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

                                    Form 10-Q


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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

                          COMMISSION FILE NUMBER 1-8383


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

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

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

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES [X] NO [ ]


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

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

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


                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

                19,342,187 shares outstanding as of July 31, 2006


<PAGE>

                          Mission West Properties, Inc.

                                    FORM 10-Q
                       FOR THE QUARTER ENDED JUNE 30, 2006


<TABLE>
<CAPTION>
                                      INDEX

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

   Item 1.    Financial Statements:

              Consolidated Balance Sheets as of June 30, 2006 (unaudited)
              and December 31, 2005 ..................................................................................2

              Consolidated Statements of Operations for the three and
              six months ended June 30, 2006 and 2005 (unaudited).....................................................3

              Consolidated Statements of Cash Flows for the
              six months ended June 30, 2006 and 2005 (unaudited).....................................................4

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

   Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations....................................................................13

   Item 3.    Quantitative and Qualitative Disclosures about Market Risk.............................................24

   Item 4.    Controls and Procedures................................................................................25


Part II       Other Information

   Item 1.    Legal Proceedings......................................................................................26

   Item 1A.   Risk Factors...........................................................................................26

   Item 4.    Submission of Matters to a Vote of Security Voters.....................................................26

   Item 6.    Exhibits...............................................................................................26

   Signatures........................................................................................................27
</TABLE>

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


                                     - 1 -
<PAGE>


PART I - FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

                          MISSION WEST PROPERTIES, INC.
                           CONSOLIDATED BALANCE SHEETS
           (dollars in thousands, except share and per share amounts)
                                    ---------
<TABLE>
<CAPTION>
                                                                                      June 30, 2006         December 31, 2005
                                                                                 ---------------------   ----------------------
                                     ASSETS                                            (unaudited)              (audited)
<S>                                                                                  <C>                     <C>
Real estate assets, at cost:
    Land                                                                             $   277,269             $   273,933
    Buildings and improvements                                                           777,192                 766,457
    Real estate related intangible assets                                                 19,529                  17,410
                                                                                 ---------------------   ----------------------
       Total investments in properties                                                 1,073,990               1,057,800
    Less accumulated depreciation and amortization                                      (142,268)               (130,419)
                                                                                 ---------------------   ----------------------
       Net investments in properties                                                     931,722                 927,381
Cash and cash equivalents                                                                 39,470                  31,441
Restricted cash                                                                           10,626                  16,712
Deferred rent receivable, net                                                             18,388                  19,218
Investment in unconsolidated joint venture                                                 3,435                   3,263
Other assets, net                                                                         25,028                  25,362
                                                                                 ---------------------   ----------------------
       Total assets                                                                  $ 1,028,669             $ 1,023,377
                                                                                 =====================   ======================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Mortgage notes payable                                                           $   352,515             $   357,481
    Mortgage notes payable (related parties)                                               9,856                  10,051
    Interest payable                                                                         321                     321
    Security deposits                                                                      6,681                   8,047
    Deferred rental income                                                                 9,846                   6,103
    Dividends and distributions payable                                                   16,733                  16,725
    Accounts payable and accrued expenses                                                 10,747                   8,952
                                                                                 ---------------------   ----------------------
       Total liabilities                                                                 406,699                 407,680
                                                                                 ---------------------   ----------------------

Commitments and contingencies (Note 10)

Minority interests                                                                       495,318                 500,682
                                                                                 ---------------------   ----------------------

Stockholders' equity:
  Preferred stock, $.001 par value, 20,000,000 shares authorized,
      none issued and outstanding                                                              -                       -
  Common stock, $.001 par value, 200,000,000 shares authorized,
      19,342,187 and 18,448,791 shares issued and outstanding
      at June 30, 2006 and December 31, 2005                                                  19                      18
  Paid-in-capital                                                                        148,457                 138,038
  Accumulated deficit                                                                    (21,824)                (23,041)
                                                                                 ---------------------   ----------------------
     Total stockholders' equity                                                          126,652                 115,015
                                                                                 ---------------------   ----------------------
     Total liabilities and stockholders' equity                                      $ 1,028,669             $ 1,023,377
                                                                                 =====================   ======================
</TABLE>


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

                                     - 2 -

<PAGE>


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

<TABLE>
<CAPTION>
Revenues:                                                       Three months ended June 30,        Six months ended June 30,
                                                             --------------------------------- ---------------------------------
                                                                   2006              2005            2006             2005
                                                             ---------------- ---------------- ---------------- ----------------
Revenues:
<S>                                                            <C>              <C>              <C>              <C>
   Rental revenue from real estate                                 $22,327          $25,104          $46,643          $51,351
   Tenant reimbursements                                             3,066            3,594            6,375            7,222
   Lease termination fees                                               13              478           16,068              478
   Other income, including interest                                  1,088            1,811            1,821            2,114
                                                             ---------------- ---------------- ---------------- ----------------
        Total revenues                                              26,494           30,987           70,907           61,165
                                                             ---------------- ---------------- ---------------- ----------------

Expenses:
   Property operating, maintenance and real estate taxes             4,311            4,129            8,992            9,019
   Interest                                                          5,193            5,905           10,408           10,552
   Interest (related parties)                                          190              243              381              549
   General and administrative                                          637              443            1,272            1,118
   Depreciation and amortization of real estate                      5,425            5,369           10,904           10,942
                                                             ---------------- ---------------- ---------------- ----------------
        Total expenses                                              15,756           16,089           31,957           32,180
                                                             ---------------- ---------------- ---------------- ----------------
Income before equity in earnings of unconsolidated
   joint venture and minority interests                             10,738           14,898           38,950           28,985
Equity in earnings of unconsolidated joint venture                     351              393              682              387
Minority interests                                                  (8,968)         (12,594)         (32,358)         (24,272)
                                                             ---------------- ---------------- ---------------------------------
   Income from continuing operations                                 2,121            2,697            7,274            5,100
                                                             ---------------- ---------------- ---------------- ----------------

Discontinued operations, net minority interests:
Gain from disposal of discontinued operations                         -                   -                -               14
Loss attributable to discontinued operations                          -                  (2)               -              (12)
                                                             ---------------- ---------------- ---------------- ----------------
   (Loss)/income from discontinued operations                         -                  (2)                  -             2
                                                             ---------------- ---------------- ---------------- ----------------

Net income available to common stockholders                         $2,121          $ 2,695          $ 7,274          $ 5,102
                                                             ================ ================ ================ ================
Net income available to minority interests                          $8,968          $12,587          $32,358          $24,282
                                                             ================ ================ ================ ================
Income per common share from continuing operations:
   Basic                                                             $0.11            $0.15            $0.39            $0.28
                                                             ================ ================ ================ ================
   Diluted                                                           $0.11            $0.15            $0.39            $0.28
                                                             ================ ================ ================ ================
Income per common share from discontinued operations:
   Basic                                                                 -                -                -               -
                                                             ================ ================ ================ ================
   Diluted                                                               -                -                -               -
                                                             ================ ================ ================ ================
Net income per common share:
   Basic                                                             $0.11            $0.15            $0.39           $0.28
                                                             ================ ================ ================ ================
   Diluted                                                           $0.11            $0.15            $0.39           $0.28
                                                             ================ ================ ================ ================
Weighted average shares of common stock outstanding (basic)     19,028,240       18,257,982       18,743,649       18,184,661
                                                             ================ ================ ================ ================
Weighted average shares of common stock outstanding (diluted)   19,123,945       18,283,058       18,824,340       18,229,245
                                                             ================ ================ ================ ================
</TABLE>

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

                                     - 3 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
                                   (unaudited)
                                    ---------
<TABLE>
<CAPTION>
                                                                                                    Six months ended June 30,
                                                                                              --------------------------------------
                                                                                                     2006                2005
                                                                                              ------------------- ------------------
Cash flows from operating activities:
<S>                                                                                             <C>                  <C>
     Net income                                                                                  $   7,274            $   5,102
     Adjustments to reconcile net income to net cash provided by operating activities:
            Minority interests                                                                      32,358               24,282
            Minority interest distributions                                                        (27,931)             (24,282)
            Depreciation and amortization of real estate and in-place leases                        10,904               10,976
            Amortization of above market lease                                                         944                  944
            Gain on sale of real estate                                                                  -                  (63)
            Equity in earnings of unconsolidated joint venture                                        (682)                (387)
            Distributions from unconsolidated joint venture                                            510                  510
            Interest earned on restricted cash                                                        (121)                   -
            Lease termination fee income related to restricted cash                                 (8,948)                   -
            Stock-based compensation expense                                                           118                    -
            Other                                                                                       35                    -
     Changes in operating assets and liabilities:
            Deferred rent receivable                                                                   830                 (890)
            Other assets                                                                               334               (6,605)
            Security deposits                                                                       (1,366)                 (35)
            Deferred rental income                                                                   3,743               (1,748)
            Accounts payable and accrued expenses                                                    1,795                  510
                                                                                              ------------------- ------------------
     Net cash provided by operating activities                                                      19,797                8,314
                                                                                              ------------------- ------------------

Cash flows from investing activities:
     Improvements to real estate assets                                                               (163)                (637)
     Proceeds from sale of real estate                                                                   -                8,387
     Purchase of real estate                                                                       (15,959)             (14,183)
     Restricted cash used for purchase of real estate                                               13,447                    -
     Excess restricted cash                                                                          1,835                    -
                                                                                              ------------------- ------------------
     Net cash used in investing activities                                                            (840)              (6,433)
                                                                                              ------------------- ------------------

Cash flows from financing activities:
    Proceeds from mortgage loan                                                                          -               25,800
    Principal payments on mortgage notes payable                                                    (4,966)              (4,116)
    Principal payments on mortgage notes payable (related parties)                                    (195)                (181)
    Net payments under line of credit (related parties)                                                  -               (9,116)
    Net payments under revolving line of credit                                                          -               (5,036)
    Proceeds from exercised stock options                                                              145                  330
    Distributions paid to minority interests in excess of earnings                                       -               (3,717)
    Dividends paid                                                                                  (5,912)              (5,799)
                                                                                              ------------------- ------------------
     Net cash used in financing activities                                                         (10,928)              (1,835)
                                                                                              ------------------- ------------------
     Net increase in cash and cash equivalents                                                       8,029                   46
Cash and cash equivalents, beginning of period                                                      31,441                1,519
                                                                                              ------------------- ------------------
Cash and cash equivalents, end of period                                                         $  39,470            $   1,565
                                                                                              =================== ==================

Supplemental information:
    Cash paid for interest                                                                       $  10,653            $  10,038
                                                                                              =================== ==================
Supplemental schedule of non-cash investing and financing activities:
    Issuance of common stock upon conversion of O.P. units                                       $   9,925            $   2,197
                                                                                              =================== ==================
    Issuance of note receivable from sale of real estate                                                 -            $   4,060
                                                                                              =================== ==================
</TABLE>

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

                                     - 4 -
<PAGE>


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

1.   ORGANIZATION AND FORMATION OF THE COMPANY

     Mission  West  Properties,  Inc.  ("the  Company")  is a fully  integrated,
     self-administered  and  self-managed  real estate company that acquires and
     manages R&D/office  properties in the portion of the San Francisco Bay Area
     commonly referred to as Silicon Valley. In July 1998, the Company purchased
     an approximate  12.11% of four existing limited  partnerships  (referred to
     collectively as the "operating partnerships") and obtained control of these
     partnerships  by becoming  the sole general  partner in each one  effective
     July 1, 1998 for financial  accounting and reporting purposes.  The Company
     purchased  an  approximate   12.11%  interest  in  each  of  the  operating
     partnerships.   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 June 30, 2006,  the Company owns a  controlling  general  partnership
     interest of 18.41%,  21.69%,  16.19% and 12.42% 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 17.93%
     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 110 R&D
     properties, all of which are located in Silicon Valley.

     The  Company  has  elected to be taxed as a real  estate  investment  trust
     ("REIT") under the Internal Revenue Code of 1986, as amended.  Accordingly,
     no  provision  has been made for income  taxes for the three and six months
     ended June 30, 2006 and 2005.

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

2.   BASIS OF PRESENTATION

     PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION
     The accompanying unaudited interim 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 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   consolidated   financial   statements  contain  all  adjustments,
     consisting  only of normal  recurring  adjustments,  necessary  to  present
     fairly the Company's  consolidated  financial position as of June 30, 2006,
     their consolidated results of operations for the three and six months ended
     June 30, 2006 and 2005,  and their cash flows for the six months ended June
     30,  2006  and  2005.  All  significant  intercompany  balances  have  been
     eliminated in consolidation.  The consolidated  financial  statements as of
     June 30, 2006 and for the three and six months ended June 30, 2006 and 2005
     and related footnote  disclosures are unaudited.  The results of operations
     for the  three  and six  months  ended  June 30,  2006 are not  necessarily
     indicative of the results to be expected for the entire year.

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

     The Company also  consolidates  all variable  interest  entities ("VIE") in
     which it is deemed to be the primary  beneficiary  in accordance  with FASB
     Interpretation  No.  46R ("FIN  46R").  As of June 30,  2006,  the  Company
     consolidated  one VIE in the  accompanying  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 5 for  further
     discussion of this transaction).

                                     - 5 -

<PAGE>


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

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

     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  consolidated  statements of operations.  Under
     SFAS No. 123R, the Company recorded $59 and $118 of expense for share-based
     compensation  relating  to  grants of stock  options  for the three and six
     months ended June 30, 2006, respectively.

     As of  June  30,  2006,  there  was  $0.7  million  of  total  unrecognized
     compensation cost related to unvested share-based compensation arrangements
     granted under the compensation plan. That cost is expected to be recognized
     over a weighted-average period of 1.4 years.

     For 2005 and all prior years,  the Company had elected to follow APB 25 and
     related  interpretations  in accounting  for its employee and  non-employee
     director  stock  options.   SFAS  No.  123,   "Accounting  for  Stock-Based
     Compensation,"  encourages,  but  does  not  require  companies  to  record
     compensation cost for stock-based employee compensation plans at fair value
     prior to year 2006. Under APB 25, no compensation  expense related to stock
     options  had been  recognized  because  the  exercise  price of the granted
     options  equaled the market  price of the  underlying  stock on the date of
     grant.  Although  the Company  had elected to follow APB 25 for  previously
     granted options prior to January 1, 2006, pro forma  information  regarding
     net income and net income per share is  required  by SFAS No.  123R for all
     periods presented prior to 2006. This information has been determined as if
     the Company had  accounted  for stock  options  under the fair value method
     under SFAS 123.

     The  following  table   illustrates  the  unaudited  pro  forma  effect  on
     consolidated net income  available to common  stockholders and consolidated
     earnings  per  share if the fair  value  method  had  been  applied  to all
     outstanding  and unvested  stock options for the three and six months ended
     June 30, 2005.

<TABLE>
<CAPTION>
                                                                      Three Months Ended              Six Months Ended
                                                                        June 30, 2005                  June 30, 2005
                                                                 ---------------------------    ---------------------------
                                                                       (dollars in thousands, except per share data)
<S>                                                                      <C>                            <C>
        Historical net income to common stockholders, as reported         $2,695                         $5,102
        Add back compensation expense for stock options included
           in historical net income to common stockholders                     -                              -
        Deduct compensation expense for stock options determined
           under fair value based method                                     (40)                           (59)
        Allocation of compensation expense to minority interests              33                             48
                                                                 ---------------------------    ---------------------------
        Pro forma net income to common stockholders                       $2,688                         $5,091
                                                                 ===========================    ===========================

        Earnings per share - basic:
           Historical net income to common stockholders, as reported       $0.15                          $0.28
           Pro forma net income to common stockholders                     $0.15                          $0.28
        Earnings per share - diluted:
           Historical net income to common stockholders, as reported       $0.15                          $0.28
           Pro forma net income to common stockholders                     $0.15                          $0.28
</TABLE>

     MINORITY INTERESTS
     Minority  interest   represents  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. In total,
     these  interests  accounted  for  approximately  82.07%  of  the  ownership
     interests in the real estate operations of the Company as of June 30, 2006.
     Minority  interest in net income is  calculated by taking the net income of
     the  operating  partnerships  (on a  stand-alone  basis)  multiplied by the
     respective weighted average minority interest ownership percentage.

                                     - 6 -

<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
       (dollars in thousands, except share, per share, O.P. units and per
                            square footage amounts)
                                   (unaudited)

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

     RECLASSIFICATIONS
     Certain  reclassifications  have been made to the previously  reported 2005
     consolidated   financial  statements  in  order  to  conform  to  the  2006
     presentation.

     The following notes,  which present interim  disclosures as required by the
     SEC, highlight  significant  changes to the notes to the Company's December
     31,  2005  audited  consolidated  financial  statements  and should be read
     together  with the  consolidated  financial  statements  and notes  thereto
     included in the Company's 2005 Form 10-K filed on March 16, 2006.

3.   REAL ESTATE

     On April 1, 2006, the Company acquired a fully leased  office/R&D  property
     with  approximately  42,100 rentable square feet located at 1875 Charleston
     Road in Mountain  View,  California by purchasing  Mission West  Charlston,
     LLC, an entity  controlled by Carl E. Berg. The total acquisition price for
     this  entity  was  $2,615,  which  is  subject  to a ground  lease  with an
     unrelated  party for the  underlying  property that runs through June 2057.
     The acquisition was paid in cash.

     The purchase price of the 1875 Charleston Road acquisition was allocated to
     long-lived  assets and the value of an in-place  lease.  The in-place lease
     was valued at fair market so there was no  intangible  asset  allocated  to
     above-or-below  market  lease  value.  The  Company  recorded  $745  of the
     purchase price as real estate related intangible assets in the accompanying
     consolidated  balance  sheet  for  the  value  of an  in-place  lease.  The
     intangible  assets will be amortized  over the applicable  remaining  lease
     term.  Amortization  expense of $35 was recorded for the three months ended
     June 30, 2006.

     The purchase  price  allocation  for this  acquisition  was  determined  in
     accordance with the following principles under SFAS No. 141:

     The fair  value of the  tangible  assets  of an  acquired  property,  which
     includes land, building and tenant  improvements,  is determined by valuing
     the property as if it were  vacant,  and the  "as-if-vacant"  value is then
     allocated to land,  building and tenant  improvements based on management's
     determination  of  the  relative  fair  values  of  these  assets.  Factors
     considered by management in performing these analyses include certain costs
     during the lease-up periods considering current market conditions and costs
     to execute  similar  leases.  These costs include  estimates of lost rental
     revenue, leasing commissions and tenant improvements.

     The  capitalized  in-place  lease  value,  included in real estate  related
     intangible  assets in the  accompanying  consolidated  balance  sheets,  is
     amortized  to expense as  amortization  of real estate  over the  remaining
     non-cancelable  lease term. If a lease were to be  terminated  prior to its
     stated expiration,  all unamortized amounts relating to that lease would be
     written off in the period that the lease is terminated.

4.   RESTRICTED CASH

     Restricted cash totaled $10,626 as of June 30, 2006. Of this amount, $9,075
     represents a balance that is consolidated due to the Company's  adoption of
     FIN 46R,  "Consolidation of Variable  Interest  Entities." 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. See Note 5 below for further discussion.
     The remaining  $1,551  represents a bond the Company posted in the Republic
     Properties  Corporation v. Mission West  Properties,  L.P.  litigation (see
     Note 10). In July 2006,  this $1,551 bond was released and the funds became
     unrestricted.

5.   VARIABLE INTEREST ENTITY

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

     In March 2006, one of the Company's tenants, JDS Uniphase ("JDS"),  entered
     into an assignment of lease  agreement  with an unrelated  party,  M&M Real
     Estate Control & Restructuring,  LLC ("M&M"), in connection with leases for
     approximately 252,000 rentable square feet located in San Jose, California.
     M&M assumed all of JDS's remaining obligations under these leases, acquired
     certain  personal  property of JDS located on the  premises  and received a
     payment of  approximately  $11,147.  At the same time, the Company  entered
     into a consent  for  assignment  of lease  with both  parties  and a mutual
     release  agreement with JDS, pursuant to which all of the JDS's obligations
     under  these  leases have been  effectively  transferred  to M&M.  M&M must
     continue to perform all

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

     of the  obligations  under  the  assumed  JDS  leases  and has the right to
     sublease any or all of the 252,000  rentable square feet vacated by JDS for
     the  remainder of the current  lease terms,  which expire in 2006 and 2007.
     Under the terms of the  agreement,  the Company will  receive  monthly rent
     payments of approximately  $733 from April 2006 through December 2006, $545
     from January 2007 through  August 2007 and $330 from September 2007 through
     November 2007. Based upon the provisions of FIN 46R, the Company determined
     that M&M is a variable interest entity. The Company further determined that
     the Company is the primary beneficiary of this variable interest entity and
     therefore  consolidated this entity for financial reporting purposes.  Upon
     consolidation, the Company recognized a lease termination fee of $11,147 in
     March 2006.

6.   STOCK TRANSACTIONS

     During the six months ended June 30, 2006, stock options to purchase 21,300
     shares of common stock were  exercised at $8.25 per share and 20,000 shares
     of common stock were  exercised at $10.00 per share.  Total proceeds to the
     Company were $145 with the remaining balance of $231 received in early July
     2006.  During the same period,  four limited partners  exchanged a total of
     852,096 O.P. units for 852,096  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 $9,925  from  minority  interest  to  paid-in-capital.
     Neither the Company nor the  operating  partnerships  received any proceeds
     from the issuance of the common stock in exchange for O.P. units.

7.   DISCONTINUED OPERATIONS

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

     As of June 30, 2006,  there were no properties under contract to be sold or
     otherwise  disposed  of which  would  qualify  as  assets  held for sale or
     discontinued operations. During the first quarter of 2005, the Company sold
     two properties for a combined sales price of $12,750.  Condensed results of
     operations for these properties for the three and six months ended June 30,
     2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                                          Three Months Ended June 30,      Six Months Ended June 30,
                                                             2006            2005             2006           2005
                                                          -----------     -----------     -----------     -----------
                                                                             (dollars in thousands)
                                                                                  (unaudited)
<S>                                                            <C>            <C>             <C>            <C>
      Revenues
         Rental revenue from real estate                        -               -              -              $14
         Tenant reimbursements                                  -               -              -                1
                                                          -----------     -----------     -----------     -----------
               Total revenues                                   -               -              -               15
                                                          -----------     -----------     -----------     -----------

      Expenses
         Property operating, maintenance and real estate taxes  -             $10              -               33
         Depreciation                                           -               -              -               33
                                                          -----------     -----------     -----------     -----------
              Total expenses                                    -              10              -               66
                                                          -----------     -----------     -----------     -----------

      Loss from discontinued operations                         -             (10)             -              (51)
      Gain from disposal of discontinued operations             -               -              -               63
      Minority interest in loss/(earnings) attributable to      -               8              -              (10)
         discontinued operations
                                                          -----------     -----------     -----------     -----------
     (Loss)/income from discontinued operations                 -            ($ 2)             -              $ 2
                                                          ===========     ===========     ===========     ===========

</TABLE>

     A deferred gain of approximately $1,408 was recorded on one of the disposed
     properties  in 2005.  The  gain  was  recognized  as  revenue  based on the
     installment  method of profit  recognition  because  the  purchaser  of the
     property did not make a sufficiently  large down payment under SFAS No. 66,
     "Accounting  for  Sales of Real  Estate"  ("SFAS  No.  66").  SFAS  No.  66
     establishes accounting standards for recognizing profit or loss on sales of
     real estate.  Gain on the sale is recognized  proportionately as the seller
     receives  payments from the purchaser.  Interest income is recognized on an
     accrual basis,  when  appropriate.  The Company  recorded a $63 gain in the
     first  quarter of 2005,  and the balance of the expected  gain was deferred
     until the Company  received the  remaining  balance of the sales price from
     the purchaser.

                                     - 8 -

<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
       (dollars in thousands, except share, per share, O.P. units and per
                            square footage amounts)
                                   (unaudited)

8.   NET INCOME PER SHARE

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

     The computation for weighted average shares is detailed below:

<TABLE>
<CAPTION>
                                                            Three Months Ended June 30,            Six Months Ended June 30,
                                                               2006              2005               2006               2005
                                                         ---------------    --------------     --------------    ---------------
<S>                                                       <C>              <C>                 <C>                <C>
         Weighted average shares outstanding (basic)       19,028,240       18,257,982          18,743,649         18,184,661
         Incremental shares from assumed option exercise       95,705           25,076              80,691             44,584
                                                         ---------------    --------------     --------------    ---------------
         Weighted average shares outstanding (diluted)     19,123,945       18,283,058          18,824,340         18,229,245
                                                         ===============    ==============     ==============    ===============
</TABLE>

     Outstanding  options  to  purchase  647,000  shares  in 2006 and 2005  were
     excluded  from the  computation  of diluted  net income per share under the
     treasury  stock method  because the option  exercise price was greater than
     the weighted  average  exercise price of the Company's  common stock during
     the respective periods.  The outstanding O.P. units, which are exchangeable
     at the unit holder's option,  subject to certain conditions,  for shares of
     common stock on a one-for-one basis have been excluded from the diluted net
     income  per  share  calculation,  as  there  would  be  no  effect  on  the
     calculation  after adding the minority  interests'  share of income back to
     net income. The total number of O.P. units outstanding at June 30, 2006 and
     2005 was 85,235,999 and 86,169,195, respectively.

9.   RELATED PARTY TRANSACTIONS

     As of June 30, 2006, the Berg Group owned  77,485,028 O.P. units.  The Berg
     Group's  combined  ownership of O.P. units and shares of common stock as of
     June 30, 2006 represented  approximately 74% of the total equity interests,
     assuming  conversion of the  85,235,999  O.P.  units  outstanding  into the
     Company's common stock.

     As of June 30,  2006,  debt in the  amount of $9,856 was due the Berg Group
     under a mortgage note  established  on May 15, 2000 in connection  with the
     acquisition of a 50% interest in Hellyer Avenue  Limited  Partnership,  the
     obligor under the mortgage  note. The mortgage note bears interest at 7.65%
     and is due in June 2010 with  principal  payments  amortized over 20 years.
     Interest expense incurred in connection with the Berg Group line of credit,
     which was  terminated in October 2005,  and mortgage note was $190 and $243
     for the three  months  June 30, 2006 and 2005,  respectively,  and $381 and
     $549 for the six months ended June 30, 2006 and 2005, respectively.

     On April 1, 2006, the Company acquired a fully leased  office/R&D  property
     with  approximately  42,100  rentable square feet located at 1875 Charlston
     Road in Mountain  View,  California by purchasing  Mission West  Charlston,
     LLC, an entity  controlled by Carl E. Berg. The total acquisition price for
     this  entity  was  $2,615,  which  is  subject  to a ground  lease  with an
     unrelated  party for the  underlying  property that runs through June 2057.
     The transaction was approved by the Independent  Directors Committee of the
     Company's Board of Directors (the "Independent Directors Committee").

     During  the first six  months  of 2006 and 2005,  Carl E. Berg or  entities
     controlled by Mr. Berg held financial  interests in several  companies that
     lease space from the operating partnerships,  which include three companies
     in which Mr. Berg has a greater than 10% ownership interest.  These related
     tenants occupy  approximately  48,000 square feet and contributed  $162 and
     $193 in rental  revenue  during the three  months  ended June 30,  2006 and
     2005,  respectively,  and $324 and $409 in rental  revenue  during  the six
     months  ended June 30,  2006 and 2005,  respectively.  Under the  Company's
     charter,  bylaws and agreements with the Berg Group, the individual members
     of the Berg Group are  prohibited  from  acquiring or holding shares of the
     Company's common stock if such acquisition would result in their beneficial
     ownership  percentage of the Company's  common stock causing the Company to
     violate any REIT qualification requirement.

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

     The Berg Group has an approximately  $2,500  commitment to complete certain
     tenant  improvements in connection  with the Company's 2002  acquisition of
     5345 Hellyer  Avenue in San Jose.  The Company has recorded this portion of
     the  purchase  price  paid to the Berg  Group as an  "Other  asset"  on its
     consolidated   balance  sheets.  The  Berg  Group  plans  to  satisfy  this
     commitment to complete  certain tenant  improvements  when requested by the
     Company following the approval of the Independent Directors Committee.

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

     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 as an "Other
     asset" on its consolidated  balance sheets. The Berg Group plans to satisfy
     this  commitment  to  construct a building  when  requested  by the Company
     following the approval of the Independent Directors Committee.

     The Company currently leases office space owned by Berg & Berg Enterprises,
     Inc.,  an affiliate of Carl E. Berg and Clyde J. Berg.  Rental  amounts and
     overhead reimbursements paid to Berg & Berg Enterprises,  Inc. were $23 for
     each of the  three-month  periods  ended June 30, 2006 and 2005 and $45 for
     each of the six-month periods ended June 30, 2006 and 2005.

10.  COMMITMENTS AND CONTINGENCIES

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

     Republic Properties  Corporation  ("RPC") v. Mission West Properties,  L.P.
     ("MWP"),  in the Circuit  Court of  Maryland  for  Baltimore  City Case No.
     24-C-00-005675.  RPC is a former partner with Mission West Properties, L.P.
     in the Hellyer Avenue Limited  Partnership  ("Hellyer  LP"). In April 2004,
     the Circuit Court for Baltimore City,  Maryland issued a Memorandum Opinion
     in  the  case  and  awarded  damages  of  approximately  $934  to  the  RPC
     plaintiffs,  which  represented  a  liability  of the  Company or MWP.  The
     Company  has a  receivable  from a Berg Group  affiliate  for the amount of
     distributions it received as the successor to RPC's interest in the Hellyer
     LP, which exceeds the amount of the damages  awarded to the RPC parties and
     would be used to pay those damages in the event the decision of the Circuit
     Court is upheld  ultimately.  The Company has never  accounted  for the 50%
     interest  in Hellyer LP that is claimed by RPC as an asset of the  Company.
     In February  2001,  the Company  filed a suit  against RPC in the  Superior
     Court of the State of California  for the County of Santa Clara Case No. CV
     796249 which was stayed  pending  resolution of the Maryland case. In March
     2005, the Company  voluntarily  dismissed its California  suit. On March 1,
     2005, the Maryland Appeals Court ruled in favor of Mission West Properties,
     L.P.,   finding  that  the  Circuit  Court  of  Maryland   lacked  personal
     jurisdiction  over MWP. In April 2005, the decision of the Maryland Appeals
     Court became final,  and the Company obtained a court order for the release
     of a $1,551 bond,  which it posted to remove an attachment  order issued to
     RPC. In April 2005,  RPC  submitted a motion to the  Superior  Court of the
     State of  California  effectively  asking  the  court to  prevent  MWP from
     dismissing  the  previously  dismissed  California  suit. In April 2006 the
     Maryland  Supreme Court upheld an earlier  Maryland Appeals Court ruling in
     favor of MWP,  finding that the Circuit Court of Maryland  could not assert
     personal  jurisdiction  over MWP in the RPC  suit.  All  litigation  in the
     Maryland   portion  of  this  dispute  over  the  Hellyer   Avenue  limited
     partnership has been concluded in the Company's  favor.  The lawsuit in the
     Santa Clara County, California Superior Court is still unresolved. However,
     the  California  Superior  Court  ordered the release of the $1,551 bond in
     June 2006.

     In January 2004, the Global Crossing Estate Representative,  for itself and
     the Liquidating Trustee of the Global Crossing Liquidating Trust v. Mission
     West Properties filed an action in United States  Bankruptcy Court Southern
     District of New York Case No.  02-40188  (REG)  asserting  that payments of
     approximately  $815 made in the ordinary  course of business within 90 days
     of the Global  Crossing  bankruptcy  filing were preference  payments.  The
     Company has engaged legal counsel to defend itself in this claim and intend
     to  vigorously  contest the matter.  On February 9, 2005,  the Court held a
     hearing  to  consider  the  objection  filed with  respect to Mission  West
     Properties'  claim.  In April 2005,  the Company filed a motion for summary
     judgment in the United States  Bankruptcy  Court  Southern  District of New
     York requesting the Court to dismiss the preference  claim.  The motion for
     summary  judgment  was denied.  Discovery  continues by both parties and no
     trial date has been set.

     GUARANTEES AND INDEMNITIES
     Under its articles of incorporation  and bylaws,  the Company has agreed to
     indemnify  its officers and  directors  for certain  events or  occurrences
     arising as a result of the officer or director's  serving in such capacity.
     The  maximum  potential  amount of future  payments  the  Company  could be
     required to make under these indemnification  agreements is unlimited.  The
     Company  believes  the  estimated  fair  value  of  these   indemnification
     agreements is minimal and has recorded no liabilities for these  agreements
     as of June 30, 2006.

     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

                                     - 10 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
       (dollars in thousands, except share, per share, O.P. units and per
                            square footage amounts)
                                   (unaudited)

     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 June 30, 2006.

     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.

     BERG LAND HOLDINGS OPTION AGREEMENT
     In April  2005,  the Berg Group  disclosed  the receipt of an offer from an
     unrelated  party  to  purchase  a  portion  of the  Piercy &  Hellyer  land
     comprised of approximately 10 acres in San Jose, California that is subject
     to  the  Berg  Land  Holdings  Option  Agreement  with  the  Company.   The
     prospective  purchaser  has  disclosed  its intention to develop "for sale"
     industrial  type  buildings.  In light of the  overcapacity  in the Silicon
     Valley  R&D  properties  market  and the  Company's  current  inventory  of
     available buildings for lease in this submarket,  the Independent Directors
     Committee,  which is responsible for reviewing,  evaluating and authorizing
     action  with  respect to any  transaction  between us and any member of the
     Berg Group, has authorized removal of this approximately  10-acre parcel of
     land from the scope of the Berg Land Holdings Option Agreement,  subject to
     the  completion  of the  sale  to  the  unrelated  party.  In  making  this
     determination,  the Independent  Directors Committee considered a number of
     factors,  including risks and other potentially  adverse  consequences that
     could be associated with acquiring undeveloped land for future development.
     In the event this parcel of land is not sold to this prospective purchaser,
     the  parcel  would not be deemed to be  removed  from the scope of the Berg
     Land  Holdings  Option  Agreement  and would remain  eligible for potential
     future  acquisition  by the  Company  under the Berg Land  Holdings  Option
     Agreement.

     In light of the  overcapacity in the Silicon Valley R&D properties  market,
     the Berg Group currently is seeking local government approval of a proposed
     rezoning of the 160-acre Evergreen site to permit  residential  development
     on a substantial portion of the site. The Independent  Directors Committee,
     which is responsible for reviewing,  evaluating and authorizing action with
     respect to any  transaction  between the Company and any member of the Berg
     Group,  authorized removal of the Evergreen site from the scope of the Berg
     Land Holdings Option  Agreement,  subject to the completion of the rezoning
     of the  160-acre  Evergreen  site,  or  portion  thereof,  for  residential
     development.  In  making  this  determination,  the  Independent  Directors
     Committee  considered  a number  of  factors,  including  risks  and  other
     potentially adverse  consequences that could be associated with large scale
     residential development activities.  Any portion of the Evergreen site that
     is not rezoned as residential property is not deemed to be removed from the
     scope of the Berg Land Holdings Option  Agreement and would remain eligible
     for  potential  future  acquisition  by the  Company  under  the Berg  Land
     Holdings Option Agreement.

     ASSET DISPOSITIONS SUBJECT TO CERTAIN CONDITIONS
     The Company has entered into sale agreements with unrelated parties subject
     to numerous material conditions,  including but not limited to re-zoning of
     the property and negotiating certain agreements with the local municipality
     acceptable  to the buyer.  As a result of the  conditions  agreed to by the
     Company and the  respective  buyers,  these assets do not meet the criteria
     set forth in SFAS No. 144 to be  classified  as assets  held for sale.  The
     following  summarizes  the assets for which the Company has executed  sales
     contracts that are subject to material conditions as previously described:

<TABLE>
<CAPTION>
        Property                   Number of Building    Rentable Square Feet        Acre            Sales Price
        --------                   ------------------    --------------------        ---------            -----------
<S>                                        <C>                  <C>                  <C>                   <C>
        McCandless Drive                    8                    427,000              23.03                 $90,000
        Milpitas, California

        Samaritan Drive                     3                    235,000              13.37                 $43,000
        San Jose, California

        Morse Avenue                        1                     39,200               2.25                 $ 8,250
        Sunnyvale, California
</TABLE>

                                     - 11 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
       (dollars in thousands, except share, per share, O.P. units and per
                            square footage amounts)
                                   (unaudited)

11.  SUBSEQUENT EVENTS

     On July 6, 2006,  the Company  paid  dividends of $0.16 per share of common
     stock to all common stockholders of record as of June 30, 2006. On the same
     date, the operating partnerships paid a distribution of $0.16 per O.P. unit
     to all  holders  of  O.P.  units.  Aggregate  dividends  and  distributions
     amounted to approximately $16,733.

     In April  2005,  the  Company  obtained a court  order for the release of a
     $1,551 bond relating to the Republic Properties Corporation v. Mission West
     Properties,  L.P.  litigation  (see above under Note 10). In June 2006, the
     California  Superior  Court  ordered the release of the $1,551 bond and the
     Company received the entire proceeds plus interest in July 2006.

                                     - 12 -

<PAGE>




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

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  should be read in  conjunction  with the  accompanying  consolidated
financial  statements and notes thereto  contained  herein and our  consolidated
financial  statements  and notes thereto  contained in our Annual Report on Form
10-K as of and for the year ended  December 31, 2005.  The results for the three
and six months ended June 30, 2006 are not necessarily indicative of the results
to be  expected  for the entire  fiscal  year  ending  December  31,  2006.  The
following  discussion  includes  forward-looking  statements,  including but not
limited  to,  statements  with  respect  to our  future  financial  performance,
operating  results,  plans and objectives.  Actual results may differ materially
from those currently anticipated depending upon a variety of factors,  including
those described under the sub-heading, "Forward-Looking Information."

FORWARD-LOOKING INFORMATION

This quarterly report 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 include, but are not limited to, the following:

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

In addition, the actual timing of development,  construction, and leasing on any
projects  that we  believe  we may  acquire  in the  future  under the Berg Land
Holdings  Option  Agreement is  presently  unknown,  and reliance  should not be
placed on estimates  concerning these projects.  These risks and  uncertainties,
together with the other risks  described under Part I, Item 1A -- "Risk Factors"
of our  annual  report  on Form 10-K for 2005 and from time to time in our other
reports and documents filed with the Securities and Exchange Commission,  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 June 30,
2006, we owned and managed 110  properties  totaling  approximately  7.9 million
rentable   square  feet  through  four   limited   partnerships,   or  operating
partnerships,  for which we are the sole general partner. This class of property
is designed  for research  and  development  and office uses and, in some cases,
includes space for light manufacturing operations with loading docks. We believe
that we have one of the  largest  portfolios  of  R&D/office  properties  in the
Silicon Valley.  As of June 30, 2006, the four tenants who each leased in excess
of  300,000  rentable  square  feet  from us  were  Microsoft  Corporation,  NEC
Electronics America, Inc. (a subsidiary of NEC Electronics  Corporation),  Ciena
Corporation  and Apple Computer,  Inc. For federal income tax purposes,  we have
operated as a self-managed,  self-administered  and fully integrated real estate
investment trust ("REIT") since 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

                                     - 13 -
<PAGE>


-    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. The Silicon Valley R&D property market has historically  fluctuated
with the local economy.  The Silicon  Valley economy and business  activity have
slowed markedly since 2001 after fast-paced  growth in 1999 and 2000.  According
to a recent  report by NAI BT  Commercial  Real  Estate,  the  vacancy  rate for
Silicon  Valley R&D property was  approximately  19.6% in late 2005 and 19.4% at
the end of the second  quarter  of 2006.  Total  vacant  R&D  square  footage in
Silicon Valley at the end of the second quarter of 2006 amounted to 29.9 million
square feet, of which 21.4%, or 6.4 million square feet, was being offered under
subleases.  Total  positive net  absorption  (which is the  computation of gross
square  footage  leased  less gross new square  footage  vacated  for the period
presented) in 2005 amounted to approximately 3.6 million square feet. During the
first  six  months  of  2006,   there  was  total  positive  net  absorption  of
approximately  76,000 square feet. Average asking market rent per square foot at
the end of the second  quarter of 2006 was $0.90 compared to $0.88 in late 2005,
although individual  properties within any particular submarket presently may be
leased above or below the current average asking market rental rates within that
submarket.  The Silicon Valley R&D property market has been  characterized  by a
substantial  number  of  submarkets,  with rent and  vacancy  rates  varying  by
submarket and location within each submarket.

Our  occupancy  rate at June 30,  2006 was 63.0%  compared  to 65.7% at June 30,
2005. We believe that our occupancy rate could decline  further going forward if
key tenants seek the protection of bankruptcy  laws,  consolidate  operations or
discontinue  operations.  In  addition,  leases  with  respect to  approximately
209,000  rentable  square  feet  are  expiring  prior  to the end of  2006.  The
properties  subject to these  leases may take  anywhere  from 24 to 36 months or
longer to re-lease.  We believe  that the average 2006 renewal  rental rates for
our properties will be approximately equal to, or perhaps below,  current market
rents,  but we cannot  give any  assurance  that  leases will be renewed or that
available  space will be re-leased at rental rates equal to or above the current
quoted market rates.

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare the 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   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
consolidated   financial  statements,   and  potentially  result  in  materially
different  results under different  conditions and assumptions.  We believe that
the following best describe our critical accounting policies:

BUSINESS COMBINATIONS.  Statement of Financial Accounting Standards ("SFAS") No.
141, "Business  Combinations"  ("SFAS No. 141"), was effective July 1, 2001. The
acquisition costs of each property acquired prior to July 1, 2001 were allocated
only to building,  land and leasing commissions with building depreciation being
computed  based on an estimated  weighted  average  composite  useful life of 40
years and leasing  commission  amortization  being computed over the term of the
lease.  Acquisitions of properties made subsequent to the effective date of SFAS
No. 141 are based on an allocation of the  acquisition  cost to land,  building,
tenant improvements,  and intangibles for at market, including lease origination
and lease up period costs,  and above and below market in place leases,  and the
determination  of their useful lives are guided by a combination of SFAS No. 141
and management's estimates. If we do not appropriately allocate these

                                     - 14 -
<PAGE>

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

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

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

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

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

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

STOCK-BASED  COMPENSATION.  In December  2004,  the FASB  issued SFAS No.  123R,
"Share-Based  Payment"  ("SFAS No.  123R"),  which  addresses the accounting for
employee and director  stock  options.  Statement 123R requires that the cost of
all  employee  and  director  stock  options,  as  well  as  other  equity-based
compensation arrangements, be reflected in the financial statements based on the
estimated  fair value of the awards.  SFAS No. 123R is an  amendment to SFAS No.
123 and supersedes APB Opinion 25 ("APB 25"). SFAS No. 123R is applicable to any
award that is settled or measured in stock, including stock options,  restricted
stock,  stock  appreciation  rights,  stock units,  and employee  stock purchase
plans. We have adopted the  requirements  of SFAS No. 123R effective  January 1,
2006 using the modified  prospective  method of transition.  Accordingly,  prior
periods have not been  restated.  The  adoption of this  standard did not have a
material  effect on our  consolidated  statements  of  operations  or  financial
position.  Compensation  cost  under SFAS No.  123R may differ due to  different
assumptions and treatment of forfeitures.

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

                                     - 15 -
<PAGE>

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.

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

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

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

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

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

                                     - 16 -
<PAGE>

RESULTS OF OPERATIONS

COMPARISON  OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 2005

As of  June  30,  2006,  through  our  controlling  interests  in the  operating
partnerships,  we  owned  110  properties  totaling  approximately  7.9  million
rentable  square feet  compared to 108  properties  totaling  approximately  8.0
million  rentable square feet owned by us as of June 30, 2005. This represents a
net  decrease  of  approximately  1% in total  rentable  square  footage,  as we
acquired two R&D properties  consisting of approximately 137,800 rentable square
feet and  disposed  of one R&D  property  consisting  of  approximately  239,000
rentable square feet since the second quarter of 2005.

Rental revenue from real estate for the three and six months ended June 30, 2006
compared to the three- and six-month periods in 2005 are as follows:
<TABLE>
<CAPTION>

                                   Three Months Ended June 30,                             % Change by        % of Total Net
                                     2006              2005              $ Change         Property Group          Change
                                 -------------     --------------     ---------------     ---------------     ----------------
                                               (dollars in thousands)
<S>                               <C>                <C>               <C>                  <C>                 <C>
       Same Property (1)           $21,774            $25,104            ($3,330)             (13.3%)             (13.3%)
       2006 Acquisitions               553                  -                553              100.0%                2.2%
                                 -------------     --------------     ---------------                         ----------------
          Total                    $22,327            $25,104            ($2,777)             (11.1%)             (11.1%)
                                 =============     ==============     ===============                         ================

                                    Six Months Ended June 30,                              % Change by        % of Total Net
                                     2006              2005              $ Change         Property Group          Change
                                 -------------     --------------     ---------------     ---------------     ----------------
                                               (dollars in thousands)
       Same Property (1)           $45,978            $51,351            ($5,373)             (10.5%)             (10.5%)
       2006 Acquisitions               665                  -                665              100.0%                1.3%
                                 -------------     --------------     ---------------                         ----------------
          Total                    $46,643            $51,351            ($4,708)              (9.2%)              (9.2%)
                                 =============     ==============     ===============                         ================
</TABLE>

(1)  "Same Property" is defined as properties  owned by us prior to 2006 that we
     still owned as of June 30, 2006.

RENTAL REVENUE FROM REAL ESTATE FROM CONTINUING OPERATIONS
For the quarter ended June 30, 2006,  rental revenue from real estate  decreased
by  approximately  ($2.8)  million,  or 11.1%,  from $25.1 million for the three
months ended June 30, 2005 to $22.3 million for the same period in 2006. For the
six months ended June 30,  2006,  rental  revenue from real estate  decreased by
approximately  ($4.7)  million,  or 9.2%,  from $51.3 million for the six months
ended June 30,  2005 to $46.6  million for the six months  ended June 30,  2006.
Rental revenue includes approximately ($0.5) million in amortization expense for
the three months ended June 30, 2006 and 2005 and  approximately  ($0.9) million
in amortization  expense for the six months ended June 30, 2006 and 2005 for the
amortization of an above-market lease intangible asset pursuant to SFAS No. 141.
The decline in rental  revenue was  primarily a result of lower  rental rates on
new  leases  and  renewals  and  the  loss  of  several  tenants  due  to  lease
terminations, bankruptcy, relocation or cessation of their operations since June
30, 2005, all of which  resulted from current  adverse  market  conditions.  Our
occupancy  rate  at  June  30,  2006  was  approximately   63.0%,   compared  to
approximately  65.7% at June 30, 2005.  Due to an over supply of R&D  properties
and competition  from other landlords in the Silicon Valley,  our occupancy rate
may drop further if the 209,000  rentable square feet scheduled to expire during
the remainder of 2006 is not renewed or re-leased.

EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE
As of June 30, 2006, we had investments in four R&D buildings,  totaling 593,000
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 June 30,  2006,  we recorded  equity in
earnings from the  unconsolidated  joint venture of approximately  $0.35 million
compared to equity in earnings of $0.39 million for the same period in 2005. Our
equity in earnings from this unconsolidated joint venture declined in the second
quarter of 2006 due to higher  operating  expenses.  For the  six-month  periods
ended June 30, 2006 and 2005, equity in earnings from the  unconsolidated  joint
venture was  approximately  $0.68 million and $0.39 million,  respectively.  The
increase  in  equity in  earnings  from  unconsolidated  joint  venture  for the
six-month  period ended June 30, 2006  resulted  from the  write-offs of leasing
commission  and tenant  improvements  in 2005 for a tenant that  terminated  its
lease  agreement.  The  occupancy  rate for the  properties  owned by this joint
venture  at  June  30,  2006  and  2005  was  approximately   86.6%  and  78.7%,
respectively.

LEASE TERMINATION INCOME FROM CONTINUING OPERATIONS
Lease  termination  fees for the three  months ended June 30, 2006 and 2005 were
$13,000  and $0.5  million,  respectively.  Lease  termination  fees for the six
months ended June 30, 2006 and 2005 were  approximately  $16.1  million and $0.5
million,  respectively.  These fees were paid by tenants  who  terminated  their
lease obligations before the end of the contractual term of the lease. We do not
consider those transactions to be recurring items.

                                     - 17 -
<PAGE>

OTHER INCOME FROM CONTINUING OPERATIONS
Other income of  approximately  $1.1 million for the three months ended June 30,
2006 included approximately $0.5 million from interest income, $0.3 million from
management fee income and $0.3 million from settlement  claims and miscellaneous
income.  Other income of  approximately  $1.8 million for the three months ended
June 30, 2005 included approximately $0.2 million from management fee income and
$1.6 million from settlement claims and miscellaneous income. For the six months
ended  June 30,  2006,  other  income of  approximately  $1.8  million  included
approximately  $0.9 million from interest  income,  $0.5 million from management
fee income and $0.4 million from settlement claims and miscellaneous income. For
the six months ended June 30, 2005, other income of  approximately  $2.1 million
included  approximately $0.5 million from management fee income and $1.6 million
from settlement claims and miscellaneous income.

EXPENSES FROM CONTINUING OPERATIONS
Property  operating  expenses and real estate taxes during the second quarter of
2006 increased by approximately $0.2 million, or 4.4%, from $4.1 million to $4.3
million for the three  months  ended June 30, 2005 and 2006,  respectively,  due
primarily to higher  property  taxes from two R&D property  acquisitions  in the
first  half  of  2006  and  higher   property   tax  refunds  in  2005.   Tenant
reimbursements  decreased by approximately  ($0.5) million,  or 14.7%, from $3.6
million for the three  months  ended June 30, 2005 to $3.1 million for the three
months ended June 30, 2006 due to lower occupancy.  Property  operating expenses
and real estate taxes  remained the same at  approximately  $9.0 million for the
six months  ended June 30, 2006 and 2005.  Tenant  reimbursements  decreased  by
approximately  ($0.8)  million,  or 11.7%,  from $7.2 million for the six months
ended June 30, 2005 to $6.4 million for the six months ended June 30, 2006.  The
decrease  in tenant  reimbursements  for the six months  ended June 30,  2006 as
compared to the same period in 2005 was due to lower occupancy. Certain expenses
such as  property  insurance,  real  estate  taxes,  and other  fixed  operating
expenses  are not  recoverable  from  vacant  properties,  however.  General and
administrative  expenses increased by approximately $0.2 million, or 43.8%, from
$0.4  million to $0.6 million for the three months ended June 30, 2005 and 2006,
respectively.  For the six months  ended  June 30,  2005 and 2006,  general  and
administrative  expenses increased by approximately $0.2 million, or 13.8%, from
$1.1  million  to $1.3  million,  respectively.  The  increase  in  general  and
administrative  expenses  for the quarter and the six months ended June 30, 2006
was  primarily a result of fees paid in  connection  with filing a  registration
statement  for the resale of shares of common stock to be acquired  from time to
time upon the exchange of O.P. Units for stock,  as well as dividend  equivalent
right compensation cost and stock option expensing.

Depreciation and amortization  expense of real estate increased by approximately
$56,000, or 1.0%, from $5.37 million to $5.43 million for the three months ended
June 30, 2005 and 2006, respectively. The increase was attributable primarily to
the additional  amortization expense relating to in-place lease value intangible
asset pursuant to SFAS No. 141 in connection with two R&D property  acquisitions
during the first six months of 2006.  Depreciation and  amortization  expense of
real estate  remained  relatively  the same at $10.9  million for the six months
ended June 30, 2005 and 2006.

Interest expense decreased by approximately  ($0.7) million, or 12.1%, from $5.9
million for the three  months  ended June 30, 2005 to $5.2 million for the three
months ended June 30,  2006,  as the 2005 figure  included a cash flow  interest
rate derivative loss of  approximately  $0.8 million.  Interest expense (related
parties) decreased by approximately  ($53,000),  or 21.8%, from $243,000 for the
three months ended June 30, 2005 to $190,000 for the three months ended June 30,
2006 due to the  termination  of the Berg Group line of credit in October  2005.
Total debt  outstanding,  including  amounts due related  parties,  increased by
approximately $18.0 million, or 5.2%, from $344.4 million as of June 30, 2005 to
$362.4 million as of June 30, 2006. Overall interest expense,  including amounts
paid to related  parties,  for the  quarter  ended June 30,  2006  decreased  by
approximately  ($0.8) million  compared to the same quarter a year ago, with the
difference  being  primarily   attributable  to  the  cash  flow  interest  rate
derivative  charge in 2005 and the  retirement  of the higher rate Citicorp loan
during  the third  quarter  of 2005,  notwithstanding  the  additional  interest
expense under the fixed rate secured  mortgage loan of $125 million from Allianz
Life Insurance Company obtained in July 2005.

Interest expense decreased by approximately  ($0.1) million, or 1.4%, from $10.5
million  for the six months  ended June 30,  2005 to $10.4  million  for the six
months ended June 30, 2006.  Interest  expense  (related  parties)  decreased by
approximately  ($168,000), or 30.6%, from $549,000 for the six months ended June
30, 2005 to $381,000 for the six months ended June 30, 2006.

INCOME FROM DISCONTINUED OPERATIONS
The following  table depicts income from  discontinued  operations for the three
and six months ended June 30, 2006 and 2005.

<TABLE>
<CAPTION>
                                                              Three Months Ended June 30,        Six Months Ended June 30,
                                                                 2006             2005             2006             2005
                                                              -----------     ------------     ------------     ------------
                                                                                  (dollars in thousands)
                                                                                       (unaudited)
<S>                                                                <C>          <C>                <C>             <C>
         Gain from disposal of discontinued operations              -               -               -               $63
         Loss attributable to discontinued operations               -            ($10)              -               (51)
         Minority interest in loss/(earnings) attributable
            to discontinued operations                              -               8               -               (10)
                                                              -----------     ------------     ------------     ------------
         (Loss)/income from discontinued operations                 -           ($  2)              -              $  2
                                                              ===========     ============     ============     ============
</TABLE>

                                     - 18 -
<PAGE>

In accordance with our adoption of SFAS No. 144, in the first quarter of 2005 we
sold and classified as  discontinued  operations  two  properties  consisting of
103,350  rentable  square feet and recorded a gain of $63,000,  of which $14,000
and $49,000 were  attributable to common  stockholders  and minority  interests,
respectively.

The  loss  to  common  stockholders  and  minority  interests   attributable  to
discontinued  operations  from these two  properties  for the three months ended
June 30, 2005 was approximately ($2,000) and ($8,000),  respectively. The income
to common  stockholders  and minority  interests  attributable  to  discontinued
operations  from these two properties for the six months ended June 30, 2005 was
approximately $2,000 and $10,000.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS AND NET INCOME AVAILABLE TO MINORITY
INTERESTS
Minority  interest in net income has been calculated by taking the net income of
the operating partnerships (on a stand-alone basis) multiplied by the respective
minority  interest  ownership  percentage.   Minority  interest  represents  the
ownership  interest of all limited partners in the operating  partnerships taken
as a whole, which was approximately 82% as of June 30, 2006 and 2005.

Net income available to common  stockholders  decreased by approximately  ($0.6)
million, or 21.3%, from $2.7 million for the three months ended June 30, 2005 to
$2.1  million  for the same period in 2006.  The  minority  interest  portion of
income decreased by approximately  ($3.6) million,  or 28.8%, from $12.6 million
for the three  months  ended June 30, 2005 to $9.0  million for the three months
ended June 30,  2006.  The decline in the  quarter's  net income for both common
stockholders  and minority  interests was primarily due to lower rental  revenue
and higher settlement income in 2005. For the six months ended June 30, 2006 and
2005, the minority  interest portion of income was  approximately  $32.4 million
and $24.3 million, respectively,  resulting in net income to common stockholders
of approximately  $7.3 million and $5.1 million,  respectively.  The increase in
net income for both common stockholders and minority interests was primarily due
to the realization of higher lease termination fees.

CHANGES IN FINANCIAL CONDITION

The most significant  changes in our financial condition during the three months
ended June 30, 2006  resulted from the  acquisition  of two R&D  properties.  In
addition, total stockholders' equity increased from the issuance of common stock
for the exchange of O.P. units and stock option exercises.

At June  30,  2006,  total  investments  in  properties  had a net  increase  of
approximately  $16.2  million from  December 31, 2005  primarily  due to two R&D
property   acquisitions   during  the  first  six  months  of  2006   consisting
approximately 137,800 rentable square feet located in the Silicon Valley.

Total  stockholders'  equity, net, increased by approximately $11.6 million from
December 31, 2005 as we obtained additional capital from the issuance of 852,096
shares of our common stock for the exchange of O.P.  units and 41,300  shares of
our common  stock from stock  option  exercises  and a decrease  in  accumulated
deficit of  approximately  $1.2 million due to the  realization  of higher lease
termination fees for the period.  The newly issued shares  increased  additional
paid-in-capital by approximately $10.4 million.

LIQUIDITY AND CAPITAL RESOURCES

We expect a  continued  decline  in  operating  cash  flows  from our  operating
property  portfolio  in 2006 as compared to 2005.  The  reduction  in cash flows
reflects the overall reduced demand for R&D  properties,  lower rental rates for
new and  renewed  leases,  and an  increase  in vacant  properties  in 2006.  In
addition,  if we are unable to lease a significant  portion of the approximately
209,000 rentable square feet scheduled to expire during the remainder of 2006 or
an  equivalent  amount of our currently  available  space of  approximately  2.9
million  rentable  square  feet,  our  operating  cash  flows  may  be  affected
adversely.  With the  expectation of lower rental  revenues for the remainder of
2006, we expect the  properties'  net operating  income to continue to show year
over year declines  when compared to 2005. As noted above,  we expect cash flows
from operating  activities to continue to show declines  primarily driven by the
general  downturn in the Silicon Valley's economy in recent years, the softening
of the Company's market specifically, and the expected weaker performance of our
properties.  We are also subject to risks of decreased  occupancy through tenant
defaults and bankruptcies  and potential  reduction in rental rates upon renewal
of properties,  which would result in reduced cash flow from  operations.  It is
reasonably  likely that vacancy  rates may  continue to increase  and  effective
rental rates on new and renewed leases may continue to decrease.

We expect our principal  source of liquidity for  distributions  to stockholders
and O.P. unit holders,  debt service,  leasing commissions and recurring capital
expenditures  to come from cash  provided by  operations  and/or the  borrowings
under the line of credit with Cupertino  National Bank ("CNB").  We expect these
sources  of  liquidity  to  be  adequate  to  meet  projected  distributions  to
stockholders and other presently anticipated liquidity  requirements in 2006. We
expect to meet our long-term liquidity  requirements for the funding of property
development,  property  acquisitions  and other material  non-recurring  capital
improvements  through  cash and  investments,  long-term  secured and  unsecured
indebtedness and the issuance of additional equity securities by us. We have the
ability to meet short-term  obligations or other liquidity needs based on a line
of credit with CNB. We expect our total interest expense to increase through new
financing  activities.  In the  remainder of 2006,  we will be obligated to make
payments  totaling  approximately  $5.3 million of debt principal under mortgage
notes without  regard to any debt  refinancing or new debt  obligations  that we
might incur, or optional payments of debt principal.

                                     - 19 -
<PAGE>

Cash and cash  equivalents  increased by  approximately  $8.0 million from $31.4
million as of December 31, 2005 to $39.5  million as of June 30, 2006  primarily
from cash flow from operations and excess remaining  restricted cash from a 1031
tax-deferred exchange transaction.

Restricted cash totaled $10.6 million as of June 30, 2006. Of this amount,  $9.1
million, net of monthly rent payments,  represents a balance we consolidated due
to our adoption of FIN 46R,  "Consolidation of Variable Interest  Entities" (see
Note 5). The  remaining  $1.5 million  represents a bond we posted in connection
with the  Republic  Properties  Corporation  v. Mission  West  Properties,  L.P.
litigation  (see Note 10). We do not possess or control  these funds or have any
rights  to  receive  them  except  as  provided  in the  applicable  agreements.
Therefore, restricted cash is not available for distribution to stockholders.

DISTRIBUTIONS
On July 6, 2006,  we paid  dividends  of $0.16 per share of common  stock to all
common  stockholders  of  record  as of June 30,  2006.  On the same  date,  the
operating partnerships paid a distribution of $0.16 per O.P. unit to all holders
of O.P. units.  Aggregate dividends and distributions  amounted to approximately
$16.7  million.  For the  remainder  of 2006,  we expect to maintain our current
quarterly dividend payment rate to common  shareholders and O.P. unit holders of
$0.16 per share.  However,  distributions  are declared at the discretion of our
Board of Directors and are subject to actual cash  available  for  distribution,
our financial  condition,  capital  requirements and such other factors,  as our
Board of Directors deems relevant.

DEBT
At June 30, 2006, we had total indebtedness of $362.4 million,  including $352.5
million  of fixed  rate  mortgage  debt and $9.9  million  under the Berg  Group
mortgage note (related  parties),  as detailed in the table below.  The CNB loan
contains certain  financial loan and reporting  covenants as defined in the loan
agreements.  As of June  30,  2006,  we  were  in  compliance  with  these  loan
covenants.

CONTRACTUAL OBLIGATIONS
The following table  identifies our contractual  obligations as of June 30, 2006
that will impact our liquidity and cash flow in future periods:

<TABLE>
<CAPTION>
                               ------------ ------------- ------------ ------------ ------------- ------------ ------------
                                   2006          2007         2008         2009          2010      Thereafter      Total
                               --------------------------------------------------------------------------------------------
                                                                  (dollars in thousands)
<S>                              <C>         <C>          <C>           <C>           <C>         <C>          <C>
Long-Term Debt Obligations (1)    $5,259      $11,028      $121,605      $9,580        $10,125     $204,774     $362,371
Operating Lease Obligations (2)       45           23             -           -              -            -           68
                               ------------ ------------- ------------ ------------ ------------- ------------ ------------
Total                             $5,304      $11,051      $121,605      $9,580        $10,125     $204,774     $362,439
                               ============ ============= ============ ============ ============= ============ ============
</TABLE>

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

                                     - 20 -

<PAGE>



The following table sets forth information regarding debt outstanding as of June
30, 2006:

<TABLE>
<CAPTION>
                                                                                                             Maturity      Interest
            Debt Description                          Collateral Properties                   Balance          Date          Rate
-------------------------------------------- ------------------------------------------  ----------------  -------------  ----------
                                                                                               (dollars in thousands)
Line of Credit:
<S>                                         <C>                                              <C>               <C>           <C>
Cupertino National Bank                      Not Applicable                                          -          11/06           (3)
                                                                                         ----------------

Mortgage Notes Payable (related parties):    5300 & 5350 Hellyer Avenue, San Jose, CA         $  9,856           6/10         7.65%
                                                                                         ----------------
Mortgage Notes Payable (1):
Prudential Insurance Co. of America (2)      10300 Bubb Road, Cupertino, CA                    116,161          10/08         6.56%
                                             10500 N. De Anza Blvd, Cupertino, CA
                                             4050 Starboard Drive, Fremont, CA
                                             45700 Northport Loop, Fremont, CA
                                             45738 Northport Loop, Fremont, CA
                                             450 National Ave., Mountain View, CA
                                             6311 San Ignacio Avenue, San Jose, CA
                                             6321 San Ignacio Avenue, San Jose, CA
                                             6325 San Ignacio Avenue, San Jose, CA
                                             6331 San Ignacio Avenue, San Jose, CA
                                             6341 San Ignacio Avenue, San Jose, CA
                                             6351 San Ignacio Avenue,San Jose, CA
                                             3236 Scott Boulevard, Santa Clara, CA
                                             3560 Bassett Street, Santa Clara, CA
                                             3570 Bassett Street, Santa Clara, CA
                                             3580 Bassett Street, Santa Clara, CA
                                             1135 Kern Avenue, Sunnyvale, CA
                                             1212 Bordeaux Lane, Sunnyvale, CA
                                             1230 E. Arques, Sunnyvale, CA
                                             1250 E. Arques, Sunnyvale, CA
                                             1170 Morse Avenue, Sunnyvale, CA
                                             1600 Memorex Drive, Santa Clara, CA
                                             1688 Richard Avenue, Santa Clara, CA
                                             1700 Richard Avenue, Santa Clara, CA
                                             3540 Bassett Street, Santa Clara, CA
                                             3542 Bassett Street, Santa Clara, CA
                                             3544 Bassett Street, Santa Clara, CA
                                             3550 Bassett Street, Santa Clara, CA

Northwestern Mutual Life Insurance Co. (4)   1750 Automation Parkway, San Jose, CA              89,780           1/13         5.64%
                                             1756 Automation Parkway, San Jose, CA
                                             1762 Automation Parkway, San Jose, CA
                                             6320 San Ignacio Avenue, San Jose, CA
                                             6540-6541 Via Del Oro, San Jose, CA
                                             6385-6387 San Ignacio Avenue, San Jose, CA
                                             2251 Lawson Lane, Santa Clara, CA
                                             1325 McCandless Drive, Milpitas, CA
                                             1650-1690 McCandless Drive, Milpitas, CA
                                             20605-20705 Valley Green Drive, Cupertino, CA
Allianz Life Ins. Co. (Allianz Loan I)(5)    5900 Optical Court, San Jose, CA                   24,907           8/25         5.56%

Allianz Life Ins. Co. (Allianz Loan II)(5)   5325-5345 Hellyer Avenue, San Jose, CA            121,667           8/25         5.22%
                                             1768 Automation Parkway, San Jose, CA
                                             2880 Scott Boulevard, Santa Clara, CA
                                             2890 Scott Boulevard, Santa Clara, CA
                                             2800 Scott Boulevard, Santa Clara, CA
                                             20400 Mariani Avenue, Cupertino, CA
                                             10450-10460 Bubb Road, Cupertino, CA
                                                                                         ----------------
                                                                                               352,515
                                                                                         ----------------

                                                                                         ----------------
TOTAL                                                                                         $362,371
                                                                                         ================
</TABLE>


(1)  Mortgage notes payable generally  require monthly  installments of interest
     and  principal  ranging  from  $177,000  to  $840,000  over  various  terms
     extending  through the year 2025.  The weighted  average  interest  rate of
     mortgage notes payable was 5.84% at June 30, 2006.
(2)  The  Prudential  Insurance  loan is  payable  in  monthly  installments  of
     $827,000,  which includes principal (based upon a 30-year amortization) and
     interest.  A  limited  partner  who is not a member  of the Berg  Group has
     guaranteed  approximately  $12.0  million  of this  debt.  Costs  and  fees
     incurred with obtaining this loan aggregated  approximately $900,000, which
     were deferred and amortized over the loan period.
(3)  Interest rate equal to LIBOR plus 1.75%.  The Cupertino  National Bank 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 June 30,  2006,  the  Company was in
     compliance with these loan covenants.
(4)  The Northwestern loan is payable in monthly installments of $696,000, which
     includes principal (based upon a 20-year amortization) and interest.  Costs
     and  fees  incurred  with  obtaining  this  loan  aggregated  approximately
     $675,000, which were deferred and amortized over the loan period.
(5)  The  Allianz  loans  are  payable  in  monthly  aggregate  installments  of
     $1,017,000,  which includes  principal (based upon a 20-year  amortization)
     and interest. Costs and fees incurred with obtaining these loans aggregated
     approximately  $1,089,000,  which were deferred and amortized over the loan
     periods.  The Allianz loans contain certain customary  covenants as defined
     in the loan agreements.  As of June 30, 2006, the Company was in compliance
     with these loan covenants.

At June 30,  2006,  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 $11.08 per share on June 30, 2006) on a fully  diluted  basis,  including the
conversion of all O.P. units into common stock, was approximately 23.8%. On June
30, 2006, the last trading day for the quarter,  total market capitalization was
approximately $1.5 billion.

                                     - 21 -
<PAGE>

At June 30, 2006, the outstanding  balance remaining under certain notes that we
owed to the operating partnerships was $1.8 million. The due date of these notes
has been  extended to September 30, 2007.  The principal  amount of these notes,
along with the  interest  expense,  which is  interest  income to the  operating
partnerships,  is  eliminated  in  consolidation  and  is  not  included  in the
corresponding line items within the consolidated financial statements.  However,
the interest  income  earned by the  operating  partnerships,  which is interest
expense to us, in connection  with this debt, is included in the  calculation of
minority  interest as  reported on the  consolidated  statement  of  operations,
thereby reducing our net income by this same amount. At present,  our only means
for  repayment  of this debt is through  distributions  that we receive from the
operating  partnerships that are in excess of the amount of dividends to be paid
to our stockholders or by raising additional equity capital.

HISTORICAL CASH FLOWS

COMPARISON  OF THE SIX MONTHS  ENDED JUNE 30, 2006 TO THE SIX MONTHS  ENDED JUNE
30, 2005

Net cash provided by operating activities for the six months ended June 30, 2006
was $19.8  million  compared to $8.3  million  for the same period in 2005.  The
increase  resulted  primarily from the increase in deferred rental income,  rent
payments  from M&M,  LLC (see Note 5) and  higher  leasing  commission  payments
(included in Other assets) in 2005, which amounted to approximately $4.0 million
compared to $0.3 million in 2006.

Net cash used in  investing  activities  was  approximately  ($0.8)  million and
($6.4)  million for the six months  ended June 30, 2006 and 2005,  respectively.
Cash used in  investing  activities  during the six months  ended June 30,  2006
related  principally to the  acquisition of the properties at 233 South Hillview
Drive and 1875 Charlston  Road for  approximately  $16.0 million.  The 233 South
Hillview Drive acquisition was completed as a tax-deferred  exchange transaction
involving our former R&D property at 800 Embedded Way, San Jose, California. The
remaining excess  restricted cash of approximately  $1.8 million was transferred
to our  general  cash  account.  Capital  expenditures  relating  to real estate
improvements were approximately $163,000 for the six months ended June 30, 2006.
Cash used in  investing  activities  during the six months  ended June 30,  2005
related  principally  to the  acquisition  of the R&D  property at 5521  Hellyer
Avenue for $14.2 million and the  disposition  of two R&D properties for a total
of $8.4 million.  We partially  financed one of the sales with a note receivable
for  approximately  $4.1  million,  which  has  been  reflected  as  a  non-cash
transaction.  Capital  expenditures  relating to real estate  improvements  were
approximately $637,000 for the six months ended June 30, 2005.

Net cash used in  financing  activities  was ($10.9)  million for the six months
ended June 30, 2006 compared to ($1.8) million for the six months ended June 30,
2005.  During the first six months of 2006,  we received $0.1 million from stock
option  exercises,  used $5.1  million to pay  outstanding  debt,  and paid $5.9
million to common stockholders for dividends. During the same period in 2005, we
received  $25.8  million from a new mortgage  loan,  received  $0.3 million from
stock option  exercises,  used $18.4 million to pay  outstanding  debt, and paid
$3.7 million to minority  interests for  distributions in excess of earnings and
$5.8 million to common stockholders for dividends.

FUNDS FROM OPERATIONS ("FFO")

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

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

                                     - 22 -

<PAGE>


FFO for the three and six months ended June 30, 2006 and 2005,  as reconciled to
net income  available to common  stockholders,  are  summarized in the following
tables:

<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,                    Six Months Ended June 30,
                                                    2006                   2005                   2006                   2005
                                             ------------------     ------------------     ------------------     ------------------
                                                       (dollars in thousands)                        (dollars in thousands)
<S>                                             <C>                    <C>                   <C>                    <C>
Net income to common stockholders                $ 2,121                $ 2,695               $ 7,274                $ 5,102
Add:
 Minority interests (1)                            8,855                 12,453                32,110                 24,028
 Depreciation & amortization of real estate (2)    5,978                  5,993                12,096                 12,382
Less:
 Gain on sale of asset                                 -                      -                     -                    (63)
                                             ------------------     ------------------     ------------------     ------------------
FFO                                              $16,954                $21,141               $51,480                $41,449
                                             ==================     ==================     ==================     ==================
</TABLE>

(1)  The minority  interest  for third  parties  totaling  $113 and $133 for the
     three months ended June 30, 2006 and 2005, respectively,  and $248 and $254
     for the six months ended June 30, 2006 and 2005, respectively, was deducted
     from total minority interest in calculating FFO.
(2)  Includes our portion of  depreciation  and  amortization of real estate and
     leasing commissions from our unconsolidated joint venture totaling $211 and
     $210 for the three months ended June 30, 2006 and 2005,  respectively,  and
     $422  and  $564  for  the  six  months   ended  June  30,  2006  and  2005,
     respectively. Also includes our amortization of leasing commissions of $342
     and $414 for the three months  ended June 30, 2006 and 2005,  respectively,
     and $770  and  $842  for the six  months  ended  June  30,  2006 and  2005,
     respectively.  Amortization  of  leasing  commissions  is  included  in the
     property  operating,  maintenance  and real  estate  taxes line item in the
     Company's consolidated  statements of operations.  For the six months ended
     June 30, 2005,  depreciation  and amortization of real estate also includes
     approximately $34 attributable to discontinued 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 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;   o  the  annual  distribution
     requirements under the REIT provisions of the federal income tax laws; and
-    such other factors as the board of directors deems relevant.

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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections" ("SFAS No. 154"), to replace APB Opinion 20, "Reporting  Accounting
Changes in Interim  Financial  Statements"  ("APB 20"). SFAS No. 154 changes the
requirements  for the  accounting  for and  reporting of a change in  accounting
principle and requires  retrospective  application to prior  periods'  financial
statements,  unless it is  impracticable to determine period specific effects or
the  cumulative  effect  of the  change.  SFAS  No.  154 will be  effective  for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after  December 15, 2005. The adoption of this statement is not expected to have
a  material  effect on our  consolidated  results  of  operations  or  financial
condition.

In December 2004, the FASB issued SFAS No. 123R,  "Share-Based  Payment"  ("SFAS
No.  123R"),  which  addresses the  accounting  for employee and director  stock
options.  Statement  123R  requires  that the cost of all  employee and director
stock  options,  as well as other  equity-based  compensation  arrangements,  be
reflected in the financial  statements  based on the estimated fair value of the
awards. SFAS No. 123R is an amendment to SFAS No. 123 and supersedes APB Opinion
No. 25 ("APB No. 25").  SFAS No. 123R is applicable to any award that is settled
or  measured  in  stock,  including  stock  options,   restricted  stock,  stock
appreciation  rights,  stock units,  and employee stock purchase  plans. We have
adopted the  requirements  of SFAS No. 123R effective  January 1, 2006 using the
modified prospective method of transition.  Accordingly,  prior periods have not
been restated.  The adoption of this standard did not have a material  effect on
our consolidated statements of operations or financial position.

                                     - 23 -

<PAGE>

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 June 30, 2006. 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,  the table  presents the  assumption  that the  outstanding
principal balance at June 30, 2006 will be paid according to scheduled principal
payments and that we will not prepay any of the outstanding principal balance.

<TABLE>
<CAPTION>
                                      Six Months
                                       Remaining
                                                            Year Ending December 31,
                                                  -------------------------------------------
                                        2006       2007       2008       2009        2010     Thereafter     Total     Fair Value
                                      ---------------------------------------------------------------------------------------------
                                                                          (dollars in thousands)
<S>                                   <C>       <C>        <C>         <C>        <C>         <C>          <C>         <C>
FIXED RATE DEBT:
  Secured notes payable                $5,259    $11,028    $121,605    $9,580     $10,125     $204,774     $362,371    $471,132
  Weighted average interest rate        5.84%      5.84%       5.84%     5.84%       5.84%        5.84%
</TABLE>


The primary  market  risks we face are  interest  rate  fluctuations.  Principal
amounts  outstanding  under the CNB line of credit,  which had a zero balance at
June 30, 2006, is tied to a LIBOR based interest rate. 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. All of our debt is denominated
in United  States  dollars.  We had no interest  rate caps or interest rate swap
contracts at June 30, 2006.

As of June 30,  2006,  we had no interest  rate risk since there was no variable
rate debt outstanding.

                                     - 24 -

<PAGE>


ITEM 4. CONTROLS AND PROCEDURES

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

As  required  by SEC Rule  13a-15(b)  we  conducted  an  evaluation,  under  the
supervision and with the  participation  of our management,  including our Chief
Executive Officer, President and Vice President of Finance, of the effectiveness
of the design and operation of our  disclosure  controls and  procedures.  Based
upon that evaluation,  the Chief Executive Officer, President and Vice President
of Finance concluded that our disclosure  controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e)) were effective as of June 30, 2006.

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.

                                     - 25 -

<PAGE>


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

While we  attempt  to  identify,  manage and  mitigate  risks and  uncertainties
associated with our business to the extent  practical  under the  circumstances,
some level of risk and  uncertainty  will always be present.  In addition to the
other  information  contained in this report,  you should  carefully  review the
factors  discussed  under Item 1A of our 2005 Form 10-K which  describes some of
the  risks and  uncertainties  associated  with our  business.  These  risks and
uncertainties  have the potential to materially  affect our business,  financial
condition,  results of operations, cash flows, and future prospects.  Additional
risks and  uncertainties  not  presently  known to us or that we currently  deem
immaterial also may impair our business operations.

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

     a)   The 2006 Annual Meeting of Stockholders of the Company was held on May
          17,  2006 in which  proxies  representing  9,746,943  shares of common
          stocks,  or 52.7% of the total  outstanding  shares,  were present and
          voted.

     b)   At the 2006  Annual  Meeting of  Stockholders,  Carl E. Berg,  John C.
          Bolger,  William A. Hasler,  Lawrence B. Helzel, and Raymond V. Marino
          were  elected as  directors  for the  ensuing  year,  all of whom were
          serving on the board of directors at the time of the meeting.

     c)   The following proposals were voted upon at the meeting:

          Proposal No. 1: Election of Directors

<TABLE>
<CAPTION>

                                           Total Vote for Each       Total Vote Withheld
             Directors                          Director              from Each Director         Total Abstentions
             ---------------------------- ----------------------     ----------------------    ----------------------
<S>                                            <C>                      <C>                          <C>
             Carl E. Berg                       9,506,101                   49,797                    191,045
             John C. Bolger                     9,547,048                    8,850                    191,045
             William A. Hasler                  7,733,647                1,822,251                    191,045
             Lawrence B. Helzel                 9,554,868                    1,030                    191,045
             Raymond V. Marino                  9,341,598                  214,300                    191,045
</TABLE>


Proposal No. 2:  Ratification  of the selection of the accounting  firm of Burr,
Pilger & Mayer, LLP as the Company's  independent  registered  public accounting
firm for the year ending December 31, 2006.  There were 9,722,077 votes in favor
of the proposal, 10,316 votes against the proposal and 14,550 abstentions.

ITEM 6.  EXHIBITS

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

                                     - 26 -

<PAGE>

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

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


                                 Mission West Properties, Inc.
                                 (Registrant)


Date: August 8, 2006             By:    /s/ Carl E. Berg
                                    --------------------------------------------
                                    Carl E. Berg
                                    Chief Executive Officer


Date: August 8, 2006             By:    /s/ Wayne N. Pham
                                    --------------------------------------------
                                    Wayne N. Pham
                                    Vice President of Finance and Controller
                                    (Principal Accounting Officer and Duly
                                    Authorized Officer)

                                     - 27 -