UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------

                                    Form 10-Q


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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

                          COMMISSION FILE NUMBER 1-8383


                          Mission West Properties, Inc.
             (Exact name of registrant as specified in its charter)

            Maryland                                        95-2635431
            --------                                        ----------
(State or other jurisdiction of                  (I.R.S. Employer Identification
 incorporation or organization)                               Number)

                               10050 Bandley Drive
                        Cupertino, California 95014-2188
                    (Address of principal executive offices)

      Registrant's telephone number, including area code is (408) 725-0700
                                   -----------


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 whether the Registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer[ ]  Accelerated filer[X]  Non-accelerated filer[ ]

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

  Indicate the number of shares outstanding of each of the issuer's classes of
                 common stock as of the latest practicable date:

              19,640,087 shares outstanding as of October 31, 2007


<PAGE>


                          Mission West Properties, Inc.

                                    FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2007


                                      INDEX
<TABLE>
<CAPTION>

                                                                                                                    Page
<S>          <C>                                                                                                    <C>
Part I        Financial Information                                                                                 ----

   Item 1.    Financial Statements:

              Condensed Consolidated Balance Sheets as of September 30, 2007
              and December 31, 2006 (unaudited).......................................................................2

              Condensed Consolidated Statements of Operations for the three
              and nine months ended September 30, 2007 and 2006 (unaudited)...........................................3

              Condensed Consolidated Statements of Cash Flows for the
              nine months ended September 30, 2007 and 2006 (unaudited)...............................................4

              Notes to Condensed Consolidated Financial Statements (unaudited)........................................5

   Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations....................................................................12

   Item 3.    Quantitative and Qualitative Disclosures about Market Risk.............................................23

   Item 4.    Controls and Procedures................................................................................24

Part II       Other Information

   Item 1.    Legal Proceedings......................................................................................25

   Item 1A.   Risk Factors...........................................................................................25

   Item 5.    Other Information......................................................................................25

   Item 6.    Exhibits...............................................................................................25

   Signatures........................................................................................................26

   Exhibits

              Exhibit 31.1 - Certification  Pursuant to Rule 13a-14(a) of the
                             Securities Exchange Act of 1934
              Exhibit 31.2 - Certification Pursuant to Rule 13a-14(a) of the
                             Securities Exchange Act of 1934
              Exhibit 31.3 - Certification Pursuant to Rule 13a-14(a) of the
                             Securities Exchange Act of 1934
              Exhibit 32   - Certification of CEO and CFO Pursuant to 18 U.S.C.
                             ss. 1350, as Adopted Pursuant to ss. 906 of the
                             Sarbanes-Oxley Act of 2002
</TABLE>

                                     - 1 -

<PAGE>



PART I - Financial Information
ITEM 1.  Condensed Consolidated Financial Statements


                          MISSION WEST PROPERTIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
           (dollars in thousands, except share and per share amounts)
                                   (unaudited)
                                    ---------
<TABLE>
<CAPTION>
                                                                                  September 30, 2007       December 31, 2006
                                                                                 ---------------------   ----------------------
                                     ASSETS
<S>                                                                                  <C>                     <C>
Real estate:
    Land                                                                              $  312,152              $  272,223
    Buildings and improvements                                                           764,408                 756,596
    Real estate related intangible assets                                                  6,422                  19,529
                                                                                 ---------------------   ----------------------
       Total investments in properties                                                 1,082,982               1,048,348
    Less accumulated depreciation and amortization                                      (155,619)               (149,459)
                                                                                 ---------------------   ----------------------
       Total investments in real estate, net                                             927,363                 898,889
Cash and cash equivalents                                                                 37,800                  33,785
Restricted cash                                                                           65,468                  48,245
Deferred rent receivable, net                                                             14,523                  18,489
Investment in unconsolidated joint venture                                                 2,835                   3,468
Other assets, net                                                                         25,522                  24,611
                                                                                 ---------------------   ----------------------
       Total assets                                                                   $1,073,511              $1,027,487
                                                                                 =====================   ======================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Mortgage notes payable                                                            $  340,225              $  348,101
    Mortgage notes payable (related parties)                                               9,335                   9,654
    Interest payable                                                                       1,334                   1,375
    Security deposits                                                                      4,738                   6,977
    Deferred rental income                                                                 4,021                   6,874
    Dividends and distributions payable                                                   16,832                  16,745
    Accounts payable and accrued expenses                                                 22,906                   7,601
                                                                                 ---------------------   ----------------------
       Total liabilities                                                                 399,391                 397,327
                                                                                 ---------------------   ----------------------
Commitments and contingencies (Note 10)

Minority interests                                                                       534,268                 501,282
                                                                                 ---------------------   ----------------------

Stockholders' equity:
  Preferred stock, $.001 par value, 20,000,000 shares authorized,
      none issued and outstanding                                                              -                       -
  Common stock, $.001 par value, 200,000,000 shares authorized,
      19,640,087 and 19,443,587 shares issued and outstanding
      at September 30, 2007 and December 31, 2006                                             20                      19
  Paid-in capital                                                                        152,619                 149,541
  Accumulated deficit                                                                    (12,787)                (20,682)
                                                                                 ---------------------   ----------------------
     Total stockholders' equity                                                          139,852                 128,878
                                                                                 ---------------------   ----------------------
     Total liabilities and stockholders' equity                                       $1,073,511              $1,027,487
                                                                                 =====================   ======================
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                     - 2 -

<PAGE>

                          MISSION WEST PROPERTIES, INC
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           (dollars in thousands, except share and per share amounts)
                                   (unaudited)
                                    ---------

<TABLE>
<CAPTION>
                                                       Three months ended September 30,         Nine months ended September 30,
                                                     -------------------------------------- ----------------------------------------
                                                           2007                2006                2007                 2006
                                                     ------------------ ------------------- -------------------- ------------------
<S>                                                    <C>                 <C>                <C>                   <C>
   Rental revenue from real estate                         $19,000            $22,444             $61,350               $68,281
   Above market lease intangible asset amortization              -               (472)             (4,091)               (1,416)
   Tenant reimbursements                                     3,454              3,260               9,908                 9,383
   Lease termination fees                                   47,238                  -              57,515                16,068
   Other income, including interest                          1,895              1,011               5,909                 2,826
                                                     ------------------ ------------------- -------------------- -------------------
        Total revenues                                      71,587             26,243             130,591                95,142
                                                     ------------------ ------------------- -------------------- -------------------
Expenses:
   Property operating, maintenance and real estate taxes     6,229              4,955              15,307                13,558
   Interest                                                  5,061              5,172              15,175                15,580
   Interest (related parties)                                  180                188                 546                   569
   General and administrative                                  982                531               2,369                 1,803
   Depreciation and amortization of real estate              5,532              5,513              17,084                15,993
                                                     ------------------ ------------------- -------------------- -------------------
        Total expenses                                      17,984             16,359              50,481                47,503
                                                     ------------------ ------------------- -------------------- -------------------
Income before equity in earnings of unconsolidated
   joint venture and minority interests                     53,603              9,884              80,110                47,639
Equity in earnings of unconsolidated joint venture             371                856               1,058                 1,538
Minority interests                                         (43,153)            (8,644)            (64,980)              (39,997)
                                                     ------------------ ------------------- -------------------- -------------------
   Income from continuing operations                        10,821              2,096              16,188                 9,180
                                                     ------------------ ------------------- -------------------- -------------------

Discontinued operations, net of minority interests:
Gain from disposal of discontinued operations                1,127                  -               1,127                     -
(Loss)/income attributable to discontinued operations           (7)                10                   5                   200
                                                     ------------------ ------------------- -------------------- -------------------
   Income from discontinued operations                       1,120                 10               1,132                   200
                                                     ------------------ ------------------- -------------------- -------------------

Net income to common stockholders                          $11,941             $2,106             $17,320               $ 9,380
                                                     ================== =================== ==================== ===================
Net income to minority interests                           $48,550             $8,700             $70,469               $41,057
                                                     ================== =================== ==================== ===================
Income per common share from continuing operations:
   Basic                                                     $0.55              $0.11               $0.82                 $0.49
                                                     ================== =================== ==================== ===================
   Diluted                                                   $0.54              $0.11               $0.81                 $0.48
                                                     ================== =================== ==================== ===================
Income per common share from discontinued operations:
   Basic                                                     $0.06                  -               $0.06                 $0.01
                                                     ================== =================== ==================== ===================
   Diluted                                                   $0.06                  -               $0.06                 $0.01
                                                     ================== =================== ==================== ===================
Net income per common share to common stockholders:
   Basic                                                     $0.61              $0.11               $0.88                 $0.50
                                                     ================== =================== ==================== ===================
   Diluted                                                   $0.60              $0.11               $0.87                 $0.49
                                                     ================== =================== ==================== ===================
Weighted average shares of
  common stock outstanding (basic)                      19,640,087          19,350,672         19,621,144            18,948,214
                                                     ================== =================== ==================== ===================
Weighted average shares of
  common stock outstanding (diluted)                    19,818,806          19,418,884         19,914,374            19,024,662
                                                     ================== =================== ==================== ===================
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                     - 3 -
<PAGE>

                          MISSION WEST PROPERTIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
                                   (unaudited)
                                    ---------
<TABLE>
<CAPTION>
                                                                                               Nine months ended September 30,
                                                                                            ---------------------------------------
                                                                                                   2007                2006
                                                                                            ------------------- -------------------
Cash flows from operating activities:
<S>                                                                                             <C>                   <C>
     Net income                                                                                  $17,320               $9,380
     Adjustments to reconcile net income to net cash provided by operating activities:
            Minority interests income                                                             70,469               41,057
            Minority interest distributions                                                      (41,424)             (41,057)
            Depreciation and amortization of real estate and in-place leases                      17,232               16,632
            Amortization of above market lease                                                     4,091                1,416
            Gain from disposal of properties classified as discontinued operations                (6,529)                   -
            Equity in earnings of unconsolidated joint venture                                    (1,058)              (1,538)
            Distributions from unconsolidated joint venture                                        1,691                1,330
            Interest earned on restricted cash                                                      (722)                (314)
            Lease termination fee related to restricted cash                                     (38,004)              (6,748)
            Stock-based compensation expense                                                         472                  176
            Other                                                                                    147                   35
     Changes in operating assets and liabilities:
            Deferred rent receivable                                                               3,966                1,048
            Other assets                                                                            (911)                (175)
            Interest payable                                                                         (41)                   -
            Security deposits                                                                     (2,246)              (1,300)
            Deferred rental income                                                                (2,853)               3,185
            Accounts payable and accrued expenses                                                  8,294                5,048
                                                                                            ------------------- -------------------
     Net cash provided by operating activities                                                    29,894               28,175
                                                                                            ------------------- -------------------

Cash flows from investing activities:
     Improvements to real estate assets                                                           (4,621)              (1,349)
     Proceeds from sale of real estate                                                            15,431                    -
     Restricted cash held in escrow                                                              (15,431)                   -
     Purchase of real estate                                                                     (47,491)             (15,959)
     Restricted cash released for purchase of real estate                                         43,191               13,447
     Excess restricted cash                                                                          630                1,835
                                                                                            ------------------- -------------------
     Net cash used in investing activities                                                        (8,291)              (2,026)
                                                                                            ------------------- -------------------

Cash flows from financing activities:
    Principal payments on mortgage notes payable                                                  (7,876)              (7,481)
    Principal payments on mortgage notes payable (related parties)                                  (319)                (295)
    Refund of appeal bond                                                                              -                1,551
    Net proceeds from exercise of stock options                                                        -                  802
    Minority interest distributions in excess of earnings                                              -                 (717)
    Dividends paid to common stockholders                                                         (9,393)              (9,007)
                                                                                            ------------------- -------------------
     Net cash used in financing activities                                                       (17,588)             (15,147)
                                                                                            ------------------- -------------------
     Net increase in cash and cash equivalents                                                     4,015               11,002
Cash and cash equivalents, beginning of period                                                    33,785               31,441
                                                                                            ------------------- -------------------
Cash and cash equivalents, end of period                                                         $37,800              $42,443
                                                                                            =================== ===================
Supplemental information:
    Cash paid for interest                                                                       $14,704              $15,944
                                                                                            =================== ===================
Supplemental schedule of non-cash investing and financing activities:
    Issuance of common stock upon conversion of O.P. units                                       $ 2,606              $ 9,977
                                                                                            =================== ===================
    Issuance of operating partnership units in connection with real estate acquisition           $ 6,603                    -
                                                                                            =================== ===================
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                     - 4 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
         (dollars in thousands, except per share and per square footage)
                                   (unaudited)

1.   ORGANIZATION AND FORMATION OF THE COMPANY

     Mission  West  Properties,  Inc.  (the  "Company")  is a fully  integrated,
     self-administered  and  self-managed  real estate company that acquires and
     manages R&D/office  properties in the portion of the San Francisco Bay Area
     commonly referred to as Silicon Valley. In July 1998, the Company purchased
     an approximate  12.11% of four existing limited  partnerships  (referred to
     collectively as the "operating partnerships") and obtained control of these
     partnerships  by becoming  the sole general  partner in each one  effective
     July 1, 1998 for financial  accounting and reporting purposes.  All limited
     partnership  interests in the operating  partnerships  were  converted into
     59,479,633  operating  partnership  ("O.P.")  units,  which  represented  a
     limited  partnership  ownership  interest  of  approximately  87.89% of the
     operating partnerships. The operating partnerships are the vehicles through
     which the  Company  holds its real  estate  investments,  makes real estate
     acquisitions, and generally conducts its business.

     On December 30, 1998, the Company was reincorporated  under the laws of the
     State of Maryland  through a merger with and into Mission West  Properties,
     Inc. Accordingly,  shares of the former company, Mission West Properties, a
     California  corporation  (no par),  which were  outstanding at December 30,
     1998,  were  converted  into  shares of common  stock,  $.001 par value per
     share, on a one-for-one basis.

     As  of  September  30,  2007,  the  Company  owns  a  controlling   general
     partnership interest of 20.08%,  21.78%,  16.26% and 12.48% in Mission West
     Properties, L.P., Mission West Properties, L.P. I, Mission West Properties,
     L.P.  II  and  Mission  West  Properties,  L.P.  III,  respectively,  which
     represents  an  18.75%  general  partnership   interest  in  the  operating
     partnerships, taken as a whole, on a consolidated weighted average basis.

     Through the operating  partnerships,  the Company owns interests in 109 R&D
     properties, all of which are located in Silicon Valley.

     The  Company  has  elected to be taxed as a real  estate  investment  trust
     ("REIT") under the Internal Revenue Code of 1986, as amended.  Accordingly,
     no  provision  has been made for income taxes for the three and nine months
     ended September 30, 2007 and 2006.

     BUSINESS SEGMENT INFORMATION
     The  Company's   primary  business  is  the  ownership  and  management  of
     R&D/office  real  estate  with a  geographic  concentration  in the Silicon
     Valley  of the  San  Francisco  Bay  Area.  Accordingly,  the  Company  has
     concluded it currently  has a single  reportable  segment for  Statement of
     Financial  Accounting  Standards  ("SFAS")  No.  131,   "Disclosures  about
     Segments of an Enterprise and Related Information," purposes.

2.   BASIS OF PRESENTATION

     PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION
     The  accompanying   unaudited  interim  condensed   consolidated  financial
     statements of the Company have been prepared in accordance  with Rule 10-01
     of Regulation S-X  promulgated  by the  Securities and Exchange  Commission
     ("SEC")  and,  therefore,  do not include  all  information  and  footnotes
     necessary  for a  fair  presentation  of  financial  position,  results  of
     operations  and  cash  flows  in  conformity  with  accounting   principles
     generally  accepted in the United States of America.  In the opinion of the
     Company, however, the accompanying unaudited interim condensed consolidated
     financial  statements  contain all  adjustments,  consisting only of normal
     recurring   adjustments,   necessary  to  present   fairly  the   Company's
     consolidated   financial   position  as  of  September   30,  2007,   their
     consolidated  results of  operations  for the three and nine  months  ended
     September 30, 2007 and 2006, and their cash flows for the nine months ended
     September 30, 2007 and 2006. All  significant  inter-company  balances have
     been  eliminated in  consolidation.  The condensed  consolidated  financial
     statements as of September 30, 2007 and for the three and nine months ended
     September 30, 2007 and 2006 and related footnote disclosures are unaudited.
     The results of operations for the three and nine months ended September 30,
     2007 are not  necessarily  indicative of the results to be expected for the
     entire year.

     The December 31, 2006 condensed consolidated balance sheet data was derived
     from audited  financial  statements,  but does not include all  disclosures
     required by accounting  principles  generally accepted in the United States
     of America.

     The Company consolidates all variable interest entities ("VIE") in which it
     is  deemed  to  be  the  primary   beneficiary  in  accordance   with  FASB
     Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN
     46R").  As of September 30, 2007, the Company  consolidated  one VIE in the
     accompanying  condensed  consolidated  balance sheets in connection with an
     assignment of a lease  agreement with an unrelated  party,  M&M Real Estate
     Control &  Restructuring,  LLC. See Note 5 for further  discussion  of this
     transaction.

                                     - 5 -

<PAGE>


                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
         (dollars in thousands, except per share and per square footage)
                                   (unaudited)

     STOCK-BASED OPTION COMPENSATION ACCOUNTING
     In December  2004,  the FASB issued SFAS No.  123R,  "Share-Based  Payment"
     ("SFAS 123R"), which addresses the accounting for stock options.  SFAS 123R
     requires  that the cost of all  employee,  director  and  consultant  stock
     options,  as well  as  other  equity-based  compensation  arrangements,  be
     reflected in the financial  statements based on the estimated fair value of
     the  awards.  SFAS  123R is an  amendment  to  SFAS  123,  "Accounting  for
     Stock-Based  Compensation,"  and  supersedes  Accounting  Principles  Board
     Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS
     123R is  applicable  to any award  that is settled  or  measured  in stock,
     including stock options, restricted stock, stock appreciation rights, stock
     units,  and employee  stock  purchase  plans.  At September  30, 2007,  the
     Company had one  stock-based  compensation  plan.  The Company  adopted the
     requirements  of SFAS 123R  effective  January 1, 2006  using the  modified
     prospective  method of  transition.  The adoption of this  standard did not
     have a material effect on the Company's condensed  consolidated  statements
     of operations, cash flows or financial position.

     In the first quarter of 2007,  stock options to purchase  710,000 shares of
     common stock were granted to four employees,  three non-employee  directors
     and four consultants, which options vest monthly for 48 months from date of
     grant,  subject to continued  employment  or other  service to the Company.
     Each option grant has a term of six years from the date of grant subject to
     earlier termination in certain events related to termination of employment.
     The  options  were  granted at an exercise  price of $12.09 per share.  The
     estimated fair value of the options  granted in 2007 was $1.45 per share on
     the date of grant using the  Black-Scholes  option  pricing  model with the
     following  assumptions:  dividend yield of 5.3%, volatility of 18.94%, risk
     free rates of 4.5% and an  expected  life of six years.  All  options  were
     granted at the fair market value at the date of grant.

     The  following  table  shows the  activity  and detail for the 2004  Equity
     Incentive Plan.

<TABLE>
<CAPTION>
                                                                   Weighted Average
                                                2004 Equity          Option Price
                                               Incentive Plan         Per Share
                                               ---------------    ------------------
<S>                                              <C>                   <C>
          Balance, December 31, 2006              1,037,100             $10.48
              Options granted                       710,000             $12.09
              Options exercised                           -
              Options cancelled                           -
                                               ---------------
          Balance, September 30, 2007             1,747,100             $11.13
                                               ===============
</TABLE>

     The Company measures  compensation cost for its stock options at fair value
     on the date of grant and recognizes  compensation  expense  relating to the
     remaining  unvested  portion of  outstanding  stock  options at the time of
     adoption  ratably over the vesting period,  generally four years.  The fair
     value of the Company's stock options is determined using the  Black-Scholes
     option  pricing  model.  Compensation  expense  related  to  the  Company's
     share-based  awards is included in general and  administrative  expenses in
     the Company's accompanying condensed consolidated statements of operations.
     Under SFAS 123R, the Company recorded approximately $157 and $59 of expense
     for the three months ended September 30, 2007 and 2006,  respectively,  and
     $472 and $176 of expense for share-based compensation relating to grants of
     stock  options  for the nine  months  ended  September  30,  2007 and 2006,
     respectively.

     As  of  September  30,  2007,  there  was   approximately   $651  of  total
     unrecognized compensation cost related to unvested share-based compensation
     arrangements  granted under the compensation plan. That cost is expected to
     be recognized over a weighted-average period of 3.0 years.

     MINORITY INTERESTS
     Minority  interests   represent  the  separate  private  ownership  of  the
     operating  partnerships  by the Berg Group  (defined  as Carl E. Berg,  his
     brother Clyde J. Berg, members of their respective immediate families,  and
     certain  entities they control) and other  non-affiliate  interests.  As of
     September 30, 2007, these interests  accounted for approximately  81.25% of
     the ownership  interests in the real estate  operations of the Company on a
     consolidated  weighted average basis.  Minority  interests in net income is
     calculated  by taking the net income of the  operating  partnerships  (on a
     stand-alone  basis) multiplied by the respective  weighted average minority
     interests ownership percentage.

     Allocation  of  corporate  general  and  administrative   expenses  to  the
     operating  partnerships  is  performed  based  upon  shares  and  operating
     partnership units outstanding for each operating partnership in relation to
     the total for all four operating partnerships.

     RECLASSIFICATIONS
     Certain  reclassifications  have been made to the previously  reported 2006
     condensed consolidated financial statements in order to conform to the 2007
     presentation.

     The following notes,  which present interim  disclosures as required by the
     SEC, highlight  significant  changes to the notes to the Company's December
     31,  2006  audited  consolidated  financial  statements  and should be read
     together  with the  consolidated  financial  statements  and notes  thereto
     included in the  Company's  2006 Annual  Report on Form 10-K filed on March
     15, 2007.

                                     - 6 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
         (dollars in thousands, except per share and per square footage)
                                   (unaudited)

3.   REAL ESTATE

     PROPERTY DISPOSITION
     On August 16, 2007,  the Company  disposed of one R&D  property  located at
     45700  Northport Loop in Fremont,  California  consisting of  approximately
     39,000 rentable square feet. A total net gain of  approximately  $1,699 was
     recognized  and  classified  as  discontinued  operations,  net of minority
     interests, on the total sales price of $7,742.

     On September 5, 2007, the Company  disposed of one R&D property  located at
     1170 Morse Avenue in  Sunnyvale,  California  consisting  of  approximately
     48,000 rentable square feet. A total net gain of  approximately  $4,830 was
     recognized  and  classified  as  discontinued  operations,  net of minority
     interests, on the total sales price of $8,301.

     PROPERTY ACQUISITION
     On  September  30,  2007,  the  Company  acquired an  approximately  99,000
     rentable square foot newly constructed R&D building located at 5845 Hellyer
     Avenue  in San Jose,  California  from the Berg  Group  under the Berg Land
     Holdings Option  Agreement.  The total  acquisition price for this property
     was  approximately  $10,903.  The Company acquired this property by issuing
     548,236 O.P. units to the Berg Group and $4,300 in cash,  which was paid in
     the fourth quarter of 2007. The Company has allocated the purchase price to
     land and building  based upon the  estimated  relative  fair values of such
     assets. Since the property was acquired vacant, there was no purchase price
     allocation to lease intangible assets.

4.   RESTRICTED CASH

     Restricted cash totaled  approximately $65,468 as of September 30, 2007. Of
     this  amount,  approximately  $15,493  represents  proceeds  received  from
     property  sales and  interest  income held in a separate  cash account at a
     trust  company  for future use in  tax-deferred  exchanges.  The  remaining
     $49,975 represents cash held by the Company's consolidated VIE. The Company
     does not have  possession  or  control  over  these  funds or any  right to
     receive  them  except in  accordance  with the  payment  terms of the lease
     agreement that has been assigned to the VIE.

5.   VARIABLE INTEREST ENTITY

     In December  2003, the FASB issued FIN 46R, a revision to FIN 46, which was
     issued in January 2003.  Under FIN 46R, a variable  interest entity must be
     consolidated  by a company if that  company is subject to a majority of the
     entity's  expected losses or entitled to receive a majority of the entity's
     expected  residual  returns or both.  FIN 46R  requires  disclosures  about
     variable  interest  entities that a company is not required to consolidate,
     but in which it has a significant variable interest.

     Under  FIN  46R,  for an  entity  to  qualify  as a VIE  one or more of the
     following three characteristics must exist:

     1.   The equity  investment at risk is not  sufficient to permit the entity
          to finance its activities  without additional  subordinated  financial
          support by any parties, including the equity holders.
     2.   The  equity  investors  lack  one or more of the  following  essential
          characteristics of a controlling financial interest:

          a.   The  direct  or  indirect  ability  to make  decisions  about the
               entity's activities through voting or similar rights.
          b.   The obligation to absorb the expected loss of the entity.
          c.   The right to receive the expected residual returns of the entity.

     3.   The equity investors have voting rights that are not  proportionate to
          their economic interests,  and the activities of the entity involve or
          are conducted on behalf of an investor with a disproportionately small
          voting interest.

     In March 2006, one of the Company's tenants, JDS Uniphase ("JDS"),  entered
     into an assignment of lease  agreement  with an unrelated  party,  M&M Real
     Estate Control & Restructuring,  LLC ("M&M"), in connection with leases for
     approximately 252,000 rentable square feet located in San Jose, California.
     M&M assumed all of JDS's remaining obligations under these leases, acquired
     certain  personal  property of JDS located on the  premises  and received a
     payment of  approximately  $11,147.  At the same time, the Company  entered
     into a consent  for  assignment  of lease  with both  parties  and a mutual
     release  agreement with JDS, pursuant to which all of the JDS's obligations
     under  these  leases  have been  effectively  transferred  to M&M.  M&M was
     obligated to continue to perform all of the  obligations  under the assumed
     JDS leases and had the right to sublease any or all of the 252,000 rentable
     square feet  vacated by JDS for the  remainder of the terms of the assigned
     leases.  Under the terms of the assignment of lease agreement,  the Company
     received  monthly  rent  payments  of  approximately  $733 from  April 2006
     through  December  2006,  $545 from January 2007 through August 2007 and is
     receiving $330 per month from September 2007 through  November 2007.  Based
     upon  the  provisions  of FIN 46R,  the  Company  determined  that M&M is a
     variable interest entity. The Company further determined that it is

                                     - 7 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
         (dollars in thousands, except per share and per square footage)
                                   (unaudited)

     the primary  beneficiary of this variable interest entity and therefore has
     consolidated   this  entity  for   financial   reporting   purposes.   Upon
     consolidation,  the Company  recognized  a gross lease  termination  fee of
     approximately $11,147 in March 2006.

     In August  2007,  one of the  Company's  tenants,  Ciena,  entered  into an
     assignment  of lease  agreement  with M&M,  in  connection  with leases for
     approximately 445,000 rentable square feet located in San Jose, California.
     M&M assumed all of Ciena's  remaining  obligations  under these  leases and
     received a payment from Ciena of $53,000,  of which $7,000 was reserved for
     tenant  improvements.  At the same time, the Company entered into a consent
     for  assignment of lease with both parties and a mutual  release  agreement
     with Ciena, pursuant to which all of Ciena's obligations under these leases
     have been  effectively  transferred to M&M. M&M is obligated to continue to
     perform all of the  obligations  under the assumed Ciena leases and has the
     right to sublease any or all of the 445,000 rentable square feet vacated by
     Ciena for the  remainder of the current  lease term,  which expire in 2011.
     Under the terms of the  assignment  of lease  agreement,  the Company  will
     receive monthly rent payments of approximately  $789 from July 2007 through
     June  2008,  $818 from July 2008  through  June  2009,  $849 from July 2009
     through June 2010, $881 from July 2010 through June 2011 and $915 from July
     2011  through  December  2011.  Based upon the  provisions  of FIN 46R, the
     Company  determined  that M&M is a variable  interest  entity.  The Company
     further  determined  that it is the primary  beneficiary  of this  variable
     interest  entity and therefore has  consolidated  this entity for financial
     reporting  purposes.  Upon  consolidation,  the Company  recognized a gross
     lease termination fee of $46,000 in August 2007.

     Factors  considered  by the  Company in  determining  whether M&M should be
     considered a VIE for financial reporting purposes included the following:

     -    No equity was contributed by the partners in the formation of M&M.
     -    At  present,  the  assigned  leases  are  the  only  properties  under
          management by M&M.
     -    Because M&M does not have an operating  history that  demonstrates its
          ability to finance  its  activities  without  additional  subordinated
          financial support.
     -    All revenues,  other than interest  income,  are generated by M&M from
          the Company in the form of fees or commissions.

     The Company  remains at risk with respect to the assigned leases because if
     M&M's operating  expenses exceed its interest income,  fees and commissions
     there would be  insufficient  funds to meet the assigned  lease  obligation
     without additional  financial support from equity holders or other parties.
     The Company,  which had released the original  tenants from its obligations
     under the leases,  would have to absorb the majority of any loss, making it
     the primary beneficiary of M&M's activities.

6.   STOCK TRANSACTIONS

     During the nine months  ended  September  30,  2007,  two limited  partners
     exchanged a total of 196,500 O.P. units for 196,500 shares of the Company's
     common stock under the terms of the  Exchange  Rights  Agreement  among the
     Company and all limited partners of the operating partnerships resulting in
     a  reclassification  of  approximately  $2,606 from  minority  interests to
     paid-in  capital.  Neither  the  Company  nor  the  operating  partnerships
     received any proceeds from the issuance of the common stock in exchange for
     O.P. units.

7.   DISCONTINUED OPERATIONS

     Effective  January 1, 2002, the Company  adopted SFAS No. 144,  "Accounting
     for the Impairment or Disposal of Long-Lived  Assets"  ("SFAS 144"),  which
     addresses  financial  accounting  and  reporting  for  the  impairment  and
     disposal of long lived assets.  In general,  income or loss attributable to
     the operations and sale of property and the operations  related to property
     held for sale is  classified  as  discontinued  operations in the condensed
     consolidated statements of operations.  Prior period condensed consolidated
     statements of operations presented in this report have been reclassified to
     reflect  the  income  or loss  related  to  properties  that  were sold and
     presented as discontinued operations in 2006. All periods presented in this
     report will likely require  further  reclassification  in future periods if
     there are properties held for sale or property sales occur.

     During the third quarter of 2007, the Company sold two R&D properties.  See
     Note 3 above for  additional  details.  In the third  quarter of 2006,  the
     Company  classified  three R&D  properties as assets held for sale and sold
     them in the  fourth  quarter  of  2006,  which  qualified  as  discontinued
     operations.  Condensed  results of operations for these  properties for the
     three and nine months ended September 30, 2007 and 2006 are as follows:

                                     - 8 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
         (dollars in thousands, except per share and per square footage)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended September 30,  Nine Months Ended September 30,
                                                            --------------------------------  -------------------------------
                                                                 2007              2006            2007             2006
                                                             -------------    -------------    ------------     ------------
                                                                                  (dollars in thousands)
                                                                                       (unaudited)
<S>                                                           <C>              <C>             <C>              <C>
         Revenues
            Rental revenue from real estate                    $  118           $  390          $  389            $2,140
            Tenant reimbursements                                  56               51              83               303
            Other income                                            1               57               1                64
                                                             -------------    -------------    ------------     ------------
               Total revenues                                     175              498             473             2,507
                                                             -------------    -------------    ------------     ------------

         Expenses
            Property operating, maintenance and real estate taxes 150              219             233               608
            Interest                                                1                -               1                 -
            Depreciation of real estate                            35              214             148               639
                                                             -------------    -------------    ------------     ------------
              Total expenses                                      186              433             382             1,247
                                                             -------------    -------------    ------------     ------------

         (Loss)/income from discontinued operations               (11)              65              91             1,260
         Gain on disposal of discontinued operations            6,529                -           6,529                 -
         Minority interest in earnings attributable to
             discontinued operations                           (5,398)             (55)         (5,488)           (1,060)
                                                             -------------    -------------    ------------     ------------
         Income from discontinued operations                   $1,120           $   10          $1,132            $  200
                                                             =============    =============    ============     ============
</TABLE>

8.   NET INCOME PER SHARE

     Basic  operating net income per share is computed by dividing net income by
     the weighted  average number of common shares  outstanding  for the period.
     Diluted  operating  net income per share is computed by dividing net income
     by the sum of the weighted-average  number of common shares outstanding for
     the period plus the assumed  exercise of all dilutive  securities using the
     treasury stock method.

     The computation for weighted average shares is detailed below:
<TABLE>
<CAPTION>

                                                          Three Months Ended September 30,      Nine Months Ended September 30,
                                                         ---------------------------------     ---------------------------------
                                                               2007              2006               2007               2006
                                                         ---------------    --------------     --------------    ---------------
<S>                                                       <C>               <C>                <C>                <C>
         Weighted average shares outstanding (basic)       19,640,087        19,350,672         19,621,144         18,948,214
         Incremental shares from assumed option exercise      178,719            68,212            293,230             76,448
                                                         ---------------    --------------     --------------    ---------------
         Weighted average shares outstanding (diluted)     19,818,806        19,418,884         19,914,374         19,024,662
                                                         ===============    ==============     ==============    ===============
</TABLE>

     Outstanding  options to purchase  647,000 shares in 2006 were excluded from
     the  computation  of diluted net income per share under the treasury  stock
     method  because the option  exercise  price was greater  than the  weighted
     average exercise price of the Company's common stock during the period. The
     outstanding O.P. units, which are exchangeable at the unit holder's option,
     subject to certain conditions,  for shares of common stock on a one-for-one
     basis have been excluded from the diluted net income per share calculation,
     as there would be no effect on the  calculation  after  adding the minority
     interests'  share of income  back to net income.  The total  number of O.P.
     units  outstanding  at  September  30,  2007 and 2006  was  85,557,935  and
     85,231,199, respectively.

9.   RELATED PARTY TRANSACTIONS

     As of September 30, 2007, the Berg Group owned  77,926,384 O.P. units.  The
     Berg Group's combined ownership of O.P. units and shares of common stock as
     of September  30, 2007  represented  approximately  74% of the total equity
     interests,  assuming  conversion  of all O.P.  units  outstanding  into the
     Company's common stock.

     As of September 30, 2007,  debt in the amount of  approximately  $9,335 was
     due the Berg Group  under a mortgage  note  established  on May 15, 2000 in
     connection with the acquisition of a 50% interest in Hellyer Avenue Limited
     Partnership,  the obligor under the mortgage  note. The mortgage note bears
     interest at 7.65% and is due in June 2010 with principal payments amortized
     over 20 years.  Interest  expense  incurred in connection with the mortgage
     note was  approximately  $180 and $188 for the three months ended September
     30,  2007 and  2006,  respectively,  and $546 and $569 for the nine  months
     ended September 30, 2007 and 2006, respectively.

     On  September  30,  2007,  the  Company  acquired an  approximately  99,000
     rentable square foot newly constructed R&D building located at 5845 Hellyer
     Avenue  in San Jose,  California  from the Berg  Group  under the Berg Land
     Holdings Option  Agreement.  The total  acquisition price for this property
     was  approximately  $10,903.  The Company acquired this property by issuing
     548,236 O.P. units to the Berg Group and $4,300 in cash,  which was paid in
     the fourth quarter of 2007. The transaction was approved by the Independent
     Directors Committee of the Company's Board of Directors.

                                     - 9 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
         (dollars in thousands, except per share and per square footage)
                                   (unaudited)

     During the first  nine  months of 2007 and 2006,  Carl E. Berg or  entities
     controlled by Mr. Berg held financial  interests in several  companies that
     lease space from the operating partnerships,  which include companies where
     Mr. Berg has a greater than 10% ownership  interest.  These related tenants
     contributed  approximately  $361 and $162 in rental  revenue  for the three
     months ended September 30, 2007 and 2006, respectively, and $1,082 and $486
     in rental  revenue for the nine months ended  September  30, 2007 and 2006,
     respectively.

     Under the Company's charter, bylaws and agreements with the Berg Group, the
     individual  members  of the Berg Group are  prohibited  from  acquiring  or
     holding  shares of the  Company's  common stock if such  acquisition  would
     result in their  beneficial  ownership  percentage of the Company's  common
     stock causing the Company to violate any REIT qualification requirement.

     In March 2006, the Company and Fujitsu Limited,  or Fujitsu,  agreed to the
     termination of a lease for one building consisting of approximately 125,000
     rentable square feet.  Fujitsu is responsible  for repairing  damage to the
     building and with the Company's  Independent  Directors  Committee approval
     has hired Berg & Berg Enterprises,  LLC to perform the restoration work for
     a total of approximately $4,500, which is substantially complete.

     The Berg Group has an approximately  $2,500  commitment to complete certain
     tenant  improvements in connection  with the Company's 2002  acquisition of
     5345 Hellyer  Avenue in San Jose.  The Company has recorded this portion of
     the  purchase  price  paid to the  Berg  Group  in  "Other  assets"  on its
     condensed  consolidated balance sheets. The Berg Group is in the process of
     satisfying this commitment to complete certain tenant improvements.

     The Berg  Group has an  approximately  $7,500  commitment  to  complete  an
     approximately  75,000 to 90,000 square foot building in connection with the
     Company's 2001  acquisition of 245 Caspian in Sunnyvale  which is comprised
     of  approximately  three acres of unimproved land. The Company has recorded
     this portion of the purchase price paid to the Berg Group in "Other assets"
     on its  condensed  consolidated  balance  sheets.  The Berg Group  plans to
     satisfy  this  commitment  to  construct a building  when  requested by the
     Company following the approval of the Independent Directors Committee.

     The Company currently leases office space owned by Berg & Berg Enterprises,
     Inc.,  an  affiliate of Carl E. Berg and Clyde J. Berg,  for the  Company's
     headquarters.  Rental  amounts and overhead  reimbursements  paid to Berg &
     Berg Enterprises,  Inc. were approximately $24 and $23 for the three months
     ended  September 30, 2007 and 2006,  respectively,  and $71 and $68 for the
     nine months ended September 30, 2007 and 2006, respectively.

10.  COMMITMENTS AND CONTINGENCIES

     Neither  the  operating  partnerships,  the  Company's  properties  nor the
     Company  are  subject to any  material  litigation  nor,  to the  Company's
     knowledge,  is any material  litigation  threatened  against the  operating
     partnerships, the properties or the Company. From time to time, the Company
     is engaged in legal proceedings arising in the ordinary course of business.
     The  Company  does not  expect any of such  proceedings  to have a material
     adverse  effect  on its cash  flows,  financial  condition  or  results  of
     operations.  The  Company is  currently  involved  in the  following  legal
     proceedings,  and does not  believe  the  ultimate  outcome of any of these
     proceedings will have a material adverse effect on its financial  condition
     or operating results.

     Mission West Properties,  L.P. v. Republic Properties  Corporation,  et al.
     Santa Clara County Superior Court, Case No. CV 796249.  Republic Properties
     Corporation  ("RPC") is a former 50% partner with Mission West  Properties,
     L.P. in the Hellyer Avenue Limited  Partnership  ("Hellyer LP"),  which was
     formed  in July  2000.  Under  the  terms  of the  Hellyer  LP  partnership
     agreement  and other  related  contracts,  Mission  West  Properties,  L.P.
     ("MWP") had the right to obtain RPC's entire  interest in Hellyer LP in the
     event of certain payment defaults which occurred in August 2000. Therefore,
     on September 1, 2000, MWP, as the general partner of Hellyer LP, ceased all
     allocations  of income and cash flow to RPC and  exercised  the right under
     the   partnership   agreement  to  cancel  RPC's  entire  interest  in  the
     partnership.  Following  discussions  with and approval by the  Independent
     Directors Committee,  the Company authorized the transfer of RPC's interest
     in Hellyer LP to Berg & Berg Enterprises, Inc. Under the Berg Land Holdings
     Option  Agreement and the  Acquisition  Agreement dated as of May 14, 1998,
     the Independent  Directors Committee had the right, but not the obligation,
     to reacquire the property interest and the related distributions related to
     the  property  interest  at any time.  The  transfer  was  effective  as of
     September 1, 2000. On November 20, 2000,  RPC  commenced a lawsuit  against
     MWP in the Circuit  Court of Maryland for  Baltimore  City.  After  lengthy
     litigation, which included a trial on the merits and subsequent appeals, in
     April 2006  Maryland's  highest  Court upheld an earlier  Maryland  Appeals
     Court ruling in favor of MWP,  finding  that the Circuit  Court of Maryland
     could not assert personal  jurisdiction over MWP in the RPC suit. The Court
     vacated the  judgment  and  decision in the trial court and  dismissed  the
     entire  Maryland  suit.  In  February  2001,  while the  Maryland  case was
     pending,  the Company filed a suit against RPC in the Superior Court of the
     State of  California  for the  County of Santa  Clara.  The case was stayed
     pending resolution of the Maryland case, and the Company dismissed its suit
     on March 4, 2005. In April 2005, RPC submitted a motion asking the Superior
     Court to reinstate  the case,  which the Court  granted on May 25, 2005. On
     July 5, 2006, RPC filed a cross-complaint  in the case seeking  partnership
     distributions  to which  the  Company  demurred.  The Court  sustained  the
     Company's demurrer with leave to amend. Subsequently,  RPC filed an amended
     complaint and the Company  submitted  another demurrer seeking dismissal of
     the

                                     - 10 -
<PAGE>

     claims on statute of limitations  grounds.  On February 20, 2007, the Court
     overruled  the  Company's  demurrer.  The  Company  sought a writ  from the
     California State Court of Appeal for the Sixth District to direct the lower
     court to reverse its decision,  but the petition for the writ was denied. A
     trial in the California Superior Court will commence in early 2008.

     The Company has a receivable  from a Berg Group affiliate for the amount of
     distributions it has received as the successor to RPC's interest in Hellyer
     LP.  Furthermore,  the Company has never  accounted for the 50% interest of
     RPC as its asset,  and if it is ultimately  determined that RPC should have
     retained  that  interest or it  reacquires  that  interest,  the  Company's
     balance  sheet and  financial  condition  would not be impacted  adversely,
     although to date, the Company has consolidated the assets,  liabilities and
     operating  results of Hellyer LP and allocated 50% of the operating  income
     to the minority interest holder.

     GUARANTEES AND INDEMNITIES
     Under its articles of incorporation  and bylaws,  the Company has agreed to
     indemnify  its officers and  directors  for certain  events or  occurrences
     arising as a result of the officer or director's  serving in such capacity.
     The  maximum  potential  amount of future  payments  the  Company  could be
     required to make under these indemnification  agreements is unlimited.  The
     Company  believes  the  estimated  fair  value  of  these   indemnification
     agreements is minimal and has recorded no liabilities for these  agreements
     as of September 30, 2007.

     The  Company  also  enters  into   indemnification   provisions  under  its
     agreements  with  other  companies  in the  ordinary  course  of  business,
     typically with lenders, joint venture partners,  contractors,  and tenants.
     Under these  provisions the Company  typically agrees to indemnify and hold
     harmless  the  indemnified  party for losses  suffered  or  incurred by the
     indemnified  party as a result of certain  kinds of activities or inactions
     of  the  Company.   These  indemnification   provisions  generally  survive
     termination of the underlying  agreement.  The maximum  potential amount of
     future  payments  the  Company  could  be  required  to  make  under  these
     indemnification  provisions  is  unlimited.  To date,  the  Company has not
     incurred  material  costs to defend  lawsuits or settle  claims  related to
     these  indemnification  agreements.  As a result,  the Company believes the
     estimated  fair value of these  agreements  is  minimal.  Accordingly,  the
     Company has recorded no  liabilities  for these  agreements as of September
     30, 2007.

     SEISMIC ACTIVITY
     The Company's  properties  are located in an active seismic area of Silicon
     Valley. Insurance policies currently maintained by the Company do not cover
     seismic  activity,  although  they do  cover  losses  from  fires  after an
     earthquake.

     ENVIRONMENTAL ISSUES
     The environmental  investigations that have been conducted on the Company's
     properties have not revealed any  environmental  liability that the Company
     believes would have a material  adverse effect on its financial  condition,
     results of operations and assets,  and the Company is not aware of any such
     liability.   Nonetheless,   it  is   possible   that  there  are   material
     environmental liabilities of which the Company is unaware. In addition, the
     Company cannot assure that future laws, ordinances, or regulations will not
     impose  any  material   environmental   liability,   or  that  the  current
     environmental  condition of the  properties  has not been,  or will not be,
     affected by tenants and  occupants of the  properties,  by the condition of
     properties in the vicinity of the properties, or by third parties unrelated
     to the Company.

     ASSET DISPOSITIONS SUBJECT TO CERTAIN CONDITIONS
     The  Company has  entered  into sales  agreements  with  unrelated  parties
     subject to  numerous  material  conditions,  including  but not  limited to
     re-zoning of the property and negotiating certain agreements with the local
     municipality  acceptable to the buyer. As a result of the conditions agreed
     to by the Company and the respective  buyers,  these assets do not meet the
     criteria  set forth in SFAS 144 to be  classified  as assets held for sale.
     The  following  summarizes  the assets for which the Company  has  executed
     sales  contracts  as of  September  30,  2007 that are  subject to material
     conditions as previously described:
<TABLE>
<CAPTION>

        Property                   Number of Buildings   Rentable Square Feet          Acres              Sales Prices
        --------                   -------------------   --------------------          -----              ------------
<S>                                        <C>                 <C>                    <C>                   <C>
        McCandless Drive
        Milpitas, California                8                   427,000                23.03                 $76,500
</TABLE>

11.  SUBSEQUENT EVENTS

     On October 4, 2007, the Company paid dividends of $0.16 per share of common
     stock to all common stockholders of record as of September 28, 2007. On the
     same date, the operating partnerships paid a distribution of $0.16 per O.P.
     unit to all holders of O.P. units.  Aggregate  dividends and  distributions
     amounted to approximately $16,832.

                                     - 11 -

<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  should  be read  in  conjunction  with  the  accompanying  condensed
consolidated financial statements and notes thereto under Part I, Item 1 of this
Report and our  audited  consolidated  financial  statements  and notes  thereto
contained  in our  Annual  Report  on Form  10-K as of and  for the  year  ended
December 31, 2006. The results for the three and nine months ended September 30,
2007 are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 2007.

FORWARD-LOOKING INFORMATION

This quarterly report on Form 10-Q contains  forward-looking  statements  within
the  meaning of the federal  securities  laws.  We intend  such  forward-looking
statements  to be  covered by the safe  harbor  provisions  for  forward-looking
statements  contained  in the  Private  Securities  Reform Act of 1995,  and are
including  this  statement  for  purposes  of  complying  with these safe harbor
provisions.  Forward-looking statements,  which are based on certain assumptions
and describe  future plans,  strategies  and  expectations  of the Company,  are
generally  identifiable  by use  of the  words  "believe,"  "expect,"  "intend,"
"anticipate,"  "estimate," "project" or similar expressions.  Additionally,  all
disclosures  under Part I, Item 3  constitute  forward-looking  statements.  Our
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.

Factors that could have a material  adverse  effect on our operations and future
prospects or would cause actual results in the future to differ  materially from
any of our  forward-looking  statements  include,  but are not  limited  to, the
following:

-    economic conditions generally and the real estate market specifically,
-    the occupancy rates of the properties,
-    rental rates on new and renewed leases,
-    legislative or regulatory  provisions  (including changes to laws governing
     the taxation of REITs),
-    availability of capital,
-    interest rates,
-    competition,
-    supply of and  demand  for R&D,  office and  industrial  properties  in our
     current and proposed market areas,
-    tenant defaults and bankruptcies,
-    lease term expirations and renewals, and
-    changes  in  general   accounting   principles,   policies  and  guidelines
     applicable to REITs.

These risks and  uncertainties,  together with the other risks  described  under
Part I, Item 1A - "Risk Factors" of our 2006 Annual Report on Form 10-K and from
time to time in our other reports and documents  filed with the  Securities  and
Exchange Commission ("SEC"), should be considered in evaluating  forward-looking
statements and undue reliance should not be placed on such statements.

OVERVIEW

We acquire,  market, lease, and manage R&D/office properties,  primarily located
in the Silicon Valley portion of the San Francisco Bay Area. As of September 30,
2007, we owned and managed 109  properties  totaling  approximately  7.9 million
rentable   square  feet  through  four   limited   partnerships,   or  operating
partnerships,  for which we are the sole general partner. This class of property
is designed  for research  and  development  and office uses and, in some cases,
includes space for light manufacturing operations with loading docks. We believe
that we have one of the  largest  portfolios  of  R&D/office  properties  in the
Silicon  Valley.  As of September 30, 2007, the three tenants who each leased in
excess of 300,000 rentable square feet from us were Microsoft  Corporation,  NEC
Electronics  America,  Inc. (a subsidiary of NEC  Electronics  Corporation)  and
Apple, Inc.

For  federal  income  tax  purposes,   we  have  operated  as  a   self-managed,
self-administered  and fully  integrated real estate  investment  trust ("REIT")
since the beginning of fiscal 1999.

Our  acquisition,  growth and  operating  strategy  incorporates  the  following
elements:

-    working  with  the Berg  Group to take  advantage  of their  abilities  and
     resources to pursue  development  opportunities  which we have an option to
     acquire, on pre-negotiated terms, upon completion and leasing;
-    capitalizing   on   opportunistic   acquisitions   from  third  parties  of
     high-quality  R&D/office  properties that provide attractive initial yields
     and significant potential for growth in cash-flow;
-    focusing  on  general  purpose,  single-tenant  Silicon  Valley  R&D/office
     properties for  information  technology  companies in order to maintain low
     operating costs, reduce tenant turnover and capitalize on our relationships
     with these  companies  and our  extensive  knowledge  of their real  estate
     needs; and
-    maintaining prudent financial management  principles that emphasize current
     cash flow while building  long-term  value,  the  acquisition of pre-leased
     properties to reduce  development  and leasing risks and the maintenance of
     sufficient liquidity to acquire and finance properties on desirable terms.

                                     - 12 -
<PAGE>

CURRENT ECONOMIC ENVIRONMENT

All of our  properties  are  located in the  Northern  California  area known as
Silicon  Valley,  which  generally  consists of portions of Santa Clara  County,
Southwestern  Alameda  County,  Southeastern  San Mateo County and Eastern Santa
Cruz County. Historically, the Silicon Valley R&D property market has fluctuated
with the local economy.  The Silicon  Valley economy and business  activity have
slowed markedly from 2001 through the middle of 2006 after fast-paced  growth in
1999 and 2000, and has been growing  steadily since then.  According to a recent
report by NAI BT Commercial Real Estate (the "BT Report"),  the vacancy rate for
Silicon  Valley R&D property was  approximately  18.3% in late 2006 and 16.2% at
the end of the third quarter of 2007. Total vacant R&D square footage in Silicon
Valley at the end of the third quarter of 2007  amounted to 24.7 million  square
feet,  of which 16.2%,  or 4.0 million  square  feet,  was being  offered  under
subleases.  According to the BT Report,  total positive net absorption (which is
the  computation  of gross square  footage  leased less gross new square footage
vacated for the period  presented) in 2006 amounted to approximately 1.9 million
square feet, but in the first nine months of 2007,  there was total positive net
absorption of approximately 3.6 million square feet. According to the BT Report,
the average  asking  market rent per square foot at the end of the third quarter
of 2007 was  $1.21  compared  to $0.99 in late  2006.  The  Silicon  Valley  R&D
property market is  characterized  by a substantial  number of submarkets,  with
rent and vacancy rates varying by submarket and location  within each submarket,
however, and individual properties within any particular submarket presently may
be leased above or below the current  average  asking market rental rates within
that submarket and the region as a whole.

Our  occupancy  rate at  September  30,  2007  was  62.3%  compared  to 64.2% at
September  30, 2006. We believe that our  occupancy  rate could decline  further
going forward if key tenants seek the protection of bankruptcy laws, consolidate
operations  or  discontinue  operations.  In  addition,  leases with  respect to
approximately  227,000  rentable  square feet are  expiring  prior to the end of
2007.  The  properties  subject to these leases may take  anywhere from 24 to 36
months or longer to re-lease.  We believe  that the average 2007 renewal  rental
rates for our  properties  will be  approximately  equal to, or  perhaps  below,
current  market  rents,  but we cannot  give any  assurance  that leases will be
renewed or that  available  space will be  re-leased at rental rates equal to or
above the current quoted market rates.

Despite our strategic focus on single tenant  properties and leases, in order to
meet market  conditions,  we have been, and expect to continue leasing less than
the entire  premises of some of our R&D  properties to a single tenant from time
to time. Leasing our R&D properties,  which generally have been built for single
tenant  occupancy,  to multiple  tenants  can  increase  our  leasing  costs and
operating expenses and reduce the profitability of our leasing activities.

If we are unable to lease a  significant  portion  of any vacant  space or space
subject to expiring leases;  if we experience  significant  tenant defaults as a
result of the current economic downturn; if we are not able to lease space at or
above current market rates; if we restructure existing leases and lower existing
rents in order to retain  tenants for an extended  term;  or if we increase  our
lease costs and operating expenses substantially to accommodate multiple tenants
in our R&D  properties,  our  results  of  operations  and  cash  flows  will be
adversely affected.  Furthermore, in this event it is probable that our board of
directors  will  reduce  the  quarterly  dividend  on the  common  stock and the
outstanding  O.P. units.  Our operating  results and ability to pay dividends at
current levels remain subject to a number of material  risks, as indicated under
the caption  "Forward-Looking  Information"  above and in the  section  entitled
"Risk Factors" in our most recent Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare the condensed  consolidated  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP"), which requires us to make certain estimates, judgments and assumptions
that affect the  reported  amounts in the  accompanying  condensed  consolidated
financial  statements,  disclosure  of  contingent  assets and  liabilities  and
related footnotes.  Accounting and disclosure decisions with respect to material
transactions that are subject to significant  management  judgments or estimates
include impairment of long lived assets,  deferred rent reserves, and allocation
of purchase price relating to property  acquisitions and the related depreciable
lives  assigned.  Actual results may differ from these estimates under different
assumptions or conditions.

Critical  accounting  policies are defined as those that require  management  to
make  estimates,   judgments  and  assumptions,   giving  due  consideration  to
materiality,  in certain  circumstances  that  affect  amounts  reported  in the
condensed   consolidated   financial  statements,   and  potentially  result  in
materially  different  results under different  conditions and  assumptions.  We
believe that the following best describe our critical accounting policies:

BUSINESS COMBINATIONS.  Statement of Financial Accounting Standards ("SFAS") No.
141,  "Business  Combinations"  ("SFAS 141"),  was effective  July 1, 2001.  The
acquisition costs of each property acquired prior to July 1, 2001 were allocated
only to building,  land and leasing commissions with building depreciation being
computed  based on an estimated  weighted  average  composite  useful life of 40
years and leasing  commission  amortization  being computed over the term of the
lease.  Acquisitions of properties made subsequent to the effective date of SFAS
141 are based on an allocation of the acquisition cost to land, building, tenant
improvements,  and  intangibles for at market,  including lease  origination and
lease up period  costs,  and above and  below  market in place  leases,  and the
determination  of their useful lives are guided by a combination of SFAS 141 and
management's  estimates.  Amortization  expense of above and below  market lease
intangible  asset is offset against rental revenue in the revenue  section while
amortization   of  in-place  lease  value   intangible   asset  is  included  in
depreciation  and  amortization  of real  estate in the  expense  section of our
condensed consolidated statements of

                                     - 13 -
<PAGE>

operations.  If  we  do  not  appropriately  allocate  these  components  or  we
incorrectly  estimate the useful lives of these  components,  our computation of
depreciation and amortization  expense may not appropriately  reflect the actual
impact of these costs over future periods, which will affect net income.

IMPAIRMENT OF  LONG-LIVED  ASSETS.  We review real estate assets for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with SFAS No. 144, "Accounting for
the Impairment and Disposal of Long-Lived  Assets" ("SFAS 144"). If the carrying
amount of the asset exceeds its  estimated  undiscounted  net cash flow,  before
interest,  we will recognize an impairment loss equal to the difference  between
its carrying  amount and its estimated fair value.  If impairment is recognized,
the reduced  carrying amount of the asset will be accounted for as its new cost.
For a  depreciable  asset,  the new cost will be  depreciated  over the  asset's
remaining  useful life.  Generally,  fair values are estimated using  discounted
cash  flow,  replacement  cost or market  comparison  analyses.  The  process of
evaluating for impairment requires estimates as to future events and conditions,
which are subject to varying market factors,  such as the vacancy rates,  future
rental rates,  lease periods,  deferred  maintenance and operating costs for R&D
facilities in the Silicon Valley area and related submarkets.  Therefore,  it is
reasonably  possible that a change in estimate  resulting  from  judgments as to
future  events  could  occur  which  would  affect the  recorded  amounts of the
property.

ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS  AND  DEFERRED  RENT.  We must  estimate  the
uncollectibility  of our  accounts  receivable  based on the  evaluation  of our
tenants'  financial  position,  analyses  of  accounts  receivable  and  current
economic  trends.  We also make estimates for reserves against our deferred rent
receivable  for  existing  tenants  with the  potential  of  early  termination,
bankruptcy  or  ceasing  operations.  We  charge  or credit  rental  income  for
increases or decreases to our deferred rent reserves. Our estimates are based on
our review of tenants' payment  histories,  the remaining lease term, whether or
not the tenant is currently occupying our building, publicly available financial
information and such additional  information about their financial  condition as
tenants  provide  to us.  The  information  available  to us  might  lead  us to
overstate or understate these reserve amounts. The use of different estimates or
assumptions could produce different results. Moreover, actual future collections
of accounts  receivable or reductions  in future  reported  rental income due to
tenant  bankruptcies or other business failures could differ materially from our
estimates.

CONSOLIDATED  JOINT VENTURES.  We, through an operating  partnership,  own three
properties that are in joint ventures of which we have controlling interests. We
manage and operate all three properties. The recognition of these properties and
their  operating  results  are  100%  reflected  on our  condensed  consolidated
financial statements, with appropriate allocation to minority interests, because
we have operational and financial control of the investments.  We make judgments
and  assumptions  about the  estimated  monthly  payments  made to our  minority
interest joint venture partners, which are reported with our periodic results of
operations.  Actual  results may differ  from these  estimates  under  different
assumptions or conditions.

INVESTMENT  IN   UNCONSOLIDATED   JOINT   VENTURE.   We,  through  an  operating
partnership,  have a 50%  non-controlling  limited  partnership  interest in one
unconsolidated joint venture.  This investment is not consolidated because we do
not exercise  significant control over major operating and financial  decisions.
We  account  for  this  joint  venture  interest  using  the  equity  method  of
accounting.

FAIR VALUE OF FINANCIAL INSTRUMENTS.  Our financial instruments include cash and
cash equivalents,  accounts receivable, accounts payable, and debt. Considerable
judgment is required in  interpreting  market data to develop  estimates of fair
value. Our estimates of fair value are not necessarily indicative of the amounts
that we could realize in a current market exchange.  The use of different market
assumptions  and/or  estimation  methodologies may have a material effect on the
estimated fair value amounts.  Cash and cash equivalents,  accounts  receivable,
and accounts payable are carried at amounts that  approximate  their fair values
due to their  short-term  maturities.  The carrying amounts of our variable rate
debt  approximate  fair value since the interest rates on these  instruments are
equivalent  to rates  currently  offered to us. For fixed rate debt, we estimate
fair value by using  discounted  cash flow analyses based on borrowing rates for
similar kinds of borrowing arrangements.

STOCK-BASED  COMPENSATION.  In December 2004,  the FASB issued SFAS 123R,  which
addresses the accounting for stock options.  SFAS 123R requires that the cost of
all  employee,   director  and  consultant  stock  options,  as  well  as  other
equity-based compensation arrangements, be reflected in the financial statements
based on the  estimated  fair value of the awards.  SFAS 123R is an amendment to
SFAS 123 and  supersedes  APB 25. SFAS 123R is  applicable  to any award that is
settled or measured in stock,  including stock options,  restricted stock, stock
appreciation  rights,  stock units,  and employee stock purchase  plans. We have
adopted  the  requirements  of SFAS 123R  effective  January  1, 2006  using the
modified prospective method of transition.  Accordingly,  prior periods have not
been restated.  The adoption of this standard did not have a material  effect on
our condensed  consolidated  statements  of  operations  or financial  position.
Compensation  cost under SFAS 123R may differ due to different  assumptions  and
treatment of forfeitures.

REVENUE RECOGNITION. Rental revenue is recognized on the straight-line method of
accounting  required by GAAP under which  contractual rent payment increases are
recognized evenly over the lease term,  regardless of when the rent payments are
received by us. The difference  between recognized rental income and rental cash
receipts is recorded as "Deferred rent receivable" on the condensed consolidated
balance sheets.

Rental revenue is affected if existing tenants  terminate or amend their leases.
We try to  identify  tenants  who may be likely  to  declare  bankruptcy,  cease
operations or are likely to seek a negotiated settlement of their obligation. By
anticipating these events in advance,  we expect to take steps to minimize their
impact on our  reported  results of  operations  through  lease  renegotiations,
reserves against deferred rent, and other  appropriate  measures.  Our judgments
and  estimations  about  tenants'  capacity  to  continue  to meet  their  lease
obligations

                                     - 14 -
<PAGE>

will affect the rental revenue  recognized.  Material  differences may result in
the amount and timing of our rental  revenue for any period if we made different
judgments or estimations.

SFAS No. 66,  "Accounting  for Sales of Real Estate"  ("SFAS  66"),  establishes
accounting standards for recognizing profit or loss on sales of real estate. The
gain on the  sale is only  recognized  proportionately  as the  seller  receives
payments from the purchaser.  Interest income is recognized on an accrual basis,
when appropriate.

Lease  termination  fees are  recognized  as other income when there is a signed
termination  letter agreement,  all of the conditions of the agreement have been
met, and when the tenant no longer has the right to occupy the  property.  These
fees are paid by tenants who want to terminate  their lease  obligations  before
the end of the contractual  term of the lease. We cannot predict or forecast the
timing or amounts of future lease termination fees.

We recognize income from rent, tenant  reimbursements and lease termination fees
and other income once all of the following  criteria are met in accordance  with
SEC Staff Accounting Bulletin 104:

-    the agreement has been fully executed and delivered;
-    services have been rendered;
-    the amount is fixed and determinable; and
-    collectibility is reasonably assured.

With regard to critical accounting policies, where applicable, we have explained
and discussed the criteria for  identification  and  selection,  methodology  in
application  and impact on the financial  statements with the Audit Committee of
our Board of Directors. The Audit Committee has reviewed the critical accounting
policies we identified.

                                     - 15 -
<PAGE>


RESULTS OF OPERATIONS

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006

As of September  30, 2007,  through our  controlling  interests in the operating
partnerships,  we  owned  109  properties  totaling  approximately  7.9  million
rentable  square feet  compared to 110  properties  totaling  approximately  7.9
million  rentable  square  feet  owned  by us as of  September  30,  2006.  This
represents  a net  decrease  of  approximately  1.0% in  total  rentable  square
footage, as we acquired four R&D properties  consisting of approximately 247,100
rentable  square feet and sold five R&D properties  consisting of  approximately
321,900  rentable  square feet since the third quarter of 2006.  Included in the
7.9 million rentable square feet are approximately  854,000 rentable square feet
(or 16  buildings),  which are in the process of being  rezoned for  residential
development.

Rental  revenue from real estate for the three and nine months  ended  September
30,  2007  compared  to the same  three- and  nine-month  periods in 2006 are as
follows:

<TABLE>
<CAPTION>
                                 Three Months Ended September 30,
                                 --------------------------------
                                                                                           % Change by
                                     2007              2006              $ Change         Property Group
                                 -------------     --------------     ---------------     ---------------
                                               (dollars in thousands)
<S>                               <C>                <C>                <C>                  <C>
       Same Property (1)           $18,429            $21,890            ($3,461)             (15.8%)
       2006 Acquisitions               554                554                  -                   -
       2007 Acquisitions                17                  -                 17                100%
                                 -------------     --------------     ---------------
          Total                    $19,000            $22,444           ($3,444)             (15.3%)
                                 =============     ==============     ===============


                                 Nine Months Ended September 30,
                                 --------------------------------
                                                                                           % Change by
                                     2007              2006              $ Change         Property Group
                                 -------------     --------------     ---------------     ---------------
                                               (dollars in thousands)

       Same Property (1)           $59,651            $67,063            ($7,412)             (11.1%)
       2006 Acquisitions             1,661              1,218                443               36.4%
       2007 Acquisitions                38                  -                 38                100%
                                 -------------     --------------     ---------------
          Total                    $61,350            $68,281            ($6,931)             (10.2%)
                                 =============     ==============     ===============
</TABLE>

(1)  "Same Property" is defined as properties  owned by us prior to 2007 that we
     still owned as of September 30, 2007.

RENTAL REVENUE FROM REAL ESTATE FROM CONTINUING OPERATIONS
For the quarter  ended  September  30,  2007,  rental  revenue  from real estate
decreased by approximately  ($3.4) million,  or (15.3%),  from $22.4 million for
the three months ended  September 30, 2006 to $19.0 million for the three months
ended September 30, 2007. For the nine months ended  September 30, 2007,  rental
revenue from real estate decreased by approximately  ($6.9) million, or (10.2%),
from $68.3 million for the nine months ended September 30, 2006 to $61.4 million
for the nine months  ended  September  30, 2007.  The decline in rental  revenue
resulted  primarily from renewing  existing leases at lower rental rates and the
loss of several  tenants due to lease  terminations,  relocation or cessation of
their  operations  since  September 30, 2006, all of which resulted from current
adverse market conditions.  Rental revenue was offset by amortization expense of
approximately  ($0.5) million for the three months ended September 30, 2006, and
($4.1) million and ($1.4)  million for the nine months ended  September 30, 2007
and 2006, respectively, for an above-market lease intangible asset. The increase
year-over-year  was attributable to a lease  termination in the first quarter of
2007,  which  resulted in the  write-off  of all  remaining  above-market  lease
intangible  asset.  Our occupancy  rate at September 30, 2007 was  approximately
62.6%, compared to approximately 64.2% at September 30, 2006.

EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE
As of September 30, 2007, we had  investments in three R&D  buildings,  totaling
466,600 rentable square feet, through an unconsolidated joint venture,  TBI-MWP,
in which we acquired a 50%  interest  in January  2003 from the Berg Group under
the Berg Land  Holdings  Option  Agreement.  We have a  non-controlling  limited
partnership  interest  in this joint  venture,  which we  account  for using the
equity method of accounting.  For the three months ended  September 30, 2007, we
recorded   equity  in  earnings  from  the   unconsolidated   joint  venture  of
approximately  $0.37 million compared to equity in earnings of $0.86 million for
the same period in 2006.  The decline was due to a $0.44  million gain from sale
of real estate in 2006 that did not recur in 2007.  For the  nine-month  periods
ended  September 30, 2007 and 2006,  equity in earnings from the  unconsolidated
joint venture was approximately  $1.06 million and $1.54 million,  respectively.
The occupancy rate for the  properties  owned by this joint venture at September
30, 2007 and 2006 was 100%.

LEASE TERMINATION INCOME
Lease  termination  fees for the three  months  ended  September  30,  2007 were
approximately  $47.2 million.  Lease  termination fees for the nine months ended
September 30, 2007 and 2006 were approximately  $57.5 million and $16.1 million,
respectively.  These  fees were  paid by  tenants  who  terminated  their  lease
obligations  before the end of the  contractual  term of the lease by  agreement
with us. We do not consider those transactions to be recurring items.

                                     - 16 -

<PAGE>

OTHER INCOME FROM CONTINUING OPERATIONS
Other income of approximately  $1.9 million for the three months ended September
30, 2007 included  approximately  $0.8 million from interest,  $0.2 million from
management  fees and $0.9 million  from  miscellaneous  income.  Other income of
approximately  $1.0  million  for the three  months  ended  September  30,  2006
included approximately $0.6 million from interest,  $0.3 million from management
fees and $0.2  million  from  security  deposit  forfeitures  and  miscellaneous
income.  For  the  nine  months  ended  September  30,  2007,  other  income  of
approximately $5.9 million included  approximately $1.6 million from a forfeited
deposit under a contract for the sale of property,  $2.1 million from  interest,
$0.8 million from  management  fees,  $0.3 million from a bankruptcy  settlement
claim and $1.1 million  from  security  deposit  forfeitures  and  miscellaneous
income.  For  the  nine  months  ended  September  30,  2006,  other  income  of
approximately  $2.8 million included  approximately  $1.5 million from interest,
$0.8 million from management  fees and $0.5 million from  bankruptcy  settlement
claims, security deposit forfeitures and miscellaneous income.

EXPENSES FROM CONTINUING OPERATIONS
Property  operating  expenses and real estate taxes during the third  quarter of
2007 increased by  approximately  $1.3 million,  or 25.7%,  from $4.9 million to
$6.2  million  for  the  three  months  ended   September  30,  2006  and  2007,
respectively.  The increase in 2007 is primarily  attributable to a write-off of
approximately $1.0 million of lease commissions  related to a lease termination.
Tenant  reimbursements  increased by approximately  $0.2 million,  or 6.0%, from
$3.3 million for the three months ended  September  30, 2006 to $3.5 million for
the three months ended September 30, 2007 due to reimbursements of non-recurring
operating  expenses.  Certain expenses such as property  insurance,  real estate
taxes,  and other  fixed  operating  expenses  are not  recoverable  from vacant
properties,  however.  For the nine months ended  September  30, 2007,  property
operating  expenses  and real  estate  taxes  increased  by  approximately  $1.7
million,  or 12.9%,  from $13.6 million for the nine months ended  September 30,
2006 to $15.3 million for the nine months ended September 30, 2007. The increase
in property  operating  expenses  and real estate taxes was mainly due to higher
lease commission expense and property taxes. General and administrative expenses
increased by  approximately  $0.5 million,  or 84.9%,  from $0.5 million to $1.0
million for the three months ended  September  30, 2006 and 2007,  respectively.
The increase in general and administrative  expenses was primarily due to higher
legal fees associated with a potential acquisition of the Company,  salaries and
wages and share-based  compensation expense. For the nine months ended September
30,  2006  and  2007,   general  and   administrative   expenses   increased  by
approximately  $0.6  million,  or 31.4%,  from  $1.8  million  to $2.4  million,
respectively, for similar reasons.

Real estate  depreciation and amortization  expense remained relatively constant
at approximately  $5.5 million for the three months ended September 30, 2007 and
2006.  Real  estate   depreciation   and  amortization   expense   increased  by
approximately $1.1 million, or 6.8%, from $16.0 million to $17.1 million for the
nine months ended  September 30, 2006 and 2007,  respectively.  The increase was
attributable  primarily to the  write-offs  of additional  amortization  expense
relating  to  in-place  lease value  intangible  assets  pursuant to SFAS 141 in
connection with two lease terminations and additional tenant improvements.

Interest expense decreased by approximately ($0.1) million, or (2.1%), from $5.2
million for the three  months ended  September  30, 2006 to $5.1 million for the
three months ended September 30, 2007 due to lower total debt in 2007.  Interest
expense  (related  parties) was  approximately  $0.2 million in both three-month
periods ended  September 30, 2007 and 2006.  Total debt  outstanding,  including
amounts due related  parties,  decreased by  approximately  ($8.2)  million,  or
(2.3%),  from $357.8  million as of September  30, 2006 to $349.6  million as of
September 30, 2007. Overall interest expense,  including amounts paid to related
parties,  for the quarter ended  September 30, 2007  decreased by  approximately
($0.1) million compared to the same quarter a year ago.

Interest expense  decreased by  approximately  ($0.4) million,  or (2.6%),  from
$15.6 million for the nine months ended  September 30, 2006 to $15.2 million for
the nine months ended September 30, 2007. Interest expense (related parties) was
approximately  $0.6  million for the nine months  ended  September  30, 2007 and
2006.

INCOME FROM DISCONTINUED OPERATIONS
The following table depicts the amounts of income from  discontinued  operations
for the three and nine months ended September 30, 2007 and 2006.
<TABLE>
<CAPTION>

                                                            Three Months Ended September 30,   Nine Months Ended September 30,
                                                             ------------------------------    -------------------------------
                                                                 2007             2006             2007             2006
                                                              -----------     ------------     ------------     ------------
                                                                                  (dollars in thousands)
                                                                                       (unaudited)
<S>                                                           <C>                 <C>          <C>              <C>
         (Loss)/income attributable to discontinued operations ($   11)            $65          $    91          $ 1,260
         Gain on disposal of discontinued operations             6,529               -            6,529                -
         Minority interests in earnings attributable to
             discontinued operations                            (5,398)            (55)          (5,488)          (1,060)
                                                              -----------     ------------     ------------     ------------
         Income from discontinued operations                    $1,120             $10          $ 1,132          $   200
                                                              ===========     ============     ============     ============
</TABLE>

In  accordance  with our  adoption of SFAS 144, in the third  quarter of 2007 we
sold two R&D properties and classified them as discontinued  operations,  and in
the third quarter of 2006 we classified  three R&D properties as assets held for
sale  and  sold  them in the  fourth  quarter  of 2006  and  classified  them as
discontinued  operations.  The  income to common  stockholders  attributable  to
discontinued  operations  from  these  properties  for the  three  months  ended
September  30,  2007  and 2006  was  approximately  $1.1  million  and  $10,000,
respectively.  The income to common  stockholders  attributable  to discontinued
operations  from these  properties for the nine months ended  September 30, 2007
and 2006 was approximately $1.1 million and $0.2 million, respectively.

                                     - 17 -

<PAGE>

NET INCOME TO COMMON STOCKHOLDERS AND NET INCOME TO MINORITY INTERESTS
Net income to common  stockholders  increased by approximately $9.8 million,  or
467.0%, from $2.1 million for the three months ended September 30, 2006 to $11.9
million for the same period in 2007.  The  minority  interest  portion of income
increased by approximately  $39.9 million,  or 458.0%, from $8.7 million for the
three  months  ended  September  30, 2006 to $48.6  million for the three months
ended  September  30, 2007.  The increase in the  quarter's  net income for both
common  stockholders  and minority  interests  was primarily due to higher lease
termination  fees in the  third  quarter  of  2007.  For the nine  months  ended
September  30,  2007 and 2006,  the  minority  interest  portion  of income  was
approximately $65.0 million and $40.0 million,  respectively,  and net income to
common   stockholders  was   approximately   $16.2  million  and  $9.2  million,
respectively.  The  increase  in net income  for both  common  stockholders  and
minority  interests in the first nine months of 2007 was  primarily  from higher
lease  termination  fee  income,  offset  by  lower  rental  income  and  higher
amortization expenses.

Minority  interest in net income has been calculated by taking the net income of
the operating partnerships (on a stand-alone basis) multiplied by the respective
minority  interest  ownership  percentage.   Minority  interests  represent  the
ownership  interest of all limited partners in the operating  partnerships taken
as a whole, which was approximately 81% as of September 30, 2007 and 2006.

CHANGES IN FINANCIAL CONDITION

The most significant  changes in our financial condition during the three months
ended September 30, 2007 resulted from the disposition of two R&D properties and
the acquisition of one R&D property.

At September 30, 2007, total investments in properties  increased on a net basis
by approximately  $34.6 million from December 31, 2006 primarily due to four R&D
property  acquisitions  consisting of approximately 247,000 rentable square feet
located  in the  Silicon  Valley,  the  acquisition  of 55 acres of vacant  land
located in Morgan Hill,  California and the  construction  of additional  tenant
improvements.

Total  stockholders'  equity, net, increased by approximately $11.0 million from
December 31, 2006 as we obtained additional capital from the issuance of 196,500
shares of our common  stock for the  exchange  of O.P.  units and a decrease  in
accumulated  deficit of approximately  $7.9 million.  The newly issued shares of
common stock increased additional paid-in capital by approximately $2.6 million.
Share-based   compensation   relating  to  grants  of  stock  options  increased
additional paid-in capital by approximately $0.5 million.

LIQUIDITY AND CAPITAL RESOURCES

We expect a slight increase in operating cash flows from our operating  property
portfolio  in 2007 as compared to 2006.  The increase in cash flows is resulting
from early lease  terminations.  If we are unable to lease a significant portion
of the approximately 227,000 rentable square feet scheduled to expire during the
remainder of 2007 or an equivalent  amount of our currently  available  space of
approximately  2.9 million  rentable  square feet,  however,  our operating cash
flows after 2007 may be affected adversely. With the expectation of lower rental
revenues for the  remainder of 2007,  we expect our  properties'  net  operating
income to show a year over year decline  when  compared to 2006 driven by excess
capacity of commercial  office and R&D space in the Silicon Valley.  We are also
subject to risks of decreased occupancy through tenant defaults and bankruptcies
and potential reduction in rental rates upon renewal of properties,  which would
result in reduced cash flow from operations.  Cash flows from lease terminations
are  non-recurring  and to maintain or increase cash flows in the future we must
re-lease our vacant properties.

We expect our principal  source of liquidity for  distributions  to stockholders
and O.P. unit holders,  debt service,  leasing commissions and recurring capital
expenditures to come from cash provided by operations or future  borrowings.  We
expect these sources of liquidity to be adequate to meet projected distributions
to stockholders and other presently anticipated liquidity  requirements in 2007.
We  expect to meet our  long-term  liquidity  requirements  for the  funding  of
property  development,  property  acquisitions and other material  non-recurring
capital  improvements  through  cash  and  investments,  long-term  secured  and
unsecured  indebtedness and the issuance of additional  equity securities by us.
We have the ability to meet  short-term  obligations  or other  liquidity  needs
based on cash  reserves  or other  short-term  borrowings.  We expect  our total
interest expense to increase through new financing activities.  In the remainder
of 2007,  we will be  obligated to make  payments  totaling  approximately  $2.8
million  of debt  principal  under  mortgage  notes  without  regard to any debt
refinancing or new debt obligations that we might incur, or optional payments of
debt principal.

Cash and cash  equivalents  increased by  approximately  $4.0 million from $33.8
million as of  December  31,  2006 to $37.8  million as of  September  30,  2007
primarily from lease termination fees.

Restricted cash totaled approximately $65.5 million as of September 30, 2007. Of
this amount,  approximately  $15.5  million  represents  proceeds  received from
property  sales and interest  income held in a separate  cash account at a trust
company for future use in  tax-deferred  exchanges.  The remaining $50.0 million
represents  cash held by our  consolidated  VIE from a lease  termination in the
third  quarter  of 2007.  We  include  this in our  restricted  cash  under  the
principles  of FIN 46R.  We do not  possess or control  these  funds or have any
rights to receive them except as provided in the applicable agreements, however.
The restricted cash is not available for distribution to stockholders.

                                     - 18 -

<PAGE>


DISTRIBUTIONS
On October 4, 2007, we paid  dividends of $0.16 per share of common stock to all
common  stockholders  of record as of September 28, 2007. On the same date,  the
operating partnerships paid a distribution of $0.16 per O.P. unit to all holders
of O.P. units.  Aggregate dividends and distributions  amounted to approximately
$16.8  million.  For the  remainder  of 2007,  we expect to maintain our current
quarterly dividend payment rate to common  stockholders and O.P. unit holders of
$0.16 per share.  However,  distributions  are declared at the discretion of our
Board of Directors and are subject to actual cash  available  for  distribution,
our financial  condition,  capital  requirements and such other factors,  as our
Board of Directors deems relevant.

DEBT
At  September  30,  2007,  we had total  indebtedness  of  approximately  $349.5
million,  including  $340.2 million of fixed rate mortgage debt and $9.3 million
debt under the Berg Group  mortgage note (related  parties),  as detailed in the
table below.  The Allianz and SCVNB loans  contain  certain  financial  loan and
reporting covenants as defined in the loan agreements. As of September 30, 2007,
we were in compliance with these loan covenants.

CONTRACTUAL OBLIGATIONS
The following table  identifies the contractual  obligations as of September 30,
2007 that will impact our liquidity and cash flow in future periods:
<TABLE>
<CAPTION>

                                   ------------ ------------ ------------- ------------ ------------- ------------ ------------
                                       2007         2008         2009          2010          2011      Thereafter      Total
                                   ------------ ------------ ------------- ------------ ------------- ------------ ------------
                                                                      (dollars in thousands)
<S>                                  <C>       <C>             <C>         <C>            <C>         <C>          <C>
    Long-Term Debt Obligations(1)     $2,816    $121,589        $9,561      $10,105        $10,681     $194,808     $349,560
    Operating Lease Obligations (2)       24          24             -            -              -            -           48
                                   ------------ ------------ ------------- ------------ ------------- ------------ ------------
    Total                             $2,840    $121,613        $9,561      $10,105        $10,681     $194,808     $349,608
                                   ============ ============ ============= ============ ============= ============ ============
</TABLE>

(1)  Our  long-term  debt  obligations  are set forth in detail in the  schedule
     below.
(2)  Our operating lease  obligations  relate to a lease of our corporate office
     facility from a related party.

                                     - 19 -

<PAGE>


The following  table sets forth  information  regarding  debt  outstanding as of
September 30, 2007:

<TABLE>
<CAPTION>
                                                                                                           Maturity      Interest
           Debt Description                          Collateral Properties                 Balance           Date          Rate
-------------------------------------------- -------------------------------------- -------------------- ------------- ------------
                                                                                   (dollars in thousands)
Line of Credit:
<S>                                                                                     <C>                   <C>           <C>
Santa Clara Valley National Bank             Not Applicable                                      -             12/07          (3)
                                                                                    --------------------

Mortgage Notes Payable (related parties):    5300 & 5350 Hellyer Avenue, San Jose, CA     $  9,335              6/10         7.65%
                                                                                    --------------------
Mortgage Notes Payable(1):
Prudential Insurance Co. of America(2)       10300 Bubb Road, Cupertino, CA                113,171             10/08         6.56%
                                             10500 N. De Anza Boulevard, Cupertino, CA
                                             4050 Starboard Drive, Fremont, CA
                                             45738 Northport Loop, Fremont, CA
                                             450 National Avenue, Mountain View, CA
                                             6311 San Ignacio Avenue, San Jose, CA
                                             6321 San Ignacio Avenue, San Jose, CA
                                             6325 San Ignacio Avenue, San Jose, CA
                                             6331 San Ignacio Avenue, San Jose, CA
                                             6341 San Ignacio Avenue, San Jose, CA
                                             6351 San Ignacio Avenue, San Jose, CA
                                             3236 Scott Boulevard, Santa Clara, CA
                                             3560 Bassett Street, Santa Clara, CA
                                             3570 Bassett Street, Santa Clara, CA
                                             3580 Bassett Street, Santa Clara, CA
                                             1135 Kern Avenue, Sunnyvale, CA
                                             1212 Bordeaux Lane, Sunnyvale, CA
                                             1230 E. Arques, Sunnyvale, CA
                                             1250 E. Arques, Sunnyvale, CA
                                             1170 Morse Avenue, Sunnyvale, CA
                                             1600 Memorex Drive, Santa Clara, CA
                                             1688 Richard Avenue, Santa Clara, CA
                                             3540 Bassett Street, Santa Clara, CA
                                             3542 Bassett Street, Santa Clara, CA
                                             3544 Bassett Street, Santa Clara, CA
                                             3550 Bassett Street, Santa Clara,CA

Northwestern Mutual Life Insurance Co.(4)    1750 Automation Parkway, San Jose, CA          85,844              1/13         5.64%
                                             1756 Automation Parkway, San Jose, CA
                                             1762 Automation Parkway, San Jose, CA
                                             6320 San Ignacio Avenue, San Jose, CA
                                             6540-6541 Via Del Oro, San Jose, CA
                                             6385-6387 San Ignacio Avenue, San Jose, CA
                                             2251 Lawson Lane, Santa Clara, CA
                                             1325 McCandless Drive, Milpitas, CA
                                             1650-1690 McCandless Drive, Milpitas, CA
                                             20605-20705 Valley Green Drive, Cupertino, CA

Allianz Life Ins. Co.(Allianz Loan I)(5)     5900 Optical Court, San Jose, CA               24,022              8/25         5.56%

Allianz Life Ins. Co.(Allianz Loan II)(5)    5325-5345 Hellyer Avenue, San Jose, CA        117,188              8/25         5.22%
                                             1768 Automation Parkway, San Jose, CA
                                             2880 Scott Boulevard, Santa Clara, CA
                                             2890 Scott Boulevard, Santa Clara, CA
                                             2800 Scott Boulevard, Santa Clara, CA
                                             20400 Mariani Avenue, Cupertino, CA
                                             10450-10460 Bubb Road, Cupertino, CA
                                                                                    --------------------
                                                                                           340,224
                                                                                    --------------------

                                                                                    --------------------
TOTAL                                                                                     $349,560
                                                                                    ====================
</TABLE>


(1)  Mortgage notes payable generally require monthly  installments of principal
     and interest ranging from  approximately  $177,000 to $840,000 over various
     terms extending  through the year 2025. The weighted  average interest rate
     of mortgage notes payable was 5.85% at September 30, 2007.
(2)  The  Prudential  Insurance  loan is  payable  in  monthly  installments  of
     approximately  $827,000,  which  includes  principal  (based upon a 30-year
     amortization)  and interest.  A limited  partner who is not a member of the
     Berg Group has guaranteed  approximately  $12.0 million of this debt. Costs
     and  fees  incurred  with  obtaining  this  loan  aggregated  approximately
     $900,000,  which were deferred and amortized  over the loan period.  In the
     third quarter of 2007,  the Company sold 45700  Northport  Loop in Fremont,
     California  and 1170  Morse  Avenue in  Sunnyvale,  California,  which were
     collateral  properties under the Prudential Insurance loan.  Prudential has
     agreed  to  release  these   properties   without  delivery  of  substitute
     properties  provided  that the  Company  pay a fee of $40,000  and  deposit
     $1,500,000 in escrow with  Prudential for a full year. The Company made the
     payments in the fourth quarter of 2007.
(3)  Interest  rate equal to LIBOR plus 1.75%.  The Santa Clara Valley  National
     Bank ("SCVNB") line of credit contains certain financial loan and reporting
     covenants as defined in the loan agreements, including minimum tangible net
     worth and debt  service  coverage  ratio.  As of September  30,  2007,  the
     Company was in compliance with these loan covenants.  SCVNB was acquired by
     Wells  Fargo Bank and the  Company is in the  process of  transferring  its
     day-to-day primary banking  relationship to Heritage Bank of Commerce.  The
     SCVNB line of credit will expire in December  2007,  and at this time,  the
     Company does not perceive a need to establish a new line of credit.
(4)  The Northwestern  loan is payable in monthly  installments of approximately
     $696,000,  which includes principal (based upon a 20-year amortization) and
     interest.  Costs and fees  incurred  with  obtaining  this loan  aggregated
     approximately  $675,000,  which were deferred and  amortized  over the loan
     period.
(5)  The  Allianz  loans  are  payable  in  monthly  aggregate  installments  of
     approximately  $1,017,000,  which includes  principal (based upon a 20-year
     amortization)  and interest.  Costs and fees incurred with obtaining  these
     loans  aggregated  approximately   $1,089,000,   which  were  deferred  and
     amortized  over  the  loan  periods.  The  Allianz  loans  contain  certain
     customary covenants as defined in the loan agreements.  As of September 30,
     2007, the Company was in compliance with these loan covenants.

                                     - 20 -

<PAGE>

At September 30, 2007, our debt to total market  capitalization  ratio, which is
computed  as our  total  debt  outstanding  divided  by the  sum of  total  debt
outstanding  plus the market value of common stock (based upon the closing price
of $12.15 per share on September 28, 2007) on a fully diluted  basis,  including
the conversion of all O.P. units into common stock, was approximately  21.4%. On
September  28,  2007,  the  last  trading  day  in  the  quarter,  total  market
capitalization was approximately $1.63 billion.

At September 30, 2007, the  outstanding  balance  remaining  under certain notes
that we owed to the operating  partnerships was approximately $1.9 million.  The
due date of these notes has been extended to September  30, 2008.  The principal
amount of these notes, along with the interest expense, which is interest income
to  the  operating  partnerships,  is  eliminated  in  consolidation  and is not
included  in the  corresponding  line items  within the  condensed  consolidated
financial  statements.  However,  the interest  income  earned by the  operating
partnerships,  which is interest expense to us, in connection with this debt, is
included in the  calculation of minority  interests as reported on the condensed
consolidated  statement of operations,  thereby  reducing our net income by this
same amount.  At present,  our only means for  repayment of this debt is through
distributions that we receive from the operating partnerships that are in excess
of the  amount  of  dividends  to be  paid  to our  stockholders  or by  raising
additional equity capital.

HISTORICAL CASH FLOWS

Comparison of the nine months ended  September 30, 2007 to the nine months ended
September 30, 2006

Net cash provided by operating  activities  for the nine months ended  September
30, 2007 was approximately  $29.9 million compared to $28.2 million for the same
period in 2006. Cash flow increases came primarily from lease  termination fees,
a forfeited deposit under a contract for the sale of property, and rent payments
from M&M, LLC in 2007 (see Note 5 of Notes to Condensed  Consolidated  Financial
Statements  in Part I,  Item  1,  above).  Higher  leasing  commission  payments
(included  in other  assets) in 2007  compared to 2006 reduced the amount of the
overall increase in cash flows.

Net cash used in  investing  activities  was  approximately  ($8.3)  million and
($2.0)  million  for  the  nine  months  ended  September  30,  2007  and  2006,
respectively.  Cash used in  investing  activities  during the nine months ended
September 30, 2007 related  principally to the acquisition of 50 acres of vacant
land at the Morgan Hill Ranch in Morgan Hill, California for approximately $25.5
million,  the  acquisition of five acres of vacant land at the Morgan Hill Ranch
in Morgan Hill,  California for approximately $2.3 million,  and the acquisition
of three R&D properties at Montague  Expressway in Milpitas,  California and one
R&D property at 5845 Hellyer Avenue in San Jose,  California  for  approximately
$19.7  million.  The  acquisition  at Montague  Expressway  was  completed  as a
tax-deferred  exchange  transaction  involving  our  former  R&D  properties  at
2033-2243  Samaritan  Drive  in  San  Jose,  California.  The  remaining  excess
restricted  cash of  approximately  $0.6 million was  transferred to our general
cash  account.   Capital   expenditures  for  real  estate   improvements   were
approximately $4.6 million for the nine months ended September 30, 2007.

Net cash used in investing activities during the nine months ended September 30,
2006  related  principally  to the  acquisition  of the  property  at 233  South
Hillview Drive in Milpitas, California for approximately $13.5 million, pursuant
to a tax-deferred  exchange transaction involving our former R&D property at 800
Embedded Way in San Jose,  California.  Excess  restricted cash of approximately
$1.8 million from the sale of 800  Embedded Way was  transferred  to our general
cash  account.   Capital   expenditures  for  real  estate   improvements   were
approximately $1.3 million for the nine months ended September 30, 2006.

Net cash used in financing activities was approximately  ($17.6) million for the
nine months ended September 30, 2007 compared to  approximately  ($15.1) million
for the nine months ended  September  30, 2006.  During the first nine months of
2007,  we used  approximately  $8.2  million  to pay  outstanding  debt and paid
approximately $9.4 million of dividends to common stockholders.  During the same
period in 2006,  we  received  approximately  $0.8  million  from  stock  option
exercises,  received  approximately  $1.6  million  from the refund of an appeal
bond,  used   approximately   $7.8  million  to  pay   outstanding   debt,  paid
approximately  $9.0  million  of  dividends  to  common  stockholders  and  paid
approximately  $0.7 million to minority interests for distributions in excess of
earnings.

FUNDS FROM OPERATIONS ("FFO")

FFO is a non-GAAP financial measurement used by real estate investment trusts to
measure and compare operating performance.  As defined by NAREIT, FFO represents
net income (loss)  before  minority  interest of O.P. unit holders,  computed in
accordance with GAAP, plus non-recurring events other than "extraordinary items"
under  GAAP,  excluding  gains and losses  from sales of  depreciable  operating
properties,  plus real estate related  depreciation and amortization,  excluding
amortization  of deferred  financing  costs and  depreciation of non-real estate
assets,  and  after  adjustments  for  unconsolidated   partnerships  and  joint
ventures.  FFO does include  impairment  losses for properties held for sale and
held for use. Management considers FFO to be an appropriate supplemental measure
of our operating and financial performance because when compared year over year,
it reflects  the impact to  operations  from trends in occupancy  rates,  rental
rates, operating costs, general and administrative  expenses and interest costs,
providing a perspective not immediately  apparent from net income.  In addition,
management  believes that FFO provides  useful  information  about our financial
performance when compared to other REITs because FFO is generally  recognized as
the industry  standard for reporting the operations of REITs. In addition to the
disclosure  of operating  earnings per share,  we will  continue to use FFO as a
measure of our  performance.  FFO should not be considered as an alternative for
net  income as a measure of  profitability  nor is it  comparable  to cash flows
provided by operating activities  determined in accordance with GAAP, nor is FFO
necessarily  indicative of funds available to meet our cash needs, including the
need to make cash distributions to satisfy REIT requirements.  For example,  FFO
is not adjusted for payments of debt  principal  required under our debt service
obligations.

                                     - 21 -
<PAGE>

Our definition of FFO also assumes  conversion at the beginning of the period of
all convertible  securities,  including minority  interests  represented by O.P.
Units that might be  exchanged  for common  stock.  FFO does not  represent  the
amount available for management's discretionary use; as such funds may be needed
for  capital  replacement  or  expansion,  debt  service  obligations  or  other
commitments and uncertainties.

Furthermore, FFO is not comparable to similarly entitled items reported by other
REITs that do not define FFO exactly as we do.

FFO for the  three  and nine  months  ended  September  30,  2007 and  2006,  as
reconciled to net income to common stockholders, are summarized in the following
table:
<TABLE>
<CAPTION>

                                                  Three Months Ended September 30,              Nine Months Ended September 30,
                                             -----------------------------------------     -----------------------------------------
                                                    2007                   2006                   2007                   2006
                                             ------------------     ------------------     ------------------     ------------------
                                                       (dollars in thousands)                        (dollars in thousands)
<S>                                              <C>                    <C>                  <C>                     <C>
Net income to common stockholders                $11,941                $ 2,106              $ 17,320                $ 9,380
Add:
   Minority interests (1)                         48,420                  8,566                70,098                 40,676
   Depreciation & amortization of real estate(2)   7,184                  6,333                19,986                 18,429
Less:
   Gain on sale of real estate                    (6,529)                  (438)               (6,529)                  (438)
                                             ------------------     ------------------     ------------------     ------------------
FFO                                              $61,016                $16,567              $100,875                $68,047
                                             ==================     ==================     ==================     ==================
</TABLE>

(1)  Minority  interests in net income is calculated by taking the net income of
     the  operating  partnerships  (on a  stand-alone  basis)  multiplied by the
     respective  weighted  average  minority  interests  ownership   percentage.
     Minority  interests for third parties totaling  approximately $130 and $134
     for the three months ended September 30, 2007 and 2006,  respectively,  and
     $371 and $382  for the nine  months  ended  September  30,  2007 and  2006,
     respectively,  were deducted from total  minority  interests in calculating
     FFO.
(2)  Includes our portion of  depreciation  and  amortization of real estate and
     leasing   commissions  from  our  unconsolidated   joint  venture  totaling
     approximately  $189 and $238 for the three months ended  September 30, 2007
     and  2006,  respectively,  and $568 and  $660  for the  nine  months  ended
     September 30, 2007 and 2006,  respectively.  Also includes our amortization
     of  leasing  commissions  of  approximately  $1,426  and $368 for the three
     months  ended  September  30, 2007 and 2006,  respectively,  and $2,187 and
     $1,138 for the nine months ended September 30, 2007 and 2006, respectively.
     Amortization of leasing  commissions is included in the property operating,
     maintenance  and real  estate  taxes line item in the  Company's  condensed
     consolidated statements of operations.

The increase in FFO year-over-year was primarily due to higher lease termination
fee income,  offset by lower rental income and higher  amortization  expenses in
2007 compared to 2006.

DISTRIBUTION POLICY

Our board of directors  determines the amount and timing of distributions to our
stockholders.  The board of directors will consider many factors prior to making
any distributions, including the following:

-    the amount of cash available for distribution;
-    our financial condition;
-    whether to reinvest funds rather than to distribute such funds;
-    our committed and projected capital expenditures;
-    the  amount  of cash  required  for new  property  acquisitions,  including
     acquisitions under existing agreements with the Berg Group;
-    the amount of our annual debt service requirements;
-    prospects  of tenant  renewals  and  re-leases  of  properties  subject  to
     expiring leases;
-    cash required for re-leasing activities;
-    the  annual  distribution  requirements  under the REIT  provisions  of the
     federal income tax laws; and
-    such other factors as the board of directors deems relevant.

We  cannot  assure  you  that we will be  able  to  meet or  maintain  our  cash
distribution objectives.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

We do not believe recently issued  accounting  standards will materially  impact
our financial position, results of operations, or cash flows.

In June 2006, the FASB issued  Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48").  FIN 48 clarifies the  accounting  for  uncertainty in
income taxes recognized in our financial  statements in accordance with SFAS No.
109,  "Accounting  for Income Taxes." The provisions of FIN 48 are effective for
our fiscal year beginning  January 1, 2007. The adoption of FIN 48 on January 1,
2007 is not expected to have a significant impact on our consolidated results of
operations or financial position.

In  September  2006,  the FASB issued SFAS No.  157,  "Fair Value  Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles,  and expands disclosures
about fair value measurements.  The provisions of SFAS 157 are effective for our
fiscal year beginning January 1, 2008. We are currently evaluating the

                                     - 22 -

<PAGE>

impact of the provisions of SFAS 157 and currently cannot estimate the impact to
our consolidated results of operations or financial position.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets and Financial  Liabilities"  ("SFAS  159").  SFAS 159 provides
companies with an option to report selected  financial assets and liabilities at
fair value.  SFAS 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets  and  liabilities  differently.  SFAS  159  is  effective  for  financial
statements  issued for fiscal years  beginning  after  November 15, 2007. We are
evaluating  whether to adopt the provisions of SFAS 159 and cannot  estimate the
impact to our  consolidated  results of operations,  financial  position or cash
flows.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not generally hold market risk sensitive instruments for trading purposes.
We use fixed and variable rate debt to finance our  operations.  Our exposure to
market risk for  changes in  interest  rates  relates  primarily  to our current
variable rate debt and future debt obligations. We are vulnerable to significant
fluctuations  of  interest  rates on our  floating  rate debt and pricing on our
future debt. We manage our market risk by monitoring interest rates where we try
to recognize the  unpredictability  of the financial  markets and seek to reduce
potentially adverse effect on the results of our operations. This takes frequent
evaluation of available lending rates and examination of opportunities to reduce
interest  expense  through  new  sources  of  debt  financing.  Several  factors
affecting the interest rate risk include governmental monetary and tax policies,
domestic  and  international  economics  and other  factors  that are beyond our
control.  The following  table  provides  information  about the principal  cash
flows,  weighted average  interest rates,  and expected  maturity dates for debt
outstanding  as of  September  30,  2007.  The  current  terms of this  debt are
described  in  Item  2,  "Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations - Liquidity  and Capital  Resources."  For
fixed rate debt, we estimate fair value by using  discounted  cash flow analyses
based on borrowing rates for similar kinds of borrowing arrangements.

For fixed rate debt,  the table  presents the  assumption  that the  outstanding
principal  balance at  September  30, 2007 will be paid  according  to scheduled
principal payments and that we will not prepay any of the outstanding  principal
balance.

<TABLE>
<CAPTION>

                                       Three
                                      Months               Year Ending December 31,
                                     Remaining  -----------------------------------------------
                                        2007       2008        2009         2010        2011     Thereafter    Total     Fair Value
                                    ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
                                                                           (dollars in thousands)
 Fixed Rate Debt:
<S>                                     <C>       <C>          <C>         <C>         <C>         <C>        <C>          <C>
   Secured notes payable                 $2,816    $121,589     $9,561      $10,105     $10,681     $194,808   $349,560     $451,126
   Weighted average interest rate         5.85%      5.85%       5.85%       5.85%       5.85%        5.85%
</TABLE>


The primary  market risks we face are interest rate  fluctuations.  We pay lower
rates of interest in periods of  decreasing  interest  rates and higher rates of
interest in periods of increasing interest rates. All of our debt is denominated
in United  States  dollars.  We had no interest  rate caps or interest rate swap
contracts at September 30, 2007.

As of  September  30,  2007,  we had no  interest  rate risk since  there was no
variable rate debt outstanding.

                                     - 23 -

<PAGE>


ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES
We strive to maintain  disclosure  controls and procedures  that are designed to
ensure that information  required to be disclosed in our Exchange Act reports is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's  rules and forms,  and that such  information  is  accumulated  and
communicated to our management,  including our chief executive officer and chief
financial  officer,  as  appropriate,  to allow for timely  decisions  regarding
required  disclosure.  In designing and evaluating  the disclosure  controls and
procedures,  management  recognizes that any controls and procedures,  no matter
how well  designed  and  operated,  can provide  only  reasonable  assurance  of
achieving the desired control objectives and management  necessarily is required
to apply its judgment in evaluating the  cost-benefit  relationship  of possible
controls and procedures.

As  required  by SEC Rule  13a-15(b)  we  conducted  an  evaluation,  under  the
supervision and with the  participation  of our management,  including our Chief
Executive Officer, President and Vice President of Finance, of the effectiveness
of the design and operation of our  disclosure  controls and  procedures.  Based
upon that evaluation,  the Chief Executive Officer, President and Vice President
of Finance concluded that our disclosure  controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e)) were effective as of September 30, 2007.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no material  change in our internal  control over financial  reporting
during the last fiscal  quarter that has materially  affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.

                                     - 24 -

<PAGE>


PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

Legal  proceedings are  incorporated  herein by reference from Part I "Item 1. -
Notes to Condensed Consolidated Financial Statements - Note 10 - Commitments and
Contingencies."

ITEM 1A.  RISK FACTORS

While we  attempt  to  identify,  manage and  mitigate  risks and  uncertainties
associated with our business to the extent  practical  under the  circumstances,
some level of risk and  uncertainty  will always be present.  In addition to the
other  information  contained in this report,  you should  carefully  review the
factors  discussed  under Item 1A of our 2006 Form 10-K which  describes some of
the  risks and  uncertainties  associated  with our  business.  These  risks and
uncertainties  have the potential to materially  affect our business,  financial
condition,  results of operations, cash flows, and future prospects.  Additional
risks and  uncertainties  not  presently  known to us or that we currently  deem
immaterial also may impair our business operations.

ITEM 5.  OTHER INFORMATION

As of October  31,  2007,  we are  continuing  discussions  with two  interested
parties in regarding the possible acquisition of the Company, but otherwise have
ceased  active  efforts to effect an  acquisition  of the Company with any other
parties.

ITEM 6.  EXHIBITS

         31.1     Section 1350 Certificate of CEO
         31.2     Section 1350 Certificate of President & COO
         31.3     Section 1350 Certificate of Principal Financial Officer
         32       Certification pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002

                                     - 25 -
<PAGE>



================================================================================
                                   Signatures

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereto duly authorized.


                                         Mission West Properties, Inc.
                                         (Registrant)


Date: November 8, 2007                   By:    /s/ Carl E. Berg
                                            ------------------------------------
                                            Carl E. Berg
                                            Chief Executive Officer


Date: November 8, 2007                   By:    /s/ Wayne N. Pham
                                            ------------------------------------
                                            Wayne N. Pham
                                            Vice President of Finance and
                                            Controller (Principal Accounting
                                            Officer and Duly Authorized Officer)


                                     - 26 -
<PAGE>