares and of the units of our
operating partnership: At February 28, 2002, PSI and its affiliates owned 25% of
the outstanding shares of our common stock (44% upon conversion of its interest
in our operating partnership) and 25% of the outstanding common units of our
operating partnership (100% of the common units not owned by us). Consequently,
PSI has the ability to significantly influence all matters submitted to a vote
of our shareholders, including electing directors, changing our articles of
incorporation, dissolving and approving other extraordinary transactions such as
mergers, and all matters requiring the consent of the limited partners of the
operating partnership. In addition, PSI's ownership may make it more difficult
for another party to take over our company without PSI's approval.

PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS MAY PREVENT CHANGES IN CONTROL.
--------------------------------------------------------------------------

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

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

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

OUR OPERATING PARTNERSHIP POSES ADDITIONAL RISKS TO US.
-------------------------------------------------------

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

WE CANNOT SELL CERTAIN PROPERTIES WITHOUT PSI'S APPROVAL.
---------------------------------------------------------

Before 2007, we may not sell 12 specified properties without PSI's
approval. Since PSI would be taxed on a sale of these properties, the interests
of PSI and our other shareholders may differ as to the best time to sell.

CERTAIN INSTITUTIONAL INVESTORS HAVE SPECIAL RIGHTS.
----------------------------------------------------

Certain institutional investors have rights, such as the right to approve
nominees to our board of directors, the right to purchase our securities in
certain circumstances and the right to require registration of their shares, not
available to our public shareholders.

WE WOULD INCUR ADVERSE TAX CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT.
------------------------------------------------------------------------

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

OUR CASH FLOW WOULD BE REDUCED IF OUR PREDECESSOR FAILED TO QUALIFY AS A
REIT: For us to qualify to be taxed as a REIT, our predecessor, American Office
Park Properties, also needed to qualify to be taxed as a REIT. We believe
American Office Park Properties qualified as a REIT beginning in 1997 until its
March 1998 merger with us. If it is determined that it did not qualify as a
REIT, we could also lose our REIT qualification. Before 1997, our predecessor
was a taxable corporation and, to qualify as a REIT, was required to distribute
all of its cumulative retained profits before the end of 1996. Because a
determination of the precise amount of profits retained by a company over a
sustained period of time is very difficult, there is some risk that not all of
American Office Park Properties' profits were so distributed. While we believe
American Office Park Properties qualified as a REIT since 1997, we did not
obtain an opinion of an outside expert at the time of its merger with us.

WE MAY NEED TO BORROW FUNDS TO MEET OUR REIT DISTRIBUTION REQUIREMENTS: To
qualify as a REIT, we must generally distribute to our shareholders 90% of our
taxable income. Our income consists primarily of our share of our operating
partnership's income. We intend to make sufficient distributions to qualify as a
REIT and otherwise avoid corporate tax. However, differences in timing between
income and expenses and the need to make nondeductible expenditures such as
capital improvements and principal payments on debt could force us to borrow
funds to make necessary shareholder distributions.

SINCE WE BUY AND OPERATE REAL ESTATE, WE ARE SUBJECT TO GENERAL REAL ESTATE
---------------------------------------------------------------------------
INVESTMENT AND OPERATING RISKS.
-------------------------------

SUMMARY OF REAL ESTATE RISKS: We own and operate commercial properties and
are subject to the risks of owning real estate generally and commercial
properties in particular. These risks include:

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

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

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

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

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

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

o changes in tax, real estate and zoning laws;

o increase in new developments;

o tenant bankruptcies;

o sublease space; and

o concentration in non-rated private companies.

Certain significant costs, such as mortgage payments, real estate
taxes, insurance and maintenance costs, generally are not reduced even when a
property's rental income is reduced. In addition, environmental and tax laws,
interest rate levels, the availability of financing and other factors may affect
real estate values and property income. Furthermore, the supply of commercial
space fluctuates with market conditions.

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

During 2001, we were affected by the slowdown in economic activity in
the United States in most of its primary markets. These effects were exacerbated
by the terrorist attacks of September 11, 2001 and the related aftermath. These
effects included a decline in occupancy rates and a reduction in market rates
throughout the portfolio, slower than expected lease-up of our development
properties, lower interest rates on invested cash and the expectation that
insurance costs will rise upon expiration of our policies in March 2002. An
extended economic slowdown will put additional downward pressure on occupancies
and market rental rates and may lead to pressure for greater rent concessions,
or generous tenant improvement allowances and higher broker commissions.

WE MAY ENCOUNTER SIGNIFICANT DELAYS IN RELETTING VACANT SPACE,
RESULTING IN LOSSES OF INCOME: When leases expire, we will incur expenses and we
may not be able to release the space on the same terms. Certain leases provide
tenants with the right to terminate early if they pay a fee. Our properties as
of December 31, 2001 generally have lower vacancy rates than the average for the
markets in which they are located, and leases for 35% of our space expire in
2002 or 2003 (leases for 60% of the space occupied by small tenants expire in
such years). While we have estimated our cost of renewing leases that expire in
2002, our estimates could be wrong. If we are unable to release space promptly,
if the terms are significantly less favorable than anticipated or if the costs
are higher, we may have to reduce our distributions to shareholders.

TENANT DEFAULTS AND BANKRUPTCIES MAY REDUCE OUR CASH FLOW AND
DISTRIBUTIONS: We may have difficulty in collecting from tenants in default,
particularly if they declare bankruptcy. This could reduce our cash flow and
distributions to shareholders.

WE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT COMPETITION AMONG
COMMERCIAL PROPERTIES: Many other commercial properties compete with our
properties for tenants and we expect that new properties will be built in our
markets. Also, we compete with other buyers, many of whom are larger than we
are, in seeking to acquire commercial properties. Therefore, we may not be able
to grow as rapidly as we would like.

WE MAY BE ADVERSELY AFFECTED IF CASUALTIES TO OUR PROPERTIES ARE NOT
COVERED BY INSURANCE: We carry insurance on our properties that we believe is
comparable to the insurance carried by other operators for similar properties.
However, we could suffer uninsured losses that adversely affect us or even
result in loss of properties. We might still remain liable on any mortgage debt
related to that property.

THE ILLIQUIDITY OF OUR REAL ESTATE INVESTMENTS MAY PREVENT US FROM
ADJUSTING OUR PORTFOLIO TO RESPOND TO MARKET CHANGES: There may be delays and
difficulties in selling real estate. Therefore, we cannot easily change our
portfolio when economic conditions change. Also, tax laws limit a REIT's ability
to sell properties held for less than four years.

WE MAY BE ADVERSELY AFFECTED BY GOVERNMENTAL REGULATION OF OUR
PROPERTIES: Our properties are subject to various federal, state and local
regulatory requirements, such as state and local fire and safety codes. If we
fail to comply with these requirements, governmental authorities could fine us
or courts could award damages against us. We believe our properties comply with
all significant legal requirements. However, these requirements could change in
a way that would reduce our cash flow and ability to make distributions to
shareholders.

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

We acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998 that is currently the subject of an environmental
investigation being conducted by two current and past owner/operators of an
industrial facility on adjacent property, pursuant to an Order on Consent
("Order") issued by the Oregon Department of Environmental Quality ("ODEQ").
There is no evidence that our past or current use of the Creekside Corporate
Park property contributed in any way to the contamination that is the subject of
the current investigation, nor has the ODEQ alleged any such contribution, and
we are not a party to the Order.

Based on the results of the site investigation, ODEQ has recommended a
final remedy that would include permanent treatment of contaminants in the
groundwater, including expanded groundwater extraction and treatment on all
parcels of the former industrial property, including portions of Creekside
Corporate Park. The estimated cost of this remedy is $3.3 million over a 30-year
time period. In the event we are ultimately deemed responsible for any costs
relating to this matter, we believe that the party from whom the property was
purchased will be responsible for any expenses or liabilities that we may incur
as a result of this contamination. In addition, we believe we may have recourse
against other potentially responsible parties, including, but not limited to,
one or both of the owner/operators of the adjacent industrial facility. However,
if we are deemed responsible for any expenses related to removal or remedial
actions on the property, and we are not successful in obtaining reimbursement
from one or more third parties, our operations and financial condition could be
harmed.

WE MAY BE AFFECTED BY THE AMERICANS WITH DISABILITIES ACT: The
Americans with Disabilities Act of 1990 requires that access and use by disabled
persons of all public accommodations and commercial properties be facilitated.
Existing commercial properties must be made accessible to disabled persons.
While we have not estimated the cost of complying with this act, we do not
believe the cost will be material.

OUR ABILITY TO CONTROL OUR PROPERTIES MAY BE ADVERSELY AFFECTED BY OWNERSHIP
----------------------------------------------------------------------------
THROUGH PARTNERSHIPS AND JOINT VENTURES.
----------------------------------------

We own most of our properties through our operating partnership. Our
organizational documents do not limit our ability to invest funds with others in
partnerships or joint ventures. During 2001, we entered into a joint venture
arrangement. This type of investment may present additional risks. For example,
our partners may have interests that differ from ours or that conflict with
ours, or our partners may become bankrupt. In addition, the joint venture may
default on its debt, which we have guaranteed under certain circumstances. We
believe this risk is mitigated by the low level of debt (57% of the cost) in the
joint venture.

WE CAN CHANGE OUR BUSINESS POLICIES AND INCREASE OUR LEVEL OF DEBT WITHOUT
--------------------------------------------------------------------------
SHAREHOLDER APPROVAL.
---------------------

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

WE CAN ISSUE ADDITIONAL SECURITIES WITHOUT SHAREHOLDER APPROVAL.
----------------------------------------------------------------

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

INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
-------------------------------------------------------------------------------
STOCK.
------

One of the factors that influences the market price of our common stock
is the annual rate of distributions that we pay on our common stock, as compared
with interest rates. Interest rates in late 2001 and early 2002 have been at
historically low levels. An increase in interest rates may lead purchasers of
REIT shares to demand higher annual distribution rates, which could adversely
affect the market price of our common stock.

SHARES THAT BECOME AVAILABLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
----------------------------------------------------------------------------
PRICE OF OUR COMMON STOCK.
--------------------------

Substantial sales of our common stock, or the perception that
substantial sales may occur, could adversely affect the market price of our
common stock. Certain of our shareholders hold significant numbers of shares of
our common stock and, subject to compliance with applicable securities laws,
could sell their shares.

WE DEPEND ON KEY PERSONNEL.
---------------------------

We depend on our executive officers, including Ronald L. Havner, Jr.,
our chief executive officer and president. The loss of Mr. Havner or other
executive officers could adversely affect our operations. We maintain no key
person insurance on our executive officers.

ITEM 2. PROPERTIES

As of December 31, 2001, the Company owned approximately 11.2 million
square feet of "flex" space, 2.5 million square feet of suburban office and 1.1
million square feet of industrial space concentrated primarily in seven major
markets consisting of Southern and Northern California, Southern and Northern
Texas, Virginia, Maryland and Oregon. The weighted average occupancy rate at
December 31, 2001 was 95.1% and the average rental rate per square foot was
$14.15.

The following table contains information about properties owned by the
Company and the Operating Partnership as of December 31, 2001:

Rentable Square Footage
--------------------------------------------------------------------- Weighted
City Flex Office Industrial Total Occupancy
-------------------------- ----------------- ---------------- ----------------- ---------------- -----------------

ARIZONA
Mesa.................. 78,038 - - 78,038 96.5%
Phoenix............... 199,581 - - 199,581 91.8%
Tempe................. 291,264 - - 291,264 84.9%
----------------- ---------------- ----------------- ---------------- -----------------
568,883 - - 568,883 88.9%
----------------- ---------------- ----------------- ---------------- -----------------

NORTHERN CALIFORNIA
Hayward............... - - 406,712 406,712 99.8%
Monterey.............. - 12,003 - 12,003 99.1%
Sacramento............ - 366,203 - 366,203 91.3%
San Jose.............. 387,631 - - 387,631 96.7%
San Ramon............. - 52,149 - 52,149 95.3%
Santa Clara........... 178,132 - - 178,132 100.0%
So. San Francisco..... 93,775 - - 93,775 99.0%
----------------- ---------------- ----------------- ---------------- -----------------
659,538 430,355 406,712 1,496,605 96.5%
----------------- ---------------- ----------------- ---------------- -----------------

SOUTHERN CALIFORNIA
Buena Park............ - - 317,312 317,312 96.3%
Carson................ 77,255 - - 77,255 93.2%
Cerritos.............. - 31,270 394,610 425,880 95.8%
Culver City........... 146,402 - - 146,402 97.2%
Irvine................ - 160,499 - 160,499 95.9%
Laguna Hills.......... 613,947 - - 613,947 96.2%
Lake Forest........... 296,597 - - 296,597 94.7%
Lakewood.............. - 56,902 - 56,902 90.7%
Monterey Park......... 199,056 - - 199,056 95.0%
San Diego............. 535,345 - - 535,345 98.7%
Signal Hill........... 178,146 - - 178,146 96.4%
Studio City........... 22,092 - - 22,092 100.0%
Torrance.............. 147,220 - - 147,220 94.0%
----------------- ---------------- ----------------- ---------------- -----------------
2,216,060 406,151 711,922 3,176,653 96.2%
----------------- ---------------- ----------------- ---------------- -----------------

KANSAS
Overland Park......... 61,836 - - 61,836 94.3%
----------------- ---------------- ----------------- ---------------- -----------------
61,836 - - 61,836 94.3%
----------------- ---------------- ----------------- ---------------- -----------------

MARYLAND
Beltsville............ 307,791 - - 307,791 98.9%
Gaithersburg.......... - 28,994 - 28,994 100.0%
Landover (2).......... 379,471 - - 379,471 95.6%
Largo................. 149,918 - - 149,918 100.0%
Rockville............. 213,853 691,434 - 905,287 93.7%
----------------- ---------------- ----------------- ---------------- -----------------
1,051,033 720,428 - 1,771,461 97.7%
----------------- ---------------- ----------------- ---------------- -----------------

OREGON
Beaverton............. 1,524,005 346,376 - 1,870,381 97.2%
Milwaukee............. 101,578 - - 101,578 95.9%
----------------- ---------------- ----------------- ---------------- -----------------
1,625,583 346,376 - 1,971,959 97.1%
----------------- ---------------- ----------------- ---------------- -----------------

TENNESSEE
Nashville............. 138,004 - - 138,004 94.7%
----------------- ---------------- ----------------- ---------------- -----------------
138,004 - - 138,004 94.7%
----------------- ---------------- ----------------- ---------------- -----------------

NORTHERN TEXAS
Dallas................ 236,997 - - 236,997 97.8%
Garland............... 36,458 - - 36,458 95.5%
Houston............... 176,977 131,214 - 308,191 88.3%
Las Colinas (1)....... 944,743 - - 944,743 94.8%
Mesquite.............. 56,541 - - 56,541 92.7%
Missouri City......... 66,000 - - 66,000 94.3%
Plano................. 184,809 - - 184,809 100.0%
Richardson............ 116,800 - - 116,800 69.6%
----------------- ---------------- ----------------- ---------------- -----------------
1,819,325 131,214 - 1,950,539 93.0%
----------------- ---------------- ----------------- ---------------- -----------------

SOUTHERN TEXAS
Austin................ 832,548 - - 832,548 94.4%
San Antonio........... - 199,269 - 199,269 78.7%
----------------- ---------------- ----------------- ---------------- -----------------
832,548 199,269 - 1,031,817 91.4%
----------------- ---------------- ----------------- ---------------- -----------------

VIRGINIA
Alexandria............ 208,519 - - 208,519 96.5%
Chantilly (2)......... 494,618 - - 494,618 89.6%
Merrifield............ 302,723 355,127 - 657,850 95.0%
Herndon (2)........... 244,373 - - 244,373 96.2%
Lorton................ 246,520 - - 246,520 99.0%
Springfield........... 359,742 - - 359,742 98.8%
Sterling (2).......... 295,625 - - 295,625 96.6%
Woodbridge............ 113,629 - - 113,629 97.6%
----------------- ---------------- ----------------- ---------------- -----------------
2,265,749 355,127 - 2,620,876 95.7%
----------------- ---------------- ----------------- ---------------- -----------------

WASHINGTON
Renton................ 27,912 - - 27,912 87.8%
----------------- ---------------- ----------------- ---------------- -----------------
27,912 - - 27,912 87.8%
----------------- ---------------- ----------------- ---------------- -----------------

Totals - 9 states..... 11,241,831 2,456,080 1,118,634 14,816,545 95.1%
================= ================ ================= ================ =================

(1) The Company owns one property that is subject to a ground lease in Las
Colinas, Texas.
(2) Eight commercial properties serve as collateral to mortgage notes payable.
See detailed listing in Schedule III to the financial statements contained
herein.

Each of these properties will continue to be used for its current
purpose. Competition exists in the market areas in which these properties are
located. Barriers to entry are relatively low for competitors with the necessary
capital and the Company will be competing for properties and tenants with
entities that have greater financial resources than the Company. The Company
believes that while the current overall demand for commercial space has softened
in 2001 and 2002, there is sufficient demand to maintain healthy occupancy
rates.

The Company has risks that tenants will default on leases and declare
bankruptcy. Management believes these risks are mitigated through the Company's
geographic diversity and diverse tenant base. As of December 31, 2001, tenants
occupying less than approximately 90,000 square feet of commercial space had
declared bankruptcy and all of the bankrupt tenants were current on their
monthly rental payments.

As of and for the year ended December 31, 2001, one of the Company's
properties had a book value of more than 10% of the Company's total assets or
accounted for more than 10% of its aggregate gross revenues. The property known
as Metro Park North is a business park in Rockville, Maryland consisting of 17
buildings (905,000 square feet) including nine office buildings (691,000 square
feet) and eight flex-space buildings (214,000 square feet). The property was
purchased on December 27, 2001 and has a book value of $127 million representing
approximately 11% of the Company's total assets at December 31, 2001.

The following table sets forth information with respect to occupancy
and rental rates at Metro Park North for each of the last five years:

1997 1998 1999 2000 2001
----------------- ---------------- ----------------- ---------------- -----------------

Occupancy Rate 98.2% 81.5% 75.9% 86.9% 93.5%

Rental Rate per square
foot $16.93 $15.36 $15.73 $16.91 $18.83

The following table sets forth information with respect to tenants
occupying ten percent or more of the rentable square footage at Metro Park
North:

Annual Rent
per Square Lease Renewal Business
Tenant Name Square Feet Feet Expiration Option Description
-------------------------- ----------------- ---------------- ----------------- ---------------- -----------------

Lockheed Martin 24,552 $23.17 9/30/05 1, 5-year Aerospace
FDA 22,713 $28.77 8/3/06 1, 5-year Government
LSI 15,786 $25.50 4/30/08 1, 5-year Hi-Tech
Axcelis 105,015 $15.93 12/31/04 1, 5-year Hi-Tech
Fusing Lighting 25,051 $14.25 12/31/02 1, 5-year Hi-Tech
Montgomery TV 12,152 $15.00 6/30/11 1, 5-year Television
FDA 53,227 $18.08 12/31/02 1, 5-year Government
CAC 53,623 $20.83 6/30/03 1, 5-year Insurance
FDA 113,912 $19.07 11/14/05 1, 5-year Government
Hughes 53,806 $23.62 8/31/05 1, 5-year Hi-Tech
Montgomery Co. 38,800 $22.95 10/7/04 1, 5-year Education

The following table sets forth information with respect to lease
expirations at Metro Park North:

Percentage of Total Annual
Base Rents Represented by
Rentable Square Footage Annual Base Rents Under Expiring Leases
Year of Lease Expiration Subject to Expiring Leases Expiring Leases
------------------------------- ---------------------------- ---------------------------- ----------------------------

2002 85,559 $1,478,000 8.5%
2003 108,373 2,073,000 11.8%
2004 219,472 3,819,000 21.8%
2005 317,321 7,179,000 41.0%
2006 74,976 1,975,000 11.3%
2007 - - -
2008 15,786 403,000 2.3%
2009 3,150 74,000 0.4%
2010 - - -
2011 15,560 265,000 1.5%
Thereafter 4,912 237,000 1.4%
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 845,109 $17,503,000 100.0%
=============================== ============================ ============================ ============================

The following table sets forth information with respect to tax
depreciation at Metro Park North:

Rate of Life Accumulated
Tax Basis Depreciation Method In Years Depreciation
----------------- ---------------- ----------------- ---------------- -----------------

Improvements $2,592,193 20.00% MACRS, 200%DDB 5 2,607,216
Improvements 5,817,593 14.29% MACRS, 200%DDB 7 831,085
Improvements 16,483,181 6.67% MACRS, 150%DDB 15 824,159
Buildings 74,659,109 2.56% MACRS, SL 39 79,885
----------------- -----------------
Total $109,552,076 4,253,569
================= =================

The Company's portfolio services two sets of customers with different
characteristics. Approximately 70% of the Company's portfolio serves primarily
large tenants. These tenants generally sign longer leases, require higher tenant
improvements, are represented by a broker and are better credit tenants. The
other 30% of the Company's portfolio serves primarily small tenants with average
space requirements of 1,600 square feet and a shorter lease term duration.
Tenant improvements are relatively small for these tenants and most leases are
done in-house with no lease commissions. These tenants have lower credit
profiles and delinquencies and bankruptcies are more frequent. The following
tables set forth the lease expirations for the properties owned as of December
31, 2001 in addition to bifurcating the lease expirations on properties serving
primarily small businesses and those properties serving primarily larger
businesses:

LEASE EXPIRATIONS (ENTIRE PORTFOLIO) AS OF DECEMBER 31, 2001
------------------------------------------------------------

2002 2,634,000 $30,380,000 16.6%
2003 2,696,000 33,138,000 18.1%
2004 2,630,000 30,006,000 16.4%
2005 2,272,000 32,951,000 18.0%
2006 1,680,000 25,509,000 13.9%
Thereafter 2,162,000 31,232,000 17.0%
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 14,074,000 $183,216,000 100.0%
=============================== ============================ ============================ ============================

LEASE EXPIRATIONS (SMALL TENANT PORTFOLIO) AS OF DECEMBER 31, 2001
------------------------------------------------------------------

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

2002 1,350,000 $16,366,000 31.6%
2003 1,157,000 14,780,000 28.5%
2004 761,000 9,916,000 19.2%
2005 287,000 4,554,000 8.8%
2006 225,000 3,378,000 6.5%
Thereafter 233,000 2,821,000 5.4%
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 4,013,000 $51,815,000 100.0%
=============================== ============================ ============================ ============================

LEASE EXPIRATIONS (LARGE TENANT PORTFOLIO) AS OF DECEMBER 31, 2001
------------------------------------------------------------------

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

2002 1,284,000 $14,014,000 10.7%
2003 1,539,000 18,358,000 14.0%
2004 1,869,000 20,090,000 15.3%
2005 1,985,000 28,397,000 21.6%
2006 1,455,000 22,131,000 16.8%
Thereafter 1,929,000 28,411,000 21.6%
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 10,061,000 $131,401,000 100.0%
=============================== ============================ ============================ ============================

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

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

The Company acquired a property in Beaverton, Oregon ("Creekside
Corporate Park") in May 1998. A portion of Creekside Corporate Park, as well as
properties adjacent to Creekside Corporate Park, are currently the subject of an
environmental investigation that is being conducted by two current and past
owner/operators of an industrial facility on adjacent property, pursuant to an
Order on Consent issued by the Oregon Department of Environmental Quality
("ODEQ"). Results to date indicate that the contamination from the industrial
facility has migrated onto portions of Creekside Corporate Park owned by the
Company. There is no evidence that the Company's past or current use of the
Creekside Corporate Park property contributed in any way to the contamination
that is the subject of the current investigation, nor has the ODEQ alleged any
such contribution.

The Company, which is not a party to the Order on Consent, executed
separate Access Agreements with the two owner/operators to allow access to
portions of Creekside Corporate Park to conduct the required sampling and
testing, and to permit one of the owner/operators subject to the Order on
Consent to construct, install and operate a groundwater treatment system on a
portion of Creekside Corporate Park owned by the Company. Operation and
maintenance of this groundwater treatment system, which is required by the
Interim Remedial Action Plan approved by ODEQ, is the sole responsibility of the
owner/operator, and not the Company.

One of the two owner/operators that are conducting the investigation
pursuant to the Order on Consent recently filed for Chapter 11 bankruptcy
protection. It is not clear at this point what impact, if any, this filing will
have on the implementation of the removal or remedial activities ordered by the
ODEQ. It is possible that the ODEQ could require the Company to participate in
the implementation of removal or remedial actions that may be required on the
Company's property, or to pay a portion of the costs to do so. In the event the
Company is ultimately deemed responsible for any costs relating to this matter,
the Company believes that it may have recourse against the party from whom the
property was purchased. In addition, the Company believes it may have recourse
against other potentially responsible parties, including, but not limited to,
one or both of the owner/operators of the adjacent industrial facility.

Although the other environmental investigations conducted to date have
not revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's business, assets or results of
operations, and the Company is not aware of any such liability, it is possible
that these investigations did not reveal all environmental liabilities or that
there are material environmental liabilities of which the Company is unaware. No
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability, or (ii) the current
environmental condition of the Company's properties has not been, or will not
be, affected by tenants and occupants of the Company's properties, by the
condition of properties in the vicinity of the Company's properties, or by third
parties unrelated to the Company.

ITEM 3. LEGAL PROCEEDINGS

On November 3, 1999, the Company filed an action titled PS Business
Parks, Inc. v. Larry Howard et al. (Case No. BC219580) in Los Angeles Superior
Court seeking damages in excess of $1 million. The complaint alleges that Mr.
Howard and entities controlled by him engaged in unfair trade practices. Some of
the Company's claims have been dismissed on summary adjudication, and the
balance is in the process of being referred to the arbitration proceedings
described below for adjudication. Mr. Howard filed a cross-complaint which the
Company intends to vigorously contest and which is also in the process of being
referred to arbitration for adjudication.

On November 27, 2000, Mary Jayne Howard, a former officer of the
Company filed a demand for arbitration with the American Arbitration Association
alleging claims against the Company for breach of contract, gender
discrimination, marital discrimination, and wrongful termination based on public
policy. The demand seeks damages of approximately $2 million. The Company plans
to vigorously contest these claims. The Company has also filed in the
arbitration a cross-claim against Ms. Howard alleging that she breached her
fiduciary duties to the Company and committed fraud, among other claims, seeking
damages in excess of $1 million.

On February 2, 2000, the Company filed an action against Mary Piper,
its former Vice President of operations, in Riverside County Superior Court,
alleging claims for breach of fiduciary duties, fraud and deceit, constructive
fraud, negligent misrepresentation, violation of Section 17000 of Business and
Professions Code, violation of Section 17200 of the Business and Professions
Code and culpable negligence. The Company's claims arose from Ms. Piper's
alleged participation in a plan that resulted in the payment of improper
kickbacks to Larry Howard, a former vendor of the Company and the husband of
Mary Jayne Howard, a former officer of the Company. Ms. Piper subsequently filed
a cross-complaint which the Company intends to vigorously contest.

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

The Company did not submit any matter to a vote of security holders in
the fourth quarter of the fiscal year ended December 31, 2001.

ITEM 4A. EXECUTIVE OFFICERS

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

Ronald L. Havner, Jr., age 44, has been Chairman, President and Chief
Executive Officer of the Company since March 1998. From December 1996 until
March 1998, Mr. Havner was Chairman, President and Chief Executive Officer of
AOPP. He was Senior Vice President and Chief Financial Officer of PSI, an
affiliated REIT, and Vice President of the Company and certain other REITs
affiliated with PSI, until December 1996. Mr. Havner became an officer of PSI in
1986, prior to which he was in the audit practice of Arthur Andersen & Company.
He is a member of the American Institute of Certified Public Accountants
(AICPA), the National Association of Real Estate Investments Trusts (NAREIT) and
the Urban Land Institute (ULI) and a Director of Business Machine Security,
Inc., Mobile Storage Group, Inc. and Burnham Pacific Properties, Inc. Mr. Havner
earned a Bachelor of Arts degree in Economics from the University of California,
Los Angeles.

Jack E. Corrigan, age 41, a certified public accountant, has been Vice
President, Chief Financial Officer and Secretary of the Company since June 1998.
From February 1991 until June 1998, Mr. Corrigan was a partner of LaRue,
Corrigan & McCormick with responsibility for the audit and accounting practice.
He was Vice President and Controller of PSI (formerly Storage Equities, Inc.)
from 1989 until February 1991. Mr. Corrigan earned a Bachelor of Science degree
in Accounting from Loyola Marymount University.

J. Michael Lynch, age 49, has been Vice President-Director of
Acquisitions and Development of the Company since June 1998. Mr. Lynch was Vice
President of Acquisitions and Development of Nottingham Properties, Inc. from
1995 until May 1998. He has 18 years of real estate experience, primarily in
acquisitions and development. From 1988 until 1995, Mr. Lynch was a development
project manager for The Parkway Companies. From 1983 until 1988, he was an
Assistant Vice President, Real Estate Investment Department of First Wachovia
Corporation. Mr. Lynch earned a Bachelor of Arts degree in Economics from Mt.
St. Mary's College and a Masters of Architecture from the Virginia Polytechnic
Institute.

Stephen S. King, age 45, has been Vice President, Chief Operating
Officer of the Company since August 2001. Mr. King joined the Company as Vice
President in April 2000 with responsibility for property operations for the
Southwest Division. He became an executive officer of the Company in March 2001.
From 1998 to April 2000, Mr. King was Vice President of Asset Management for The
RREEF Funds with responsibility for over 10 million square feet of industrial
property owned in a joint venture with the California Public Employees
Retirement System (CalPERS). From 1989 through 1998, Mr. King was Assistant Vice
President, Western Division for USAA Real Estate Company. He has over twenty
years of development, construction, property management and leasing experience.
Mr. King is a licensed California real estate broker and a member of the
Institute for Real Estate Management (IREM) and the National Association of
Industrial and Office Properties (NAIOP). Mr. King earned a Bachelor of Arts
degree in Economics from Texas A&M.

Jeffrey H. Reinstein, age 38, has been Vice President-Business Services
of the Company since May 2000. From March 1997 until April 2000, Mr. Reinstein
was the President and Chief Operating Officer of Barrister Executive Suites and
was responsible for overseeing and managing all activities for the company
including operations, business development, marketing, human resources, finance
and accounting. From May 1987 to October 1996, Mr. Reinstein held various
positions for Weyerhaeuser Financial Investments, Inc. where he was involved in
developing, managing, leasing, financing and disposing of all types of real
estate assets. Mr. Reinstein earned a Bachelor of Science degree in Business
Administration from California State University, Northridge.

Joseph E. Miller, age 38, was promoted to Vice President, Corporate
Controller in December 2001 with responsibilities for financial and operational
accounting, reporting, and analysis. Mr. Miller joined the Company in August
2001 as Vice President, Property Operations Controller focusing on operational
systems and processes. Previously, Mr. Miller was Corporate Controller for
Maguire Partners, a prominent Los Angeles commercial real estate developer,
owner, and manager, from May 1987 to August 2001. Prior to joining Maguire
Partners, Mr. Miller was an audit manager at Ernst & Young with a focus on real
estate clients. Mr. Miller is a Certified Public Accountant and has earned a

Bachelor of Science degree in Business Administration from California State
University, Northridge, and a Masters of Business Administration from the
University of Southern California.

Angelique A. Benschneider, age 39, joined the Company as Vice President
in November 2000 with responsibility for property operations for the Midwest
Division. Ms. Benschneider became an executive officer of the Company in March
2001. From 1999 to November 2000, Ms. Benschneider was a Senior Asset Manager
for Amerishop Real Estate Services, where she was responsible for retail
portfolio performance for the Company on the East Coast. From 1996 to 1999, Ms.
Benschneider was a General Manager for GIC Real Estate, Inc. and was responsible
for the management and leasing of Thanksgiving Tower, a 1,500,000 square foot
high rise office tower. Mrs. Benschneider has extensive experience in regional
malls, working on the redevelopment of the 2,900,000 square foot King of Prussia
Mall in Philadelphia, Pennsylvania. Ms. Benschneider earned a Bachelor of
Science degree in Business Administration from the University of North Texas and
a Masters of Business Administration from the University of Texas, Dallas.

David C. Bischoff, age 50, has been Vice President of the Company since
August 1999 with responsibility for property operations for the Eastern
Division. He became an executive officer of the Company in March 2001. From June
1996 to July 1999, Mr. Bischoff was Managing Director in the Client Advisory
Group with CB Richard Ellis (CBRE) with responsibility for overseeing, directing
and managing all the various business services (property management, leasing,
appraisal, acquisition and disposition) provided by CBRE to several large
institutional clients. From September 1984 to May 1996, Mr. Bischoff held a
variety of positions with ABKB Realty Advisors (acquired by LaSalle Advisors)
responsible for several pension fund clients, with responsibilities including
raising and investing capital, selecting, directing and managing the personnel
and business services provided by third party firms, and financing and ultimate
disposition of client assets. Mr. Bischoff earned an Associates of Arts degree
from the Philadelphia Community College.

Maria R. Hawthorne, age 42, has been a Vice President of the Company
since June 2001 with responsibility for property operations for the Northern
Virginia Division. Mrs. Hawthorne has been with the Company and its predecessors
for the past sixteen years. From July 1994 to June 2002, Mrs. Hawthorne was a
Regional Manager of the Company. From August 1988 to July 1994, Mrs. Hawthorne
was the Director of Leasing and Property Manager for AOPP. Ms. Hawthorne earned
a Bachelor of Arts degree in International Relations from Pomona College.

William A. McFaul, age 36, was promoted to Vice President of PS
Business Parks, Inc. in December 2001 with responsibility for property
operations for the Maryland Division. Mr. McFaul has been with the Company since
July 1999. Mr. McFaul became a Regional Manager in January 2001 with
responsibility for property operations of the Maryland Region and was a Senior
Property Manager from July 1999 until December 2000. Prior to joining PS
Business Parks, Mr. McFaul worked for The Rouse Company, a national real estate
development firm, for ten years holding various positions in leasing and
operations. Mr. McFaul earned a Bachelor of Science degree in Business
Administration and a Masters of Business Administration from Loyola College in
Maryland.

Eileen M. Newkirk, age 53, has been a Vice President of the Company
since March 2000 with responsibility for property operations for the Pacific
Northwest Division. Ms. Newkirk became an executive officer of the Company in
March 2001. From August 1998 to March 2000, Ms. Newkirk was a Regional Manager
of the Company. From 1997 to 1998, Ms. Newkirk held the position of United
States Facilities Manager for N-Cube, a high tech company based in Foster City,
California. From 1994 to 1997, she was a Property Manager for AOPP. Prior to
joining AOPP, Ms. Newkirk held a variety of development and operations
management positions, including the management of a Class A central business
district high-rise. Ms. Newkirk maintains an Oregon real estate license.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

2001 1st $28.10 $26.50
2nd $29.57 $25.80
3rd $28.30 $26.00
4th $32.95 $29.75

2000 1st $22.88 $19.88
2nd $25.13 $20.25
3rd $28.13 $23.88
4th $28.79 $25.75

As of February 7, 2002, there were approximately 688 holders of record
of the Common Stock.

b. Dividends

Holders of Common Stock are entitled to receive distributions when, as
and if declared by the Company's Board of Directors out of any funds legally
available for that purpose. The Company is required to distribute at least 90%
of its net taxable ordinary income prior to the filing of the Company's tax
return and 85%, subject to certain adjustments, during the calendar year, to
maintain its REIT status for federal income tax purposes. It is management's
intention to pay distributions of not less than these required amounts.

Distributions paid per share of Common Stock for 2001 and 2000 amounted
to $1.31 and $1.00 per year, respectively. Since the second quarter of 1998 and
through the fourth quarter of 2000, the Company had declared regular quarterly
dividends of $0.25 per common share. In March 2001, the Board of Directors
increased the quarterly dividends from $0.25 to $0.29 per common share. In
December 2001, the Board of Directors declared a special dividend of $0.15 per
common share. The Board of Directors has established a distribution policy to
maximize the retention of operating cash flow and only distribute the minimum
amount required for the Company to maintain its tax status as a REIT. Pursuant
to restrictions contained in the Credit Facility, distributions may not exceed
95% of funds from operations, as defined.

c. Issuance of Unregistered Securities

On September 21, 2001, the Operating Partnership issued 2,120,000
preferred units with a preferred distribution rate of 9 1/4%. The Operating
Partnership received net proceeds from the sale of these preferred units of
approximately $51.6 million. The Operating Partnership sold the preferred units
in a private placement in reliance on an exemption from the registration
requirements of the Securities Act pursuant to Section 4(2) and Rule 506 of
Regulation D promulgated thereunder. The preferred units were issued to a single
institutional "accredited investor" within the meaning of Regulation D.

ITEM 6. SELECTED FINANCIAL DATA (1)

The following sets forth selected consolidated and combined financial and
operating information on a historical basis for the Company and its
predecessors. 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.

For the Periods (2)
-----------------------------
April 1, 1997 January 1,
through 1997 through
For the Years Ended December 31, December 31, March 31,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1997
--------------------------------------------------------------------------------------------
Revenues: (In thousands, except per share data)

Rental income......................... $ 167,062 $ 144,171 $ 125,327 $ 88,320 $ 24,364 $ 5,805
Facility management fees primarily 683 539 471 529 709 247
from affiliates.......................
Business services..................... 353 547 - - - -
Equity in income of joint venture..... 25 - - - - -
Interest income....................... 2,251 4,076 2,356 1,411 424 29
Dividend income....................... 17 1,301 459 - - -
--------------------------------------------------------------------------------------------
170,391 150,634 128,613 90,260 25,497 6,081
--------------------------------------------------------------------------------------------
Expenses:
Cost of operations.................... 45,214 39,290 34,891 26,073 9,837 2,493
Cost of facility management........... 152 111 94 77 129 60
Cost of business services............. 572 344 - - - -
Depreciation and amortization......... 41,067 35,637 29,762 18,908 4,375 820
General and administrative............ 4,320 3,954 3,153 2,233 1,248 213
Interest expense...................... 1,715 1,481 3,153 2,361 1 -
--------------------------------------------------------------------------------------------
93,040 80,817 71,053 49,652 15,590 3,586
--------------------------------------------------------------------------------------------
Income before disposition of
investments, minority interest and
extraordinary item...................... 77,351 69,817 57,560 40,608 9,907 2,495
Gain on investment in marketable
securities............................ 8 7,849 - - - -
Gain on disposition of properties..... - 256 - - - -
--------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item...................... 77,359 77,922 57,560 40,608 9,907 2,495

Minority interest in income -
preferred units....................... (14,107) (12,185) (4,156) - - -
Minority interest in income - common
units................................. (13,382) (14,556) (11,954) (11,208) (6,753) (1,813)
--------------------------------------------------------------------------------------------
Income before extraordinary item........ 49,870 51,181 41,450 29,400 3,154 682
Extraordinary item, net of minority
interest.............................. - - (195) - - -
--------------------------------------------------------------------------------------------
Net income.............................. $ 49,870 $ 51,181 $ 41,255 $ 29,400 $ 3,154 $ 682
============================================================================================
Net income allocation:
Allocable to preferred shareholders... $ 8,854 $ 5,088 $ 3,406 $ - $ - $ -
Allocable to common shareholders...... 41,016 46,093 37,849 29,400 3,154 682
--------------------------------------------------------------------------------------------
$ 49,870 $ 51,181 $ 41,255 $ 29,400 $ 3,154 $ 682
============================================================================================

Per Common Share:
-----------------
Distribution (3)........................ $ 1.31 $ 1.00 $ 1.00 $ 1.10 $ 0.68 $ 0.00
Net income - Basic...................... $ 1.84 $ 1.98 $ 1.60 $ 1.52 $ 0.92 $ 0.31
Net income - Diluted.................... $ 1.83 $ 1.97 $ 1.60 $ 1.51 $ 0.92 $ 0.31
Weighted average common shares-Basic.... 22,350 23,284 23,641 19,361 3,414 2,193
Weighted average common shares-Diluted.. 22,435 23,365 23,709 19,429 3,426 2,193

Balance Sheet Data:
-------------------
Total assets............................ $ 1,169,955 $ 930,756 $ 903,741 $ 709,414 $ 323,454 $ 136,922
Total debt.............................. 165,145 30,971 37,066 50,541 3,500 -
Minority interest - preferred units..... 197,750 144,750 132,750 - - -
Minority interest - common units....... 162,141 161,728 157,199 153,015 168,665 97,180
Preferred stock......................... 121,000 55,000 55,000 - - -
Common shareholders' equity............. $ 478,731 $ 509,343 $ 500,531 $ 489,905 $ 142,958 $ 36,670

Other Data:
-----------
Net cash provided by operating
activities.............................. $ 126,677 $ 111,197 $ 88,440 $ 60,228 $ 13,597 $ 5,840
Net cash used in investing activities... (318,367) (77,468) (131,318) (308,646) (47,105) (582)
Net cash provided by (used in)
financing activities............... 145,471 (58,654) 111,030 250,602 31,443 (228)
Funds from operations (4)............... $ 93,568 $ 85,977 $ 76,353 $ 57,430 $ 14,282 $ 3,315
Square footage owned at end of period... 14,817 12,600 12,359 10,930 6,009 3,014

(1) The selected financial data for periods prior to March 17, 1998 refers to
AOPP.

(2) Prior to March 31, 1997, control of AOPP was held by entities other than
PSI. As a result of PSI acquiring a majority of the voting common stock and
control of AOPP on March 31, 1997, the 1997 consolidated financial statements
are presented separately for the period prior to March 31, 1997 (January 1, 1997
through March 31, 1997) and the period subsequent to March 31, 1997 (April 1,
1997 through December 31, 1997) when control was held by PSI.

(3) In March 2001, the Board of Directors increased the annual distribution to
$1.16 per common share. In December 2001, the Board of Directors declared a
special distribution of $0.15 per common share.

(4) Funds from operations ("FFO") is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP") before
depreciation, amortization, minority interest in income, straight line rent
adjustments and extraordinary or non-recurring items. FFO does not represent net
income or cash flows from operations as defined by GAAP. FFO does not take into

consideration scheduled principal payments on debt and capital improvements.
Accordingly, FFO is not necessarily a substitute for cash flow or net income as
a measure of liquidity or operating performance or ability to make acquisitions
and capital improvements or ability to pay distributions or debt principal
payments. Also, FFO as computed and disclosed by the Company many not be
comparable to FFO computed and disclosed by other REITs. The Company believes
that in order to facilitate a clear understanding of the Company's operating
results, FFO should be analyzed in conjunction with net income as presented in
the Company's consolidated financial statements included elsewhere in this Form
10-K.

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 of PS Business Parks, Inc. (the "Company") should be read in
conjunction with the selected financial data and the Company's consolidated
financial statements and notes thereto included elsewhere in the Form 10-K.

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

EFFECT OF ECONOMIC CONDITIONS ON THE COMPANY'S OPERATIONS: During 2001,
the Company was affected by the slowdown in economic activity in the United
States in most of its primary markets. These effects were exacerbated by the
terrorist attacks of September 11, 2001 and the related aftermath. These effects
include a decline in occupancy rates and a reduction in market rates throughout
the portfolio, slower than expected lease-up of our development properties,
lower interest rates on invested cash and the expectation that insurance costs
will rise upon expiration of our policies in March 2002.

The reduction in occupancies and market rental rates has been the
result of several factors related to general economic conditions. There are more
businesses contracting than expanding, more businesses failing than starting-up
and businesses are uncertain, resulting in slower decision-making and requests
for shorter term leases. There is also more competing vacant space including
substantial amounts of sub-lease space in many of the Company's markets. Many of
the Company's properties have lower vacancy rates than the average rates for the
markets in which they are located; consequently, the Company may have difficulty
in maintaining its occupancy rates as leases expire. An extended economic
slowdown will put additional downward pressure on occupancies and market rental
rates. The economic slowdown and the abundance of space alternatives to
customers has led to pressure for greater rent concessions, more generous tenant
improvement allowances and higher broker commissions.

The Company's three development properties were 63% leased as of
December 31, 2001, but they have not been leased as rapidly as the Company had
anticipated. The development properties consist of a 102,000 square foot
development in the Las Colinas submarket of Dallas, Texas that was 100% leased,
a 141,000 square foot flex development in Northern Virginia that was 60% leased,
and a 94,000 square foot development in the Beaverton submarket of Portland,
Oregon that was 27% leased. The interest of tenants in the Oregon property has
been significantly affected by the economic slowdown.

Historically, the Company has raised capital prior to identifying
opportunities to deploy the capital. This has generally resulted in some
short-term earnings dilution. Interest rates on cash investments have declined
350 basis points over the twelve months ended December 31, 2001, resulting in a
significantly greater dilution to earnings from holding capital waiting to be
deployed. During this period of low interest rates, the Company has determined
that the cost of this strategy currently exceeds the benefits derived from it.
As a result, the Company has used its line of credit and other short-term
borrowing sources to provide the capital to complete acquisitions.

The Company also anticipates a 25%-50% increase in insurance costs when
our current policies expire in April 2002 due to the terrorist attacks of
September 11, 2001. The Company does not expect the increase to materially
impact its results since insurance expense represents less than 3% of the

Company's operating costs and the Company believes that most of the cost can be
passed along to the Company's customers in accordance with the applicable lease
agreements.

EFFECT OF ECONOMIC CONDITIONS ON THE COMPANY'S PRIMARY MARKETS: The
Company has concentrated its operations in seven major markets. Each of these
markets has been affected by the slowdown in economic activity. The Company's
overall view of these markets is summarized below as of December 31, 2001. For
purposes of market occupancy statistics, the Company has compiled these
statistics using broker reports for these 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 1.9 million square feet in the Beaverton
sub market of Portland, Oregon. The average vacancy rate in this market is 18%
for office and 11% for flex. Leasing activity slowed dramatically during 2001,
but is beginning to show signs of improvement. On the supply side, a significant
amount of flex and office space was added in 2001, but the Company does not
believe significant new construction starts will occur in 2002. The Company's
vacancy rate is 3.4%.

The Company owns approximately 1.5 million square feet in Northern
California with a concentration in South San Francisco, Santa Clara and San
Jose. The vacancy rate in this market stands at 20% or more throughout most of
the Bay Area. Market rates dropped dramatically in 2001 and continue to decrease
and are now at approximately the same level they were at in 1999, and most
construction starts have been postponed or terminated. The Company's vacancy
rate is 2.7%.

The Company owns approximately 3.5 million square feet in Southern
California (including its partial ownership in a joint venture). This is one of
the most stable markets in the country but continues to experience slowing.
Vacancy rates have increased throughout Southern California for flex, industrial
and office, ranging from 5% to 25%, depending on sub-markets and product type,
and the rental rates for the Company's properties have dropped slightly. The
Company's vacancy is 1.3% in San Diego, 1.0% in Los Angeles and 2.5% in Orange
County.

The Company owns approximately 0.8 million square feet in Austin,
Texas. This market experienced a drastic increase in office and flex vacancy,
running at 19% and 17%, respectively. One half of the office vacancy is due to
sub-lease space. Construction deliveries of office and flex space continue to
add to the vacancy rate resulting in downward pressure on rental rates. The
Company's vacancy rate is 8.7%.

The Company owns approximately 1.9 million square feet in Northern
Texas. The vacancy rate in Las Colinas, where most of the Company's properties
are concentrated, is 19.5% for flex and 23% for office. Over the 12 months ended
December 31, 2001, the number of new properties constructed has decreased,
virtually no new construction has commenced and very little pre-leasing of space
has occurred. The Company believes that any such new construction will cause
vacancy rates to rise. Leasing activity has slowed overall and sub-leasing is
continuing to increase in the Telecom Corridor. The Company's vacancy rate is
3.9%.

The Company owns approximately 2.6 million square feet in Northern
Virginia, where the vacancy rate grew from 3.9% to 11.9% during 2001.
Prospective tenants in the sub-markets near downtown and the D.C. Beltway, such
as Ballston, Alexandria and Merrifield, have shown increased interest in renting
space recently, primarily as a result of the demand for space by the GSA and
government contractors. Vacancy rates have risen to over 20% in the sub-markets
in the western technology corridor, such as Herndon, Chantilly and Sterling,
primarily as a result of the decline in the technology sector. The Company's
vacancy rate in is 3.1%.

The Company owns approximately 1.8 million square feet in Maryland. In
Montgomery County, Maryland's 1-270 Corridor vacancy rates are 10% for office
and 8% for flex space. The Company expects that the business of the GSA, defense
contractors and the biotech industry will continue to grow in 2002. With most
2002 construction deliveries pre-leased, the Company expects that the vacancy
rate will remain flat or decline. The Company's vacancy rate is 5%.

GROWTH OF THE COMPANY'S OPERATIONS: During 2000 and 2001, the Company
focused on increasing cash flow from its existing core portfolio of properties,
expanding its presence in existing markets through strategic acquisitions and
developments and strengthening its balance sheet, primarily through the issuance
of preferred stock/units. The Company has maintained low debt and overall
leverage levels including preferred stock/units which give it the flexibility
for future growth without the issuance of additional common stock.

During 2001, the Company added approximately 2.2 million square feet to
its portfolio at an aggregate cost of approximately $303 million. These
acquisitions increased the Company's presence in its existing markets. The
Company acquired 658,000 square feet in Northern Virginia for approximately $88
million, 685,000 square feet in Oregon for approximately $88 million and 905,000
square feet in Maryland for approximately $127 million. In addition, the Company
completed development of three properties totaling 339,000 square feet in
Northern Virginia, Portland and Dallas for approximately $28.5 million. The
Company also disposed of a property aggregating 77,000 square feet for
approximately $9 million. The Company also formed a joint venture to own and
operate an industrial park. This park consisting of 294,000 square feet, was
acquired in December 2000 at a cost of approximately $14.4 million and was
contributed to the joint venture at its original cost for a 25% equity interest
in the joint venture.

During 2000, the Company added approximately 0.8 million square feet to
its portfolio at an aggregate cost of approximately $82 million. The Company
acquired 454,000 square feet in Southern California for $40 million, 178,000
square feet in Northern California for $23 million and 210,000 square feet in
Northern Virginia for approximately $19 million. In addition, the Company
completed development of a property totaling 22,000 square feet in Oregon for
approximately $3 million. The Company also disposed of five properties in
non-core markets aggregating 627,000 square feet for approximately $23.8
million.

During 1999, the Company added approximately 1.3 million square feet to
its portfolio at an aggregate cost of approximately $103 million. The Company
acquired 483,000 square feet in Texas for approximately $32 million, 405,000
square feet in Northern Virginia/Maryland market for approximately $41 million,
211,000 square feet in Northern California for approximately $17 million and
200,000 square feet in Arizona for approximately $13 million. In addition, the
Company completed development of two properties totaling 127,000 square feet in
Oregon and Texas for approximately $14 million.

COMPARISON OF 2001 TO 2000
--------------------------

RESULTS OF OPERATIONS: Net income for the year ended December 31, 2001
was $49,870,000 compared to $51,181,000 for the same period in 2000. Net income
allocable to common shareholders (net income less preferred stock dividends) for
the year ended December 31, 2001 was $41,016,000 compared to $46,093,000 for the
same period in 2000. Net income per common share on a diluted basis was $1.83
for the year ended December 31, 2001 compared to $1.97 for the same period in
2000 (based on weighted average diluted common shares outstanding of 22,435,000
and 23,365,000, respectively). The decreases in net income and net income per
common share reflect a non-recurring realized and unrealized gain on the
Company's investment in the common stock of Pacific Gulf Properties, Inc.
("PAG") recognized in the prior year.

The Company's property operations account for almost all of the net
operating income earned by the Company. The following table presents the
pre-depreciation operating results of the properties for the years ended
December 31, 2001 and 2000:

Years Ended
December 31,
------------------------------
2001 2000 Change
------------ ------------ ------------

Rental income:
"Same Park" facilities (11.4 million net rentable
square feet).............................................. $140,844,000 $133,386,000 5.6%
Other facilities............................................ 26,218,000 10,785,000 143.1%
------------ ------------ ------------
Total rental income......................................... $167,062,000 $144,171,000 15.9%
============ ============ ============

Cost of operations (excluding depreciation):
"Same Park" facilities...................................... $36,385,000 $35,061,000 3.8%
Other facilities............................................ 8,829,000 4,229,000 108.8%
------------ ------------ ------------
Total cost of operations.................................... $45,214,000 $39,290,000 15.1%
============ ============ ============

Net operating income (rental income less cost of operations):
"Same Park" facilities (1).................................. $104,459,000 $98,325,000 6.2%
Other facilities............................................ 17,389,000 6,556,000 165.2%
------------ ------------ ------------
Total net operating income.................................. $121,848,000 $104,881,000 16.2%
============ ============ ============

(1) See "Supplemental Property Data and Trends" below for a definition of
"Same Park" facilities.

Rental income and rental income less cost of operations or net operating
income prior to depreciation (defined as "NOI" for purposes of the following
tables) are summarized for the year ended December 31, 2001 by major geographic
region below:

Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
------------------------------ --------- -------- ----------- -------- ----------- --------

Southern California 3,177,000 22% $44,053,000 26% $32,951,000 27%
Northern California 1,495,000 10% 19,576,000 12% 14,876,000 12%
Southern Texas 1,032,000 7% 11,796,000 7% 7,089,000 6%
Northern Texas 1,951,000 13% 19,828,000 12% 13,549,000 11%
Virginia 2,621,000 18% 34,338,000 21% 25,008,000 21%
Maryland 1,771,000 12% 10,112,000 6% 7,819,000 6%
Oregon 1,973,000 13% 19,868,000 12% 16,162,000 13%
Other 797,000 5% 7,491,000 4% 4,394,000 4%
--------- -------- ----------- -------- ----------- --------
14,817,000 100% $167,062,000 100% $121,848,000 100%
========= ======== =========== ======== =========== ========

SUPPLEMENTAL PROPERTY DATA AND TRENDS: In order to evaluate the
performance of the Company's overall portfolio, management analyzes the
operating performance of a consistent group of properties constituting 11.4
million net rentable square feet ("Same Park" facilities). The Company currently
has an ownership interest in these properties and has owned and operated them
for the comparable periods. These properties do not include properties that have
been acquired or sold during 2000 and 2001. The "Same Park" facilities represent
approximately 90% of the weighted average square footage of the Company's
portfolio for 2001.

The following table summarizes the pre-depreciation historical
operating results of the "Same Park" facilities excluding the effects of
accounting for rental revenues on a straight-line basis for the years ended
December 31, 2001 and 2000.

"Same Park" Facilities (11.4 million square feet)

Years Ended
December 31,
---------------------------------
2001 2000 Change
------------- ------------- -------------

Rental income (1).................................... $ 139,239,000 $ 131,347,000 6.0%
Cost of operations................................... 36,385,000 35,061,000 3.8%
------------- ------------- -------------
Net operating income................................. $ 102,854,000 $ 96,286,000 6.8%
============= ============= =============

Gross margin (2)..................................... 73.9% 73.3% 0.6%

Weighted average for period:
----------------------------
Occupancy........................................ 95.6% 96.8% (1.2%)
Annualized realized rent per square foot.(3)..... $12.78 $11.90 7.4%

------------------

(1) Rental income is presented on a cash basis and excludes the effect of
straight-line accounting of $1,904,000 and $2,204,000 for the years ended
December 31, 2001 and 2000, respectively.

(2) Gross margin is computed by dividing property net operating income by
rental income.

(3) Realized rent per square foot represents the actual revenues earned per
occupied square foot.

The following tables summarize the "Same Park" operating results prior to
depreciation by major geographic region for the years ended December 31, 2001
and 2000:

Revenues Revenues NOI NOI
Region 2001 2000 Increase 2001 2000 Increase
------------------------- ------------ ------------- -------- ------------- ----------- --------

Southern California..... $37,275,000 $35,011,000 6.5% $28,702,000 $26,965,000 6.4%
Northern California..... 16,697,000 14,719,000 13.5% 12,610,000 10,728,000 17.5%
Southern Texas.......... 9,413,000 8,799,000 6.7% 6,289,000 5,762,000 9.1%
Northern Texas.......... 19,076,000 18,680,000 2.1% 13,058,000 12,855,000 1.6%
Virginia................ 23,198,000 21,952,000 5.7% 16,868,000 15,986,000 5.5%
Maryland................ 9,853,000 9,808,000 0.5% 7,598,000 7,398,000 2.7%
Oregon.................. 16,293,000 15,179,000 7.3% 13,343,000 12,260,000 8.8%
Other................... 7,434,000 7,199,000 3.2% 4,386,000 4,332,000 1.3%
------------ ------------- -------- ------------- ----------- --------
$139,239,000 $131,347,000 6.0% $102,854,000 $96,286,000 6.8%
============ ============= ======== ============= =========== ========

The increases noted above reflect the performance of the Company's
existing markets. Northern California benefited from the expiration of leases
with below market rents, as did all other markets to a lesser extent, resulting
in revenue and NOI increases in all of our markets.

FACILITY MANAGEMENT OPERATIONS: The Company's facility management
accounts for a small portion of the Company's net operating income. During the
year ended December 31, 2001, $531,000 in net operating income was recognized
from facility management operations compared to $428,000 for the same period in
2000. Facility management fees have increased due to the increase in rental
rates of the properties managed by the Company and additional properties brought
under management during 2000 and 2001.

BUSINESS SERVICES: Business services include construction management
fees and fees from telecommunication service providers. During the year ended
December 31, 2001, the Company incurred a net operating loss of $219,000 from
such services compared to net operating income of $203,000 recognized for the
same period in 2000. Business services revenues have declined due to the
bankruptcies of Darwin Networks, Winstar and Teligent. Expenses have increased
as a result of a full year of operations in 2001.

EQUITY IN INCOME OF JOINT VENTURE: On October 23, 2001, the Company
formed a joint venture with an unaffiliated investor to own and operate an
industrial park in the City of Industry submarket of Los Angeles County. The
Company recognized income of $25,000 in 2001 which represented the Company's 25%
equity interest in the joint venture.

INTEREST INCOME: Interest income reflects earnings on interest bearing
investments. Interest income was $2,251,000 for the year ended December 31, 2001
compared to $4,076,000 for the same period in 2000. The decrease is attributable
to lower interest rates and lower average cash balances. Weighted average
interest bearing investments and effective interest rates for the year ended
December 31, 2001 were approximately $53 million and 4.2% compared to $62
million and 6.5% for the same period in 2000.

DIVIDEND INCOME: Dividend income reflects dividends received from
marketable securities. Dividend income was $17,000 for the year ended December
31, 2001 compared to $1,301,000 for the same period in 2000. Dividend income
decreased due to the liquidation of PAG during the year ended December 31, 2001.

COST OF OPERATIONS: Cost of operations was $45,214,000 for the year
ended December 31, 2001 compared to $39,290,000 for the same period in 2000. The
increase is due primarily to the growth in the square footage of the Company's
portfolio of properties. Cost of operations as a percentage of rental income
decreased from 27.3% in 2000 to 27.1% in 2001 as a result of economies of scale
achieved through the acquisition and development of properties in core markets
and the disposition of properties outside of the Company's core markets. Cost of
operations for the year ended December 31, 2001 consists primarily of property
taxes ($14,241,000), property maintenance ($9,386,000), utilities ($8,046,000)
and direct payroll ($6,957,000).

DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization
expense was $41,067,000 for the year ended December 31, 2001 compared to
$35,637,000 for the same period in 2000. The increase is due to the acquisition
and development of real estate facilities during 2000 and 2001 and recurring
capitalized expenditures.

GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
was $4,320,000 for the year ended December 31, 2001 compared to $3,954,000 for
the same period in 2000. The increase is due primarily to the increased size and
activities of the Company offset by a decrease in legal costs. Included in
general and administrative costs are internal acquisition costs and abandoned
transaction costs. Internal acquisition expenses were $587,000 and $553,000 for
the year ended December 31, 2001 and 2000, respectively. Abandoned transaction
costs was $7,000 for both the years ended December 31, 2001 and 2000. Legal
costs were $176,000 and $837,000 for the years ended December 31, 2001 and 2000,
respectively. Legal costs were higher in 2000 as a result of the litigation
matters described in Item 3 of this Form 10-K.

INTEREST EXPENSE: Interest expense was $1,715,000 for the year ended
December 31, 2001 compared to $1,481,000 for the same period in 2000. The
increase is primarily attributable to increased average debt balances during the
period and greater capitalized interest in 2000 as a result of more construction
in progress. Interest expense of $1,091,000 and $1,415,000 was capitalized as
part of building costs associated with properties under development during the
years ended December 31, 2001 and 2000, respectively.

MINORITY INTEREST IN INCOME: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership that are not
owned by the Company. Minority interest in income was $27,489,000 ($14,107,000
allocated to preferred unitholders and $13,382,000 allocated to common
unitholders) for the year ended December 31, 2001 compared to $26,741,000
($12,185,000 allocated to preferred unitholders and $14,556,000 allocated to
common unitholders) for the same period in 2000. The increase in minority
interest in income is due primarily to the issuance of preferred operating
partnership units during 2000 and 2001 and higher earnings at the operating
partnership level, partially offset by a conversion of units to common stock
during 2000.

GAIN ON INVESTMENT IN MARKETABLE SECURITIES: Gain on investments in
marketable securities was $8,000 for the year ended December 31, 2001 compared
to $7,849,000 for the same period in 2000. The Company received a liquidating
distribution from PAG of approximately $21.8 million and recognized a
non-recurring gain of approximately $7.8 million during the year ended December
31, 2000.

DISPOSITION OF PROPERTIES: Certain properties that were identified as
not meeting the Company's ongoing investment strategy were designated for sale
in 2000 and 2001. The Company disposed of a property in San Diego with 77,000
square feet for approximately $9 million in November 2001 and deferred a gain of
$5,366,000. The Company disposed of five properties aggregating 627,000 square
feet for approximately $23.8 million during the year ended December 31, 2000 at
a gain of $256,000.

COMPARISON OF 2000 TO 1999
--------------------------

RESULTS OF OPERATIONS: Net income for the year ended December 31, 2000
was $51,181,000 compared to $41,255,000 for the same period in 1999. Net income
allocable to common shareholders (net income less preferred stock dividends) for
the year ended December 31, 2000 was $46,093,000 compared to $37,849,000 for the
same period in 1999. Net income per common share on a diluted basis was $1.97
for the year ended December 31, 2000 compared to $1.60 for the same period in
1999 (based on weighted average diluted common shares outstanding of 23,365,000
and 23,709,000, respectively). The increases in net income and net income per
common share reflect the Company's growth in its asset base through the
acquisition and development of commercial properties, increased net operating
income from its stabilized base of properties, a non-recurring realized and
unrealized gain on the Company's investment in the common stock of PAG and the
repurchase of common shares.

Years Ended
December 31,
------------------------------
2000 1999 Change
------------ ------------ -------
Rental income:

"Same Park" facilities (107 facilities, 10.5 million net
rentable square feet).................................. $121,489,000 $114,445,000 6.2%
Other facilities............................................ 22,682,000 10,882,000 108.4%
------------ ------------ -------
Total rental income......................................... $144,171,000 $125,327,000 15.0%
============ ============ ========

Cost of operations (excluding depreciation):
"Same Park" facilities...................................... $31,835,000 $30,983,000 2.7%
Other facilities............................................ 7,455,000 3,908,000 90.8%
------------ ------------ -------
Total cost of operations.................................... $39,290,000 $34,891,000 12.6%
============ ============ ========

Net operating income (rental income less cost of operations):
"Same Park" facilities...................................... $89,654,000 $83,462,000 7.4%
Other facilities............................................ 15,227,000 6,974,000 118.3%
------------ ------------ -------
Total net operating income.................................. $104,881,000 $90,436,000 16.0%
============ ============ ========

Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
------------------------ ---------- -------- ------------ -------- ------------ --------

Southern California 3,548,000 28.1% $37,670,000 26.1% $28,874,000 27.5%
Northern California 1,495,000 11.8% 16,977,000 11.8% 12,655,000 12.1%
Southern Texas 1,032,000 8.2% 11,084,000 7.7% 6,661,000 6.4%
Northern Texas 1,849,000 14.7% 19,183,000 13.3% 13,259,000 12.6%
Virginia 1,822,000 14.5% 22,375,000 15.5% 16,404,000 15.6%
Maryland 866,000 6.9% 12,592,000 8.7% 9,117,000 8.7%
Oregon 1,191,000 9.5% 16,653,000 11.6% 13,306,000 12.7%
Other 797,000 6.3% 7,637,000 5.3% 4,605,000 4.4%
---------- -------- ------------ -------- ------------ --------
12,600,000 100.0% $144,171,000 100.0% $104,881,000 100.0%
========== ======== ============ ======== ============ ========

SUPPLEMENTAL PROPERTY DATA AND TRENDS: In order to evaluate the
performance of the Company's overall portfolio, management analyzes the
operating performance of a consistent group of 107 properties (constituting 10.5
million net rentable square feet). These 107 properties (herein referred to as
the "Same Park" facilities) have been owned and operated by the Company for the
comparable periods. These properties do not include properties that have been
acquired or sold during 1999 and 2000. The "Same Park" facilities represented
approximately 84% of the square footage of the Company's portfolio at December
31, 2000.

"Same Park" Facilities (10.5 million square feet)

Years Ended
December 31,
---------------------------------
2000 1999 Change
------------- -------------- -------

Rental income (1).................................... $ 119,632,000 $ 111,334,000 7.5%
Cost of operations................................... 31,835,000 30,983,000 2.7%
------------- -------------- -------
Net operating income................................. $ 87,797,000 $ 80,351,000 9.3%
============= ============== =======

Gross margin (2)..................................... 73.4% 72.2% 1.2%

Weighted average for period:
Occupancy........................................ 97.0% 96.7% 0.3%
Annualized realized rent per sq. ft.(3).......... $11.71 $10.93 7.1%

------------------
(1) Rental income is presented on a cash basis and excludes the effect of
straight-line accounting of $2,204,000 and $3,407,000 for the years ended
December 31, 2000 and 1999, respectively.

(2) Gross margin is computed by dividing property net operating income by
rental income.

(3) Realized rent per square foot represents the actual revenues earned per
occupied square foot.

The following tables summarize the "Same Park" operating results prior to
depreciation by major geographic region for the years ended December 31, 2000
and 1999:

Revenues Revenues NOI NOI
Region 2000 1999 Increase 2000 1999 Increase
------------------------ ------------ ------------ ------------ ------------- ------------ --------

Southern California..... $36,160,000 $33,116,000 9.2% $27,591,000 $24,811,000 11.2%
Northern California..... 12,005,000 10,888,000 10.3% 9,143,000 8,187,000 11.7%
Southern Texas.......... 9,666,000 8,996,000 7.4% 5,613,000 5,422,000 3.5%
Northern Texas.......... 15,971,000 15,236,000 4.8% 11,103,000 10,138,000 9.5%
Virginia................ 15,988,000 14,739,000 8.5% 11,699,000 10,680,000 9.5%
Maryland................ 9,805,000 9,406,000 4.2% 7,397,000 6,876,000 7.6%
Oregon.................. 15,174,000 14,333,000 5.9% 12,257,000 11,398,000 7.5%
Other................... 4,863,000 4,620,000 5.3% 2,994,000 2,839,000 5.5%
------------ ------------ ------------ ------------- ------------ --------
$119,632,000 $111,334,000 7.5% $87,797,000 $80,351,000 9.3%
============ ============ ============ ============= ============ ========

The increases noted above reflect the performance of the Company's
existing markets. Southern and Northern California continued to benefit from a
strong economy, as did all other markets to a lesser extent, resulting in
revenue and NOI (prior to depreciation) increases in all of our markets.

FACILITY MANAGEMENT OPERATIONS: Facility management accounted for a
small portion of the Company's net operating income. During the year ended
December 31, 2000, $428,000 in net operating income was recognized from facility
management operations compared to $377,000 for the same period in 1999. Facility
management fees have increased due to the increase in rental rates of the
properties managed by the Company and an additional property brought under
management during 2000.

BUSINESS SERVICES: The Company hired a Vice President in 2000 to focus
on creating new revenue opportunities for the Company and additional products
and services for our customers. The Company began receiving income in 2000 from
construction management fees and fees from telecommunication service providers.
During the year ended December 31, 2000, $203,000 in net operating income was
derived from such services compared to none for the same period in 1999.

INTEREST INCOME: Interest income reflects earnings on cash balances.
Interest income was $4,076,000 for the year ended December 31, 2000 compared to
$2,356,000 for the same period in 1999. The increase is attributable to higher
interest rates and higher average cash balances. Weighted average cash balances
and effective interest rates for the year ended December 31, 2000 were
approximately $62 million and 6.5%compared to $43 million and 5.5% for the same
period in 1999.

DIVIDEND INCOME: Dividend income reflects dividends received from
marketable securities, primarily the Company's investment in PAG. Dividend
income was $1,301,000 for the year ended December 31, 2000 compared to $459,000
for the same period in 1999. The increase is attributable to the Company's
increased investment in PAG beginning in the third quarter of 1999.

COST OF OPERATIONS: Cost of operations for the year ended December 31,
2000 was $39,290,000 compared to $34,891,000 for the same period in 1999. The
increase is due primarily to the growth in the square footage of the Company's
portfolio of properties. Cost of operations as a percentage of rental income
decreased from 27.8% in 1999 to 27.3% in 2000 as a result of economies of scale
achieved through the acquisition and development of properties in core markets
and the disposition of properties outside of the Company's core markets. Cost of
operations for the year ended December 31, 2000 consists primarily of property
taxes ($12,590,000), property maintenance ($7,401,000), utilities ($5,615,000)
and direct payroll ($6,189,000).

DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization
expense for the year ended December 31, 2000 was $35,637,000 compared to
$29,762,000 for the same period in 1999. The increase is due to the acquisition
and development of real estate facilities during 1999 and 2000 and recurring
capitalized expenditures.

GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
was $3,954,000 for the year ended December 31, 2000 compared to $3,153,000 for
the same period in 1999. The increase is due primarily to the increased size and
activities of the Company and legal costs related to litigation matters
described in Item 3 of this Form 10-K. Included in general and administrative
costs are internal acquisition costs and abandoned transaction costs. Internal
acquisition expenses were $553,000 and $430,000 for the years ended December 31,
2000 and 1999, respectively. Abandoned transaction costs were $7,000 and $41,000
for the years ended December 31, 2000 and 1999, respectively. Legal costs were
$837,000 and $147,000 for the years ended December 31, 2000 and 1999,
respectively.

INTEREST EXPENSE: Interest expense was $1,481,000 for the year ended
December 31, 2000 compared to $3,153,000 for the same period in 1999. The
decrease is attributable to decreased average debt balances during the period
and greater capitalized interest in 2000 as a result of more construction in
progress. Interest expense of $1,415,000 and $989,000 was capitalized as part of
building costs associated with properties under development during the years
ended December 31, 2000 and 1999, respectively.

MINORITY INTEREST IN INCOME: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership that are not
owned by the Company. Minority interest in income for the year ended December
31, 2000 was $26,741,000 ($12,185,000 allocated to preferred unitholders and
$14,556,000 allocated to common unitholders) compared to $16,049,000 ($4,156,000
allocated to preferred unitholders and $11,893,000 allocated to common
unitholders) for the same period in 1999. The increase in minority interest in
income is due primarily to the issuance of preferred operating partnership units
during 1999 and 2000 and higher earnings at the operating partnership level,
partially offset by a conversion of units to common stock during 2000.

GAIN ON INVESTMENT IN PAG: At December 31, 2000, the Company owned
approximately one million shares of common stock of PAG. PAG began the process
of liquidating its assets in 2000. On December 15, 2000, the Company received an
initial liquidating distribution from PAG of approximately $21.8 million and
recognized a non-recurring gain of approximately $7.8 million during the year
ended December 31, 2000.

DISPOSITION OF PROPERTIES: Certain properties that were identified as
not meeting the Company's ongoing investment strategy were designated for sale
in 2000. The Company sold five properties aggregating 627,000 square feet for
approximately $23.8 million during the year ended December 31, 2000 at a gain of
$256,000.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Net cash provided by operating activities for the year ended December
31, 2001 and 2000 was $126,677,000 and $111,197,000, respectively. Management
believes that its internally generated net cash provided by operating activities
will continue to be sufficient to enable it to meet its operating expenses,
capital improvements and debt service requirements, and to maintain the level of
distributions to shareholders in addition to providing additional retained cash
for future growth, debt repayment and stock repurchases. There are various
factors, however, that could cause net cash provided by operating activities to
be less than management anticipates, including the factors set forth in Item 1A
"Risk Factors". In particular, leases for 35% of the space in the Company's
properties expire in 2002 or 2003 (leases for 60% of the space occupied by small
tenants expire in such years). If the Company is not able to maintain the
occupancy rate of its properties, which in many of the Company's markets is
significantly higher than the average for such markets, the Company's retained
cash flow will decrease and if there is substantial deterioration in occupancy
rates, the Company may have to reduce its level of distributions and/or increase
the level of its borrowings.

The Company disposed of a property in San Diego with 77,000 square feet
for approximately $9 million in November 2001 and deferred a gain of $5,366,000.
The Company disposed of five properties in non-core markets for approximately
$23.8 million during the year ended December 31, 2000 at a gain of $256,000.

The following table summarizes the Company's cash flow from operating
activities:

Years Ended December 31,
--------------------------------
2001 2000
------------- -------------

Net income............................................................ $49,870,000 $51,181,000
Gain on disposition of properties..................................... - (256,000)
Gain on investment in Pacific Gulf Properties, Inc.................... (8,000) (7,849,000)
Depreciation and amortization......................................... 41,067,000 35,637,000
Minority interest in income........................................... 27,489,000 26,741,000
Change in working capital............................................. 8,259,000 5,743,000
------------- -------------
Net cash provided by operating activities............................. 126,677,000 111,197,000

Maintenance capital expenditures...................................... (4,202,000) (3,228,000)
Tenant improvements................................................... (4,926,000) (5,264,000)
Capitalized lease commissions......................................... (2,513,000) (3,275,000)
------------- -------------
Funds available for distribution to shareholders, minority interests,
acquisitions and other corporate purposes.......................... 115,036,000 99,430,000

Cash distributions to common and preferred shareholders and minority
interests............................................................. (61,559,000) (47,877,000)
------------- -------------
Excess funds available for principal payments on debt, investments in real
estate and other corporate purposes................................... $53,477,000 $51,553,000
============= =============

The Company's capital structure is characterized by a low level of
leverage. As of December 31, 2001, the Company had seven fixed rate mortgage
notes payable totaling $30,145,000 which represented 2.7% of its total
capitalization (based on book value, including minority interests and debt). As
of December 31, 2001, the weighted average interest rate for the mortgage notes
was 7.56% and the weighted average maturity was 4.4 years.

The Company used its short-term borrowing capacity to complete
acquisitions totaling $303 million in 2001. The Company borrowed $100 million
from its line of credit and $35 million from PSI. The remaining balance was
funded from the issuance of preferred stock and preferred units in the operating

partnership totaling $116 million and existing cash of $52 million. During
January 2002, the Company issued 2,000,000 depositary shares, each representing
1/1,000 of a share of 8 3/4% Cumulative Preferred Stock, Series F, resulting in
net proceeds of $48.4 million. This was used to repay PSI and to increase
financial flexibility.

During February 2002, the Company entered into a seven year $50 million
term loan agreement with Fleet National Bank. The note bears interest at LIBOR
plus 1.45% and is due on February 20, 2009. The Company paid a one-time fee of
0.35% or $175,000 for the facility. The Company expects to use the proceeds of
the loan to reduce the amount drawn on its line of credit with Wells Fargo Bank.

The Company expects to fund its growth strategies primarily with
permanent capital, including the issuance of common and preferred stock and
internally generated retained cash flows and to a lesser extent with secured or
unsecured debt. 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 intends to repay
amounts borrowed under the Credit Facility from undistributed cash flow or, as
market conditions permit and as determined to be advantageous, from the public
or private placement of preferred and common stock/OP units of the Company or
Operating Partnership or the formation of joint ventures. The Company targets a
leverage ratio of 40% (defined as debt and preferred equity as a percentage of
market capitalization). In addition, the Company targets a ratio of Funds from
Operations ("FFO") to combined fixed charges and preferred distributions of 3.0
to 1.0. As of December 31, 2001 and for the year then ended, the leverage ratio
was 35% and the FFO to fixed charges and preferred distributions coverage ratio
was 4.6 to 1.0.

During 1999, the Company issued 2,200,000 depositary shares, each
representing 1/1,000 of a share of 9 1/4% Cumulative Preferred Stock, Series A.
The net proceeds of $53.1 million were used to repay borrowings from PSI and a
mortgage note payable of approximately $11 million. The remaining proceeds were
used for investment in real estate. During 2001, the Company issued 2,640,000
depositary shares, each representing 1/1,000 of a share of 9 1/2% Cumulative
Preferred Stock, Series D. The net proceeds of $64.3 million were used for
investment in real estate and general corporate purposes.

During 1999, the Operating Partnership issued 2,110,000 preferred
units with a preferred distribution rate of 8 7/8% and 3,200,000 preferred units
with a preferred distribution rate of 8 3/4%. The net proceeds of approximately
$129.6 million were used to repay borrowings from PSI and a mortgage note
payable of approximately $8.5 million. The remaining proceeds were used for
investment in real estate and general corporate purposes. During 2000, the
Operating Partnership issued 480,000 preferred units with a preferred
distribution rate of 8 7/8%. The net proceeds of $11.7 million were used for
investment in real estate. During 2001, the Operating Partnership issued
2,120,000 preferred units with a preferred distribution rate of 9 1/4%. The net
proceeds of $51.6 million were used for investment in real estate.

In September 2000, the Company extended its Credit Facility with Wells
Fargo Bank. The Credit Facility has a borrowing limit of $100 million and an
expiration date of August 6, 2003. The expiration date may be extended by one
year on each anniversary of the Credit Facility. 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 0.75% to LIBOR plus 1.35% depending
on the Company's credit ratings and coverage ratios, as defined (currently LIBOR
plus 1.00%). In addition, the Company is required to pay an annual commitment
fee of 0.25% of the borrowing limit.

In October 2001, the Company formed a joint venture with an
unaffiliated investor to own and operate an industrial park in the City of
Industry submarket of Los Angeles County. The park, consisting of 294,000 square
feet of industrial space, was acquired in December 2000 at a cost of
approximately $14.4 million. The property was contributed to the joint venture
at its original cost. The joint venture is capitalized with equity capital
consisting of 25% from the Company and 75% from the unaffiliated joint venture
partner. The joint venture has a variable rate mortgage obligation of
$7,015,000, which currently bears interest at a rate of 5.45% per annum and
matures on November 1, 2005. The Company has guaranteed repayment of this

obligation, but the obligation is not included in the Company's total
liabilities set forth on its balance sheet in the financial statements. See Note
2 to the Financial Statements included in this Form 10-K.

FUNDS FROM OPERATIONS: FFO is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"), before
depreciation, amortization, minority interest in income, straight line rent
adjustments and extraordinary or non-recurring items. FFO is presented because
the Company considers FFO to be a useful measure of the operating performance of
a REIT which, together with net income and cash flows provides investors with a
basis to evaluate the operating and cash flow performances of a REIT. FFO does
not represent net income or cash flows from operations as defined by GAAP. FFO
does not take into consideration scheduled principal payments on debt or capital
improvements. The Company believes that in order to facilitate a clear
understanding of the Company's operating results, FFO should be analyzed in
conjunction with net income as presented in the Company's consolidated financial
statements included elsewhere in this Form 10-K. Accordingly, FFO is not
necessarily a substitute for cash flow or net income as a measure of liquidity
or operating performance or ability to make acquisitions and capital
improvements or ability to make distributions or debt principal payments. Also,
FFO as computed and disclosed by the Company may not be comparable to FFO
computed and disclosed by other REITs.

FFO for the Company is computed as follows:

Years Ended December 31,
--------------------------------
2001 2000
------------- -------------

Net income allocable to common shareholders.............................. $41,016,000 $46,093,000
Less: Gain on investment in PAG...................................... (8,000) (7,849,000)
Less: Gain on disposition of properties.............................. - (256,000)
Depreciation and amortization......................................... 41,067,000 35,637,000
Depreciation from joint venture....................................... 15,000 -
Minority interest in income - common units............................ 13,382,000 14,556,000
Effects of straight line rents........................................ (1,904,000) (2,204,000)
------------- -------------
Consolidated FFO allocable to common shareholders and minority interests.
93,568,000 85,977,000
FFO allocated to minority interests - common units.................... (23,018,000) (20,634,000)
------------- -------------
FFO allocated to common shareholders..................................... $70,550,000 $65,343,000
============= =============

CAPITAL EXPENDITURES: During 2001, the Company incurred $11.6 million
or $0.91 per weighted average square foot in maintenance capital expenditures,
tenant improvements and capitalized leasing commissions. On a recurring annual
basis, the Company expects $0.90 to $1.20 per square foot in recurring capital
expenditures ($13 - $18 million based on square footage at December 31, 2001).
In addition, the Company expects to make $18 million in additional capital
expenditures in 2002. These investments include reserves to bring acquired
properties up to the Company's standards of $6.6 million, first generation
tenant improvements and leasing commissions on development properties of $7
million and the renovation of properties in Southern California and Northern
Virginia totaling $4.4 million.

During 2000, the Company incurred $11.8 million or $0.96 per weighted
average square foot in maintenance capital expenditures, tenant improvements and
capitalized leasing commissions.

STOCK REPURCHASE: On November 7, 2001, the Board of Directors increased
the number of common shares authorized to be repurchased from 2,500,000 to
4,500,000. The shares may be repurchased periodically on the open market or in
privately negotiated transactions. The Company repurchased 1,599,111 shares of
common stock and 30,484 common units at an aggregate cost of approximately $43.9
million and $808,000, respectively during the year ended December 31, 2001.
Since inception of the program (March 2000) through December 31, 2001, the
Company has repurchased 2,321,711 shares of common stock and 30,484 common units
at an aggregate cost of approximately $61.4 million. Any significant reduction
in the Company's net cash from operations will limit the Company's ability to
repurchase shares or units.

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

RELATED PARTY TRANSACTIONS: At February 28, 2002, PSI owns 25% of the
outstanding shares of the Company's common stock (44% upon conversion of its
interest in the Operating Partnership) and 25% of the outstanding common units
of the Operating Partnership (100% of the common units not owned by the
Company). Ronald L. Havner, Jr., the Company's Chairman, President and Chief
Executive Officer, is also an employee of PSI. As of December 31, 2001, the
Company had $35 million in short-term borrowings from PSI. The notes bore
interest at 3.25% and were repaid as of January 28, 2002. Pursuant to a cost
sharing and administrative services agreement, the Company shares costs with PSI
and affiliated entities for certain administrative services. These services
include employee relations, insurance, administration, management information
systems, legal, income tax and office services. Under this agreement, costs are
allocated to the Company in accordance with its proportionate share of these
costs. Finally, the Company provides property management services for properties
owned by PSI and its affiliates for a fee of 5% of the gross revenues of such
properties in addition to reimbursement of direct costs.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To limit the Company's exposure to market risk, the Company principally
finances its operations and growth with permanent equity capital consisting
either of common or preferred stock. At December 31, 2001, the Company's debt as
a percentage of shareholders' equity (based on book values) was 27.5%.

The Company's market risk sensitive instruments include mortgage notes
payable which totaled $30,145,000 at December 31, 2001. All of the Company's
mortgage notes payable bear interest at fixed rates. See Note 6 of the Notes to
Consolidated Financial Statements for terms, valuations and approximate
principal maturities of the mortgage notes payable as of December 31, 2001.
Based on borrowing rates currently available to the Company, the carrying amount
of debt approximates fair value.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company at December 31, 2001 and 2000
and for the years ended December 31, 2001, 2000 and 1999 and the report of Ernst
& Young LLP, Independent Auditors, 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 14.

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

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to directors is
hereby incorporated by reference to the material appearing in the Company's
definitive proxy statement to be filed in connection with the annual
shareholders' meeting to be held in 2002 (the "Proxy Statement") under the
caption "Election of Directors." Information required by this item with respect
to executive officers is provided in Item 4A of this report. See "Executive
Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated by
reference to the material appearing in the Proxy Statement under the captions
"Compensation" and "Compensation Committee Interlocks and Insider
Participation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is hereby incorporated by
reference to the material appearing in the Proxy Statement under the captions
"Election of Directors-Security Ownership of Certain Beneficial Owners" and
"-Security Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

a. 1. Financial Statements

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

2. Financial Statements Schedule

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

3. Exhibits

See Index to Exhibits contained herein.

b. Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K dated October 8, 2001
(filed October 9, 2001) pursuant to Item 9, relating to Regulation FD
Disclosure.

The Registrant filed a Current Report on Form 8-K dated November 20,
2001 (filed November 21, 2001) pursuant to Item 9, relating to
Regulation FD Disclosure.

The Registrant filed a Current Report on Form 8-K dated November 20,
2001 (filed November 27, 2001), as amended by Form 8-K/A dated November
20, 2001 (filed December 18, 2001) pursuant to Item 5, which filed
Combined Statements of Certain Revenues and Certain Operating Expenses
for the Prosperity Business Campus for the nine months ended September
30, 2001 and for the year ended December 31, 2000 and Combined
Statements of Certain Revenues and Certain Operating Expenses for the
Cornell Oaks Corporate Center for the nine months ended September 30,
2001 and for the year ended December 31, 2000.

c. Exhibits

See Index to Exhibits contained herein.

d. Financial Statement Schedules

Not applicable.

PS BUSINESS PARKS, INC.
EXHIBIT INDEX
(Items 14(a)(3) and 14(c))

2.1 Amended and Restated Agreement and Plan of Reorganization among
Registrant, American Office Park Properties, Inc. ("AOPP") and
Public Storage, Inc. ("PSI") dated as of December 17, 1997. Filed
with Registrant's Registration Statement No. 333-45405 and
incorporated herein by reference.

3.1 Restated Articles of Incorporation. Filed with Registrant's
Registration Statement No. 333-78627 and incorporated herein by
reference.

3.2 Certificate of Determination of Preferences of 8 3/4% Series C
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.

3.3 Certificate of Determination of Preferences of 8 7/8% Series X
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.

3.4 Amendment to Certificate of Determination of Preferences of 8 7/8%
Series X Cumulative Redeemable Preferred Stock of PS Business Parks,
Inc. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.

3.5 Certificate of Determination of Preferences of 8 7/8% Series Y
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 and incorporated herein by
reference.

3.6 Certificate of Determination of Preferences of 9 1/2% Series D
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Current Report on Form 8-K dated May 7, 2001
and incorporated herein by reference.

3.7 Amendment to Certificate of Determination of Preferences of 9 1/2%
Series D Cumulative Redeemable Preferred Stock of PS Business Parks,
Inc. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.

3.8 Certificate of Determination of Preferences of 9 1/4% Series E
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.

3.9 Certificate of Determination of Preferences of 8.750% Series F
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Current Report on Form 8-K dated January 18,
2002 and incorporated herein by reference.

3.10 Restated Bylaws. Filed with Registrant's Current Report on Form 8-K
dated March 17, 1998 and incorporated herein by reference.

10.1 Amended Management Agreement between Storage Equities, Inc. and
Public Storage Commercial Properties Group, Inc. dated as of
February 21, 1995. Filed with PSI's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.

10.2* Registrant's 1997 Stock Option and Incentive Plan. Filed with
Registrant's Registration Statement No. 333-48313 and incorporated
herein by reference.

10.3 Agreement of Limited Partnership of PS Business Parks, L.P. Filed
with Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 and incorporated herein by reference.

10.4 Agreement Among Shareholders and Company dated as of December 23,
1997 among Acquiport Two Corporation, AOPP, American Office Park
Properties, L.P. and PSI. Filed with Registrant's Registration
Statement No. 333-45405 and incorporated herein by reference.

10.5 Amendment to Agreement Among Shareholders and Company dated as of
January 21, 1998 among Acquiport Two Corporation, AOPP, American
Office Park Properties, L.P. and PSI. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.

10.6 Non-Competition Agreement dated as of December 23, 1997 among PSI,
AOPP, American Office Park Properties, L.P. and Acquiport Two
Corporation. Filed with Registrant's Registration Statement No.
333-45405 and incorporated herein by reference.

10.7** Employment Agreement between AOPP and Ronald L. Havner, Jr. dated as
of December 23, 1997. Filed with Registrant's Registration Statement
No. 333-45405 and incorporated herein by reference.

10.8** Employment Agreement between Registrant and J. Michael Lynch dated
as of May 20, 1998. Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 and incorporated
herein by reference.

10.9 Revolving Credit Agreement dated August 6, 1998 among PS Business
Parks, L.P., Wells Fargo Bank, National Association, as Agent, and
the Lenders named therein. Filed with Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998 and
incorporated herein by reference.

10.10 First Amendment to Revolving Credit Agreement dated as of August 19,
1999 among PS Business Parks, L.P., Wells Fargo Bank, National
Association, as Agent, and the Lenders named therein. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.

10.11 Second Amendment to Revolving Credit Agreement dated as of September
29, 2000 among PS Business Parks, L.P., Wells Fargo Bank, National
Association, as Agent, and the Lenders named therein. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000 and incorporated herein by reference.

10.12 Form of Indemnity Agreement. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998
and incorporated herein by reference.

10.13 Cost Sharing and Administrative Services Agreement dated as of
November 16, 1995 by and among PSCC, Inc. and the owners listed
therein. Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998 and incorporated herein by
reference.

10.14 Amendment to Cost Sharing and Administrative Services Agreement
dated as of January 2, 1997 by and among PSCC, Inc. and the owners
listed therein. Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998 and incorporated
herein by reference.

10.15 Accounts Payable and Payroll Disbursement Services Agreement dated
as of January 2, 1997 by and between PSCC, Inc. and American Office
Park Properties, L.P. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998 and
incorporated herein by reference.

10.16 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 7/8% Series B Cumulative Redeemable Preferred
Units, dated as of April 23, 1999. Filed with Registrant's Quarterly

Report on Form 10-Q for the quarterly period ended March 31, 1999
and incorporated herein by reference.

10.17 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 9 1/4% Series A Cumulative Redeemable Preferred
Units, dated as of April 30, 1999. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999
and incorporated herein by reference.

10.18 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 3/4% Series C Cumulative Redeemable Preferred
Units, dated as of September 3, 1999. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference.

10.19 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 7/8% Series X Cumulative Redeemable Preferred
Units, dated as of September 7, 1999. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference.

10.20 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to Additional 8 7/8% Series X Cumulative Redeemable
Preferred Units, dated as of September 23, 1999. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.

10.21 Amendment to Agreement of Limited Partnership of PS Business Parks
L.P. Relating to 8 7/8% Series Y Cumulative Redeemable Preferred
Units, dated as of July 12, 2000. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000 and
incorporated herein by reference.

10.22 Amendment to Agreement of Limited Partnership of PS Business Parks
L.P. Relating to 9 1/2% Series D Cumulative Redeemable Preferred
Units, dated as of May 10, 2001. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001
and incorporated herein by reference.

10.23 Amendment No. 1 to Amendment to Agreement of Limited Partnership of
PS Business Parks L.P. Relating to 9 1/2% Series D Cumulative
Redeemable Preferred Units, dated as of June 18, 2001. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001 and incorporated herein by reference.

10.24 Amendment to Agreement of Limited Partnership of PS Business Parks
L.P. Relating to 9 1/4% Series E Cumulative Redeemable Preferred
Units, dated as of September 21, 2001. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2001 and incorporated herein by reference.

10.25 Amendment to Agreement of Limited Partnership of PS Business Parks
L.P. Relating to 8 3/4% Series F Cumulative Redeemable Preferred
Units, dated as of January 18, 2002. Filed herewith.

10.26 Registration Rights Agreement dated as of March 17, 1998 between
Registrant and Acquiport Two Corporation ("Acquiport Registration
Rights Agreement"). Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 and incorporated
herein by reference.

10.27 Letter dated May 20, 1998 relating to Acquiport Registration Rights
Agreement. Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.

10.28 Third Amendment to Revolving Credit Agreement dated as of February
15, 2002 among PS Business Parks, L.P., Wells Fargo Bank, National
Association, as Agent, and the Lenders named therein. Filed
herewith.

10.29 Term Loan Agreement dated as of February 20, 2002 among PS Business
Parks, L.P. and Fleet National Bank, as Agent. Filed herewith.

12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
Filed herewith.

21 List of Subsidiaries

23 Consent of Independent Auditors. Filed herewith.

---------------
* Compensatory benefit plan.
** Management contract.

SIGNATURES

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

Dated: March 14, 2002

PS BUSINESS PARKS, INC.

BY: /s/ Ronald L. Havner, Jr.
--------------------------------
Ronald L. Havner, Jr.
President, Chairman of the Board
and Chief Executive Officer

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

Signature Title Date
---------------------------------------- -------------------------------------- --------------------------------------

President, Chairman of the Board and
/s/ Ronald L. Havner, Jr. Chief Executive Officer (principal
------------------------- executive officer) March 14, 2002
Ronald L. Havner, Jr.

Vice President and Chief Financial
/s/ Jack E. Corrigan Officer (principal financial officer
-------------------- and principal accounting officer) March 14, 2002
Jack E. Corrigan

/s/ Harvey Lenkin
-----------------
Harvey Lenkin Director March 14, 2002

/s/ Vern O. Curtis
------------------
Vern O. Curtis Director March 14, 2002

/s/ James H. Kropp
------------------
James H. Kropp Director March 14, 2002

/s/ Jack D. Steele
------------------
Jack D. Steele Director March 14, 2002

/s/ Alan K. Pribble
-------------------
Alan K. Pribble Director March 14, 2002

/s/ Arthur M. Friedman
----------------------
Arthur M. Friedman Director March 14, 2002

PS BUSINESS PARKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

(Item 14(a)(3) and Item 14(c))

Page

Report of Independent Auditors.............................................................. F-1

Consolidated balance sheets as of December 31, 2001 and 2000................................ F-2

Consolidated statements of income for the years ended December 31, 2001, 2000 and 1999...... F-3

Consolidated statement of shareholders' equity for the years ended December 31, 2001, 2000 and
1999........................................................................................ F-4

Consolidated statements of cash flows for the years ended December 31, 2001,
2000 and 1999............................................................................... F-5

Notes to consolidated financial statements.................................................. F-7

Schedule:

III - Real estate and accumulated depreciation.............................................. F-24

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 AUDITORS

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

We have audited the accompanying consolidated balance sheets of PS Business
Parks, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
December 31, 2001, 2000 and 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(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 auditing standards generally accepted
in the 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, 2001 and 2000, and the consolidated results
of its operations and its cash flows for the years ended December 31, 2001, 2000
and 1999 in conformity with accounting principles generally accepted in the
United States. 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.

/s/ ERNST & YOUNG LLP

Los Angeles, California
January 30, 2002

F-1

PS BUSINESS PARKS, INC.
CONSOLIDATED BALANCE SHEETS

December 31, December 31,
2001 2000
---------------- ----------------

ASSETS

Cash and cash equivalents............................... $ 3,076,000 $ 49,295,000
Marketable securities................................... 9,134,000 6,065,000

Real estate facilities, at cost:
Land............................................... 288,792,000 214,020,000
Buildings and equipment............................ 948,899,000 709,328,000
---------------- ----------------
1,237,691,000 923,348,000
Accumulated depreciation........................... (121,609,000) (83,841,000)
---------------- ----------------
1,116,082,000 839,507,000
Properties held for disposition, net.................... 9,498,000 -
Land held for development............................... 10,629,000 5,737,000
Construction in progress................................ - 19,467,000
---------------- ----------------
1,136,209,000 864,711,000

Investment in joint venture............................. 974,000 -
Rent receivable......................................... 745,000 445,000
Interest receivable..................................... 137,000 16,000
Note receivable......................................... 7,450,000 -
Deferred rent receivables............................... 9,601,000 7,697,000
Intangible assets, net.................................. 679,000 981,000
Other assets............................................ 1,950,000 1,546,000
---------------- ----------------
Total assets.............................. $ 1,169,955,000 $ 930,756,000
================ ================

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued and other liabilities.............................. $ 39,822,000 $ 28,964,000
Deferred gain on property disposition...................... 5,366,000 -
Line of credit............................................. 100,000,000 -
Notes payable to affiliate................................. 35,000,000 -
Mortgage notes payable..................................... 30,145,000 30,971,000
---------------- ----------------
Total liabilities................................. 210,333,000 59,935,000

Minority interest:
Preferred units................................... 197,750,000 144,750,000
Common units...................................... 162,141,000 161,728,000

Shareholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 4,840 and
2,200 shares issued and outstanding
at December 31, 2001 and December 31, 2000, respectively... 121,000,000 55,000,000
Common stock, $0.01 par value, 100,000,000 shares
authorized, 21,539,783 and 23,044,635 shares issued and
outstanding at December 31, 2001 and December 31, 2000, 215,000 230,000
respectively...............................................
Paid-in capital......................................... 422,161,000 464,855,000
Cumulative net income................................... 174,860,000 124,990,000
Comprehensive gain...................................... 108,000 -
Cumulative distributions................................ (118,613,000) (80,732,000)
---------------- ----------------
Total shareholders' equity........................ 599,731,000 564,343,000
---------------- ----------------
Total liabilities and shareholders' equity... $ 1,169,955,000 $ 930,756,000
================ ================

See accompanying notes.
F-2

PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Revenues:

Rental income.................................................... $ 167,062,000 $ 144,171,000 $ 125,327,000
Facility management fees primarily from affiliates............... 683,000 539,000 471,000
Business services................................................ 353,000 547,000 -
Equity in income of joint venture................................ 25,000 - -
Interest income.................................................. 2,251,000 4,076,000 2,356,000
Dividend income.................................................. 17,000 1,301,000 459,000
--------------- --------------- ---------------
170,391,000 150,634,000 128,613,000
--------------- --------------- ---------------
Expenses:
Cost of operations................................................ 45,214,000 39,290,000 34,891,000
Cost of facility management....................................... 152,000 111,000 94,000
Cost of business services......................................... 572,000 344,000 -
Depreciation and amortization..................................... 41,067,000 35,637,000 29,762,000
General and administrative........................................ 4,320,000 3,954,000 3,153,000
Interest expense................................................. 1,715,000 1,481,000 3,153,000
--------------- --------------- ---------------
93,040,000 80,817,000 71,053,000
--------------- --------------- ---------------
Income before disposition of investments, minority interest and
extraordinary item............................................... 77,351,000 69,817,000 57,560,000
Gain on investment in marketable securities....................... 8,000 7,849,000 -
Gain on disposition of properties................................. - 256,000 -
--------------- --------------- ---------------
Income before minority interest and extraordinary item.............. 77,359,000 77,922,000 57,560,000
Minority interest in income - preferred units..................... (14,107,000) (12,185,000) (4,156,000)
Minority interest in income - common units........................ (13,382,000) (14,556,000) (11,954,000)
--------------- --------------- ---------------
Income before extraordinary item.................................... 49,870,000 51,181,000 41,450,000
Extraordinary loss on early extinguishment of debt, net of minority
interest......................................................... - - (195,000)
--------------- --------------- ---------------
Net income.......................................................... $ 49,870,000 $ 51,181,000 $ 41,255,000
=============== =============== ===============
Net income allocation:
Allocable to preferred shareholders............................... $ 8,854,000 $ 5,088,000 $ 3,406,000
Allocable to common shareholders.................................. 41,016,000 46,093,000 37,849,000
--------------- --------------- ---------------
$ 49,870,000 $ 51,181,000 $ 41,255,000
=============== =============== ===============
Net income per common share - basic:
Income before extraordinary item.................................. $ 1.84 $ 1.98 $ 1.61
Extraordinary loss, net of minority interest...................... - - (0.01)
--------------- --------------- ---------------
Net income........................................................ $ 1.84 $ 1.98 $ 1.60
=============== =============== ===============
Net income per common share - diluted:
Income before extraordinary item.................................. $ 1.83 $ 1.97 $ 1.61
Extraordinary loss, net of minority interest...................... - - (0.01)
--------------- --------------- ---------------
Net income........................................................ $ 1.83 $ 1.97 $ 1.60
=============== =============== ===============
Weighted average common shares outstanding:
Basic............................................................. 22,350,000 23,284,000 23,641,000
=============== =============== ===============
Diluted........................................................... 22,435,000 23,365,000 23,709,000
=============== =============== ===============

See accompanying notes.
F-3

PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Preferred Stock Common Stock
-------------------------- -------------------------- Paid-in
Shares Amount Shares Amount Capital
----------- ------------- ----------- ---------- ------------

Balances at December 31, 1998...... - - 23,635,650 236,000 482,471,000
Issuance of preferred stock,
net of costs.................. 2,200 55,000,000 - - (1,936,000)
Exercise of stock options....... - - 9,811 - 179,000
Net income...................... - - - - -
Distributions paid:
Preferred stock............. - - - - -
Common stock................ - - - - -
Adjustment to reflect minority
interest to underlying ownership
interest.......................... - - - - (1,825,000)
----------- ------------- ----------- ---------- ------------
Balances at December 31, 1999...... 2,200 55,000,000 23,645,461 236,000 478,889,000
Issuance of common stock:
Conversion of common OP
units..................... - - 107,517 1,000 2,530,000
Exercise of stock options... - - 14,257 - 261,000
Repurchase of common stock...... - - (722,600) (7,000) (16,634,000)
Net income...................... - - - - -
Distributions paid:
Preferred stock............. - - - - -
Common stock................ - - - - -
Adjustment to reflect minority
interest to underlying ownership
interest.......................... - - - (191,000)
----------- ------------- ----------- ---------- ------------
Balances at December 31, 2000...... 2,200 55,000,000 23,044,635 230,000 464,855,000
Issuance of preferred stock,
net of costs.................. 2,640 66,000,000 - - (1,663,000)
Issuance of common stock:
Exercise of stock options... - - 94,259 1,000 1,602,000
Unrealized gain - appreciation
in marketable securities - - - - -
Repurchase of common stock...... - - (1,599,111) (16,000) (43,910,000)
Net income...................... - - - - -
Distributions paid:
Preferred stock............. - - - - -
Common stock................ - - - - -
Adjustment to reflect minority
interest to underlying ownership
interest.......................... - - - 1,277,000
----------- ------------- ----------- ---------- ------------
Balances at December 31, 2001...... 4,840 $121,000,000 21,539,783 $215,000 $422,161,000
=========== ============= =========== ========== ============

Other
Cumulative Comprehensive Cumulative Shareholders'
Net Income Income Distributions Equity
------------ ------------- --------------- -------------

Balances at December 31, 1998...... 32,554,000 - (25,356,000) 489,905,000
Issuance of preferred stock,
net of costs.................. - - - 53,064,000
Exercise of stock options....... - - - 179,000
Net income...................... 41,255,000 - - 41,255,000
Distributions paid:
Preferred stock............. - - (3,406,000) (3,406,000)
Common stock................ - - (23,641,000) (23,641,000)
Adjustment to reflect minority
interest to underlying ownership
interest.......................... - - - (1,825,000)
------------ ------------- --------------- -------------
Balances at December 31, 1999...... 73,809,000 - (52,403,000) 555,531,000
Issuance of common stock:
Conversion of common OP
units..................... - - - 2,531,000
Exercise of stock options... - - - 261,000
Repurchase of common stock...... - - - (16,641,000)
Net income...................... 51,181,000 - - 51,181,000
Distributions paid:
Preferred stock............. - - (5,088,000) (5,088,000)
Common stock................ - - (23,241,000) (23,241,000)
Adjustment to reflect minority
interest to underlying ownership
interest.......................... - - - (191,000)
------------ ------------- --------------- -------------
Balances at December 31, 2000...... 124,990,000 - (80,732,000) 564,343,000
Issuance of preferred stock,
net of costs.................. - - - 64,337,000
Issuance of common stock:
Exercise of stock options... - - - 1,603,000
Unrealized gain - appreciation
in marketable securities - 108,000 - 108,000
Repurchase of common stock...... - - - (43,926,000)
Net income...................... 49,870,000 - - 49,870,000
Distributions paid:
Preferred stock............. - - (8,854,000) (8,854,000)
Common stock................ - - (29,027,000) (29,027,000)
Adjustment to reflect minority
interest to underlying ownership
interest.......................... - - - 1,277,000
------------ ------------- --------------- -------------
Balances at December 31, 2001...... $174,860,000 $108,000 $(118,613,000) $599,731,000
============ ============= =============== =============

See accompanying notes.
F-4

PS BUSINESS PARKS, INC.
STATEMENTS OF CASH FLOWS

For the Years Ended December 31,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:

Net income....................................................... $ 49,870,000 $ 51,181,000 $ 41,255,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on investment in marketable securities.................. (8,000) (7,849,000) -
Gain on disposition of properties............................ - (256,000) -
Depreciation and amortization expense........................ 41,067,000 35,637,000 29,762,000
Minority interest in income.................................. 27,489,000 26,741,000 16,049,000
Increase in receivables and other assets..................... (2,642,000) (2,004,000) (3,868,000)
Increase in accrued and other liabilities.................... 10,901,000 7,747,000 5,242,000
-------------- -------------- --------------
Total adjustments....................................... 76,807,000 60,016,000 47,185,000
-------------- -------------- --------------
Net cash provided by operating activities.................. 126,677,000 111,197,000 88,440,000
-------------- -------------- --------------

Cash flows from investing activities:
Distribution from Pacific Gulf Properties, Inc............... - 21,767,000 -
Sale of marketable securities................................ 6,401,000 - -
Investment in marketable securities.......................... (9,441,000) (1,720,000) (18,470,000)
Acquisition of real estate facilities........................ (301,960,000) (82,335,000) (82,087,000)
Disposition of properties.................................... 1,175,000 23,763,000 -
Distribution from investment in joint venture................ 13,122,000 - -
Capital improvements to real estate facilities............... (12,760,000) (19,127,000) (16,211,000)
Land held for development and construction in progress........ (14,904,000) (19,816,000) (14,550,000)
-------------- -------------- --------------
Net cash used in investing activities...................... (318,367,000) (77,468,000) (131,318,000)
-------------- -------------- --------------

Cash flows from financing activities:
Borrowings from an affiliate................................. 35,000,000 - -
Borrowings from line of credit............................... 100,000,000 - 14,000,000
Repayment of borrowings from line of credit.................. - - (26,500,000)
Principal payments on mortgage notes payable................. (826,000) (6,095,000) (20,694,000)
Net proceeds from the issuance of common stock............... 1,603,000 261,000 179,000
Repurchase of common stock................................... (43,926,000) (16,641,000) -
Redemption of common operating partnership units............. (808,000)
Net proceeds from the issuance of preferred stock............ 64,337,000 - 53,064,000
Net proceeds from the issuance of preferred operating
partnership units.......................................... 51,650,000 11,698,000 129,613,000
Distributions paid to preferred shareholders................. (8,854,000) (5,088,000) (3,406,000)
Distributions paid to minority interests - preferred units... (14,107,000) (12,185,000) (4,156,000)
Distributions paid to common shareholders.................... (29,027,000) (23,241,000) (23,641,000)
Distributions paid to minority interests - common units...... (9,571,000) (7,363,000) (7,429,000)
-------------- -------------- --------------
Net cash provided by (used in) financing activities........ 145,471,000 (58,654,000) 111,030,000
-------------- -------------- --------------

Net (decrease) increase in cash and cash equivalents................ (46,219,000) (24,925,000) 68,152,000
Cash and cash equivalents at the beginning of the period............ 49,295,000 74,220,000 6,068,000
-------------- -------------- --------------
Cash and cash equivalents at the end of the period.................. $ 3,076,000 $ 49,295,000 $ 74,220,000
============== ============== ==============

Supplemental disclosures:
Interest paid................................................ $ 2,121,000 $ 2,896,000 $ 3,053,000
============== ============== ==============

See accompanying notes.
F-5

For the Years Ended December 31,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Supplemental schedule of non cash investing and financing
activities:

Acquisitions of real estate facilities and associated assets and liabilities in
exchange for minority interests and mortgage notes payable:

Real estate facilities....................................... $ - $ - $ (20,752,000)
Other assets (deposits on real estate acquisitions).......... - - -
Accrued and other liabilities................................ - - -
Minority interest - common units............................. - - 1,033,000
Mortgage notes payable....................................... - - 19,719,000

Conversion of common OP units into shares of common stock:
Minority interest - common units............................. - (2,531,000) -
Common stock................................................. - 1,000 -
Paid-in capital.............................................. - 2,530,000 -

Adjustment to reflect minority interest to underlying ownership interest:
Minority interest - common units............................. (1,277,000) 191,000 1,825,000
Paid-in capital.............................................. 1,277,000 (191,000) (1,825,000)

Transfer of developed properties to real estate facilities:
Real estate facilities....................................... (29,479,000) (3,228,000) (13,650,000)
Construction in progress..................................... 29,479,000 3,228,000 13,650,000

Disposition of property:
Real estate facilities....................................... 3,265,000 - -
Deferred gain on property disposition........................ 5,360,000 - -
Note receivable.............................................. (7,450,000) - -

Investment in joint venture:
Real estate facilities....................................... 14,096,000 - -
Investment in joint venture.................................. (14,096,000) - -

Unrealized gain:
Marketable securities........................................ (108,000) - -
Other comprehensive income................................... 108,000 - -

See accompanying notes.
F-6

PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001

1. Organization and description of business

Organization

PS Business Parks, Inc. ("PSB") was incorporated in the state of California
in 1990. As of December 31, 2001, PSB owned approximately 75% of the common
partnership units of PS Business Parks, L.P. (the "Operating Partnership"
or "OP"). The remaining common partnership units were owned by Public
Storage, Inc. ("PSI") and its affiliated entities. PSB, as the sole general
partner of the Operating Partnership, has full, exclusive and complete
responsibility and discretion in managing and controlling the Operating
Partnership. PSB and the Operating Partnership are collectively referred to
as the "Company."

Description of business

The Company is a fully-integrated, self-advised and self-managed real
estate investment trust ("REIT") that acquires, develops, owns and operates
commercial properties containing commercial and industrial rental space. As
of December 31, 2001, the Company owned and operated approximately 14.8
million net rentable square feet of commercial space located in 9 states.
The Company also managed approximately 1.7 million net rentable square feet
on behalf of PSI and its affiliated entities, third party owners and a
joint venture in which the Company held a 25% ownership interest (See Note
2).

2. Summary of significant accounting policies

Basis of presentation

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

Use of estimates

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from estimates.

Financial instruments

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

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

F-7

Financial assets that are exposed to credit risk consist primarily of cash
and cash equivalents and accounts receivable. Cash and cash equivalents,
which consist of short-term investments, including commercial paper, are
only invested in entities with investment grade ratings. Accounts
receivable are not a significant portion of total assets and are comprised
of a large number of customers.

Marketable securities

Marketable securities at December 31, 2001 are classified as
"available-for-sale" in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Investments are reflected on the balance sheet at fair
market value based upon the quoted market price. The unrealized gain of
$108,000 is excluded from earnings and reported in a separate component of
shareholders' equity. Dividend income is recognized when earned.

The Company owned approximately one million common shares of Pacific Gulf
Properties Inc ("PAG") at December 31, 2000. On December 15, 2000, the
Company received a liquidating cash distribution of approximately $21.8
million and recognized a gain of approximately $6.1 million in excess of
its original investment. The investment was classified as "trading
securities" in accordance with SFAS No. 115. The investment was reflected
on the balance sheet at fair market value based upon the quoted market
price, resulting in an unrealized gain of $1.7 million which was included
in earnings. The Company sold its remaining investment in Pacific Gulf
Properties Inc. during the year ended December 31, 2001 and recognized a
gain of $15,000.

Real estate facilities

Real estate facilities are recorded at cost. Costs related to the
renovation or improvement of the properties are capitalized. Expenditures
for repair and maintenance are expensed as incurred. Buildings and
equipment are depreciated on the straight-line method over the estimated
useful lives, which are generally 30 and 5 years, respectively.

Interest cost and property taxes incurred during the period of construction
of real estate facilities are capitalized. The Company capitalized
$1,091,000, $1,415,000 and $989,000 of interest expense and $321,000,
$64,000 and $56,000 of property taxes during the years ended December 31,
2001, 2000 and 1999, respectively.

F-8

Investment in joint venture

In October 2001, the Company formed a joint venture with an unaffiliated
investor to own and operate an industrial park in the City of Industry
submarket of Los Angles County. The park, consisting of 294,000 square feet
of industrial space, was acquired in December 2000 at a cost of
approximately $14.4 million. The property was contributed to the joint
venture at its original cost. The partnership is capitalized with equity
capital consisting of 25% from the Company and 75% from the unaffiliated
investor and mortgage note payable. Summarized below is financial data for
the joint venture as of December 31, 2001.

For the Year Ended
December 31, 2001
--------------------

Rental income ....................................... $ 253,000
Other income ........................................ 76,000
--------------------
Total revenues .................................... 329,000
--------------------
Cost of operations .................................. 134,000
Depreciation and amortization ....................... 59,000
Other expenses ...................................... 46,000
--------------------
Total expenses .................................... 239,000
--------------------
Net income ........................................ $ 90,000
====================
--------------------------------------------------------------------------------
Real estate, net .................................... $14,779,000
Total assets ........................................ 15,022,000

Notes payable ....................................... 7,015,000
Total liabilities ................................... 9,391,000
Partner's equity .................................... 5,631,000

The Company's investment at December 31, 2001 ....... $ 974,000

The joint venture has a variable rate mortgage obligation of $7,015,000,
which currently bears interest at 5.45% per annum and is due on November 1,
2005. Under certain conditions, the Company has guaranteed repayment of the
mortgage. The debt is not included in the Company's total liabilities. The
Company's investment is accounted for under the equity method in accordance
with APB 18, "Equity Method of Accounting for Investments." The Company's
share of the debt is netted against its share of the assets in determining
the investment in the joint venture of $974,000.

Intangible assets

Intangible assets consist of property management contracts for properties
managed, but not owned, by the Company. The intangible assets are being
amortized over seven years. Accumulated amortization was $1,477,000 and
$1,175,000 at December 31, 2001 and December 31, 2000, respectively.

F-9

Evaluation of asset impairment

The Company evaluates its assets used in operations, by identifying
indicators of impairment and by comparing the sum of the estimated
undiscounted future cash flows for each asset to the asset's carrying
amount. When indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying value of such
asset, an impairment loss is recorded equal to the difference between the
asset's current carrying value and its value based on discounting its
estimated future cash flows. In addition, the Company evaluates its assets
held for disposition. Assets held for disposition are reported at the lower
of their carrying amount or fair value, less cost of dispositions. At
December 31, 2001, no such indicators of impairment have been identified.

Borrowings from and loans to affiliate

The Company borrowed an aggregate of $41.4 million from PSI and paid
$371,000 in interest expense during the period of January 19, 1999 through
April 30, 1999. The notes bore interest at 5.5% (per annum) and were repaid
as of April 30, 1999.

The Company loaned an aggregate of $77 million to PSI and received $153,000
in interest income during the period of January 5, 2000 through March 20,
2000. The notes bore interest at 5.9% (per annum) and were repaid as of
March 20, 2000.

The Company borrowed an aggregate of $35 million from PSI and paid $10,000
in interest expense during the period of December 27, 2001 through December
31, 2001. The notes bore interest at 3.25% (per annum) and were repaid as
of January 28, 2002.

Stock-based compensation

The Company has elected to adopt the disclosure requirements of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," but will continue to account for stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees."

Revenue and expense recognition

All leases are classified as operating leases. Rental income is recognized
on a straight-line basis over the terms of the leases. Reimbursements from
tenants for real estate taxes and other recoverable operating expenses are
recognized as revenue in the period the applicable costs are incurred.

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

Property management fees are recognized in the period earned.

General and administrative expense

General and administrative expense includes executive compensation, office
expense, professional fees, state income taxes, cost of acquisition
personnel and other such administrative items. Such amounts include amounts
incurred by PSI on behalf of the Company, which were subsequently charged
to the Company in accordance with the allocation methodology pursuant to
the cost allocation and administrative service agreement between the
Company and PSI.

F-10

Acquisition costs

In March 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued guidance (the "97-11 Guidance") with
respect to Issue No. 97-11, "Accounting for Internal Acquisition Costs
Relating to Real Estate Property Acquisitions." The 97-11 Guidance provides
that a company shall expense internal pre-acquisition costs (such as costs
of an internal acquisitions department) related to the purchase of an
operating property. The Company does not capitalize such internal
pre-acquisition costs with respect to the acquisition of operating real
estate facilities. Accordingly, the 97-11 Guidance had no impact upon the
consolidated financial statements.

Income taxes

The Company qualified and intends to continue to qualify as a REIT, as
defined in Section 856 of the Internal Revenue Code. As a REIT, the Company
is not subject to federal income tax to the extent that it distributes its
taxable income to its shareholders. A REIT must distribute at least 90% of
its taxable income each year. In addition, REIT's are subject to a number
of organizational and operating requirements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) based
on its taxable income using corporate income tax rates. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain
state and local taxes on its income and property and to federal income and
excise taxes on its undistributed taxable income. The Company believes it
met all organization and operating requirements to maintain its REIT status
during 2001, 2000 and 1999 and intends to continue to meet such
requirements. Accordingly, no provision for income taxes has been made in
the accompanying financial statements.

Net income per common share

Per share amounts are computed using the weighted average common shares
outstanding. "Diluted" weighted average common shares outstanding include
the dilutive effect of stock options under the treasury stock method.
"Basic" weighted average common shares outstanding excludes such effect.
Earnings per share has been calculated as follows:

For the Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------

Net income allocable to common shareholders .................................. $41,016,000 $46,093,000 $37,849,000
============ ============ ============
Weighted average common shares outstanding:

Basic weighted average common shares outstanding .......................... 22,350,000 23,284,000 23,641,000
Net effect of dilutive stock options - based on treasury
stock method using average market price ................................. 85,000 81,000 68,000
------------ ------------ ------------
Diluted weighted average common shares outstanding ........................ 22,435,000 23,365,000 23,709,000
============ ============ ============

Basic earnings per common share .............................................. $ 1.84 $ 1.98 $ 1.60
============ ============ ============
Diluted earnings per common share ............................................ $ 1.83 $ 1.97 $ 1.60
============ ============ ============

F-11

Reclassifications

Certain reclassifications have been made to the consolidated financial
statements for 2000 in order to conform to the 2001 presentation.

3. Real estate facilities

The activity in real estate facilities for the years ended December 31,
2001, 2000 and 1999 is as follows:

Accumulated
Land Buildings Depreciation Total
---------------- ---------------- ---------------- ----------------

Balances at December 31, 1998..... $ 176,241,000 $ 536,697,000 $ (22,517,000) $ 690,421,000
Property acquisitions............ 18,705,000 84,134,000 - 102,839,000
Property held for disposition.... (4,531,000) (10,706,000) 1,002,000 (14,235,000)
Developed projects............... 3,725,000 9,925,000 - 13,650,000
Capital improvements............. - 16,211,000 - 16,211,000
Depreciation expense............. - - (29,461,000) (29,461,000)
---------------- ---------------- ---------------- ----------------
Balances at December 31, 1999...... 194,140,000 636,261,000 (50,976,000) 779,425,000
Property acquisitions............ 21,517,000 60,818,000 - 82,335,000
Property dispositions............ (1,995,000) (9,748,000) 2,471,000 (9,272,000)
Developed projects............... 358,000 2,870,000 - 3,228,000
Capital improvements............. - 19,127,000 - 19,127,000
Depreciation expense............. - - (35,336,000) (35,336,000)
---------------- ---------------- ---------------- ----------------
Balances at December 31, 2000...... 214,020,000 709,328,000 (83,841,000) 839,507,000
Property acquisitions............ 76,595,000 225,365,000 - 301,960,000
Property dispositions............ (930,000) (2,881,000) 546,000 (3,265,000)
Contribution to joint venture.... (3,432,000) (11,100,000) 436,000 (14,096,000)
Properties held for disposition.. (1,860,000) (9,653,000) 2,015,000 (9,498,000)
Developed projects............... 4,399,000 25,080,000 - 29,479,000
Capital improvements............. - 12,760,000 - 12,760,000
Depreciation expense............. - - (40,765,000) (40,765,000)
---------------- ---------------- ---------------- ----------------
Balances at December 31, 2001...... $ 288,792,000 $ 948,899,000 $ (121,609,000) $ 1,116,082,000
================ ================ ================ ================

The unaudited basis of real estate facilities for federal income tax
purposes was approximately $1 billion at December 31, 2001.

During the years ended December 31, 2001, 2000 and 1999, the Company
incurred $14.9 million, $19.8 million, and $14.6 million in development
costs, respectively. In 1999, the Company completed a 61,000 square foot
development in Dallas, Texas and a 66,000 square foot development in
Beaverton, Oregon at a cost of approximately $13.6 million. In 2000, the
Company completed a 22,000 square foot development in Beaverton, Oregon at
a cost of approximately $3.2 million. In 2001, the Company completed a
97,000 square foot development in Beaverton, Oregon, a 141,000 square foot
development in Chantilly, Virginia and a 102,000 square foot development in
Dallas, Texas at a cost of approximately $28.5 million.

F-12

Two properties have been identified as not meeting the Company's ongoing
investment strategy and have been designated as properties held for
disposition at December 31, 2001. These properties are currently being
marketed and the Company anticipates a gain on the sale in 2002. The
following summarizes the condensed results of operations of the property
held for disposition which is also included in the condensed consolidated
statements of income:
For the Years
Ended December 31,
-------------------------------------------
2001 2000
------------------- -------------------
Rental income................. $ 2,279,000 $ 2,120,000
Cost of operations............ (1,530,000) (1,372,000)
Depreciation.................. (709,000) (480,000)
------------------- -------------------
Net operating income.......... $ 40,000 $ 268,000
=================== ===================

4. Leasing activity

The Company leases space in its real estate facilities to tenants under
non-cancelable leases generally ranging from one to ten years. Future
minimum rental revenues excluding recovery of expenses as of December 31,
2001 under these leases are as follows:

2002................................ $ 160,504,000
2003................................ 130,728,000
2004................................ 100,135,000
2005................................ 70,082,000
2006................................ 39,366,000
Thereafter.......................... 63,082,000
--------------
$ 563,897,000
==============

In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amount to
$22,764,000, $19,265,000, and $16,591,000 for the years ended December 31,
2001, 2000 and 1999, respectively. These amounts are included as rental
income and cost of operations in the accompanying consolidated statements
of income.

5. Revolving line of credit

In September 2000, the Company extended its unsecured line of credit (the
"Credit Facility") with Wells Fargo Bank. The Credit Facility has a
borrowing limit of $100 million and an expiration date of August 6, 2003.
The expiration date may be extended by one year on each anniversary of the
Credit Facility. 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 0.75% to LIBOR plus 1.35% depending on the Company's credit
ratings and coverage ratios, as defined (currently LIBOR plus 1.00%). In
addition, the Company is required to pay an annual commitment fee of 0.25%
of the borrowing limit. The Company had drawn $100 million on its line of
credit at December 31, 2001 and none at December 31, 2000.

F-13

The Credit Facility requires the Company to meet certain covenants
including (i) maintain a balance sheet leverage ratio (as defined) of less
than 0.50 to 1.00, (ii) maintain interest and fixed charge coverage ratios
(as defined) of not less than 2.25 to 1.00 and 1.75 to 1.00, respectively,
(iii) maintain a minimum total shareholders' equity (as defined) and (iv)
limit distributions to 95% of funds from operations (as defined). In
addition, the Company is limited in its ability to incur additional
borrowings (the Company is required to maintain unencumbered assets with an
aggregate book value equal to or greater than two times the Company's
unsecured recourse debt) or sell assets. The Company was in compliance with
the covenants of the Credit Facility at December 31, 2001.

6. Mortgage notes payable

Mortgage notes consist of the following:

December 31, December 31,
2001 2000
--------------- ---------------

7.050% mortgage note, secured by one commercial property with an
approximate carrying amount of $17,951,000, principal and
interest payable monthly, due May 2006........................ $ 8,374,000 $ 8,570,000
8.190% mortgage note, secured by one commercial property with an
approximate carrying amount of $11,691,000, principal and
interest payable monthly, due March 2007...................... 6,283,000 6,482,000
7.290% mortgage note, secured by one commercial property with an
approximate carrying amount of $7,975,000, principal and
interest payable monthly, due February 2009................... 6,164,000 6,272,000
7.280% mortgage note, secured by two commercial properties with
approximate carrying amounts totaling $7,476,000, principal and
interest payable monthly, due February 2003................... 4,059,000 4,186,000
8.000% mortgage note, secured by one commercial property with an
approximate carrying amount of $5,115,000, principal and
interest payable monthly, due April 2003...................... 1,930,000 2,022,000
8.500% mortgage note, secured by one commercial property with an
approximate carrying amount of $3,293,000, principal and
interest payable monthly, due July 2007....................... 1,797,000 1,850,000
8.000% mortgage note, secured by one commercial property with an
approximate carrying amount of $3,405,000, principal and
interest payable monthly, due April 2003...................... 1,538,000 1,589,000
--------------- ---------------
$30,145,000 $30,971,000
=============== ===============

At December 31, 2001, approximate principal maturities of mortgage notes
payable are as follows:

2002................................ $ 903,000
2003................................ 7,874,000
2004................................ 699,000
2005................................ 755,000
2006................................ 7,971,000
Thereafter.......................... 11,943,000
$ 30,145,000

F-14

The mortgage notes have a weighted average interest rate of 7.56% and an
average maturity of 4.4 years.

On November 12, 1999, the Company prepaid a mortgage note payable of
approximately $8.5 million. The prepayment penalty of $195,000 (net of
minority interest of $61,000) is included as an extraordinary loss on early
extinguishment of debt for the year ended December 31, 1999.
7. Minority interests

Common partnership units

The Company presents the accounts of PSB and the Operating Partnership on a
consolidated basis. Ownership interests in the Operating Partnership, other
than PSB's interest, are classified as minority interest in the
consolidated financial statements. Minority interest in income consists of
the minority interests' share of the consolidated operating results.

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

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

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

On January 12, 2001, the Company redeemed 30,484 common units from
unaffiliated third parties for an aggregate cost of $808,000 in cash.

At December 31, 2001, there were 7,305,355 OP units owned by PSI and
affiliated entities and which are accounted for as minority interests. On a
fully converted basis, assuming all 7,305,355 minority interest OP units
were converted into shares of common stock of PSB at December 31, 2001, the
minority interest units would convert into approximately 25% of the common
shares outstanding. At the end of each reporting period, Company determines
the amount of equity (book value of net assets) which is allocable to the
minority interest based upon the ownership interest and an adjustment is
made to the minority interest, with a corresponding adjustment to paid-in
capital, to reflect the minority interests' equity in the Company.

Preferred partnership units

On April 23, 1999, the Operating Partnership completed a private placement
of 510,000 preferred units with a preferred distribution rate of 8 7/8%.
The net proceeds from the placement of preferred units were approximately
$12.5 million and were used to repay borrowings from PSI.

F-15

On September 3, 1999, the Operating Partnership completed a private
placement of 3,200,000 preferred units with a preferred distribution rate
of 8 3/4%. The net proceeds from the placement of preferred units were
approximately $78 million and part of the proceeds was used to prepay a
mortgage note payable of approximately $8.5 million.

On September 7 and 23, 1999, the Operating Partnership completed private
placements of 1,200,000 and 400,000 preferred units, respectively, with a
preferred distribution rate of 8 7/8%. The net proceeds from the placements
of preferred units were approximately $39.2 million and were used for
investment in real estate.

On July 12, 2000, the Operating Partnership completed a private placement
of 480,000 preferred units with a preferred distribution rate of 8 7/8%.
The net proceeds from the placement of preferred units were approximately
$11.7 million and were used for investment in real estate

On September 21, 2001, the Operating Partnership completed a private
placement of 2,120,000 preferred units with a preferred distribution rate
of 9 1/4%. The net proceeds from the placement of preferred units were
approximately $51.6 million and were used for investment in real estate.

The Operating Partnership has the right to redeem preferred units on or
after the fifth anniversary of the applicable issuance date at the original
capital contribution plus the cumulative priority return, as defined, to
the redemption date to the extent not previously distributed. The preferred
units are exchangeable for Cumulative Redeemable Preferred Stock of the
respective series of PS Business Parks, Inc. on or after the tenth
anniversary of the date of issuance at the option of the Operating
Partnership or a majority of the holders of the respective preferred units.
The Preferred Stock will have the same distribution rate and par value as
the respective units and will have equivalent terms to those described in
Note 9.

8. Property management contracts

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

The property management contracts provide for compensation of a percentage
of the gross revenues of the facilities managed. Under the supervision of
the property owners, the Operating Partnership coordinates rental policies,
rent collections, marketing activities, the purchase of equipment and
supplies, maintenance activities, and the selection and engagement of
vendors, suppliers and independent contractors. In addition, the Operating
Partnership assists and advises the property owners in establishing
policies for the hire, discharge and supervision of employees for the
operation of these facilities, including property managers and leasing,
billing and maintenance personnel.

The property management contract with PSI is for a seven year term with the
term being extended one year on each anniversary. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty
days notice.

9. Shareholders' equity

Preferred stock

As of December 31, 2001 and December 31, 2000, the Company had the
following series of preferred stock outstanding:

F-16

December 31, 2001 December 31, 2000
-------------------------------------- --------------------------------------
Series Dividend Rate Shares Outstanding Carrying Amount Shares Outstanding Carrying Amount
--------------- ------------------ ------------------- ------------------ ------------------ -------------------

Series A 9.250% 2,200 $ 55,000,000 2,200 $ 55,000,000
Series D 9.500% 2,640 66,000,000 - -
------------------- ------------------ ------------------ -------------------
4,840 $ 121,000,000 2,200 $ 55,000,000
=================== ================== ================== ===================

On April 30, 1999, the Company issued 2,200,000 depositary shares, each
representing 1/1,000 of a share of 9 1/4% Cumulative Preferred Stock,
Series A. Net proceeds from the public perpetual preferred stock offering
were approximately $53.1 million and were used to repay borrowings from PSI
and a mortgage note payable of approximately $11 million. The remaining
proceeds were used for investment in real estate.

On May 10, 2001, the Company issued 1,840,000 depositary shares, each
representing 1/1,000 of a share of 9 1/2% Cumulative Preferred Stock,
Series D in a public offering. On June 18, 2001, the Company issued 800,000
depositary shares, each representing 1/1,000 of a share of 9 1/2%
Cumulative Preferred Stock, Series D in a directed placement. Net proceeds
from the offerings were approximately $64.3 million and were used for
investment in real estate and general corporate purposes.

Holders of the Company's preferred stock will not be entitled to vote on
most matters, except under certain conditions. In the event of a cumulative
arrearage equal to six quarterly dividends, the holders of the preferred
stock will have the right to elect two additional members to serve on the
Company's Board of Directors until all events of default have been cured.
At December 31, 2001, there were no dividends in arrears.

Except under certain conditions relating to the Company's qualification as
a REIT, the preferred stock is not redeemable prior to the following dates:
Series A - April 30, 2004 and Series D - May 10, 2006. On or after the
respective dates, the respective series of preferred stock will be
redeemable, at the option of the Company, in whole or in part, at $25 per
depositary share, plus any accrued and unpaid dividends.

The Company paid $8,854,000, $5,088,000 and $3,406,000 in distributions to
its preferred shareholders for the years ended December 31, 2001, 2000 and
1999, respectively.

Common Stock

The Company's Board of Directors has authorized the repurchase from time to
time of up to 4,500,000 shares of the Company's common stock on the open
market or in privately negotiated transactions. The Company repurchased
1,599,111 shares of common stock at an aggregate cost of approximately
$43.9 million (average cost of $27.45 per share) and 722,600 shares at an
aggregate cost of approximately $16.6 million (average cost of $22.97 per
share) during the years ended December 31, 2001 and 2000, respectively.
Since the inception of the program (March 2000), the Company has
repurchased an aggregate total of 2,321,711 shares of common stock at an
aggregate cost of approximately $60.5 million (average cost of $26.06 per
share).

On March 31, 2000, a holder of common OP units exercised its option and
converted its 107,517 common OP units into an equal number of shares of PSB
common stock. The conversion resulted in an increase in shareholders'
equity and a corresponding decrease in minority interest of approximately
$2,531,000, representing the book value of the OP units at the time of
conversion.

F-17

The Company paid $29,027,000 ($1.31 per common share), $23,241,000 ($1.00
per common share) and $23,641,000 ($1.00 per common share) in distributions
to its common shareholders for the year ended December 31, 2001, 2000 and
1999 respectively. Pursuant to restrictions imposed by the Credit Facility,
distributions may not exceed 95% of funds from operations, as defined.

Equity stock

In addition to common and preferred stock, the Company is authorized to
issue 100,000,000 shares of Equity Stock. The Articles of Incorporation
provide that the Equity Stock may be issued from time to time in one or
more series and give the Board of Directors broad authority to fix the
dividend and distribution rights, conversion and voting rights, redemption
provisions and liquidation rights of each series of Equity Stock.

10. Stock options

PSB has a 1997 Stock Option and Incentive Plan (the "Plan"). Under the
Plan, PSB has granted non-qualified options to certain directors, officers
and key employees to purchase shares of PSB's common stock at a price no
less than the fair market value of the common stock at the date of grant.
Generally, options under the Plan vest over a three-year period from the
date of grant at the rate of one third per year and expire ten years after
the date of grant. The remaining weighted average contractual lives were
8.6, 8.4 and 7.9 years, respectively at December 31, 2001, 2000 and 1999.

At December 31, 2001, there were 1,500,000 options authorized to grant.
Information with respect to the Plan is as follows:

Number Exercise Weighted Average
of Options Price Exercise Price
------------ --------------- -----------------

Outstanding at December 31, 1998........... 489,046 $16.69 - $25.00 $20.09
Granted............................... 11,000 24.69 - 24.75 24.70
Exercised............................. (7,191) 16.69 16.69
Forfeited............................. (10,497) 16.69 - 25.00 18.67
------------ --------------- -----------------
Outstanding at December 31, 1999........... 482,358 16.69 - 25.00 20.28
Granted............................... 305,500 20.50 - 26.95 25.74
Exercised............................. (13,237) 16.69 - 25.00 17.72
Forfeited............................. (135,939) 16.69 - 25.00 21.05
------------ --------------- -----------------
Outstanding at December 31, 2000........... 638,682 16.69 - 26.95 22.78
Granted............................... 322,500 26.40 - 29.19 26.96
Exercised............................. (94,259) 16.69 - 26.21 17.00
Forfeited............................. (34,001) 25.00 - 26.95 25.42
------------ --------------- -----------------
Outstanding at December 31, 2001........... 832,922 $16.69 - $29.19 $24.94
============ =============== =================
Exercisable at:
December 31, 1999..................... 226,417 $16.69 - $25.00 $19.16
December 31, 2000..................... 278,340 $16.69 - $25.00 $19.32
December 31, 2001..................... 310,577 $16.69 - $26.80 $22.37

The Company applies APB 25 and related interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been
recognized. The weighted average grant date fair value of the options for
2001, 2000 and 1999 were $3.22, $4.42 and $4.16, respectively. Had

F-18

compensation cost for the plan been determined based on the fair value at
the grant date for awards under the plan consistent with the method
prescribed by SFAS No. 123, the Company's pro forma net income available to
common shareholders would have been:

For the Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------

Pro forma net income allocable to common shareholders.......... $ 40,330,000 $ 45,545,000 $ 37,224,000
=============== =============== ===============

Pro forma earnings per common share - Basic.................... $ 1.80 $ 1.96 $ 1.57
=============== =============== ===============
Pro forma earnings per common share - Diluted.................. $ 1.80 $ 1.96 $ 1.57
=============== =============== ===============

For these disclosure purposes, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 2001,
2000 and 1999, respectively; dividend yield of 4.7%, 4.1% and 4.3%;
expected volatility of 17.9%, 19.4% and 21.3%; expected lives of five
years; and risk-free interest rates of 4.6%, 6.2% and 5.6%. The pro forma
effect on net income allocable to common shareholders during 2001, 2000 and
1999 will not be representative of the pro forma effect on net income
allocable to common shareholders in future years.

During 2001 and 2000, the Company also granted 30,000 and 36,500 restricted
stock units to employees under the Plan, of which 57,500 restricted stock
units were outstanding at December 31, 2001. The restricted stock units
were granted at a zero exercise price. The fair market value of the
restricted stock units at the date of grant ranged from $24.02 to $28.27
per restricted stock unit. The restricted stock units are subject to a
five-year vesting schedule, at 30% in year three, 30% in year four and 40%
in year five. Compensation expense of $282,000 and $86,000 was recognized
during the years ended December 31, 2001 and 2000, respectively. No
restricted stock units were converted to common stock in 2001 and 2000.

11. Recent accounting pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
required to be adopted by the Company on January 1, 2001. This statement
provides a comprehensive and consistent standard for the recognition and
measurements of derivatives and hedging activities. The Company adopted
SFAS No. 133 on January 1, 2001. This adoption had no material impact on
the Company's consolidated financial statements.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement addresses financial accounting and reporting for the disposal of
long-lived assets and becomes effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company is studying
this statement to determine its effect on the consolidated financial
statements and will adopt this statement in the year ending December 31,
2002.
F-19

12. Supplementary quarterly financial data (unaudited)

Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------- ------------- ------------- -------------

Revenues................. $ 29,251,000 $ 31,248,000 $ 33,281,000 $ 34,833,000
Net income allocable to
common shareholders...... $ 9,442,000 $ 9,393,000 $ 9,383,000 $ 9,631,000

Net income per share:
Basic.................... $0.40 $0.40 $0.40 $0.41
Diluted.................. $0.40 $0.40 $0.40 $0.41

Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
------------- ------------- ------------- -------------

Revenues................. $ 35,864,000 $ 37,991,000 $ 38,485,000 $ 38,294,000
Net income allocable to
common shareholders...... $ 9,471,000 $ 10,240,000 $ 10,199,000 $ 16,183,000

Net income per share:
Basic.................... $0.40 $0.44 $0.44 $0.70
Diluted.................. $0.40 $0.44 $0.44 $0.70

Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------- ------------- ------------- -------------

Revenues................. $ 39,475,000 $ 41,082,000 $ 43,885,000 $ 45,949,000
Net income allocable to
common shareholders...... $ 10,193,000 $ 10,927,000 $ 10,010,000 $ 9,886,000

Net income per share:
Basic.................... $0.44 $0.48 $0.45 $0.46
Diluted.................. $0.44 $0.48 $0.45 $0.46

F-20

13. Commitments and contingencies

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

The Company acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998. A portion of Creekside Corporate Park, as well as
properties adjacent to Creekside Corporate Park, are currently the subject
of an environmental investigation that is being conducted by two current
and past owner/operators of an industrial facility on adjacent property,
pursuant to an Order on Consent issued by the Oregon Department of
Environmental Quality ("ODEQ"). Results to date indicate that the
contamination from the industrial facility has migrated onto portions of
Creekside Corporate Park owned by the Company. There is no evidence that
the Company's past or current use of the Creekside Corporate Park property
contributed in any way to the contamination that is the subject of the
current investigation, nor has the ODEQ alleged any such contribution.

The Company, which is not a party to the Order on Consent, executed
separate Access Agreements with the two owner/operators to allow access to
portions of Creekside Corporate Park to conduct the required sampling and
testing, and to permit one of the owner/operators subject to the Order on
Consent to construct, install and operate a groundwater treatment system on
a portion of Creekside Corporate Park owned by the Company. Operation and
maintenance of this groundwater treatment system, which is required by the
Interim Remedial Action Plan approved by ODEQ, is the sole responsibility
of the owner/operator, and not the Company.

One of the two owner/operators that are conducting the investigation
pursuant to the Order on Consent recently filed for Chapter 11 bankruptcy
protection. It is not clear at this point what impact, if any, this filing
will have on the implementation of the removal or remedial activities
ordered by the ODEQ. It is possible that the ODEQ could require the Company
to participate in the implementation of removal or remedial actions that
may be required on the Company's property, or to pay a portion of the costs
to do so. In the event the Company is ultimately deemed responsible for any
costs relating to this matter, the Company believes that it may have
recourse against the party from whom the property was purchased. In
addition, the Company believes it may have recourse against other
potentially responsible parties, including, but not limited to, one or both
of the owner/operators of the adjacent industrial facility.

Although the other environmental investigations conducted to date have not
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's business, assets or results of
operations, and the Company is not aware of any such liability, it is
possible that these investigations did not reveal all environmental
liabilities or that there are material environmental liabilities of which
the Company is unaware. No assurances can be given that (i) future laws,
ordinances, or regulations will not impose any material environmental
liability, or (ii) the current environmental condition of the Company's
properties has not been, or will not be, affected by tenants and occupants
of the Company's properties, by the condition of properties in the vicinity
of the Company's properties, or by third parties unrelated to the Company.

F-21

On November 3, 1999, the Company filed an action titled PS Business Parks,
Inc. v. Larry Howard et al. (Case No. BC219580) in Los Angeles Superior
Court seeking damages in excess of $1 million. The complaint alleges that
Mr. Howard and entities controlled by him engaged in unfair trade
practices. Some of the Company's claims have been dismissed on summary
adjudication, and the balance is in the process of being referred to the
arbitration proceedings described below for adjudication. Mr. Howard filed
a cross-complaint which the Company intends to vigorously contest and which
is also in the process of being referred to arbitration for adjudication.

On November 27, 2000, Mary Jayne Howard, a former officer of the Company
filed a demand for arbitration with the American Arbitration Association
alleging claims against the Company for breach of contract, gender
discrimination, marital discrimination, and wrongful termination based on
public policy. The demand seeks damages of approximately $2 million. The
Company plans to vigorously contest these claims. The Company has also
filed in the arbitration a cross-claim against Ms. Howard alleging that she
breached her fiduciary duties to the Company and committed fraud, among
other claims, seeking damages in excess of $1 million.

On February 2, 2000, the Company filed an action against Mary Piper, its
former Vice President of operations, in Riverside County Superior Court,
alleging claims for breach of fiduciary duties, fraud and deceit,
constructive fraud, negligent misrepresentation, violation of Section 17000
of Business and Professions Code, violation of Section 17200 of the
Business and Professions Code and culpable negligence. The Company's claims
arose from Ms. Piper's alleged participation in a plan that resulted in the
payment of improper kickbacks to Larry Howard, a former vendor of the
Company and the husband of Mary Jayne Howard, a former officer of the
Company. Ms. Piper subsequently filed a cross-complaint which the Company
intends to vigorously contest.

The Company currently is neither subject to any other material litigation
nor, to management's knowledge, is any material litigation currently
threatened against the Company other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Management believes that these items will not have a material adverse
impact on the Company's condensed consolidated financial position or
results of operations.

14. Reportable Segments

The Company has three reportable segments: flex properties, office
properties and industrial properties located in eight geographical regions.
Flex properties can generally be described as facilities that are
configured with a combination of office and warehouse space and can be
designed to fit an almost limitless number of uses (including office,
assembly, showroom, laboratory, light manufacturing and warehouse). Office
properties consist primarily of low-rise suburban office buildings.
Industrial properties are designed for light manufacturing, assembly,
storage and warehousing, distribution and research and development
activities. The properties generate rental income through the leasing of
space to a diverse group of tenants. The accounting policies of the
Company's segments are the same as those described in Note 2.

The Company evaluates the performance of its properties primarily based on
net operating income ("NOI"). NOI is defined by the Company as rental
income less cost of operations. Accordingly, NOI excludes certain items
such as interest income, dividend income, depreciation expense,
amortization expense, general and administrative expense, interest expense
and minority interest in income which are included in the determination of
net income under accounting principles generally accepted in the United
States.

F-22

For the Year Ended December 31, 2001
------------------------------------------------------------------------
Flex Office Industrial Total
-------------- --------------- -------------- ---------------
Revenue:

Southern California...... $ 28,587,000 $ 9,642,000 $ 5,824,000 $ 44,053,000
Northern California...... 15,451,000 1,369,000 2,756,000 19,576,000
Southern Texas........... 9,488,000 2,308,000 - 11,796,000
Northern Texas........... 18,005,000 1,823,000 - 19,828,000
Virginia................. 25,747,000 8,591,000 - 34,338,000
Maryland................. 9,600,000 512,000 - 10,112,000
Oregon................... 15,432,000 4,436,000 - 19,868,000
Other.................... 7,491,000 - - 7,491,000
-------------- --------------- -------------- ---------------
$ 129,801,000 $ 28,681,000 $ 8,580,000 $ 167,062,000
============== =============== ============== ===============

NOI:
Southern California...... $ 22,357,000 $ 6,039,000 $ 4,555,000 $ 32,951,000
Northern California...... 11,706,000 942,000 2,228,000 14,876,000
Southern Texas........... 6,311,000 778,000 - 7,089,000
Northern Texas........... 12,602,000 947,000 - 13,549,000
Virginia................. 19,500,000 5,508,000 - 25,008,000
Maryland................. 7,419,000 400,000 - 7,819,000
Oregon................... 12,865,000 3,297,000 - 16,162,000
Other.................... 4,394,000 - - 4,394,000
-------------- --------------- -------------- ---------------
$ 97,154,000 $ 17,911,000 $ 6,783,000 $ 121,848,000
============== =============== ============== ===============

For the Year Ended December 31, 2000
Flex Office Industrial Total
Revenue:
Southern California...... $ 27,072,000 $ 6,233,000 $ 4,365,000 $ 37,670,000
Northern California...... 13,165,000 1,319,000 2,493,000 16,977,000
Southern Texas........... 8,938,000 2,146,000 - 11,084,000
Northern Texas........... 17,729,000 1,454,000 - 19,183,000
Virginia................. 18,712,000 3,663,000 - 22,375,000
Maryland................. 9,583,000 3,009,000 - 12,592,000
Oregon................... 13,457,000 3,196,000 - 16,653,000
Other.................... 7,637,000 - - 7,637,000
-------------- --------------- -------------- ---------------
$ 116,293,000 $ 21,020,000 $ 6,858,000 $ 144,171,000
============== =============== ============== ===============

NOI:
Southern California...... $ 21,385,000 $ 3,948,000 $ 3,541,000 $ 28,874,000
Northern California...... 9,835,000 884,000 1,936,000 12,655,000
Southern Texas........... 5,899,000 762,000 - 6,661,000
Northern Texas........... 12,565,000 694,000 - 13,259,000
Virginia................. 14,147,000 2,257,000 - 16,404,000
Maryland................. 7,271,000 1,846,000 - 9,117,000
Oregon................... 11,112,000 2,194,000 - 13,306,000
Other.................... 4,605,000 - - 4,605,000
-------------- --------------- -------------- ---------------
$ 86,819,000 $ 12,585,000 $ 5,477,000 $ 104,881,000
============== =============== ============== ===============

F-23

For the Year Ended December 31, 1999
------------------------------------------------------------------------
Flex Office Industrial Total
-------------- --------------- -------------- ---------------
Revenue:

Southern California...... $ 24,968,000 $ 4,829,000 $ 4,165,000 $ 33,962,000
Northern California...... 8,806,000 1,277,000 2,293,000 12,376,000
Southern Texas........... 7,659,000 2,240,000 - 9,899,000
Northern Texas........... 14,473,000 1,621,000 - 16,094,000
Virginia................. 15,728,000 3,096,000 - 18,824,000
Maryland................. 9,275,000 4,340,000 - 13,615,000
Oregon................... 12,187,000 2,497,000 - 14,684,000
Other.................... 5,873,000 - - 5,873,000
-------------- --------------- -------------- ---------------
$ 98,969,000 $ 19,900,000 $ 6,458,000 $ 125,327,000
============== =============== ============== ===============

NOI:
Southern California...... $ 19,049,000 $ 3,032,000 $ 3,345,000 $ 25,426,000
Northern California...... 6,532,000 864,000 1,780,000 9,176,000
Southern Texas........... 5,444,000 986,000 - 6,430,000
Northern Texas........... 10,113,000 755,000 - 10,868,000
Virginia................. 11,795,000 1,884,000 - 13,679,000
Maryland................. 6,847,000 2,795,000 - 9,642,000
Oregon................... 9,831,000 1,634,000 - 11,465,000
Other.................... 3,750,000 - - 3,750,000
-------------- --------------- -------------- ---------------
$ 73,361,000 $ 11,950,000 $ 5,125,000 $ 90,436,000
============== =============== ============== ===============

Revenues are from external customers and no revenues are generated from
transactions between segments. No single tenant accounted for more than 10%
of the Company's total revenues. No segment data relative to assets or
liabilities is presented since the Company does not evaluate performance
based upon the assets or liabilities of the segments. The Company does no
believe that historical cost of real estate facilities has any significant
bearing upon the performance of the properties.

16. Subsequent Events (unaudited)

On January 28, 2002, the Company issued 2,000,000 depositary shares, each
representing 1/1,000 of a share of 8 3/4 % Cumulative Preferred Stock,
Series F, in a public offering. Net proceeds from the offering were
approximately $48.4 million and were used to partially repay borrowings
from PSI of $30 million. The remaining proceeds will be used for general
corporate purposes.

In February 2002, the Company entered into a seven year $50 million term
loan agreement with Fleet National Bank. The note bears interest at LIBOR
plus 1.45% and is due on February 20, 2009. The Company paid a one-time
facility fee of 0.35% or $175,000 for the loan. The Company expects to use
the proceeds from the loan to reduce the amount drawn on its line of credit
with Wells Fargo Bank

F-24

PS BUSINESS PARKS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

Cost
Capitalized
Subsequent
to
Initial Cost to Company Acquisition
------------------------- -------------

Buildings Buildings
and and
Description Location Encumbrances Land Improvements Improvements
------------------------------ ---------------- -------------- ---------- -------------- -------------

Overland Park............. Overland Park, KS $ - $889 $2,176 $423
Produce................... San Francisco, CA - 770 1,886 38
Crenshaw II............... Torrance, CA - 2,318 6,069 776
Airport................... San Francisco, CA - 899 2,387 266
Christopher Ave........... Gaithersburg, MD - 475 1,203 152
Monterey Park............. Monterey Park, CA - 3,078 7,862 463
Calle Del Oaks............ Monterey, CA - 282 706 112
Milwaukie I............... Milwaukie, OR - 1,125 2,857 605
Edwards Road.............. Cerritos, CA - 450 1,217 421
Rainier................... Renton, WA - 330 889 175
Lusk...................... San Diego, CA - 1,500 3,738 524
Eisenhower................ Alexandria, VA - 1,440 3,635 433
McKellips................. Tempe, AZ - 195 522 89
Old Oakland Rd............ San Jose, CA - 3,458 8,765 899
Junipero.................. Signal Hill, CA - 900 2,510 120
Watson Plaza.............. Lakewood, CA - 930 2,360 248
Northgate Blvd............ Sacramento, CA - 1,710 4,567 532
Uplander.................. Culver City, CA - 3,252 8,157 1,640
University................ Tempe, AZ - 2,160 5,454 1,174
E. 28th Street............ Signal Hill, CA - 1,500 3,749 392
W. Main................... Mesa, AZ - 675 1,692 351
S. Edward................. Tempe, AZ - 645 1,653 488
Leapwood Ave.............. Carson, CA - 990 2,496 610
Downtown Center........... Nashville, TN - 660 1,681 602
Airport South............. Nashville, TN - 660 1,657 231
Great Oaks................ Woodbridge, VA - 1,350 3,398 390
Ventura Blvd. II.......... Studio City, CA - 621 1,530 164
Largo 95.................. Largo, MD - 3,085 7,332 563
Gunston................... Lorton, VA - 4,146 17,872 1,137
Canada.................... Lake Forest, CA - 5,508 13,785 1,634
Ridge Route............... Laguna Hills, CA - 16,261 39,559 755
Lake Forest Commerce Park. Laguna Hills, CA - 2,037 5,051 1,088
Buena Park Industrial Center Buena Park, CA - 3,245 7,703 942
Cerritos Business Center.. Cerritos, CA - 4,218 10,273 1,050
Parkway Commerce Center... Hayward, CA - 4,398 10,433 1,337
Northpointe E............. Sterling, VA - 1,156 2,957 108
Ammendale................. Beltsville, MD - 4,278 18,380 1,291
Centrepointe.............. Landover, MD 8,374 3,801 16,708 1,422

Gross Amount at Which Carried at
December 31, 2001
------------------------------------

Buildings Depreciable
and Accumulated Date Lives
Description Location Land Improvements Totals Depreciation Acquired (Years)
------------------------------ ---------------- --------- -------------- ----------- ------------- ----------- ------------

Overland Park............. Overland Park, KS $889 $2,599 $3,488 $300 3/17/98 5-30
Produce................... San Francisco, CA 770 1,924 2,694 259 3/17/98 5-30
Crenshaw II............... Torrance, CA 2,318 6,845 9,163 1,196 4/12/97 5-30
Airport................... San Francisco, CA 899 2,653 3,552 431 4/12/97 5-30
Christopher Ave........... Gaithersburg, MD 475 1,355 1,830 239 4/12/97 5-30
Monterey Park............. Monterey Park, CA 3,078 8,325 11,403 1,418 1/1/97 5-30
Calle Del Oaks............ Monterey, CA 286 818 1,104 159 1/1/97 5-30
Milwaukie I............... Milwaukie, OR 1,125 3,462 4,587 622 1/1/97 5-30
Edwards Road.............. Cerritos, CA 450 1,638 2,088 283 1/1/97 5-30
Rainier................... Renton, WA 330 1,064 1,394 191 1/1/97 5-30
Lusk...................... San Diego, CA 1,500 4,262 5,762 741 1/1/97 5-30
Eisenhower................ Alexandria, VA 1,440 4,068 5,508 695 1/1/97 5-30
McKellips................. Tempe, AZ 195 611 806 105 1/1/97 5-30
Old Oakland Rd............ San Jose, CA 3,458 9,664 13,122 1,624 1/1/97 5-30
Junipero.................. Signal Hill, CA 900 2,630 3,530 399 1/1/97 5-30
Watson Plaza.............. Lakewood, CA 930 2,608 3,538 427 1/1/97 5-30
Northgate Blvd............ Sacramento, CA 1,710 5,099 6,809 860 1/1/97 5-30
Uplander.................. Culver City, CA 3,252 9,797 13,049 1,815 1/1/97 5-30
University................ Tempe, AZ 2,160 6,628 8,788 1,154 1/1/97 5-30
E. 28th Street............ Signal Hill, CA 1,500 4,141 5,641 699 1/1/97 5-30
W. Main................... Mesa, AZ 675 2,043 2,718 345 1/1/97 5-30
S. Edward................. Tempe, AZ 645 2,141 2,786 387 1/1/97 5-30
Leapwood Ave.............. Carson, CA 990 3,106 4,096 597 1/1/97 5-30
Downtown Center........... Nashville, TN 660 2,283 2,943 408 1/1/97 5-30
Airport South............. Nashville, TN 660 1,888 2,548 324 1/1/97 5-30
Great Oaks................ Woodbridge, VA 1,350 3,788 5,138 626 1/1/97 5-30
Ventura Blvd. II.......... Studio City, CA 621 1,694 2,315 307 1/1/97 5-30
Largo 95.................. Largo, MD 3,085 7,895 10,980 1,276 9/24/97 5-30
Gunston................... Lorton, VA 4,146 19,009 23,155 3,652 6/17/98 5-30
Canada.................... Lake Forest, CA 5,508 15,419 20,927 1,878 12/23/97 5-30
Ridge Route............... Laguna Hills, CA 16,261 40,314 56,575 5,596 12/23/97 5-30
Lake Forest Commerce Park. Laguna Hills, CA 2,037 6,139 8,176 1,103 12/23/97 5-30
Buena Park Industrial Center Buena Park, CA 3,245 8,645 11,890 1,358 12/23/97 5-30
Cerritos Business Center.. Cerritos, CA 4,218 11,323 15,541 1,772 12/23/97 5-30
Parkway Commerce Center... Hayward, CA 4,398 11,770 16,168 1,741 12/23/97 5-30
Northpointe E............. Sterling, VA 1,156 3,065 4,221 473 12/10/97 5-30
Ammendale................. Beltsville, MD 4,278 19,671 23,949 4,917 1/13/98 5-30
Centrepointe.............. Landover, MD 3,801 18,130 21,931 3,980 3/20/98 5-30

F-25

Cost
Capitalized
Subsequent
to
Initial Cost to Company Acquisition
------------------------- -------------

Buildings Buildings
and and
Description Location Encumbrances Land Improvements Improvements
------------------------------ ---------------- -------------- ---------- -------------- -------------

Shaw Road................. Sterling, VA - 2,969 10,008 732
Creekside-Phase 1......... Beaverton, OR - 4,519 13,651 781
Creekside-Phase 2 Bldg-4.. Beaverton, OR - 832 2,542 199
Creekside-Phase 2 Bldg-5.. Beaverton, OR - 521 1,603 100
Creekside-Phase 2 Bldg-1.. Beaverton, OR - 1,326 4,035 276
Creekside-Phase 3......... Beaverton, OR - 1,353 4,101 536
Creekside-Phase 5......... Beaverton, OR - 1,741 5,301 427
Creekside-Phase 6......... Beaverton, OR - 2,616 7,908 259
Creekside-Phase 7......... Beaverton, OR - 3,293 9,938 972
Creekside-Phase 8......... Beaverton, OR - 1,140 3,644 88
Woodside-Phase 1.......... Beaverton, OR - 2,987 8,982 895
Woodside-Phase 2 Bldg-6... Beaverton, OR - 255 784 71
Woodside-Phase 2 Bldg-7&8. Beaverton, OR - 2,101 6,386 224
Woodside-Sequent 1........ Beaverton, OR - 2,890 8,672 41
Woodside-Sequent 5........ Beaverton, OR - 3,093 9,279 2
Northpointe G............. Sterling, VA 1,797 824 2,964 137
Spectrum 95............... Landover, MD - 1,610 7,129 902
Las Plumas................ San Jose, CA - 4,379 12,889 470
Lafayette................. Chantilly, VA - 671 4,179 26
CreeksideVII.............. Beaverton, OR - 358 3,232 82
Woodside-Greystone........ Beaverton, OR - 1,262 6,966 2,398
Dulles South.............. Chantilly, VA 1,827 599 3,098 180
Sullyfield Circle......... Chantilly, VA 2,232 774 3,712 111
Park East I & II.......... Chantilly, VA 6,283 2,324 10,875 62
Park East III............. Chantilly, VA 6,164 1,527 7,154 351
Northpointe Business Center A Sacramento, CA - 729 3,324 304
Corporate Park Phoenix.... Phoenix, AZ - 2,761 10,269 396
Santa Clara Technology Park Santa Clara, CA - 7,673 15,645 22
Corporate Pointe.......... Irvine, CA - 6,876 18,519 486
Lafayette II/Pleasant Valley Chantilly, VA - 1,009 9,219 -
Northpointe Business Center B Sacramento, CA - 717 3,269 205
Northpointe Business Center C Sacramento, CA - 726 3,313 143
Northpointe Business Center D Sacramento, CA - 427 1,950 27
Northpointe Business Center E Sacramento, CA - 432 1,970 37
I-95 Building I........... Springfield, VA - 1,308 5,790 -
I-95 Building II.......... Springfield, VA - 1,308 5,790 -
I-95 Building III......... Springfield, VA - 919 4,092 7
2700 Prosperity Avenue.... Fairfax, VA - 3,404 9,883 -
2701 Prosperity Avenue.... Fairfax, VA - 2,199 6,374 -

Gross Amount at Which Carried at
December 31, 2001
-------------------------------------

Buildings Depreciable
and Accumulated Date Lives
Description Location Land Improvements Totals Depreciation Acquired (Years)
------------------------------ ---------------- ---------- -------------- ----------- ------------- ----------- ------------

Shaw Road................. Sterling, VA 2,969 10,740 13,709 2,610 3/9/98 5-30
Creekside-Phase 1......... Beaverton, OR 4,519 14,432 18,951 3,112 5/4/98 5-30
Creekside-Phase 2 Bldg-4.. Beaverton, OR 807 2,741 3,548 576 5/4/98 5-30
Creekside-Phase 2 Bldg-5.. Beaverton, OR 521 1,703 2,224 360 5/4/98 5-30
Creekside-Phase 2 Bldg-1.. Beaverton, OR 1,326 4,311 5,637 947 5/4/98 5-30
Creekside-Phase 3......... Beaverton, OR 1,353 4,637 5,990 1,017 5/4/98 5-30
Creekside-Phase 5......... Beaverton, OR 1,741 5,728 7,469 1,274 5/4/98 5-30
Creekside-Phase 6......... Beaverton, OR 2,616 8,167 10,783 1,819 5/4/98 5-30
Creekside-Phase 7......... Beaverton, OR 3,293 10,910 14,203 2,349 5/4/98 5-30
Creekside-Phase 8......... Beaverton, OR 1,140 3,732 4,872 782 5/4/98 5-30
Woodside-Phase 1.......... Beaverton, OR 2,987 9,877 12,864 2,091 5/4/98 5-30
Woodside-Phase 2 Bldg-6... Beaverton, OR 255 855 1,110 205 5/4/98 5-30
Woodside-Phase 2 Bldg-7&8. Beaverton, OR 2,101 6,610 8,711 1,456 5/4/98 5-30
Woodside-Sequent 1........ Beaverton, OR 2,890 8,713 11,603 1,896 5/4/98 5-30
Woodside-Sequent 5........ Beaverton, OR 3,093 9,281 12,374 2,021 5/4/98 5-30
Northpointe G............. Sterling, VA 824 3,101 3,925 632 6/11/98 5-30
Spectrum 95............... Landover, MD 1,610 8,031 9,641 1,520 9/30/98 5-30
Las Plumas................ San Jose, CA 4,379 13,359 17,738 2,629 12/31/98 5-30
Lafayette................. Chantilly, VA 671 4,205 4,876 681 01/29/99 5-30
CreeksideVII.............. Beaverton, OR 358 3,314 3,672 222 04/17/00 5-30
Woodside-Greystone........ Beaverton, OR 1,262 9,364 10,626 961 7/15/99 5-30
Dulles South.............. Chantilly, VA 599 3,278 3,877 441 6/30/99 5-30
Sullyfield Circle......... Chantilly, VA 774 3,823 4,597 557 6/30/99 5-30
Park East I & II.......... Chantilly, VA 2,324 10,937 13,261 1,570 6/30/99 5-30
Park East III............. Chantilly, VA 1,527 7,505 9,032 1,057 6/30/99 5-30
Northpointe Business Center A Sacramento, CA 729 3,628 4,357 902 7/29/99 5-30
Corporate Park Phoenix.... Phoenix, AZ 2,761 10,665 13,426 1,054 12/30/99 5-30
Santa Clara Technology Park Santa Clara, CA 7,673 15,667 23,340 1,535 3/28/00 5-30
Corporate Pointe.......... Irvine, CA 6,876 19,005 25,881 1,419 9/22/00 5-30
Lafayette II/Pleasant Valley Chantilly, VA 1,009 9,219 10,228 144 8/15/01 5-30
Rd
Northpointe Business Center B Sacramento, CA 717 3,474 4,191 385 7/29/99 5-30
Northpointe Business Center C Sacramento, CA 726 3,456 4,182 377 7/29/99 5-30
Northpointe Business Center D Sacramento, CA 427 1,977 2,404 216 7/29/99 5-30
Northpointe Business Center E Sacramento, CA 432 2,007 2,439 220 7/29/99 5-30
I-95 Building I........... Springfield, VA 1,308 5,790 7,098 370 12/20/00 5-30
I-95 Building II.......... Springfield, VA 1,308 5,790 7,098 369 12/20/00 5-30
I-95 Building III......... Springfield, VA 919 4,099 5,018 260 12/20/00 5-30
2700 Prosperity Avenue.... Fairfax, VA 3,404 9,883 13,287 188 6/1/01 5-30
2701 Prosperity Avenue.... Fairfax, VA 2,199 6,374 8,573 121 6/1/01 5-30

F-26

Cost
Capitalized
Subsequent
to
Initial Cost to Company Acquisition
------------------------- -------------

Buildings Buildings
and and
Description Location Encumbrances Land Improvements Improvements
------------------------------ ---------------- -------------- ---------- -------------- -------------

2710 Prosperity Avenue.... Fairfax, VA - 969 2,844 -
2711 Prosperity Avenue.... Fairfax, VA - 1,047 3,099 -
2720 Prosperity Avenue.... Fairfax, VA - 1,898 5,502 -
2721 Prosperity Avenue.... Fairfax, VA - 576 1,673 -
2730 Prosperity Avenue.... Fairfax, VA - 3,011 8,841 -
2731 Prosperity Avenue.... Fairfax, VA - 524 1,521 -
2740 Prosperity Avenue.... Fairfax, VA - 890 2,732 -
2741 Prosperity Avenue.... Fairfax, VA - 786 2,284 -
2750 Prosperity Avenue.... Fairfax, VA - 4,203 12,190 -
2751 Prosperity Avenue.... Fairfax, VA - 3,640 10,632 -
Woodside Greystone II & III Beaverton, OR - 1,558 9,024 -
Greenbrier Court.......... Beaverton, OR - 2,771 8,403 -
Parkside.................. Beaverton, OR - 4,348 13,502 -
The Atrium................ Beaverton, OR - 5,535 16,814 -
Waterside................. Beaverton, OR - 4,045 12,419 -
Ridgeview................. Beaverton, OR - 2,478 7,531 -
The Commons............... Beaverton, OR - 1,439 4,566 -
Lamar Boulevard........... Austin, TX - 2,528 6,596 2,131
N. Barker's Landing....... Houston, TX - 1,140 3,003 1,372
La Prada.................. Mesquite, TX - 495 1,235 128
NW Highway................ Garland, TX - 480 1,203 75
Quail Valley.............. Missouri City, TX - 360 918 97
Business Parkway I........ Richardson, TX - 799 3,568 364
The Summit................ Plano, TX - 1,536 6,654 902
Northgate II.............. Dallas, TX - 1,274 5,505 846
Empire Commerce........... Dallas, TX - 304 1,545 211
Royal Tech - Digital...... Irving, TX - 319 1,393 169
Royal Tech - Springwood... Irving, TX - 894 3,824 476
Royal Tech - Regent....... Irving, TX - 606 2,615 749
Royal Tech - Bldg 7....... Irving, TX - 246 1,061 -
Royal Tech - NFTZ......... Irving, TX - 1,517 6,499 261
Royal Tech - Olympus...... Irving, TX - 1,060 4,531 17
Royal Tech - Honeywell.... Irving, TX - 548 2,347 172
Royal Tech - Bldg 12...... Irving, TX - 1,466 6,263 8
Royal Tech - Bldg 13...... Irving, TX - 955 4,080 258
Royal Tech - Bldg 14...... Irving, TX - 2,010 10,242 37
Royal Tech - Bldg 15...... Irving, TX - 1,307 5,600 153

Gross Amount at Which Carried at
December 31, 2001
------------------------------------

2710 Prosperity Avenue.... Fairfax, VA 969 2,844 3,813 56 6/1/01 5-30
2711 Prosperity Avenue.... Fairfax, VA 1,047 3,099 4,146 58 6/1/01 5-30
2720 Prosperity Avenue.... Fairfax, VA 1,898 5,502 7,400 105 6/1/01 5-30
2721 Prosperity Avenue.... Fairfax, VA 576 1,673 2,249 32 6/1/01 5-30
2730 Prosperity Avenue.... Fairfax, VA 3,011 8,841 11,852 177 6/1/01 5-30
2731 Prosperity Avenue.... Fairfax, VA 524 1,521 2,045 29 6/1/01 5-30
2740 Prosperity Avenue.... Fairfax, VA 890 2,732 3,622 52 6/1/01 5-30
2741 Prosperity Avenue.... Fairfax, VA 786 2,284 3,070 44 6/1/01 5-30
2750 Prosperity Avenue.... Fairfax, VA 4,203 12,190 16,393 233 6/1/01 5-30
2751 Prosperity Avenue.... Fairfax, VA 3,640 10,632 14,272 205 6/1/01 5-30
Woodside Greystone II & III Beaverton, OR 1,558 9,024 10,582 84 09/30/01 5-30
Greenbrier Court.......... Beaverton, OR 2,771 8,403 11,174 31 11/20/01 5-30
Parkside.................. Beaverton, OR 4,348 13,502 17,850 76 11/20/01 5-30
The Atrium................ Beaverton, OR 5,535 16,814 22,349 63 11/20/01 5-30
Waterside................. Beaverton, OR 4,045 12,419 16,464 46 11/20/01 5-30
Ridgeview................. Beaverton, OR 2,478 7,531 10,009 28 11/20/01 5-30
The Commons............... Beaverton, OR 1,439 4,566 6,005 16 11/20/01 5-30
Lamar Boulevard........... Austin, TX 2,528 8,727 11,255 1,592 1/1/97 5-30
N. Barker's Landing....... Houston, TX 1,140 4,375 5,515 817 1/1/97 5-30
La Prada.................. Mesquite, TX 495 1,363 1,858 229 1/1/97 5-30
NW Highway................ Garland, TX 480 1,278 1,758 214 1/1/97 5-30
Quail Valley.............. Missouri City, TX 360 1,015 1,375 171 1/1/97 5-30
Business Parkway I........ Richardson, TX 799 3,932 4,731 853 5/4/98 5-30
The Summit................ Plano, TX 1,536 7,556 9,092 1,848 5/4/98 5-30
Northgate II.............. Dallas, TX 1,274 6,351 7,625 1,534 5/4/98 5-30
Empire Commerce........... Dallas, TX 304 1,756 2,060 334 5/4/98 5-30
Royal Tech - Digital...... Irving, TX 319 1,562 1,881 360 5/4/98 5-30
Royal Tech - Springwood... Irving, TX 894 4,300 5,194 928 5/4/98 5-30
Royal Tech - Regent....... Irving, TX 606 3,364 3,970 794 5/4/98 5-30
Royal Tech - Bldg 7....... Irving, TX 246 1,061 1,307 225 5/4/98 5-30
Royal Tech - NFTZ......... Irving, TX 1,517 6,760 8,277 1,486 5/4/98 5-30
Royal Tech - Olympus...... Irving, TX 1,060 4,548 5,608 971 5/4/98 5-30
Royal Tech - Honeywell.... Irving, TX 548 2,519 3,067 549 5/4/98 5-30
Royal Tech - Bldg 12...... Irving, TX 1,466 6,271 7,737 1,340 5/4/98 5-30
Royal Tech - Bldg 13...... Irving, TX 955 4,338 5,293 941 5/4/98 5-30
Royal Tech - Bldg 14...... Irving, TX 2,010 10,279 12,289 2,040 5/4/98 5-30
Royal Tech - Bldg 15...... Irving, TX 1,307 5,753 7,060 1,194 11/4/98 5-30

F-27

Cost
Capitalized
Subsequent
to
Initial Cost to Company Acquisition
------------------------- -------------

Buildings Buildings
and and
Description Location Encumbrances Land Improvements Improvements
------------------------------ ---------------- -------------- ---------- -------------- -------------

Westchase Corporate Park.. Houston, TX - 2,173 7,338 114
Ben White 1............... Austin, TX - 789 3,571 23
Ben White 5............... Austin, TX - 761 3,444 78
McKalla 3................. Austin, TX - 662 2,994 166
McKalla 4................. Austin, TX - 749 3,390 59
Mopac 6................... Austin, TX - 307 1,390 178
Waterford A............... Austin, TX - 597 2,752 1
Waterford B............... Austin, TX - 367 1,672 -
Waterford C............... Austin, TX - 1,144 5,225 11
McNeil 6.................. Austin, TX - 437 2,013 -
Rutland 11................ Austin, TX - 325 1,536 -
Rutland 12................ Austin, TX - 535 2,487 54
Rutland 13................ Austin, TX - 469 2,190 30
Rutland 14................ Austin, TX - 535 2,422 91
Rutland 19................ Austin, TX - 158 762 133
Royal Tech - Bldg 16..... Irving, TX - 2,464 2,703 2,011
Royal Tech - Bldg 17..... Irving, TX - 1,832 6,901 -
Monroe Business Center.... Herndon, VA - 5,926 13,944 1,657
Lusk II-R&D............... San Diego, CA - 1,077 2,644 106
Lusk II-Office............ San Diego, CA - 1,230 3,005 619
Norris Cn-Office.......... San Ramon, CA - 1,486 3,642 409
Northpointe D............. Sterling, VA 1,538 787 2,857 364
Monroe II................. Herndon, VA 1,930 811 4,967 310
Metro Park I.............. Rockville, MD - 5,383 15,404 -
Metro Park I R&D.......... Rockville, MD - 5,404 15,748 -
Metro Park II............. Rockville, MD - 1,223 3,490 -
Metro Park II............. Rockville, MD - 2,287 6,533 -
Metro Park III............ Rockville, MD - 4,555 13,039 -
Metro Park IV............. Rockville, MD - 4,188 12,035 -
Metro Park V.............. Rockville, MD - 9,813 28,214 -
Kearny Mesa-Office........ San Diego, CA - 785 1,933 613
Kearny Mesa-R&D........... San Diego, CA - 2,109 5,156 129
Bren Mar-Office........... Alexandria, VA - 572 1,401 678
Lusk III.................. San Diego, CA - 1,904 4,662 177
Bren Mar-R&D.............. Alexandria, VA - 1,625 3,979 93
Alban Road-Office......... Springfield, VA - 988 2,418 845
Alban Road-R&D............ Springfield, VA - 947 2,318 184
-------------- ---------- -------------- -------------
$30,145 $288,813 $895,746 $53,153
============== ========== ============== =============

Gross Amount at Which Carried at
December 31, 2001
-------------------------------------

Buildings Depreciable
and Accumulated Date Lives
Description Location Land Improvements Totals Depreciation Acquired (Years)
------------------------------ ---------------- ---------- -------------- ----------- ------------- ----------- ------------

Westchase Corporate Park.. Houston, TX 2,173 7,452 9,625 800 12/30/99 5-30
Ben White 1............... Austin, TX 789 3,594 4,383 656 12/31/98 5-30
Ben White 5............... Austin, TX 761 3,522 4,283 648 12/31/98 5-30
McKalla 3................. Austin, TX 662 3,160 3,822 580 12/31/98 5-30
McKalla 4................. Austin, TX 749 3,449 4,198 646 12/31/98 5-30
Mopac 6................... Austin, TX 307 1,568 1,875 294 12/31/98 5-30
Waterford A............... Austin, TX 597 2,753 3,350 473 1/06/99 5-30
Waterford B............... Austin, TX 367 1,672 2,039 250 5/20/99 5-30
Waterford C............... Austin, TX 1,144 5,236 6,380 787 5/20/99 5-30
McNeil 6.................. Austin, TX 437 2,013 2,450 346 1/6/9 5-30
Rutland 11................ Austin, TX 325 1,536 1,861 259 1/6/99 5-30
Rutland 12................ Austin, TX 535 2,541 3,076 454 1/6/99 5-30
Rutland 13................ Austin, TX 469 2,220 2,689 383 1/6/99 5-30
Rutland 14................ Austin, TX 535 2,513 3,048 468 12/31/98 5-30
Rutland 19................ Austin, TX 158 895 1,053 169 1/6/99 5-30
Royal Tech - Bldg 16..... Irving, TX 2,464 4,714 7,178 309 7/1/99 5-30
Royal Tech - Bldg 17..... Irving, TX 1,832 6,901 8,733 128 8/15/01 5-30
Monroe Business Center.... Herndon, VA 5,926 15,601 21,527 2,957 8/1/97 5-30
Lusk II-R&D............... San Diego, CA 1,077 2,750 3,827 377 3/17/98 5-30
Lusk II-Office............ San Diego, CA 1,230 3,624 4,854 516 3/17/98 5-30
Norris Cn-Office.......... San Ramon, CA 1,486 4,051 5,537 568 3/17/98 5-30
Northpointe D............. Sterling, VA 787 3,221 4,008 603 6/11/98 5-30
Monroe II................. Herndon, VA 811 5,277 6,088 973 1/29/99 5-30
Metro Park I.............. Rockville, MD 5,383 15,404 20,787 6 12/27/01 5-30
Metro Park I R&D.......... Rockville, MD 5,404 15,748 21,152 6 12/27/01 5-30
Metro Park II............. Rockville, MD 1,223 3,490 4,713 1 12/27/01 5-30
Metro Park II............. Rockville, MD 2,287 6,533 8,820 2 12/27/01 5-30
Metro Park III............ Rockville, MD 4,555 13,039 17,594 5 12/27/01 5-30
Metro Park IV............. Rockville, MD 4,188 12,035 16,223 4 12/27/01 5-30
Metro Park V.............. Rockville, MD 9,813 28,214 38,027 10 12/27/01 5-30
Kearny Mesa-Office........ San Diego, CA 785 2,546 3,331 380 3/17/98 5-30
Kearny Mesa-R&D........... San Diego, CA 2,109 5,285 7,394 703 3/17/98 5-30
Bren Mar-Office........... Alexandria, VA 572 2,079 2,651 382 3/17/98 5-30
Lusk III.................. San Diego, CA 1,904 4,839 6,743 657 3/17/98 5-30
Bren Mar-R&D.............. Alexandria, VA 1,625 4,072 5,697 537 3/17/98 5-30
Alban Road-Office......... Springfield, VA 988 3,263 4,251 480 3/17/98 5-30
Alban Road-R&D............ Springfield, VA 947 2,502 3,449 335 3/17/98 5-30
---------- -------------- ----------- -------------
$288,792 $948,899 $1,237,691 $121,609
========== ============== =========== =============

F-28