UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549







Form
10-Q





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





For the
quarterly period ended September 30, 2009





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





For the
transition period from _____ to _____





Commission
File Number 1-8383





Mission
West Properties, Inc.


(Exact
name of registrant as specified in its charter)





Maryland
                    (State
      or other jurisdiction of incorporation or organization)
                  95-2635431
                    (I.R.S.
      Employer Identification No.)10050
      Bandley Drive
                    Cupertino,
      California
                    (Address
      of principal executive offices)
                  95014
                    (Zip
      Code)





(408)
725-0700


(Registrant's
telephone number, including area code)








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.   xYes    ̈No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  ̈Yes    ̈No





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  ̈Yes   xNo





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.





As of
November 6, 2009, there were 21,770,211 shares of common stock outstanding, par
value $.001 per share.





Mission
West Properties, Inc.





FORM
10-Q


FOR
THE QUARTER ENDED SEPTEMBER 30, 2009





INDEX





PagePart
      I
                                                Financial
      InformationItem
      1.
                                                Condensed
      Consolidated Financial Statements:Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008
                                                2Condensed
      Consolidated Statements of Operations for the three and nine months ended
      September 30, 2009 and 2008 (unaudited)
                                                3Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008 (unaudited)
                                                4Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                                5Item
      2.
                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                14Item
      3.
                                                Quantitative
      and Qualitative Disclosures about Market Risk
                                                25Item
      4.
                                                Controls
      and Procedures
                                                26Part
      II
                                                Other
      InformationItem
      1.
                                                Legal
      Proceedings
                                                27Item
      1A.
                                                Risk
      Factors
                                                27Item
      6.
                                                Exhibits
                                                27Signatures
                                                28





Exhibits


Exhibit
10.29 - Berg Group Promissory Note, dated October 8, 2009


Exhibit
10.56.3 - Heritage Bank of Commerce Revolving Credit Loan Change in Terms
Agreement, dated August 20, 2009


Exhibit
10.56.4 - Heritage Bank of Commerce Revolving Credit Loan Change in Terms
Agreement, dated October 13, 2009


Exhibit
10.60 - M&M Real Estate Control & Restructuring, LLC Promissory Note,
dated October 2, 2009


Exhibit
10.61 - M&M Real Estate Control & Restructuring, LLC Promissory Note,
dated October 23, 2009


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. § 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002


- 1 -


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)







September 30, 2009
                
                
                December 31, 2008(unaudited)ASSETSInvestments
      in real estate:Land
                
                $
                320,911
                
                
                $
                320,911Buildings
      and improvements
                
                
                799,627
                
                
                
                799,471Real
      estate related intangible assets
                
                
                3,240
                
                
                
                3,240Total
      investments in properties
                
                
                1,123,778
                
                
                
                1,123,622Accumulated
      depreciation and amortization
                
                
                (198,243
                )
                
                
                (180,043
                )Net
      investments in properties
                
                
                925,535
                
                
                
                943,579Investment
      in unconsolidated joint venture
                
                
                3,830
                
                
                
                3,768Net
      investments in real estate
                
                
                929,365
                
                
                
                947,347Cash
      and cash equivalents
                
                
                576
                
                
                
                -Restricted
      cash
                
                
                7,597
                
                
                
                39,478Restricted
      investment in marketable securities
                
                
                11,124
                
                
                
                -Investment
      in marketable securities
                
                
                -
                
                
                
                3,368Deferred
      rent receivables
                
                
                18,516
                
                
                
                17,841Other
      assets, net
                
                
                31,408
                
                
                
                26,251Total
      assets
                
                $
                998,586
                
                
                $
                1,034,285LIABILITIES
      AND EQUITYLiabilities:Mortgage
      notes payable
                
                $
                321,907
                
                
                $
                330,908Mortgage
      note payable (related parties)
                
                
                8,389
                
                
                
                8,761Note
      payable (related parties)
                
                
                5,057
                
                
                
                -Revolving
      line of credit
                
                
                3,573
                
                
                
                13,079Interest
      payable
                
                
                1,530
                
                
                
                1,596Security
      deposits
                
                
                5,026
                
                
                
                5,272Deferred
      rental income
                
                
                5,525
                
                
                
                3,964Dividends
      and distributions payable
                
                
                15,791
                
                
                
                21,055Accounts
      payable and accrued expenses
                
                
                29,283
                
                
                
                17,747Total
      liabilities
                
                
                396,081
                
                
                
                402,382Commitments
      and contingencies (Note 9)Equity: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, 21,770,211 and
      19,748,211 shares issued and outstanding at September 30, 2009 and
      December 31, 2008
                
                
                22
                
                
                
                20Additional
      paid-in capital
                
                
                169,790
                
                
                
                154,412Distributions
      in excess of accumulated earnings
                
                
                (24,912
                )
                
                
                (20,014
                )Total
      stockholders’ equity
                
                
                144,900
                
                
                
                134,418Noncontrolling
      interests
                
                
                457,605
                
                
                
                497,485Total
      equity
                
                
                602,505
                
                
                
                631,903Total
      liabilities and equity
                
                $
                998,586
                
                
                $
                1,034,285





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


- 2 -


MISSION
WEST PROPERTIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(dollars
in thousands, except share and per share amounts)


(unaudited)









Three months ended September
      30,
                
                
                Nine months ended September
    30,2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      revenues:Rental revenue from real
      estate
                
                $
                20,442
                
                
                $
                20,256
                
                
                $
                61,521
                
                
                $
                58,612Tenant
    reimbursements
                
                
                4,566
                
                
                
                4,607
                
                
                
                13,681
                
                
                
                11,900Lease termination
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,921Other income
                
                
                284
                
                
                
                292
                
                
                
                906
                
                
                
                769Total
      operating revenues
                
                
                25,292
                
                
                
                25,155
                
                
                
                76,108
                
                
                
                73,202Operating
      expenses:Property
      operating, maintenance and real estate taxes
                
                
                6,787
                
                
                
                5,839
                
                
                
                20,010
                
                
                
                16,238General and
      administrative
                
                
                589
                
                
                
                605
                
                
                
                1,743
                
                
                
                1,951Depreciation and amortization of
      real estate
                
                
                5,921
                
                
                
                5,759
                
                
                
                18,200
                
                
                
                17,064Total
      operating expenses
                
                
                13,297
                
                
                
                12,203
                
                
                
                39,953
                
                
                
                35,253Operating
      income
                
                
                11,995
                
                
                
                12,952
                
                
                
                36,155
                
                
                
                37,949Other
      income (expenses):Equity
      in earnings of unconsolidated joint venture
                
                
                72
                
                
                
                126
                
                
                
                237
                
                
                
                915Interest and dividend
      income
                
                
                93
                
                
                
                193
                
                
                
                1,158
                
                
                
                965Unrealized gain from
      investment
                
                
                4,464
                
                
                
                -
                
                
                
                4,140
                
                
                
                -Interest expense
                
                
                (5,180
                )
                
                
                (5,023
                )
                
                
                (17,071
                )
                
                
                (14,907
                )Interest expense – related
      parties
                
                
                (202
                )
                
                
                (309
                )
                
                
                (554
                )
                
                
                (1,025
                )Net
      income
                
                
                11,242
                
                
                
                7,939
                
                
                
                24,065
                
                
                
                23,897Net
      income attributable to noncontrolling interests
                
                
                (8,476
                )
                
                
                (6,304
                )
                
                
                (18,083
                )
                
                
                (19,021
                )Net
      income attributable to common stockholders
                
                $
                2,766
                
                
                $
                1,635
                
                
                $
                5,982
                
                
                $
                4,876Net
      income per common share to common stockholders:Basic
                
                $
                0.13
                
                
                $
                0.08
                
                
                $
                0.28
                
                
                $
                0.25Diluted
                
                $
                0.13
                
                
                $
                0.08
                
                
                $
                0.27
                
                
                $
                0.25Weighted
      average shares of common stock outstanding (basic)
                
                
                21,770,211
                
                
                
                19,745,141
                
                
                
                21,717,713
                
                
                
                19,703,066Weighted
      average shares of common stock outstanding (diluted)
                
                
                21,902,387
                
                
                
                19,783,507
                
                
                
                21,858,067
                
                
                
                19,769,148





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


- 3 -





MISSION
WEST PROPERTIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars
in thousands)


(unaudited)







Nine months ended September
    30,2009
                
                
                2008Cash
      flows from operating activities:Net
      income
                
                $
                24,065
                
                
                $
                23,897Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of real estate and in-place leases
                
                
                18,200
                
                
                
                17,064Unrealized
      (gain) from restricted investment in marketable securities
                
                
                (4,140
                )
                
                
                -Dividend
      income from restricted investment in marketable securities
                
                
                (651
                )
                
                
                -Equity
      in earnings of unconsolidated joint venture
                
                
                (237
                )
                
                
                (915
                )Distributions
      from unconsolidated joint venture
                
                
                175
                
                
                
                1,350Interest
      earned on restricted cash
                
                
                (92
                )
                
                
                (829
                )Lease
      termination fee related to restricted cash
                
                
                10,864
                
                
                
                7,285Stock-based
      compensation expense
                
                
                243
                
                
                
                364Other
                
                
                -
                
                
                
                144Changes
      in operating assets and liabilities:Deferred
      rent receivables
                
                
                (675
                )
                
                
                (2,444
                )Other
      assets
                
                
                (5,157
                )
                
                
                (4,245
                )Interest
      payable
                
                
                (26
                )
                
                
                137Security
      deposits
                
                
                (246
                )
                
                
                873Deferred
      rental income
                
                
                1,561
                
                
                
                2,724Accounts
      payable and accrued expenses
                
                
                11,215
                
                
                
                4,989Net
      cash provided by operating activities
                
                
                55,099
                
                
                
                50,394Cash
      flows from investing activities:Improvements
      to real estate assets
                
                
                (156
                )
                
                
                (6,164
                )(Increase)
      in restricted cash
                
                
                (500
                )
                
                
                -Purchase
      of real estate
                
                
                -
                
                
                
                (35,764
                )Restricted
      cash released for purchase of real estate
                
                
                -
                
                
                
                8,082Excess
      restricted cash
                
                
                -
                
                
                
                7,654Proceeds
      from investment in marketable securities
                
                
                3,646
                
                
                
                -Net
      cash provided by (used in) investing activities
                
                
                2,990
                
                
                
                (26,192
                )Cash
      flows from financing activities:Principal
      payments on mortgage notes payable
                
                
                (9,001
                )
                
                
                (8,332
                )Principal
      payments on mortgage note payable (related parties)
                
                
                (372
                )
                
                
                (344
                )Proceeds
      from real estate purchase financing (related parties)
                
                
                -
                
                
                
                19,429Payments
      on real estate purchase financing (related parties)
                
                
                -
                
                
                
                (19,429
                )Proceeds
      from note payable (related parties)
                
                
                29,641
                
                
                
                3,000Payments
      on note payable (related parties)
                
                
                (29,641
                )
                
                
                (3,000
                )Proceeds
      from note payable
                
                
                15,000
                
                
                
                -Net
      (repayments) borrowings on revolving line of credit
                
                
                (9,506
                )
                
                
                11,911Debt
      issuance costs
                
                
                -
                
                
                
                (26
                )Net
      proceeds from exercise of stock options
                
                
                -
                
                
                
                768Distributions
      paid to noncontrolling interests
                
                
                (42,069
                )
                
                
                (40,841
                )Dividends
      paid to common stockholders
                
                
                (11,565
                )
                
                
                (11,029
                )Net
      cash used in financing activities
                
                
                (57,513
                )
                
                
                (47,893
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                576
                
                
                
                (23,691
                )Cash
      and cash equivalents, beginning of period
                
                
                -
                
                
                
                23,691Cash
      and cash equivalents, end of period
                
                $
                576
                
                
                $
                -Supplemental
      information:Cash
      paid for interest
                
                $
                14,841
                
                
                $
                15,720Supplemental
      schedule of non-cash investing and financing activities:Debt
      from seller in connection with real estate purchase (related
      parties)
                
                $
                -
                
                
                $
                19,068Issuance
      of common stock upon conversion of O.P. units
                
                $
                15,138
                
                
                $
                66





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


- 4 -




MISSION
WEST PROPERTIES, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS,CONTINUED


(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 research and
development (“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, 2009, the Company owned a controlling general partnership interest
of 24.00%, 21.85%, 16.31% and 12.52% 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 a 20.63% 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 111 R&D/office
properties, all of which are located in the 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,
2009 and 2008.





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 the Segment Reporting Topic of the
Financial Accounting Standards Board Accounting Standards Codification
(“FASB ASC”) 280 purposes.





2.
            Basis
      of Presentation





Principles of Consolidation
and Basis of 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, 2009, their consolidated
results of operations for the three and nine months ended September 30, 2009 and
2008, and their cash flows for the nine months ended September 30, 2009 and
2008. All significant inter-company balances have been eliminated in
consolidation. The condensed consolidated financial statements as of September
30, 2009 and for the three and nine months ended September 30, 2009 and 2008 and
related footnote disclosures are unaudited. The results of operations for the
three and nine months ended September 30, 2009 are not necessarily indicative of
the results to be expected for the entire year.





The
December 31, 2008 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
(“GAAP”).





Effective
July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the
Accounting Standards Codification (“ASC”) as the primary source of authoritative
GAAP recognized by the FASB to be applied to nongovernmental
entities.  Although the establishment of the ASC did not change
current GAAP, it did change the way we refer to GAAP throughout this document to
reflect the updated referencing convention.


- 5 -




MISSION
WEST PROPERTIES, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS,CONTINUED


(dollars
in thousands, except per share and per square footage)


(unaudited)




The
Company evaluates all joint venture arrangements for consolidation. The
percentage interest in the joint venture, evaluation of control and whether a
variable interest entity (“VIE”) exists are all considered in determining if the
arrangement qualifies for consolidation in accordance with the Consolidation Topic of the FASB
ASC805. As of
September 30, 2009, the Company consolidated one VIE in the accompanying
condensed consolidated balance sheet in connection with an assignment of a lease
agreement with an unrelated party, M&M Real Estate Control &
Restructuring, LLC. See Note 3to Condensed
Consolidated Financial Statements for further discussion of this
transaction.





The
Company has evaluated events subsequent to September 30, 2009 through the time
of the filing of this Form 10-Q.





Stock-Based Option
Compensation Accounting


The Compensation-Stock Compensation
Topic of the FASB ASC 718 addresses the accounting for stock options. It
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. It 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, 2009, the Company had one stock-based
compensation plan.





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





Weighted
      AverageOptions
                      
                      
                      Option
      PriceOutstanding
                      
                      
                      Per ShareBalance,
      December 31, 2008
                      
                      
                      3,332,500
                      
                      
                      $
                      9.62Options
      granted
                      
                      
                      500,000
                      
                      
                      $
                      5.99Options
      forfeited
                      
                      
                      (375,000
                      )
                      
                      $
                      11.33Options
      canceled
                      
                      
                      (200,000
                      )
                      
                      $
                      9.51Balance,
      September 30, 2009
                      
                      
                      3,257,500
                      
                      
                      $
                      8.87





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 the Compensation-Stock Compensation
Topic of the FASB ASC 718, the Company recorded approximately $109 and
$122 of expense for the three months ended September 30, 2009 and 2008,
respectively, and approximately $243 and $364 of expense for share-based
compensation relating to grants of stock options for the nine months ended
September 30, 2009 and 2008, respectively.





As of
September 30, 2009, the total amount of unrecognized compensation cost related
to unvested share-based compensation arrangements granted under the compensation
plan was approximately $316. This cost is expected to be recognized over a
weighted-average period of 1.93 years.





Noncontrolling
Interests


The
Company adopted the noncontrolling interests provisions of the Consolidation Topic of the FASB ASC
805 effective January 1, 2009. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in a consolidated entity,
which should be reported as equity in the parent’s consolidated financial
statements. It requires disclosure, on the face of the consolidated statement of
operations, of those amounts of consolidated net income and other comprehensive
other income attributable to controlling and noncontrolling interests,
eliminating the past practice of reporting amounts of income attributable to
noncontrolling interests as an adjustment in arriving at consolidated net
income.





In
connection with the adoption of noncontrolling interests provisions of the Consolidation Topic of the FASB ASC
805, the Company reclassified into the Company’s condensed consolidated
equity the historical balances related to noncontrolling interests in the
consolidated operating partnerships. At December 31, 2008, the carrying amount
of noncontrolling interests in the consolidated operating partnerships was
approximately $497,485.


- 6 -




MISSION
WEST PROPERTIES, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS,CONTINUED


(dollars
in thousands, except per share and per square footage)


(unaudited)




The
following table presents a reconciliation of the December 31, 2008 and September
30, 2009 carrying amounts for equity and the related amounts of equity
attributable to stockholders’ equity and noncontrolling interests:





EquityCommon
                          Stock
                        
                        
                        Additional
                          Paid-in Capital
                        
                        
                        Distributionsin
                          Excess of
                          Accumulated
                          Earnings
                        
                        
                        Noncontrolling
                          Interests
                        
                        
                        Total(dollars
      in thousands)Balance,
      December 31, 2008
                        
                        $
                        20
                        
                        
                        $
                        154,412
                        
                        
                        $
                        (20,014
                        )
                        
                        $
                        497,485
                        
                        
                        $
                        631,903Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,982
                        
                        
                        
                        18,083
                        
                        
                        
                        24,065Amortization
      of previously granted share awards
                        
                        
                        -
                        
                        
                        
                        242
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        242Conversions
      of operating partnership units
                        
                        
                        2
                        
                        
                        
                        15,136
                        
                        
                        
                        -
                        
                        
                        
                        (15,138
                        )
                        
                        
                        -Cash
      dividends/distributions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (10,880
                        )
                        
                        
                        (42,825
                        )
                        
                        
                        (53,705
                        )Balance,
      September 30, 2009
                        
                        $
                        22
                        
                        
                        $
                        169,790
                        
                        
                        $
                        (24,912
                        )
                        
                        $
                        457,605
                        
                        
                        $
                        602,505





Noncontrolling
interests represent the aggregate partnership interest in the operating
partnership held by the operating partnership limited partner unit holders.
Income allocated to noncontrolling interests is based on the unit holders’
ownership percentage of the operating partnership. Because an O.P. unit is
generally redeemable for cash or a share of common stock at the option of the
Company, it is deemed to be equivalent to a share of common
stock.  Therefore, such transactions are treated as capital
transactions and result in an allocation between stockholders’ equity and
noncontrolling interests in the accompanying condensed balance sheets to account
for the change in the ownership of the underlying equity in the operating
partnerships. The Company’s noncontrolling 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, 2009, these interests accounted for approximately 79.3% of
the ownership interests in the real estate operations of the Company on a
consolidated weighted average basis. The amount of noncontrolling 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
noncontrolling interests’ ownership percentage.





Allocation
of corporate general and administrative expenses to the operating partnerships
is performed based upon shares and O. P. 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 2008 condensed
consolidated financial statements in order to conform to the 2009 presentation.
The reclassifications were to reflect the retrospective adoption of the
noncontrolling interests provisions of the Consolidation Topic of the FASB ASC
805. The reclassification resulted in (i) the reclassification of the
Company’s minority interests in the consolidated operating partnerships to
“noncontrolling interests,” a component of equity on the Company’s condensed
consolidated balance sheets, and (ii) the reclassification of minority interests
to “net income attributable to noncontrolling interests” on the Company’s
condensed consolidated statements of operations. The reclassifications had no
impact on previously reported net income attributable to common stockholders or
net income per common share to common stockholders.





The
following notes, which present interim disclosures as required by the SEC,
highlight significant changes to the notes to the Company’s December 31, 2008
audited consolidated financial statements and should be read together with the
consolidated financial statements and notes thereto included in the Company’s
2008 Annual Report on Form 10-K filed on March 16, 2009.





Accounting
Standards


The Fair Value Measurements and
Disclosures Topic ofthe FASB ASC 820 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. It applies under other accounting
standards that require or permit fair value measurements. Accordingly, this
provision does not require any new fair value measurements. This guidance was
issued to increase consistency and comparability in fair value measurements and
to expand disclosures about fair value measurements. The provision establishes
and requires disclosure of fair value hierarchy that distinguishes between data
obtained from sources independent of the reporting entity and the reporting
entity’s own assumptions about market participant assumptions. The three levels
of hierarchy are 1) using quoted prices in active markets for identical assets
and liabilities, 2) “significant other observable inputs” and 3) “significant
unobservable inputs”. “Significant other observable inputs” can include quoted
prices for similar assets or liabilities in active markets, as well as inputs
that are observable for the asset or liability, such as interest rates, foreign
exchange rates and yield curves that are observable at commonly quoted
intervals. “Significant unobservable inputs” are typically based on an entity’s
own assumptions, as there is little, if any, related market activity. Adoption
on January 1, 2008 did not have a material effect on the Company’s
consolidated financial statements.





The Financial InstrumentsTopic ofthe FASB ASC
825 provides companies with an option to report selected financial
assets and liabilities at fair value. Its objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Adoption on
January 1, 2008 did not have a material effect on the Company’s
consolidated financial statements.




- 7 -


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


The Business CombinationsTopic ofthe FASB ASC 805 changed
the accounting for business combinations. Under the provision, an acquiring
entity is required to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition date fair value with limited exceptions. It
changed the accounting treatment and disclosure for certain specific items in a
business combination. The provision requires that acquisition-related costs and
restructuring costs be recognized separately from the business combination and
expensed as incurred. The provision applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Based on historical acquisition costs and activity levels, the adoption of the
Business CombinationsTopic ofthe FASB ASC 805 on January
1, 2009 did not have a material impact on the Company’s results of operations or
financial position.





The
noncontrolling interests provisions of the ConsolidationTopic ofthe FASB ASC
805 requires that noncontrolling interests (previously referred to
as minority interests) be presented as a component of consolidated equity,
eliminates “minority interest accounting” such that the amount of net income
attributable to noncontrolling interests will be presented as part of
consolidated net income on the consolidated statement of operations and not as a
separate component of income and expenses. The provision requires a
reconciliation of equity attributable to noncontrolling interests and disclosure
of those amounts of consolidated net income attributable to noncontrolling
interests. The provision is effective for fiscal years beginning on or after
December 15, 2008. The adoption of the noncontrolling interests provisions
of the ConsolidationTopic ofthe FASB ASC 805 on January
1, 2009, which required retroactive adoption of the presentation and disclosure
requirements for existing minority interests, had a significant impact on the
Company’s computation of net income and its presentation of the balance
sheet.





The Financial InstrumentsTopic ofthe FASB ASC 825 requires (i)
disclosure of the fair value of all financial instruments for which it is
practicable to estimate that value in interim period financial statements as
well as in annual financial statements, (ii) that the fair value information be
presented together with the related carrying amount of the asset or liability,
and (iii) disclosure of the methods and significant assumptions used to estimate
the fair value and changes, if any, to the methods and significant assumptions
used during the period. The provision is effective for interim periods ending
after June 15, 2009.





The Subsequent EventsTopic ofthe FASB ASC 855 sets forth
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. The provision requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. The provisionis effective for
financial statements issued for fiscal years and interim periods beginning after
June 15, 2009 and will be applied prospectively. The adoption of the
Subsequent EventsTopic ofthe FASB ASC 855did not have an impact on
the Company’s results of operations or financial condition.





In June
2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”).  SFAS 167 modifies the existing
quantitative guidance used in determining the primary beneficiary of a variable
interest entity (“VIE”) by requiring entitiesto qualitatively assess
whether an enterprise is a primary beneficiary, based on whether the entity has
(i) power over the significant activities of the VIE, and (ii) an obligation to
absorb losses or the right to receive benefits that could be potentially
significant to the VIE.  SFAS 167 becomes effective for all new and
existing VIEs on January 1, 2010. The adoption of SFAS 167
is not expected to have a material impact on the Company’s results of operations
or financial condition.





In June
2009, the FASB issued SFAS 168, “The FASB Accounting Codification and
Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB No.
162”.  The FASB Accounting Standards Codification TM
 (“Codification”) does not change U.S. GAAP, but combines all authoritative
standards such as those issued by the FASB, AICPA, and EITF, into a
comprehensive, topically organized online database.  The Codification
was released on July 1, 2009 and will become the single source of authoritative
U. S. GAAP applicable for all nongovernmental entities, except for rules and
interpretive releases of the SEC.  The Codification is effective for
all interim periods and year ends subsequent to September 15, 2009. As the
Codification was not intended to change or alter existing GAAP, it will not have
any impact on the Company’s consolidated financial statements.





3.
            Variable
      Interest Entity





Under the
VIE provisions of the Consolidation Topic of the FASB
ASC805, a VIE
must be consolidated by a company if it is subject to a majority of the entity’s
expected losses or is entitled to receive a majority of the entity’s expected
residual returns or both. In addition, the Consolidation Topic of the FASB
ASC805 requires
disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest.





Under the
Consolidation Topic of the
FASB ASC805,
for an entity to qualify as a VIE one or more of the following three
characteristics must exist:




- 8 -


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


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 August
2007, one of the Company’s tenants, Ciena, entered into an assignment of lease
agreement with an unrelated party, M&M Real Estate Control &
Restructuring, LLC (“M&M Real Estate”), in connection with leases for
approximately 445,000 rentable square feet located in San Jose, California. As a
result of the Assignment, M&M Real Estate 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 were effectively transferred to M&M Real Estate. M&M Real
Estate 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 received monthly rent payments of approximately $789 from
July 2007 through June 2008, received $818 from July 2008 through June 2009, is
receiving $849 from July 2009 through June 2010, and will receive $881 from July
2010 through June 2011 and $915 from July 2011 through December 2011. Based
upon the provisions of the Consolidation Topic of the FASB
ASC805, the
Company determined that M&M Real Estate is a VIE. The Company further
determined that it is the primary beneficiary of this VIE, and therefore has
consolidated this entity for financial reporting purposes.





Factors
considered by the Company in determining whether M&M Real Estate 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 Real
      Estate.


·
            At
      present, the assigned leases are the only properties under management by
      M&M Real Estate.


·
            M&M
      Real Estate 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 Real Estate
      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
Real Estate’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 Real Estate’s
activities.





4.
            Restricted
      Cash





Restricted
cash totaled approximately $7,597 on September 30, 2009. Of this amount,
approximately $7,097 represents cash held by M&M Real Estate, a 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 and any other additional agreements
with the VIE. The balance of restricted cash is a $500 deposit made by the
Company for a property purchase offer.





5.
            Restricted
      Investment in Marketable Securities





In
accordance with the provisions of the Investments–Debt and Securities
Topic of the FASB ASC 320, investments in debt and equity “marketable”
securities are classified at acquisition, and on subsequent reporting dates,
into one of the following categories: (a) Trading Securities - debt and equity
securities purchased and held principally for the purpose of selling them in the
near future. (b) Available-for-Sale Securities - debt securities not classified
as held-to-maturity, and debt and equity securities not classified as trading
securities. (c) Held-to-Maturity Debt Securities - those debt securities for
which the company has the “positive intent and ability to hold the securities to
maturity.”





The
Company’s restricted investment in marketable securities on September 30, 2009
was classified as trading securities, whereas unrealized holdings gains and
losses (differences between the initial cost and the fair value at the balance
sheet date) are included in


- 9
-


MISSION
WEST PROPERTIES, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS,CONTINUED
 (dollars
in thousands, except per share and per square footage)
 (unaudited)
  net
income of the current period, and interest and dividend revenue, as well as
realized gains and losses on sales, are included in net income of the current
period. The marketable securities are classified as Level 1 of the fair value
hierarchy in accordance with the provisions of the Fair Value Measurements and
DisclosuresTopicof the FASB
ASC820 and
thus measured at fair value using quoted market prices for identical instruments
in active markets from an independent third party
source.





Restricted
investment in marketable securities totaled approximately $11,124 on September
30, 2009, which was funded by the Company’s restricted cash through its VIE. The
amount represents an investment in marketable securities of a real estate
investment trust company traded on the New York Stock Exchange Euronext. The
marketable securities are adjusted to fair value at the end of each accounting
period, with the corresponding loss and gain recorded in unrealized loss or gain
from investment in the Company’s consolidated statement of operations. For
the three months ended September 30, 2009, the Company recorded net
unrealized gain of approximately $4,464 related to the increase in fair value of
the marketable securities. For the nine months ended September 30, 2009,
the Company recorded net unrealized gain of approximately $4,140.





6.
            Stock
      Transactions





During
the nine months ended September 30, 2009, one limited partner exchanged a total
of 2,022,000 O.P. units for 2,022,000 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 $15,138 from noncontrolling interests to stockholders’ equity.
Neither the Company nor the operating partnerships received any proceeds from
the issuance of the common stock in exchange for O.P. units. Under the
limited partnership agreements, each exchange is treated as the purchase of
additional O.P. units of the general partner interest by the Company in exchange
for stock, and the contribution of additional capital to the partnership by the
Company equal in amount to the value of the stock issued in exchange for the
limited partnership interests.





7.
            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:





Three Months Ended September
      30,
                  
                  
                  Nine Months Ended September
    30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted
      average shares outstanding (basic)
                  
                  
                  21,770,211
                  
                  
                  
                  19,745,141
                  
                  
                  
                  21,717,713
                  
                  
                  
                  19,703,066Incremental
      shares from assumed option exercise
                  
                  
                  132,176
                  
                  
                  
                  38,366
                  
                  
                  
                  140,354
                  
                  
                  
                  66,082Weighted
      average shares outstanding (diluted)
                  
                  
                  21,902,387
                  
                  
                  
                  19,783,507
                  
                  
                  
                  21,858,067
                  
                  
                  
                  19,769,148





At
September 30, 2009, outstanding options to purchase 2,052,500 shares of common
stock were excluded from the computation of diluted net income per share under
the treasury stock method for the three and nine months ended September 30, 2009
because the option exercise price was greater than the weighted average closing
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 noncontrolling interests’ share of income
back to net income. The total number of O.P. units outstanding at September 30,
2009 and 2008 was 83,504,965 and 85,526,965, respectively.





8.
            Related
      Party Transactions





As of
September 30, 2009, the Berg Group owned 75,880,384 O.P. units. The Berg Group’s
combined ownership of O.P. units and shares of common stock as of September 30,
2009 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, 2009, debt in the amount of approximately $8,389 was due the Berg
Group under a mortgage note established 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 principal
payments are amortized over 20 years. On October 1, 2008, the Company and the
Berg Group agreed to extend the maturity due date to June 2013. Interest expense
incurred in connection with the mortgage note was approximately $162 and $171
for the three months ended September 30, 2009 and 2008, respectively, and $493
and $521 for the nine months ended September 30, 2009 and 2008,
respectively.





On June 11, 2009, the
superior court issued a tentative decision that concludedRepublic
Properties Corporationis a partner in theHellyer Avenue Limited Partnershiprelating to theMission West
Properties, L.P. v. Republic Properties Corporation
litigation.




- 10 -


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


Because
Republic Properties Corporation’s interest in the Hellyer Avenue Limited
Partnershipwas
transferred to Berg & Berg Enterprises, Inc. and past distributions from
profits were paid to Berg & Berg Enterprises, Inc., the Company accrued
approximately $1,021 in interest receivable due from Berg & Berg
Enterprises, Inc. The $1,021 interest income accrual was calculated at an
interest rate of LIBOR plus 1.25%. On September 17, 2009, the superior court issued
a final decision and entry of judgment in favor of Republic Properties
Corporation. A motion for new trial is pending. See Note 9to
Condensed Consolidated Financial Statements belowfor details.





During
the first nine months of 2009, debt in the amount of approximately $34,677 was
borrowed from the Berg Group and approximately $29,620 was repaid to the Berg
Group under short-term notes payable in connection with the fourth quarter 2008,
first quarter 2009 and second quarter 2009 dividend distributions. The notes
payable interest was calculated at LIBOR plus 1.75%-2.00%. Interest expense
incurred in connection with the loans was approximately $40 and $61 for the
three and nine months ended September 30, 2009, respectively.





During
the first nine months of 2009 and 2008, Carl E. Berg or entities controlled by
him 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
$273 and $307 in rental revenue for the three months ended September 30, 2009
and 2008, respectively, and $845 and $921 in rental revenue for the nine months
ended September 30, 2009 and 2008, 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. Currently their share ownership
is below a level at which rent from related tenants would be excluded in
determining compliance with REIT qualification tests.





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 for
the Company’s headquarters. Rental amounts and overhead reimbursements paid to
Berg & Berg Enterprises were $30 for the three months ended September 30,
2009 and 2008, respectively, and $90 and $84 for the nine months ended September
30, 2009 and 2008, respectively.





9.
            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 it believes that the ultimate outcome of these
proceedings will not have a material adverse effect on its operating results,
cash flows or financial condition.





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 its
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. (“BBE”). Under the Berg Land
Holdings Option Agreement and the Acquisition Agreement dated as of May 14,
1998, the Company acting through 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 Maryland. 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




- 11 -


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


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. A
trial in the superior court commenced in February 2009. On June 11, 2009, the
superior court issued a tentative decision that concluded RPC is a partner in
the Hellyer LP and is entitled to distribution of profits of the Hellyer LP in
accordance with its percentage interest together with pre-judgment interest on
each distribution from the date it was due and payable.On September 17,
2009, the superior
court issued a final decision and entry of judgment in favor of RPC in the
amount of approximately $6,625, together with pre-judgment interest of 10%
through September 3, 2009 in the sum of $2,692, for a total of approximately
$9,317. As a result, the Company recorded an additional $469 in interest
expense. The Company filed an appeal following the court’s issuance of a final
decision and entry of judgment. A motion for new trial is pending. On October 5, 2009, the
Company deposited with the clerk of the Santa Clara County Superior Court a
check in the amount of approximately $13,975, of which approximately $4,658, or
50% of $9,317, was a deposit to appeal the court’s final decision. The
additional $4,658 appeal deposit is refundable regardless of the outcome of the
appeal process. Pending the outcome of the appeal, the Company has
accrued approximately $2,379 in interest payable on the amount of past
distributions that would be payable to RPC by Hellyer LP based on the judgment
determined at the legal rate of interest of 10%. In addition, the Company has
accrued approximately $1,021 in interest receivable due from BBE because past
distributions with respect to RPC’s interest in Hellyer LP were paid to BBE,
which interest income accrual was calculated at an interest rate of LIBOR plus
1.25%.





Since the
inception of Hellyer LP, the Company has accounted for the properties owned by
the partnership on a consolidated basis, with reductions for the noncontrolling
interests held by the noncontrolling partner (first RPC and then BBE). In each
period, the Company has accrued amounts payable by Hellyer LP to the
noncontrolling interest partner, including BBE prior to payment. BBE's share of
earnings allocated to its 50% noncontrolling interest was approximately $1,040
and $604 in the first nine months of 2009 and 2008, respectively. As of
September 30, 2009, accumulated cash flow distributions from Hellyer LP totaling
approximately $5,986 were accrued and distributed to BBE. If the Company's
litigation with RPC is ultimately decided in RPC's favor, the Company
anticipates that BBE will be required to return all distributions paid to BBE
and RPC's former interest in Hellyer LP to RPC. In anticipation of this
contingency, since  October 2003, the Company has recorded such
distributions as an account receivable from BBE, which is included in "Other
assets" on the Company's consolidated balance sheets, with an offsetting account
payable to BBE.





The
Independent Directors Committee of the Board of Directors will exercise its
right to acquire on behalf of the Company the former RPC interest and related
distributions from Berg & Berg Enterprises, Inc. under the terms of the Berg
Land Holdings Option Agreement between the Company and the Berg Group, if the
litigation is ultimately decided in favor of the Company.





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 its obligations under these indemnification agreements is minimal and
has recorded no liabilities for these agreements as of September 30,
2009.





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,
2009.





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.




- 12 -


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


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
the Property, Plant, and
Equipment Topic of the FASB ASC 360 to be classified as assets held for
sale. The following summarizes the assets for which the Company has an executed
sales contract as of September 30, 2009 that is subject to such material
conditions:





Property
                  
                  Number of Buildings
                  
                  
                  Rentable Square Feet
                  
                  
                  Acres
                  
                  
                  Sales PriceMcCandless
      Drive
                    Milpitas,
      California
                  
                  
                  8
                  
                  
                  
                  427,000
                  
                  
                  
                  23.03
                  
                  
                  $
                  76,500





10.
            Subsequent
      Events





In
October 2009, the Company issued two notes in the aggregate amount of $7,000 to
M&M Real Estate. The notes bear interest at LIBOR plus 2% and are due
December 31, 2010. The proceeds were used to pay an outstanding short-term note
issued to the Berg Group and general corporate purposes.





On October 5, 2009, the
Companydeposited with the clerk of the Santa Clara County Superior Court
a check in the amount of approximately $13,975. Of this amount, $9,317
represents the amount owed to RPC and $4,658 represents a deposit to appeal the
court’s final decision in the RPC litigation (See Note 9 to Condensed Consolidated
Financial Statements above for details).





On
October 8, 2009, the Company paid dividends of $0.15 per share of common stock
to all common stockholders of record as of September 30, 2009. On the same date,
the operating partnerships paid a distribution of $0.15 per O.P. unit to all
holders of O.P. units, with the exception of the Berg Group. Aggregate dividends
and distributions amounted to approximately $15,791.





On
October 8, 2009, the Company issued a short-term note for approximately $16,573
to the Berg Group in connection with the second and third quarter 2009 dividend
distributions. The note’s interest rate is LIBOR plus 1.75%.





On
October 13, 2009, the Company entered into a change in terms agreement with
Heritage Bank of Commerce to amend the maturity date of the $17,500 revolving
line of credit to September 15, 2011. The interest rate on the revolving
line of credit is the greater of LIBOR plus 1.75% or 4.00% per annum. The
Heritage Bank of Commerce loan is secured by three properties consisting of
approximately 219,000 rentable square feet. The revolving line of credit
contains certain customary covenants as defined in the loan agreement. The
Company paid approximately $23 in loan and legal fees in obtaining the revolving
line of credit.


- 13 -


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, 2008. The results for the three and nine months ended September 30,
2009 are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 2009.





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:





·
            the
      current turmoil in the credit markets could limit the demands for R&D
      space and affect the overall availability and cost of
    credit,


·
            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,


·
            changes in general accounting
      principles, policies and guidelines applicable to REITs,
      and


·
            ability to timely refinance
      maturing debt obligations and the terms of any such
      refinancing.





These
risks and uncertainties, together with the other risks described under Part I,
Item 1A - “Risk Factors” of our 2008 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, 2009, we owned and managed 111 properties totaling approximately
8.0 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, 2009, two tenants individually lease in
excess of 300,000 rentable square feet from us: Microsoft 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




- 14 -




·
            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.





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 slowed markedly
from 2001 through 2006 and grew slowly until the second half of 2008. Since
September 2008, the impact of the worldwide recession has adversely affected the
local economy. 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 16.3% in late 2008 and 19.1% at the end of the third quarter of
2009. Total vacant R&D square footage in Silicon Valley at the end of the
third quarter of 2009 amounted to approximately 29.7 million square feet, of
which 16.7%, or 5.0 million square feet, was being offered under subleases.
According to the BT Report, total negative net absorption (which is the
computation of gross square footage leased less gross new square footage vacated
for the period presented) in 2008 amounted to approximately 33,000 square feet,
and in the first nine months of 2009 there was total negative net absorption of
approximately 4.6 million square feet. Also according to the BT Report, the
average asking market rent per square foot at the end of the third quarter of
2009 was $1.08 compared with $1.26 in late 2008. 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.
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. Due to the substantial overhang of vacant
R&D properties throughout Silicon Valley, we believe that we are unlikely to
see a sustainable recovery in the leasing market for our properties prior to
2012.





Our
occupancy rate at September 30, 2009 was 65.7% compared with 66.7% at September
30, 2008. We believe that our occupancy rate could decline if key tenants seek
the protection of bankruptcy laws, consolidate operations or discontinue
operations. In addition, leases with respect to approximately 56,000 rentable
square feet are expiring prior to the end of 2009. The properties subject to
these leases may take anywhere from 24 to 40 months or longer to re-lease. We
believe that the average 2009 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 affected
adversely. 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. The
provisions of the Business
CombinationsTopic ofthe FASB ASC 805
state that the fair value of the real estate acquired is allocated to acquired
tangible assets, consisting of land, building and tenant improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, acquired in-place leases and the value of
tenant relationships, based in each case on their fair values. The determination
of the tangible and intangible assets’ useful lives are guided by




- 15 -




the
provision. The provision requires that acquisition-related costs and
restructuring costs be recognized separately from the business combination and
expensed as incurred.





The
capitalized above-market lease values and the capitalized below-market lease
values are amortized as an adjustment to rental income over the initial lease
term 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 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 the impairment provisions of the Property, Plant, and Equipment Topic
of the FASB ASC 360. We evaluate the recoverability of our investments in
real estate assets to be held and used each quarter and record an impairment
charge when there is an indicator of impairment and the undiscounted projected
cash flows are less than the carrying amount for a particular property. 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 the our views of market and economic 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. We recognize these properties and 100% of their operating
results in our condensed consolidated financial statements, with appropriate
allocation to noncontrolling interests, because we have operational and
financial control of the investments. We make judgments and assumptions about
the estimated monthly payments made to our noncontrolling 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 evaluate all joint venture arrangements for
consolidation. The percentage interest in the joint venture, evaluation of
control and whether a variable interest entity (“VIE”) exists are all considered
in determining if the arrangement qualifies for consolidation in accordance
with the VIE provisions of the Consolidation Topic of the FASB
ASC805. 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. We adopted the provisions of the Fair Value Measurements and
Disclosures Topic ofthe FASB ASC 820 for our
financial assets and liabilities measured at fair value on a recurring basis.
The provisions define fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. It also specifies a three-level hierarchy of valuation techniques
based upon whether the inputs reflect assumptions other market participants
would use based upon market data obtained from independent sources (observable
inputs) or reflect its own assumptions of market participant valuation
(unobservable inputs) and requires the use of observable inputs if such data is
available without undue cost and effort. At September 30, 2009, we had
approximately $11.1 million of financial assets classified as Level 1 and thus
measured at fair value using quoted market prices for identical instruments in
active markets from an independent third party source.





The only
financial asset or liability recorded at fair value in our consolidated
financial statements is the restricted investment in marketable securities. We
determined the fair value for the marketable securities using quoted prices in
active markets for identical securities.





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




- 16 -


debt, we estimate fair value by using discounted cash flow analyses based
on borrowing rates for similar kinds of borrowing
arrangements.




Stock-Based Compensation. The
Compensation-Stock
Compensation Topic of the FASB ASC 718 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. It 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.
Compensation cost under the Compensation-Stock Compensation
Topic of the FASB ASC 718 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 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.





The real
estate sales provisions of the Property, Plant, and Equipment Topic
of the FASB ASC 360 establish 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:





·
            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.


- 17
-


Results
of Operations





Comparison
of the three and nine months ended September 30, 2009 with the three and nine
months ended September 30, 2008





As of
September 30, 2009 and 2008, through our controlling interests in the operating
partnerships, we owned 111 properties totaling approximately 8.0 million
rentable square feet. Included in the 8.0 million rentable square feet are
approximately 854,000 rentable square feet (or 16 buildings) that we are seeking
to have rezoned for residential development.





Comparison
of rental revenue from real estate for the three and nine months ended September
30, 2009 and 2008 are as follows:


Three
      Months Ended September 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    $
      Change
                                    
                                    
                                    %
      Change by
                                      Property
      Group(dollars
      in thousands)Same Property (1)
                                    $
                                    20,114
                                    
                                    
                                    $
                                    19,928
                                    
                                    
                                    $
                                    186
                                    
                                    
                                    
                                    0.9
                                    %2008
      Acquisitions
                                    
                                    328
                                    
                                    
                                    
                                    328
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
                                    $
                                    20,442
                                    
                                    
                                    $
                                    20,256
                                    
                                    
                                    $
                                    186
                                    
                                    
                                    
                                    0.9
                                    %
  Nine
      Months Ended September 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      $
      Change
                                      
                                      
                                      %
      Change by
                                        Property
      Group(dollars
      in thousands)Same Property (1)
                                      $
                                      60,538
                                      
                                      
                                      $
                                      57,847
                                      
                                      
                                      $
                                      2,691
                                      
                                      
                                      
                                      4.7
                                      %2008
      Acquisitions
                                      
                                      983
                                      
                                      
                                      
                                      765
                                      
                                      
                                      
                                      218
                                      
                                      
                                      
                                      28.5
                                      %Total
                                      $
                                      61,521
                                      
                                      
                                      $
                                      58,612
                                      
                                      
                                      $
                                      2,909
                                      
                                      
                                      
                                      5.0
                                      %


(1)
            “Same
      Property” is defined as properties owned by us prior to 2008 that we still
      owned as of September 30, 2009.





Rental Revenue from Real
Estate Operations


For the
quarter ended September 30, 2009, rental revenue from real estate increased by
approximately $0.2 million, or 0.9%, from $20.2 million for the three months
ended September 30, 2008 to $20.4 million for the three months ended September
30, 2009. For the nine months ended September 30, 2009, rental revenue from real
estate increased by approximately $2.9 million, or 5.0%, from $58.6 million for
the nine months ended September 30, 2008 to $61.5 million for the nine months
ended September 30, 2009. In both periods, the increase in rental revenue
resulted primarily from new leases since September 30, 2008. Our occupancy rate
at September 30, 2009 was approximately 65.7%, compared with 66.7% at September
30, 2008.





Lease Termination
Income


We had no
lease termination fee income in the third quarter of 2009 and 2008. Lease
termination fee income for the nine months ended September 30, 2008 of
approximately $1.9 million was paid by a tenant who terminated its lease
obligations before the end of the lease term. We do not consider that
transaction to be a recurring item.





Other
Income


Other
income of approximately $0.28 million for the three months ended September 30,
2009 included approximately $0.25 million from management fees and $0.03 million
from miscellaneous income. Other income of approximately $0.29 million for the
three months ended September 30, 2008 included approximately $0.25 million from
management fees and $0.04 million from miscellaneous income. For the nine months
ended September 30, 2009, other income of approximately $0.91 million included
approximately $0.74 million from management fees, $0.06 million from an
insurance claim and $0.11 million from miscellaneous income. For the nine months
ended September 30, 2008, other income of approximately $0.77 million included
approximately $0.71 million from management fees and $0.06 million from
miscellaneous income.





Expenses from
Operations


Property
operating expenses and real estate taxes during the third quarter of 2009
increased by approximately $0.9 million, or 16.2%, from $5.8 million to $6.8
million for the three months ended September 30, 2008 and 2009, respectively.
Expenses for repairs and maintenance increased in the latest quarter, while the
third quarter of 2008 benefited from higher real estate tax refunds. Tenant
reimbursements decreased by approximately ($0.04) million, or (0.01%), from
$4.61 million for the three months ended September 30, 2008 to $4.57 million for
the three months ended September 30, 2009. The level of tenant reimbursements is
affected by vacancies because certain recurring expenses such as property
insurance, real estate taxes, and other fixed operating expenses are not
recoverable from vacant properties. For the nine months ended September 30,
2009, property operating expenses and real estate taxes increased by
approximately $3.8 million, or 23.2%, from $16.2 million for the nine months
ended September 30, 2008 to $20.0 million for the nine months ended September
30, 2009. Tenant reimbursements increased by approximately $1.8 million, or
15.0%, from $11.9 million for the nine months ended September 30, 2008 to $13.7
million for the nine months ended September 30, 2009. The increase in tenant
reimbursements for the nine month period was due to higher operating costs in
2009.





General
and administrative expenses decreased by approximately ($0.02) million, or
(2.6%), from $0.61 million to $0.59 million for the three months ended September
30, 2008 and 2009, respectively. For the nine months ended September 30, 2008
and 2009, general and




- 18
-




administrative
expenses decreased by approximately ($0.21) million, or (10.7%), from $1.95
million to $1.74 million, respectively. In the comparable periods of 2008 we
incurred higher legal fees and stock compensation expense in 2008 than in
2009.


Real
estate depreciation and amortization expense increased by approximately $0.2
million, or 2.8%, from $5.7 million to $5.9 million for the three months ended
September 30, 2008 and 2009, respectively. The increase resulted from additional
tenant improvements since September 30, 2008. Real estate depreciation and
amortization expense increased by approximately $1.1 million, or 6.7%, from
$17.1 million to $18.2 million for the nine months ended September 30, 2008 and
2009, respectively.





Equity in Earnings from
Unconsolidated Joint Venture


As of
September 30, 2009, we held investments in one R&D building totaling
approximately 155,500 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, 2009, we recorded equity in earnings from the unconsolidated joint
venture of approximately $0.07 million compared with equity in earnings of $0.13
million for the same period in 2008. The decrease was attributable to the sale
of two R&D properties subsequent to September 30, 2008. For the nine-month
periods ended September 30, 2009 and 2008, equity in earnings from the
unconsolidated joint venture was approximately $0.24 million and $0.92 million,
respectively. The occupancy rate for the properties owned by this joint venture
at September 30, 2009 and 2008 was 100%.





Interest and Dividend
Income


Interest
and dividend income decreased by approximately ($0.1) million, or (51.8%), from
$0.19 million to $0.09 million for the three months ended September 30, 2008 and
2009, respectively. The decrease was primarily due to lower cash reserve on hand
in 2009. Interest and dividend income increased by approximately $0.19 million,
or 20.0%, from $0.97 million to $1.16 million for the nine months ended
September 30, 2008 and 2009, respectively.





Interest
Expense


Interest
expense increased by approximately $0.2 million, or 3.1%, from $5.0 million for
the three months ended September 30, 2008 to $5.2 million for the three months
ended September 30, 2009 due to the accrual of approximately $0.5 million
related to the Hellyer Avenue Limited Partnership litigation (see Note 9 to
Condensed Consolidated Financial Statements in Item 1 above for an explanation
of this accrual). Interest expense (related parties) decreased by approximately
($0.1) million, or (34.6%), from $0.3 million for the three months ended
September 30, 2008 to $0.2 million for the three months ended September 30, 2009
due to higher related party debt incurred in the quarter ended September 30,
2008. Interest expense increased by approximately $2.2 million, or 14.5%, from
$14.9 million for the nine months ended September 30, 2008 to $17.1 million for
the nine months ended September 30, 2009 due to the accrual of approximately
$2.4 million related to the Hellyer Avenue Limited Partnership litigation.
Interest expense (related parties) decreased by approximately ($0.5) million, or
(46.0%), from $1.0 million for the nine months ended September 30, 2008 to $0.5
million for the nine months ended September 30, 2009. Total debt outstanding,
including debt due related parties, decreased by approximately ($18.9) million,
or (5.3%), from $357.8 million as of September 30, 2008 to $338.9 million as of
September 30, 2009 because of principal repayments.





Net Income Attributable to
Common Stockholders and Net Income Attributable to Noncontrolling
Interests


Net
income attributable to common stockholders increased by approximately $1.1
million, or 69.2%, from $1.6 million for the three months ended September30, 2008to $2.7
million for the same period in 2009. Net income attributable to noncontrolling
interests increased by approximately $2.2 million, or 34.5%, from $6.3 million
for the three months ended September30, 2008to $8.5
million for the three months ended September30, 2009. For the
nine months ended September 30, 2009 and 2008, net income attributable to common
stockholders was approximately $6.0 million and $4.9 million, respectively, and
net income attributable to noncontrolling interests was approximately $18.1
million and $19.0 million, respectively.





The
amount of net income attributable to noncontrolling interests in net income has
been calculated by multiplying the net income of the operating partnerships (on
a stand-alone basis) by the respective noncontrolling interests ownership
percentage. Noncontrolling interests represent the ownership interest of all
limited partners in the operating partnerships taken as a whole, which was
approximately 79% and 81% as of September30, 2009 and 2008,
respectively.





Changes
in Financial Condition





Total
stockholders’ equity, net, increased by approximately $10.5 million from
December 31, 2008. We obtained additional capital from the issuance of 2,022,000
shares of our common stock for the exchange of O.P. units, which increased
additional paid-in capital by approximately $15.1 million. Stockholders’ equity
was reduced during the most recent quarter by distributions in excess of
accumulated earnings of approximately $4.9 million.


- 19
-


Liquidity
and Capital Resources





We expect
an increase in operating cash flows from our operating property portfolio in
2009 compared with 2008 primarily from new leases and the release of restricted
cash owned by our VIE, M&M Real Estate Control & Restructuring (“M&M
Real Estate”). If we are unable to lease a significant portion of the
approximately 56,000 rentable square feet scheduled to expire during the
remainder of 2009 and approximately 342,000 rentable square feet scheduled to
expire in 2010 or an equivalent amount of our currently available space of
approximately 2.8 million rentable square feet, however, our operating cash
flows after 2009 may be affected adversely. With the expectation of higher
rental revenues for the remainder of 2009, we expect our properties’ operating
income to show a year-over-year increase compared with 2008 driven by new
leases. We are also subject to risks of decreased occupancy through tenant
defaults and bankruptcies and potential reduction in rental rates upon renewal
of properties that could result in reduced cash flow from operations instead.
Cash flows from lease terminations are non-recurring. To maintain or increase
cash flows in the future we must lease our vacant properties.





Our
principal sources of liquidity for distributions to stockholders and O.P. unit
holders, debt service, leasing commissions, recurring capital expenditures and
deposit for appeal of the judgment in the Hellyer Avenue Limited Partnership
litigation discussed in Note 9 to Condensed Consolidated Financial Statements in
Item 1, above, are to come from cash provided by operations, as well as
borrowings under our line of credit with the Heritage Bank of Commerce (“HBC”),
borrowings from M&M Real Estate through restricted cash and short-term loans
from the Berg Group. We expect these sources of liquidity to be adequate to meet
projected distributions to stockholders and other presently anticipated
liquidity requirements for the remainder of 2009. 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
potentially the issuance of additional equity securities.





In 2009,
the sources of fund for distributions to stockholders and O.P. unit holders were
provided by cash from operations, borrowings under our credit facility,
borrowings from M&M Real Estate through restricted cash and short-term loans
from the Berg Group.





As of
September 30, 2009, restricted cash totaled approximately $7.6 million and
restricted investment in marketable securities totaled approximately $11.1
million. Of the $7.6 million, $0.5 million represents a deposit made by
management for a property purchase offer. The remaining cash balance represents
cash and investment held by M&M Real Estate. We do not possess or control
these funds or have any rights to receive them except as provided in the
applicable agreements and any other additional agreements with the VIE. We
include this in our restricted cash and investment in accordance with the Consolidation Topic of the FASB
ASC805.





In 2009,
we issued a note in the amount of $15 million to M&M Real Estate for funds
borrowed from restricted cash. The notes bear interest at LIBOR plus 2% and are
due December 31, 2010. The proceeds were used to pay outstanding short-term
notes issued to the Berg Group and for general corporate purposes. This cash is
due to Mission West Properties in any event between now and December 2011 under
the terms of the lease termination and assumption agreements with M&M Real
Estate. See Note 3 to Condensed Consolidated Financial Statements in Item 1
above for an
explanation of the scheduled rent payments from M&M Real
Estate.





Distributions


On
October 8, 2009, we paid dividends of $0.15 per share of common stock to all
common stockholders of record as of September 30, 2009. On the same date, the
operating partnerships paid a distribution of $0.15 per O.P. unit to all holders
of O.P. units, with the exception of the Berg Group. The aggregate dividends and
distributions amounted to approximately $15.8 million. On October 8, 2009, we
issued a short-term note for approximately $16.6 million to the Berg Group in
connection with the second and third quarter 2009 dividend distributions. This
note had an interest rate of LIBOR plus 1.75% and is due December 31,
2009.





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


On
October 13, 2009, we entered into a change in terms agreement with HBC to amend
the maturity date of the $17.5 million revolving line of credit to September 15,
2011. The interest rate on the revolving line of credit is the greater of
LIBOR plus 1.75% or 4.00% per annum. The HBC loan is secured by three
properties consisting of approximately 219,000 rentable square feet. The
revolving line of credit contains certain customary covenants as defined in the
loan agreement. We paid approximately $23,000 in loan and legal fees in
obtaining the revolving line of credit.





In the
first nine months of 2009, we issued short-term notes for approximately $34.7
million to the Berg Group in connection with the fourth quarter 2008, first
quarter 2009 and second quarter 2009 dividend distributions. The notes’ interest
rates were LIBOR plus 1.75-2.00%. Of the total amount owed, we have repaid
approximately $29.6 million to the Berg Group.





At
September 30, 2009, we had total indebtedness of approximately $338.9 million,
including $321.9 million of fixed rate mortgage debt, $3.6 million under the HBC
line of credit, $5.0 million under the Berg Group note payable (related parties)
and $8.4 million debt under the Berg Group mortgage note (related parties), as
detailed in the table below. The Northwestern, Allianz, Hartford and HBC loans
contain certain financial loan and reporting covenants as defined in the loan
agreements. As of September 30, 2009, we were in compliance with these loan
covenants.


- 20
-


Contractual
Obligations


The
following table identifies the contractual obligations with respect to the
maturities and scheduled principal repayments of our secured debt, unsecured
notes, credit facility and scheduled interest payments of our fixed-rate and
variable-rate debt at September 30, 2009and provides information
about our operating lease obligationsthat will impact our liquidity and
cash flow in future periods.





2009
                          
                          
                          2010
                          
                          
                          2011
                          
                          
                          2012
                          
                          
                          2013
                          
                          
                          Thereafter
                          
                          
                          Total(dollars
      in thousands)Principal payments (1)
                          
                          $
                          8,274
                          
                          
                          $
                          13,328
                          
                          
                          $
                          17,682
                          
                          
                          $
                          14,935
                          
                          
                          $
                          81,269
                          
                          
                          $
                          203,438
                          
                          
                          $
                          338,926Interest
      payments-fixed rate debt (2)
                          
                          
                          4,722
                          
                          
                          
                          18,433
                          
                          
                          
                          17,652
                          
                          
                          
                          16,825
                          
                          
                          
                          12,820
                          
                          
                          
                          62,288
                          
                          
                          
                          132,740Interest
      payments-variable rate debt (3)
                          
                          
                          58
                          
                          
                          
                          143
                          
                          
                          
                          107
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          308Operating
      lease obligations (4)
                          
                          
                          30
                          
                          
                          
                          30
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          60Total
                          
                          $
                          13,084
                          
                          
                          $
                          31,934
                          
                          
                          $
                          35,441
                          
                          
                          $
                          31,760
                          
                          
                          $
                          94,089
                          
                          
                          $
                          265,726
                          
                          
                          $
                          472,034





(1)
            As
      of September 30, 2009, 97.5% of our debt was contractually fixed and 2.5%
      of our debt bore interest at variable rates. Our debt obligations are set
      forth in detail in the table below.


(2)
            The
      information in the table above reflects our projected interest rate
      obligations for the fixed-rate payments based on the contractual interest
      rates, interest payment dates and scheduled maturity
  dates.


(3)
            The
      information in the table above reflects our projected interest rate
      obligations for the variable-rate payments based on 4.00% and LIBOR plus
      1.75% at September 30, 2009, the scheduled interest payment dates and
      maturity dates.


(4)
            Our
      operating lease obligations relate to a lease of our corporate office
      facility from a related party.


- 21
-


The
following table and notes set forth information regarding debt outstanding as of
September 30, 2009:





Debt
      Description
                  
                  Collateral
      Properties
                  
                  Balance
                  
                  MaturityDate
                  
                  Interest
      Rate(dollars
      in thousands)Line
      of Credit:Heritage
      Bank of Commerce
                  
                  Not
      Applicable
                  
                  $
                  3,573
                  
                  Oct
      2009
                  
                  
                  
                  (1)Note
      Payable (related parties):
                  
                  Not
      Applicable
                  
                  
                  5,057
                  
                  Dec
      2009
                  
                  
                  
                  (1)Mortgage
      Note Payable (related parties) (2):
                  
                  5300
      & 5350 Hellyer Avenue, San Jose, CA
                  
                  
                  8,389
                  
                  Jun
      2013
                  
                  
                  7.65
                  %Mortgage
      Notes Payable (2):Hartford
      Life Insurance Company
                    Hartford
      Life and Accident Insurance Company
                    Hartford
      Life and Annuity Insurance Company
                    (collectively known
      as the “Hartford Loan”) (3)
                  
                  5981
      Optical Court, San Jose, CA
                    5500
      Hellyer Avenue, San Jose, CA
                    5550
      Hellyer Avenue, San Jose, CA
                    4050
      Starboard Drive, Fremont, CA
                    45738
      Northport Loop, Fremont, CA
                    233
      South Hillview Drive, Milpitas, CA
                    10300
      Bubb Road, Cupertino, CA
                    1230
      E. Arques, Sunnyvale, CA
                    1250-1280
      E. Arques, Sunnyvale, CA
                    1212
      Bordeaux Lane, Sunnyvale, CA
                    2904
      Orchard Parkway, San Jose, CA
                    3236
      Scott Blvd, Santa Clara, CA
                    6311
      San Ignacio Avenue, San Jose, CA
                    6321-6325
      San Ignacio Avenue, San Jose, CA
                    6331
      San Ignacio Avenue, San Jose, CA
                    6341-6351
      San Ignacio Avenue, San Jose, CA
                    3540-3580
      Bassett Street, Santa Clara, CA
                  
                  
                  112,259
                  
                  Oct
      2018
                  
                  
                  6.21
                  %Northwestern Mutual
      Life Insurance Company (4)
                  
                  1750
      Automation Parkway, San Jose, CA
                    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
                    20605-20705
      Valley Green Drive, Cupertino, CA
                    2001
      Walsh Avenue, Santa Clara, CA
                    2220
      Central Expressway, Santa Clara, CA
                    2300
      Central Expressway, Santa Clara, CA
                    2330
      Central Expressway, Santa Clara, CA
                  
                  
                  78,434
                  
                  Feb
      2013
                  
                  
                  5.64
                  %Allianz Life
      Insurance Company (Allianz Loan I) (5)
                  
                  5900
      Optical Court, San Jose, CA
                  
                  
                  22,366
                  
                  Aug
      2025
                  
                  
                  5.56
                  %Allianz Life
      Insurance Company (Allianz Loan II) (5)
                  
                  5325-5345
      Hellyer Avenue, San Jose, CA
                    1768
      Automation Parkway, San Jose, CA
                    2880
      Scott Boulevard, Santa Clara, CA
                    2890
      Scott Boulevard, Santa Clara, CA
                    2800
      Scott Boulevard, Santa Clara, CA
                    10450-10460
      Bubb Road, Cupertino, CA
                    6800-6810
      Santa Teresa Blvd., San Jose, CA
                    6850
      Santa Teresa Blvd., San Jose, CA
                    4750
      Patrick Henry Drive, Santa Clara, CA
                  
                  
                  108,848
                  
                  Aug
      2025
                  
                  
                  5.22
                  %321,907TOTAL
                  
                  
                  
                  $
                  338,926




(1)
            Loan
      carries a variable interest rate equal to LIBOR plus 1.75%. The interest
      rate at September 30, 2009 was 2.02%. The Heritage Bank of Commerce 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, 2009, we were in
      compliance with these loan covenants. The Heritage Bank of Commerce line
      of credit matured on September 15, 2009 and subsequently extended to
      October 15, 2009. On October 13, 2009, we entered into a change in terms
      agreement and extended the maturity date to September 15,
      2011.


(2)
            Mortgage
      notes payable and mortgage note payable (related parties) generally
      require monthly installments of principal and interest ranging from
      approximately $96 to $840 over various terms extending through the year
      2025. The weighted average interest rate of mortgage notes payable was
      5.74% at September 30, 2009.


(3)
            The
      Hartford loan is payable in monthly installments of approximately $838,
      which includes principal (based upon a 20-year amortization) and interest.
      Costs and fees incurred with obtaining this loan aggregated approximately
      $1,058, which were deferred and amortized over the loan period. The
      Hartford loan contains certain customary covenants as defined in the loan
      agreement. As of September 30, 2009, we were in compliance with these loan
      covenants.


(4)
            The
      Northwestern loan is payable in monthly installments of approximately
      $696, which includes principal (based upon a 20-year amortization) and
      interest. Costs and fees incurred with obtaining this loan aggregated
      approximately $675, which were deferred and amortized over the loan
      period. The Northwestern loan contains certain customary covenants as
      defined in the loan agreement. As of September 30, 2009, we were in
      compliance with these loan
covenants.


(5)
            The
      Allianz loans are payable in monthly aggregate installments of
      approximately $1,017, which includes principal (based upon a 20-year
      amortization) and interest. Costs and fees incurred with obtaining these
      loans aggregated approximately $1,089, 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, 2009, we
      were in compliance with these loan
covenants.


- 22
-


At
September 30, 2009, 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 $6.73per share on
September 30, 2009) on a fully diluted basis, including the conversion of all
O.P. units into common stock, was approximately32.3%. OnSeptember 30,
2009, the last trading
dayinthe quarter,total
market capitalization was approximately $1.05 billion.





AtSeptember 30,
2009, the outstanding
balance remaining under certain notes that we owed to the operating partnerships
wasapproximately $2.2million. The due date of
these notes has been extended to September 30, 2010. 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 thecondensed 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 ofnoncontrollinginterests as reported on thecondensedconsolidated 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, 2009 with the nine months ended September
30, 2008





Net cash
provided by operating activities for the nine months ended September 30, 2009
was approximately $55.1 million compared with $50.4 million for the same period
in 2008. Cash flow increases came primarily from payment by M&M Real Estate
of prepaid rent for 2009 per lease agreement as discussed under Note 3 to
Condensed Consolidated Financial Statements in Item 1 above.





Net cash
provided by (used in) investing activities was approximately $3.0 million and
($26.2) million for the nine months ended September 30, 2009 and 2008,
respectively. Cash provided by investing activities during the nine months ended
September 30, 2009 related principally to the reimbursement of funds invested in
marketable securities from M&M Real Estate through restricted cash. Net cash
used in investing activities during the nine months ended September 30, 2008
related principally to the acquisition of one R&D property at 5981 Optical
Court in San Jose, California and one R&D property at 2904 Orchard Parkway
in San Jose, California for approximately $35.8 million. The acquisition at 2904
Orchard Parkway was completed as a tax-deferred exchange transaction involving
our former R&D property at 1170 Morse Avenue in Sunnyvale, California.
Excess restricted cash of approximately $7.7 million from that exchange
transaction was transferred to our general cash account. Capital expenditures
for real estate improvements were approximately $6.2 million.





Net cash
used in financing activities was approximately $57.5 million for the nine months
ended September, 2009 compared with approximately $47.9 million for the nine
months ended September 30, 2008. During the first nine months of 2009, we
financed approximately $29.6 million in short-term debt from the Berg Group,
received $15 million from a loan with M&M Real Estate, paid approximately
$48.5 million towards outstanding debt, paid approximately $42.1 million of
distributions to noncontrolling interests and paid approximately $11.5 million
of dividends to common stockholders. During the same period in 2008, we financed
approximately $22.4 million in short-term debt, received approximately $11.9
million from our line of credit, received approximately $0.7 million from stock
option exercises, paid approximately $31.1 million towards outstanding debt,
paid approximately $40.8 million of distributions to noncontrolling interests
and paid approximately $11.0 million of dividends to common
stockholders.





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), 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 with
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 neither 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.





Our
definition of FFO also assumes conversion at the beginning of the period of all
convertible securities, including noncontrolling 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.


- 23
-


FFO for
the three and nine months ended September 30, 2009 and 2008, as reconciled to
net income, are summarized in the following table:





Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(dollars
      in thousands)
                  
                  
                  (dollars
      in thousands)Net
      income
                  
                  $
                  11,242
                  
                  
                  $
                  7,939
                  
                  
                  $
                  24,065
                  
                  
                  $
                  23,897Add:Depreciation
      and amortization of real estate (1)
                  
                  
                  6,445
                  
                  
                  
                  6,393
                  
                  
                  
                  19,975
                  
                  
                  
                  18,881Less:Noncontrolling
      interests in joint ventures
                  
                  
                  (83
                  )
                  
                  
                  (133
                  )
                  
                  
                  (177
                  )
                  
                  
                  (307
                  )FFO
                  
                  $
                  17,604
                  
                  
                  $
                  14,199
                  
                  
                  $
                  43,863
                  
                  
                  $
                  42,471





(1)
            Includes
      our portion of depreciation and amortization of real estate and leasing
      commissions from our unconsolidated joint venture totaling approximately
      $60 and $189 for the three months ended September 30, 2009 and 2008,
      respectively, and $179 and $568 for the nine months ended September 30,
      2009 and 2008, respectively. Also includes our amortization of leasing
      commissions of approximately $464 and $444 for the three months ended
      September 30, 2009 and 2008, respectively, and $1596 and $1,249 for the
      nine months ended September 30, 2009 and 2008, respectively. Amortization
      of leasing commissions is included in the property operating, maintenance
      and real estate taxes line item in the condensed consolidated statements
      of operations.





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
      ability to refinance maturing debt
obligations;


·
            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.


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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, 2009. 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, 2009 will be paid according to scheduled principal
payments and that we will not prepay any of the outstanding principal
balance.





For
variable rate debt, the table presents the assumption that the outstanding
principal balance at September 30, 2009 will be paid upon maturity.





Three
                    Months
                    Remaining
                  
                  
                  Year
      Ending December 31,2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  Thereafter
                  
                  
                  Total
                  
                  
                  Fair
      Value(dollars
      in thousands)Fixed
      Rate Debt:Secured
      notes payable
                  
                  $
                  3,218
                  
                  
                  $
                  13,328
                  
                  
                  $
                  14,109
                  
                  
                  $
                  14,935
                  
                  
                  $
                  81,269
                  
                  
                  $
                  203,438
                  
                  
                  $
                  330,297
                  
                  
                  $
                  471,797Weighted
      average interest rate
                  
                  
                  5.74
                  %
                  
                  
                  5.74
                  %
                  
                  
                  5.74
                  %
                  
                  
                  5.74
                  %
                  
                  
                  5.74
                  %
                  
                  
                  5.74
                  %Variable
      Rate Debt:Unsecured
      debt
                  
                  $
                  5,056
                  
                  
                  
                  -
                  
                  
                  $
                  3,573
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  8,629
                  
                  
                  $
                  8,629Weighted
      average interest rate
                  
                  
                  2.02
                  %
                  
                  
                  
                  
                  
                  
                  2.02
                  %





The
primary market risks we face are interest rate fluctuations. As a result, we pay
lower rates of interest in periods of decreasing interest rates and higher rates
of interest in periods of increasing interest rates. We had no interest rate
caps or interest rate swap contracts at September 30, 2009. The only variable
debt that we had as of September 30, 2009 was approximately $3.6 million owed to
the Heritage Bank of Commerce and $5.0 million owed to the Berg Group. This
represented approximately 2.5% of the total $338.9 million of outstanding debt
as of September 30, 2009. All of our debt is denominated in United States
dollars.





The
following discussion of market risk is based solely on a possible hypothetical
change in future market conditions related to our variable-rate debt. It
includes “forward-looking statements,” as previously defined, regarding market
risk, but we are not forecasting the occurrence of these market
changes.





Based on
the amount of variable debt outstanding as of September 30, 2009, a 1% increase
or decrease in interest rates on our approximately $8.6 million of floating rate
debt would decrease or increase, respectively, earnings and cash flows for the
nine-month period then ended by approximately $65,000, as a result of the
increased or decreased interest expense associated with the change in rate, and
would not have an impact on the fair value of the floating rate debt. This
amount is determined by considering the impact of hypothetical interest rates on
our borrowing cost. Due to the uncertainty of fluctuations in interest rates and
the specific actions that might be taken by us to mitigate such fluctuations and
their possible effects, the foregoing sensitivity analysis assumes no changes to
our financial structure.


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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,
2009.





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.


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PART
II - Other Information





ITEM
1.  Legal Proceedings





The
discussion of legal proceedings is incorporated herein by reference from Part I
“Item 1. – Notes to Condensed Consolidated Financial Statements – Note 9 –
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 annual report on Form 10-K for the year ended December
31, 2008 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
6.  Exhibits





10.29
            Berg
      Group Promissory Note, dated October 8,
2009


10.56.3
            Heritage
      Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated
      August 20, 2009


10.56.4
            Heritage
      Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated
      October 13, 2009


10.60
            M&M
      Real Estate Control & Restructuring, LLC Promissory Note, dated
      October 2, 2009


10.61
            M&M
      Real Estate Control & Restructuring, LLC Promissory Note, dated
      October 23, 2009


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




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-







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 6, 2009
                      By:
                      /s/
      Carl E. BergCarl
      E. BergChief
      Executive OfficerDate:
      November 6, 2009
                      By:
                      /s/
      Wayne N. PhamWayne
      N. PhamVice
      President of Finance(Principal
      Accounting Officer and Duly Authorized
Officer)




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