UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q





X

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

For the quarterly period ended March 31, 2003.





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

For the transition period from ________________ to _______________.



Commission File Number 1-12222



BEDFORD PROPERTY INVESTORS, INC.

(Exact name of registrant as specified in its charter)





MARYLAND

68-0306514

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)





270 Lafayette Circle, Lafayette, CA

94549

(Address of principal executive offices)

(Zip Code)





(925) 283-8910

(Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X  No___



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X  No___



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





Class

Outstanding as of May 5, 2003

Common Stock, $0.02 par value

16,561,403



















BEDFORD PROPERTY INVESTORS, INC.



INDEX





PART I.  FINANCIAL INFORMATION

Page



Item 1.  Financial Statements



Statement

1



Balance Sheets as of March 31, 2003

and December 31, 2002 (Unaudited)

2



Statements of Income for the three months ended

March 31, 2003 and 2002 (Unaudited)

3



Statements of Stockholders' Equity for the

three months ended March 31, 2003 (Unaudited)

4



Statements of Cash Flows for the three months ended

March 31, 2003 and 2002 (Unaudited)

5



Notes to Financial Statements

6-16



Item 2.  Management's Discussion and Analysis of

Financial Condition and Results of Operations

17-33



Item 3.  Quantitative and Qualitative Disclosures

about Market Risk

34



Item 4.  Controls and Procedures

34



PART II.  OTHER INFORMATION



Items 1 - 6

35-36



SIGNATURES

37



CERTIFICATIONS

38-39







BEDFORD PROPERTY INVESTORS, INC.









PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements



STATEMENT



We have prepared the following unaudited interim financial statements in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission.  In our opinion, the interim financial statements presented reflect all adjustments, consisting only of normally recurring adjustments, which are necessary for a fair presentation of our financial condition and results of operations.  These financial statements should be read in conjunction with the notes to consolidated financial statements appearing in the annual report to stockholders for the year ended December 31, 2002.



When used in this Form 10-Q, the words "believes," "expects," "intends," "anticipates" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from those expressed, expected or implied by the forward-looking statements.  The risks and uncertainties that could cause our actual results to differ from managements estimates and expectations are contained in our filings with the Securities and Exchange Commission, including our 2002 Annual Report on Form 10-K, and as set forth in the section below entitled Potential Factors Affecting Future Operating Results.  Readers are cautioned not to place undue reliance on these forward-looking statements since they only reflect information available as of the date of this filing.  We do not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information.







































1



BEDFORD PROPERTY INVESTORS, INC.

BALANCE SHEETS

AS OF MARCH 31, 2003 AND DECEMBER 31, 2002

(Unaudited)

(in thousands, except share and per share amounts)



|                                                                                                                                                                            | March 31, 2003 | December 31, 2002
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -----------------
|Assets:
Real estate investments:                                                                                                                                            |                |                  
|Industrial buildings                                                                                                                                                        | $375,254       | $372,105         
|Office buildings                                                                                                                                                            | 336,776        | 336,472          
|Properties under development                                                                                                                                                | -              | 2,864            
|Land held for development                                                                                                                                                   | 13,800         | 13,747           
|                                                                                                                                                                            | 725,830        | 725,188          
|Less accumulated depreciation                                                                                                                                               | 66,905         | 62,562           
|Total real estate investments                                                                                                                                               | 658,925        | 662,626          
|Cash and cash equivalents                                                                                                                                                   | 6,825          | 3,727            
|Other assets                                                                                                                                                                | 26,412         | 27,978           
|                                                                                                                                                                            | $692,162       | $694,331         
|Liabilities and Stockholders' Equity:                                                                                                                                       |                |                  
|Bank loans payable                                                                                                                                                          | $  98,376      | $124,681         
|Mortgage loans payable                                                                                                                                                      | 288,457        | 259,496          
|Accounts payable and accrued expenses                                                                                                                                       | 6,338          | 10,173           
|Dividends payable                                                                                                                                                           | 8,280          | 8,222            
|Other liabilities                                                                                                                                                           | 15,146         | 15,702           
|Total liabilities                                                                                                                                                           | 416,597        | 418,274          
|Commitments and contingencies (Note 8)                                                                                                                                      |                |                  
|Stockholders' equity:
Common stock, par value $0.02 per share;
authorized 50,000,000 shares; issued and
outstanding 16,560,801 shares in 2003 and
16,443,664 shares in 2002 | 331            | 329              
|Additional paid-in capital                                                                                                                                                  | 296,312        | 293,864          
|Deferred stock compensation                                                                                                                                                 | (6,956)        | (4,622)          
|Accumulated dividends in
excess of net income                                                                                                                               | (14,122)       | (13,514)         
|Total stockholders' equity                                                                                                                                                  | 275,565        | 276,057          
|                                                                                                                                                                            | $692,162       | $694,331         
|                                                                                                                                                                            |                |                  



See accompanying notes to financial statements.

2



BEDFORD PROPERTY INVESTORS, INC.

STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

(Unaudited)

(in thousands, except share and per share amounts)



|                                            | 2003       |  | 2002      
|------------------------------------------- | ---------- |  | ----------
|Property operations:
Rental income          | $26,953    |  | $23,805   
|Rental expenses:
Operating expenses         | 4,576      |  | 3,958     
|Real estate taxes                           | 2,678      |  | 2,085     
|Depreciation and amortization               | 4,910      |  | 3,752     
|Income from property operations             | 14,789     |  | 14,010    
|General and administrative expenses         | (1,684)    |  | (979)     
|Interest income                             | 39         |  | 36        
|Interest expense                            | (5,472)    |  | (4,917)   
|Income from continuing operations           | 7,672      |  | 8,150     
|Discontinued operations:                    |            |  |           
|Income from operating properties sold, net  | -          |  | 225       
|Net income                                  | $7,672     |  | $8,375    
|Earnings per share - basic:                 |            |  |           
|Income from continuing operations           | $    0.48  |  | $    0.50 
|Income from discontinued operations         | -          |  | 0.02      
|Earnings per share - basic                  | $0.48      |  | $0.52     
|Weighted average number of shares - basic   | 16,078,897 |  | 16,197,385
|Earnings per share - diluted:               |            |  |           
|Income from continuing operations           | $    0.47  |  | $    0.49 
|Income from discontinued operations         | -          |  | 0.01      
|Earnings per share - diluted                | $0.47      |  | $0.50     
|Weighted average number of shares  diluted | 16,370,146 |  | 16,589,831



See accompanying notes to financial statements.

3







BEDFORD PROPERTY INVESTORS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2003

(Unaudited)

(in thousands, except per share amounts)



|                                                   | Common
stock | Additional
paid-in
capital | Deferred
stock
compensation | Accumulated
dividends
in excess of
net income | Total
stockholders' equity
|-------------------------------------------------- | ------------ | -------------------------- | --------------------------- | --------------------------------------------- | --------------------------
|Balance, December 31, 2002                         | $329         | $293,864                   | $(4,622)                    | $(13,514)                                     | $276,057                  
|Issuance of common stock                           | 2            | 1,750                      | -                           | -                                             | 1,752                     
|Repurchase and retirement of common
stock          | (2)          | (2,270)                    | -                           | -                                             | (2,272)                   
|Stock option expense                               | -            | 54                         | -                           | -                                             | 54                        
|Issuance of restricted stock                       | 2            | 2,935                      | (2,937)                     | -                                             | -                         
|Forfeiture of restricted stock                     | -            | (21)                       | 21                          | -                                             | -                         
|Amortization of restricted stock                   | -            | -                          | 582                         | -                                             | 582                       
|Dividends to common stockholders
($0.50 per share) | -            | -                          | -                           | (8,280)                                       | (8,280)                   
|Net income                                         | -            | -                          | -                           | 7,672                                         | 7,672                     
|Balance, March 31, 2003                            | $331         | $296,312                   | $(6,956)                    | $(14,122)                                     | $275,565                  





See accompanying notes to financial statements.

































4







BEDFORD PROPERTY INVESTORS, INC.

STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

(Unaudited)

( in thousands)



|                                                                                                                                                      | 2003          | 2002      
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----------
|Operating Activities:
Net income                                                                                                                      | $    7,672    | $    8,375
|Adjustments to reconcile net income to net cash
provided by operating activities:                                                                     |               |           
|Depreciation and amortization, including amortization
of deferred loan costs                                                                          | 5,413         | 4,453     
|Amortization of deferred compensation                                                                                                                 | 582           | 516       
|Stock compensation expense                                                                                                                            | 54            | -         
|Uncollectible accounts expense                                                                                                                        | (23)          | 204       
|Change in other assets                                                                                                                                | 216           | (774)     
|Change in accounts payable and accrued expenses                                                                                                       | (3,705)       | (3,829)   
|Change in other liabilities                                                                                                                           | (556)         | (1,479)   
|Net cash provided by operating activities                                                                                                             | 9,653         | 7,466     
|Investing Activities:
Investments in real estate                                                                                                      | (642)         | (1,663)   
|Contract retention paid, net                                                                                                                          | (130)         | (817)     
|Net cash used by investing activities                                                                                                                 | (772)         | (2,480)   
|Financing Activities:
Proceeds from bank loans payable, net of loan costs                                                                             | 26,834        | 8,384     
|Repayments of bank loans payable                                                                                                                      | (53,208)      | (4,626)   
|Refund of loan costs                                                                                                                                  | 485           | 2         
|Proceeds from mortgage loans payable, net of loan costs                                                                                               | 48,387        | -         
|Repayments of mortgage loans payable                                                                                                                  | (19,539)      | (1,316)   
|Issuance of common stock                                                                                                                              | 1,752         | 834       
|Repurchase and retirement of common stock                                                                                                             | (2,272)       | (538)     
|Redemption of Operating Partnership Units                                                                                                             | -             | (202)     
|Payment of dividends and distributions                                                                                                                | (8,222)       | (7,962)   
|Net cash used by financing activities                                                                                                                 | (5,783)       | (5,424)   
|Net increase (decrease) in cash and cash equivalents                                                                                                  | 3,098         | (438)     
|Cash and cash equivalents at beginning of period                                                                                                      | 3,727         | 5,512     
|Cash and cash equivalents at end of period                                                                                                            | $6,825        | $5,074    
|Supplemental disclosure of cash flow information:

Cash paid during the year for interest, net of amounts capitalized of
$37 in 2003 and $273 in 2002 | $5,148        | $4,869    
|Cash paid during the year for income taxes                                                                                                            | $300          | $-        
|Non-cash investing and financing transactions:

Redemption of Operating Partnership Units paid in common stock                                        | $           - | $(1,483)  
|Investment in real estate assets                                                                                                                      | -             | 550       
|Minority interest in consolidated partnership                                                                                                         | $-            | $933      



See accompanying notes to financial statements

5





BEDFORD PROPERTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS(Unaudited)

MARCH 31, 2003





Note 1 - Organization and Summary of Significant Accounting Policies and Practices



The Company

Bedford Property Investors, Inc. is a real estate investment trust (REIT) formed in 1993 as a Maryland corporation.  We are a self-administered and self-managed equity REIT engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties concentrated in the western United States.  Our Common Stock trades under the symbol "BED" on both the New York Stock Exchange and the Pacific Exchange.



Basis of Presentation

We have prepared the accompanying unaudited interim financial statements in accordance with the requirements of Form 10-Q as set forth by the Securities and Exchange Commission.   Therefore, they do not include all information and footnotes necessary for a presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America.  In our opinion, the interim financial statements presented reflect all adjustments, consisting only of normally recurring adjustments, which are necessary for a fair presentation of our financial condition and results of operations.  These unaudited financial statements should be read in conjunction with the Notes to the 2002 audited financial statements.



Stock-Based Compensation

In prior years, we accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) 25 and all related interpretations.  As of January 1, 2003, we adopted Statement of Financial Accounting Standards (SFAS) 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS 123, on a modified prospective basis.  SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The impact of adopting SFAS 148 was an increase in compensation expense of $54,000 in the first quarter of 2003.



If we had determined compensation costs for the stock options granted to employees consistent with SFAS 123 during the three months ended March 31, 2002, our net income and earnings per share would have

been reduced to the pro forma amounts as follows (in thousands, except per share amounts):



|                                        |  | Three Months Ended
March 31, 2002
|--------------------------------------- |  | ---------------------------------
|Net income:                             |  |                                  
|As reported                             |  | $8,375                           
|Less: compensation expense per SFAS 123 |  | 56                               
|Pro forma                               |  | $8,319                           
|                                        |  |                                  
|Earnings per share  basic:             |  |                                  
|As reported                             |  | $  0.52                          
|Less: compensation expense per SFAS 123 |  | 0.01                             
|Pro forma                               |  | $0.51                            
|                                        |  |                                  
|Earnings per share  diluted:           |  |                                  
|As reported                             |  | $  0.50                          
|Less: compensation expense per SFAS 123 |  | -                                
|Pro forma                               |  | $0.50                            



6







Per Share Data

Per share data are based on the weighted average number of common shares outstanding during the year.  We include stock options issued under our stock option plans, non-vested restricted stock, and the Operating Partnership (OP) Units of Bedford Realty Partners, L.P. (prior to their redemption on January 15, 2002) in the calculation of diluted per share data if, upon exercise or vestiture, they would have a dilutive effect.



Cash and Cash Equivalents

We consider all demand deposits, money market accounts and temporary cash investments to be cash equivalents.  We maintain our cash and cash equivalents at financial institutions.  The combined account balances at each institution periodically exceed the Federal Depository Insurance Corporation (FDIC) insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage.  We do not believe that this credit risk is significant as we do not anticipate their non-performance.



Recent Accounting Pronouncements

In November 2002, the FASB issued SFAS Interpretation (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees.  FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees.  It requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002.  The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002.  The adoption of this pronouncement did not have a material impact on our financial position or results of operations.



In January 2003, the FASB issued SFAS Interpretation (FIN) 46, Consolidation of Variable Interest Entities.  FIN 46 changes the criteria by which one company includes another entity in its consolidated financial statements.  Previously, the criteria were based on control through voting interest.  FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities created prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established.  The adoption of this pronouncement did not have a material impact on our financial position or results of operations.



Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation, with no effect on our financial position, cash flows, or net income.





7









Note 2  Real Estate Investments



As of March 31, 2003, our real estate investments were diversified by property type as follows (dollars in

thousands):



|                          | Number of
Properties | Gross
Cost | Percent
of Total
|------------------------- | -------------------- | ---------- | ----------------
|Industrial buildings      | 57                   | $375,254   | 52%             
|Office buildings          | 30                   | 336,776    | 46%             
|Land held for development | 11                   | 13,800     | 2%              
|Total                     | 98                   | $725,830   | 100%            

























































8







The following table sets forth our real estate investments at March 31, 2003 and December 31, 2002(in thousands):



|                                              | Land      | Building | Development
In-Progress | Less
Accumulated
Depreciation | Total   
|--------------------------------------------- | --------- | -------- | ----------------------- | ----------------------------- | --------
|Industrial buildings
Northern California      | $  68,084 | $138,629 | $         -             | $19,103                       | $187,610
|Arizona                                       | 22,224    | 73,678   | -                       | 8,209                         | 87,693  
|Southern California                           | 17,234    | 41,203   | -                       | 6,170                         | 52,267  
|Northwest                                     | 3,409     | 10,793   | -                       | 2,536                         | 11,666  
|Total industrial buildings                    | 110,951   | 264,303  | -                       | 36,018                        | 339,236 
|Office buildings
Northern California          | 6,073     | 25,358   | -                       | 3,188                         | 28,243  
|Arizona                                       | 10,588    | 25,716   | -                       | 3,054                         | 33,250  
|Southern California                           | 9,340     | 22,067   | -                       | 3,058                         | 28,349  
|Northwest                                     | 16,669    | 100,259  | -                       | 11,636                        | 105,292 
|Colorado                                      | 13,706    | 93,902   | -                       | 8,367                         | 99,241  
|Nevada                                        | 2,102     | 10,996   | -                       | 1,584                         | 11,514  
|Total office buildings                        | 58,478    | 278,298  | -                       | 30,887                        | 305,889 
|Land held for
development
Northern California | 5,784     | -        | -                       | -                             | 5,784   
|Arizona                                       | 637       | -        | -                       | -                             | 637     
|Southern California                           | 2,306     | -        | -                       | -                             | 2,306   
|Northwest                                     | 1,128     | -        | -                       | -                             | 1,128   
|Colorado                                      | 3,945     | -        | -                       | -                             | 3,945   
|Total land held for development               | 13,800    | -        | -                       | -                             | 13,800  
|Total as of March 31, 2003                    | $183,229  | $542,601 | $-                      | $66,905                       | $658,925
|Total as of December 31, 2002                 | $182,310  | $540,014 | $2,864                  | $62,562                       | $662,626



Our personnel directly manage all but one of our properties from regional offices in Lafayette, California; Tustin, California; Phoenix, Arizona; Denver, Colorado; and Seattle, Washington.  We have retained an outside manager to assist in some of the management functions for U.S. Bank Centre in Reno, Nevada. All financial record-keeping is centralized at our corporate office in Lafayette, California.



9







Note 3.  Debt



Bank Loans Payable



In May 2001, we renewed our revolving credit facility with a bank group led by Bank of America.  The facility, which matures on June 1, 2004, consists of a $150 million secured line with an accordion feature that gives us the option to expand the facility to $175 million, if needed.  Interest on the facility is at a floating rate equal to either the lenders prime rate or LIBOR plus a margin ranging from 1.30% to 1.55%, depending on our leverage level as defined in the credit agreement.  As of March 31, 2003, the $150 million facility was secured by our interests in 25 properties, which collectively accounted for approximately 27% of our annualized base rent for 2003 and approximately 29% of our total real estate assets at March 31, 2003.



In September 2002, we obtained an additional $40 million unsecured bridge facility with a six-month term, two three-month options to extend, and an interest rate of LIBOR plus 1.55%.  On February 10, 2003, we exercised the option to extend the loan for an additional three-month period.  In March 2003, we paid down $18 million of this credit facility with a portion of the proceeds from our new mortgage from Teachers Insurance and Annuity Association of America described below.



As of March 31, 2003, these facilities had a total outstanding balance of $98,376,000 and an effective interest rate of 3.46%.  The daily weighted average outstanding balances were $131,882,000 and $84,173,000 for the three months ended March 31, 2003 and 2002, respectively.  The weighted average annual interest rates under the credit facilities in each of these periods were 3.55% and 4.98%, respectively.



The credit facilities contain various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of our average Funds From Operations (FFO).  We were in compliance with the various covenants and requirements of our credit facilities during the quarter ended March 31, 2003 and during the year ended December 31, 2002.



Mortgage Loans Payable



In March 2003, we obtained a new $48,500,000 mortgage from Teachers Insurance and Annuity Association of America.  The loan has a ten-year term and carries a fixed interest rate of 5.60%.  It is collateralized by five of our properties representing approximately 8% of our annualized base rent for 2003 and approximately 7% of our total real estate assets at March 31, 2003.  Proceeds from the mortgage financing were used to pay down a portion of the outstanding balance of our lines of credit and to replace an $18,000,000 mortgage from Prudential Insurance Company of America, which matured in March 2003 and carried a fixed interest rate of 7.02%.



10







Mortgage loans payable at March 31, 2003 consist of the following (in thousands):



|Lender                                    | Maturity Date     | Interest Rate as of
March 31, 2003 | Balance  
|----------------------------------------- | ----------------- | ---------------------------------- | ---------
|Union Bank                                | November 19, 2004 | 3.16%(1)                           | $  21,096
|Union Bank                                | January 1, 2005   | 6.00%(2)                           | 4,364    
|TIAA-CREF                                 | June 1, 2005      | 7.17%                              | 25,659   
|Security Life of Denver
Insurance Company | August 1, 2005    | 2.74%(3)                           | 22,049   
|Security Life of Denver
Insurance Company | August 1, 2005    | 2.74%(3)                           | 3,419    
|Nationwide Life Insurance                 | November 1, 2005  | 4.61%                              | 22,438   
|Prudential Insurance                      | July 31, 2006     | 8.90%                              | 7,877    
|Prudential Insurance                      | July 31, 2006     | 6.91%                              | 18,994   
|TIAA-CREF                                 | December 1, 2006  | 7.95%                              | 21,109   
|TIAA-CREF                                 | June 1, 2007      | 7.17%                              | 34,900   
|TIAA-CREF                                 | June 1, 2009      | 7.17%                              | 40,763   
|Washington Mutual                         | August 1, 2011    | 4.92%(4)                           | 17,289   
|TIAA-CREF                                 | April 1, 2013     | 5.60%                              | 48,500   
|                                          | Total             |                                    | $288,457 



(1)

Floating rate based on LIBOR plus 1.60%.  The LIBOR rate was locked for one year at an all-in rate of 3.16% and expires

on December 22, 2003.

(2)

Floating rate based on 3 month LIBOR plus 2.50% with a minimum rate of 6.00% (adjusted quarterly).

(3)

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly).

(4)

Floating rate based on a 12-month average of U.S. Treasury security yields plus 2.60% (adjusted semi-annually).



The mortgage loans are collaterized by our interests in 55 properties, which collectively accounted for approximately 64% of our annualized base rents for 2003 and approximately 60% of our total real estate assets at March 31, 2003.  We were in compliance with the covenants and requirements of our various mortgages during the quarter ended March 31, 2003 and during the year ended December 31, 2002.



The following table presents scheduled principal payments on mortgage loans for each of the twelve-month periods ending March 31 (in thousands):



|2004       | $    6,356
|---------- | ----------
|2005       | 30,894    
|2006       | 74,175    
|2007       | 47,882    
|2008       | 34,308    
|Thereafter | 94,842    
|Total      | $288,457  



11



Note 4.  Discontinued Operations



In accordance with SFAS 144, income from properties sold during the period from April 1, 2002 through December 31, 2002 are presented in the income statement as discontinued operations for the quarter ended March 31, 2002.  Income from operating properties sold, net includes an allocation of interest expense based on the percentage of the cost basis of properties sold to the cost basis of total real estate assets as of March 31, 2002.  The following schedule presents the calculation of income from operating properties sold, net (in thousands):



|Rental income                              | $1,045
|------------------------------------------ | ------
|Rental expenses                            |       
|Operating expenses                         | 125   
|Real estate taxes                          | 104   
|Depreciation and amortization              | 349   
|                                           |       
|Income from property operations            | 467   
|                                           |       
|Interest expense                           | (242) 
|                                           |       
|Income from operating properties sold, net | $225  





12







Note 5.  Segment Disclosure



We have five reportable segments organized by the region in which they operate: Northern California (Northern California and Nevada), Arizona, Southern California, Northwest (greater Seattle, Washington and Portland, Oregon) and Colorado.



The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  We evaluate performance based upon income from property operations from the combined properties in each segment.



|                                           | For the three months ended March 31, 2003(in thousands, except percentages)
|------------------------------------------ | ---------------------------------------------------------------------------
|                                           |                                                                            
|                                           | Northern
California                                                        
|Rental income                              | $  10,535                                                                  
|Operating expenses and
real estate taxes   | 2,270                                                                      
|Depreciation and
amortization              | 1,626                                                                      
|Income from property
operations            | 6,639                                                                      
|General and administrative
expenses        | -                                                                          
|Interest income
(1)                        | 8                                                                          
|Interest expense                           | -                                                                          
|Net income (loss)                          | $6,647                                                                     
|Percent of income from
property operations | 45%                                                                        
|Real estate investments                    | $257,027                                                                   
|Additions of real
estate investments       | $74                                                                        
|Total assets                               | $268,193                                                                   



(1)

The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivable.





13



|                                                  | For the three months ended March 31, 2002(in thousands, except percentages)
|------------------------------------------------- | ---------------------------------------------------------------------------
|                                                  | Northern
California                                                        
|Rental income                                     | $    8,608                                                                 
|Operating expenses and
real estate taxes          | 1,783                                                                      
|Depreciation and
amortization                     | 1,111                                                                      
|Income from property
operations                   | 5,714                                                                      
|General and administrative
expenses               | -                                                                          
|Interest income (1)                               | 7                                                                          
|Interest expense                                  | -                                                                          
|Income (loss) from continuing
operations          | 5,721                                                                      
|Discontinued operations:                          |                                                                            
|(Loss) income from
operating properties
sold, net | (53)                                                                       
|Net income (loss)                                 | $5,668                                                                     
|Percent of income from
property operations        | 41%                                                                        
|Real estate investments                           | $208,375                                                                   
|Additions of real
estate investments              | $424                                                                       
|Total assets                                      | $219,112                                                                   







(1)

The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivable.















14







Note 6.  Earnings Per Share



Following is a reconciliation of earnings per share (in thousands, except share and per share amounts):



|                                                                                                                        | Three Months Ended
March 31, 2003 |  | Three Months Ended
March 31, 2002
|----------------------------------------------------------------------------------------------------------------------- | --------------------------------- |  | ---------------------------------
|Basic:                                                                                                                  |                                   |  |                                  
|Income from continuing operations                                                                                       | $    7,672                        |  | $    8,150                       
|Income from discontinued operations                                                                                     | -                                 |  | 225                              
|Net income for basic earnings per share                                                                                 | $7,672                            |  | $8,375                           
|Weighted average number of shares  basic                                                                               | 16,078,897                        |  | 16,197,385                       
|Earnings per share:                                                                                                     |                                   |  |                                  
|Income from continuing operations                                                                                       | $      0.48                       |  | $      0.50                      
|Income from discontinued operations                                                                                     | -                                 |  | 0.02                             
|Earnings per share  basic                                                                                              | $0.48                             |  | $0.52                            
|Diluted:                                                                                                                |                                   |  |                                  
|Income from continuing operations                                                                                       | $    7,672                        |  | $    8,150                       
|Income from discontinued operations                                                                                     | -                                 |  | 225                              
|Net income for diluted earnings per share                                                                               | $7,672                            |  | $8,375                           
|Weighted average number of shares  basic                                                                               | 16,078,897                        |  | 16,197,385                       
|Weighted average shares of dilutive stock
options using average period stock price
under the treasury stock method      | 158,277                           |  | 189,318                          
|Weighted average shares issuable upon the
conversion of Operating Partnership Units                                     | -                                 |  | 11,210                           
|Weighted average shares of non-vested
restricted stock using average period
stock price under the treasury stock method | 132,972                           |  | 191,918                          
|Weighted average number of shares  diluted                                                                             | 16,370,146                        |  | 16,589,831                       
|Earnings per share:                                                                                                     |                                   |  |                                  
|Income from continuing operations                                                                                       | $     0.47                        |  | $     0.49                       
|Income from discontinued operations                                                                                     | -                                 |  | 0.01                             
|Earnings per share  diluted                                                                                            | $0.47                             |  | $0.50                            



15







Note 7.  Related Party Transactions



In prior years, we used Bedford Acquisitions, Inc. (BAI), a corporation wholly owned by our Chairman of the Board and Chief Executive Officer, Peter Bedford, to provide services for our acquisition, disposition, financing and development activities.  These services were provided under an agreement that was terminated on July 1, 2002.  Upon termination of the agreement, we hired the employees of BAI.



Fees incurred for services provided during the three months ended March 31, 2002 were expensed in the accompanying income statement to the extent that such fees did not represent payments to BAI for direct and incremental development costs or independent third party costs incurred by BAI on our behalf.   During the three months ended March 31, 2002, we paid BAI approximately $1,345,000 for acquisition, disposition, financing, and development activities provided pursuant to the agreement.  As of December 31, 2002, we had a receivable of $590,000 for excess fees paid to BAI, which was subsequently paid in January 2003 by BAI.



We occasionally use the services of the law firm Bartko, Zankel, Tarrant & Miller of which a member of our Board of Directors, Martin I. Zankel, is a partner.  During the three months ended March 31, 2003, we paid Bartko, Zankel, Tarrant & Miller approximately $26,000.



Note 8.  Commitments and Contingencies



As of March 31, 2003, we had outstanding contractual construction commitments of approximately $272,000 relating to development in progress and tenant improvements on recently developed properties.  We had outstanding undrawn letters of credit against our credit facility of approximately $6,662,000 as of March 31, 2003.



From time to time, we are subject to legal claims in the ordinary course of business.  We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, prospects, financial condition, operating results or cash flows.









16







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



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to valuation of real estate investments, income recognition, allowance for doubtful accounts, stock compensation expense, deferred assets, and qualification as a Real Estate Investment Trust (REIT).  These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances.  Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.



Real Estate Investments



Real estate investments are recorded at cost less accumulated depreciation.  The cost of real estate includes purchase price, other acquisition costs, and costs to develop properties which include interest and real estate taxes.  Expenditures for maintenance and repairs that do not add to the value or prolong the useful life of the property are expensed.  Expenditures for asset replacements or significant improvements that extend the life or increase the propertys value are capitalized.  Real estate properties are depreciated using the straight-line method over estimated useful lives.  When circumstances such as adverse market conditions indicate an impairment of a property, we will recognize a loss to the extent that the carrying value exceeds the fair value of the property.



Revenue Recognition and Allowance for Doubtful Accounts



Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements.  Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable.  The amount of straight-line rent receivable is charged against income upon early termination of a lease or as a reduction of gain on sale of the property.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction to income.  Management determines the adequacy of this allowance by continually evaluating individual tenant receivables considering the tenants financial condition, security deposits, letters of credit, lease guarantees and current economic conditions.



Stock Compensation Expense



Beginning January 1, 2003, we voluntarily adopted the recognition provisions of Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation," using the modified prospective method as prescribed in SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123."  The modified prospective method provides for the calculation of the compensation expense as if the fair value based accounting method had been used to account for all stock options granted in fiscal years after December 15, 1994.  The impact of adopting SFAS 148 was an increase in compensation expense of $54,000 in the first quarter of 2003.



17



Deferred Assets



Costs incurred for debt financing and property leasing are capitalized as deferred assets.  Deferred loan costs include amounts paid to lenders and others to obtain financing.  Such costs are amortized over the term of the related loan.  Amortization of deferred financing costs is included in interest expense in our statements of income.  Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease.  Deferred leasing costs are included with the basis when a property is sold and therefore reduce the gain on sale.  Unamortized financing and leasing costs are charged to expense in the event of debt prepayment or early termination of the lease.



Qualification as a REIT



We have elected to be taxed as a real estate investment trust under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the "Code").  A real estate investment trust is generally not subject to federal income tax on that portion of real estate investment trust taxable income ("Taxable Income") that is distributed to stockholders, provided that at least 90% of Taxable Income is distributed and other requirements are met.  If we were to fail to qualify as a REIT, we would be, among other things, required to provide for federal income taxes on our income and reduce the level of distributions made to our stockholders.



RESULTS OF OPERATIONS



Our operations consist of developing, owning and operating industrial and suburban office properties located primarily in the western United States.



Variances in revenues, expenses, net income and cash flows for the three months ended March 31, 2003 when compared with the same period in 2002 were due primarily to the acquisition, development and sale of operating properties during the following periods:



|                        |  | Activities from January 1, 2002
to March 31, 2002 |  | Activities from April 1, 2002

to March 31, 2003
|----------------------- |  | ------------------------------------------------- |  | ------------------------------------------------
|                        |  | Number of
Properties                              |  | Square
Feet                                     
|Acquisitions
Industrial |  | -                                                 |  | -                                               
|Development
Industrial  |  | 1                                                 |  | 42,000                                          
|Sales*
Industrial       |  | -                                                 |  | -                                               
|Office                  |  | -                                                 |  | -                                               
|                        |  | -                                                 |  | -                                               



*  Income from Property Operations for 2002 sales has been recorded as discontinued operations and is excluded from the comparisons of Income from Property Operations, Rental Income, and Rental Expenses discussed below.



18







Three Months Ended March 31, 2003 Compared with Three Months Ended March 31, 2002



Income from Property Operations



Income from property operations (defined as rental income less rental expenses) increased $779,000 or 6% in 2003 compared with 2002.  This increase is attributable to an increase in rental income of $3,148,000, offset by an increase in rental expenses (which include operating expenses, real estate taxes, and depreciation and amortization) of  $2,369,000.



Rental Income



The net increase in rental income of $3,148,000 is primarily attributable to property acquisitions, development activities, and higher rental income on existing properties.  Acquired properties contributed an additional $2,641,000 to rental income in 2003 as compared to 2002.  Development activities increased rental income by $143,000.  A lower level of bad debt expense contributed to the remaining increase in rental income of $364,000.



Rental Expenses



The net increase in rental expenses of $2,369,000 is primarily attributable to property acquisitions, development activities, and increased operating expenses.  Acquired properties contributed an additional $854,000 to rental expenses in 2003 as compared to 2002.  Development activities increased rental expenses by $93,000.  Increases in property taxes, depreciation, and management costs contributed to the remaining increase in operating expenses of  $1,422,000.



General and Administrative Expenses



General and administrative expenses increased $705,000 or 72% in 2003 compared with 2002, primarily as a result of increased compensation costs associated with hiring the employees of Bedford Acquisitions, Inc. (see Related Party Transactions).



Interest Expense



Interest expense, which includes amortization of loan fees, increased $555,000 or 11% in 2003 compared with 2002.  The increase is attributable to a higher level of weighted average outstanding debt in 2003 due to share repurchases and the funding of property acquisitions in the third quarter of 2002.  The amortization of loan fees was $426,000 and $284,000 in 2003 and 2002, respectively.  The increase in amortization of loan fees is primarily due to loan fees paid in connection with the $40 million bridge facility in September 2002 and the $22.6 million mortgage in October 2002.



Discontinued Operations



Income from operating properties sold as presented in the income statement for the three months ended March 31, 2002 consists of income generated during that period for properties sold subsequent to March 31, 2002.



Dividends



Common Stock dividends to stockholders declared for the first quarter of 2003 were $0.50 per share.  Common Stock dividends to stockholders and distributions to Operating Partnership (OP) Unitholders declared for the first quarter of 2002 were $0.48 per share.  The outstanding OP Units were redeemed on January 15, 2002.  Consistent with our policy, dividends and distributions were paid in the quarter following the quarter in which they were declared.

19





LIQUIDITY AND CAPITAL RESOURCES



Liquidity



We expect to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, share repurchases, development of properties, and dividends from:

•

cash flow from operations;

•

borrowings under our credit facility and, if available, other indebtedness which may include indebtedness assumed in acquisitions; and

•

the sale of certain real estate investments.



Cash Flows



Our cash and cash equivalents increased to $6,825,000 at March 31, 2003, from $3,727,000 at December 31, 2002.  This increase is due to $9,653,000 of cash provided by operations, offset by $772,000 used by investing activities and $5,783,000 used by financing activities.



Net cash of $9,653,000 provided by operating activities consisted primarily of $7,672,000 of net income and $6,026,000 of adjustments for non-cash items, offset by $4,045,000 used in working capital and other activities.  Net cash used in working capital and other activities resulted from payments of accounts payable, accrued expenses, and other liabilities, offset by a reduction in other assets.



Net cash of $772,000 used by investing activities consisted of cash used for investments in real estate of $451,000 for operating properties and $321,000 for developed properties.  Investments in real estate include the cost of land, buildings, building improvements, and tenant improvements.  We expect to incur capital expenditures for our current portfolio of approximately $10,000,000 for the remainder of 2003.



Net cash used by financing activities of $5,783,000 consisted of repayments of bank borrowings and mortgage loans of $72,747,000, payment of dividends and distributions of $8,222,000, and the repurchase of 89,290 shares of our Common Stock for $2,272,000, offset by net proceeds from bank borrowings and mortgage loans of $75,221,000, net proceeds from stock options exercised by employees and directors of $1,752,000, and refund of loan costs of $485,000.



Debt Financing



Our ability to continue to finance operations is subject to several uncertainties.  For example, our ability to obtain mortgage loans on income producing property is dependent upon our ability to attract and retain tenants and the  economics of the various markets in which the properties are located, as well as the willingness of mortgage-lending institutions to make loans secured by real property. Approximately 89% of our real estate investments served as collateral for our existing indebtedness as of March 31, 2003. Our ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at reasonable commercial rates.



In May 2001, we renewed our revolving credit facility with a bank group led by Bank of America.  The facility, which matures on June 1, 2004, consists of a $150 million secured line with an accordion feature that allows us at our option to expand the facility to $175 million, if needed.  Interest on the facility is at a floating rate equal to either the lenders prime rate or LIBOR plus a margin ranging from 1.30% to 1.55% depending on our leverage level.  In September 2002, we obtained an additional $40 million unsecured bridge facility with a six-month term, two three-month options to extend, and an interest rate of LIBOR plus 1.55%.  As of March 31, 2003, the facilities had a total outstanding balance of $98,376,000 and an effective interest rate of 3.46%.

20



In March 2003, we obtained a $48,500,000 new mortgage from Teachers Insurance and Annuity Association of America.  The loan has a ten-year term and carries a fixed interest rate of 5.60%.  Proceeds from the mortgage financing were used to pay down a portion of the outstanding balance of our lines of credit and to replace an $18,000,000 mortgage from Prudential Insurance Company of America, which matured in March 2003 and carried a fixed interest rate of 7.02%.



Mortgage loans payable at March 31, 2003 consist of the following (in thousands):



|Lender                                    | Maturity Date     | Interest Rate as of
March 31, 2003 | Balance  
|----------------------------------------- | ----------------- | ---------------------------------- | ---------
|Union Bank                                | November 19, 2004 | 3.16%(1)                           | $  21,096
|Union Bank                                | January 1, 2005   | 6.00%(2)                           | 4,364    
|TIAA-CREF                                 | June 1, 2005      | 7.17%                              | 25,659   
|Security Life of Denver
Insurance Company | August 1, 2005    | 2.74%(3)                           | 22,049   
|Security Life of Denver
Insurance Company | August 1, 2005    | 2.74%(3)                           | 3,419    
|Nationwide Life Insurance                 | November 1, 2005  | 4.61%                              | 22,438   
|Prudential Insurance                      | July 31, 2006     | 8.90%                              | 7,877    
|Prudential Insurance                      | July 31, 2006     | 6.91%                              | 18,994   
|TIAA-CREF                                 | December 1, 2006  | 7.95%                              | 21,109   
|TIAA-CREF                                 | June 1, 2007      | 7.17%                              | 34,900   
|TIAA-CREF                                 | June 1, 2009      | 7.17%                              | 40,763   
|Washington Mutual                         | August 1, 2011    | 4.92%(4)                           | 17,289   
|TIAA-CREF                                 | April 1, 2013     | 5.60%                              | 48,500   
|                                          | Total             |                                    | $288,457 



(1)

Floating rate based on LIBOR plus 1.60%.  The LIBOR rate was locked for one year at an all-in rate of 3.16% and

expires on December 22, 2003.

(2)

Floating rate based on 3 month LIBOR plus 2.50% with a minimum rate of 6.00% (adjusted quarterly).

(3)

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly).

(4)

Floating rate based on a 12-month average of U.S. Treasury security yields plus 2.60% (adjusted semi-annually).



We were in compliance with the various covenants and other requirements of our debt financing instruments during the quarter ended March 31, 2003.  We anticipate that the cash flow generated by our real estate investments and funds available under the credit facility will be sufficient to meet our short-term liquidity requirements.

21



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS



The following summarizes our contractual obligations and other commitments at March 31, 2003, and the effect such obligations could have on our liquidity and cash flow in future periods (in thousands):



|                                  | Amount of Commitment Expiring by Period
|--------------------------------- | ---------------------------------------
|                                  | Less
Than
1 Year                       
|Bank Loan Payable                 | $22,000                                
|Mortgage Loans Payable            | 6,356                                  
|Construction Contract
Commitments | 272                                    
|Standby Letters of Credit         | 6,219                                  
|Total                             | $34,847                                



RELATED PARTY TRANSACTIONS



In prior years, we used Bedford Acquisitions, Inc. (BAI), a corporation wholly owned by our Chairman of the Board and Chief Executive Officer, Peter Bedford, to provide services for our acquisition, disposition, financing and development activities.  These services were provided under an agreement that was terminated on July 1, 2002.  Upon termination of the agreement, we hired the employees of BAI.



Fees incurred for services provided during the three months ended March 31, 2002 were expensed in the accompanying income statement to the extent that such fees did not represent payments to BAI for direct and incremental development costs or independent third party costs incurred by BAI on our behalf.   During the three months ended March 31, 2002, we paid BAI approximately $1,345,000 for acquisition, disposition, financing, and development activities provided pursuant to the agreement.  As of December 31, 2002, we had a receivable of $590,000 for excess fees paid to BAI, which was subsequently paid in January 2003 by BAI.



We occasionally use the services of the law firm Bartko, Zankel, Tarrant & Miller of which a member of our Board of Directors, Martin I. Zankel, is a partner.  During the three months ended March 31, 2003, we paid Bartko, Zankel, Tarrant & Miller approximately $26,000.



OFF-BALANCE SHEET ARRANGEMENTS



At March 31, 2003 and 2002, we did not have any other relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.





22



POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS



Many factors affect our actual financial performance and may cause our future results to be different from past performance or trends.  These factors include the following:



A significant portion of our base rent is generated by properties in California, and our business could be harmed by an economic downturn in the California real estate market.



As of March 31, 2003, approximately 53% of our total annualized base rent was generated by our properties located in the State of California.  As a result of this geographic concentration, the performance of the commercial real estate markets and the local economies in various areas within California could affect the value of these properties and the rental income from these properties and, in turn, our results of operations.  In addition, the geographic concentration of our properties in California in close proximity to regions known for their seismic activity exposes us to the risk that our operating results could be harmed by a significant earthquake.



Future declines in the demand for office and light industrial space in the greater San Francisco Bay Area could harm our results of operations and, consequently, our ability to make distributions to our stockholders.



Approximately 14% of our net operating income was generated by our office properties and flex industrial properties located in the greater San Francisco Bay Area.  As a result, our business is somewhat dependent on the condition of the San Francisco Bay Area economy in general and the market for office space in the San Francisco Bay Area, in particular.  The market for such space in the San Francisco Bay Area is in the midst of one of the most severe downturns of the past several decades.  This downturn has been precipitated by the unprecedented collapse of many technology and so-called dot com businesses, which during the past several years had been chiefly responsible for generating demand for and increased prices of local office properties.  In the event this downturn continues or economic conditions in the San Francisco Bay Area worsen, it could harm the market value of our properties, the results derived therefrom, and our ability to make distributions to our stockholders.



Real estate investments are inherently risky, and many of the risks involved are beyond our ability to control.



Real property investments are subject to numerous risks.  The yields available from an equity investment in real estate depend on the amount of income generated and costs incurred by the related properties.  If properties in which we invest do not generate sufficient income to meet costs, including debt service, tenant improvements, third-party leasing commissions and capital expenditures, our results of operations and ability to make distributions to our stockholders could suffer.  Revenues and values of our properties may also be harmed by a number of other factors, some of which are beyond our control, including:

•

the national economic climate;

•

the local economic climate;

•

local real estate conditions, such as an oversupply of space or a reduction in demand for real estate in an area;

•

the attractiveness of our properties to tenants;

•

competition from other available space;

•

our ability to provide adequate maintenance and insurance to cover other operating costs, government regulations and changes in real estate, zoning or tax laws, interest rate levels; and

•

the availability of financing and potential liabilities under environmental and other laws.



We have in the past, and may in the future, have tenants who are delinquent in their rental payments, which in the aggregate may adversely affect financial performance.



Historically, we have had tenants leasing space in our properties who occasionally have been delinquent in their payments.  Although we have devoted significant resources to try to minimize these delinquencies, as recently as March 2003 approximately 2% of our current month rental payments were collected more than 10 days past their

23







due date.  As substantially all of our income is derived from rental income from real property, our results of operations and ability to make distributions to stockholders would suffer if a number of our tenants or one or more of our significant tenants were unable to meet their obligations to us on a timely basis.



We could experience a reduction in rental income if we are unable to renew or relet space on expiring leases on current lease terms, or at all.



If the rental rates upon reletting or renewal of leases were significantly lower than current rates, or if we were unable to lease a significant amount of space on economically favorable terms, or at all, our results of operations could suffer.  As of March 31, 2003, leases representing 9%, 23%, 25% and 13% of our total annualized base rent were scheduled to expire during 2003, 2004, 2005, and 2006, respectively.  We are subject to the risk that, upon expiration, some of these or other leases will not be renewed, the space may not be relet, or the terms of renewal or reletting, including the costs of required renovations or concessions to tenants, may be less favorable than current lease terms.  We could face difficulty in reletting our space on commercially acceptable terms when it becomes available.  In addition, we expect to incur costs in making improvements or repairs to our properties required by new or renewing tenants and expenses associated with brokerage commissions payable in connection with the reletting of space.  Similarly, our rental income could be reduced by vacancies resulting from lease expirations or by construction of tenant improvements required by renewing or new tenants.  If we are unable to promptly renew leases or relet space or to fund expenses relating to tenant turnover, or if the expenses relating to tenant turnover are greater than expected, our financial results could be harmed.



Our leases with our 25 largest tenants generate approximately 44% of our base rent, and the loss of one or more of these tenants could adversely affect our results of operations.



As of March 31, 2003, our 25 largest tenants accounted for approximately 44% of our total annualized base rent.  If we were to lose any one or more of these tenants, or if any one or more of these tenants were to declare bankruptcy or to fail to make rental payments when due, our results of operations could be harmed and our ability to make distributions to our stockholders could be compromised.



If our tenants experience financial difficulty or seek the protection of bankruptcy laws, our funds from operations could suffer.



Our commercial tenants may, from time to time, experience downturns in their business operations and finances due to adverse economic conditions, which may result in their failure to make rental payments to us on a timely basis or at all.  Missed rental payments, in the aggregate, could impair our funds from operations and subsequently, our ability to make distributions to our stockholders.



At any time, a tenant could seek the protection of the bankruptcy laws, which might result in the modification or termination of such tenants lease and cause a reduction in our cash flow.  During the threemonths ended March 31, 2003, two of our tenants, representing less than 1% of our base rent, filed for bankruptcy.  In the event of default by or bankruptcy of a tenant, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment.  The default, bankruptcy or insolvency of a major tenant may have an adverse effect on us and our ability to pay dividends to our stockholders.  Any failure of our tenants to affirm their leases following bankruptcy could reduce our funds from operations.



Our dependence on smaller businesses to rent office space could adversely affect our cash flow.



Many of the tenants in our properties operate smaller businesses that may not have the financial strength of larger corporate tenants.  Smaller companies generally experience a higher rate of failure and are generally more susceptible to financial risks than large, well-capitalized enterprises.  Dependence on these companies could create a higher risk of tenant defaults, turnover and bankruptcies, which could harm our ability to pay dividends.



24



The acquisition and development of real estate is subject to numerous risks, and the cost of bringing any acquired property to standards for its intended market position could exceed our estimates.



We may acquire industrial and suburban office properties and portfolios of these properties, which may include the acquisition of other companies and business entities owning the properties.  Although we engage in due diligence review for each new acquisition, we may not be aware of all potential liabilities and problems associated with a property. We may have limited contractual recourse, or no contractual recourse, against the sellers of a property.  In the future, we expect the majority of our properties and portfolios of properties to be acquired on an as is basis, with limited recourse against the sellers.  In addition, our investments may fail to perform in accordance with our expectations.  Further, estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate.  To the extent that we acquire properties with substantial vacancies, as we have in the past, we may be unable to lease vacant space in a timely manner or at all, and the costs of obtaining tenants, including tenant improvements, lease concessions and brokerage commissions, could prove more costly than anticipated.  Real estate development is subject to other risks, including the following:

•

the risks of difficult and complicated construction projects;

•

the risks related to the use of contractors and subcontractors to perform all construction activities;

•

the risk of development delays, unanticipated increases in construction costs, environmental issues and regulatory approvals; and

•

financial risks relating to financing and construction loan difficulties.



Additionally, the time frame required for development, construction and lease-up of these properties means that we may have to wait a few years or more for a significant cash return to be realized.



Our uninsured or underinsured losses could result in a loss in value of our properties.



We currently maintain general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as $40 million of umbrella/excess liability coverage.  This coverage protects us against liability claims as well as the cost of legal defense.  We carry property All Risks insurance of $200 million on a replacement value basis covering both the cost of direct physical damage and the loss of rental income.  Separate flood and earthquake insurance is provided with an annual aggregate limit of $10 million, subject to a deductible of 5% of total insurable value per building and respective rent loss with respect to earthquake coverage.  Additional excess earthquake coverage with an aggregate limit of $20 million is provided for property located in California, as well as additional excess earthquake insurance with an aggregate limit of $10 million for property located in Washington.  Some losses such as those due to acts of war, nuclear accidents, pollution, mold, or terrorism may be either uninsurable or not economically insurable.  However, we do presently carry insurance for such terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 (the Act) under our all risk property policies, liability policies, primary and umbrella/excess. In addition, non-certified terrorism coverage is provided under our property policy for losses in excess of $10 million up to the $200 million limit.



In addition, some losses could exceed the limits of our insurance policies or could cause us to bear a substantial portion of those losses due to deductibles under those policies.  If we suffer an uninsured loss, we could lose both our invested capital in and anticipated cash flow from the property while being obligated to repay any outstanding indebtedness incurred to acquire the property.  In addition, a majority of our properties are located in areas that are subject to earthquake activity.  Although we have obtained earthquake insurance policies for all of our properties, if one or more properties sustain damage as a result of an earthquake, we may incur substantial losses up to the amount of the deductible under the earthquake policy and, additionally, to the extent that the damage exceeds the policys maximum coverage.  Although we have obtained owners title insurance policies for each of our properties, the title insurance may be in an amount less than the current market value of some of the properties.  If a title defect results in a loss that exceeds insured limits, we could lose all or part of our investment in, and anticipated gains, if any, from the property.



25



We cannot assure you that we will be able to pay dividends regularly although we have done so in the past.



Our ability to pay dividends in the future is dependent on our ability to operate profitably and to generate cash from our operations.  Although we have done so in the past, we cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future.  Further, any new shares of Common Stock issued will substantially increase the cash required to continue to pay cash dividends at current levels.  Any Common Stock or preferred stock that may in the future be issued to finance acquisitions, upon exercise of stock options or otherwise, would have a similar effect.  In addition, our existing credit facility limits our ability to pay quarterly dividends to stockholders.



Our ability to pay dividends is further limited by the requirements of Maryland law.



Our ability to pay dividends on the Common Stock is further limited by the laws of Maryland.  Under the Maryland General Corporation Law (the MGCL), a Maryland corporation may not make a distribution if, after giving effect to such distribution, either (i) the corporation would not be able to pay indebtedness of the corporation as such indebtedness becomes due in the usual course of business or (ii) the corporations total assets would be less than the sum of the corporations total liabilities plus (unless the corporations charter provides otherwise, which our charter does with respect to dividends but does not with respect to distributions by redemption or other acquisition of shares or otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution.  Accordingly, we cannot make a distribution, except by dividend, on our Common Stock if, after giving effect to the distribution, our total assets would be less than the sum of our liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of any shares of preferred stock then outstanding if we were to be dissolved at the time of the distribution.



If we fail to maintain our qualification as a REIT, we could experience adverse tax and other consequences, including the loss of deductibility of dividends in calculating our taxable income and the imposition of federal income tax at regular corporate rates.



We have elected to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code (the "Code").  We believe that we have satisfied the REIT qualification requirements since 1985.  However, the IRS could challenge our REIT qualification for taxable years still subject to audit, and we may fail to qualify as a REIT in the future.



Qualification as a REIT involves the application of highly technical and complex tax code provisions, and the determination of various factual matters and circumstances not entirely within our control may have an impact on our ability to maintain our qualification as a REIT.  For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources and we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains.  In addition, we cannot assure you that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification.  We are not aware of any proposal to amend the tax laws that would significantly and adversely affect our ability to continue to operate as a REIT.



If we fail to maintain our qualification as a REIT, or are found not to have qualified as a REIT for any prior year, we would not be entitled to deduct dividends paid to our stockholders and would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates.  In addition, unless entitled to statutory relief, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost.  This treatment would reduce amounts available for investment or distribution to stockholders because of any additional tax liability for the year or years involved.  In addition, we would no longer be required by the Code to make any distributions.  As a result, disqualification as a REIT would adversely affect us and our ability to make distributions to our stockholders.  To the extent that distributions to stockholders have been made in anticipation of our qualification as a REIT, we might be required to borrow funds or to liquidate investments to pay the applicable tax.

26



We must comply with strict income distribution requirements to maintain favorable tax treatment as a REIT.  If our cash flow is insufficient to meet our operating expenses and the distribution requirements, we may need to incur additional borrowings or otherwise obtain funds to satisfy these requirements.



To maintain REIT status, we are required each year to distribute to our stockholders at least 90% of our taxable income, excluding net capital gains.  In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income and 95% of our capital gain net income for the calendar year plus any amount of such income not distributed in prior years.  Although we anticipate that cash flow from operations will be sufficient to pay our operating expenses and meet the distribution requirements, we cannot assure you that this will occur, and we may need to incur borrowings or otherwise obtain funds to satisfy the distribution requirements associated with maintaining the REIT qualification.  In addition, differences in timing between the receipt of income and payment of expenses in arriving at our taxable income could require us to incur borrowings or otherwise obtain funds to meet the distribution requirements necessary to maintain qualification as a REIT.  We cannot assure you that we will be able to borrow funds or otherwise obtain funds if and when necessary to satisfy these requirements.



As a REIT, we are subject to complex constructive ownership rules that limit any holder to 5% of our outstanding stock.  Any shares transferred in violation of this rule are subject to redemption by us and any such transaction is voidable.



To maintain REIT qualification, our charter provides that no holder is permitted to own more than 5% in value of our outstanding Common Stock.  In addition, no holder is permitted to own any shares of any class of our stock if that ownership would cause more than 50% in value of our outstanding stock to be owned by five or fewer individuals, would result in our stock being beneficially owned by less than 100 persons or would otherwise result in our failure to qualify as a REIT.  Acquisition or ownership of our stock in violation of these restrictions results in automatic transfer of the stock to a trust for the benefit of a charitable beneficiary or, under specified circumstances, the violative transfer may be deemed void or we may choose to redeem the violative shares.  Peter B. Bedford is subject to higher ownership limitations than our other stockholders.  Specifically, Mr. Bedford is not permitted to own more than 15% of the lesser of the number or value of the outstanding shares of our Common Stock.



The constructive ownership rules are complex and may cause Common Stock owned beneficially or constructively by a group of related individuals and/or entities to be constructively owned by one individual or entity.  As a result, the acquisition of less than 5% of our outstanding Common Stock or the acquisition of an interest in an entity which owns our Common Stock by an individual or entity could cause that individual or entity or another individual or entity to constructively own Common Stock in excess of the limits and subject that stock to the ownership restrictions in our charter.



We rely on the services of our key personnel, particularly our Chief Executive Officer, and their knowledge of our business and expertise would be difficult to replace.



We are highly dependent on the efforts of our senior officers, and in particular Peter B. Bedford, our Chairman and Chief Executive Officer.  While we believe that we could find suitable replacements for these key personnel, the loss of their services could harm our business.  In addition, our credit facility provides that it is an event of default if Mr. Bedford ceases for any reason to be our Chairman or Chief Executive Officer and a replacement reasonably satisfactory to the lenders has not been appointed by our Board of Directors within six months.  We have entered into an amended employment agreement with Mr. Bedford pursuant to which he will serve as Chairman of the Board and Chief Executive Officer on a substantially full-time basis until the agreement is terminated by the Board of Directors.



27



The commercial real estate industry is highly competitive, and we compete with substantially larger companies, including REITs, for the acquisition, development and operation of properties, and we may not be able to compete effectively with other properties to attract tenants.



Many real estate companies, including other REITs, compete with us in making bids to acquire new properties.  Many of these companies are larger and have substantially greater financial resources than we do.  The activities of these competitors could cause us to pay a higher purchase price for a new property than we otherwise would have paid, or may prevent us from purchasing a desired property at all.  Numerous industrial and suburban office properties compete with our properties in attracting tenants.  Some of these competing properties are newer, better located or better capitalized than our properties.  Many of our investments are located in markets that have a significant supply of available space, resulting in intense competition for tenants and lower rents.  We believe the oversupply of available space relative to demand is likely to increase in the near to intermediate term due to the softening U.S. economy.  The number of competitive properties in a particular area could adversely affect our ability to lease space in the properties or at newly acquired or developed properties.



We could incur costs from environmental liabilities even though we did not cause, contribute to, or know about them.



Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be held liable for the costs of removal or remediation of hazardous or toxic substances released on, above, under or in a property.  These laws often impose liability regardless of whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances.  In addition, environmental laws often impose liability on a previous owner of property for hazardous or toxic substances present during the prior ownership period.  A transfer of the property may not relieve an owner of all liability.  Accordingly, we could be liable for properties and joint venture interests previously sold or otherwise divested.  The costs of removal or remediation could be substantial.  Additionally, the presence of the substances, or the failure to properly remove them, may harm our ability to borrow using the real estate as collateral.



All of our properties have had Phase I environmental site assessments, which involve inspection without soil sampling or groundwater analysis, by independent environmental consultants and have been inspected for hazardous materials as part of our acquisition inspections.  None of the Phase I assessments has revealed any environmental problems requiring material costs for clean up.  The Phase I assessment for Milpitas Town Center, however, indicates that the groundwater under that property either has been or may in the future be, impacted by the migration of contaminants originating off-site.  According to information available to us, the responsible party for this offsite source has been identified and has begun clean up.  We do not believe that this environmental matter will impair the future value of Milpitas Town Center in any significant respect, or that we will be required to fund any portion of the cost of remediation, although we cannot assure you that these Phase I assessments or our inspections have revealed all environmental liabilities and problems relating to our properties.



We believe that we are in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances.  To date, compliance with federal, state and local environmental protection regulations has not had a material effect on us.  However, we cannot assure you that costs of investigating and remediating environmental matters for properties currently or previously owned by us, or properties which we may acquire in the future, or other expenditures or liabilities (including claims by private parties) resulting from hazardous substances present in, on, under or above the properties or resulting from circumstances or other actions or claims relating to environmental matters, will not harm us and our ability to pay dividends to our stockholders.



28



We could incur unanticipated costs to comply with the Americans With Disabilities Act, and any non-compliance could result in fines.



Under the Americans with Disabilities Act (the ADA), all public accommodations and commercial facilities are required to meet federal requirements related to access and use by disabled persons.  Compliance with the ADA requires removal of access barriers, and any non-compliance may result in the imposition of fines by the U.S. government or an award of damages to private litigants.  Although we believe that our properties are substantially in compliance with these requirements, we may in the future incur costs to comply with the ADA with respect to both existing properties and properties acquired in the future, which could have an adverse effect on our ability to make distributions to stockholders.



We are subject to numerous federal, state and local regulatory requirements, and any changes to existing regulations or new laws may result in significant, unanticipated costs.



Our properties are, and any properties we may acquire in the future will be, subject to various other federal, state and local regulatory requirements, including local building codes.  Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants.  We believe that our properties are currently in substantial compliance with all applicable regulatory requirements,although expenditures at properties owned by us may be necessary to comply with changes in these laws.  Although no material expenditures are contemplated at this time to comply with any laws or regulations, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us, which could harm us and our ability to make distributions to our stockholders.  Similarly, changes in laws increasing the potential liability for environmental conditions existing on our properties could result in significant unanticipated expenditures.



Our $150 million credit agreement and some of our mortgage loans are collateralized by approximately 89% of our total real estate assets, and in the event of default under these debt instruments, our lenders could foreclose on the collateral securing this indebtedness.



As of March 31, 2003, our $150 million credit facility had an outstanding balance of $76.4 million, and we had other floating rate loans and our $40 million bridge facility which totaled $90.2 million.  Borrowings under our credit facility bear interest at a floating rate, and we may from time to time incur or assume other indebtedness also bearing interest at a floating rate.  In that regard, our results of operations for the last year have benefited from low levels of interest rates that are currently at or near historic lows.  Should this trend in interest rates reverse itself, our operating results would be harmed.  As of March 31, 2003, our $150 million credit facility was secured by mortgages on 25 properties that accounted for approximately 27% of our annualized base rent, along with the rental proceeds from such properties.  As of March 31, 2003, these 25 properties comprised approximately 29% of our total real estate assets.  While the $40 million bridge facility is unsecured, we have assigned all sale or refinancing proceeds on a property that accounts for approximately 5% of our annualized base rent and 5% of our total real estate assets.  In addition, our fixed rate mortgage loans were in the aggregate approximately $220.2 million as of March 31, 2003.  All of our mortgage loans were collateralized by 55 properties that accounted for approximately 64% of our annualized base rent and approximately 60% of our total real estate assets.  If we fail to meet our obligations under the credit facility, the mortgage loans, or any other debt instruments we may enter into from time to time, including failure to comply with financial covenants, the holders of this indebtedness generally would be entitled to demand immediate repayment of the principal and to foreclose upon any collateral securing this indebtedness.  In addition, default under or acceleration of any debt instrument could, pursuant to cross-default clauses, cause or permit the acceleration of other indebtedness.  Any default or acceleration could adversely affect us and jeopardize our qualification as a REIT and threaten our continued viability.



29



Our credit facility limits our ability to repurchase and retire shares of our Common Stock, and the discontinuation of our share buy back program could result in a decrease of our stock price.



Since November 1998, we have repurchased a total of 7,623,812 shares of our Common Stock for a total of approximately $140 million, at an average price of $18.34 per share.  This represents approximately 34% of the shares outstanding since November 1998 when we began implementing our share buy back program.  However, our credit facility limits our ability to continue to repurchase such shares by imposing a minimum net worth requirement of $255 million.  As of March 31, 2003, our net worth was approximately $276 million.  If we are forced to discontinue our share buy back program as a result of these limitations, one of the primary drivers behind our historical increases in our stock price will be removed.



We use borrowings to finance the acquisition, development and operation of properties and to repurchase our Common Stock, and we cannot be certain that financing will be available on commercially reasonable terms, or at all, in the future.



We borrow money to pay for the acquisition, development and operation of our properties, to repurchase our Common Stock and for other general corporate purposes.  Our credit facility currently expires on June 1, 2004, when the principal amount of all outstanding borrowings must be paid.  Since the term of our credit facility is limited, our ability to fund acquisitions and provide funds for working capital and other cash needs following the expiration or utilization of the credit facility will depend primarily on our ability to obtain additional private or public equity or debt financing.



A downturn in the economy could make it difficult for us to borrow money on favorable terms.  If we are unable to borrow, we may need to sell some of our assets at unfavorable prices in order to pay our loans.  We could encounter several problems, including:

•

insufficient cash flow necessary to meet required payments of principal and interest;

•

an increase on variable interest rates on indebtedness; and

•

an inability to refinance existing indebtedness on favorable terms or at all.



Our leverage could harm our ability to operate our business and fulfill our debt obligations.



We have significant debt service obligations.  As of March 31, 2003, we had total liabilities of approximately $416.6 million, excluding unused commitments under our credit facility, and total stockholders equity of approximately $275.6 million.  Payments to service this debt totaled approximately $7.0 million during the three months of 2003.  Our debt level increases the possibility that we could be unable to generate cash sufficient to pay the principal of, interest on or other amounts due in respect of our indebtedness.  In addition, we may incur additional debt from time to time to fund our stock buy back program, finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in our indebtedness documents.



An increase in market interest rates could also have an adverse effect on the price of our Common Stock.



One of the factors that may influence the market price of the shares of Common Stock in public markets will be the annual dividend yield on the price paid for shares of Common Stock as compared to yields on other financial instruments.  An increase in market interest rates may lead prospective purchasers of the Common Stock to seek a higher annual yield from their investments, which may adversely affect the market price of the Common Stock.  As of March 31, 2003, interest rates in the U.S. were at or near their historic lows.



30







We have not used derivatives extensively to mitigate our interest rate risks.



Historically, we have not used interest rate swaps, caps and floors or other derivative transactions to help us mitigate our interest rate risks because we have determined that the cost of these transactions outweighed their potential benefits and could have, in some cases, jeopardized our status as a REIT.  In 2001, we entered into two swap agreements to hedge our exposure to variable interest rates on two mortgages with remaining principal balances totaling approximately $30.5 million at the date of inception.  These agreements matured on July 1, 2002, and we currently are not involved in any swap agreements.  Even if we were to use derivative transactions more extensively, it would not fully insulate us from the prepayment and interest rate risks to which we are exposed.  However, we do not have any policy that prohibits us from using derivative transactions or other hedging strategies more extensively in the future.  If we do engage in additional derivative transactions in the future, we cannot assure you that a liquid secondary market will exist for any instruments purchased or sold in those transactions, and we may be required to maintain a position until exercise or expiration, which could result in losses.



Our Board of Directors has opted out of the business combination provisions of the MGCL, thereby exempting us from the five year prohibition and the supermajority vote requirements for a business combination with an interested stockholder.



Under the MGCL, business combinations, including issuances of equity securities, between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporations shares or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an Interested Stockholder) or an affiliate of the Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder.  A person is not an Interested Stockholder under the business combination provisions of the MGCL if our Board of Directors approves in advance the transaction by which the Interested Stockholder otherwise would have become an Interested Stockholder.  Thereafter, all business combinations must be approved by two supermajority votes of the stockholders unless, among other conditions, the corporations common stockholders receive a minimum price, as defined in the MGCL, for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its common shares.  However, as permitted by the MGCL, our Board of Directors has elected to exempt any business combination with any person from these provisions of the MGCL.  Consequently, unless this exemption is amended or repealed by our Board of Directors, the five-year prohibition and the supermajority vote requirements imposed by the MGCL will not apply to any business combination between any Interested Stockholder and us.  As a result, we may enter into business combinations with Mr. Bedford or other Interested Stockholders, without requiring a supermajority vote or compliance with the other statutory provisions.  The exemption from these provisions may be amended or repealed by our Board of Directors at any time.  Such action by our Board of Directors would impose the business combination restrictions of the MGCL on Interested Stockholders, which could delay, defer or prevent a transaction or change in control involving a premium price for our stock or otherwise be in the best interests of the stockholders or that could otherwise adversely affect the interests of the stockholders.



The provisions of our charter documents may inhibit potential acquisition bids that a stockholder may believe are desirable, and the market price of our Common Stock may be lower as a result.



Our charter authorizes our Board of Directors to cause us to issue additional shares of Common Stock, preferred stock and convertible preferred stock and to set the preferences, conversion or other rights, voting process, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of preferred stock without the approval of the holders of the Common Stock.  In addition, our Board of Directors may classify or reclassify any unissued shares of preferred stock and may set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, or terms or conditions of redemption of the classified or reclassified shares.  Although our Board of Directors has no current intention to issue any shares of preferred stock, it may establish one or more series of preferred stock that could, depending on their terms, delay, defer or prevent a change in control or other transaction that may be in the best interests of the stockholders.  As a result, these provisions may prevent the market price of our Common Stock from increasing substantially in response to actual or rumored take-over attempts.  In addition, these provisions may prevent changes in our management.

31



We may change our policies without stockholder approval.



Our major policies, including those concerning our qualification as a REIT and with respect to dividends, acquisitions, debt and investments, are established by our Board of Directors.  Although it has no present intention to do so, the Board of Directors may amend or revise these and other policies from time to time without a vote of or advance notice to our stockholders.  Accordingly, holders of the shares of Common Stock will have no control over changes in our policies, including any policies relating to the payment of dividends or to maintaining qualification as a REIT.  In addition, policy changes could adversely affect our financial condition, results of operations, the market price of our Common Stock or our ability to pay dividends.







32







FINANCIAL PERFORMANCE



Although Funds From Operations, or FFO, is not a financial measure calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we believe that FFO may be an appropriate alternative measure of the performance of an equity REIT.  FFO during the three months ended March 31, 2003 was $12,582,000.  During the same period in 2002, FFO was $12,476,000.  Presentation of this information provides the reader with an additional measure to compare the performance of REITs.  FFO is generally defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with GAAP), excluding extraordinary items and gains (losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  We computed our FFO in accordance with this definition.  FFO does not represent cash generated by operating activities in accordance with GAAP; it is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income (loss) as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.   Further, FFO as disclosed by other REITs may not be comparable to our presentation.  The most directly comparable financial measure calculated in accordance with GAAP to FFO is net income (loss).  The following table sets forth a reconciliation of the differences between our FFO and our net income for each of the three months ended March 31, 2003 and 2002.





|                                                                  | Three Months Ended
March 31
|----------------------------------------------------------------- | ---------------------------
|                                                                  | 2003                       
|Funds From Operations
(in thousands, except share amounts):       |                            
|Net income                                                        | $  7,672                   
|Adjustments:
Depreciation and amortization:
Continuing operations | 4,910                      
|Discontinued operations                                           | -                          
|Funds From Operations                                             | $12,582                    
|Weighted average number of
shares  diluted                       | 16,370,146                 
|                                                                  |                            



33







Item 3.  Qualitative and Quantitative Disclosures about Market Risk





We are exposed to interest rate changes primarily as a result of our line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of our real estate investment portfolio and operations.  Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs.  To achieve these objectives, we balance our borrowings between fixed and variable rate debt.  While we have entered into interest swap agreements to minimize our exposure to interest rate fluctuations, we do not enter into derivative or interest rate transactions for speculative purposes.



Our interest rate risk is monitored using a variety of techniques.  The table below presents the principal amounts, weighted average annual interest rates, fair values and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in thousands):



|                               | Twelve Month Period Ending March 31,
|------------------------------ | ------------------------------------
|                               | 2004                                
|Variable rate LIBOR
debt       | $24,091                             
|Weighted average
interest rate | 3.47%                               
|Fixed rate
debt                | $  4,265                            
|Weighted average
interest rate | 6.79%                               



As the table incorporates only those exposures that existed as of March 31, 2003, it does not consider those exposures or positions which could arise after that date.  Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value.  As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time, and interest rates.



Item 4.  Controls and Procedures



Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our design and operation of disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days prior to the filing date of this quarterly report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.  There have been no significant changes in internal controls or other factors that could significantly affect these controls subsequent to the date of such evaluation.



34







PART II.  OTHER INFORMATION



Item 1.  Legal Proceedings



We are not presently subject to material litigation.  Moreover, to our knowledge, we are not aware of any threatened litigation against us, other than routine actions for negligence or other claims and proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse impact on our liquidity, results of operations, business or financial position.



Item 2.  Changes in Securities



None





Item 3.  Defaults upon Senior Securities



None



Item 4.  Submission of Matters to Vote of Security Holders



None



Item 5.  Other Information



None



Item 6.  Exhibits and Reports on Form 8-K



A.

Exhibits

Exhibit No.

Exhibit



3.1(a)

Articles of Incorporation of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 4.2 of our Registration Statement on Form S-2 (File No. 333-00921) filed on February 14, 1996.



3.1(b)

Charter of Bedford Property Investors, Inc., as amended, is incorporated herein by reference to Exhibit 4.2 of our Amendment No. 1 to our Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 1996.





3.1(c)

Articles of Amendment of Charter of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1997.



3.2

Amended and Restated Bylaws of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 3.2 to our Form 10-K for the year ended December 31, 2000.



35









10.48*

Promissory Note dated as of March 28, 2003 between Bedford Property Investors, Inc. as Borrower and Teachers Insurance and Annuity Association of America as Lender.



99.11*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.



99.12*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.



*  Filed herewith



B.

Reports on Form 8-K



On March 20, 2003, we filed a report on Form 8-K announcing a change in our certifying accountant from KPMG LLP to PricewaterhouseCoopers LLP.





























36







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 thereunto duly authorized.



Dated:      May 9, 2003



BEDFORD PROPERTY INVESTORS, INC.

(Registrant)





By:

/s/ HANH KIHARA

Hanh Kihara

Senior Vice President and

Chief Financial Officer





By:

/s/ KRISTA K. ROWLAND

Krista K. Rowland

Vice President and Controller



























































37







CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Peter B. Bedford, certify that:



1.

I have reviewed this quarterly report on Form 10-Q of Bedford Property Investors, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4.

The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.

The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6.

The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



May 9, 2003

/s/ Peter B. Bedford

Peter B. Bedford
Chief Executive Officer

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CERTIFICATION OF CHIEF FINANCIAL OFFICER



I, Hanh Kihara, certify that:



1.

I have reviewed this quarterly report on Form 10-Q of Bedford Property Investors, Inc.;



2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4.

The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and

6.

The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 9, 2003

/s/ Hanh Kihara

Hanh Kihara
Chief Financial Officer





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