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

                                    Form 10-Q


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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 Identification
 incorporation or organization)                               Number)

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

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


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


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

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

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


                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

              19,397,287 shares outstanding as of October 31, 2006




<PAGE>

                          Mission West Properties, Inc.

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


<TABLE>
<CAPTION>
                                      INDEX

                                                                                                                     Page
Part I        Financial Information

   Item 1.    Financial Statements:

<S>                                                                                                                 <C>
              Condensed Consolidated Balance Sheets as of September 30, 2006
              and December 31, 2005 (unaudited).......................................................................2

              Condensed Consolidated Statements of Operations for the three and
              nine months ended September 30, 2006 and 2005 (unaudited)...............................................3

              Condensed Consolidated Statements of Cash Flows for the
              nine months ended September 30, 2006 and 2005 (unaudited)...............................................4

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

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

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

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


Part II       Other Information

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

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

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

   Signatures........................................................................................................26
</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.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                          MISSION WEST PROPERTIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
           (dollars in thousands, except share and per share amounts)
                                   (unaudited)
                                    ---------
<TABLE>
<CAPTION>
                                                                                  September 30, 2006       December 31, 2005
                                                                                 ---------------------   ----------------------
                                     ASSETS
Real estate assets, at cost:
<S>                                                                                  <C>                     <C>
    Land                                                                              $  272,222              $  273,933
    Buildings and improvements                                                           753,668                 766,457
    Real estate related intangible assets                                                 19,529                  17,410
                                                                                 ---------------------   ----------------------
       Total investments in properties                                                 1,045,419               1,057,800
    Less accumulated depreciation and amortization                                      (143,344)               (130,419)
    Assets held for sale, net                                                             24,633                       -
                                                                                 ---------------------   ----------------------
       Net investments in properties                                                     926,708                 927,381
Cash and cash equivalents                                                                 42,443                  31,441
Restricted cash                                                                            6,893                  16,712
Deferred rent receivable, net                                                             18,170                  19,218
Investment in unconsolidated joint venture                                                 3,472                   3,263
Other assets, net                                                                         25,537                  25,362
                                                                                 ---------------------   ----------------------
       Total assets                                                                   $1,023,223              $1,023,377
                                                                                 =====================   ======================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Mortgage notes payable                                                            $  350,000              $  357,481
    Mortgage notes payable (related parties)                                               9,756                  10,051
    Interest payable                                                                         321                     321
    Security deposits                                                                      6,727                   8,047
    Deferred rental income                                                                 9,288                   6,103
    Liabilities related to assets held for sale                                              383                       -
    Dividends and distributions payable                                                   16,741                  16,725
    Accounts payable and accrued expenses                                                 13,694                   8,952
                                                                                 ---------------------   ----------------------
       Total liabilities                                                                 406,910                 407,680
                                                                                 ---------------------   ----------------------

Commitments and contingencies (Note 9)

Minority interests                                                                       490,122                 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,
      19,397,287 and 18,448,791 shares issued and outstanding
      at September 30, 2006 and December 31, 2005                                             19                      18
  Paid-in-capital                                                                        148,993                 138,038
  Accumulated deficit                                                                    (22,821)                (23,041)
                                                                                 ---------------------   ----------------------
     Total stockholders' equity                                                          126,191                 115,015
                                                                                 ---------------------   ----------------------
     Total liabilities and stockholders' equity                                       $1,023,223              $1,023,377
                                                                                 =====================   ======================
</TABLE>

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

                                      - 2 -

<PAGE>



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

<TABLE>
<CAPTION>
                                                         Three months ended September 30,         Nine months ended September 30,
                                                       -------------------------------------- --------------------------------------
                                                             2006                2005                2006                 2005
                                                       ------------------ ------------------- -------------------- -----------------
Revenues:
<S>                                                        <C>                <C>               <C>                   <C>
   Rental revenue from real estate                             $22,107            $23,935           $67,271               $73,753
   Tenant reimbursements                                         3,274              3,779             9,424                10,722
   Lease termination fees                                            -                  -            16,068                   478
   Other income, including interest                              1,047                423             2,862                 2,530
                                                       ------------------ ------------------- -------------------- -----------------
        Total revenues                                          26,428             28,137            95,625                87,483
                                                       ------------------ ------------------- -------------------- -----------------
Expenses:
   Property operating, maintenance and real estate taxes         5,002              5,092            13,672                13,576
   Interest                                                      5,172              5,494            15,580                16,046
   Interest (related parties)                                      188                229               569                   779
   General and administrative                                      531                424             1,803                 1,542
   Depreciation and amortization of real estate                  5,569              5,111            16,161                15,432
                                                       ------------------ ------------------- -------------------- -----------------
        Total expenses                                          16,462             16,350            47,785                47,375
                                                       ------------------ ------------------- -------------------- -----------------
Income before equity in earnings of unconsolidated
   joint venture and minority interests                          9,966             11,787            47,840                40,108
Equity in earnings of unconsolidated joint venture                 857                291             1,538                   677
Minority interests                                              (8,714)           (10,009)          (40,170)              (33,718)
                                                       ------------------ ------------------- -------------------- -----------------
   Income from continuing operations                             2,109              2,069             9,208                 7,067
                                                       ------------------ ------------------- -------------------- -----------------
Discontinued operations, net minority interests:
Gain on disposal of discontinued operations                       -                 291                   -                   305
(Loss)/income attributable to discontinued operations            (3)                 91                 172                   182
                                                       ------------------ ------------------- -------------------- -----------------
   (Loss)/income from discontinued operations                    (3)                382                 172                   487
                                                       ------------------ ------------------- -------------------- -----------------
Net income available to common stockholders                     $2,106            $ 2,451           $ 9,380               $ 7,554
                                                       ================== =================== ==================== =================
Net income available to minority interests                      $8,700            $11,541           $41,057               $35,823
                                                       ================== =================== ==================== =================
Income per common share from continuing operations:
   Basic                                                         $0.11              $0.11             $0.49                 $0.39
                                                       ================== =================== ==================== =================
   Diluted                                                       $0.11              $0.11             $0.48                 $0.39
                                                       ================== =================== ==================== =================
Income per common share from discontinued operations:
   Basic                                                             -              $0.02             $0.01                 $0.02
                                                       ================== =================== ==================== =================
   Diluted                                                           -              $0.02             $0.01                 $0.02
                                                       ================== =================== ==================== =================
Net income per common share:
   Basic                                                         $0.11              $0.13             $0.50                 $0.41
                                                       ================== =================== ==================== =================
   Diluted                                                       $0.11              $0.13             $0.49                 $0.41
                                                       ================== =================== ==================== =================
Weighted average shares ofcommon stock outstanding(basic)   19,350,672         18,356,278        18,948,214            18,242,495
                                                       ================== =================== ==================== =================
Weighted average shares of common stock outstanding(diluted)19,418,884         18,407,891        19,024,662            18,289,699
                                                       ================== =================== ==================== =================
</TABLE>

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

                                     - 3 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
                                   (unaudited)
                                    ---------
<TABLE>
<CAPTION>
                                                                                                 Nine months ended September 30,
                                                                                              --------------------------------------
                                                                                                     2006                2005
                                                                                              ------------------- ------------------
Cash flows from operating activities:
<S>                                                                                               <C>                  <C>
     Net income                                                                                    $ 9,380              $ 7,554
     Adjustments to reconcile net income to net cash provided by operating activities:
            Minority interests                                                                      41,057               35,823
            Minority interest distributions                                                        (41,057)             (35,823)
            Depreciation and amortization of real estate and in-place leases                        16,632               16,321
            Amortization of above market lease                                                       1,416                1,416
            Gain on sale of real estate                                                                  -               (1,408)
            Equity in earnings of unconsolidated joint venture                                      (1,538)                (677)
            Distributions from unconsolidated joint venture                                          1,330                  765
            Interest earned on restricted cash                                                        (314)                   -
            Lease termination fee income related to restricted cash                                 (6,748)                   -
            Stock-based compensation expense                                                           176                    -
            Other                                                                                       35                    -
     Changes in operating assets and liabilities:
            Deferred rent receivable                                                                 1,048                 (791)
            Other assets                                                                              (175)              (5,159)
            Security deposits                                                                       (1,300)                (110)
            Deferred rental income                                                                   3,185                  653
            Accounts payable and accrued expenses                                                    5,048                4,346
                                                                                              ------------------- ------------------
     Net cash provided by operating activities                                                      28,175               22,910
                                                                                              ------------------- ------------------
Cash flows from investing activities:
     Improvements to real estate assets                                                             (1,349)                (871)
     Proceeds from sale of real estate                                                                   -               12,447
     Purchase of real estate                                                                       (15,959)             (14,184)
     Restricted cash used for purchase of real estate                                               13,447                    -
     Excess restricted cash                                                                          1,835                    -
                                                                                              ------------------- ------------------
     Net cash used in investing activities                                                          (2,026)              (2,608)
                                                                                              ------------------- ------------------
Cash flows from financing activities:
    Proceeds from mortgage loan                                                                          -              150,800
    Principal payments on mortgage notes payable                                                    (7,481)              (5,021)
    Principal payments on mortgage notes payable (related parties)                                    (295)                (274)
    Net payments under line of credit (related parties)                                                  -               (9,560)
    Payment on mortgage loan payable                                                                     -              (78,710)
    Net payments under revolving line of credit                                                          -              (24,208)
    Refund of appeal bond                                                                            1,551                    -
    Proceeds from exercised stock options                                                              802                  480
    Distributions paid to minority interests in excess of earnings                                    (717)              (6,156)
    Dividends paid                                                                                  (9,007)              (8,729)
                                                                                              ------------------- ------------------
     Net cash (used in)/provided by financing activities                                           (15,147)              18,622
                                                                                              ------------------- ------------------
     Net increase in cash and cash equivalents                                                      11,002               38,924
Cash and cash equivalents, beginning of period                                                      31,441                1,519
                                                                                              ------------------- ------------------
Cash and cash equivalents, end of period                                                           $42,443              $40,443
                                                                                              =================== ==================
Supplemental information:
    Cash paid for interest                                                                         $15,944              $16,471
                                                                                              =================== ==================
Supplemental schedule of non-cash investing and financing activities:
    Issuance of common stock upon conversion of O.P. units                                         $ 9,977              $ 2,197
                                                                                              =================== ==================
</TABLE>

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

                                     - 4 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
         (dollars in thousands, except 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.  All limited
     partnership  interests in the operating  partnerships  were  converted into
     59,479,633  operating  partnership  ("O.P.")  units,  which  represented  a
     limited  partnership  ownership  interest  of  approximately  87.89% of the
     operating partnerships. The operating partnerships are the vehicles through
     which the  Company  holds its real  estate  investments,  makes real estate
     acquisitions, and generally conducts its business.

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

     As  of  September  30,  2006,  the  Company  owns  a  controlling   general
     partnership interest of 18.81%,  21.70%,  16.20% and 12.43% in Mission West
     Properties, L.P., Mission West Properties, L.P. I, Mission West Properties,
     L.P.  II  and  Mission  West  Properties,  L.P.  III,  respectively,  which
     represents  an  18.12%  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 nine months
     ended September 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  condensed   consolidated  financial
     statements of the Company have been prepared in accordance  with Rule 10-01
     of Regulation S-X  promulgated  by the  Securities and Exchange  Commission
     and, therefore,  do not include all information and footnotes necessary for
     a fair presentation of financial  position,  results of operations and cash
     flows in conformity with accounting  principles  generally  accepted in the
     United  States of America.  In the  opinion of the  Company,  however,  the
     accompanying  unaudited interim condensed consolidated financial statements
     contain all adjustments,  consisting only of normal recurring  adjustments,
     necessary to present fairly the Company's  consolidated  financial position
     as of September 30, 2006, their consolidated  results of operations for the
     three and nine months  ended  September  30, 2006 and 2005,  and their cash
     flows  for  the  nine  months  ended  September  30,  2006  and  2005.  All
     significant  intercompany  balances have been eliminated in  consolidation.
     The condensed  consolidated  financial  statements as of September 30, 2006
     and for the three and nine  months  ended  September  30, 2006 and 2005 and
     related footnote  disclosures are unaudited.  The results of operations for
     the three and nine months  ended  September  30,  2006 are not  necessarily
     indicative of the results to be expected for the entire year.

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

     The Company 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 September 30, 2006, the Company
     consolidated one VIE in the  accompanying  condensed  consolidated  balance
     sheet  in  connection  with  an  assignment  of a lease  agreement  with an
     unrelated party,  M&M Real Estate Control & Restructuring,  LLC (see Note 4
     for further discussion of this transaction).

                                     - 5 -

<PAGE>

                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED 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 September 30, 2006, the Company had
     one stock-based 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 condensed  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 condensed consolidated statements of operations.
     Under SFAS No.  123R,  the  Company  recorded  $59 and $176 of expense  for
     share-based  compensation relating to grants of stock options for the three
     and nine months ended September 30, 2006, respectively.

     As of September 30, 2006, there was $150 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 1.2 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 nine months ended
     September 30, 2005.

<TABLE>
<CAPTION>
                                                                     Three Months Ended             Nine Months Ended
                                                                     September 30, 2005             September 30, 2005
                                                                 ---------------------------    ---------------------------
                                                                       (dollars in thousands, except per share data)
<S>                                                                      <C>                            <C>
        Historical net income to common stockholders, as reported         $2,451                         $7,554
        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                                     (51)                          (110)
        Allocation of compensation expense to minority interests              42                             91
                                                                 ---------------------------    ---------------------------
        Pro forma net income to common stockholders                       $2,442                         $7,535
                                                                 ===========================    ===========================

        Earnings per share - basic:
          Historical net income to common stockholders, as reported        $0.13                          $0.41
          Pro forma net income to common stockholders                      $0.13                          $0.41
        Earnings per share - diluted:
          Historical net income to common stockholders, as reported        $0.13                          $0.41
          Pro forma net income to common stockholders                      $0.13                          $0.41
</TABLE>

     MINORITY INTERESTS
     Minority  interests   represent  the  separate  private  ownership  of  the
     operating  partnerships  by the Berg Group  (defined  as Carl E. Berg,  his
     brother Clyde J. Berg, members of their respective immediate families,  and
     certain  entities they control) and other  non-affiliate  interests.  As of
     September 30, 2006, these interests  accounted for approximately  81.88% of
     the ownership  interests in the real estate  operations of the Company on a
     consolidated  weighted average basis.  Minority  interests in net income is
     calculated  by taking the net income of the  operating  partnerships  (on a
     stand-alone  basis) multiplied by the respective  weighted average minority
     interests ownership percentage.

                                     - 6 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
         NOTES TO CONDENSED 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
     condensed 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 condensed  consolidated financial statements and should be
     read together  with the condensed  consolidated  financial  statements  and
     notes thereto  included in the Company's  2005 Form 10-K filed on March 16,
     2006.

3.   RESTRICTED CASH

     Restricted  cash  totaled  $6,893 as of  September  30,  2006.  This amount
     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 4 below for further discussion.

4.   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 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 has  consolidated  this entity for
     financial reporting purposes. Upon consolidation,  the Company recognized a
     lease termination fee of $11,147 in March 2006.

5.   STOCK TRANSACTIONS

     During the nine months ended September 30, 2006,  stock options to purchase
     65,000 shares of common stock were  exercised at $8.25 per share and 26,600
     shares of common stock were  exercised at $10.00 per share.  Total proceeds
     to the Company  were $802.  During the same period,  four limited  partners
     exchanged a total of 856,896 O.P. units for 856,896 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 $9,977 from minority  interests to  paid-in-capital.
     Neither the Company nor the  operating  partnerships  received any proceeds
     from the issuance of the common stock in exchange for O.P. units.

6.   REAL ESTATE ASSETS HELD FOR SALE/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  condensed  consolidated
     statements of operations. Prior period condensed consolidated statements of
     operations  presented in this report have been  reclassified to reflect the
     income or loss related to properties  that were held for sale and presented
     as discontinued operations during the three and nine months ended September
     30, 2006. All periods  presented in this report will likely require further
     reclassification in future periods if there are properties held for sale or
     property sales occur.

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

     As of September 30, 2006,  there were three properties under contract to be
     sold or otherwise  disposed of which would  qualify as assets held for sale
     or discontinued  operations.  The Company classified those three properties
     as assets  held for sale and  discontinued  operations  because the Company
     committed to an action to sell the  properties,  the properties had a buyer
     and were available for immediate sale in their present  condition  (subject
     to terms that are usual and customary for sales of such property), the sale
     was probable and actions  required to complete the plan  indicated  that it
     was unlikely that significant changes to the plan would be made or that the
     plan would be withdrawn.  As of September 30, 2005,  there was one property
     under  contract to be sold or otherwise  disposed of which  qualified as an
     asset held for sale or discontinued operations.  That property was sold for
     $15,105 in October 2005. 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 nine  months  ended
     September 30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                                             Three Months Ended September 30,  Nine Months Ended September 30,
                                                                 2006              2005            2006             2005
                                                             -------------    -------------    ------------     ------------
                                                                                  (dollars in thousands)
                                                                                       (unaudited)
         Revenues
<S>                                                              <C>             <C>             <C>               <C>
            Rental revenue from real estate                       $254            $  757          $1,734            $2,305
            Tenant reimbursements                                   37               253             262               532
            Other income                                            22                 3              28                10
                                                             -------------    -------------    ------------     ------------
               Total revenues                                      313             1,013           2,024             2,847
                                                             -------------    -------------    ------------     ------------

         Expenses
            Property operating, maintenance and real estate taxes  172              $210             494               775
            Depreciation                                           158               234             471               889
                                                             -------------    -------------    ------------     ------------
              Total expenses                                       330               444             965             1,664
                                                             -------------    -------------    ------------     ------------

         (Loss)/income attributable to discontinued operations     (17)              569           1,059             1,183
         Gain on disposal of discontinued operations                 -             1,345               -             1,408
         Minority interests in loss/(earnings) attributable to
            discontinued operations                                 14            (1,532)           (887)           (2,104)
                                                             -------------    -------------    ------------     ------------
         (Loss)/income from discontinued operations                 (3)           $  382          $  172            $  487
                                                             =============    =============    ============     ============
</TABLE>

     For the three and nine months ended September 30, 2006 and 2005, income and
     loss from  discontinued  operations  included  results of  operations  from
     assets held for sale at September 30, 2006 and three  properties  that were
     sold in 2005.

     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.  In  September  2005,  the  Company  received  the
     remaining  balance of the sales price from the  purchaser and the remaining
     gain of $1,345 was recognized in the third quarter of 2005.

7.   NET INCOME PER SHARE

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

     The computation for weighted average shares is detailed below:

<TABLE>
<CAPTION>
                                                          Three Months Ended September 30,      Nine Months Ended September 30,
                                                               2006              2005               2006               2005
                                                         ---------------    --------------     --------------    ---------------
<S>                                                       <C>                <C>                <C>                <C>
         Weighted average shares outstanding (basic)       19,350,672         18,356,278         18,948,214         18,242,495
         Incremental shares from assumed option exercise       68,212             51,613             76,448             47,204
                                                         ---------------    --------------     --------------    ---------------
         Weighted average shares outstanding (diluted)     19,418,884         18,407,891         19,024,662         18,289,699
                                                         ===============    ==============     ==============    ===============
</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

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

     to net income.  The total number of O.P. units outstanding at September 30,
     2006 and 2005 was 85,231,199 and 86,169,195, respectively.

8.   RELATED PARTY TRANSACTIONS

     As of September 30, 2006, the Berg Group owned  77,480,228 O.P. units.  The
     Berg Group's combined ownership of O.P. units and shares of common stock as
     of September  30, 2006  represented  approximately  74% of the total equity
     interests,  assuming  conversion of the 85,231,199  O.P. units  outstanding
     into the Company's common stock.

     As of  September  30,  2006,  debt in the amount of $9,756 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 the mortgage note was
     $188 and $229 for the  three  months  ended  September  30,  2006 and 2005,
     respectively,  and $569 and $779 for the nine months  ended  September  30,
     2006 and 2005, respectively.

     During the first  nine  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 in
     rental revenue  during the three months ended  September 30, 2006 and 2005,
     and $486 and $570 in rental revenue during the nine months ended  September
     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
     condensed 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.

     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 condensed  consolidated  balance sheets. The Berg Group plans
     to satisfy this  commitment to construct a building  when  requested by the
     Company following the approval of the Independent Directors Committee.

     The Company currently leases office space owned by Berg & Berg Enterprises,
     Inc.,  an affiliate of Carl E. Berg and Clyde J. Berg.  Rental  amounts and
     overhead reimbursements paid to Berg & Berg Enterprises,  Inc. were $23 for
     each of the  three-month  periods ended September 30, 2006 and 2005 and $68
     for each of the nine-month periods ended September 30, 2006 and 2005.

9.   COMMITMENTS AND CONTINGENCIES

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

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

     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 an Order dated  October 26, 2006,  the Santa Clara  Superior
     Court  granted MWP's  demurrer to  defendants'  cross-complaint,  ruling as
     follows:  Plaintiffs'  demurrer  to each  cause of  action  in  Defendants'
     Cross-Complaint  is  granted  with 20 days  leave to amend on the ground of
     defect of parties  because  Hellyer Avenue Limited  Partnership  and Berg &
     Berg Enterprises as necessary parties must be added to the cross-complaint.
     We intend to challenge the amended complaint.

     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 September 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 certain  kinds of activities or inactions
     of  the  Company.   These  indemnification   provisions  generally  survive
     termination of the underlying  agreement.  The maximum  potential amount of
     future  payments  the  Company  could  be  required  to  make  under  these
     indemnification  provisions  is  unlimited.  To date,  the  Company has not
     incurred  material  costs to defend  lawsuits or settle  claims  related to
     these  indemnification  agreements.  As a result,  the Company believes the
     estimated  fair value of these  agreements  is  minimal.  Accordingly,  the
     Company has recorded no  liabilities  for these  agreements as of September
     30, 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.

                                     - 10 -

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

     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 the Company 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 the third  quarter  of 2006,  the Berg  Group  informed  the
     Company that the unrelated party referred to above has withdrawn its offer.

     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
        Milpitas, California (1)            3                    162,000          13.03        $48,500

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

     (1)  Due to the changing market conditions, in October 2006 the Company and
          buyer  agreed  to an  amendment  to the  purchase  and sale  agreement
          reducing the number of acres to be sold in this transaction.

10.  SUBSEQUENT EVENTS

     On October 5, 2006, the Company paid dividends of $0.16 per share of common
     stock to all common stockholders of record as of September 29, 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 $16,741.

     On October 31, 2006, the Company completed the sale of three R&D properties
     consisting of approximately 235,000 rentable square feet at Samaritan Drive
     in San Jose, California. A gain of approximately $18,110 will be recognized
     in the fourth quarter of 2006 on the total sales price of $43,271.

                                     - 11 -

<PAGE>

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

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  should  be read  in  conjunction  with  the  accompanying  condensed
consolidated  financial  statements and notes thereto  contained  herein and our
condensed  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  nine  months  ended  September  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 September 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 September 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

                                     - 12 -
<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 "BT  Report"),  the
vacancy rate for Silicon  Valley R&D property  was  approximately  19.6% in late
2005 and 18.2% at the end of the third quarter of 2006.  Total vacant R&D square
footage in Silicon  Valley at the end of the third  quarter of 2006  amounted to
28.1 million square feet, of which 19.9%,  or 5.6 million square feet, was being
offered  under  subleases.  According  to  the BT  Report,  total  positive  net
absorption  (which is the  computation of gross square footage leased less gross
new  square  footage  vacated  for the period  presented)  in 2005  amounted  to
approximately  3.6 million square feet.  According to the BT Report,  during the
first  nine  months  of  2006,  there  was  total  positive  net  absorption  of
approximately  2.1 million  square  feet.  According  to the BT Report,  average
asking  market rent per square foot at the end of the third  quarter of 2006 was
$0.94 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  September  30,  2006  was  64.2%  compared  to 67.5% at
September  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  160,000  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 condensed  consolidated  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP"), which requires us to make certain estimates, judgments and assumptions
that affect the  reported  amounts in the  accompanying  condensed  consolidated
financial  statements,  disclosure  of  contingent  assets and  liabilities  and
related footnotes.  Accounting and disclosure decisions with respect to material
transactions that are subject to significant  management  judgments or estimates
include impairment of long lived assets,  deferred rent reserves, and allocation
of purchase price relating to property  acquisitions and the related depreciable
lives  assigned.  Actual results may differ from these estimates under different
assumptions or conditions.

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

BUSINESS COMBINATIONS.  Statement of Financial Accounting Standards ("SFAS") No.
141, "Business  Combinations"  ("SFAS 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

                                     - 13 -
<PAGE>

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  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  condensed  consolidated
financial statements, with appropriate allocation to minority interests, because
we have operational and financial control of the investments.  We make judgments
and  assumptions  about the  estimated  monthly  payments  made to our  minority
interest joint venture partners, which are reported with our periodic results of
operations.  Actual  results may differ  from these  estimates  under  different
assumptions or conditions.

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

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

STOCK-BASED  COMPENSATION.  In December  2004,  the FASB  issued SFAS 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  condensed  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 condensed consolidated
balance sheets.

                                     - 14 -
<PAGE>

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

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.

                                     - 15 -
<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2005

As of September  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  September  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 third quarter of 2005.

Rental  revenue from real estate for the three and nine months  ended  September
30, 2006 compared to the three- and nine-month periods in 2005 are as follows:

<TABLE>
<CAPTION>
                                  Three Months Ended September 30,
                                                                                           % Change by        % of Total Net
                                     2006              2005              $ Change         Property Group          Change
                                 -------------     --------------     ---------------     ---------------     ----------------
                                               (dollars in thousands)
<S>                               <C>                <C>                <C>                 <C>                 <C>
       Same Property (1)           $21,333            $23,935            ($2,602)            (10.9%)             (10.9%)
       2006 Acquisitions               774                  -                774             100.0%                3.3%
                                 -------------     --------------     ---------------                         ----------------
          Total                    $22,107            $23,935            ($1,828)             (7.6%)              (7.6%)
                                 =============     ==============     ===============                         ================


                                  Nine Months Ended September 30,
                                                                                           % Change by        % of Total Net
                                     2006              2005              $ Change         Property Group          Change
                                 -------------     --------------     ---------------     ---------------     ----------------
                                               (dollars in thousands)
       Same Property (1)           $65,833            $73,753            ($7,920)             (10.7%)             (10.7%)
       2006 Acquisitions             1,438                  -              1,438              100.0%                1.9%
                                 -------------     --------------     ---------------                         ----------------
          Total                    $67,271            $73,753            ($6,482)              (8.8%)              (8.8%)
                                 =============     ==============     ===============                         ================
</TABLE>

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

RENTAL REVENUE FROM REAL ESTATE FROM CONTINUING OPERATIONS
For the quarter  ended  September  30,  2006,  rental  revenue  from real estate
decreased by approximately  ($1.8) million,  or 7.6%, from $23.9 million for the
three  months  ended  September  30, 2005 to $22.1  million for the three months
ended September 30, 2006. For the nine months ended  September 30, 2006,  rental
revenue from real estate  decreased by  approximately  ($6.5) million,  or 8.8%,
from $73.8 million for the nine months ended September 30, 2005 to $67.3 million
for  the  nine  months  ended  September  30,  2006.   Rental  revenue  includes
approximately  ($0.5) million in amortization expense for the three months ended
September 30, 2006 and 2005 and  approximately  ($1.4)  million in  amortization
expense  for  the  nine  months  ended  September  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
September  30,  2005,  all  of  which  resulted  from  current   adverse  market
conditions.  Our occupancy rate at September 30, 2006 was  approximately  64.2%,
compared to approximately  67.5% at September 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 existing  leases for 160,000  rentable square
feet  scheduled to expire  during the remainder of 2006 are not renewed or those
properties are not re-leased.

EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE
As of September 30, 2006, we had  investments in three R&D  buildings,  totaling
466,600 rentable square feet, through an unconsolidated joint venture,  TBI-MWP,
in which we acquired a 50%  interest  in January  2003 from the Berg Group under
the Berg Land  Holdings  Option  Agreement.  We have a  non-controlling  limited
partnership  interest  in this joint  venture,  which we  account  for using the
equity method of accounting.  For the three months ended  September 30, 2006, we
recorded   equity  in  earnings  from  the   unconsolidated   joint  venture  of
approximately  $0.86 million compared to equity in earnings of $0.29 million for
the same period in 2005. Our equity in earnings from this  unconsolidated  joint
venture  increased  in the  third  quarter  of 2006  due to the  sale of one R&D
property with approximately  126,400 rentable square feet for approximately $8.5
million.  The total gain on the sale was  approximately  $0.88  million of which
$0.44 million was our share. For the nine-month periods ended September 30, 2006
and  2005,  equity  in  earnings  from  the  unconsolidated  joint  venture  was
approximately  $1.5  million and $0.68  million,  respectively.  The increase in
equity in earnings from  unconsolidated  joint venture for the nine-month period
ended  September 30, 2006 resulted from the gain on sale of one R&D property and
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  September  30,  2006 and 2005 was
approximately 100% and 78.7%, respectively.

                                     - 16 -

<PAGE>


LEASE TERMINATION INCOME FROM CONTINUING OPERATIONS
Lease  termination  fees for the nine months ended  September  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.

OTHER INCOME FROM CONTINUING OPERATIONS
Other income of approximately  $1.0 million for the three months ended September
30, 2006 included  approximately  $0.6 million from interest,  $0.2 million from
management  fee and $0.2  million  from deposit  forfeitures  and  miscellaneous
income.  Other income of  approximately  $0.4 million for the three months ended
September 30, 2005 included  approximately  $0.2 million from management fee and
$0.2 million from interest.  For the nine months ended September 30, 2006, other
income of approximately  $2.9 million included  approximately  $1.5 million from
interest,  $0.8 million  from  management  fee and $0.6 million from  settlement
claims,  deposit forfeitures and miscellaneous income. For the nine months ended
September  30,  2005,  other  income  of  approximately  $2.5  million  included
approximately  $0.7 million from  management fee, $0.2 million from interest and
$1.6 million from settlement claims and miscellaneous income.

EXPENSES FROM CONTINUING OPERATIONS
Property  operating  expenses and real estate taxes during the third  quarter of
2006 decreased by  approximately  ($0.1) million,  or 2.4%, from $5.1 million to
$5.0  million  for  the  three  months  ended   September  30,  2005  and  2006,
respectively,  due primarily to lower repair and  maintenance  services.  Tenant
reimbursements  decreased by approximately  ($0.5) million,  or 13.4%, from $3.8
million for the three  months ended  September  30, 2005 to $3.3 million for the
three months ended September 30, 2006 due to lower occupancy. Property operating
expenses and real estate taxes remained the same at approximately  $13.6 million
for the nine months ended  September  30, 2006 and 2005.  Tenant  reimbursements
decreased by approximately  ($1.3) million, or 12.1%, from $10.7 million for the
nine months ended  September  30, 2005 to $9.4 million for the nine months ended
September  30, 2006.  The decrease in tenant  reimbursements  for the nine month
periods 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 $0.1 million,  or 25.2%, from $0.4 million to $0.5 million for the
three  months  ended  September  30, 2005 and 2006,  respectively.  For the nine
months ended September 30, 2005 and 2006,  general and  administrative  expenses
increased by  approximately  $0.3 million,  or 16.9%,  from $1.5 million to $1.8
million,  respectively.  The increase in general and administrative expenses for
the nine months  ended  September  30,  2006 was  primarily a result of dividend
equivalent right  compensation cost and stock option expensing,  as well as 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.

Depreciation and amortization  expense of real estate increased by approximately
$0.5  million,  or 9.0%,  from $5.1 million to $5.6 million for the three months
ended September 30, 2005 and 2006,  respectively.  The increase was attributable
primarily to the write-offs of tenant  improvements from lease  terminations and
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 nine months of 2006.  Depreciation and amortization  expense of
real estate increased by approximately $0.7 million, or 4.7%, from $15.4 million
to  $16.1  million  for the nine  months  ended  September  30,  2005 and  2006,
respectively. The increase for the nine months ended September 30, 2006 compared
to the same  period  in 2005 was  attributable  primarily  for the same  reasons
stated above comparing the three months ended September 30, 2006 to 2005.

Interest expense decreased by approximately  ($0.3) million,  or 5.9%, from $5.5
million for the three  months ended  September  30, 2005 to $5.2 million for the
three months ended September 30, 2006 due to lower total debt in 2006.  Interest
expense (related parties) decreased by approximately  ($41,000),  or 17.9%, from
$229,000 for the three months ended September 30, 2005 to $188,000 for the three
months ended September 30, 2006 due to the termination of the Berg Group line of
credit in October 2005. Total debt  outstanding,  including  amounts due related
parties,  decreased  by  approximately  ($10.3)  million,  or 2.8%,  from $370.0
million as of September  30, 2005 to $359.7  million as of  September  30, 2006.
Overall interest  expense,  including  amounts paid to related parties,  for the
quarter  ended  September 30, 2006  decreased by  approximately  ($0.4)  million
compared to the same quarter a year ago,  with the  difference  being  primarily
attributable to the retirement of the higher rate Citicorp loan and the pay down
of the Santa Clara Valley  National Bank (formerly  known as Cupertino  National
Bank) line of credit during the third quarter of 2005.

Interest expense decreased by approximately  ($0.5) million, or 2.9%, from $16.1
million for the nine months ended  September  30, 2005 to $15.6  million for the
nine months  ended  September  30,  2006.  Interest  expense  (related  parties)
decreased by  approximately  ($210,000),  or 27.0%,  from  $779,000 for the nine
months ended  September 30, 2005 to $569,000 for the nine months ended September
30, 2006.

                                     - 17 -

<PAGE>

INCOME/(LOSS) FROM DISCONTINUED OPERATIONS
The following  table depicts income from  discontinued  operations for the three
and nine months ended September 30, 2006 and 2005.

<TABLE>
<CAPTION>
                                                            Three Months Ended September 30,   Nine Months Ended September 30,
                                                                 2006             2005             2006             2005
                                                              -----------     ------------     ------------     ------------
                                                                                  (dollars in thousands)
                                                                                       (unaudited)
<S>                                                             <C>            <C>              <C>               <C>
         Gain on disposal of discontinued operations                -           $1,345                -            $1,408
         (Loss)/income attributable to discontinued operations   ($17)             569           $1,059             1,183
         Minority interests in loss/(earnings) attributable to
             discontinued operations                               14           (1,532)            (887)           (2,104)
                                                              -----------     ------------     ------------     ------------
         (Loss)/income from discontinued operations              ($ 3)          $   382          $  172            $ 487
                                                              ===========     ============     ============     ============
</TABLE>

In  accordance  with our  adoption  of SFAS No. 144,  at  September  30, 2006 we
classified three properties consisting of 235,000 rentable square feet as assets
held for sale and discontinued  operations,  and in the first quarter of 2005 we
sold and classified as  discontinued  operations  two  properties  consisting of
103,350  rentable square feet. In the third quarter of 2006, we classified three
properties  as  assets  held for sale and  discontinued  operations  because  we
committed to an action to sell the  properties,  the  properties had a buyer and
was available for immediate  sale in their present  condition  (subject to terms
that are usual and customary for sales of such property),  the sale was probable
and actions  required to complete the plan  indicated  that it was unlikely that
significant  changes  to the  plan  would  be made or that  the  plan  would  be
withdrawn.  Net gains on sale and operating  results of assets held for sale and
disposed  properties were classified as  discontinued  operations.  SFAS No. 144
requires prior period results of operations for these  properties to be restated
and  presented  in  discontinued  operations  in  prior  condensed  consolidated
statements of operations.

In  accordance  with SFAS No. 66, in the third  quarter of 2005 we received  the
remaining balance owed on one of the properties disposed in the first quarter of
2005 and recorded the remaining gain of approximately $1.3 million.

The (loss)/income to common stockholders attributable to discontinued operations
from these properties for the three months ended September 30, 2006 and 2005 was
approximately  ($3,000)  and $0.4  million,  respectively.  The income to common
stockholders  attributable to discontinued  operations from these properties for
the nine months ended September 30, 2006 and 2005 was approximately $0.2 million
and $0.5 million, respectively.

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  interests  represent  the
ownership  interest of all limited partners in the operating  partnerships taken
as a whole,  which was  approximately  81% and 82% as of September  30, 2006 and
2005, respectively.

Net income available to common  stockholders  decreased by approximately  ($0.3)
million,  or 14.1%,  from $2.4 million for the three months ended  September 30,
2005 to $2.1 million for the same period in 2006. The minority  interest portion
of income  decreased  by  approximately  ($2.8)  million,  or 24.6%,  from $11.5
million for the three  months ended  September  30, 2005 to $8.7 million for the
three months ended  September 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 gain on disposal of  discontinued  operations in 2005.
For the nine months ended  September  30, 2006 and 2005,  the minority  interest
portion  of  income  was   approximately   $41.1  million  and  $35.8   million,
respectively,  resulting in net income to common  stockholders of  approximately
$9.4 million and $7.6 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 in 2006.

CHANGES IN FINANCIAL CONDITION

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

At September 30, 2006,  total  investments  in properties  had a net increase of
approximately  $17.4  million  from  December 31, 2005  primarily  due to tenant
improvements and two R&D property  acquisitions  during the first nine months of
2006  consisting of  approximately  137,800  rentable square feet located in the
Silicon Valley.

Total  stockholders'  equity, net, increased by approximately $11.2 million from
December 31, 2005 as we obtained additional capital from the issuance of 856,896
shares of our common stock for the exchange of O.P.  units and 91,600  shares of
our common  stock from stock  option  exercises  and a decrease  in  accumulated
deficit of  approximately  $0.2 million due to the  realization  of higher lease
termination fees for the period.  The newly issued shares  increased  additional
paid-in-capital by approximately $11.0 million.

                                     - 18 -

<PAGE>

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
160,000 rentable square feet scheduled to expire during the remainder of 2006 or
an  equivalent  amount of our currently  available  space of  approximately  2.8
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
excess capacity of commercial  office and R&D space in the Silicon  Valley,  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 Santa Clara Valley  National Bank (formerly  known
as Cupertino  National Bank) ("SCVNB").  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 SCVNB.  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 $2.6 million of debt principal under mortgage notes without regard
to any debt refinancing or new debt obligations that we might incur, or optional
payments of debt principal.

Cash and cash equivalents  increased by  approximately  $11.0 million from $31.4
million as of  December  31,  2005 to $42.4  million as of  September  30,  2006
primarily from cash flow from  operations and excess  remaining  restricted cash
from a 1031 tax-deferred exchange transaction.

Restricted  cash  totaled $6.9  million as of  September  30, 2006.  This amount
represents  a  balance  we  consolidated   due  to  our  adoption  of  FIN  46R,
"Consolidation of Variable Interest  Entities" (see Note 4 of Notes to Condensed
Consolidated  Financial  Statements in Part I, Item 1, above). 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 October 5, 2006, we paid  dividends of $0.16 per share of common stock to all
common  stockholders  of record as of September 29, 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  stockholders and O.P. unit holders of
$0.16 per share.  However,  distributions  are declared at the discretion of our
Board of Directors and are subject to actual cash  available  for  distribution,
our financial  condition,  capital  requirements and such other factors,  as our
Board of Directors deems relevant.

DEBT
At September 30, 2006, we had total  indebtedness of $359.8  million,  including
$350.0 million of fixed rate mortgage debt and $9.8 million under the Berg Group
mortgage note (related parties),  as detailed in the table below. The SCVNB loan
contains certain  financial loan and reporting  covenants as defined in the loan
agreements.  As of September  30, 2006,  we were in  compliance  with these loan
covenants.

CONTRACTUAL OBLIGATIONS
The following table  identifies our contractual  obligations as of September 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)     $2,649      $11,028      $121,605      $9,580        $10,125     $204,769     $359,756
Operating Lease Obligations (2)       23           23             -           -              -            -           46
                               ------------ ------------- ------------ ------------ ------------- ------------ ------------
Total                             $2,672      $11,051      $121,605      $9,580        $10,125     $204,769     $359,802
                               ============ ============= ============ ============ ============= ============ ============
</TABLE>

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

                                     - 19 -

<PAGE>



The following  table sets forth  information  regarding  debt  outstanding as of
September 30, 2006:
<TABLE>
<CAPTION>

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

Mortgage Notes Payable (related parties):       5300 & 5350 Hellyer Ave., San Jose, CA      $  9,756              6/10        7.65%

                                                                                       --------------------
Mortgage Notes Payable (1):
Prudential Insurance Company of America (2)     10300 Bubb Road, Cupertino, CA                115,582            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 Company (4)  1750 Automation Parkway, San Jose, CA         88,965              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 Insurance Co. (Allianz Loan I)(5)  5900 Optical Court, San Jose, CA              24,723              8/25        5.56%

Allianz Life Insurance Co. (Allianz Loan II)(5) 5325-5345 Hellyer Avenue, San Jose, CA       120,730              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
                                                                                       --------------------
                                                                                             350,000
                                                                                       --------------------

                                                                                       --------------------
TOTAL                                                                                       $359,756
                                                                                       ====================
</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 September 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 Santa Clara Valley  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 September 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  September  30,  2006,  the  Company was in
     compliance with these loan covenants.

At September 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 $11.40 per share on September 29, 2006) on a fully diluted  basis,  including
the conversion of all O.P. units into common stock, was approximately  23.2%. On
September  29,  2006,  the  last  trading  day for  the  quarter,  total  market
capitalization was approximately $1.55 billion.

                                     - 20 -
<PAGE>

At September 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  condensed  consolidated  financial
statements.  However, the interest income earned by the operating  partnerships,
which is interest  expense to us, in  connection  with this debt, is included in
the calculation of minority interests as reported on the condensed  consolidated
statement of operations, thereby reducing our net income by this same amount. At
present, our only means for repayment of this debt is through distributions that
we receive from the operating  partnerships  that are in excess of the amount of
dividends  to be  paid  to our  stockholders  or by  raising  additional  equity
capital.

HISTORICAL CASH FLOWS

COMPARISON OF THE NINE MONTHS ENDED  SEPTEMBER 30, 2006 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2005

Net cash provided by operating  activities  for the nine months ended  September
30, 2006 was approximately  $28.2 million compared to $22.9 million for the same
period  in  2005.  The  increase  resulted  primarily  from  the  cash  receipts
associated with deferred rental income and rent payments from M&M, LLC (see Note
4 of Notes to Condensed  Consolidated  Financial  Statements  in Part I, Item 1,
above) in 2006,  and  because we incurred  higher  leasing  commission  payments
(included  in Other  assets)  in 2005,  which  amounted  to  approximately  $4.0
million, compared to $0.8 million in 2006.

Net cash used in  investing  activities  was  approximately  ($2.0)  million and
($2.6)  million  for  the  nine  months  ended  September  30,  2006  and  2005,
respectively.  Cash used in  investing  activities  during the nine months ended
September 30, 2006 related  principally to the  acquisition of the properties at
233  South  Hillview  Drive and 1875  Charleston  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  $1.3
million for the nine months ended  September  30,  2006.  Cash used in investing
activities  during the nine months ended September 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 $12.4 million.  Capital
expenditures  relating  to real  estate  improvements  were  approximately  $0.9
million for the nine months ended September 30, 2005.

Net cash used in financing activities was approximately  ($15.1) million for the
nine months ended  September 30, 2006 compared to net cash provided by financing
activities of  approximately  $18.6 million for the nine months ended  September
30, 2005.  During the first nine months of 2006,  we received  $0.8 million from
stock option exercises, received $1.6 million from the refund of an appeal bond,
used  $7.8  million  to pay  outstanding  debt,  paid  $9.0  million  to  common
stockholders  for  dividends  and paid $0.7  million to minority  interests  for
distributions in excess of earnings. During the same period in 2005, we received
$150.8  million from two new mortgage  loans,  received  $0.5 million from stock
option  exercises,  used $117.8 million to pay  outstanding  debt, and paid $6.2
million to minority  interests for  distributions in excess of earnings and $8.7
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.

                                     - 21 -
<PAGE>

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

<TABLE>
<CAPTION>
                                                  Three Months Ended September 30,              Nine Months Ended September 30,
                                                    2006                   2005                   2006                   2005
                                             ------------------     ------------------     ------------------     ------------------
                                                       (dollars in thousands)                        (dollars in thousands)
<S>                                              <C>                    <C>                   <C>                    <C>
Net income to common stockholders                $ 2,106                $ 2,451               $ 9,380                $ 7,554
Add:
 Minority interests (1)                            8,566                 11,414                40,676                 35,441
 Depreciation & amortization of real estate (2)    6,333                  6,008                18,429                 18,390
Less:
 Gain on sale of JV real estate or real estate      (438)                (1,345)                 (438)                (1,408)
                                             ------------------     ------------------     ------------------     ------------------
FFO                                              $16,567                $18,528               $68,047                $59,977
                                             ==================     ==================     ==================     ==================
</TABLE>

(1)  The minority  interests  for third  parties  totaling $134 and $127 for the
     three months ended September 30, 2006 and 2005, respectively,  and $382 for
     the nine months ended  September  30, 2006 and 2005 was deducted from total
     minority interests in calculating FFO.
(2)  Includes our portion of  depreciation  and  amortization of real estate and
     leasing commissions from our unconsolidated joint venture totaling $238 and
     $210 for the three months ended September 30, 2006 and 2005,  respectively,
     and $660 and $774 for the nine months  ended  September  30, 2006 and 2005,
     respectively. Also includes our amortization of leasing commissions of $368
     and  $453  for  the  three  months  ended  September  30,  2006  and  2005,
     respectively, and $1,138 and $1,295 for the nine months ended September 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 condensed consolidated statements of operations.  For
     the three  months  ended  September  30,  2006 and 2005,  depreciation  and
     amortization  of real estate  also  includes  approximately  $158 and $234,
     respectively,  attributable to discontinued operations. For the nine months
     ended September 30, 2006 and 2005,  depreciation  and  amortization of real
     estate   also   includes   approximately   $471  and  $889,   respectively,
     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;
-    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 condensed consolidated statements of operations or financial position.

                                     - 22 -

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

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

<TABLE>
<CAPTION>
                                        Three
                                        Months            Year Ending December 31,
                                       Remaining  ----------------------------------------------
                                         2006        2007        2008       2009        2010     Thereafter     Total     Fair Value
                                      ----------------------------------------------------------------------------------------------
                                                                          (dollars in thousands)
FIXED RATE DEBT:
<S>                                    <C>        <C>         <C>         <C>        <C>         <C>          <C>         <C>
  Secured notes payable                 $2,649     $11,028     $121,605    $9,580     $10,125     $204,769     $359,756    $468,105
  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 SCVNB line of credit,  which had a zero balance at
September 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 September 30, 2006.

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

                                     - 23 -

<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

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

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

                                     - 24 -

<PAGE>


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Legal  proceedings are  incorporated  herein by reference from Part I "Item 1. -
Notes to Condensed  Consolidated Financial Statements - Note 9 - Commitments and
Contingencies."

ITEM 1A.  RISK FACTORS

While we  attempt  to  identify,  manage and  mitigate  risks and  uncertainties
associated with our business to the extent  practical  under the  circumstances,
some level of risk and  uncertainty  will always be present.  In addition to the
other  information  contained in this report,  you should  carefully  review the
factors  discussed  under Item 1A of our 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 6.  EXHIBITS

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

                                     - 25 -

<PAGE>



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

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


                                Mission West Properties, Inc.
                                (Registrant)


Date: November 6, 2006           By:    /s/ Carl E. Berg
                                 -----------------------------------------------
                                 Carl E. Berg
                                 Chief Executive Officer


Date: November 6, 2006           By:    /s/ Wayne N. Pham
                                 -----------------------------------------------
                                 Wayne N. Pham
                                 Vice President of Finance and Controller
                                 (Principal Accounting Officer and Duly
                                 Authorized Officer)

                                     - 26 -