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 June 30, 2005.





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   August 5
, 2005

Common Stock, $0.02 par value

16,248,057

















BEDFORD PROPERTY INVESTORS, INC.



INDEX





PART I.  FINANCIAL INFORMATION

Page



Item 1.  Financial Statements (Unaudited)



Consolidated Balance Sheets as of June 30, 2005

and December 31, 2004

1



Consolidated Statements of Income for the three and six months ended

June 30, 2005 and 2004

2



Consolidated Statement of Stockholders' Equity for the six months

ended June 30, 2005

3



Consolidated Statements of Cash Flows for the six months ended

June 30, 2005 and 2004

4



Notes to Consolidated Financial Statements

5-19



Item 2.  Management's Discussion and Analysis of

Financial Condition and Results of Operations

20-46



Item 3.  Quantitative and Qualitative Disclosures

about Market Risk

47



Item 4.  Controls and Procedures

47



PART II.  OTHER INFORMATION



Items 1 - 6

48-50



SIGNATURES

51



EXHIBIT INDEX

52

















PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements

1







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2005 AND DECEMBER 31, 2004

(Unaudited)

(in thousands, except share and per share amounts)



|                                                                                                                                                                                                | June 30, 2005 | December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | -----------------
|Assets:
Real estate investments:                                                                                                                                                                |               |                  
|Industrial buildings                                                                                                                                                                            | $408,199      | $417,613         
|Office buildings                                                                                                                                                                                | 345,541       | 332,695          
|Properties under development                                                                                                                                                                    | 19,701        | 29,716           
|Land held for development                                                                                                                                                                       | 12,666        | 13,529           
|                                                                                                                                                                                                | 786,107       | 793,553          
|Less accumulated depreciation                                                                                                                                                                   | 94,117        | 85,436           
|                                                                                                                                                                                                | 691,990       | 708,117          
|Operating properties held for sale, net                                                                                                                                                         | -             | 8,293            
|Total real estate investments                                                                                                                                                                   | 691,990       | 716,410          
|Cash and cash equivalents                                                                                                                                                                       | 2,508         | 24,218           
|Accounts receivable, net                                                                                                                                                                        | 464           | 679              
|Notes receivable, net                                                                                                                                                                           | -             | 6,820            
|Other assets                                                                                                                                                                                    | 42,848        | 45,356           
|Total assets                                                                                                                                                                                    | $737,810      | $793,483         
|Liabilities and Stockholders' Equity:                                                                                                                                                           |               |                  
|Bank loan payable                                                                                                                                                                               | $  44,163     | $            -   
|Mortgage loans payable                                                                                                                                                                          | 316,588       | 351,335          
|Accounts payable and accrued expenses                                                                                                                                                           | 7,773         | 13,135           
|Dividends payable                                                                                                                                                                               | 10,311        | 63,898           
|Other liabilities                                                                                                                                                                               | 12,406        | 14,657           
|Total liabilities                                                                                                                                                                               | 391,241       | 443,025          
|Commitments and contingencies (Note 10)                                                                                                                                                         |               |                  
|Stockholders' equity:
Preferred stock, $0.01 par value; authorized
6,795,000 shares; issued none                                                                                                | -             | -                
|Series A 8.75% cumulative redeemable preferred stock,
$0.01 par value; authorized and issued 805,000
shares at June 30, 2005 and December 31, 2004;
stated liquidation preference of $40,250    | 38,947        | 38,947           
|Series B 7.625% cumulative redeemable preferred stock,
$0.01 par value; authorized and issued 2,400,000
shares at June 30, 2005 and December 31, 2004;
stated liquidation preference of $60,000 | 57,769        | 57,769           
|Common stock, $0.02 par value; authorized 50,000,000 shares;
issued and outstanding 16,248,057 shares at June 30, 2005
and 16,325,584 shares at December 31, 2004                               | 324           | 326              
|Additional paid-in capital                                                                                                                                                                      | 287,683       | 289,132          
|Deferred stock compensation                                                                                                                                                                     | (11,361)      | (10,114)         
|Accumulated dividends in excess of net income                                                                                                                                                   | (26,826)      | (25,700)         
|Accumulated other comprehensive income                                                                                                                                                          | 33            | 98               
|Total stockholders' equity                                                                                                                                                                      | 346,569       | 350,458          
|Total liabilities and stockholders' equity                                                                                                                                                      | $737,810      | $793,483         



See accompanying notes to consolidated financial statements.

1







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(Unaudited)

(in thousands, except share and per share amounts)



|                                            |  | Three Months  |  | Six Months  
|------------------------------------------- |  | ------------- |  | ------------
|                                            |  | 2005          |  | 2004        
|Rental income                               |  | $  23,543     |  | $  23,276   
|Rental expenses:                            |  |               |  |             
|Operating expenses                          |  | 4,872         |  | 4,082       
|Real estate taxes                           |  | 2,931         |  | 2,598       
|Depreciation and amortization               |  | 7,246         |  | 6,550       
|General and administrative expenses         |  | 2,052         |  | 1,583       
|Income from operations                      |  | 6,442         |  | 8,463       
|                                            |  |               |  |             
|Other income (expense)                      |  |               |  |             
|Interest income                             |  | 26            |  | 11          
|Interest expense                            |  | (5,274)       |  | (4,701)     
|                                            |  |               |  |             
|Income from continuing operations           |  | 1,194         |  | 3,773       
|                                            |  |               |  |             
|Discontinued operations:                    |  |               |  |             
|Income from discontinued operations         |  | 394           |  | 1,983       
|Gain on sale of operating properties        |  | 9,095         |  | -           
|                                            |  |               |  |             
|Income from discontinued operations         |  | 9,489         |  | 1,983       
|                                            |  |               |  |             
|Net income                                  |  | 10,683        |  | 5,756       
|Preferred dividends  Series A              |  | (881)         |  | (881)       
|Preferred dividends  Series B              |  | (1,143)       |  | -           
|                                            |  |               |  |             
|Net income available to common stockholders |  | $    8,659    |  | $    4,875  
|                                            |  |               |  |             
|Income per common share  basic:            |  |               |  |             
|(Loss) income from continuing operations    |  | $     (0.05)  |  | $      0.18 
|Income from discontinued operations         |  | 0.60          |  | 0.13        
|Net income available to common stockholders |  | $      0.55   |  | $      0.31 
|                                            |  |               |  |             
|Weighted average number of shares  basic   |  | 15,764,606    |  | 15,838,442  
|                                            |  |               |  |             
|Income per common share  diluted:          |  |               |  |             
|(Loss) income from continuing operations    |  | $     (0.05)  |  | $      0.18 
|Income from discontinued operations         |  | 0.60          |  | 0.12        
|Net income available to common stockholders |  | $      0.55   |  | $      0.30 
|                                            |  |               |  |             
|Weighted average number of shares  diluted |  | 15,795,296    |  | 16,059,299  
|                                            |  |               |  |             
|Dividends declared per common share         |  | $        0.51 |  | $       0.51



See accompanying notes to consolidated financial statements.



2







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2005

(Unaudited)

(in thousands, except per share amounts)



|                                                                  | Series A
Preferred
Stock | Series B
Preferred
Stock | Common
Stock | Additional
Paid-in
Capital | Deferred
Stock
Compensation | Accumulated
Dividends
in Excess of
Net Income | Accumulated
Other
Comprehensive
Income | Total
Stockholders'
Equity
|----------------------------------------------------------------- | ------------------------ | ------------------------ | ------------ | -------------------------- | --------------------------- | --------------------------------------------- | -------------------------------------- | --------------------------
|Balance, December 31, 2004                                        | $38,947                  | $57,769                  | $326         | $289,132                   | $(10,114)                   | $(25,700)                                     | $98                                    | $350,458                  
|Issuance of preferred stock                                       | -                        | -                        | -            | -                          | -                           | -                                             | -                                      | -                         
|Issuance of common stock                                          | -                        | -                        | -            | 363                        | -                           | -                                             | -                                      | 363                       
|Repurchase and retirement of
common  stock                        | -                        | -                        | (4)          | (4,657)                    | -                           | -                                             | -                                      | (4,661)                   
|Stock option expense                                              | -                        | -                        | -            | 37                         | -                           | -                                             | -                                      | 37                        
|Issuance of restricted stock                                      | -                        | -                        | 3            | 3,759                      | (3,762)                     | -                                             | -                                      | -                         
|Forfeiture of restricted stock                                    | -                        | -                        | (1)          | (722)                      | 576                         | -                                             | -                                      | (147)                     
|Remeasurement of restricted
stock                                 | -                        | -                        | -            | (229)                      | 229                         | -                                             | -                                      | -                         
|Amortization of restricted
stock                                  | -                        | -                        | -            | -                          | 1,710                       | -                                             | -                                      | 1,710                     
|Dividends to common
stockholders ($1.02 per share)                | -                        | -                        | -            | -                          | -                           | (16,671)                                      | -                                      | (16,671)                  
|Dividends to Series A preferred
stockholders ($2.1875
per share)  | -                        | -                        | -            | -                          | -                           | (1,761)                                       | -                                      | (1,761)                   
|Dividends to Series B preferred
stockholders ($0.95312
per share) | -                        | -                        | -            | -                          | -                           | (2,287)                                       | -                                      | (2,287)                   
|Subtotal                                                          | 38,947                   | 57,769                   | 324          | 287,683                    | (11,361)                    | (46,419)                                      | 98                                     | 327,041                   
|Net income                                                        | -                        | -                        | -            | -                          | -                           | 19,593                                        | -                                      | 19,593                    
|Other comprehensive loss                                          | -                        | -                        | -            | -                          | -                           | -                                             | (65)                                   | (65)                      
|Comprehensive income                                              | -                        | -                        | -            | -                          | -                           | 19,593                                        | (65)                                   | 19,528                    
|Balance, June 30, 2005                                            | $38,947                  | $57,769                  | $324         | $287,683                   | $(11,361)                   | $(26,826)                                     | $33                                    | $346,569                  





See accompanying notes to consolidated financial statements.

3







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(Unaudited)

(in thousands)



|                                                                                                                                                      | 2005           | 2004        
|----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------------
|                                                                                                                                                      |                |             
|Operating Activities:
Net income                                                                                                                      | $  19,593      | $  11,372   
|Adjustments to reconcile net income to net cash
provided by operating activities:                                                                     |                |             
|Depreciation and amortization, including amounts for
deferred loan costs and discontinued operations                                                  | 15,604         | 15,246      
|Amortization of deferred compensation                                                                                                                 | 1,563          | 1,355       
|Stock compensation expense                                                                                                                            | 37             | 56          
|Uncollectible accounts expense                                                                                                                        | (79)           | 188         
|Gain on sales of operating properties                                                                                                                 | (16,239)       | -           
|Change in receivables and other assets                                                                                                                | 4,987          | (825)       
|Change in accounts payable and accrued expenses                                                                                                       | (3,994)        | (1,683)     
|Change in other liabilities                                                                                                                           | (2,251)        | (41)        
|Net cash provided by operating activities                                                                                                             | 19,221         | 25,668      
|Investing Activities:
Investments in real estate                                                                                                      | (14,458)       | (53,820)    
|Proceeds from sales of real estate investments, net                                                                                                   | 43,429         | -           
|Net cash provided by (used in) investing activities                                                                                                   | 28,971         | (53,820)    
|Financing Activities:
Proceeds from bank loans payable                                                                                                | 91,558         | 66,532      
|Repayments of bank loans payable                                                                                                                      | (47,395)       | (66,678)    
|Repayments of mortgage loans payable                                                                                                                  | (34,747)       | (3,500)     
|Payment of loan costs                                                                                                                                 | (714)          | (1,716)     
|Issuance of preferred stock, net of issuance costs                                                                                                    | -              | 57,832      
|Issuance of common stock                                                                                                                              | 363            | 2,609       
|Repurchase and retirement of common stock                                                                                                             | (4,661)        | (11,116)    
|Payment of dividends and distributions                                                                                                                | (74,306)       | (18,497)    
|Net cash (used in) provided by financing activities                                                                                                   | (69,902)       | 25,466      
|Net decrease in cash and cash equivalents                                                                                                             | (21,710)       | (2,686)     
|Cash and cash equivalents at beginning of period                                                                                                      | 24,218         | 7,598       
|Cash and cash equivalents at end of period                                                                                                            | $    2,508     | $    4,912  
|Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of amounts capitalized of
$972 in 2005 and $678 in 2004 | $  11,264      | $  10,985   
|Cash paid during the year for income taxes                                                                                                            | $         30   | $         12
|Non-cash investing and financing transactions:
Assumption of debt                                                                                     | $            - | $    3,070  



See accompanying notes to consolidated financial statements.

4









BEDFORD PROPERTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

JUNE 30, 2005





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



The Company

Bedford Property Investors, Inc. is a real estate investment trust (REIT) incorporated 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 multi-tenant industrial and suburban office properties concentrated in the western United States. Our common stock, par value $0.02 per share, 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 United States 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 (GAAP). 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 2004 audited financial statements contained in our annual report on Form 10-K for the year ended December 31, 2004.



Basis of Consolidation

Our consolidated financial statements have been prepared in accordance with GAAP. Our consolidated financial statements include the financial information of Bedford Property Investors, Inc., seven wholly-owned corporations, and three wholly-owned limited liability companies. All significant inter-entity balances have been eliminated in consolidation.



Accounting for Development Costs

Costs associated with the development of real estate include acquisition and direct construction costs as well as capitalization of real estate taxes, insurance, incidental revenue and expenses, and a portion of salaries and overhead of personnel responsible for development activity.  In addition, we capitalize interest expense to the development project. The amount of interest capitalized during a period is determined by applying the weighted average rate of our borrowings to the average accumulated costs, excluding interest, of the project. The capitalization of interest, real estate taxes, insurance, and incidental revenue and expenses begins when construction of a project commences and ends when a project or a portion of the project is placed in service, not to exceed twelve months from the cessation of construction activities.  The capitalization of salaries and overhead of development personnel begins upon acquisition of a land parcel or upon commencement of active development for redevelopment and rehabilitation projects and ends with completion of the project.







5









Allowance for Doubtful Accounts

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, taking into account the tenants financial condition, security deposits, any letters of credit, any lease guarantees, and current economic conditions.  As of June 30, 2005 and December 31, 2004, our allowance for doubtful accounts related to accounts receivable was approximately $56,000 and $20,000, respectively. As of December 31, 2004, our allowance for doubtful accounts related to a note receivable was approximately $127,000.  Accounts and notes receivable amounts are presented net of these allowances for doubtful accounts in the consolidated balance sheets.



Per Share Data

Per share data are based on the weighted average number of common shares outstanding during the period. We include stock options issued under our stock option plans and non-vested restricted stock in the calculation of diluted per share data if, upon exercise or vestiture, they would have a dilutive effect. The dilutive shares are calculated using the treasury stock method.



Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 123R, Share-Based Payment, a revision of SFAS 123, Accounting for Stock-Based Compensation. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R is now effective for public companies beginning with the first fiscal year commencing after June 15, 2005. Due to our adoption of the fair value based method of accounting for stock-based employee compensation effective January 1, 2003, we do not expect this pronouncement to have a material impact on our financial position or results of operations.



In March 2005, the FASB issued SFAS Interpretation (FIN) 47, Accounting for Conditional Asset Retirement Obligations  an Interpretation of FASB Statement No. 143. FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We do not expect this interpretation to have a material impact on our financial position or results of operations.



In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3, which replaces Accounting Principles Board (APB) 20, Accounting Changes and FASB 3, Reporting Accounting Changes in Interim Financial Statements.  This statement changes the requirements for the accounting for and reporting of a change in accounting principle, including changes required by an accounting pronouncement.  It requires retrospective application of changes in accounting principles to prior period financial statements with the intent to improve the consistency of financial information between periods.  We do not expect this pronouncement to have a material impact on our financial position or results of operations.





6







Note 2  Real Estate Investments



As of June 30, 2005, 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                   | $408,199   | 52%             
|Office buildings             | 30                   | 345,541    | 44%             
|Properties under development | 3                    | 19,701     | 2%              
|Land held for development    | 11                   | 12,666     | 2%              
|Total                        | 101                  | $786,107   | 100%            







7









The following table sets forth our real estate investments at June 30, 2005 and December 31, 2004(in thousands):



|                                                 | Land      | Building | Development
In-Progress | Total
Cost | Less
Accumulated
Depreciation | Net
Total
|------------------------------------------------ | --------- | -------- | ----------------------- | ---------- | ----------------------------- | ---------
|Industrial buildings
Northern California         | $  55,528 | $121,960 | $          -            | $177,488   | $24,723                       | $152,765 
|Arizona                                          | 28,945    | 92,159   | -                       | 121,104    | 16,653                        | 104,451  
|Southern California                              | 12,757    | 33,810   | -                       | 46,567     | 6,926                         | 39,641   
|Northwest                                        | 9,418     | 27,034   | -                       | 36,452     | 5,433                         | 31,019   
|Nevada                                           | 7,784     | 18,804   | -                       | 26,588     | 1,962                         | 24,626   
|Total industrial buildings                       | 114,432   | 293,767  | -                       | 408,199    | 55,697                        | 352,502  
|Office buildings
Northern California             | 6,073     | 25,945   | -                       | 32,018     | 5,895                         | 26,123   
|Arizona                                          | 23,605    | 51,681   | -                       | 75,286     | 4,924                         | 70,362   
|Southern California                              | 6,074     | 28,620   | -                       | 34,694     | 2,325                         | 32,369   
|Northwest                                        | 15,719    | 59,325   | -                       | 75,044     | 6,168                         | 68,876   
|Colorado                                         | 13,706    | 101,166  | -                       | 114,872    | 16,633                        | 98,239   
|Nevada                                           | 2,102     | 11,525   | -                       | 13,627     | 2,475                         | 11,152   
|Total office buildings                           | 67,279    | 278,262  | -                       | 345,541    | 38,420                        | 307,121  
|Properties under development
Northern California | -         | -        | 1,810                   | 1,810      | -                             | 1,810    
|Arizona                                          | -         | -        | 12,018                  | 12,018     | -                             | 12,018   
|Northwest                                        | -         | -        | 5,873                   | 5,873      | -                             | 5,873    
|Total properties under
development               | -         | -        | 19,701                  | 19,701     | -                             | 19,701   
|Land held for development
Northern California    | 4,550     | -        | -                       | 4,550      | -                             | 4,550    
|Arizona                                          | 637       | -        | -                       | 637        | -                             | 637      
|Northwest                                        | 1,162     | -        | -                       | 1,162      | -                             | 1,162    
|Colorado                                         | 3,950     | -        | -                       | 3,950      | -                             | 3,950    
|Nevada                                           | 2,367     | -        | -                       | 2,367      | -                             | 2,367    
|Total land held for development                  | 12,666    | -        | -                       | 12,666     | -                             | 12,666   
|Total as of June 30, 2005                        | $194,377  | $572,029 | $19,701                 | $786,107   | $94,117                       | $691,990 
|Total as of December 31, 2004                    | $198,838  | $574,516 | $29,716                 | $803,070   | $86,660                       | $716,410 





8







Our personnel directly manage all but six of our properties from regional offices in Lafayette, California; Tustin, California; Phoenix, Arizona; Denver, Colorado; and Seattle, Washington. We have retained outside managers to assist in some of the management functions for U.S. Bank Centre in Reno, Nevada; Russell Commerce Center in Las Vegas, Nevada; Northport Business Center in North Las Vegas, Nevada; and SunTech Corporate Park 1, SunTech Corporate Park 2, and Tanasbourne Corporate Park in Hillsboro, Oregon. All financial record keeping is centralized at our corporate office in Lafayette, California.



Note 3. Debt



Bank Loans Payable



On March 31, 2004, we renewed our revolving credit facility with a six-bank lending group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line of credit with an accordion feature that gives us the option to expand the facility to $200 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 1.75%, depending on our leverage level as defined in the credit agreement. As of June 30, 2005, the facility had a total outstanding balance of $44,163,000 and an effective interest rate of 4.64%, and was collateralized by our interests in 19 properties with a net book value of approximately $121,302,000. These properties collectively accounted for approximately 20% of our annualized base rent for 2005 and approximately 18% of our total real estate assets at June 30, 2005. As of December 31, 2004, the facility did not have an outstanding balance due to the pay down of the balance with sales proceeds from assets sold in December 2004. In the first six months of 2005, the net borrowing under the facility of $44,163,000 was used to partially fund the special common stock dividend paid on January 18, 2005 and to pay off a mortgage that matured on June 1, 2005. These borrowings were partially offset by payments with sales proceeds from the sale of six operating properties during the first six months of 2005.



The daily weighted average outstanding balance on the facility was $35,968,000 and $67,908,000 for the six months ended June 30, 2005 and 2004, respectively. The weighted average annual interest rates in each of these periods were 4.48% and 2.95%, respectively.



We were in compliance with the various covenants and requirements of our credit facility during the six months ended June 30, 2005 and during the year ended December 31, 2004.



9







Mortgage Loans Payable







Mortgage loans payable at June 30, 2005 consist of the following (in thousands):



|                                          |                     |                                 |          | Collateral as of June 30, 2005
|----------------------------------------- | ------------------- | ------------------------------- | -------- | ------------------------------
|Lender                                    | Maturity Date       | Interest Rate at
June 30, 2005+ | Balance  | Number of
Properties          
|Security Life of Denver
Insurance Company | Sept. 1, 2005(1)    | 3.00%(2)                        | $ 11,312 | 3                             
|Nationwide Life
Insurance                 | November 1, 2005(3) | 4.61%                           | 16,758   | 3                             
|Prudential Insurance                      | July 31, 2006       | 8.90%                           | 7,316    | 1                             
|Prudential Insurance                      | July 31, 2006       | 6.91%                           | 12,341   | 2                             
|Union Bank                                | November 19, 2006   | 5.46%(4)                        | 12,881   | 6                             
|TIAA-CREF                                 | December 1, 2006    | 7.95%                           | 20,214   | 2                             
|TIAA-CREF                                 | June 1, 2007        | 7.17%                           | 33,193   | 5                             
|John Hancock                              | December 1, 2008    | 4.60%                           | 11,800   | 5                             
|Sun Life Assurance Co.                    | April 1, 2009       | 7.00%                           | 1,577    | 1                             
|Sun Life Assurance Co.                    | April 1, 2009       | 7.25%                           | 1,418    | *                             
|TIAA-CREF                                 | June 1, 2009        | 7.17%                           | 38,770   | 7                             
|John Hancock                              | December 1, 2010    | 4.95%                           | 27,900   | 2(5)                          
|Washington Mutual                         | August 1, 2011      | 4.49%(6)                        | 15,821   | 5                             
|Woodmen of the World                      | July 1, 2012        | 7.23%                           | 6,963    | 1                             
|TIAA-CREF                                 | April 1, 2013       | 5.60%                           | 47,063   | 5                             
|Bank of America                           | November 1, 2013    | 5.45%                           | 9,900    | 1                             
|Bank of America                           | December 1, 2013    | 5.55%                           | 11,400   | 4                             
|JP Morgan                                 | December 1, 2013    | 5.74%                           | 24,543   | 1                             
|Thrivent Financial                        | August 15, 2029     | 5.94%                           | 5,418    | 1                             
|                                          | Total               |                                 | $316,588 | 55                            



+

Interest rates are fixed unless otherwise indicated by footnote.

(1)

At maturity, the loan balance is expected to be paid in full .

(2)

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly). Effective July 3, 2003, the floating 30-day LIBOR rate was swapped to a fixed rate of 1.595% for an all-in rate of 2.995% until maturity.

(3)

Maturity date of November 1, 2005 represents the first of two interest rate reset dates, at which time we may opt to reject the new rate and pay the outstanding balance on the mortgage. We expect
 to pay the outstanding balance in full
on November 1, 2005.

(4)

Floating rate based on LIBOR plus 1.60%. The current rate of 5.46% is fixed until June 16, 2006, at which time we have the option of fixing the LIBOR rate for a period of 1 month, 3 months, 6 months, or 12 months.

(5)

In addition, a letter of credit in the amount of $5,720,000 serves as security for this loan pending replacement of the Laguna Hills Square property sold in 2004, which previously served as collateral for this loan.

(6)

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

*

The two Sun Life Assurance Company mortgages are collateralized by a single property.





10







The 55 operating properties that served as collateral for our mortgages had a net book value of approximately $477,406,000 as of June 30, 2005. We were in compliance with the covenants and requirements of our various mortgages during the six months ended June 30, 2005 and during the year ended December 31, 2004.



The following table presents scheduled principal payments on mortgage loans for each of the twelve-month periods ending June 30 (in thousands):



|2006       | $  33,798
|---------- | ---------
|2007       | 87,038   
|2008       | 4,132    
|2009       | 52,830   
|2010       | 3,221    
|Thereafter | 135,569  
|Total      | $316,588 



Note 4.  Stockholders' Equity



Series A Preferred Stock

On August 5, 2003, we issued and sold 805,000 shares of our 8.75% Series A Cumulative Redeemable Preferred Stock at a price of $50.00 per share for a gross total of $40,250,000. The offering was made only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. We pay cumulative dividends on the shares from the date of original issuance at the rate of 8.75% of the $50.00 liquidation preference per share per year, which is equivalent to $4.375 per share per year. Dividends on the shares are paid quarterly in arrears and are recorded when declared.  Quarterly dividends were declared and paid in the first two quarters of 2005 as follows:



|            | Amount     
|----------- | -----------
|1st Quarter | $   880,000
|2nd Quarter | 881,000    
|Total       | $1,761,000 



The Series A preferred shares have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any other securities. The shares are redeemable at our option beginning in August 2008, or earlier if necessary in limited circumstances to preserve our status as a REIT.



Series B Preferred Stock

On April 6, 2004, we issued and sold 2,400,000 shares of our 7.625% Series B Cumulative Redeemable Preferred Stock in a public offering at a price of $25.00 per share for a gross total of $60,000,000. We pay cumulative dividends on the shares from the date of original issuance at the rate of 7.625% of the $25.00 liquidation preference per share per year, which is equivalent to $1.90625 per share per year.  Dividends on the shares are paid quarterly in arrears beginning on July 15, 2004 and are recorded when declared.  Quarterly dividends were declared and paid in the first two quarters of 2005 as follows:



|            | Amount    
|----------- | ----------
|1st Quarter | $1,144,000
|2nd Quarter | 1,143,000 
|Total       | $2,287,000



The Series B preferred shares have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any other securities.  The shares are redeemable at our option beginning in April 2009, or earlier if necessary in limited circumstances to preserve our status as a REIT.





11







11







The following schedule presents changes in the number of outstanding shares of common stock and preferred stock during the period from January 1, 2005 through June 30, 2005:



|                                          | Common
Stock |  | Series A
Preferred
Stock |  | Series B
Preferred
Stock
|----------------------------------------- | ------------ |  | ------------------------ |  | ------------------------
|                                          |              |  |                          |  |                         
|Balance, December 31, 2004                | 16,325,584   |  | 805,000                  |  | 2,400,000               
|Issuance of common stock                  | 8,847        |  | -                        |  | -                       
|Repurchase and retirement of common
stock | (208,437)    |  | -                        |  | -                       
|Issuance of restricted stock              | 150,725      |  | -                        |  | -                       
|Forfeiture of restricted stock            | (28,662)     |  | -                        |  | -                       
|Balance, June 30, 2005                    | 16,248,057   |  | 805,000                  |  | 2,400,000               



In July 1998, our board of directors approved a share repurchase program of 3 million shares which was increased first to 4.5 million shares in September 1999, then to 8 million shares in September 2000 and later to 10 million shares in January 2002. The share repurchase program does not require us to purchase a specified number of shares and it does not have an expiration date. For the six months ended June 30, 2005 and 2004, we repurchased 208,437 and 402,129 shares, respectively, for annual average prices of $22.36 and $27.64, respectively. During the first six months of 2005, we acquired 30,709 of these shares from employees to satisfy payroll tax obligations upon the vesting of restricted stock.



Note 5.  Discontinued Operations



In December 2004, we sold four industrial properties in South San Francisco, California; one industrial property in Santa Rosa, California; one industrial property in Napa, California; two office properties in Seattle, Washington; one office property and a 4.3 acre parcel of land in San Diego, California; and an office building in Laguna Hills, California in seven sale transactions for net sale prices totaling $175,110,000, which resulted in an aggregate gain of $70,235,000. In January 2005, we sold an industrial property in San Diego, California for a sale price of $15,800,000, resulting in a gain of approximately $6,894,000. In addition, we recorded a gain of $250,000 from funds released from escrow in the first quarter of 2005 in connection with one of the properties we sold in December 2004. In June 2005, we sold three industrial properties and two office properties in San Diego, California in one transaction for a total
sale price of $27,750,000, which resulted in an aggregate gain of $9,095,000.



Income from the properties held for sale and sold is presented in the income statement as discontinued operations for all periods presented.  Income from discontinued operations includes allocations of interest expense based on the percentage of the cost basis of each property held for sale and sold to the cost basis of total real estate assets as of the respective balance sheet date.  The following schedule presents the calculation of income from discontinued operations (in thousands):



|                                    | Three Months Ended June 30, |  | Six Months Ended
June 30,
|----------------------------------- | --------------------------- |  | -------------------------
|                                    | 2005                        |  | 2004                     
|Rental income                       | $633                        |  | $5,438                   
|Rental expenses:
Operating expenses | 54                          |  | 1,242                    
|Real estate taxes                   | 51                          |  | 373                      
|Depreciation and amortization       | -                           |  | 801                      
|Interest expense                    | 134                         |  | 1,039                    
|                                    |                             |  |                          
|Income from discontinued operations | $394                        |  | $1,983                   



12









12







Assets and liabilities related to properties held for sale as of June 30, 2005 and December 31, 2004 were as follows (in thousands):



|                  | June 30, 2005 |  | December 31, 2004
|----------------- | ------------- |  | -----------------
|Other assets      | $     -       |  | $358             
|Other liabilities | $     -       |  | $  71            



Note 6. Segment Disclosure



We view our operations as several geographic segments reflecting the regional management structure of our operating portfolio. We have five operating segments organized by the regions in which we own properties as follows: Northern California (includes Reno, Nevada), Arizona, Southern California (includes Las Vegas, Nevada), Northwest (greater Seattle, Washington and Portland, Oregon) and Colorado. The corporate and other segment includes amounts associated with general business activities not specifically related to our properties.



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 operations from the combined properties in each segment.



|                                                    | For the three months ended June 30, 2005(in thousands)
|--------------------------------------------------- | ------------------------------------------------------
|                                                    | Northern
California                                   
|Rental income                                       | $    6,549                                            
|Rental expenses:                                    |                                                       
|Operating expenses and
real estate taxes            | 1,988                                                 
|Depreciation and
amortization                       | 1,705                                                 
|General and administrative
expenses                 | -                                                     
|                                                    |                                                       
|Income from operations                              | 2,856                                                 
|                                                    |                                                       
|Other income (expense)                              |                                                       
|Interest income (1)                                 | 3                                                     
|Interest expense                                    | -                                                     
|                                                    |                                                       
|Income from continuing                              |                                                       
|operations                                          | 2,859                                                 
|                                                    |                                                       
|Discontinued operations:                            |                                                       
|Income from discontinued
operations                 | -                                                     
|Gain on sale of operating
properties                | -                                                     
|                                                    |                                                       
|Income from discontinued
operations                 | -                                                     
|                                                    |                                                       
|Net income (loss)                                   | $    2,859                                            
|                                                    |                                                       
|Real estate investments                             | $229,492                                              
|                                                    |                                                       
|Additions (dispositions) of
Real estate investments | $       801                                           
|                                                    |                                                       
|Total assets                                        | $249,181                                              
|                                                    |                                                       



(1) The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivables.

13







|                                                    | For the six months ended June 30, 2005(in thousands)
|--------------------------------------------------- | ----------------------------------------------------
|                                                    | Northern
California                                 
|Rental income                                       | $  13,734                                           
|Rental expenses:                                    |                                                     
|Operating expenses and
real estate taxes            | 3,872                                               
|Depreciation and
amortization                       | 3,460                                               
|General and administrative
expenses                 | -                                                   
|                                                    |                                                     
|Income from operations                              | 6,402                                               
|                                                    |                                                     
|Other income (expense)                              |                                                     
|Interest income (1)                                 | 4                                                   
|Interest expense                                    | -                                                   
|                                                    |                                                     
|Income from continuing                              |                                                     
|operations                                          | 6,406                                               
|                                                    |                                                     
|Discontinued operations:                            |                                                     
|Income from discontinued
operations                 | -                                                   
|Gain on sale of operating
properties                | -                                                   
|                                                    |                                                     
|Income from discontinued
operations                 | -                                                   
|Net income (loss)                                   | $    6,406                                          
|Real estate investments                             | $229,492                                            
|Additions (dispositions) of
real estate investments | $    1,260                                          
|Total assets                                        | $249,181                                            



(1) The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivables.





































14













|                                         | For the three months ended June 30, 2004(in thousands)
|---------------------------------------- | ------------------------------------------------------
|                                         | Northern
California                                   
|Rental income                            | $    7,787                                            
|Rental expenses:                         |                                                       
|Operating expenses and
real estate taxes | 1,911                                                 
|Depreciation and
amortization            | 1,745                                                 
|General and administrative
expenses      | -                                                     
|                                         |                                                       
|Income from operations                   | 4,131                                                 
|                                         |                                                       
|Other income (expense)                   |                                                       
|Interest income (1)                      | 6                                                     
|Interest expense                         | -                                                     
|                                         |                                                       
|Income from continuing                   |                                                       
|operations                               | 4,137                                                 
|                                         |                                                       
|Discontinued operations:                 |                                                       
|Income from discontinued
operations      | 590                                                   
|Gain on sale of operating
properties     | -                                                     
|                                         |                                                       
|Income from discontinued
operations      | 590                                                   
|Net income (loss)                        | $    4,727                                            
|Real estate investments                  | $259,506                                              
|Additions of real
estate investments     | $    1,631                                            
|Total assets                             | $278,255                                              



(1) The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivables.













15









|                                         | For the six months ended June 30, 2004(in thousands)
|---------------------------------------- | ----------------------------------------------------
|                                         |                                                     
|                                         | Northern
California                                 
|Rental income                            | $  16,049                                           
|Rental expenses:                         |                                                     
|Operating expenses and
real estate taxes | 3,771                                               
|Depreciation and
amortization            | 3,507                                               
|General and administrative
expenses      | -                                                   
|Income from operations                   | 8,771                                               
|                                         |                                                     
|Other income (expense)                   |                                                     
|Interest income (1)                      | 11                                                  
|Interest expense                         | -                                                   
|Income from continuing
operations        | 8,782                                               
|                                         |                                                     
|Discontinued operations:                 |                                                     
|Income from discontinued
operations      | 1,005                                               
|Gain on sale of operating
properties     | -                                                   
|                                         |                                                     
|Income from discontinued
operations      | 1,005                                               
|Net income (loss)                        | $    9,787                                          
|Real estate investments                  | $259,506                                            
|Additions of real
estate investments     | $    3,122                                          
|Total assets                             | $278,255                                            





(1)

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







16







Note 7. Acquisitions and Pro Forma Financial Information



During 2004, we acquired six operating properties, one redevelopment project, one development project, and three parcels of land for contract prices totaling approximately $103,641,000. Pro forma amounts include estimates for rental income, rental expenses, and interest expense, and are presented as if these properties had been acquired at the beginning of 2004. The following table presents pro forma financial information for the three and six months ended June 30, 2004 (dollars in thousands, except share and per share amounts):



|                                                                     | Three Months Ended |  | Six Months Ended
|-------------------------------------------------------------------- | ------------------ |  | ----------------
|                                                                     | June 30, 2004      |  | June 30, 2004   
|Rental income                                                        | $24,588            |  | $48,648         
|Income from continuing operations                                    | 3,567              |  | 7,198           
|Income from discontinued operations                                  | 1,983              |  | 3,770           
|Net income                                                           | 5,550              |  | 10,968          
|Net income available to common
stockholders                          | $ 4,374            |  | $ 7,810         
|                                                                     |                    |  |                 
|Income per common share  basic:                                     |                    |  |                 
|Income from continuing operations                                    | $
  0.15           |  | $  
 0.25       
|Income from discontinued operations                                  | 0.13               |  | 0.24            
|Net income available to common
stockholders                          | $   0.28           |  | $   0.49        
|Weighted average number of common
shares  basic                     | 15,838,442         |  | 15,898,655      
|                                                                     |                    |  |                 
|Income per common share  diluted:
Income from continuing operations | $   0.15           |  | $   0.25        
|Income from discontinued operations                                  | 0.12               |  | 0.23            
|Net income available to common
stockholders                          | $   0.27           |  | $   0.48        
|Weighted average number of common
shares  diluted                   | 16,059,299         |  | 16,181,870      



During 2005, we acquired two parcels of land for contract prices totaling $953,500. Pro forma amounts have not been presented due to the insignificant impact of these transactions on our financial results.





17









Note 8. Earnings Per Share



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



|                                                                                                                        | Three Months Ended June 30, | Six Months Ended June 30,
|----------------------------------------------------------------------------------------------------------------------- | --------------------------- | -------------------------
|                                                                                                                        | 2005                        | 2004                     
|Basic:                                                                                                                  |                             |                          
|Income from continuing operations                                                                                       | $     1,194                 | $     3,773              
|Less:  preferred dividends  Series A                                                                                   | (881)                       | (881)                    
|Less:  preferred dividends  Series B                                                                                   | (1,143)                     | -                        
|Income available to common stockholders
from continuing operations                                                      | (830)                       | 2,892                    
|Income from discontinued operations                                                                                     | 9,489                       | 1,983                    
|Net income available to common stockholders                                                                             | $     8,659                 | $     4,875              
|Weighted average number of shares - basic                                                                               | 15,764,606                  | 15,838,442               
|Income per common share  basic:                                                                                        |                             |                          
|(Loss) income from continuing operations                                                                                | $     (0.05)                | $       0.18             
|Income from discontinued operations                                                                                     | 0.60                        | 0.13                     
|Net income available to common stockholders                                                                             | $       0.55                | $       0.31             
|Diluted:                                                                                                                |                             |                          
|Income from continuing operations                                                                                       | $     1,194                 | $     3,773              
|Less:  preferred dividends  Series A                                                                                   | (881)                       | (881)                    
|Less:  preferred dividends  Series B                                                                                   | (1,143)                     | -                        
|Income available to common stockholders
from continuing operations                                                      | (830)                       | 2,892                    
|Income from discontinued operations                                                                                     | 9,489                       | 1,983                    
|Net income available to common stockholders                                                                             | $     8,659                 | $     4,875              
|Weighted average number of shares  basic                                                                               | 15,764,606                  | 15,838,442               
|Weighted average shares of dilutive stock
options using average period stock price
under the treasury stock method      | 4,699                       | 112,262                  
|Weighted average shares of non-vested
restricted stock using average period
stock price under the treasury stock method | 25,991                      | 108,595                  
|                                                                                                                        |                             |                          
|Weighted average number of common
shares  diluted                                                                      | 15,795,296                  | 16,059,299               
|Income per common share  diluted                                                                                       |                             |                          
|(Loss) income from continuing operations                                                                                | $     (0.05)                | $      0.18              
|Income from discontinued operations                                                                                     | 0.60                        | 0.12                     
|Net income available to common stockholders                                                                             | $      0.55                 | $      0.30              



Stock option grants and restricted stock awards with an exercise or issuance price on the date of grant that is above the average market price during the period are considered antidilutive and have been excluded from the weighted average share calculations. For the three and six months ended June 30, 2005, 507,200 and 424,037 of our stock options and restricted stock awards have been excluded from the weighted average number of shares  diluted. Stock options and restricted stock awards of 1,000 and 593 have been excluded from the weighted average number of shares  diluted for the three and six months ended June 30, 2004.



18







Note 9. Related Party Transactions



We have occasionally used 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 six months ended June 30, 2004, we paid Bartko, Zankel, Tarrant & Miller approximately $200 in legal fees.  During the six months ended June 30, 2005, no payments were made to the firm.



Note 10. Commitments and Contingencies



As of June 30, 2005, we had outstanding contractual construction commitments of approximately $9.0 million 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 $11,246,000 as of June 30, 2005.



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.





19







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





GENERAL



Bedford Property Investors, Inc. is a self-administered and self-managed equity real estate investment trust (REIT). We own, manage, acquire and develop multi-tenant industrial and suburban office properties proximate to metropolitan areas in the western United States. As of June 30, 2005, we owned 87 operating properties totaling approximately 7.2 million rentable square feet and 11 parcels of land totaling approximately 40 acres. In addition, we owned one office property and one industrial property that are currently under redevelopment, and one industrial property currently being developed on a parcel of land that we purchased in 1998. Of the 87 operating properties, 57 are industrial buildings and 30 are suburban offices. Our properties are located in California, Arizona, Washington, Colorado, Oregon, and Nevada.



The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated
financial statements and consolidated
notes to financial statements included in this report, as well as our annual report on Form 10-K for the year ended December 31, 2004. When used in the following discussion, the words believe, expect, intend, plan, anticipate 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 that could cause actual results to differ materially from those expressed, expected or implied by the forward-looking statements. These risks and uncertainties are described in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2004, and are 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 because 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.



OVERVIEW



Significant Events During the Quarter



On June 15, 2005, we acquired a 1.31-acre parcel of land in Phoenix, Arizona for approximately $587,000. The land, which is adjacent to one of our existing operating properties, will be used to accommodate the expanded parking requirements of one of our tenants.



On June 21, 2005, we sold two office properties and three industrial properties totaling 182,186 square feet in San Diego, California for $27,750,000. This sale generated a gain of approximately $9,095,000.



Market Conditions



The Northwest Region



We believe that the Puget Sound area of Washington is still experiencing the effects of significant job loss resulting from the technology and telecommunication industry slowdowns. We also believe that these economic conditions have affected most commercial real estate markets causing excess space, both in the direct leasing and sub-leasing markets, and weaker deal terms. However, in 2004, the employment trend turned positive with the Seattle area gaining more than 45,000 jobs. At June 30, 2005, our Northwest operating portfolio, which includes three Oregon properties, was 90% occupied with approximately 57,000 square feet vacant in four operating properties. We believe that this comparatively strong occupancy has insulated us from the worst effects of local market conditions. In February 2004, one of our largest tenants in this region vacated our approximately 334,000 square-foot five-building complex in Renton, Washington upon expiration of its lease. In March 2004, we transferred this property to our development portfolio and commenced a program to reposition the complex as a campus-style multi-tenant office park. In September 2004, we completed the first phase of this repositioning and began construction on the second phase, which is currently in progress.  As of June 30, 2005, we have signed five leases for an aggregate of 83,866 square feet.

20







20







The Northern California Region



Our properties in Northern California are located throughout the San Francisco Bay Area and include one property in Reno, Nevada. The Bay Area market has also been impacted by the technology industry slowdown, particularly in the Silicon Valley area, where we own 14 properties totaling 1,217,207 square feet as of June 30, 2005. In this sub-market, we believe that the job loss associated with the recent recession has been significant, resulting in increased vacancy and reduced rental rates. While the California employment situation has shown improvement in recent months, the oversupply of space and reduced rental rates continue to be a challenge.  In addition, we expect higher than usual lease expirations in the Silicon Valley to continue through 2005, which creates the potential for increasing vacancy in our portfolio. We have responded to these challenges by improving our marketing processes and the marketability of our vacant spaces. For example, we are making capital improvements to our vacant spaces to render them to near move-in condition for prospective tenants. Other Bay Area sub-markets have not been as dramatically affected as the Fremont, Milpitas, and San Jose markets in Silicon Valley. In the Sonoma County, Napa County, and Contra Costa County sub-markets, while demand has slowed during the past three years, vacancy rates have not climbed to the extent they have in Silicon Valley. Currently we are seeing an improvement in demand for space and a reduction in leasing concessions in our northern California markets, particularly in Contra Costa County and Napa County.



Another Bay Area sub-market that has demonstrated some weakness during the last few years is the South San Francisco industrial market. In December 2004, we sold four of our five properties in South San Francisco, leaving one 81% leased property remaining in this sub-market. As of June 30, 2005, this property was 81% leased.



The Southern California Region



In Southern California, we have properties in three relatively healthy sub-markets. These sub-markets are Orange County, San Diego, and the Inland Empire. We have two properties in Orange County and maintained them at, or close to, 100% occupancy during 2004 and in the first six months of 2005. In the Inland Empire, we have a bulk industrial property in Ontario, California, which was 96% leased as of June 30, 2005. We also have three recently developed properties in the Inland Empire: Jurupa Business Center Phase I, which was 100% leased as of June 30, 2005; Jurupa Business Center Phase II, which was 91% leased as of June 30, 2005; and Jurupa Business Center Phase IV, which was 100% leased as of June 30, 2005. In addition, the Jurupa Business Center Phase III became shell complete during the fourth quarter of 2004 and was 41% leased as of June 30, 2005. Finally, in San Diego, our properties were 100% leased during the year 2004 and in the first six months of 2005.  In June 2005, we sold five of our operating properties in San Diego, leaving one fully leased property in this sub-market as of June 30, 2005.



In Las Vegas, Nevada, we own two industrial properties totaling 224,543 square feet, which were 97% occupied as of June 30, 2005. In addition, we own 4 parcels of land totaling 5.74 acres, which are being held for future development. The Las Vegas market continues to be one of the strongest in the country with employment growth of 7. 8
% from May of 2004 to May of 2005.



The Arizona Region



Most of our properties in Arizona are in Phoenix, a market that has been characterized by the same weakness in demand for office, research and development, and industrial space that we have experienced in other regions. More recently, the Phoenix region has shown considerable improvement as evidenced by first quarter 2005 positive net absorption of approximately 400,000 and 800,000 square feet in the office and industrial markets, respectively, as well as strong leasing activity experienced in our portfolio. As of June 30, 2005, the approximately 2 million square feet of rentable space we own in this region was 95% leased, with approximately 107,000 square feet of vacant space in seven properties.

21







The Colorado Region



All of our properties in Colorado are in the southeast Denver suburban office market. We believe that market conditions in Denver reflect the effects of the significant job losses experienced in this region during the last several years, similar to other markets. Our ten-story office property at 4601 DTC Boulevard was 80% leased to a single tenant under a lease that expired on January 31, 2005, which the tenant opted not to renew. In preparation for this expected vacancy, we made significant capital improvements to the property and began actively marketing the space in 2004. With the addition of replacement leases signed this year, including a 31,366 square-foot lease with a national engineering firm, the property was 47% leased as of June 30, 2005. Additional 2005 capital improvements to this property include a new lobby and entry-way completed in June 2005 and a parking garage which is expected to be completed by early 2006. We expect these additions to enhance the competitive positioning of this property.



Future Trends and Events



Acquisitions and Dispositions



Capitalization rates continue to remain low as the result of the large amount of capital available in the marketplace and the low cost of debt. While we have, in the past, been successful at acquiring properties that we believe will enhance our portfolio, it has become increasingly challenging to find properties that meet our target capitalization rate of 9%.  However, we will continue to evaluate, and may capitalize on, opportunities to acquire attractive properties or portfolios of properties as and when they arise.  To accomplish our goal of continuing to reposition ourselves as a multi-tenant REIT, we may also enter into complementary acquisitions of other businesses.



In addition, we intend to continue to sell selected properties in order to reposition our portfolio and to take advantage of the current low capitalization rates in the market.  Properties that will be considered for sale include those that we believe have reached their full potential and can produce a significant gain on sale.  As part of continuing to reposition ourselves as a multi-tenant REIT, we are also shifting our focus away from single-tenant properties to multi-tenant properties in an effort to reduce the vacancy risk associated with large, single-tenant buildings. As a result, we may also sell properties that do not meet our multi-tenant configuration criteria, as and when appropriate opportunities arise.



Development and Redevelopment



In response to market conditions, our development activities in 2003 and 2004 were primarily limited to our Jurupa Business Center project in Ontario, California. As of June 30, 2005, the 41,726 square-foot Phase I was 100% leased, and the 41,390 square-foot Phase II, which was shell complete in December 2002, was 91% leased. In October 2004, we completed construction on the final two phases. As of June 30, 2005, the 15,490 square-foot Phase III was 41% leased and the 24,805 square-foot Phase IV was 100% leased.  In total, the four phases of the Jurupa Business Center comprise 123,411 square feet and are 89% leased as of June 30, 2005.



In March 2004, we began the redevelopment of our approximately 334,000 square-foot five-building facility in Renton, Washington. The construction process for site work, shell enhancement, construction of lobbies, and the upgrade of common areas is expected to take place over a 48-month period. The construction is being completed in phases, with the completion and leasing of the buildings occurring during the 48-month period. In September 2004, we completed the first phase of this repositioning and began construction on the second phase, which is currently in progress.  As of June 30, 2005, we have signed five leases for an aggregate of 83,866 square feet, bringing the project to 26% leased.

22







In April 2004, we purchased a 130,639 square-foot industrial building in Phoenix, Arizona with the intent to redevelop the property to accommodate the expansion requirements of one of our existing tenants in another property.  The redevelopment began in August 2004 and was completed in June 2005 at a redevelopment cost of approximately $8.3 million, of which approximately $3.3 million was funded by us and approximately $5 million was funded by the tenant.



In September 2004, we purchased an 83,244 square-foot office/research and development property in Hillsboro, Oregon.  The property was acquired in shell complete condition with the intent to complete the final build-out and lease-up of the building. The expected cost of development to bring this property to operating status is approximately $2.7 million over an 18-month period. This property was approximately 38% leased as of July 31, 2005.



In May 2005, we broke ground on the development of an 88,551 square-foot service/flex building on one of our land parcels in Napa, California.  The development project has been named The Vines and is expected to be shell complete in November 2005 with an estimated cost of approximately $9 million.



Capital Expenditures and Development Costs



We expect the higher than usual lease expirations in our portfolio that occurred during 2004 to continue throughout 2005. Prior to 2004, annual lease expirations in our portfolio ranged from approximately 12% to 15% of our annualized base rents. As of June 30, 2005, our expected remaining lease expirations for 2005 were 11% of annualized base rents. As a result, we have been incurring, and we expect to continue to incur, significant capital expenditures in 2005, including the costs of leasing commissions and tenant improvements related to renewing or replacing the expiring leases. In several instances, these lease expirations may occur in markets that have experienced considerable weakness due to job loss and excess inventory. This market weakness, combined with a higher level of lease expirations, may require us to incur more capital expenditures than we have experienced historically to renew or re-lease these spaces.



We also expect to incur substantial costs during the remainder of the year as we continue our current development and redevelopment projects.  These projects include the final build-out and lease-up of our Jurupa Phases II and III in Ontario, California and SunTech III in Hillsboro, Oregon; the redevelopment of Time Square in Renton, Washington; and the development of The Vines in Napa, California. In addition, we are also in the process of building a new parking structure at our 4601 DTC Boulevard property in Denver Colorado.



While t
he se expected expenditures
will require that we manage our capital resources carefully , we believe that we will have sufficient funds to meet our capital needs
.. We intend to closely monitor these activities
 and continually assess our actual expenditures against our planned expenditures.
We plan to spend approximately $9 million in capital expenditures and $17 million in development and redevelopment costs during the remainder of the year 2005.



Share Repurchases



Since the inception of our share repurchase program in November of 1998, we have repurchased a total of 8,694,344 shares of our common stock at an average cost of $19.31 per share, which represents 38% of the shares of common stock outstanding at November 1998. We intend to continue to repurchase shares of our common stock on the open market when the opportunities exist. Our share repurchase strategy takes into consideration several factors, including the dividend yield on our stock price, the cost of capital and its alternative uses, existing yields on potential acquisitions, market trading volume, trading regulations, and debt covenants. We currently have board approval to repurchase up to a total of 10 million shares of our common stock. During the six months ended June 30, 2005, we repurchased or acquired 208,437 shares of our common stock at an average price of $22.36. We acquired 30,709 of these shares from employees to satisfy payroll tax obligations upon the vesting of restricted stock.



23







Occupancy and Rental Rates



As of June 30, 2005, our operating portfolio occupancy, which excludes properties in lease-up status, was 88%, a 1 percentage point decrease from the 89% occupancy as of March 31, 2005. Maintaining our occupancy rate has been our highest priority both during and following the recent economic downturn. In order to retain tenants in the current market, we have sometimes found it necessary to negotiate lower current rental rates in exchange for extended lease terms, which we refer to as blend and extend leases. While this has a negative impact on our current income from operations, we believe the negative impact of losing good credit tenants in the long-term would surpass the immediate incremental loss due to reduced rental rates. We intend to continue this strategy in order to maximize our occupancy rate when a tenant's credit and other factors merit consideration of a blend and extend lease. During the three months ended June 30, 2005, we renewed or re-leased 57 of 70 expiring leases or 82% of our expiring square footage and experienced a 16% decline in weighted average rental rates on these leases.



Leasing



Over the next three years, we will be facing significant lease rollovers. During the remainder of 2005, in 2006, and in 2007, leases representing 11%, 15%, and 16% of annualized base rent, respectively, will expire. As of June 30, 2005, the expirations as a percentage of annualized base rent by region are as follows:



|                    | 2005 | 2006 | 2007
|------------------- | ---- | ---- | ----
|Northern California | 4%   | 5%   | 5%  
|Arizona             | 2%   | 4%   | 5%  
|Southern California | 1%   | 3%   | 2%  
|Northwest           | 2%   | 1%   | 1%  
|Colorado            | 1%   | 1%   | 2%  
|Nevada              | 1%   | 1%   | 1%  
|Total               | 11%  | 15%  | 16% 





24







CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) 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, classification of discontinued operations, accounting for development costs, revenue recognition and allowance for doubtful accounts, stock compensation expense, and qualification as a REIT, each of which is discussed in more detail below. 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.



Valuation of Real Estate Investments



Real estate investments are recorded at cost less accumulated depreciation. The cost of real estate includes the purchase price and other related acquisition costs. In accordance with Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, a portion of the purchase price is allocated to tenant improvements and identifiable intangible assets or liabilities. For acquired properties with rental guarantees from the seller, amounts received under the rental guarantee are recorded as a reduction to the basis of the asset upon receipt. 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. The fair value of a property is determined by using an internally developed discounted cash flow analysis. The evaluation of the fair value of individual properties requires significant management judgments and assumptions that affect the amount of any impairment loss that we may recognize. Significant changes in the facts and circumstances underlying these judgments and assumptions in future periods could cause significant impairment adjustments to be recorded.



The acquisition of real estate investments results in the allocation of a portion of the purchase price to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a historical basis prorated over the remaining lease terms. They are classified as an asset under real estate investments and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases as follows: (i) origination value, which represents the value associated with cost avoidance of acquiring in-place leases, such as lease commissions paid under terms generally experienced in our markets; (ii) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the assumed vacant property to the occupancy level when purchased; (iii) fair market value of acquired leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks; and (iv) value of tenant relationships, which reflects estimated future benefits from enhanced renewal probabilities and cost savings in lease commissions and tenant improvements. Origination value is recorded as an other asset and is amortized over the remaining lease terms. Value of in-place leases is recorded as an other asset and amortized over the average term of the acquired leases. Fair market value of acquired leases is classified as an other asset or liability, depending on whether the contractual terms are above or below market, and the asset or liability is amortized to rental revenue over the remaining terms of the leases. Value of tenant relationships is classified as an other asset and is amortized over the anticipated term of the customer relationship, not to exceed the remaining depreciable life of the building.



25







Classification of Discontinued Operations



We record real estate investments that are considered held for sale at the lower of carrying amount or fair value less estimated costs to sell, and such properties are no longer depreciated. We classify real estate assets as held for sale in the period in which both of the following criteria are met:



§

management has obtained board approval to sell the asset, and

§

a letter of intent has been signed by an officer of the company and the buyer.



We present the net operating results of properties held for sale and sold during the year, less allocated interest expense, as income from discontinued operations for all periods presented. The gain on sale of operating properties sold, net of sale costs, is presented as income from discontinued operations. We allocate interest expense based on the percentage of the cost basis of each property held for sale and sold to the total cost basis of real estate assets as of the respective year-end, pro-rated for the number of days prior to sale.



Accounting for Development Costs



In accordance with SFAS 67, Accounting for Costs and Initial Rental Operations of Real Estate, costs associated with the development of real estate include acquisition and direct construction costs as well as capitalization of real estate taxes, insurance, incidental revenue and expenses, and a portion of salaries and overhead of personnel responsible for development activity.  In addition, we capitalize interest expense to the development projects according to SFAS 34, Capitalization of Interest Cost.  The amount of interest capitalized during a period is determined by applying the weighted average rate of our borrowings to the average accumulated costs, excluding interest, of the project. The capitalization of interest, real estate taxes, insurance, and incidental revenue and expenses begins when construction of a project commences and ends when a project or a portion of the project is placed in service, not to exceed twelve months from the cessation of construction activities. The capitalization of salaries and overhead of development personnel begins upon acquisition of a land parcel or upon commencement of active development for redevelopment and rehabilitation projects and ends with completion of the project.



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. In the event a tenant downsizes into a smaller space with reduced rent, a pro-rated amount of the straight-line rent receivable is charged against income based on square footage.  Lease termination income is recorded when we have an executed lease termination agreement with no further contractual obligations that must be met before the fee is due to us. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination fees are deferred and recognized over the term of such tenants occupancy. In accordance with SFAS 141, Business Combinations, a portion of the purchase price of acquired properties is allocated to the market value of in-place leases. The market value of in-place leases is classified as an other asset or liability and is amortized to rental income over the remaining terms of the leases. 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, taking into account the tenants financial condition, security deposits, any letters of credit, any lease guarantees, and current economic conditions.  Significant judgments and estimates must be made by management and used in connection with establishing this allowance in any accounting period.  In the event that the allowance for doubtful accounts is insufficient to cover the actual amount of accounts that are subsequently written off in an accounting period, additional bad debt expense would be recognized as a current period charge in our income statement.



26







Stock Compensation Expense



Beginning January 1, 2003, we voluntarily adopted the recognition provisions of 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. In December 2004, the F inancial Accounting Standards Board
 (FASB)
issued SFAS 123R, Share-Based Payment, a revision of SFAS 123, which now requires public companies to adopt the fair value based method of accounting for stock-based employee compensation using the modified prospective basis for fiscal years beginning after June 15, 2005. Due to our voluntary adoption of the modified prospective basis of accounting for our stock-based employee compensation on January 1, 2003, we do not expect this pronouncement to result in changes to our accounting policy
.. 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. Management is required to make certain assumptions in calculating the amount of any stock-based compensation expense, including assumptions relating to the fair value of options.  In determining the fair value of options, we make assumptions about the future volatility of our stock, the expected term to exercise the options, the expected dividend yields, and the risk-free interest rate.  The underlying assumptions affect amounts reported in future periods.



Qualification as a REIT



We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. A REIT is generally not subject to federal income tax on that portion of real estate investment trust taxable income that is distributed to stockholders, provided that at least 90% of such 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.





27







RESULTS OF OPERATIONS



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



The following table presents changes in our portfolio during the six months ended June 30, 2004 and during the period from July 1, 2004 through June 30, 2005:

|                                                     | Office Properties    | Industrial Properties | Total Operating Properties
|---------------------------------------------------- | -------------------- | --------------------- | --------------------------
|                                                     | Number of
Properties | Square
Feet           | Number of
Properties      
|Total at January 1, 2004                             | 31                   | 2,797,000             | 61                        
|Activity from January 1, 2004 through June 30, 2004: |                      |                       |                           
|Acquisitions                                         | 2                    | 175,000               | 2                         
|Transfer to Redevelopment(1)                         | (1)                  | (334,000)             | (1)                       
|Total at June 30, 2004                               | 32                   | 2,638,000             | 62                        
|                                                     |                      |                       |                           
|Activity from July 1, 2004 through June 30, 2005:    |                      |                       |                           
|Acquisitions(2)                                      | 1                    | 196,000               | 3                         
|Sales                                                | (7)                  | (600,000)             | (10)                      
|Development(3)                                       | -                    | -                     | 2                         
|Redevelopment(1)                                     | 4                    | 267,000               | -                         
|Total at June 30, 2005                               | 30                   | 2,501,000             | 57                        



(1)

One 334,000 square-foot five-building office property was transferred from operating to development on March 1, 2004 as a redevelopment project.  Four of the buildings from the five-building property were transferred to operating as lease-up properties during the period from July 1, 2004 through June 30, 2005.  One industrial property was acquired on April 21, 2004 as a redevelopment project.

(2)

One property was acquired on September 27, 2004 as a development project and is currently under lease-up.

(3)

Properties are included in development based on the date of shell completion.





Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004



Income from Operations



Income from operations, defined as rental income less rental expenses (which includes operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses), decreased $2,021,000 or 24% in the three months ended June 30, 2005 compared to the same period in 2004. This decrease is attributable to an increase in rental income of $267,000, offset by an increase in rental expenses of $2,288,000.



28







The following table presents the change in income from operations for the three months ended June 30, 2005 compared with the same period in 2004, detailing amounts contributed by properties acquired, properties redeveloped, properties developed, and properties that remained stable during the period from January 1, 2004 to June 30, 2005 (in thousands):



|                                    | Acquisitions | Redevelopment+ | Development++ | Stabilized(1) | Total   
|----------------------------------- | ------------ | -------------- | ------------- | ------------- | --------
|                                    |              |                |               |               |         
|Rental income                       | $1,720       | $103           | $168          | $(1,724)      | $    267
|Rental expenses:
Operating expenses | (333)        | (87)           | (14)          | (356)         | (790)   
|Real estate taxes                   | (221)        | (32)           | (10)          | (70)          | (333)   
|Depreciation and
amortization       | (708)        | (51)           | (43)          | 106           | (696)   
|General and administrative
expenses | -            | -              | -             | (469)         | (469)   
|                                    |              |                |               |               |         
|Income from operations              | $  458       | $(67)          | $101          | $(2,513)      | $(2,021)
|                                    |              |                |               |               |         



+

Includes one five-building property transferred from operating to development on March 1, 2004, and one property acquired for redevelopment on April 21, 2004.

++

Includes two properties with a shell completion date of October 18, 2004.

(1)

Stabilized properties includes properties that were fully operating during the period.



The increase in rental income of $267,000 is primarily attributable to operating property acquisitions of approximately $88,900,000 in 2004, offset by a decrease in rental income on stabilized properties. The decrease in rental income of $1,724,000 on the stabilized properties is generally attributable to decreased rental rates on new leases, renewed leases, and blend and extend leases, as well as decreased occupancy rates.



The increases in operating expenses of $790,000 or 19%, real estate taxes of $333,000 or 13%, and depreciation and amortization of $696,000 or 11% are primarily due to additional expenses incurred for properties acquired during 2004. The increase of $356,000 in operating expenses on the stabilized properties is primarily due to increased repairs and maintenance expense and utility expense.



General and administrative expenses increased $469,000 or 30% in the second quarter of 2005 compared to the same period in 2004, primarily as a result of an accrual of approximately $468,000 for employee bonuses for the first half of 2005.  In 2004, the company did not make a decision to pay employee bonuses until the fourth quarter and as a result they were accrued in the fourth quarter.



Interest Expense



Total interest expense decreased $332,000 or 6% to $5,408,000 in the second quarter of 2005 from $5,740,000 in the second quarter of 2004, primarily as a result of a lower weighted average outstanding balance on the line of credit as well as increased capitalized interest in 2005. Interest associated with continuing operations increased $573,000 or 12% in the second quarter of 2005 compared with 2004 primarily due to a lower interest allocation to discontinued operations of $134,000 in the second quarter of 2005 as compared to $1,039,000 in the second quarter of 2004 as presented in the table below (in thousands):



|                                             | 2005   |  | 2004   |  | Increase
(decrease)
|-------------------------------------------- | ------ |  | ------ |  | -------------------
|Interest included in continuing
operations   | $5,274 |  | $4,701 |  | $ 573              
|Interest included in discontinued
operations | 134    |  | 1,039  |  | (905)              
|                                             |        |  |        |  |                    
|Total interest                               | $5,408 |  | $5,740 |  | $(332)             



29







Discontinued Operations



In December 2004, we sold four industrial properties in South San Francisco, California; one industrial property in Santa Rosa, California; one industrial property in Napa, California; two office properties in Seattle, Washington; one office property and a 4.3 acre parcel of land in San Diego, California; and an office building in Laguna Hills, California for net sale prices totaling $175,110,000, which resulted in an aggregate gain of $70,235,000. In January 2005, we sold an industrial property in San Diego, California for a sale price of $15,800,000, resulting in a gain of approximately $6,894,000. In addition, we recorded a gain of $250,000 from funds released from escrow in the first quarter of 2005 in connection with one of the properties we sold in December 2004. In June 2005, we sold two office properties and three industrial properties in San Diego, California for $27,750,000, resulting in a gain of approximately $9,095,000. Net operating income relating to all of these properties is classified as discontinued operations for all periods presented.



Dividends



Common stock dividends to stockholders declared for each of the second quarters of 2005 and 2004 were $0.51 per share. Quarterly dividends on our Series A preferred stock of $1.09375 per share were declared for each of the second quarters of 2005 and 2004. Quarterly dividends on our Series B preferred stock of $0.47656 per share were declared for the second quarter of 2005. The Series B preferred stock was issued in April 2004, and no dividends were declared until July 2004.



Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004



Income from Operations



Income from operations, defined as rental income less rental expenses (which includes operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses), decreased $4,296,000 or 25% in the six months ended June 30, 2005 compared to the same period in 2004. This decrease is attributable to an increase in rental income of $1,153,000, offset by an increase in rental expenses of $5,449,000.



The following table presents the change in income from operations for the six months ended June 30, 2005 compared with the same period in 2004, detailing amounts contributed by properties acquired, properties redeveloped, properties developed, and properties that remained stable during the period from January 1, 2004 to June 30, 2005 (in thousands):



|                                    | Acquisitions | Redevelopment+ | Development++ | Stabilized(1) | Total   
|----------------------------------- | ------------ | -------------- | ------------- | ------------- | --------
|                                    |              |                |               |               |         
|Rental income                       | $4,548       | $(515)         | $302          | $(3,182)      | $
1,153 
|Rental expenses:
Operating expenses | (780)        | (135)          | (29)          | (729)         | (1,673) 
|Real estate taxes                   | (532)        | (35)           | (11)          | (185)         | (763)   
|Depreciation and
amortization       | (1,806)      | 15             | (56)          | (141)         | (1,988) 
|General and administrative
expenses | -            | -              | -             | (1,025)       | (1,025) 
|Income from operations              | $1,430       | $(670)         | $206          | $(5,262)      | $(4,296)



+

Includes one five-building property transferred from operating to development on March 1, 2004, and one property acquired for redevelopment on April 21, 2004.

++

Includes two properties with a shell completion date of October 18, 2004.

(1)

Stabilized properties includes properties that were fully operating during the period.



The increase in rental income of $1,153,000 is primarily attributable to operating property acquisitions of approximately $88,900,000 in 2004, offset by a decrease in rental income on stabilized properties. The decrease in rental income of $3,182,000 on the stabilized properties is generally attributable to decreased rental rates on new leases, renewed leases, and blend and extend leases, as well as decreased occupancy rates.

30









The increases in operating expenses of $1,673,000 or 22%, real estate taxes of $763,000 or 15%, and depreciation and amortization of $1,988,000 or 16% are primarily due to additional expenses incurred for properties acquired during 2004. The increase of $729,000 in operating expenses on the stabilized properties is primarily due to increased property management personnel costs and increased repairs and maintenance expenses.



General and administrative expenses increased $1,025,000 or 33% in the first six months of 2005 compared to the same period in 2004, primarily as a result of increased personnel costs of approximately $1,002,000 for salaries, restricted stock expense, bonus accruals, and employer 401(K) matching expense.



Interest Expense



Total interest expense decreased $926,000 or 8% to $10,934,000 in the first six months of 2005 from $11,860,000 in the first six months of 2004, primarily as a result of a lower weighted average outstanding balance on the line of credit as well as increased capitalized interest in 2005. Interest associated with continuing operations increased $836,000 or 9% in the first six months of 2005 compared with 2004 primarily due to a lower interest allocation to discontinued operations of $313,000 in the first six months of 2005 as compared to $2,075,000 in the first six months of 2004 as presented in the table below (in thousands):



|                                             | 2005    |  | 2004     |  | Increase
(decrease)
|-------------------------------------------- | ------- |  | -------- |  | -------------------
|Interest included in continuing
operations   | $10,621 |  | $  9,785 |  | $   836            
|Interest included in discontinued
operations | 313     |  | 2,075    |  | (1,762)            
|                                             |         |  |          |  |                    
|Total interest                               | $10,934 |  | $11,860  |  | $  (926)           



Discontinued Operations



In December 2004, we sold four industrial properties in South San Francisco, California; one industrial property in Santa Rosa, California; one industrial property in Napa, California; two office properties in Seattle, Washington; one office property and a 4.3 acre parcel of land in San Diego, California; and an office building in Laguna Hills, California for net sale prices totaling $175,110,000, which resulted in an aggregate gain of $70,235,000. In January 2005, we sold an industrial property in San Diego, California for a sale price of $15,800,000, resulting in a gain of approximately $6,894,000. In addition, we recorded a gain of $250,000 from funds released from escrow in the first quarter of 2005 in connection with one of the properties we sold in December 2004.  In June 2005, we sold two office properties and three industrial properties in San Diego, California for $27,750,000, resulting in a gain of approximately $9,095,000. Net operating income relating to all of these properties is classified as discontinued operations for all periods presented.



Dividends



Common stock dividends to stockholders declared for each of the first and second quarters of 2005 and 2004 were $0.51 per share. Quarterly dividends on our Series A preferred stock of $1.09375 per share were declared for each of the first and second quarters of 2005 and 2004. Quarterly dividends on our Series B preferred stock of $0.47656 per share were declared for the first and second quarters of 2005. The Series B preferred stock was issued in April 2004, and no dividends were declared until July 2004.





31







LIQUIDITY AND CAPITAL RESOURCES



Cash Flows



Operating Activities



Net cash provided by operating activities decreased approximately $6,447,000 to $19,221,000 for the six months ended June 30, 2005 as compared to $25,668,000 for the same period in 2004. This decrease was primarily due to decreased rental receipts of approximately $9,236,000 resulting from the sale of 11 operating properties in December 2004 and six operating properties in the first six months of 2005, as well as decreased rental receipts of approximately $1,311,000 due to decreased occupancy and rental rates on existing properties.  The decrease in cash provided by operating activities is also due to increased payments of operating expenses of approximately $4,667,000 primarily due to timing of cash payments, the impact of the
acquisition of six operating properties in 2004, and higher repairs and maintenance and utility costs.  We also incurred additional general and administrative costs of approximately $1,319,000, primarily due to employee bonuses for 2004 that were
paid in January 2005. These decreases in cash provided by operating activities were partially offset by reduced payments of operating expenses of approximately $3,203,000 in the first six months of 2005 as compared to the same period in 2004 for the properties sold in 2004 and 2005, and cash received on notes receivable of approximately $6,840,000 in 2005.



Investing Activities



Net cash provided by investing activities increased approximately $82,791,000 to $28,971,000 for the six months ended June 30, 2005 as compared to cash used in investing activities of $53,820,000 for the same period in 2004. The increase in cash provided by investing activities was partly due to net proceeds from the sale of six operating properties in the first six months of 2005 of approximately $43,429,000. In addition, we acquired three operating properties, a redevelopment property, and three land parcels in the first six months of 2004 for approximately $46,641,000 compared to the acquisition of two land parcels in the first six months of 2005 for approximately $973,000, resulting in decreased spending for real estate investments in 2005 compared to the same period in 2004.



Financing Activities



Net cash used in financing activities increased approximately $95,368,000 to $69,902,000 for the six months ended June 30, 2005 as compared to cash provided by financing activities of $25,466,000 for the same period in 2004. The increase in cash used in financing activities was partly
due to increased dividend payments in the first six months of 2005 for the special dividend of approximately $53,548,000 paid in January 2005
resulting from 2004 gains on sales and dividends on the Series B preferred stock , as well as the
 payment of a mortgage of approximately $24,454,000 that matured in 2005 .
 In addition, cash provided by financing activities in the first six months of 2004 included
 funding from the Series B preferred stock offering of approximately $57,832,000.  These increases in cash used in the first six months of 2005 as compared to 2004
were partially offset by cash provided by
increased net borrowings of approximately $44,309,000 on our credit facility in 2005
to fund the special dividend and the paydown of the mortgage maturity.



Available Borrowings, Capital Resources, and Cash Balances



We expect to meet our long-term liquidity and capital requirements, such as funding capital expenditures, costs associated with lease renewals and re-leasing of space, the cost of acquisitions, 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 or the refinancing of existing indebtedness;

-

the sale of real estate investments; and

-

issuance of long-term debt and equity securities.





32











33











Our line of credit, which has a total commitment of $150 million plus an accordion feature for expansion of $50 million, had an outstanding balance of $44,163,000 and letters of credit issued and undrawn of approximately $11,246,000 at June 30, 2005, leaving approximately $144,591,000 of available borrowing capacity. We anticipate utilizing this available borrowing capacity and/or sale proceeds from real estate assets to fund our investing activities in 2005, including estimated remaining development and redevelopment costs of approximately $17 million and estimated remaining capital expenditures of approximately $9 million.



As of June 30, 2005, we had approximately $2,508,000 in cash and cash equivalents, including approximately $22,000 of restricted cash.  Restricted cash represents security deposits held in interest bearing cash deposit accounts in accordance with tenant leases. Unrestricted cash includes approximately $994,000 held in an investment account investing in money market instruments backed by U.S. government short-term securities. The balance of the unrestricted cash is in a demand deposit account which is used to fund our disbursements.



We anticipate that the cash flow generated by our real estate investments and funds available under our credit facility will be sufficient to meet our short-term liquidity requirements.



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 87% of our real estate investments served as collateral for our existing mortgage indebtedness and available borrowing under our credit facility as of June 30, 2005. Our ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at reasonable commercial rates.



We currently have a revolving credit facility with a bank group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line with an accordion feature that allows us at our option to expand the facility to $200 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 1.75%, depending on our leverage level. As of June 30, 2005, the facility had an outstanding balance of $44,163,000 and an effective interest rate of 4.64%.



On June 1, 2005, we paid off a 7.17% fixed rate mortgage that had matured for approximately $24,454,000 with sale proceeds and funding from our credit facility.  On June 21, 2005, we paid down a portion of a floating rate mortgage with a current interest rate of 5.46% in the amount of $6,930,000 with proceeds from the sale of operating properties.





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Mortgage loans payable at June 30, 2005 consist of the following (in thousands):



|                                          |                     |                                 |          | Collateral as of June 30, 2005
|----------------------------------------- | ------------------- | ------------------------------- | -------- | ------------------------------
|Lender                                    | Maturity Date       | Interest Rate at
June 30, 2005+ | Balance  | Number of
Properties          
|Security Life of Denver
Insurance Company | Sept. 1, 2005(1)    | 3.00%(2)                        | $ 11,312 | 3                             
|Nationwide Life
Insurance                 | November 1, 2005(3) | 4.61%                           | 16,758   | 3                             
|Prudential Insurance                      | July 31, 2006       | 8.90%                           | 7,316    | 1                             
|Prudential Insurance                      | July 31, 2006       | 6.91%                           | 12,341   | 2                             
|Union Bank                                | November 19, 2006   | 5.46%(4)                        | 12,881   | 6                             
|TIAA-CREF                                 | December 1, 2006    | 7.95%                           | 20,214   | 2                             
|TIAA-CREF                                 | June 1, 2007        | 7.17%                           | 33,193   | 5                             
|John Hancock                              | December 1, 2008    | 4.60%                           | 11,800   | 5                             
|Sun Life Assurance Co.                    | April 1, 2009       | 7.00%                           | 1,577    | 1                             
|Sun Life Assurance Co.                    | April 1, 2009       | 7.25%                           | 1,418    | *                             
|TIAA-CREF                                 | June 1, 2009        | 7.17%                           | 38,770   | 7                             
|John Hancock                              | December 1, 2010    | 4.95%                           | 27,900   | 2(5)                          
|Washington Mutual                         | August 1, 2011      | 4.49%(6)                        | 15,821   | 5                             
|Woodmen of the World                      | July 1, 2012        | 7.23%                           | 6,963    | 1                             
|TIAA-CREF                                 | April 1, 2013       | 5.60%                           | 47,063   | 5                             
|Bank of America                           | November 1, 2013    | 5.45%                           | 9,900    | 1                             
|Bank of America                           | December 1, 2013    | 5.55%                           | 11,400   | 4                             
|JP Morgan                                 | December 1, 2013    | 5.74%                           | 24,543   | 1                             
|Thrivent Financial                        | August 15, 2029     | 5.94%                           | 5,418    | 1                             
|                                          | Total               |                                 | $316,588 | 55                            



+

Interest rates are fixed unless otherwise indicated by footnote.

(1)

At maturity, the loan balance is expected to be paid in full .

(2)

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly). Effective July 3, 2003, the floating 30-day LIBOR rate was swapped to a fixed rate of 1.595% for an all-in rate of 2.995% until maturity.

(3)

Maturity date of November 1, 2005 represents the first of two interest rate reset dates, at which time we may opt to reject the new rate and pay the outstanding balance on the mortgage. We expect
to pay the outstanding balance in full
 on November 1, 2005 .

(4)

Floating rate based on LIBOR plus 1.60%. The current rate of 5.46% is fixed until June 16, 2006, at which time we have the option of fixing the LIBOR rate for a period of 1 month, 3 months, 6 months, or 12 months.

(5)

In addition, a letter of credit in the amount of $5,720,000 serves as security for this loan pending replacement of the Laguna Hills Square property sold in 2004, which previously served as collateral for this loan.

(6)

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

*

The two Sun Life Assurance Company mortgages are collateralized by a single property.



The 55 operating properties that served as collateral for our mortgages had a net book value of approximately $477,406,000 as of June 30, 2005. We were in compliance with the covenants and requirements of our various mortgage loans payable during the six months ended June 30, 2005 and during the year ended December 31, 2004.





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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS



The following summarizes our contractual obligations and other commitments at June 30, 2005, 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                                    | $           -                          
|Mortgage loans payable                               | 33,798                                 
|Interest obligations on bank loan
and mortgage loans | 20,252                                 
|Construction contract
commitments                    | 8,963                                  
|Stand-by letters of credit                           | 11,246                                 
|Total                                                | $ 74,259                               





RELATED PARTY TRANSACTIONS



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 six months ended June 30, 2004, we paid Bartko, Zankel, Tarrant & Miller approximately $200 in legal fees.  During the six months ended June 30, 2005, no payments were made to the firm.



OFF-BALANCE SHEET ARRANGEMENTS



At June 30, 2005 and December 31, 2004, we did not have any 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.



As of June 30, 2005, we had outstanding undrawn letters of credit against our credit facility of approximately $11,246,000. The letters of credit were required by our various lenders as substitution for insurance and real estate impound accounts, as temporary substitution of collateral for a sold property, and as security for seismic upgrade obligations on collateral properties.



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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:



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



A significant portion of our leases is scheduled to expire in the near future. As of June 30, 2005, leases representing 11%, 15%, 16%, and 26% of our total annualized base rent were scheduled to expire during the remainder of 2005, and in 2006, 2007, and 2008, respectively. If the rental rates upon re-leasing or renewal of leases are significantly lower than current rates, or if we are unable to lease a significant amount of space on economically favorable terms, or at all, our results of operations could suffer. We are subject to the risk that, upon expiration, some of these or other leases will not be renewed, the space may not be re-leased, or the terms of renewal or re-leasing, including the costs of required renovations or concessions to tenants, may be less favorable than current lease terms. We could face difficulties re-leasing 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 re-leasing of space. Similarly, our rental income has in the past and could in the future be reduced by vacancies resulting from lease expirations or by rental rates that are less favorable than our current terms. If we are unable to promptly renew leases or re-lease space 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 40% of our base rent, and the loss of one or more of these tenants, as well as the inability to re-lease this space on equivalent terms, could harm our results of operations.



As of June 30, 2005, our 25 largest tenants accounted for approximately 40% of our total annualized base rent. In the event that one or more of our larger tenants were to vacate or not renew their lease with us, the re-leasing of the square footage previously leased by these tenants may require considerable capital expenditures and an indeterminate period of time. Losses of our larger tenants and our inability to re-lease vacated properties on favorable terms could limit our ability to make distributions to our stockholders.



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 or a significant earthquake.



As of June 30, 2005, approximately 43% of our total annualized base rent was generated by our properties located in the State of California. As a result of this geographic concentration, a downturn in the performance of the commercial real estate markets and the local economies in various areas within California could adversely 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 commercial 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 29% of our net operating income, including income from discontinued operations, for the six months ended June 30, 2005 was generated by our 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. The market for commercial space in the San Francisco Bay Area is recovering from of one of the most severe downturns of the past several decades. This downturn was precipitated by the unprecedented collapse of many technology and so-called dot com businesses that, during the 1998-2001 period, had been chiefly responsible for generating demand for, and increased prices of, local office properties. This downturn has harmed, and may continue to harm, our

36







results of operations. In the event economic conditions in the San Francisco Bay Area fail to improve or worsen, it could harm the market value of our properties, the results derived from such properties 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 the 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, including 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, and interest rate levels;

-

the availability of financing; and

-

potential liabilities under environmental and other laws.



If our tenants experience financial difficulty or seek the protection of bankruptcy laws, our cash from operating activities could suffer.



Our commercial tenants may, from time to time, experience downturns in their business operations and finances due to adverse economic conditions or other reasons, 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 cash flows and, as a result, 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 the tenants lease and cause a reduction in our cash flow. During the six months ended June 30, 2005, one of our tenants, representing less than 1% of our year-to-date base rent, had 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 few major tenants may harm us and our ability to pay dividends to our stockholders.



Our dependence on smaller businesses to rent office space could negatively 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, all of which could harm our business as well as our ability to pay dividends.



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



To supplement the reduction in net operating income caused by the higher than usual leasing turnover we have been experiencing, we expanded our acquisitions program in 2003 and during the first ten months of 2004. Acquisitions totaled approximately $85.1 million in 2003 and $103.6 million in 2004. The goal of our acquisitions program was to purchase additional properties, the net operating income from which would supplement the declines in net operating income we have been experiencing and will experience from rental rate declines and from our high lease expiration rates in 2004 and 2005. Due to the fact that we were unable to acquire sufficient properties that met our targets for return on investment at the end of 2004, we determined that we would focus instead on selling individual properties in the current seller-favorable market in order to supplement our net operating income with gains from sales. However,
 as part of our continuing strategy of
repositioning ourselves as a multi-tenant REIT, we intend to continue to pursue acquisitions of additional properties that meet our acquisition criteria as opportunities arise. 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.



We may abandon development opportunities resulting in direct expenses to us.



From time to time, we may invest significant time and resources exploring development opportunities that we subsequently decide are not in our best interest. The costs of investigating these opportunities will still be considered a direct expense and may harm our financial condition.



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 the greater of $100,000 or 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 properties located in California, which represent approximately 43% of our portfolios annualized base rent as of June 30, 2005. Some losses, including 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 terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 under our All Risks property policies, liability policies, primary and umbrella/excess policies. 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.



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 insurance policy and, additionally, to the extent that the damage exceeds the policys maximum coverage, we would not have insurance compensation for that portion of the losses. 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. Furthermore, the current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language. Continued increases in the costs of insurance coverage or increased limits or exclusions in insurance policy coverage could negatively affect our financial results.

38







If we fail to maintain our qualification as a real estate investment trust, 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 real estate investment trust (REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. We believe that we have been organized and have operated in a manner so as to have satisfied the REIT qualification requirements since 1985. However, the IRS could challenge our qualification as a REIT 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 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 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 negatively 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 Internal Revenue Code to make any distributions. As a result, disqualification as a REIT would harm 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.



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 REIT 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 our 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.



39







As a REIT, we are subject to complex constructive ownership rules that limit any holder to 9.8% in value of our outstanding common and preferred stock, taken together. 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 9.8% in value of our outstanding common and preferred stock, taken together, or more than 9.8% (in value or number) 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 common and preferred stock, taken together, 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 common or preferred 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, our Chairman of the Board and Chief Executive Officer, 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 ownership limitations described above are applied using the constructive ownership rules of the Internal Revenue Code. These rules are complex and may cause common or preferred 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 9.8% of our outstanding common or preferred stock or the acquisition of an interest in an entity that owns our common or preferred stock by an individual or entity could cause that individual or entity or another individual or entity to constructively own stock in excess of the limits and subject that stock to the ownership restrictions in our charter.



If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our stock.



Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, we cannot provide absolute assurance that these controls will always be effective.  There are inherent limitations on the effectiveness of internal controls including collusion, management override, and breakdowns in human judgment. Because of this, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal control or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our stock price.



40







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



We are highly dependent on the efforts of our senior officers.  While we believe that we could find suitable replacements for these key personnel, the loss of their services could harm our business.  Pursuant to the terms of his employment agreement with us, our founder Peter Bedford's term of employment as our chief executive officer is expected to continue until at least
December 31, 2007. James Moore, our former President and chief operating officer, retired as of June 30, 2005. Upon Mr. Moores announcement of his planned retirement in 2004, we restructured our organization and Stephen M. Silla assumed the position of chief operating officer, effective January 31, 2005. Further changes in our senior management and any future departures of key employees or other members of senior management could have a material adverse effect on our ability to implement our business strategy and on our results of operations.



The commercial real estate industry is highly competitive, and we compete with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us.



We have historically sought to grow our asset base through the acquisition of industrial and suburban office properties and portfolios of these properties, as well as through the development of new industrial and suburban office properties. Many real estate companies, including other REITs, compete with us in making bids to acquire new properties. The level of competition to acquire income-producing properties is largely measured by the capitalization rates at which properties are trading. The capitalization rate is the annual yield that property produces on the investment. Currently, capitalization rates are low due to the amount of capital available for investment and attractive debt financing terms. As a result, we may not be able to compete effectively with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us.



Many of our properties are located in markets with an oversupply of space, and our ability to compete effectively with other properties to attract tenants may be limited to the extent that competing properties may be newer, better capitalized or in more desirable locations than our properties.



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 has increased in recent years due to the softened U.S. economy. The number of competitive properties in a particular area could negatively impact 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 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.

41







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. We cannot assure you, however, that these Phase I assessments or our inspections have revealed all environmental liabilities and problems relating to this or any other of 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 relating to the investigation and remediation of environmental issues for properties currently or previously owned by us, or properties that 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.



Costs associated with moisture infiltration and resulting mold remediation may be significant.



Concern about indoor exposure to mold, fungi, and mycotoxins has been increasing because this exposure is allegedly linked to various adverse effects on health. Increasingly, insurance companies are excluding mold-related risks from their policy coverage, and it is now excluded from our coverage. Costs and potential liability stemming from tenant exposure to mold and the increased costs of renovating and remodeling buildings with exposure to mold could harm our financial position and results. We have in the past incurred costs for mold remediation in certain of our properties and may incur such costs in the future.



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, in the future we may incur costs to comply with the ADA with respect to both existing properties and properties acquired in the future, which could limit 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.

42







Our $150 million credit agreement and our mortgage loans are collateralized by approximately 87% of our total real estate assets, and in the event of default under any of these debt instruments, our lenders could foreclose on the collateral securing this indebtedness.



As of June 30, 2005, our $150 million credit facility was collateralized by mortgages on 19 properties that accounted for approximately 20% of our annualized base rent and approximately 18% of our total real estate assets. All of our mortgage loans were collateralized by 55 properties that accounted for approximately 69% of our annualized base rent and approximately 69% 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 would harm us, jeopardizing our qualification as a REIT and threatening our continued viability. In addition, upon the sale of any property subject to a mortgage loan or which forms part of the collateral for our credit facility, we would be required to apply the proceeds of any such sale first to pay off any mortgage loan on the property or (to the extent the total value of the collateral securing our credit facility after such sale is less than the total amount outstanding under the credit facility) to pay down our credit facility, as applicable.



Our $150 million credit agreement and some of our mortgage loans carry floating interest rates, and increases in market interest rates could harm our results of operations.



As of June 30, 2005, our $150 million credit facility had an outstanding balance of approximately $44.2 million, and we had other outstanding floating rate loans of $28.7 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 in recent years have benefited from low levels of interest rates. Should this trend in interest rates reverse itself, our operating results could be harmed.



We use borrowings to finance the acquisition, development and operation of properties and to repurchase our common stock, and we cannot assure you 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 March 31, 2007, 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.  Such financing may not be available to us on commercially reasonable terms, or at all, at the time we may require such financing.



A downturn in the economy could make it difficult for us to borrow money on favorable terms. If we are unable to borrow money on favorable terms, 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 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.



43







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



We have significant debt service obligations. As of June 30, 2005, we had total liabilities of approximately $391.2 million, excluding unused commitments under our credit facility, and total stockholders equity of approximately $346.6 million. Payments to service our outstanding debt obligations during the six months ended June 30, 2005 totaled approximately $15.6 million. 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, or for other purposes, subject to the restrictions contained in our debt instruments.



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 extensively 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. However, we have entered into a swap agreement to hedge our exposure to the variable interest rate on a mortgage with a remaining principal balance of approximately $11.3 million as of June 30, 2005. Even if we were to use derivative transactions more extensively, we would not be fully insulated 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.



An increase in market interest rates could cause the respective prices of our common stock and preferred stock to decrease.



One of the factors that may influence the respective market prices of our shares of common stock and preferred stock will be the annual dividend yield on the price paid for shares of our common stock or preferred stock as compared to yields on other financial instruments. An increase in market interest rates may lead prospective purchasers of our stock to seek a higher annual yield from their investments, which may adversely affect the respective market prices of our common stock and preferred stock. As of June 30, 2005, interest rates in the U.S. remained relatively low.



We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends.



Our existing debt instruments permit us to incur additional indebtedness and other liabilities, subject to the restrictions contained in those debt instruments. As of June 30, 2005, we had approximately $360.8 million of indebtedness outstanding. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends. As a result, we may not have sufficient funds to satisfy our dividend obligations relating to our preferred stock or pay dividends on our common stock, if we assume additional indebtedness.



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. Furthermore, 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 covenants have specific limits regarding our ability to pay quarterly dividends to stockholders.



44







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



Our ability to pay dividends on our common stock and preferred stock is further limited by the laws of Maryland. Under the Maryland General Corporation Law, a Maryland corporation may not make a distribution if, after giving effect to the distribution, either the corporation would not be able to pay indebtedness of the corporation as the indebtedness becomes due in the usual course of business or the corporations total assets would be less than the sum of the corporations total liabilities plus 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 or preferred 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, or if we would not be able to pay our indebtedness as it became due.







45







FINANCIAL PERFORMANCE



Our Funds From Operations (FFO) during the three and six months ended June 30, 2005 was $6,810,000 and $14,057,000, respectively. During the same periods in 2004, FFO was $12,226,000 and $23,870,000, respectively. Although 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. Presentation of this information provides the reader with an additional measure to compare the performance of equity 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. Furthermore, 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 available to common stockholders. The following table sets forth a reconciliation of the differences between our FFO and our net income available to common stockholders for the three and six months ended June 30, 2005 and 2004.





|                                                            | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------------------------- | --------------------------- | -------------------------
|                                                            | 2005                        | 2004                     
|Funds From Operations
(in thousands, except share amounts): |                             |                          
|Net income available to common stockholders                 | $    8,659                  | $    4,875               
|Adjustments:
Depreciation and amortization:                 |                             |                          
|Continuing operations                                       | 7,246                       | 6,550                    
|Discontinued operations                                     | -                           | 801                      
|Gain on sale of operating properties                        | (9,095)                     | -                        
|Funds From Operations                                       | $    6,810                  | $  12,226                
|Weighted average number of
common shares  diluted          | 15,795,296                  | 16,059,299               



46







Item 3. Quantitative and Qualitative 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. During 2003, we significantly increased our level of fixed rate debt to take advantage of historically low interest rates. 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.



We monitor our interest rate risk using a variety of techniques. The table below presents the principal amounts and related weighted average annual interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in thousands):



|                               | Twelve Month Period Ending June 30,
|------------------------------ | -----------------------------------
|                               | 2006                               
|Variable rate debt             | $  
1,246                          
|Weighted average
interest rate | 4.93%                              
|Fixed rate debt                | $32,553                            
|Weighted average
interest rate | 4.36%                              



As the table incorporates only those exposures that existed as of June 30, 2005, 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. If interest rates were to increase by 10%, or an average of 41 basis points, interest expense on our outstanding variable rate debt would increase by approximately $346,000 annually.



Item 4. Controls and Procedures



Our management, with the participation of our chief executive officer and chief financial officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2005. Based on that evaluation, the chief executive officer and chief financial officer concluded that our 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 our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

47







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, Use of Proceeds and Issuer Purchases of Equity Securities



The table below provides information with respect to shares of our common stock that we repurchased during the three months ended June 30, 2005.



|Period           | Total number of
shares purchased (1) | Average price
paid per share | Total number of
shares purchased as
part of publicly
announced program | Maximum number
of shares that may
yet be purchased
under the program (2)
|---------------- | ------------------------------------ | ---------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------------------
|April 1-30, 2005 | -                                    | -                            | -                                                                      | 1,484,019                                                               
|May 1-31, 2005   | 178,363                              | $21.81                       | 177,728                                                                | 1,305,656                                                               
|June 1-30, 2005  | -                                    | -                            | -                                                                      | 1,305,656                                                               
|Total            | 178,363                              | $21.81                       | 177,728                                                                | 1,305,656                                                               



(1)

During the second quarter of 2005, we acquired 635 shares of our common stock from our employees to satisfy payroll tax obligations upon the vesting of restricted stock. These acquisitions were not made pursuant to our publicly announced share repurchase program.



(2)

On July 7, 1998, we announced that our board of directors had authorized management to repurchase up to 3 million shares of our common stock through open market transactions. The board of directors subsequently approved increases in the number of share repurchases to 4.5 million shares in September 1999, then to 8 million shares in September 2000 and later to 10 million shares in January 2002.  The share repurchase program does not have an expiration date.



Item 3. Defaults upon Senior Securities



None



Item 4. Submission of Matters to Vote of Security Holders





We held our annual stockholders' meeting on May 11, 2005 to consider the following proposals:



1.

To elect five directors by the holders of our common stock for the ensuing year.



2.

To ratify the appointment by the Board of Directors of PricewaterhouseCoopers, LLP as our independent public accountants for the year ending December 31, 2005.



Both proposals were approved.  With respect to the first proposal, the stockholders elected each of the following five nominees to serve as a member of our Board of Directors until the next annual meeting of stockholders or until their earlier retirement, resignation or removal.  Votes for the directors were cast as follows:



48









|Director             |  | For        |  | Withheld
|-------------------- |  | ---------- |  | --------
|                     |  |            |  |         
|Peter B. Bedford     |  | 14,835,038 |  | 273,165 
|                     |  |            |  |         
|Peter Linneman       |  | 15,029,698 |  | 78,505  
|                     |  |            |  |         
|Bowen H. McCoy       |  | 15,028,853 |  | 79,350  
|                     |  |            |  |         
|Thomas H. Nolan, Jr. |  | 14,617,281 |  | 490,922 
|                     |  |            |  |         
|Martin I. Zankel     |  | 14,474,705 |  | 633,498 





Following are the results of the voting for proposal 2:



|   |                                                                                                                                                                  | For        | Against | Abstain | No Vote
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ------- | ------- | -------
|2. | To ratify the appointment by the Board of Directors of PricewaterhouseCoopers, LLP as our independent public accountants for the year ending December 31, 2005 . | 14,624,869 | 462,040 | 21,294  | -      









Item 5. Other Information



None





49









Item 6. Exhibits



A.

Exhibits

Exhibit No.

Exhibit





3.1(d)

Articles of Amendment and Restatement of Bedford Property Investors, Inc., filed on May 27, 2003, is incorporated herein by reference to Exhibit 3.1(d) to our Form 10-Q for the quarter ending June 30, 2003.



3.1(e)

Articles Supplementary relating to the Series A Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on August 4, 2003, is incorporated herein by reference to Exhibit 3.1(e) to our Form 10-Q for the quarter ending June 30, 2003.



3.1(f)

Articles Supplementary relating to the Series B Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on April 5, 2004, is incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A filed with the SEC on April 5, 2004.



3.2(b)

Second Amended and Restated Bylaws of Bedford Property Investors, Inc. are incorporated herein by reference to Exhibit 3.2(b) to our Form 10-Q for the quarter ending June 30, 2003.



4.4

Series A Cumulative Redeemable Preferred Stock Registration Rights Agreement, dated August 5, 2003, between Bedford Property Investors, Inc. and RBC Dain Rauscher Inc. is incorporated herein by reference to Exhibit 4.4 to our Form 10-Q for the quarter ending June 30, 2003.



31.1*

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2*

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1*

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.



32.2*

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



50







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:  August 9, 2005



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





51







EXHIBIT INDEX

Exhibit No.

Exhibit



3.1(d)

Articles of Amendment and Restatement of Bedford Property Investors, Inc., filed on May 27, 2003, is incorporated herein by reference to Exhibit 3.1(d) to our Form 10-Q for the quarter ending June 30, 2003.



3.1(e)

Articles Supplementary relating to the Series A Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on August 4, 2003, is incorporated herein by reference to Exhibit 3.1(e) to our Form 10-Q for the quarter ending June 30, 2003.



3.1(f)

Articles Supplementary relating to the Series B Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on April 5, 2004, is incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A filed with the SEC on April 5, 2004.



3.2(b)

Second Amended and Restated Bylaws of Bedford Property Investors, Inc. are incorporated herein by reference to Exhibit 3.2(b) to our Form 10-Q for the quarter ending June 30, 2003.



4.4

Series A Cumulative Redeemable Preferred Stock Registration Rights Agreement, dated August 5, 2003, between Bedford Property Investors, Inc. and RBC Dain Rauscher Inc. is incorporated herein by reference to Exhibit 4.4 to our Form 10-Q for the quarter ending June 30, 2003.



31.1*

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2*

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1*

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.



32.2*

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





52