##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-Q



---

(Mark One)

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

For the quarterly period ended June 30, 2006

OR



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

Commission file number 1-14162



---

GLENBOROUGH REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 94-3211970                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

400 South El Camino Real, Suite 1100 San Mateo, California 94402-1708

(Address of principal executive offices)

(650) 343-9300

Registrants telephone number, including area code



---

Securities registered pursuant
to Section 12(b) of the Act:



|                                                            |  |                                           
|----------------------------------------------------------- |  | ------------------------------------------
|Title of each class:                                        |  | Name of each exchange on which registered:
|Common Stock, $.001 par value                               |  | New York Stock Exchange                   
|73/4% Series A Convertible Preferred
Stock, $.001 par value |  | New York Stock Exchange                   

Securities registered pursuant to Section 12(g) of the Act: None



---

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.    x  Yes ̈No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x    Accelerated Filer ̈Non-accelerated filer ̈

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

As of August 7, 2006, 32,246,732 shares of Common Stock ($.001 par value) and 3,740,807 shares of 7.75% Series A Convertible Preferred Stock ($.001
par value, $25.00 per share liquidation preference) were outstanding.



---



---

##### Table of Contents

INDEX

GLENBOROUGH REALTY TRUST INCORPORATED



|              |  |                                                                                         |  |         
|------------- |  | --------------------------------------------------------------------------------------- |  | --------
|              |  |                                                                                         |  | Page No.
|PART I        |  | FINANCIAL INFORMATION                                                                   |  |         
|              |  |                                                                                        
|Item 1.       |  | Consolidated Financial Statements of Glenborough Realty Trust Incorporated (Unaudited): |  |         
|              |  |                                                                                        
|              |  | Consolidated Balance Sheets at June 30, 2006 and December 31, 2005                      |  | 3       
|              |  |                                                                                        
|              |  | Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 |  | 4       
|              |  |                                                                                        
|              |  | Consolidated Statements of Operations for the six months ended June 30, 2006 and 2005   |  | 5       
|              |  |                                                                                        
|              |  | Consolidated Statement of Stockholders Equity for the six months ended June 30, 2006   |  | 6       
|              |  |                                                                                        
|              |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005   |  | 7-8     
|              |  |                                                                                        
|              |  | Notes to Consolidated Financial Statements                                              |  | 9-32    
|              |  |                                                                                        
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations   |  | 33-46   
|              |  |                                                                                        
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                              |  | 47      
|              |  |                                                                                        
|Item 4.       |  | Controls and Procedures                                                                 |  | 47-48   
|              |  |                                                                                        
|PART II       |  | OTHER INFORMATION                                                                       |  |         
|              |  |                                                                                        
|Item 1.       |  | Legal Proceedings                                                                       |  | 48      
|              |  |                                                                                        
|Item 1A.      |  | Risk Factors                                                                            |  | 48      
|              |  |                                                                                        
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                             |  | 48      
|              |  |                                                                                        
|Item 3.       |  | Defaults Upon Senior Securities                                                         |  | 48      
|              |  |                                                                                        
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                     |  | 48      
|              |  |                                                                                        
|Item 5.       |  | Other Information                                                                       |  | 49      
|              |  |                                                                                        
|Item 6.       |  | Exhibits                                                                                |  | 49-50   
|              | 
|SIGNATURES    |  | 51                                                                                     
|              | 
|EXHIBIT INDEX |  | 52-53                                                                                  



2



---

##### Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)



|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                           |  | June 30, 2006 |           |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                                     |  |               |           |   |                   |   |           |  
|Rental properties, gross                                                                                                                                                                   |  | $             | 1,317,638 |   |                   | $ | 1,296,057 |  
|Accumulated depreciation and amortization                                                                                                                                                  |  |               | (200,712  | ) |                   |   | (186,449  | )
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|Rental properties, net                                                                                                                                                                     |  |               | 1,116,926 |   |                   |   | 1,109,608 |  
|                                                                                                                                                                                           |  |              
|Properties held for sale                                                                                                                                                                   |  |               | 16,088    |   |                   |   | 103,548   |  
|Investments in land and development                                                                                                                                                        |  |               | 51,057    |   |                   |   | 51,750    |  
|Investments in unconsolidated joint ventures                                                                                                                                               |  |               | 10,781    |   |                   |   | 12,040    |  
|Mortgage loans receivable                                                                                                                                                                  |  |               | 11,974    |   |                   |   | 11,231    |  
|Leasing and financing costs (net of accumulated amortization of $12,369 and $17,664 as of June 30, 2006 and December 31, 2005,
respectively)                                               |  |               | 20,815    |   |                   |   | 21,465    |  
|Straight-line rent receivable                                                                                                                                                              |  |               | 19,131    |   |                   |   | 16,874    |  
|Cash and cash equivalents                                                                                                                                                                  |  |               | 5,746     |   |                   |   | 3,661     |  
|Restricted cash                                                                                                                                                                            |  |               | 5,228     |   |                   |   | 5,720     |  
|Accounts receivable, net                                                                                                                                                                   |  |               | 3,128     |   |                   |   | 2,292     |  
|Other assets, net                                                                                                                                                                          |  |               | 8,281     |   |                   |   | 7,941     |  
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|TOTAL ASSETS                                                                                                                                                                               |  | $             | 1,269,155 |   |                   | $ | 1,346,130 |  
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                       |  |               |           |   |                   |   |           |  
|Liabilities:                                                                                                                                                                               |  |               |           |   |                   |   |           |  
|Mortgage loans                                                                                                                                                                             |  | $             | 667,927   |   |                   | $ | 659,870   |  
|Unsecured bank line of credit                                                                                                                                                              |  |               | 88,734    |   |                   |   | 106,669   |  
|Accrued common and preferred stock dividends                                                                                                                                               |  |               | 10,667    |   |                   |   | 13,610    |  
|Obligations associated with properties held for sale                                                                                                                                       |  |               | 66        |   |                   |   | 45,855    |  
|Other liabilities                                                                                                                                                                          |  |               | 38,871    |   |                   |   | 41,276    |  
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                                          |  |               | 806,265   |   |                   |   | 867,280   |  
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|Commitments and contingencies (Note 18)                                                                                                                                                    |  |               |           |   |                   |   |           |  
|                                                                                                                                                                                           |  |              
|Minority interest                                                                                                                                                                          |  |               | 31,465    |   |                   |   | 31,206    |  
|                                                                                                                                                                                           |  |              
|Stockholders Equity:                                                                                                                                                                      |  |               |           |   |                   |   |           |  
|Common stock, $0.001 par value, 188,000,000 shares authorized, 32,202,521 and 33,710,400 shares issued and outstanding at June 30, 2006
and December 31, 2005, respectively                |  |               | 32        |   |                   |   | 34        |  
|Convertible preferred stock, $0.001 par value, 12,000,000 shares authorized, $25.00 liquidation preference, 3,740,277 shares issued and
outstanding at June 30, 2006 and December 31, 2005 |  |               | 4         |   |                   |   | 4         |  
|Additional paid-in capital                                                                                                                                                                 |  |               | 720,319   |   |                   |   | 751,183   |  
|Distributions in excess of accumulated earnings                                                                                                                                            |  |               | (288,930  | ) |                   |   | (303,577  | )
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                                                                 |  |               | 431,425   |   |                   |   | 447,644   |  
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                 |  | $             | 1,269,155 |   |                   | $ | 1,346,130 |  
|                                                                                                                                                                                           |  |               |           |   |                   |   |           |  

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



3



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended June 30, 2006 and 2005

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                |  | 2006 |            |   | 2005 |  
|OPERATING REVENUE                                                                                               |  |      |            |   |      |   |            |  
|Rental revenue                                                                                                  |  | $    | 38,776     |   |      | $ | 33,609     |  
|Tenant reimbursements                                                                                           |  |      | 5,731      |   |      |   | 3,819      |  
|Fees and reimbursements, including from related parties                                                         |  |      | 2,111      |   |      |   | 1,359      |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Total operating revenue                                                                                         |  |      | 46,618     |   |      |   | 38,787     |  
|                                                                                                                |  |      |            |   |      |   |            |  
|OPERATING EXPENSES                                                                                              |  |      |            |   |      |   |            |  
|Property operating expenses                                                                                     |  |      | 15,079     |   |      |   | 12,056     |  
|General and administrative                                                                                      |  |      | 3,799      |   |      |   | 3,925      |  
|Depreciation and amortization                                                                                   |  |      | 13,908     |   |      |   | 11,777     |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Total operating expenses                                                                                        |  |      | 32,786     |   |      |   | 27,758     |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Interest and other income                                                                                       |  |      | 529        |   |      |   | 615        |  
|Equity in earnings of unconsolidated joint ventures                                                             |  |      | 19,713     |   |      |   | 169        |  
|Interest expense                                                                                                |  |      | (11,615    | ) |      |   | (8,683     | )
|Loss on early extinguishment of debt                                                                            |  |      | (103       | ) |      |   |           |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Income before minority interest, discontinued operations and gain on sale of real estate assets                 |  |      | 22,356     |   |      |   | 3,130      |  
|Minority interest (including share of discontinued operations and gain on sale of real estate assets)           |  |      | (2,643     | ) |      |   | (1,005     | )
|                                                                                                                |  |      |            |   |      |   |            |  
|Income before discontinued operations and gain on sale of real estate assets                                    |  |      | 19,713     |   |      |   | 2,125      |  
|Discontinued operations (including net gain (loss) on sales of $(69) and $9,309 in 2006 and 2005, respectively) |  |      | 220        |   |      |   | 11,666     |  
|Gain on sale of real estate assets                                                                              |  |      | 10,506     |   |      |   |           |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Net income                                                                                                      |  |      | 30,439     |   |      |   | 13,791     |  
|Preferred dividends                                                                                             |  |      | (1,811     | ) |      |   | (1,812     | )
|                                                                                                                |  |      |            |   |      |   |            |  
|Net income available to Common Stockholders                                                                     |  | $    | 28,628     |   |      | $ | 11,979     |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Basic Income Per Share Data:                                                                                    |  |      |            |   |      |   |            |  
|Continuing operations (including gain on sale of real estate assets of $0.30 in 2006)                           |  | $    | 0.88       |   |      | $ | 0.03       |  
|Discontinued operations                                                                                         |  |      | 0.01       |   |      |   | 0.30       |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Net income available to Common Stockholders                                                                     |  | $    | 0.89       |   |      | $ | 0.33       |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Basic weighted average shares outstanding                                                                       |  |      | 32,029,830 |   |      |   | 35,921,157 |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Diluted Income Per Share Data:                                                                                  |  |      |            |   |      |   |            |  
|Continuing operations (including gain on sale of real estate assets of $0.28 in 2006)                           |  | $    | 0.86       |   |      | $ | 0.03       |  
|Discontinued operations                                                                                         |  |      | 0.01       |   |      |   | 0.30       |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Net income available to Common Stockholders                                                                     |  | $    | 0.87       |   |      | $ | 0.33       |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Diluted weighted average shares outstanding                                                                     |  |      | 38,043,064 |   |      |   | 39,159,087 |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Dividends declared per common share outstanding                                                                 |  | $    | 0.275      |   |      | $ | 0.35       |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Dividends declared per preferred share outstanding                                                              |  | $    | 0.48       |   |      | $ | 0.48       |  
|                                                                                                                |  |      |            |   |      |   |            |  

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



4



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

For the six months ended June 30, 2006 and 2005

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                                                            |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                            |  | 2006 |            |   | 2005 |  
|OPERATING REVENUE                                                                                                                                           |  |      |            |   |      |   |            |  
|Rental revenue                                                                                                                                              |  | $    | 76,878     |   |      | $ | 66,467     |  
|Tenant reimbursements                                                                                                                                       |  |      | 10,761     |   |      |   | 7,345      |  
|Fees and reimbursements, including from related parties                                                                                                     |  |      | 2,999      |   |      |   | 2,454      |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Total operating revenue                                                                                                                                     |  |      | 90,638     |   |      |   | 76,266     |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|OPERATING EXPENSES                                                                                                                                          |  |      |            |   |      |   |            |  
|Property operating expenses                                                                                                                                 |  |      | 30,718     |   |      |   | 25,025     |  
|General and administrative                                                                                                                                  |  |      | 7,781      |   |      |   | 7,210      |  
|Depreciation and amortization                                                                                                                               |  |      | 27,415     |   |      |   | 23,510     |  
|Provision for impairment of real estate assets                                                                                                              |  |      |           |   |      |   | 5,097      |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Total operating expenses                                                                                                                                    |  |      | 65,914     |   |      |   | 60,842     |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Interest and other income                                                                                                                                   |  |      | 1,029      |   |      |   | 1,645      |  
|Equity in earnings of unconsolidated joint ventures                                                                                                         |  |      | 19,812     |   |      |   | 302        |  
|Interest expense                                                                                                                                            |  |      | (22,204    | ) |      |   | (16,817    | )
|Loss on early extinguishment of debt                                                                                                                        |  |      | (103       | ) |      |   | (561       | )
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Income (loss) before minority interest, discontinued operations, gain on sale of real estate assets and cumulative effect of change in
accounting principle |  |      | 23,258     |   |      |   | (7         | )
|Minority interest (including share of discontinued operations and gain on sale of real estate assets)                                                       |  |      | (3,201     | ) |      |   | 2,705      |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Income before discontinued operations, gain on sale of real estate assets and cumulative effect of change in accounting
principle                           |  |      | 20,057     |   |      |   | 2,698      |  
|Discontinued operations (including net gain on sales of $7,671 and $26,629 in 2006 and 2005, respectively)                                                  |  |      | 7,516      |   |      |   | (25,730    | )
|Gain on sale of real estate assets                                                                                                                          |  |      | 10,506     |   |      |   |           |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Income (loss) before cumulative effect of change in accounting principle                                                                                    |  |      | 38,079     |   |      |   | (23,032    | )
|Cumulative effect of change in accounting principle (see Note 17)                                                                                           |  |      | 277        |   |      |   |           |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Net income (loss)                                                                                                                                           |  |      | 38,356     |   |      |   | (23,032    | )
|Preferred dividends                                                                                                                                         |  |      | (3,623     | ) |      |   | (3,624     | )
|Dividends declared on redeemed preferred stock                                                                                                              |  |      |           |   |      |   | (596       | )
|Premium and write-off of original issuance costs on preferred stock redemption and repurchases                                                              |  |      |           |   |      |   | (5,309     | )
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Net income (loss) available to Common Stockholders                                                                                                          |  | $    | 34,733     |   |      | $ | (32,561    | )
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Basic Income (Loss) Per Share Data:                                                                                                                         |  |      |            |   |      |   |            |  
|Continuing operations (including gain on sale of real estate assets of a $0.30 in 2006)                                                                     |  | $    | 0.85       |   |      | $ | (0.25      | )
|Discontinued operations                                                                                                                                     |  |      | 0.21       |   |      |   | (0.66      | )
|Cumulative effect of change in accounting principle                                                                                                         |  |      | 0.01       |   |      |   |           |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Net income (loss) available to Common Stockholders                                                                                                          |  | $    | 1.07       |   |      | $ | (0.91      | )
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Basic weighted average shares outstanding                                                                                                                   |  |      | 32,329,709 |   |      |   | 35,870,534 |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Diluted Income (Loss) Per Share Data:                                                                                                                       |  |      |            |   |      |   |            |  
|Continuing operations (including gain on sale of real estate assets of a $0.30 in 2006)                                                                     |  | $    | 0.85       |   |      | $ | (0.25      | )
|Discontinued operations                                                                                                                                     |  |      | 0.21       |   |      |   | (0.66      | )
|Cumulative effect of change in accounting principle                                                                                                         |  |      | 0.01       |   |      |   |           |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Net income (loss) available to Common Stockholders                                                                                                          |  | $    | 1.07       |   |      | $ | (0.91      | )
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Diluted weighted average shares outstanding                                                                                                                 |  |      | 35,477,487 |   |      |   | 35,870,534 |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Dividends declared per common share outstanding                                                                                                             |  | $    | 0.625      |   |      | $ | 0.70       |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  
|Dividends declared per preferred share outstanding                                                                                                          |  | $    | 0.97       |   |      | $ | 0.97       |  
|                                                                                                                                                            |  |      |            |   |      |   |            |  

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



5



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the six months ended June 30, 2006

(in thousands)

(unaudited)



|                                                                     |  |              |   |  |                 |    |                          |        |       |                                              |   |   |       |   |         |   |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------------ | - |  | --------------- | -- | ------------------------ | ------ | ----- | -------------------------------------------- | - | - | ----- | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                                                     |  | Common Stock |   |  | Preferred Stock |    | AdditionalPaid-inCapital |        |       | Distributionsin excess
ofaccumulatedearnings |   |   | Total |  
|                                                                     |  | Shares       |   |  | ParValue        |    |                          | Shares |       | ParValue                                     |   |   |      
|Balance at December 31, 2005                                         |  | 33,710       |   |  | $               | 34 |                          |        | 3,740 |                                              | $ | 4 |       | $ | 751,183 |   |  | $ | (303,577 | ) |  | $ | 447,644 |  
|Exercise of stock options                                            |  | 294          |   |  |                 |   |                          |        |      |                                              |   |  |       |   | 4,655   |   |  |   |         |   |  |   | 4,655   |  
|Share-based compensation expense                                     |  |             |   |  |                 |   |                          |        |      |                                              |   |  |       |   | 787     |   |  |   |         |   |  |   | 787     |  
|Issuance of restricted common stock                                  |  | 14           |   |  |                 |   |                          |        |      |                                              |   |  |       |   |        |   |  |   |         |   |  |   |        |  
|Common stock repurchases                                             |  | (1,805       | ) |  |                 | (2 | )                        |        |      |                                              |   |  |       |   | (34,330 | ) |  |   |         |   |  |   | (34,332 | )
|Cancellation of stock grants                                         |  | (10          | ) |  |                 |   |                          |        |      |                                              |   |  |       |   |        |   |  |   |         |   |  |   |        |  
|Reallocation of limited partners interests in Operating Partnership |  |             |   |  |                 |   |                          |        |      |                                              |   |  |       |   | (1,699  | ) |  |   |         |   |  |   | (1,699  | )
|Dividends declared on common and preferred stock                     |  |             |   |  |                 |   |                          |        |      |                                              |   |  |       |   |        |   |  |   | (23,709  | ) |  |   | (23,709 | )
|Cumulative effect of change in accounting principle                  |  |             |   |  |                 |   |                          |        |      |                                              |   |  |       |   | (277    | ) |  |   |         |   |  |   | (277    | )
|Net income                                                           |  |             |   |  |                 |   |                          |        |      |                                              |   |  |       |   |        |   |  |   | 38,356   |   |  |   | 38,356  |  
|                                                                     |  |              |   |  |                 |    |                          |        |       |                                              |   |   |       |   |         |   |  |   |          |   |  |   |         |  
|Balance at June 30, 2006                                             |  | 32,203       |   |  | $               | 32 |                          |        | 3,740 |                                              | $ | 4 |       | $ | 720,319 |   |  | $ | (288,930 | ) |  | $ | 431,425 |  
|                                                                     |  |              |   |  |                 |    |                          |        |       |                                              |   |   |       |   |         |   |  |   |          |   |  |   |         |  

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



6



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2006 and 2005

(in thousands)

(unaudited)



|                                                                                            |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                            |  | 2006 |          |   | 2005 |  
|Cash flows from operating activities:                                                       |  |      |          |   |      |   |          |  
|Net income (loss)                                                                           |  | $    | 38,356   |   |      | $ | (23,032  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:    |  |      |          |   |      |   |          |  
|Depreciation and amortization (including discontinued operations)                           |  |      | 28,094   |   |      |   | 29,949   |  
|Amortization of loan fees, included in interest expense (including discontinued operations) |  |      | 1,091    |   |      |   | 981      |  
|Accrued interest on mortgage loans receivable                                               |  |      | (743     | ) |      |   | (701     | )
|Minority interest in income from operations                                                 |  |      | 3,201    |   |      |   | (2,705   | )
|Equity in earnings of unconsolidated joint ventures                                         |  |      | (19,812  | ) |      |   | (302     | )
|Distributions of earnings from unconsolidated joint ventures                                |  |      | 2,798    |   |      |   |         |  
|Gain on sales of real estate assets                                                         |  |      | (10,506  | ) |      |   |         |  
|Gain on sales of real estate assets (included in discontinued operations)                   |  |      | (7,671   | ) |      |   | (26,629  | )
|Loss on early extinguishment of debt (including discontinued operations)                    |  |      | 103      |   |      |   | 3,073    |  
|Provision for impairment of real estate assets (including discontinued operations)          |  |      | 561      |   |      |   | 58,236   |  
|Cumulative effect of change in accounting principle                                         |  |      | (277     | ) |      |   |         |  
|Stock-based compensation                                                                    |  |      | 787      |   |      |   | 629      |  
|Increase in other assets                                                                    |  |      | (5,440   | ) |      |   | (14,637  | )
|Increase (decrease) in other liabilities                                                    |  |      | (4,991   | ) |      |   | 1,621    |  
|                                                                                            |  |      |          |   |      |   |          |  
|Net cash provided by operating activities                                                   |  |      | 25,551   |   |      |   | 26,483   |  
|                                                                                            |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                                       |  |      |          |   |      |   |          |  
|Net proceeds from sales of real estate assets                                               |  |      | 128,975  |   |      |   | 115,262  |  
|Acquisitions of rental properties                                                           |  |      | (48,269  | ) |      |   | (34,022  | )
|Payments for capital and tenant improvements                                                |  |      | (7,735   | ) |      |   | (13,208  | )
|Investments in land and development                                                         |  |      | (2,144   | ) |      |   | (4,265   | )
|Net investments in unconsolidated joint ventures                                            |  |      | (6,362   | ) |      |   |         |  
|Distributions from unconsolidated joint ventures                                            |  |      | 24,989   |   |      |   | 380      |  
|Principal payments from mortgage loans receivable                                           |  |      |         |   |      |   | 9,500    |  
|                                                                                            |  |      |          |   |      |   |          |  
|Net cash provided by investing activities                                                   |  |      | 89,454   |   |      |   | 73,647   |  
|                                                                                            |  |      |          |   |      |   |          |  
|Cash flows from financing activities:                                                       |  |      |          |   |      |   |          |  
|Borrowings from mortgage loans                                                              |  |      | 129,628  |   |      |   | 69,250   |  
|Repayment of mortgage loans                                                                 |  |      | (166,571 | ) |      |   | (78,560  | )
|Borrowings from line of credit                                                              |  |      | 94,126   |   |      |   | 119,487  |  
|Repayment of line of credit                                                                 |  |      | (112,061 | ) |      |   | (96,688  | )
|Payment of deferred financing costs                                                         |  |      | (625     | ) |      |   | (1,634   | )
|Prepayment penalties on loan payoffs                                                        |  |      | (34      | ) |      |   | (2,725   | )
|Contributions from minority interest holders                                                |  |      | 100      |   |      |   | 120      |  
|Distributions to minority interest holders                                                  |  |      | (2,117   | ) |      |   | (2,102   | )
|Dividends paid to common and preferred stockholders                                         |  |      | (26,652  | ) |      |   | (28,853  | )
|Proceeds from issuance of common stock, net of offering costs                               |  |      |         |   |      |   | (158     | )
|Preferred stock redemption                                                                  |  |      |         |   |      |   | (77,748  | )
|Dividends paid on redeemed preferred stock                                                  |  |      |         |   |      |   | (2,102   | )
|Premium on preferred stock redemption                                                       |  |      |         |   |      |   | (1,857   | )
|Repurchases of common stock                                                                 |  |      | (34,332  | ) |      |   |         |  
|Exercise of stock options                                                                   |  |      | 4,655    |   |      |   | 2,269    |  
|                                                                                            |  |      |          |   |      |   |          |  
|Net cash used for financing activities                                                      |  |      | (113,883 | ) |      |   | (101,301 | )
|                                                                                            |  |      |          |   |      |   |          |  

continued

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



7



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the three months ended
June 30, 2006 and 2005

(in thousands)

(unaudited)



|                                                                                                         |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                         |  | 2006 |        |   | 2005 |  
|Net increase (decrease) in cash and cash equivalents                                                     |  | $    | 1,122  |   |      | $ | (1,171 | )
|Cash and cash equivalents at beginning of period after adjustment for properties held for sale           |  |      | 3,661  |   |      |   | 6,003  |  
|Cash and cash equivalents at properties held for sale                                                    |  |      | 963    |   |      |   |       |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                               |  | $    | 5,746  |   |      | $ | 4,832  |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                                        |  |      |        |   |      |   |        |  
|Cash paid for interest (net of capitalized interest of $1,183 and $2,196 in 2006 and 2005, respectively) |  | $    | 21,107 |   |      | $ | 18,010 |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Supplemental disclosure of non-cash investing and financing activities:                                  |  |      |        |   |      |   |        |  
|Assumption of mortgage loan in acquisition of real estate                                                |  | $    |       |   |      | $ | 39,391 |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Mortgage loan receivable related to disposition of investment in land and development                    |  | $    |       |   |      | $ | (7,000 | )
|                                                                                                         |  |      |        |   |      |   |        |  
|Write-off of fully amortized leasing and financing costs                                                 |  | $    | 5,351  |   |      | $ | 418    |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Write-off of original issuance costs on preferred stock redemption                                       |  | $    |       |   |      | $ | 3,452  |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Reallocation of limited partners interests in Operating Partnership                                     |  | $    | (1,699 | ) |      | $ | 2,887  |  
|                                                                                                         |  |      |        |   |      |   |        |  
|Common and preferred stock dividends declared but not yet paid                                           |  | $    | 10,667 |   |      | $ | 14,490 |  
|                                                                                                         |  |      |        |   |      |   |        |  

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



8



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 1. ORGANIZATION

Glenborough Realty Trust Incorporated (the
Company) was incorporated in the State of Maryland on August 26, 1994. The Company commenced operations on January 1, 1996. The Company has elected to qualify as a real estate investment trust (REIT) under the
Internal Revenue Code. The common and preferred stock of the Company (the Common Stock and the Preferred Stock, respectively) are listed on the New York Stock Exchange (NYSE) under the trading symbols
GLB and GLB Pr A, respectively.

As of June 30, 2006, 32,202,521 shares of Common Stock and 3,740,277 shares of Preferred
Stock were issued and outstanding. Common and preferred shares authorized are 188,000,000 and 12,000,000, respectively. The issuance of 2,998,488 shares of Common Stock issuable upon redemption of 2,998,488 partnership units in the Operating
Partnership (as defined below), would result in 35,201,009 shares of Common Stock outstanding as of June 30, 2006. As of May 8, 2006, the Companys Board of Directors authorized the repurchase of up to 14,710,700 shares of Common
Stock and 3,450,000 shares of Preferred Stock. As of June 30, 2006, 10,726,316 shares of Common Stock and 1,543,700 shares of Preferred Stock have been repurchased at a total cost of approximately $213.0 million.

The Companys Preferred Stock has a $25.00 per share liquidation preference and is convertible at any time at the option of the holder thereof into shares of Common
Stock at an initial conversion price of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615 shares of Common Stock for each share of Series A Convertible Preferred Stock). As of January 16, 2003, the Series A Preferred
Stock may be redeemed at the option of the Company, in whole or in part, initially at 103.88% of the liquidation preference per share, and thereafter at prices declining to 100% of the liquidation preference on and after January 16, 2008, plus
in each case accumulated, accrued and unpaid dividends, if any, to the redemption date.

To maintain the Companys qualification as a REIT, no more
than 50% of the value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company
will not fail this test, the Companys Articles of Incorporation provide for certain restrictions on the transfer of the Common Stock to prevent further concentration of stock ownership.

The Company, through its majority owned subsidiaries, is engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of
various income-producing properties. The Companys principal consolidated subsidiary, in which it holds a 1% general partner interest and a 90.56% limited partner interest at June 30, 2006, is Glenborough Properties, L.P. (the
Operating Partnership). Each of the holders of the remaining interests in the Operating Partnership (OP Units) has the option to redeem its OP Units and to receive, at the option of the Company, in exchange for each OP Unit,
either (i) one share of common stock of the Company, or (ii) cash equal to the fair market value of one share of common stock of the Company. As of June 30, 2006, the Operating Partnership, directly and through the subsidiaries in
which it and the Company own 100% of the ownership interests, controls a portfolio of 45 real estate projects.

NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Basis of Presentation

The
accompanying financial statements present the consolidated financial position of the Company and its subsidiaries as of June 30, 2006 and December 31, 2005, and the consolidated results of operations of the Company and its subsidiaries for
the three and six months ended June 30, 2006 and 2005, and cash flows of the Company for the six months ended June 30, 2006 and 2005. All significant intercompany transactions, receivables and payables have been eliminated in
consolidation.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal accruals)
necessary to present fairly the financial position of the Company as of June 30, 2006 and December 31, 2005, the results of operations of the Company for the three and six months ended June 30, 2006 and 2005, and cash flows of the
Company for the six months ended June 30, 2006 and 2005. These financial statements should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2005.



9



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Reclassifications

Certain prior year balances have been reclassified to conform to the current year presentation, with no effect on consolidated results of operations, cash flows, or
stockholders equity.

Use of Estimates

The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity
investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (FIN 46 Revised). The Company has not entered into any arrangements which are considered special purpose entities. Certain of the entities through which and with which the Company
conducts business, including those described in Notes 6 and 8 have been deemed to be VIEs under the provisions of FIN 46 Revised. There are other alliances which are VIEs, but the Company is not the primary beneficiary of them.

Stock-Based Compensation

The Company has an employee stock incentive
plan and issues stock options and stock grants (restricted shares of common stock) to employees, officers and directors. Prior to January 1, 2006, the Company accounted for the stock options and stock grants in the plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Effective
January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards No. 123, (revised 2004) Share-Based Payment, using the modified prospective transition method. Under that transition
method, no restatement is necessary to compensation cost recognized in prior periods. SFAS 123(R) requires measurement of compensation cost for the stock grants at fair value on date of grant and recognition of compensation over the service period
for awards expected to vest.

See Note 17 for further discussion.

Rental Properties

Rental properties are stated at cost, net of
accumulated depreciation, unless circumstances indicate that such amount cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value. Estimated fair value: (i) is based upon the Companys
plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net
operating income based upon the age, construction and use of the building. The fulfillment of the Companys plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the
Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the
Companys properties could be materially different than current expectations.

Purchase accounting is applied to the assets and liabilities related to
real estate properties acquired by the Company subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards No. 141, Business Combinations, whereby the fair value of the real estate acquired is
allocated to the acquired tangible assets,



10



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

consisting of land, building and tenant
improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of at-market in-place leases and the value of tenant relationships, based in each case on their fair values.

The fair value of the tangible assets (which includes land, building and tenant improvements) of an acquired property is determined by valuing the
property as if it were vacant, and the as-if-vacant value is then allocated to land, building and tenant improvements based on managements determination of the relative fair values of these assets. Management determines the
as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering
current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods
based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In
allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using a discount rate which reflects the risks
associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) managements estimate of fair market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values (included in rental properties, gross in the accompanying consolidated balance sheet) are amortized as a reduction of rental
revenue over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values (included in other liabilities in the accompanying consolidated balance sheet) are amortized as an increase to rental revenue over
the initial term and any fixed rate renewal periods in the respective leases.

The aggregate value of other acquired intangible assets, consisting of
in-place leases and tenant relationships (if any), is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property
as-if-vacant, determined as set forth above. This aggregate value is allocated between at-market in-place lease values and tenant relationships (if any) based on managements evaluation of the specific characteristics of each tenants
lease. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, this amount would be separately allocated and amortized over the estimated life of the relationship. The value of at-market
in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be written off.

Depreciation is provided using the straight line method over the useful lives of the
respective assets. The useful lives are as follows:



|                           |  |                                                                 
|-------------------------- |  | ----------------------------------------------------------------
|Buildings and improvements |  | 5 to 40 years                                                   
|Tenant improvements        |  | Lesser of the term of the related lease or the life of the asset
|Furniture and equipment    |  | 5 to 7 years                                                    
|Acquired in-place leases   |  | Remaining term of the related lease                             

Expenditures for maintenance and repairs are charged to operations as incurred. Maintenance expenditures include
planned major maintenance activities such as painting, paving, HVAC and roofing repair costs. The Company expenses costs as incurred and does not accrue in advance of planned major maintenance activities. Significant renovations or betterments that
extend the economic useful lives of assets are capitalized.

Investments in Land and Development

The Company, through mezzanine loans and equity contributions, invests in various development alliances with projects currently under development. The interest on
advances and other direct project costs incurred by the Company are capitalized to the investments during the period in which the projects are under development. See Note 6 for further discussion.



11



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Investments in Unconsolidated Joint Ventures

The Companys investments in joint ventures are accounted for using the equity method. The Company does not hold a controlling interest in any
joint venture. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions. To the extent the Companys cost basis is different than the basis reflected at the joint
venture level, the basis difference is amortized over the life of the underlying asset which created the basis difference and is included in the Companys share of equity in earnings of unconsolidated joint ventures. See Note 7 for further
discussion.

Mortgage Loans Receivable

The Company
monitors the recoverability of its mortgage loans receivable through ongoing contact with the borrowers to ensure timely receipt of interest and principal payments, and where appropriate, obtains financial information concerning the operation of the
properties. Interest on mortgage loans receivable is recognized as revenue as it accrues during the period the loan is outstanding. Mortgage loans receivable will be evaluated for impairment at least quarterly or if it becomes evident that the
borrower is unable to meet its debt service obligations in a timely manner and cannot satisfy its payments using sources other than the operations of the property securing the loan. If it is concluded that such circumstances exist, then such loan
will be considered to be impaired and its recorded amount will be reduced to the estimated fair value of the collateral securing it. Interest income will also cease to accrue under such circumstances. Due to uncertainties inherent in the valuation
process, it is reasonably possible that the amount ultimately realized from the Companys collection on its mortgage loans receivable will be different than the recorded amounts. See Note 8 for further discussion.

Cash and Cash Equivalents

The Company considers short-term
investments (including certificates of deposit) with an original maturity of three months or less at the time of investment to be cash equivalents.

Restricted Cash

Restricted cash primarily consists of cash impound accounts for capital expenditures, real estate taxes, insurance
premiums, tenant improvements and leasing reserves as required by several of the Companys mortgage loans.

Fair Value of Financial Instruments

For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities (included in
other liabilities), and the unsecured bank line of credit, the recorded amounts approximate fair value due to the relatively short maturity period. Based on interest rates that the Company would be able to obtain for mortgage loans to third parties
with similar terms, the carrying value of the Companys mortgage loans receivable approximates fair value. Based on interest rates available to the Company for debt with comparable maturities and other terms, the estimated fair value of the
Companys secured mortgage loans as of June 30, 2006 and December 31, 2005, would be approximately $648,967 and $704,035 (in thousands), respectively.

Leasing and Financing Costs

Fees paid in connection with the financing and leasing of the Companys properties
are amortized using the straight-line method over the term of the related notes payable or leases.

Minority Interest

Minority interest represents the 8.44% and 7.74% limited partner interests in the Operating Partnership not held by the Company at June 30, 2006 and
December 31, 2005, respectively. The Company periodically adjusts the carrying value of minority interest to reflect its share of the book value of the Operating Partnership. Such adjustments are recorded to stockholders equity as a
reallocation of limited partnership interest in the Operating Partnership.



12



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Revenues

The Company recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result
in higher or lower levels from period to period as the Companys collection experience and the credit quality of the Companys tenants change. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line
basis if specific tenants are unable to pay rent that the Company has previously recognized as revenue. Rental revenue also includes the amortization of above or below market in-place leases recognized in accordance with SFAS No. 141 as
discussed under the previous Rental Properties accounting policy.

Reimbursements from tenants for real estate taxes, utilities, insurance,
common area maintenance and other recoverable costs are recognized as revenue in the period the applicable expenses are incurred.

For the three and six
months ended June 30, 2006 and 2005, no one tenant represented 10% or more of rental revenue of the Company.

Fee and reimbursement revenue consists
of fees for property management and asset management, and transaction fees for acquisition, disposition, refinancing, leasing and construction supervision services from related parties and third parties.

Sales of Real Estate

The Company recognizes sales of real estate
when a contract has been executed, a closing has occurred, the buyers initial and continuing investment is adequate to demonstrate a commitment to pay for the property and the Company does not have a substantial continuing involvement in the
property. Each property is deemed a separately identifiable component of the Company and is reported in discontinued operations when the operations and cash flows of the property have been (or will be) eliminated from the ongoing operations of the
Company as a result of a disposal transaction. Interest expense associated with a mortgage loan is classified as a component of discontinued operations if that loan is directly secured by a property classified as a discontinued operation. Sales to
entities in which the Company has or receives an interest are accounted for in accordance with partial sale accounting provisions as set forth in SFAS No. 66.

Income Taxes

The Company has elected to be taxed as a real estate investment trust under Sections 856 to 860 of the Internal Revenue Code.
A real estate investment trust is generally not subject to federal income tax on that portion of its taxable income that is distributed to its stockholders, provided that at least 90% of taxable income is distributed. REITs are subject to a number
of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular
corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.

The Company has elected to treat one of the Operating Partnerships subsidiaries as a taxable REIT subsidiary (TRS). The TRS is able to engage in activities that
had the REIT engaged in; it would result in income that would be disqualified for purposes of qualifying as a REIT under the provisions of the Federal income tax code. Income taxes are accounted for under the asset and liability method as required
by SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. In assessing the realizability of the deferred tax assets, the Company considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Due to the uncertainty of realizing the benefit of the assets, the Company has fully offset the deferred tax assets with a valuation allowance. However, the TRS may
generate taxable income in future periods for Federal income tax purpose; as a result, the Company may reverse some or all of its deferred tax asset valuation allowance resulting in an income tax benefit.



13



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Recently Issued Accounting Literature

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements and prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48
becomes effective on January 1, 2007. The Company is currently evaluating the impact of adopting this Interpretation.



14



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 3. RENTAL PROPERTIES

The cost and accumulated depreciation of rental properties, by market, as of June 30, 2006 and December 31, 2005, are as follows (in thousands):



|                         |  |                     |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|------------------------ |  | ------------------- | ------- | - | ------------------------- | - | --------- | ---------- |  | - | ----------------------- | - |  | ---------------- | -------- | - |  | - | --------- | -
|                         |  | As of June 30, 2006 |        
|                         |  | Land                |         |   | Buildings & Improve-ments |   |           | Total Cost |  |   | AccumulatedDepreciation |   |  | NetRecordedValue |         
|Washington D.C.          |  | $                   | 45,968  |   |                           | $ | 303,092   |            |  | $ | 349,060                 |   |  | $                | (30,151  | ) |  | $ | 318,909   | *
|Southern California      |  |                     | 45,055  |   |                           |   | 217,750   |            |  |   | 262,805                 |   |  |                  | (36,382  | ) |  |   | 226,423   | *
|Northern New Jersey      |  |                     | 30,480  |   |                           |   | 147,866   |            |  |   | 178,346                 |   |  |                  | (37,889  | ) |  |   | 140,457   | *
|Boston                   |  |                     | 21,098  |   |                           |   | 158,255   |            |  |   | 179,353                 |   |  |                  | (37,662  | ) |  |   | 141,691   | *
|San Francisco            |  |                     | 47,429  |   |                           |   | 153,519   |            |  |   | 200,948                 |   |  |                  | (21,877  | ) |  |   | 179,071   | *
|Tampa/Orlando            |  |                     | 7,805   |   |                           |   | 41,499    |            |  |   | 49,304                  |   |  |                  | (11,513  | ) |  |   | 37,791    | *
|Denver                   |  |                     | 4,887   |   |                           |   | 40,990    |            |  |   | 45,877                  |   |  |                  | (7,800   | ) |  |   | 38,077    | *
|Las Vegas                |  |                     | 4,628   |   |                           |   | 22,500    |            |  |   | 27,128                  |   |  |                  | (7,317   | ) |  |   | 19,811    |  
|All others               |  |                     | 3,776   |   |                           |   | 43,371    |            |  |   | 47,147                  |   |  |                  | (16,725  | ) |  |   | 30,422    |  
|Properties held for sale |  |                     | (1,034  | ) |                           |   | (21,296   | )          |  |   | (22,330                 | ) |  |                  | 6,604    |   |  |   | (15,726   | )
|                         |  |                     |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|Total                    |  | $                   | 210,092 |   |                           | $ | 1,107,546 |            |  | $ | 1,317,638               |   |  | $                | (200,712 | ) |  | $ | 1,116,926 |  
|                         |  |                     |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  

---

|* | Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of accumulated amortization, of $11,919 in Washington D.C., $3,618 in Southern
California, $1,068 in Northern New Jersey, $3,099 in Boston, $4,515 in San Francisco, $418 in Tampa/Orlando, and $835 in Denver.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                         |  |                         |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|------------------------ |  | ----------------------- | ------- | - | ------------------------- | - | --------- | ---------- |  | - | ----------------------- | - |  | ---------------- | -------- | - |  | - | --------- | -
|                         |  | As of December 31, 2005 |        
|                         |  | Land                    |         |   | Buildings & Improve-ments |   |           | Total Cost |  |   | AccumulatedDepreciation |   |  | NetRecordedValue |         
|Washington D.C.          |  | $                       | 47,895  |   |                           | $ | 312,351   |            |  | $ | 360,246                 |   |  | $                | (26,170  | ) |  | $ | 334,076   | *
|Southern California      |  |                         | 39,780  |   |                           |   | 191,289   |            |  |   | 231,069                 |   |  |                  | (33,422  | ) |  |   | 197,647   | *
|Northern New Jersey      |  |                         | 25,321  |   |                           |   | 143,420   |            |  |   | 168,741                 |   |  |                  | (37,325  | ) |  |   | 131,416   |  
|Boston                   |  |                         | 21,237  |   |                           |   | 156,816   |            |  |   | 178,053                 |   |  |                  | (33,850  | ) |  |   | 144,203   | *
|San Francisco            |  |                         | 47,429  |   |                           |   | 152,288   |            |  |   | 199,717                 |   |  |                  | (18,173  | ) |  |   | 181,544   | *
|Tampa/Orlando            |  |                         | 7,805   |   |                           |   | 41,448    |            |  |   | 49,253                  |   |  |                  | (10,534  | ) |  |   | 38,719    | *
|Denver                   |  |                         | 4,887   |   |                           |   | 40,900    |            |  |   | 45,787                  |   |  |                  | (6,892   | ) |  |   | 38,895    | *
|Las Vegas                |  |                         | 4,628   |   |                           |   | 22,451    |            |  |   | 27,079                  |   |  |                  | (6,746   | ) |  |   | 20,333    |  
|All others               |  |                         | 14,286  |   |                           |   | 87,382    |            |  |   | 101,668                 |   |  |                  | (34,219  | ) |  |   | 67,449    |  
|Properties held for sale |  |                         | (12,374 | ) |                           |   | (53,182   | )          |  |   | (65,556                 | ) |  |                  | 20,882   |   |  |   | (44,674   | )
|                         |  |                         |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|Total                    |  | $                       | 200,894 |   |                           | $ | 1,095,163 |            |  | $ | 1,296,057               |   |  | $                | (186,449 | ) |  | $ | 1,109,608 |  
|                         |  |                         |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  

---

|* | Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of accumulated amortization, of $13,502 in Washington D.C., $2,814 in Southern
California, $3,814 in Boston, $5,415 in San Francisco, $486 in Tampa/Orlando, and $966 in Denver.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 4. ACQUISITION OF RENTAL PROPERTY

On April 28, 2006, the Company acquired 3330 Cahuenga Boulevard, a 103,781 square foot, five-story multi-tenant office building located in Los
Angeles. The total acquisition cost of approximately $30.6 million was funded with a new mortgage loan and a draw on the Companys unsecured bank line of credit (as defined in Note 10). The acquisition was structured as a reverse
1031 tax-deferred exchange such that the net proceeds received from the future sale of a trade property will be used to pay down the mortgage loan. SFAS No. 141 requires the acquirer to allocate a portion of the acquisition costs to intangible
assets and liabilities in applying the purchase method of accounting. In accordance with SFAS No. 141, intangible assets related to at-market and above-market rate in-place leases recognized in this transaction amounted to approximately $1.9
million. Liabilities related to below-market rate in-place leases amounted to approximately $571,000. The Company is amortizing the intangible value of the leases over 3 years, which is the weighted average remaining life of the existing leases.

On March 1, 2006, the Company acquired Chatham Executive Center, a 63,346 square foot, three-story multi-tenant office building located in Northern
New Jersey. The total acquisition cost of approximately $17.4 million was funded using a draw from the Companys unsecured bank line of credit. SFAS No. 141 requires the acquirer to allocate a portion of the acquisition costs to intangible
assets and liabilities in applying the purchase method of accounting. In accordance with SFAS No. 141, intangible assets related to at-market and above-market rate in-place leases recognized in this transaction amounted to approximately $1.1
million. Liabilities related to below-market rate in-place leases amounted to approximately $1.0 million. The Company is amortizing the intangible value of the leases over 5 years, which is the weighted average remaining life of the existing leases.

The following table presents the purchase price allocation for the above acquisitions (dollars in thousands):



|                          |  |   |       
|------------------------- |  | - | ------
|Rental property, gross    |  | $ | 46,770
|Intangibles, net          |  |   | 1,499 
|                          |  |   |       
|Cash paid for acquisition |  | $ | 48,269
|                          |  |   |       

NOTE 5. DISPOSITIONS OF RENTAL PROPERTIES

During the six months ended June 30, 2006, the Company contributed a property at a value of $23.5 million, to a new unconsolidated joint venture with an investment advisor. The Company recognized a gain of
$10.5 million on the contribution related to the outside partners purchase of its interest in the contributed property. Additionally, the Company sold four properties for an aggregate sales price of approximately $56.7 million and
recognized an aggregate gain on sale of approximately $7.0 million on three of the properties, Capitol Center, Thousand Oaks and Vreeland Business Center. In addition, due to higher than anticipated costs to sell the Osram Building, an additional
provision for impairment of real estate assets of $561,000 was recognized. The property contributed to the joint venture and the four properties sold were:



|                            |  |              |  |                |   
|--------------------------- |  | ------------ |  | -------------- | --
|Property                    |  | Market       |  | Square Footage |   
|Capitol Center              |  | Des Moines   |  | 165,127        | sf
|Osram Building              |  | Indianapolis |  | 45,265         | sf
|Thousand Oaks               |  | Memphis      |  | 422,363        | sf
|Vreeland Business Center    |  | New Jersey   |  | 133,090        | sf
|Montgomery Executive Center |  | Gaithersburg |  | 119,679        | sf

In accordance with SFAS 144 Accounting for the Impairment or Disposal of Long Lived Assets, the gain
on sale and the related operating results from the four sold properties are classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. The property that was contributed to a joint
venture in which the Company retains an interest was not accounted for as a discontinued operation due to the Companys significant continuing involvement in the operations and cash flows of the property through its joint venture interest. In
addition, real estate properties classified as held for sale are presented separately on the consolidated balance sheet with the related results from operations classified as discontinued operations in the accompanying consolidated statements of
operations for all periods presented.



16



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

As of June 30, 2006, there was one
property, One Pacific Place, classified as held for sale. As of December 31, 2005, there were five assets classified as held for sale.

The major
classes of assets and liabilities of One Pacific Place classified as held for sale at June 30, 2006, as well as the assets and liabilities of Capitol Center, Osram Building, Thousand Oaks, Vreeland Business Center and Marina Shores (see Note
6), classified as held for sale at December 31, 2005 are as follows (dollars in thousands):



|                                                     |  |              |        |                  |   |        
|---------------------------------------------------- |  | ------------ | ------ | ---------------- | - | -------
|                                                     |  | June 30,2006 |        | December 31,2005
|ASSETS                                               |  |              |        |                  |   |        
|Rental properties, net                               |  | $            | 15,726 |                  | $ | 44,674 
|Leasing and financing costs, net                     |  |              | 203    |                  |   | 1,920  
|Straight-line rent receivable and other assets, net  |  |              | 159    |                  |   | 2,954  
|Investments in land and development                  |  |              |       |                  |   | 54,000 
|                                                     |  |              |        |                  |   |        
|Properties held for sale                             |  | $            | 16,088 |                  | $ | 103,548
|                                                     |  |              |        |                  |   |        
|LIABILITIES                                          |  |              |        |                  |   |        
|Notes payable                                        |  | $            |       |                  | $ | 45,000 
|Other liabilities                                    |  |              | 66     |                  |   | 855    
|                                                     |  |              |        |                  |   |        
|Obligations associated with properties held for sale |  | $            | 66     |                  | $ | 45,855 
|                                                     |  |              |        |                  |   |        

Below is a summary of the results of operations of: (i) sold properties through their respective disposition
dates and (ii) properties held for sale through the current reporting period (dollars in thousands):



|                                                                |  |                             |     |                           |      |   |        |  |   |       |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------------- | --- | ------------------------- | ---- | - | ------ |  | - | ----- | - |  | - | ------- | -
|                                                                |  | Three months ended June 30, |     | Six months ended June 30, |     
|                                                                |  | 2006                        |     |                           | 2005 |   | 2006   |  |   | 2005  |  
|Total rental revenue                                            |  | $                           | 878 |                           |      | $ | 10,127 |  | $ | 2,006 |   |  | $ | 21,092  |  
|                                                                |  |                             |     |                           |      |   |        |  |   |       |   |  |   |         |  
|Property operating expenses                                     |  |                             | 304 |                           |      |   | 4,359  |  |   | 890   |   |  |   | 9,231   |  
|Depreciation and amortization                                   |  |                             | 285 |                           |      |   | 2,329  |  |   | 679   |   |  |   | 6,439   |  
|Provision for impairment of real estate assets                  |  |                             |    |                           |      |   |       |  |   | 561   |   |  |   | 53,139  |  
|Interest expense                                                |  |                             |    |                           |      |   | 947    |  |   | 37    |   |  |   | 2,129   |  
|Loss on early extinguishment of debt                            |  |                             |    |                           |      |   | 135    |  |   |      |   |  |   | 2,513   |  
|                                                                |  |                             |     |                           |      |   |        |  |   |       |   |  |   |         |  
|Total expenses                                                  |  |                             | 589 |                           |      |   | 7,770  |  |   | 2,167 |   |  |   | 73,451  |  
|                                                                |  |                             |     |                           |      |   |        |  |   |       |   |  |   |         |  
|Interest and other income                                       |  |                             |    |                           |      |   |       |  |   | 6     |   |  |   |        |  
|                                                                |  |                             |     |                          
|Income (loss) before gain (loss) on sales of real estate assets |  |                             | 289 |                           |      |   | 2,357  |  |   | (155  | ) |  |   | (52,359 | )
|Gain (loss) on sales of real estate assets                      |  |                             | (69 | )1                        |      |   | 9,309  |  |   | 7,671 |   |  |   | 26,629  |  
|                                                                |  |                             |     |                           |      |   |        |  |   |       |   |  |   |         |  
|Discontinued operations                                         |  | $                           | 220 |                           |      | $ | 11,666 |  | $ | 7,516 |   |  | $ | (25,730 | )
|                                                                |  |                             |     |                           |      |   |        |  |   |       |   |  |   |         |  

---

|1 | The loss on sales of real estate assets for the three months ended June 30, 2006 relates to a prior period gain adjustment of two properties sold in prior
periods.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 6. INVESTMENTS IN LAND AND DEVELOPMENT

The Companys investments in land and development decreased from $51,750,000 at December 31, 2005, to $51,057,000 at June 30, 2006. This
decrease is primarily due to the sales of approximately 13.7 acres of the land at Gateway Park located in Denver, Colorado in which the Company had a partial interest.

In addition, on March 30, 2006, the Company sold a majority of its interest in the Marina Shores development project located in Redwood City, California resulting in net gain of $715,000. The Companys
investment was in the form of equity and mezzanine loans with a net basis of approximately $52.9 million and was classified as held for sale as of December 31, 2005. In connection with this sale, the Company repaid $45 million in collateralized
third party financing that encumbered the project.

As of June 30, 2006 and December 31, 2005, the Company had investments in the following
properties under development and land held for development. The investment descriptions are as of June 30, 2006 (dollars in thousands).



|                                |  |                             |  |                                                                                                                |  |                          |   |                       |  |                  |      |        |                                  |        |     |                                      |   |        |    
|------------------------------- |  | --------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------ | - | --------------------- |  | ---------------- | ---- | ------ | -------------------------------- | ------ | --- | ------------------------------------ | - | ------ | ---
|Market                          |  | Properties                  |  | Description                                                                                                    |  | City                     |   | ProposedSquareFootage |  | EconomicInterest |      |        | InvestmentBalance atJune 30,2006 |        |     | InvestmentBalance atDecember 31,2005 |  
|Boston                          |  | Marlborough Corporate Place |  | Three office buildings to be constructed as the eighth, ninth, and tenth phases of Marlborough Corporate Place |  | Marlborough              |   | 235,000               |  | 100              | %    |        | $                                | 5,265  |     |                                      | $ | 5,248  |    
|                                |  |                             |  |                                                                                                                |  |                          |   |                       |  |                  |      |        |                                  |        |     |                                      |   |        |    
|                                |  | Subtotal - Boston           |  |                                                                                                                |  |                          |   | 235,000               |  |                  |      |        |                                  | 5,265  |     |                                      |   | 5,248  |    
|                                |  |                             |  |                                                                                                                |  |                          |  
|Denver                          |  | Gateway Park                |  | 1,200 acre mixed-use park near Denver International Airport; approximately 409 acres undeveloped               |  | Denver                   |   | n/a                   |  | 50               | %(1) |        |                                  | 35,481 | (1) |                                      |   | 35,994 | (1)
|                                |  |                             |  |                                                                                                                |  |                          |  
|                                |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                    |  | Denver                   |   | 150,000               |  | 100              | %    |        |                                  | 4,812  |     |                                      |   | 4,750  |    
|                                |  |                             |  |                                                                                                                |  |                          |   |                       |  |                  |      |        |                                  |        |     |                                      |   |        |    
|                                |  | Subtotal - Denver           |  |                                                                                                                |  |                          |   | 150,000               |  |                  |      |        |                                  | 40,293 |     |                                      |   | 40,744 |    
|                                |  |                             |  |                                                                                                                |  |                          |  
|                                |  |                             |  | Other land held for development                                                                                |  | New Jersey/San Francisco |   |                       |  |                  |      |        |                                  | 5,499  |     |                                      |   | 5,758  |    
|                                |  |                             |  |                                                                                                                |  |                          |   |                       |  |                  |      |        |                                  |        |     |                                      |   |        |    
|TOTAL LAND HELD FOR DEVELOPMENT |  | 385,000                     |  |                                                                                                                |  |                          | $ | 51,057                |  |                  | $    | 51,750 |                                 
|                                |  |                             |  |                                                                                                                |  |                          |   |                       |  |                  |      |        |                                  |        |     |                                      |   |        |    

---

|(1) | Interest in the form of mezzanine loans and equity. In addition, the Company holds a mortgage
loan receivable secured by adjacent parcels of land with a balance of $11,974 and $11,231 at June 30, 2006 and December 31, 2005, respectively (see Note 8 for further discussion).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has no further contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working
capital needs until such time as other financing is obtained. Under a development alliance, the Company has provided an aggregate of approximately $2.5 million in debt guarantees; however, some of the loans were not fully drawn as of June 30,
2006. These guarantees will remain in place until such time as the related development financing has been replaced or repaid, the terms of which vary from less than 1 year to up to 2 years. The Company would be required to perform under these
guarantees in the event that the proceeds generated by the sale, refinance or additional capital contribution by partners of the development project were insufficient to repay the full amount of the related debt financing. There is currently no
recorded liability for any amounts that may become payable under these guarantees, nor is there a liability for the Companys obligation to stand-ready to fund such guarantees which were all originally issued prior to 2003. In the
event that the Company must make payments under one of these guarantees, its only recourse is to the limited liability companies that own the properties. No estimate of the amount that could be recovered by the Company in such an event can be made
at this time.



18



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Certain of the alliances with which the Company
conducts business have been deemed to be VIEs as defined by FIN 46 Revised; however, none of these VIEs are required to be consolidated as the Company is not deemed to be the primary beneficiary as defined by FIN 46 Revised. The total assets and
liabilities of such entities were approximately $108.0 million and $61.9 million, respectively, at June 30, 2006, and $97.6 million and $60.0 million, respectively, at December 31, 2005. The Companys maximum exposure to loss is equal
to its investments in these arrangements, plus the related debt guarantees, as described above.

NOTE 7. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The Companys investments in unconsolidated joint ventures are accounted for using the equity method. The Company records earnings on its
investments equal to its ownership interest in the ventures earnings and losses. Distributions are recorded as a reduction of the Companys investment.

The Companys investments in unconsolidated joint ventures consisted of the following as of June 30, 2006 and December 31, 2005 (dollars in thousands):



|                            |  |                   |   |  |                    |               |                     |       |              |                 |  |                    |        |   |  |   |       
|--------------------------- |  | ----------------- | - |  | ------------------ | ------------- | ------------------- | ----- | ------------ | --------------- |  | ------------------ | ------ | - |  | - | ------
|                            |  | OwnershipInterest |   |  | Property Location  |               | SquareFootage/Units |       |              | Property Type   |  | Investment Balance
|Joint Venture               |  |                   |   |  |                    | June 30, 2006 |                     |       | Dec 31, 2005
|Rincon Center I & II        |  | 10                | % |  | San Francisco, CA  |               | 757,250             | sf    |              | Office          |  | $                  |       |   |  | $ | 4,304 
|2000 Corporate Ridge        |  | 10                | % |  | McLean, VA         |               | 256,022             | sf    |              | Office          |  |                    |       |   |  |   | 3,174 
|Gateway Retail I            |  | 50                | % |  | Denver, CO         |               | 12,000              | sf    |              | Retail          |  |                    | 467    |   |  |   | 444   
|Lakecrest Apartments        |  | 27                | % |  | Aurora, CO         |               | 440                 | units |              | Residential     |  |                    | 3,926  |   |  |   | 4,118 
|Montgomery Executive Center |  | 25                | % |  | Gaithersburg, MD   |               | 119,679             | sf    |              | Office          |  |                    | (834   | ) |  |   |      
|Tri-City Corporate Centre   |  | 6                 | % |  | San Bernardino, CA |               | 1,208,255           | sf    |              | Office / Retail |  |                    | 7,222  |   |  |   |      
|                            |  |                   |   |  |                    |               |                     |       |              |                 |  |                    |        |   |  |   |       
|                            |  |                   |   |  |                    |               |                     |       |              |                 |  | $                  | 10,781 |   |  | $ | 12,040
|                            |  |                   |   |  |                    |               |                     |       |              |                 |  |                    |        |   |  |   |       

On June 16, 2006, the Company contributed Montgomery Executive Center, a 119,679 square foot office building
in Gaithersburg, Maryland, at a value of $23.5 million for 100% of the property, to a new joint venture with an investment advisor. The investment advisor contributed $8.2 million in cash for a 75% ownership interest and the joint venture borrowed
$12.5 million from a third party lender. The Company received net cash proceeds of $20.6 million which was used to pay down the Companys unsecured bank line of credit. The Company recognized a gain from the transaction of $10.5 million
relating to the outside partners purchase of its interest of 75%. The Company retained a 25% ownership interest in the joint venture and will provide property management, leasing and asset management services to the joint venture on an
on-going basis. The investment balance is net of a deferred gain on the sale of $3.5 million, which will be recognized when the joint venture sells the contributed property.

On June 15, 2006, the Company and one of its joint venture partners sold the property known as 2000 Corporate Ridge in McLean, Virginia for $79.1 million. The Company received from the joint venture net cash
proceeds of $14.5 million which was used to pay down the Companys unsecured bank line of credit. The Companys portion of the gain on sale of $10.1 million is included in equity in earnings of unconsolidated joint ventures. The Company
also recognized an incentive fee of $1.1 million, which is included in fee and reimbursements income.

On June 9, 2006, the Company and one of its
joint venture partners sold the property known as Rincon Center, a mixed-use property in San Francisco comprised of 528,000 square feet of class A office and retail and 320 apartment units for $275.0 million. The Company received from
the joint venture net cash proceeds of $13.6 million which was used to pay down the Companys unsecured bank line of credit. The Companys portion of the gain on sale of $9.5 million is included in equity in earnings of unconsolidated
joint ventures.

As of June 30, 2006, the Company purchased 3,308 or 5% and 5,514 or 6.6% of the units in Rancon
Realty Fund IV,



19



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

a California Limited Partnership and Rancon
Realty Fund V, a California Limited Partnership, respectively, Rancon Partnership. Together these partnerships own Tri-City Corporate Centre which is a mixed use project containing 1,011,208 square feet of class A office and
197,047 square feet of retail, located in San Bernardino, California in the Inland Empire. Since January 1995, the Company has been contracted by each of the partnerships to perform property and asset management as well as construction, leasing,
financing and development services. See Note 12 for discussion of related party transactions.

NOTE 8. MORTGAGE LOANS RECEIVABLE

The Company holds a first mortgage collateralized by a 50% interest in 140 acres of land at Gateway Business Park in Aurora, Colorado. The balance of this mortgage loan
receivable increased from $11,231,000 at December 31, 2005, to $11,974,000 at June 30, 2006 due to monthly interest accruals totaling $743,000. The loan was originally funded in June 1998 and has an interest rate of 9.0%. Periodic payments
of interest and principal are received on the loan from proceeds of land parcel sales in the project. Gateway Business Park is a development project where the Company and the Pauls Corporation have an alliance and where the Company has also acquired
property. In this arrangement, the Company has rights under certain conditions and subject to certain contingencies to purchase the properties upon completion of development. No loan loss reserves have been recorded related to this loan. The
borrowing entities in this loan arrangement have been deemed to be VIEs, but the Company is not deemed to be the primary beneficiary as defined by FIN 46 Revised. The Companys maximum exposure to loss is equal to the recorded amount of its
loan, including accrued interest.

NOTE 9. OTHER ASSETS

As of June 30, 2006 and December 31, 2005, other assets on the consolidated balance sheets consist of the following (in thousands):



|                                                                    |  |               |       |                   |   |      
|------------------------------------------------------------------- |  | ------------- | ----- | ----------------- | - | -----
|                                                                    |  | June 30, 2006 |       | December 31, 2005
|Other receivables1                                                  |  | $             | 907   |                   | $ | 378  
|Prepaid expenses and deposits                                       |  |               | 4,207 |                   |   | 4,070
|Notes receivable                                                    |  |               | 1,288 |                   |   | 1,288
|Investment in management contracts, net of accumulated amortization |  |               | 361   |                   |   | 578  
|Other                                                               |  |               | 1,518 |                   |   | 1,627
|                                                                    |  |               |       |                   |   |      
|Total other assets                                                  |  | $             | 8,281 |                   | $ | 7,941
|                                                                    |  |               |       |                   |   |      

---

|1 | Included in other receivables at June 30, 2006 are development and lease consulting fees totaling $223,000 from the Rancon Partnerships related to Tri-City
Corporate Centre.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 10. SECURED AND UNSECURED LOANS

The Company had the following mortgage loans and unsecured bank line of credit outstanding as of June 30, 2006 and December 31, 2005 (dollars
in thousands):



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               |         |                   |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | June 30, 2006 |         | December 31, 2005
|Loans with various lenders, bearing interest at fixed rates between 4.73% and 7.01% at June 30, 2006, and 4.73% and 8.32% at
December 31, 2005, with monthly principal and interest payments ranging between $52 and $297 and maturing at various dates through July 1, 2016. These loans are collateralized by properties with an aggregate net carrying value of $681,210
and $737,499 at June 30, 2006 and December 31, 2005, respectively. One of these loans includes an unamortized premium of $745 and $896 at June 30, 2006 and December 31, 2005, respectively.                                                                                                                                      |  | $             | 500,819 |                   | $ | 536,047
|Loan with an insurance company, net of unamortized discount of $215 and $255 at June 30, 2006 and December 31, 2005, respectively.
The loan has two fixed rate components. The fixed rate component of $30,672 at June 30, 2006 bears interest at 6.13%, matures on February 11, 2009, and requires monthly principal and interest payments of $231. The fixed rate component of
$136,436 at June 30, 2006 bears interest at 5.91%, matures on February 11, 2009, and requires monthly principal and interest payments of $923. The two components are cross-collateralized by properties with an aggregate net carrying value
of $215,024 and $217,514 at June 30, 2006 and December 31, 2005, respectively. |  |               | 167,108 |                   |   | 168,823
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               |         |                   |   |        
|Total mortgage loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |               | 667,927 |                   |   | 704,870
|Unsecured $180,000 line of credit with a group of commercial banks, with a variable interest rate of 30-day LIBOR plus 1.65% at June 30,
2006 and 30-day LIBOR plus 1.20% at December 31, 2005 (7.0% and 5.59%, respectively), monthly interest only payments and a maturity date of March 26, 2007, with a one-year extension option.                                                                                                                                                                                                                                                                                                                                                                        |  |               | 88,734  |                   |   | 106,669
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               |         |                   |   |        
|Total mortgage loans and unsecured bank line of credit before adjustment for properties held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $             | 756,661 |                   | $ | 811,539
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               |         |                   |   |        

Mortgage loans on the consolidated balance sheets as of June 30, 2006 and December 31, 2005 are
presented net of properties classified as held for sale. The following table reconciles total mortgage loans from the table above to the amounts presented on the consolidated balance sheets (dollars in thousands):



|                                                            |  |               |         |                   |   |         |  
|----------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | ------- | -
|                                                            |  | June 30, 2006 |         | December 31, 2005 |  
|Total mortgage loans                                        |  | $             | 667,927 |                   | $ | 704,870 |  
|Mortgage loans related to properties held for sale (Note 5) |  |               |        |                   |   | (45,000 | )
|                                                            |  |               |         |                   |   |         |  
|Total mortgage loans adjusted for properties held for sale  |  | $             | 667,927 |                   | $ | 659,870 |  
|                                                            |  |               |         |                   |   |         |  

At June 30, 2006 and December 31, 2005, the Companys indebtedness included fixed-rate debt of
$667,927,000 and $704,870,000, respectively, and floating-rate debt of $88,734,000 and $106,669,000, respectively.



21



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Outstanding borrowings under the Companys
unsecured bank line of credit decreased from $106,669,000 at December 31, 2005, to $88,734,000 at June 30, 2006. The decrease was due to pay downs totaling $112,061,000 generated from the proceeds of property and land sales and cash flow
from operations, partially offset by draws totaling $94,126,000 for common stock repurchases, property acquisition, mortgage loan payoff and dividend distributions. The unsecured bank line of credit requires the Company, among other things, to be in
compliance with certain financial and operating covenants. The Company has been in compliance during all of 2005 and 2006.

For the six months ended
June 30, 2006, the following mortgage loan transactions occurred (dollars in thousands):



|                                                                                                            |  |              |          |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | -
|                                                                                                            |  | June 30,2006 |         
|Balance at beginning of year                                                                                |  | $            | 704,870  |  
|Repayments and scheduled principal amortization                                                             |  |              | (121,571 | )
|New borrowings and refinancing (a)                                                                          |  |              | 129,628  |  
|Repaid upon sale of properties and joint venture interest (see Note 6  Investment in Land and Development) |  |              | (45,000  | )
|                                                                                                            |  |              |          |  
|Balance at end of period                                                                                    |  | $            | 667,927  |  
|                                                                                                            |  |              |          |  

---

|(a) | On April 27, 2006, the Company obtained a new mortgage loan of $30.6 million in connection with the acquisition of 3330 Cahuenga Boulevard. The loan bears interest at a fixed
rate of 6.93% and matures in October 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On May 31, 2006, the Company completed a $30 million refinancing of its King
Street Station II property. The loan bears interest at a fixed rate of 5.62% and matures in June 2016. Proceeds from the refinancing were used to repay the existing loan.

On May 31, 2006, the Company completed a $28 million refinancing of its 400 South El Camino property. The loan bears interest at a fixed rate of 5.78% and matures in June 2016. Proceeds from the refinancing were
used to repay the existing loan.

On June 30, 2006, the Company completed a $41 million refinancing of its CenterPointe I-IV
properties. The loan bears interest at a fixed rate of 6.39% and matures in July 2016. Net proceeds of $2.5 million were used to pay down the Companys unsecured bank line of credit after repaying two existing loans and closing costs.

At June 30, 2006 and December 31, 2005, the Company was not a party to any open interest rate protection agreements. Some of the Companys
properties are held in limited partnerships and limited liability companies in order to facilitate financing. All such entities are owned 100% directly or indirectly by the Company.

The required principal payments on the Companys debt for the next five years and thereafter, as of June 30, 2006, are as follows (in thousands). Included in the year ending December 31, 2007, is the
unsecured bank line of credit balance of $88,734,000 which has an initial maturity of March 26, 2007.



|                         |  |   |        
|------------------------ |  | - | -------
|Year Ending December 31, |  |  
|2006                     |  | $ | 65,224 
|2007                     |  |   | 112,439
|2008                     |  |   | 107,165
|2009                     |  |   | 193,960
|2010                     |  |   | 33,115 
|Thereafter               |  |   | 244,758
|                         |  |   |        
|Total                    |  | $ | 756,661
|                         |  |   |        



22



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 11. OTHER LIABILITIES

As of June 30, 2006 and December 31, 2005, other liabilities on the consolidated balance sheets consist of the following (in thousands):



|                                                                       |  |               |        |                   |   |       
|---------------------------------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                                                       |  | June 30, 2006 |        | December 31, 2005
|Accounts payable and accrued liabilities                               |  | $             | 5,438  |                   | $ | 7,718 
|SFAS No. 141 below market rate leases, net of accumulated amortization |  |               | 10,639 |                   |   | 10,809
|Unsecured note payable                                                 |  |               | 2,914  |                   |   | 2,846 
|Accrued retirement benefits                                            |  |               | 5,393  |                   |   | 5,321 
|Interest payable                                                       |  |               | 2,254  |                   |   | 2,210 
|Security deposits                                                      |  |               | 6,027  |                   |   | 5,928 
|Property taxes payable                                                 |  |               | 1,806  |                   |   | 1,459 
|Prepaid rents                                                          |  |               | 3,368  |                   |   | 3,949 
|Deferred gain on sale                                                  |  |               | 1,032  |                   |   | 1,000 
|Deferred income                                                        |  |               |       |                   |   | 36    
|                                                                       |  |               |        |                   |   |       
|Total other liabilities                                                |  | $             | 38,871 |                   | $ | 41,276
|                                                                       |  |               |        |                   |   |       

NOTE 12. RELATED PARTY TRANSACTIONS

Fee and reimbursement income earned by the Company from related parties totaled approximately $1,791,000 and $292,000 for the three months ended June 30, 2006 and 2005, respectively, and $1,895,000 and $415,000
for the six months ended June 30, 2006 and 2005, respectively, and consisted of incentive fees, structuring fees, property and asset management fees and other fee income. Included in the three and six months ended June 30, 2006 are
property and asset management fees, lease consulting and development fees from Rancon Partnership (Tri-City Corporate Centre) as they became a related party beginning in the second quarter of 2006.

NOTE 13. PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS

In the first
quarter of 2006, in connection with the disposition of the Osram Building, an additional provision for impairment of real estate assets of $561,000 was recognized due to higher than anticipated costs to sell the property. Separately, in the first
quarter of 2005, in connection with the Companys decision to dispose of assets in its non-core markets and certain non-core assets in core markets, the Company reduced the intended holding period of 21 assets to two years or less. Based on the
Companys analysis of the anticipated net disposition proceeds of each asset over the next two years, the Company determined that nine of the assets were impaired. The difference between the estimated fair value (calculated by sales proceeds)
and the net book value was approximately $49.3 million. When combined with impairment charges recognized on two additional assets sold during the first quarter of 2005, the total impairment charge recognized during the six months ended June 30,
2005, was approximately $58.2 million ($53.1 million of which is included in discontinued operations).

NOTE 14. LOSS ON EARLY EXTINGUISHMENT OF DEBT

During the three and six months ended June 30, 2006, the Company recorded losses on early extinguishment of debt of $103,000, which consisted
primarily of write-offs of unamortized original financing costs as well as a prepayment penalty in connection with the refinancing of debts and payoff of various loans. In connection with various loan payoffs, including those related to properties
classified as discontinued operations, the Company recorded aggregate losses on early extinguishment of debt of $135,000 and $3,074,000 during the three and six months ended June 30, 2005, consisting of prepayment penalties and write-offs of
unamortized original financing costs. Of these total losses, $135,000 and $2,513,000 has been included in discontinued operations for the three and six months ended June 30, 2005, as they were related to loan payoffs in connection with property
sales.



23



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 15. EARNINGS PER SHARE

Earnings per share are as follows (in thousands, except for weighted average shares and per share amounts):



|                                                             |  |                             |            |                           |   |            |  |      |            |  |   |            |  
|------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | ---- | ---------- |  | - | ---------- | -
|                                                             |  | Three months ended June 30, |            | Six months ended June 30, |  
|                                                             |  | 2006                        |            | 2005                      |   | 2006       |  | 2005 |           
|Net income (loss) available to Common Stockholders  Basic   |  | $                           | 28,628     |                           | $ | 11,979     |  | $    | 34,733     |  | $ | (32,561    | )
|Minority interest                                            |  |                             | 2,643      |                           |   | 1,005      |  |      | 3,201      |  |   |           |  
|Preferred dividends                                          |  |                             | 1,811      |                           |   |           |  |      |           |  |   |           |  
|                                                             |  |                             |            |                           |   |            |  |      |            |  |   |            |  
|Net income (loss) available to Common Stockholders  Diluted |  | $                           | 33,082     |                           | $ | 12,984     |  | $    | 37,934     |  | $ | (32,561    | )
|                                                             |  |                             |            |                           |   |            |  |      |            |  |   |            |  
|Weighted average shares:                                     |  |                             |            |                           |   |            |  |      |            |  |   |            |  
|Basic                                                        |  |                             | 32,029,830 |                           |   | 35,921,157 |  |      | 32,329,709 |  |   | 35,870,534 |  
|Stock options and restricted stock                           |  |                             | 171,227    |                           |   | 243,961    |  |      | 154,365    |  |   |           |  
|Convertible Operating Partnership Units                      |  |                             | 2,993,791  |                           |   | 2,993,969  |  |      | 2,993,413  |  |   |           |  
|Preferred stock                                              |  |                             | 2,848,216  |                           |   |           |  |      |           |  |   |           |  
|                                                             |  |                             |            |                           |   |            |  |      |            |  |   |            |  
|Diluted                                                      |  |                             | 38,043,064 |                           |   | 39,159,087 |  |      | 35,477,487 |  |   | 35,870,534 |  
|                                                             |  |                             |            |                           |   |            |  |      |            |  |   |            |  
|Basic earnings (loss) per share                              |  | $                           | 0.89       |                           | $ | 0.33       |  | $    | 1.07       |  | $ | (0.91      | )
|Diluted earnings (loss) per share                            |  | $                           | 0.87       |                           | $ | 0.33       |  | $    | 1.07       |  | $ | (0.91      | )

Options to purchase shares of the Companys common stock of 1,976,582 and 1,992,121 for the three and six
months ended June 30, 2006, respectively, and 2,368,239 for the three months ended June 30, 2005, have been excluded from the computation of diluted earnings per share as the exercise prices of the stock options were greater than or equal
to the average share price for the period, and therefore, their inclusion would have been anti-dilutive. For the six months ended June 30, 2005, 2,923,700 options to purchase shares of the Companys common stock and 2,997,941 convertible
operating partnership units have been excluded from the computation of diluted earnings per share as they are anti-dilutive due to loss from continuing operations after adjusting for preferred dividends. The conversion of preferred stock has been
excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2005 and for the six months ended June 30, 2006, as it is anti-dilutive.

NOTE 16. SEGMENT INFORMATION

The Company owns and operates office properties throughout the United States and
manages its business by geographic markets. During the three months ended June 30, 2006, office properties represented approximately 96% of the Companys portfolio by net operating income and consist primarily of multi-tenant office
buildings. The remaining 4% of the Companys portfolio consists primarily of industrial properties designed for warehouse, distribution and light manufacturing for single-tenant or multi-tenant use. The Companys geographic markets are
managed separately as each market requires different operating, pricing and leasing strategies. Each represents a reportable segment. As of June 30, 2006, the Companys largest markets are Southern California, Washington D.C., Northern New
Jersey, Boston and San Francisco.

The accounting policies of the segments are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based upon net operating income of the combined properties which represents rental revenue less property operating expenses in each segment. Significant information used by the Company for its reportable
segments (including discontinued operations) as of and for the three and six months ended June 30, 2006 and 2005, is as follows (in thousands):



24



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)



|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|---------------------------------------------- |  | ------------------------------- | ------ | ------------------------------- | - | ----------------------------- |  | ----------------------------- | ------ |  | - | ------
|                                               |  | Three MonthsEnded June 30, 2006 |        | Three MonthsEnded June 30, 2005 |   | Six MonthsEnded June 30, 2006 |  | Six MonthsEnded June 30, 2005
|Washington D.C.                                |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Rental revenue and tenant reimbursements       |  | $                               | 11,719 |                                 | $ | 9,112                         |  | $                             | 23,128 |  | $ | 17,116
|Property operating expenses                    |  |                                 | 3,279  |                                 |   | 2,269                         |  |                               | 6,803  |  |   | 4,563 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Net operating income                           |  | $                               | 8,440  |                                 | $ | 6,843                         |  | $                             | 16,325 |  | $ | 12,553
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Southern California                            |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Rental revenue and tenant reimbursements       |  | $                               | 9,354  |                                 | $ | 8,685                         |  | $                             | 18,090 |  | $ | 17,379
|Property operating expenses                    |  |                                 | 2,895  |                                 |   | 2,683                         |  |                               | 5,733  |  |   | 5,435 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Net operating income                           |  | $                               | 6,459  |                                 | $ | 6,002                         |  | $                             | 12,357 |  | $ | 11,944
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Northern New Jersey                            |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Rental revenue and tenant reimbursements       |  | $                               | 6,857  |                                 | $ | 6,271                         |  | $                             | 13,378 |  | $ | 12,152
|Property operating expenses                    |  |                                 | 2,382  |                                 |   | 2,063                         |  |                               | 4,920  |  |   | 4,527 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Net operating income                           |  | $                               | 4,475  |                                 | $ | 4,208                         |  | $                             | 8,458  |  | $ | 7,625 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Provision for impairment of real estate assets |  | $                               |       |                                 | $ |                              |  | $                             |       |  | $ | 836   
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Boston                                         |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Rental revenue and tenant reimbursements       |  | $                               | 6,435  |                                 | $ | 6,357                         |  | $                             | 13,173 |  | $ | 12,836
|Property operating expenses                    |  |                                 | 3,253  |                                 |   | 2,713                         |  |                               | 6,623  |  |   | 5,871 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Net operating income                           |  | $                               | 3,182  |                                 | $ | 3,644                         |  | $                             | 6,550  |  | $ | 6,965 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|San Francisco                                  |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Rental revenue and tenant reimbursements       |  | $                               | 4,697  |                                 | $ | 2,301                         |  | $                             | 9,363  |  | $ | 4,777 
|Property operating expenses                    |  |                                 | 1,582  |                                 |   | 701                           |  |                               | 3,105  |  |   | 1,430 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Net operating income                           |  | $                               | 3,115  |                                 | $ | 1,600                         |  | $                             | 6,258  |  | $ | 3,347 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Tampa/Orlando                                  |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Rental revenue and tenant reimbursements       |  | $                               | 1,978  |                                 | $ | 2,049                         |  | $                             | 3,969  |  | $ | 4,401 
|Property operating expenses                    |  |                                 | 606    |                                 |   | 603                           |  |                               | 1,279  |  |   | 1,359 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       
|Net operating income                           |  | $                               | 1,372  |                                 | $ | 1,446                         |  | $                             | 2,690  |  | $ | 3,042 
|                                               |  |                                 |        |                                 |   |                               |  |                               |        |  |   |       

continued



25



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)



|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|---------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------- | - | ------- | ----------------------------- |  | - | ----------------------------- | - |  | - | ------- | -
|                                               |  | Three MonthsEnded June 30, 2006 |        |   | Three MonthsEnded June 30, 2005 |   |         | Six MonthsEnded June 30, 2006 |  |   | Six MonthsEnded June 30, 2005 |  
|Denver                                         |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Rental revenue and tenant reimbursements       |  | $                               | 1,780  |   |                                 | $ | 1,688   |                               |  | $ | 3,373                         |   |  | $ | 3,380   |  
|Property operating expenses                    |  |                                 | 589    |   |                                 |   | 644     |                               |  |   | 1,223                         |   |  |   | 1,282   |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net operating income                           |  | $                               | 1,191  |   |                                 | $ | 1,044   |                               |  | $ | 2,150                         |   |  | $ | 2,098   |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                               |       |   |                                 | $ |        |                               |  | $ |                              |   |  | $ | 3,136   |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Las Vegas                                      |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Rental revenue and tenant reimbursements       |  | $                               | 1,008  |   |                                 | $ | 1,249   |                               |  | $ | 1,914                         |   |  | $ | 2,533   |  
|Property operating expenses                    |  |                                 | 224    |   |                                 |   | 291     |                               |  |   | 480                           |   |  |   | 595     |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net operating income                           |  | $                               | 784    |   |                                 | $ | 958     |                               |  | $ | 1,434                         |   |  | $ | 1,938   |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|All Others                                     |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Rental revenue and tenant reimbursements       |  | $                               | 1,557  |   |                                 | $ | 9,843   |                               |  | $ | 3,257                         |   |  | $ | 20,330  |  
|Property operating expenses                    |  |                                 | 573    |   |                                 |   | 4,448   |                               |  |   | 1,442                         |   |  |   | 9,194   |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net operating income                           |  | $                               | 984    |   |                                 | $ | 5,395   |                               |  | $ | 1,815                         |   |  | $ | 11,136  |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                               |       |   |                                 | $ |        |                               |  | $ | 561                           |   |  | $ | 54,264  |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Discontinued Operations                        |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Rental revenue and tenant reimbursements       |  | $                               | (878   | ) |                                 | $ | (10,127 | )                             |  | $ | (2,006                        | ) |  | $ | (21,092 | )
|Property operating expenses                    |  |                                 | (304   | ) |                                 |   | (4,359  | )                             |  |   | (890                          | ) |  |   | (9,231  | )
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net operating (income) loss                    |  | $                               | (574   | ) |                                 | $ | (5,768  | )                             |  | $ | (1,116                        | ) |  | $ | (11,861 | )
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                               |       |   |                                 | $ |        |                               |  | $ | (561                          | ) |  | $ | (53,139 | )
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Total                                          |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Rental revenue and tenant reimbursements       |  | $                               | 44,507 |   |                                 | $ | 37,428  |                               |  | $ | 87,639                        |   |  | $ | 73,812  |  
|Property operating expenses                    |  |                                 | 15,079 |   |                                 |   | 12,056  |                               |  |   | 30,718                        |   |  |   | 25,025  |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net operating income                           |  | $                               | 29,428 |   |                                 | $ | 25,372  |                               |  | $ | 56,921                        |   |  | $ | 48,787  |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                               |       |   |                                 | $ |        |                               |  | $ |                              |   |  | $ | 5,097   |  
|                                               |  |                                 |        |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  



26



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

The following is a reconciliation of segment
revenues and net operating income to total operating revenue and income (loss) before minority interest, discontinued operations and cumulative effect of a change in accounting principle for the periods presented above (in thousands):



|                                                                                                                        |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | - | ------- | ----------------------------- |  | - | ----------------------------- | - |  | - | ------- | -
|                                                                                                                        |  | Three MonthsEnded June 30, 2006 |         |   | Three MonthsEnded June 30, 2005 |   |         | Six MonthsEnded June 30, 2006 |  |   | Six MonthsEnded June 30, 2005 |  
|Revenues                                                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Rental revenue and tenant reimbursements for reportable segments                                                        |  | $                               | 44,507  |   |                                 | $ | 37,428  |                               |  | $ | 87,639                        |   |  | $ | 73,812  |  
|Fees and reimbursements, including from related parties                                                                 |  |                                 | 2,111   |   |                                 |   | 1,359   |                               |  |   | 2,999                         |   |  |   | 2,454   |  
|                                                                                                                        |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Total operating revenue                                                                                                 |  | $                               | 46,618  |   |                                 | $ | 38,787  |                               |  | $ | 90,638                        |   |  | $ | 76,266  |  
|                                                                                                                        |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net Operating Income                                                                                                    |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Net operating income for reportable segments                                                                            |  | $                               | 29,428  |   |                                 | $ | 25,372  |                               |  | $ | 56,921                        |   |  | $ | 48,787  |  
|Provision for impairment of real estate assets for reportable segments                                                  |  |                                 |        |   |                                 |   |        |                               |  |   |                              |   |  |   | (5,097  | )
|Unallocated amounts:                                                                                                    |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Fees and reimbursements, including from related parties                                                                 |  |                                 | 2,111   |   |                                 |   | 1,359   |                               |  |   | 2,999                         |   |  |   | 2,454   |  
|Interest and other income                                                                                               |  |                                 | 529     |   |                                 |   | 615     |                               |  |   | 1,029                         |   |  |   | 1,645   |  
|Equity in earnings of unconsolidated joint ventures                                                                     |  |                                 | 19,713  |   |                                 |   | 169     |                               |  |   | 19,812                        |   |  |   | 302     |  
|Gain on sale of real estate assets                                                                                      |  |                                 | 10,506  |   |                                 |   |        |                               |  |   | 10,506                        |   |  |   |        |  
|General and administrative                                                                                              |  |                                 | (3,799  | ) |                                 |   | (3,925  | )                             |  |   | (7,781                        | ) |  |   | (7,210  | )
|Depreciation and amortization                                                                                           |  |                                 | (13,908 | ) |                                 |   | (11,777 | )                             |  |   | (27,415                       | ) |  |   | (23,510 | )
|Interest expense                                                                                                        |  |                                 | (11,615 | ) |                                 |   | (8,683  | )                             |  |   | (22,204                       | ) |  |   | (16,817 | )
|Loss on early extinguishment of debt                                                                                    |  |                                 | (103    | ) |                                 |   |        |                               |  |   | (103                          | ) |  |   | (561    | )
|                                                                                                                        |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  
|Income (loss) before minority interest, discontinued operations and cumulative effect of change in accounting principle |  | $                               | 32,862  |   |                                 | $ | 3,130   |                               |  | $ | 33,764                        |   |  | $ | (7      | )
|                                                                                                                        |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |         |  



27



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

The following is a reconciliation of segment
assets to total assets for the periods presented on the consolidated balance sheets (in thousands):



|                                                     |  |                     |           |   |                        |   |           |  
|---------------------------------------------------- |  | ------------------- | --------- | - | ---------------------- | - | --------- | -
|                                                     |  | As of June 30, 2006 |           |   | As of December 31,2005 |  
|Washington D.C.                                      |  | $                   | 318,909   |   |                        | $ | 334,076   |  
|Southern California                                  |  |                     | 226,423   |   |                        |   | 197,647   |  
|Northern New Jersey                                  |  |                     | 140,457   |   |                        |   | 131,416   |  
|Boston                                               |  |                     | 141,691   |   |                        |   | 144,203   |  
|San Francisco                                        |  |                     | 179,071   |   |                        |   | 181,544   |  
|Tampa/Orlando                                        |  |                     | 37,791    |   |                        |   | 38,719    |  
|Denver                                               |  |                     | 38,077    |   |                        |   | 38,895    |  
|Las Vegas                                            |  |                     | 19,811    |   |                        |   | 20,333    |  
|All others                                           |  |                     | 30,422    |   |                        |   | 67,449    |  
|Properties held for sale                             |  |                     | (15,726   | ) |                        |   | (44,674   | )
|                                                     |  |                     |           |   |                        |   |           |  
|Total rental properties for reportable segments, net |  |                     | 1,116,926 |   |                        |   | 1,109,608 |  
|                                                     |  |                    
|Unallocated amounts:                                 |  |                     |           |   |                        |   |           |  
|Properties held for sale                             |  |                     | 16,088    |   |                        |   | 103,548   |  
|Investments in land and development                  |  |                     | 51,057    |   |                        |   | 51,750    |  
|Investments in unconsolidated joint ventures         |  |                     | 10,781    |   |                        |   | 12,040    |  
|Mortgage loans receivable                            |  |                     | 11,974    |   |                        |   | 11,231    |  
|Leasing and financing costs, net                     |  |                     | 20,815    |   |                        |   | 21,465    |  
|Straight-line rent receivable                        |  |                     | 19,131    |   |                        |   | 16,874    |  
|Cash and cash equivalents                            |  |                     | 5,746     |   |                        |   | 3,661     |  
|Restricted cash                                      |  |                     | 5,228     |   |                        |   | 5,720     |  
|Accounts receivable, net                             |  |                     | 3,128     |   |                        |   | 2,292     |  
|Other assets, net                                    |  |                     | 8,281     |   |                        |   | 7,941     |  
|                                                     |  |                     |           |   |                        |   |           |  
|Total assets                                         |  | $                   | 1,269,155 |   |                        | $ | 1,346,130 |  
|                                                     |  |                     |           |   |                        |   |           |  

NOTE 17. STOCK COMPENSATION PLAN AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Adoption of New Accounting Pronouncement

The Company has an employee
stock incentive plan and issues stock options and stock grants to employees, officers and directors. Prior to January 1, 2006, the Company accounted for the stock options in the employee stock incentive plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Under the methodology prescribed in APB 25, no stock-based employee compensation cost for options was reflected in net income as all options granted since the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The options vest over periods ranging from 1 and 10 years, and have a maximum term of 10 years. Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards No. 123, (revised 2004) Share-Based Payment (SFAS 123(R)), using the modified prospective transition method. Under that transition method, no restatement of compensation cost
is recognized in prior periods as required by SFAS 123(R). Effective January 1, 2006, compensation cost is recognized for the cost of all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of SFAS 123, with the offsetting reduction in additional paid-in-capital.



28



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

Prior to January 1, 2006, the Company
accounted for stock grants in the employee stock incentive plan based on the stock price at the date of grant. SFAS 123(R) requires measurement of compensation cost for the stock grants at fair value on date of grant and recognition of compensation
over the service period for awards expected to vest.

As of June 30, 2006, 395,961 shares of stock grants were outstanding under the Plan. The vesting
of 345,961 of these shares is time-based and the deferred compensation related to these shares is amortized to general and administrative expense ratably over the respective vesting periods that range from 1 to 10 years.

The vesting of 50,000 of these shares, which were granted on March 30, 2004, is based on achieving annual performance metrics over a ten-year period and
compensation cost is recognized ratably over the requisite service period. For these shares, the adoption of SFAS 123(R) resulted in a cumulative benefit from accounting change of $277,000 during the first quarter of 2006, which reflects the net
cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted under APB Opinion No. 25.

Nonvested stock grants as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:



|                                 |  |         |   |  |                                  |      
|-------------------------------- |  | ------- | - |  | -------------------------------- | -----
|                                 |  | Shares  |   |  | Weighted AvgGrant-DateFair Value
|Nonvested at beginning of period |  | 183,800 |   |  | $                                | 20.71
|Granted                          |  | 13,500  |   |  | $                                | 19.53
|Vested                           |  | (23,225 | ) |  | $                                | 21.09
|Forfeited                        |  | (10,280 | ) |  | $                                | 18.39
|                                 |  |         |   |  |                                  |      
|Nonvested at end of period       |  | 163,795 |   |  | $                                | 20.70

At June 30, 2006, there was $2.0 million of unrecognized compensation cost related to nonvested stock grants
that the Company expects to recognize over a weighted average period of 4.8 years.

In addition, under the Plan, the Company, on February 15, 2006,
issued a 2006 Annual Incentive Program and 2006 Multi-Year Incentive Program to key executive officers that were approved by the Board of Directors in January 2006. The vesting of the 63,600 shares of the 2006 Annual Incentive Program is based on
achieving performance and market condition metrics over a four-year requisite service period and compensation cost is recognized on an accelerated basis. The fair value of these stock grants is estimated on the date of the grant using a lattice
valuation model and estimated forfeitures of 40,048 shares. The Company recognized compensation cost of $38,484 and $76,968 for the 2006 Annual Incentive Program for the three and six months ended June 30, 2006. The vesting of the 181,088
shares of the 2006 Multi-Year Incentive Plan is based on achieving market condition metrics and compensation cost is recognized ratably over a four-year requisite service period. The fair value of these stock grants is estimated on the date of grant
using a lattice valuation model and estimated forfeitures of 117,314 shares. The Company recognized compensation cost of $72,145 and $144,290 for the 2006 Multi-Year Incentive Plan for the three and six months ended June 30, 2006.

Stock-Based Employee Compensation Plans

In May 1996, the Company
adopted an employee stock incentive plan (the Plan) to provide incentives to attract and retain high quality executive officers and key employees. Certain amendments to the Plan were ratified and approved by the stockholders of the
Company at the Companys 1997 Annual Meeting of Stockholders. The Plan, as amended, provides for the grant of (i) shares of Common Stock of the Company, (ii) options, stock appreciation rights (SARs) or similar rights with
an exercise or conversion privilege at a fixed or variable price related to the Common Stock and/or the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other
security with the value derived from the value of the Common Stock of the Company or other securities issued by a related entity. Such awards include, without limitation, options, SARs, sales or bonuses of restricted stock, dividend equivalent
rights (DERs), Performance Units or Preference Shares.



29



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

On May 4, 2006, the board of directors of
the Company amended and restated the Plan. New York Stock Exchange issuer rules prohibit evergreen provisions to issuer stock compensation plans which have a term longer than ten years and automatically increases the shares available for
grant. Prior to the Plans amendment, automatic increases to the number of shares available for grant were triggered whenever the Company issued any of its common stock. The board therefore approved an amendment and restatement of the Plan to
eliminate the automatic increases provisions and to set the number of shares available for grant at the current maximum, three million six hundred seventy thousand eight hundred thirty-three (3,670,833), while maintaining the perpetual life of the
Plan.

In May 1999, the Companys stockholders approved the grant of 700,000 non-qualified stock options to Robert Batinovich, Chairman of the
Company, and 300,000 non-qualified stock options to Andrew Batinovich, President and CEO of the Company, outside the Plan, at exercise prices ranging from $27.03 to $37.84. As of June 30, 2006, 1,992,121 options to purchase shares of Common
Stock, including the 1,000,000 of stock options granted to Robert Batinovich and Andrew Batinovich as described above, and 395,961 shares of bonus grants were outstanding under the Plan.

For the three and six months ended June 30, 2006, the Company recorded stock option compensation expense of $9,800 and $18,100, respectively, using an estimated weighted average fair value of $1.68 using the
Black-Scholes option-pricing model, based on options issued from date of inception forward, and the following weighted-average assumptions: dividend yield of 9.09%, risk-free interest rate of 4.73%, expected volatility factor of 28.42%, and expected
lives of 5-10 years.

As permitted by SFAS 123, the Company has not changed its method of accounting for stock options prior to December 31, 2005, but
has provided the additional required disclosures. Had compensation cost for the Companys stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, consistent with the method of SFAS
No. 123, as amended by SFAS No. 148 Accounting for Stock-Based Compensation, an amendment of SFAS No. 123, the Companys net income (loss) and earnings (loss) per share would have been adjusted to the pro forma
amounts indicated below (in thousands except for per share amounts):



|                                                   |  |                                 |        |   |                               |   |         |  
|-------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------- | -
|                                                   |  | Three MonthsEnded June 30, 2005 |        |   | Six MonthsEnded June 30, 2005 |  
|Net income (loss) available to Common Stockholders |  |                                 |        |   |                               |   |         |  
|As reported                                        |  | $                               | 11,979 |   |                               | $ | (32,561 | )
|SFAS No. 123 Adj.                                  |  |                                 | (63    | ) |                               |   | (101    | )
|                                                   |  |                                 |        |   |                               |   |         |  
|Pro forma                                          |  | $                               | 11,916 |   |                               |   | (32,662 | )
|                                                   |  |                                 |        |   |                               |   |         |  
|Basic earnings (loss) per share                    |  |                                 |        |   |                               |   |         |  
|As reported                                        |  | $                               | 0.33   |   |                               | $ | (0.91   | )
|SFAS No. 123 Adj.                                  |  |                                 |       |   |                               |   |        |  
|                                                   |  |                                 |        |   |                               |   |         |  
|Pro forma                                          |  | $                               | 0.33   |   |                               | $ | (0.91   | )
|                                                   |  |                                 |        |   |                               |   |         |  
|Diluted earnings (loss) per share                  |  |                                 |        |   |                               |   |         |  
|As reported                                        |  | $                               | 0.33   |   |                               | $ | (0.91   | )
|SFAS No. 123 Adj.                                  |  |                                 |       |   |                               |   |        |  
|                                                   |  |                                 |        |   |                               |   |         |  
|Pro forma                                          |  | $                               | 0.33   |   |                               | $ | (0.91   | )
|                                                   |  |                                 |        |   |                               |   |         |  



30



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

The following
table represents stock option activity for the three months ended June 30, 2006:



|                                   |  |           |   |  |                          |       |                                      |           
|---------------------------------- |  | --------- | - |  | ------------------------ | ----- | ------------------------------------ | ----------
|                                   |  | Shares    |   |  | WeightedAvgExercisePrice |       | Weighted AvgRemainingContractualLife
|Outstanding at beginning of period |  | 2,531,701 |   |  | $                        | 23.46 |                                      |           
|Granted                            |  |          |   |  | $                        |      |                                      |           
|Exercised                          |  | (294,170  | ) |  | $                        | 15.84 |                                      |           
|Forfeited/Canceled                 |  | (89,430   | ) |  | $                        | 18.05 |                                      |           
|                                   |  |           |   |  |                          |       |                                      |           
|Outstanding at end of period       |  | 2,148,101 |   |  | $                        | 24.66 |                                      | 2.79 years
|Exercisable at end of period       |  | 2,063,277 |   |  | $                        | 24.95 |                                      | 2.74 years

The total intrinsic value of options exercised during the three and six months ended June 30, 2006 were $0.5
million and $1.7 million, respectively. Cash received from option exercises for the three and six months ended June 30, 2006 were $1.7 million and $4.7 million, respectively.

The Company plans to issue stock under the reserve plan pursuant to the exercise of stock options.

The following table summarizes information about stock options outstanding at June 30, 2006:



|                         |  |                             |  |                                           |  |                                 |       |                             |           |                                |   |      
|------------------------ |  | --------------------------- |  | ----------------------------------------- |  | ------------------------------- | ----- | --------------------------- | --------- | ------------------------------ | - | -----
|                         |  | OPTIONS OUTSTANDING         |  | OPTIONS EXERCISABLE                      
|Range of Exercise Prices |  | NumberOutstandingat 6/30/06 |  | Weighted-averageremainingcontractual life |  | Weighted- averageexercise price |       | NumberExercisable at6/30/06 |           | Weighted-averageexercise price
|$11.35 to $15.14         |  | 149,103                     |  | 1.5 years                                 |  | $                               | 13.27 |                             | 149,103   |                                | $ | 13.27
|$15.14 to $18.92         |  | 656,498                     |  | 4.1 years                                 |  | $                               | 17.00 |                             | 573,340   |                                | $ | 16.89
|$18.92 to $22.70         |  | 327,500                     |  | 2.3 years                                 |  | $                               | 21.47 |                             | 325,834   |                                | $ | 21.47
|$22.70 to $26.49         |  | 15,000                      |  | 1.4 years                                 |  | $                               | 25.00 |                             | 15,000    |                                | $ | 25.00
|$26.49 to $30.27         |  | 333,333                     |  | 2.3 years                                 |  | $                               | 27.03 |                             | 333,333   |                                | $ | 27.03
|$30.27 to $34.06         |  | 333,333                     |  | 2.3 years                                 |  | $                               | 32.44 |                             | 333,333   |                                | $ | 32.44
|$34.06 to $37.84         |  | 333,334                     |  | 2.3 years                                 |  | $                               | 37.84 |                             | 333,334   |                                | $ | 37.84
|                         |  |                             |  |                                           |  |                                 |       |                             |           |                                |   |      
|                         |  | 2,148,101                   |  | 2.79 years                                |  | $                               | 24.66 |                             | 2,063,277 |                                | $ | 24.95

The aggregate intrinsic value of stock options outstanding at June 30, 2006 was $4.2 million. Intrinsic
value for stock options is calculated based on the exercise price of the underlying awards and the Companys closing stock price of $21.54 as of June 30, 2006.

Cumulative Effect of Change in Accounting Principle

The Company adopted SFAS 123(R) on January 1, 2006 using
the modified prospective transition method. As of December 31, 2005, the Company recognized a $277,200 cumulative effect adjustment ($0.01 per common share  basic and diluted) to appropriately recognize compensation cost for only the
awards that it expects to ultimately vest. The total compensation cost that should be recognized over the ten year requisite service period would be $333,000. The Company would recognize $214,200 of compensation cost over the last 8.25 years.

There was no impact on cash flows from operating or financing activities as a result of the adoption of SFAS 123(R).



31



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2006 and 2005

(unaudited)

NOTE 18. COMMITMENTS AND CONTINGENCIES

Environmental Matters

The Company follows a policy
of monitoring its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Companys business, assets
or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Companys results of operations and
cash flow.

General Uninsured Losses

The Company, or
in certain instances, tenants of the properties, carry property and liability insurance with respect to the properties. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of
losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity and floods. Should a property sustain damage as a
result of an earthquake or flood, the Company may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, the Company has elected to obtain insurance coverage for certified acts of
terrorism as defined in the Terrorism Risk Insurance Act of 2002; however, our policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured
loss occur, the Company could lose some or all of its capital investment, cash flow and anticipated profits related to one or more properties.

Tax
indemnifications

Twenty-two of the properties in the Companys portfolio were acquired on terms and conditions under which they can be disposed of
only in a like-kind exchange or other non-taxable transaction for limited periods of time. The agreed upon time periods for these restrictions on dispositions vary from transaction to transaction. In the event the Company was to dispose
of one of these properties through a taxable transaction during the restriction period, the Company would be required to indemnify the contributor of such property for all direct and indirect adverse tax consequences. The Company has no intentions
to sell or otherwise dispose of the properties or interests therein in taxable transactions during the restriction period.

Litigation

Certain claims and lawsuits have arisen against the Company in its normal course of business. Based on advice from legal counsel, the Company believes that such claims
and lawsuits will not have a material adverse effect on the Companys financial position, cash flow or results of operations.

NOTE 19. EQUITY
TRANSACTIONS

Stock Repurchases

As of June 30,
2006, the Companys Board of Directors authorized the repurchase of 14,710,700 shares of common stock. During the six months ended June 30, 2006, the Company repurchased 1,805,600 shares at an average cost of $19.01 per share, bringing the
total repurchases through June 30, 2006 to 10,726,316 shares at an average cost of $17.60 per share. All shares repurchased have been retired.

Preferred Stock Redemptions

On January 28, 2005, the Company redeemed approximately 3.1 million shares of Preferred Stock,
representing approximately 45.4% of the total number of outstanding shares. The redemption price was $25.5825 per share of Preferred Stock plus $0.1916 per share in accrued and unpaid dividends for the period from December 24, 2004 through and
including January 28, 2005, without interest. This redemption was funded with proceeds from the December 2004 common stock offering which had temporarily been used to pay down the Companys unsecured bank line of credit.



32



---

##### Table of Contents

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

Background

Glenborough Realty Trust Incorporated is a self-administered Real Estate Investment Trust (REIT) with a nationwide portfolio of 45 primarily office
properties, including 4 joint ventures, as of June 30, 2006. We focus on owning and managing high-quality, multi-tenant office properties with strong demand attributes located in supply constrained locations within large diverse markets. Our
portfolio encompasses approximately 8 million square feet with the largest concentrations in the following markets: Washington D.C., Southern California, Northern New Jersey, Boston and San Francisco.

We were incorporated in the State of Maryland on August 26, 1994. On December 31, 1995, we completed a consolidation in which Glenborough Corporation, a
California corporation, and eight public limited partnerships (the GRT Predecessor Entities) merged with and into us. We elected to qualify as a REIT under the Internal Revenue Code. Our Common Stock and Preferred Stock are listed on the
New York Stock Exchange, or NYSE, under the trading symbols GLB and GLB Pr A. Our Common Stock is included in the S&P SmallCap 600 Index and we are a member of the National Association of Real Estate Investment Trusts
(NAREIT).

Availability of Reports on Website

On our
website (www.glenborough.com), we make available, free of charge, our (i) annual report on Form 10-K, (ii) quarterly reports on Form 10-Q, (iii) current reports on Form 8-K, and (iv) all amendments to those reports. Those
reports are available on our website the same day they are filed with or furnished to the Securities and Exchange Commission (SEC). All such reports are available on our website via hyperlink with the SECs EDGAR system, and reports filed
within the prior 12 months are also posted directly on the website in PDF format.

Results of Operations

Overview

Portfolio Performance

Overall portfolio occupancy (excluding joint ventures) increased from 90.2% at December 31, 2005 to 94.1% at June 30, 2006.

Lease Maturities

During the three months ended June 30, 2006,
we executed approximately 92,365 square feet of new office leases at an average rent of $26.03 per square foot. We also renewed approximately 192,193 square feet of office leases which expired in 2006 at an average rent per square foot of $20.02.
The renewals represented an increase in effective rents (annualized rents net of concessions) of 3.9% during the second quarter of 2006.



33



---

##### Table of Contents

Comparison of the three and six months ended June 30, 2006 to the three and six months ended June 30,
2005.

Net Operating Income. Following is a table of net operating income by market, for comparative purposes, presenting the results for the
three and six months ended June 30, 2006 and 2005 (in thousands), excluding discontinued operations. The data set forth below should be read in conjunction with Note 16. Segment Information in our consolidated financial statements
included in Item 1.



|                           |  |                    |        |               |                  |                     |  |   |               |   |               |   |                     |  |   |        |  |   |       |  
|-------------------------- |  | ------------------ | ------ | ------------- | ---------------- | ------------------- |  | - | ------------- | - | ------------- | - | ------------------- |  | - | ------ |  | - | ----- | -
|                           |  | Three Months ended |        |               | Six Months ended |                    
|                           |  | June 30, 2006      |        | June 30, 2005 |                  | Variance in dollars |  |   | June 30, 2006 |   | June 30, 2005 |   | Variance in dollars | 
|Washington D.C.            |  | $                  | 8,409  |               | $                | 6,666               |  | $ | 1,743         |   |               | $ | 16,347              |  | $ | 12,303 |  | $ | 4,044 |  
|Southern California        |  |                    | 6,459  |               |                  | 6,002               |  |   | 457           |   |               |   | 12,357              |  |   | 11,944 |  |   | 413   |  
|Northern New Jersey        |  |                    | 4,480  |               |                  | 4,045               |  |   | 435           |   |               |   | 8,399               |  |   | 7,298  |  |   | 1,101 |  
|Boston                     |  |                    | 3,182  |               |                  | 3,622               |  |   | (440          | ) |               |   | 6,550               |  |   | 6,941  |  |   | (391  | )
|San Francisco              |  |                    | 3,115  |               |                  | 1,600               |  |   | 1,515         |   |               |   | 6,258               |  |   | 3,347  |  |   | 2,911 |  
|Tampa/Orlando              |  |                    | 1,372  |               |                  | 1,253               |  |   | 119           |   |               |   | 2,638               |  |   | 2,506  |  |   | 132   |  
|Denver                     |  |                    | 1,191  |               |                  | 1,088               |  |   | 103           |   |               |   | 2,150               |  |   | 2,184  |  |   | (34   | )
|Las Vegas                  |  |                    | 786    |               |                  | 637                 |  |   | 149           |   |               |   | 1,438               |  |   | 1,275  |  |   | 163   |  
|All others                 |  |                    | 434    |               |                  | 459                 |  |   | (25           | ) |               |   | 784                 |  |   | 989    |  |   | (205  | )
|                           |  |                    |        |               |                  |                     |  |   |               |   |               |   |                     |  |   |        |  |   |       |  
|Total Net Operating Income |  | $                  | 29,428 |               | $                | 25,372              |  | $ | 4,056         |   |               | $ | 56,921              |  | $ | 48,787 |  | $ | 8,134 |  
|                           |  |                    |        |               |                  |                     |  |   |               |   |               |   |                     |  |   |        |  |   |       |  



|                            |  |                    |         |   |                  |   |         |                     |  |   |               |   |  |               |         |   |                     |   |         |   |  |   |        |  
|--------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------------- |  | - | ------------- | - |  | ------------- | ------- | - | ------------------- | - | ------- | - |  | - | ------ | -
|                            |  | Three Months ended |         |   | Six Months ended |  
|                            |  | June 30, 2006      |         |   | June 30, 2005    |   |         | Variance in dollars |  |   | June 30, 2006 |   |  | June 30, 2005 |         |   | Variance in dollars |  
|Rental revenue              |  | $                  | 38,776  |   |                  | $ | 33,609  |                     |  | $ | 5,167         |   |  | $             | 76,878  |   |                     | $ | 66,467  |   |  | $ | 10,411 |  
|Tenant reimbursements       |  |                    | 5,731   |   |                  |   | 3,819   |                     |  |   | 1,912         |   |  |               | 10,761  |   |                     |   | 7,345   |   |  |   | 3,416  |  
|Property operating expenses |  |                    | (15,079 | ) |                  |   | (12,056 | )                   |  |   | (3,023        | ) |  |               | (30,718 | ) |                     |   | (25,025 | ) |  |   | (5,693 | )
|                            |  |                    |         |   |                  |   |         |                     |  |   |               |   |  |               |         |   |                     |   |         |   |  |   |        |  
|Total Net Operating Income  |  | $                  | 29,428  |   |                  | $ | 25,372  |                     |  | $ | 4,056         |   |  | $             | 56,921  |   |                     | $ | 48,787  |   |  | $ | 8,134  |  
|                            |  |                    |         |   |                  |   |         |                     |  |   |               |   |  |               |         |   |                     |   |         |   |  |   |        |  

Rental revenue

Rental revenue for the three months ended June 30, 2006 increased $5,167,000 to $38,776,000 from $33,609,000 for the comparable period in 2005. Rental revenue for the six months ended June 30, 2006 increased $10,411,000 to
$76,878,000 from $66,467,000 for the comparable period in 2005. The increase for the three and six months ended June 30, 2006 was primarily due to acquisitions of four properties and an overall increase in occupancy in the Washington D.C.,
Southern California, Northern New Jersey, San Francisco and Boston markets. Occupancy increased from 88.3% at June 30, 2005 to approximately 94.1% at June 30, 2006.

Tenant reimbursements

Tenant reimbursements for the three months ended June 30, 2006 increased $1,912,000 to
$5,731,000 from $3,819,000 for the comparable period in 2005. Tenant reimbursements for the six months ended June 30, 2006 increased $3,416,000 to $10,761,000 from $7,345,000 for the comparable period in 2005. Reimbursements from tenants
increased for the three and six months ended June 30, 2006 due to increases in operating expenses largely related to utility costs and adjustments to the receivable related to recoveries from capital projects and operating expenses.

Property operating expenses

Property operating expenses for the
three months ended June 30, 2006 increased $3,023,000 to $15,079,000 from $12,056,000 for the comparable period in 2005. Property operating expenses for the six months ended June 30, 2006 increased $5,693,000 to $30,718,000 from
$25,025,000 for the comparable period in 2005. The increase for the three and six months ended June 30, 2006 was primarily due to an increase in utility costs across all segments attributable to higher utility rates, increased occupancy,
increased repairs and maintenance costs and higher property taxes resulting from an acquisition in both the San Francisco and Washington D.C. markets.



34



---

##### Table of Contents

|                                                        |  |                    |       |                  |   |                     |  |               |     |               |   |                     |  |   |       |  |   |    
|------------------------------------------------------- |  | ------------------ | ----- | ---------------- | - | ------------------- |  | ------------- | --- | ------------- | - | ------------------- |  | - | ----- |  | - | ---
|                                                        |  | Three Months ended |       | Six Months ended
|                                                        |  | June 30, 2006      |       | June 30, 2005    |   | Variance in dollars |  | June 30, 2006 |     | June 30, 2005 |   | Variance in dollars
|Fees and reimbursements, including from related parties |  | $                  | 2,111 |                  | $ | 1,359               |  | $             | 752 |               | $ | 2,999               |  | $ | 2,454 |  | $ | 545
|                                                        |  |                    |       |                  |   |                     |  |               |     |               |   |                     |  |   |       |  |   |    

Fees and reimbursements, including from related parties

Fees and reimbursements, including from related parties, consist primarily of property management and asset management fees paid to us under property and asset management
agreements with the unconsolidated joint ventures and the Rancon Partnerships (Tri-City Corporate Centre). This revenue increased $752,000 to $2,111,000 for the three months ended June 30, 2006 from $1,359,000 for the comparable period in 2005.
Fees and reimbursements revenue also increased $545,000 to $2,999,000 for the six months ended June 30, 2006 from $2,454,000 for the comparable period in 2005. The increase for the three and six months ended June 30, 2006 was primarily due
to an incentive fee of $1.1 million received upon the sale of 2000 Corporate Ridge (as discussed below) as a result of the economic returns generated over the life of the joint venture, partially offset by decreases in dispositions, development and
other fees from the Rancon Partnerships (Tri-City Corporate Centre).



|                                               |  |                    |        |               |                  |                     |  |   |               |   |               |   |                     |  |   |        |  |   |        |  
|---------------------------------------------- |  | ------------------ | ------ | ------------- | ---------------- | ------------------- |  | - | ------------- | - | ------------- | - | ------------------- |  | - | ------ |  | - | ------ | -
|                                               |  | Three Months ended |        |               | Six Months ended |                    
|                                               |  | June 30, 2006      |        | June 30, 2005 |                  | Variance in dollars |  |   | June 30, 2006 |   | June 30, 2005 |   | Variance in dollars | 
|General and administrative                     |  | $                  | 3,799  |               | $                | 3,925               |  | $ | (126          | ) |               | $ | 7,781               |  | $ | 7,210  |  | $ | 571    |  
|Depreciation and amortization                  |  |                    | 13,908 |               |                  | 11,777              |  |   | 2,131         |   |               |   | 27,415              |  |   | 23,510 |  |   | 3,905  |  
|Provision for impairment of real estate assets |  |                    |       |               |                  |                    |  |   |              |   |               |   |                    |  |   | 5,097  |  |   | (5,097 | )
|                                               |  |                    |        |               |                  |                     |  |   |               |   |               |   |                     |  |   |        |  |   |        |  

General and administrative

General and administrative expenses were basically flat with a slight decrease of $126,000 to $3,799,000 for the three months ended June 30, 2006 from $3,925,000 for the comparable period in 2005. General and
administrative expenses for the six months ended June 30, 2006 increased $571,000 to $7,781,000 from $7,210,000 for the comparable period in 2005. The increase for the six months ended June 30, 2006 resulted from higher professional fees
related to the restatement of the December 31, 2004 annual and the 2005 quarterly financials, as well as higher office services expenses and increased travel expenses.

Depreciation and amortization

Depreciation and amortization for the three months ended June 30, 2006 increased
$2,131,000 to $13,908,000 from $11,777,000 for the comparable period in 2005. Depreciation and amortization for the six months ended June 30, 2006 increased $3,905,000 to $27,415,000 from $23,510,000 for the comparable period in 2005. The
increase for the three and six months ended June 30, 2006 was primarily due to the acquisition of four properties in the third quarter of 2005 and during the first and second quarters of 2006 for a total purchase price of $193 million in the
Washington D.C, San Francisco, Southern California and Northern New Jersey regions.

Provision for impairment of real estate assets

During the first quarter of 2005, in connection with the disposition of approximately 28 acres of land held for development, known as Eden Shores located in Hayward,
California. On March 25, 2005, we entered into a contract to sell Eden Shores to an unaffiliated third party for a sales price of $12 million. At that time, we recognized an impairment charge of approximately $5.1 million which was the
difference between the estimated fair value (based on sales proceeds) and the net book value.



35



---

##### Table of Contents

|                                                    |  |                    |         |   |                  |   |        |                     |  |   |               |   |  |               |         |   |                     |   |         |   |  |   |        |  
|--------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | ------------------- |  | - | ------------- | - |  | ------------- | ------- | - | ------------------- | - | ------- | - |  | - | ------ | -
|                                                    |  | Three Months ended |         |   | Six Months ended |  
|                                                    |  | June 30, 2006      |         |   | June 30, 2005    |   |        | Variance in dollars |  |   | June 30, 2006 |   |  | June 30, 2005 |         |   | Variance in dollars |  
|Interest and other income                           |  | $                  | 529     |   |                  | $ | 615    |                     |  | $ | (86           | ) |  | $             | 1,029   |   |                     | $ | 1,645   |   |  | $ | (616   | )
|Equity in earnings of unconsolidated joint ventures |  |                    | 19,713  |   |                  |   | 169    |                     |  |   | 19,544        |   |  |               | 19,812  |   |                     |   | 302     |   |  |   | 19,510 |  
|Interest expense                                    |  |                    | (11,615 | ) |                  |   | (8,683 | )                   |  |   | (2,932        | ) |  |               | (22,204 | ) |                     |   | (16,817 | ) |  |   | (5,387 | )
|Loss on early extinguishment of debt                |  |                    | (103    | ) |                  |   |       |                     |  |   | (103          | ) |  |               | (103    | ) |                     |   | (561    | ) |  |   | 458    |  
|                                                    |  |                    |         |   |                  |   |        |                     |  |   |               |   |  |               |         |   |                     |   |         |   |  |   |        |  

Interest and other income

Interest and other income were basically flat with a slight decrease of $86,000 to $529,000 for the three months ended June 30, 2006 from $615,000 for the comparable period in 2005. Interest and other income for
the six months ended June 30, 2006 decreased $616,000 to $1,029,000 from $1,645,000 for the comparable period in 2005. The decrease for the six months ended June 30, 2006 was primarily due to a fee we received in the first quarter of 2005
to waive our right to acquire the Gateway Office Five development project.

Equity in earnings of unconsolidated joint ventures

Equity in earnings of unconsolidated joint ventures increased $19,544,000 to $19,713,000 from $169,000 and $19,510,000 to $19,812,000, from $302,000 during the three and
six months ended June 30, 2006, respectively, primarily due to our portion of the joint ventures gains on the sale of properties. On June 15, 2006, we and one of our joint venture partners sold the property known as 2000 Corporate Ridge in
McLean, Virginia for $79.1 million. We received from the joint venture net cash proceeds of $14.5 million and recognized our portion of the gain on sale of $10.1 million. In addition, on June 9, 2006, we and one of our joint venture partners
sold the property known as Rincon Center, a mixed-use property in San Francisco comprised of 528,000 square feet of class A office and retail and 320 apartment units for $275.0 million. We received from the joint venture net cash
proceeds of $13.6 million and recognized our portion of the gain on sale of $9.5 million.

Interest expense

Interest expense for the three months ended June 30, 2006 increased $2,932,000 to $11,615,000 from $8,683,000 for the comparable period in 2005. Interest expense for
the six months ended June 30, 2006 increased $5,387,000 to $22,204,000 from $16,817,000 for the comparable period in 2005. The increase for the three and six months ended June 30, 2006 was primarily attributable to higher variable interest
rates and a higher principal balance on our unsecured bank line of credit as well as the cessation of interest capitalization on the Marina Shores development project due to the decision to sell a majority of our interest in the development project.

Loss on early extinguishment of debt

During the three
and six months ended June 30, 2006, we recorded losses on early extinguishment of debt of $103,000, which consisted primarily of write-offs of unamortized original financing costs as well as a prepayment penalty in connection with the
refinancing of debts and payoff of various loans. During the six months ended June 30, 2005, losses on early extinguishment of debt of $561,000 represent a prepayment penalty and the write-off of unamortized original financing costs in connection
with the refinancing of the 1100 17thStreet loan.



36



---

##### Table of Contents

Discontinued operations

During the three months ended June 30, 2006, discontinued operations included the results of operations of real estate assets sold or classified as held for sale prior to June 30, 2006. This included an office property classified
as held for sale on April 2006. During the second quarter of 2005, we disposed of four properties for an aggregate sales price of $30.53 million, with a resulting net gain of approximately $9.3 million. During the six months ended June 30,
2006, discontinued operations included the gain on sales of real estate assets of approximately $7.7 million related to three office properties and the Marina Shores development project. Additionally, included in discontinued operations is a
provision for impairment of real estate assets of $561,000 in connection with the sale of the Osram Building due to higher than anticipated costs to sell the property. During the six months ended June 30, 2005, we disposed of six properties for
an aggregate sales price of $114.57 million, with a resulting net gain of approximately $26.6 million. In addition, in connection with our decision in March 2005 to dispose of assets in its non-core markets and certain non-core assets in core
markets, we reduced the intended holding period of 21 assets to two years or less. Based on our analysis of the anticipated net disposition proceeds of each asset over the next two years, we determined that nine of the assets were impaired. The
difference between the estimated fair value (calculated by sales proceeds) and the net book value was approximately $49.3 million. When combined with impairment charge recognized on an asset sold during the first quarter of 2005, the total
impairment charge recognized during the six months ended June 30, 2005, was approximately $53.1 million. See Note 5 in our consolidated financial statements included in Item 1 for additional information regarding discontinued operations.

Gain on sale of real estate assets

The gain on sales
of real estate assets of $10,506,000 during the second quarter and first six months of fiscal 2006 resulted from the gain recognized from the contribution of a property to a new joint venture. On June 16, 2006, we contributed Montgomery Executive
Center, a 119,679 square foot office building in Gaithersburg, Maryland, at a value of $23.5 million for 100% of the property, to a new joint venture with an investment advisor. The investment advisor contributed $8.2 million in cash for a 75%
ownership interest and the joint venture borrowed $12.5 million from a third party lender. We received net cash proceeds of $20.6 million and recognized a gain of $10.5 million relating to the outside partners purchase of its 75% interest; the
remaining 25% of the gain of $3.5 million has been deferred and netted against the investment in unconsolidated joint venture balance and will be recognized by us when the joint venture sells the contributed property.

Cumulative Effect of Change in Accounting Principle

We adopted SFAS
123(R) on January 1, 2006 using the modified prospective transition method. The adoption of FAS 123(R) resulted in a cumulative benefit of $277,000 related to the impact of estimating future forfeitures in the determination of period expense,
rather than recording forfeitures when they occur as previously permitted under APB Opinion No. 25.

Charges associated with the redemption of
preferred stock

In January 2005, we redeemed approximately 3.1 million shares of our outstanding 73/4% Series A Convertible Preferred Stock. In connection with this redemption, during the three months ended June 30, 2005, we incurred $596,000 for the
final dividends declared and paid on the redeemed preferred shareholders, as well as a charge of $5,309,000, which consisted of $3,452,000 for the non-cash write-off of original issuance costs of the preferred shares, $1,812,000 for the premium paid
to redeem the preferred shares and $45,000 in other miscellaneous costs.

Liquidity and Capital Resources

Cash Flows

For the six months ended June 30, 2006, cash provided
by operating activities was $25,551,000 as compared to $26,483,000 for the same period in 2005. This change was primarily due to increases in interest expense and increases in general and administrative expenses (as discussed above), which were
partially offset by an increase in net operating income. Cash provided by investing activities was $89,454,000 for the six months ended June 30, 2006, as compared to $73,647,000 for the same period in 2005. This change is primarily due to
proceeds received from sale of joint venture properties, higher proceeds from property sales and a decrease in payments for capital and tenant improvements, partially offset by an increase in funds used for acquisition of properties and investment
in Tri-City Corporate Centre during the six months ended June 30, 2006. Cash used for financing activities was $113,883,000 for the six months ended June 30, 2006, as compared to $101,301,000 for the same period in 2005. This change is due
primarily to an increase in repayments of debt and repurchases of common stock in 2006, partially offset by an increase in borrowings in 2006 and the costs of the preferred stock redemption in 2005.

During the six months ended June 30, 2006 and 2005, cash provided by operating activities was insufficient to pay dividends by $30,000 and $5,129,000, respectively.
The shortfalls were funded from property sales.

We expect to meet our short-term liquidity requirements generally through our working capital, our
unsecured bank line of credit and cash generated by operations. We anticipate that cash generated by our operations will be adequate to meet our operating requirements and to make distributions in accordance with REIT requirements in



37



---

##### Table of Contents

both the short and the long-term. In addition to cash generated by operations, the unsecured bank line of credit provides
for working capital advances. However, there can be no assurance that our results of operations will not fluctuate in the future and at times affect our ability to meet our operating requirements and the amount of our distributions. If significant
decreases in occupancy or rental rates occurred at our properties, this could have an adverse impact on our operating cash flows. Similarly, increases in interest rates could have a significant adverse impact on our operating cash flows.

Our principal sources of funding for acquisitions, expansion and renovation of properties, development and stock repurchases include the unsecured bank line of
credit, permanent secured debt financing, the issuance of partnership units in the Operating Partnership, proceeds from property sales including contributions to joint ventures and cash flow provided by operations.

Investments in Land and Development

Our investments in land and
development decreased from $51,750,000 at December 31, 2005, to $51,057,000 at June 30, 2006. This decrease is primarily due to the sale of approximately 13.7 acres of the land at Gateway Park located in Denver, Colorado in which we had a
partial interest.

In addition, on March 30, 2006, we sold a majority of our interest in the Marina Shores development project located in Redwood
City, California resulting in net gain of $715,000. The Companys investment was in the form of equity and mezzanine loans with a net basis of approximately $52.9 million and was classified as held for sale as of December 31, 2005. In
connection with this sale, we repaid $45 million in secured third party financing that encumbered the project.

As of June 30, 2006 and
December 31, 2005, we had investments in the following properties under development and land held for development. The investment descriptions are as of June 30, 2006 (dollars in thousands).



|                                |  |                            |  |                                                                                                                |  |                        |   |                       |  |                  |      |        |                                   |        |     |                                      |   |        |    
|------------------------------- |  | -------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | --------------------- |  | ---------------- | ---- | ------ | --------------------------------- | ------ | --- | ------------------------------------ | - | ------ | ---
|Market                          |  | Properties                 |  | Description                                                                                                    |  | City                   |   | ProposedSquareFootage |  | EconomicInterest |      |        | InvestmentBalance atJune 30, 2006 |        |     | InvestmentBalance atDecember 31,2005 |  
|Boston                          |  | MarlboroughCorporate Place |  | Three office buildings to be constructed as the eighth, ninth, and tenth phases of Marlborough Corporate Place |  | Marlborough            |   | 235,000               |  | 100              | %    |        | $                                 | 5,265  |     |                                      | $ | 5,248  |    
|                                |  |                            |  |                                                                                                                |  |                        |   |                       |  |                  |      |        |                                   |        |     |                                      |   |        |    
|                                |  | Subtotal -Boston           |  |                                                                                                                |  |                        |   | 235,000               |  |                  |      |        |                                   | 5,265  |     |                                      |   | 5,248  |    
|                                |  |                            |  |                                                                                                                |  |                        |  
|Denver                          |  | Gateway Park               |  | 1,200 acre mixed-use park near Denver International Airport; approximately 409 acres undeveloped               |  | Denver                 |   | n/a                   |  | 50               | %(1) |        |                                   | 35,481 | (1) |                                      |   | 35,994 | (1)
|                                |  |                            |  |                                                                                                                |  |                        |  
|                                |  | Lima Street                |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                    |  | Denver                 |   | 150,000               |  | 100              | %    |        |                                   | 4,812  |     |                                      |   | 4,750  |    
|                                |  |                            |  |                                                                                                                |  |                        |   |                       |  |                  |      |        |                                   |        |     |                                      |   |        |    
|                                |  | Subtotal -Denver           |  |                                                                                                                |  |                        |   | 150,000               |  |                  |      |        |                                   | 40,293 |     |                                      |   | 40,744 |    
|                                |  |                            |  |                                                                                                                |  |                        |  
|                                |  |                            |  | Other land held for development                                                                                |  | NewJersey/SanFrancisco |   |                       |  |                  |      |        |                                   | 5,499  |     |                                      |   | 5,758  |    
|                                |  |                            |  |                                                                                                                |  |                        |   |                       |  |                  |      |        |                                   |        |     |                                      |   |        |    
|TOTAL LAND HELD FOR DEVELOPMENT |  | 385,000                    |  |                                                                                                                |  |                        | $ | 51,057                |  |                  | $    | 51,750 |                                  
|                                |  |                            |  |                                                                                                                |  |                        |   |                       |  |                  |      |        |                                   |        |     |                                      |   |        |    

---

|(1) | Interest in the form of mezzanine loans and equity. In addition, we hold a mortgage loan
receivable secured by adjacent parcels of land with a balance of $11,974 and $11,231 at June 30, 2006 and December 31, 2005, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have no further contractual obligations for the future funding of these developments; however, we will likely be funding a portion of their working capital needs until such time as other financing is obtained. Under a development
alliance, we have provided an aggregate of approximately $2.5 million in debt guarantees; however, some of the loans were not fully drawn as of June 30, 2006. These guarantees will remain in place until such time as the related development
financing has been replaced or repaid, the terms of which vary from less than 1 year to up to 2 years. We would be required to perform under these guarantees in the event that the proceeds generated by the sale, refinance or additional capital
contribution by partners of the development project were insufficient to repay the full amount of the related debt financing. There is currently no recorded liability for any amounts that may become payable under these guarantees, nor is there a
liability for our obligation to stand-ready to fund such guarantees



38



---

##### Table of Contents

which were all originally issued prior to 2003. In the event that we must make payments under one of these guarantees,
our only recourse is to the limited liability companies that own the properties. No estimate of the amount that could be recovered by us in such an event can be made at this time.

Certain of the alliances with which we conduct business have been deemed to be Variable Interest Entities (VIEs) as defined by FIN 46 Revised; however, other than Marina Shores, none of these VIEs are required to be
consolidated as we are not deemed to be the primary beneficiary as defined by FIN 46 Revised. The total assets and liabilities of such entities were approximately $108.0 million and $61.9 million, respectively, at June 30, 2006, and $97.6
million and $60.0 million, respectively, at December 31, 2005. Our maximum exposure to loss is equal to our investments in these arrangements, plus the related debt guarantees, as described above.

Investments in Unconsolidated Joint Ventures

Investments in
unconsolidated joint ventures decreased from $12,040,000 at December 31, 2005 to $10,781,000 at June 30, 2006. This decrease was primarily due to the sales of two joint venture properties, partially offset by our investment in Tri-City
Corporate Centre. To the extent our cost basis is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the underlying asset which created the basis difference and is included in our share
of equity in earnings of unconsolidated joint ventures.

Mortgage Loans Receivable

Mortgage loans receivable consists primarily of a first mortgage secured by a 50% interest in 140 acres of land at June 30, 2006 and December 31, 2005 at Gateway Business Park in Aurora, Colorado (as noted
in above table). Periodic payments of interest and principal are received from proceeds of land parcel sales in the project. The balance of this mortgage loan receivable increased from $11,231,000 at December 31, 2005, to $11,974,000 at
June 30, 2006 due to monthly interest accruals totaling $743,000. The borrowing entities in this loan arrangement have been deemed to be VIEs, but we are not deemed to be the primary beneficiary as defined by FIN 46 Revised. Our maximum
exposure to loss is equal to the recorded amount of our loan, including accrued interest.

Mortgage Loans and Unsecured Bank Line of Credit

At June 30, 2006 and December 31, 2005, our indebtedness included fixed-rate debt of $667,927,000 and $704,870,000, respectively, and
floating-rate debt of $88,734,000 and $106,669,000, respectively.

During the six months ended June 30, 2006, mortgage loans payable decreased from
$704,870,000 to $667,927,000. This decrease resulted from loan payoffs of $96,117,000 in connection with new financings, $65,190,000 paid off in connection with dispositions of a property and a development project and $5,264,000 of scheduled
principal amortization, offset by new mortgage loans obtained totaling $129,628,000.

Outstanding borrowings under our unsecured bank line of credit
decreased from $106,669,000 at December 31, 2005, to $88,734,000 at June 30, 2006. The decrease was due to pay downs totaling $112,061,000 generated from the proceeds of property and land sales and cash flow from operations, partially
offset by draws totaling $94,126,000 for common stock repurchases, property acquisition, mortgage loan payoff and dividend distributions. The unsecured bank line of credit requires us, among other things, to be in compliance with certain financial
and operating covenants. We have been in compliance during all of 2005 and, 2006.

For the six months ended June 30, 2006, the following mortgage loan
transactions occurred (dollars in thousands):



|                                                                                                                                                     |  |               |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | -
|                                                                                                                                                     |  | June 30, 2006 |         
|Balance at beginning of year                                                                                                                         |  | $             | 704,870  |  
|Repayments and scheduled principal amortization                                                                                                      |  |               | (121,571 | )
|New borrowings and refinancing (a)                                                                                                                   |  |               | 129,628  |  
|Repaid upon sale of properties and joint venture interest (see Note 6 to the consolidated financial statements  Investment in
Land and Development) |  |               | (45,000  | )
|                                                                                                                                                     |  |               |          |  
|Balance at end of period                                                                                                                             |  | $             | 667,927  |  
|                                                                                                                                                     |  |               |          |  

---

|(a) | On April 27, 2006, we obtained a new mortgage loan of $30.6 million in connection with the acquisition of 3330 Cahuenga Boulevard. The loan bears interest at a fixed rate of
6.93% and matures in October 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39



---

##### Table of Contents

On May 31, 2006, we completed a $30 million refinancing of our King Street Station II property. The
loan bears interest at a fixed rate of 5.62% and matures in June 2016. Proceeds from the refinancing were used to repay the existing loan.

On May 31, 2006, we completed a $28 million refinancing of our 400 South El Camino property. The loan bears interest at a fixed rate of 5.78% and matures in June 2016. Proceeds from the refinancing were used to repay the existing loan.

On June 30, 2006, we completed a $41 million refinancing of our CenterPointe I-IV properties. The loan bears interest at a fixed rate
of 6.39% and matures in July 2016. Net proceeds of $2.5 million were used to pay down our unsecured bank line of credit after repaying two existing loans and closing costs.

At June 30, 2006 and December 31, 2005, we were not a party to any open interest rate protection agreements. Some of our properties are held in limited partnerships and limited liability companies in order
to facilitate financing. All such entities are owned 100% directly or indirectly by us.

The required principal payments on our debt for the next five
years and thereafter, as of June 30, 2006, are as follows (in thousands). Included in the year ending December 31, 2007, is the unsecured bank line of credit balance of $88,734,000 which has an initial maturity of March 26, 2007.



|                         |  |   |        
|------------------------ |  | - | -------
|Year Ending December 31, |  |  
|2006                     |  | $ | 65,224 
|2007                     |  |   | 112,439
|2008                     |  |   | 107,165
|2009                     |  |   | 193,960
|2010                     |  |   | 33,115 
|Thereafter               |  |   | 244,758
|                         |  |   |        
|Total                    |  | $ | 756,661
|                         |  |   |        

Stock Repurchases

In 1999, our Board of Directors authorized the repurchase of up to 6.2 million shares of our outstanding Common Stock. This represented approximately 20% of our total outstanding Common Stock. In December 2000, the repurchase
authorization was increased to approximately 8.2 million shares, representing approximately 26% of Common Stock outstanding when the repurchase program began. As of May 2006, the repurchase authorization was increased to approximately
14.7 million shares, representing approximately 45% of Common Stock outstanding when the repurchase program began. As of June 30, 2006, 10,726,316 common shares have been repurchased and retired at an average price per share of $17.60 and
a total cost of approximately $188.8 million; this represents approximately 88% of the expanded repurchase authorization and approximately 34% of Common Stock outstanding when the repurchase program began. In addition, during 1999, we announced that
our Board of Directors had approved the repurchase of up to 15% of its Preferred Stock, or 1,725,000 shares. In May 2000, the Preferred Stock repurchase authorization was increased to 3,450,000 shares, representing approximately 30% of Preferred
Stock outstanding when the repurchase program began. As of June 30, 2006, 1,543,700 preferred shares have been repurchased at an average price per share of $15.72 and a total cost of approximately $24.2 million; this represents approximately
45% of the expanded repurchase authorization and approximately 13% of Preferred Stock outstanding when the repurchase program began. We intend to make future stock repurchases from time to time in the open market or otherwise and the timing will
depend on market conditions and other factors.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in
the U.S. (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and



40



---

##### Table of Contents

estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue recognized on a straight-line basis

We recognize rental
revenue on a straight-line basis at amounts that we believe we will collect on a tenant-by-tenant basis. The estimation process may result in higher or lower levels from period to period as our collection experience and the credit quality of our
tenants changes. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that we have previously recognized as revenue, or if other tenants remain whom we
previously believed would not.

Carrying value of rental properties, investments in development and other investment assets

Our rental properties are generally carried at the lower of depreciated cost or estimated fair value. Estimated fair value: (i) is based upon our plans for the
continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income
based upon the age, construction and use of the building. The fulfillment of our plans related to each of our properties is dependent upon, among other things, the presence of economic conditions which will enable us to continue to hold and operate
the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of our properties could be materially different than
current expectations.

We review our properties for impairment quarterly and whenever events or changes in circumstances indicate that the carrying value
of a property may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest) is less than the carrying amount of the property. The estimate of expected future net cash flows is
inherently uncertain and relies on assumptions regarding current and future market conditions. These estimates could be impacted by significant changes in occupancy, lease termination or move-out by significant customers, or significant decreases in
base rent at the property. If impairment analysis assumptions change, then an adjustment to the carrying amount of our long-lived assets could occur in the future period in which estimates change.

Depreciation is computed on a straight line basis over the expected useful life of the assets. Determination of the estimated useful life of an asset requires
assumptions regarding the probable period over which the asset will be utilized. Changes in the expected life of the assets would impact depreciation and amortization recorded in the consolidated financial statements.

We account for the acquisition of real estate in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, whereby the fair
value of the real estate acquired is allocated to the acquired tangible assets and identified intangible assets. The estimate of fair value is inherently uncertain and relies on assumptions regarding cash flows and current and future market
conditions. These estimates could be impacted by significant changes in future cash flows which would impact the allocation among assets acquired and the resulting depreciation and amortization.

Our investments in development and other investment assets such as joint ventures and mortgage loans receivable are also generally carried at the lower of cost or
estimated fair value. Certain development joint ventures include our share of undistributed income or loss arising from the investment, and the mortgage loans receivable include accrued interest. In addition, some interest, payroll and general and
administrative costs incurred in connection with our development activities may be capitalized. The actual value of our portfolio of properties, investments in development and other investments could be significantly different than their carrying
amounts.

Property dispositions

We report real estate
dispositions under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,which requires us to separately report assets held for sale as discontinued operations if the
operations and cash flows of the property have been (or will be) eliminated from our ongoing operations as a result of the disposition. Amounts included in discontinued operations include operating



41



---

##### Table of Contents

results of the property and the related gain or loss upon sale. Results of prior periods are included in discontinued
operations to conform to that presentation. Sales of real estate are recognized when a contract has been executed, initial and continuing investment is adequate to demonstrate a commitment to pay for the property and we do not have substantial
continuing involvement in the property. Sales to entities in which the Company has or receives an interest are accounted for in accordance with partial sale accounting provisions as set forth in SFAS No. 66.

Our status as a real estate investment trust

We have elected to be
taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code. A real estate investment trust generally is not subject to federal income tax on that portion of its real estate investment trust taxable income that is distributed to its
stockholders, provided that at least 90% of real estate investment trust taxable income is distributed and other requirements are met. We believe that we have complied with all requirements to qualify as a REIT for the six months ended June 30,
2006, and for the year ended December 31, 2005. Also, we do not believe that the sales of properties during the current year will violate any REIT rules or result in the characterization of us as a dealer. Accordingly, no provision for income
taxes is included in our consolidated financial statements.

Our variable interest entities under FIN 46 Revised

Certain of the entities through which and with which we conduct business have been deemed to be VIEs under the provisions of FIN 46 Revised. In accordance with FIN 46
Revised, we began consolidating the entity known as Marina Shores, effective January 1, 2004, as we are deemed to be the primary beneficiary as defined by FIN 46 Revised. As of June 30, 2006, we sold a majority of our interest in the
Marina Shores development project. We have other alliances which are VIEs, but we are not the primary beneficiary of them. Accordingly, the alliances are not consolidated but are accounted for under the equity method of accounting.

Stock-Based Compensation

In accordance with SFAS 123(R), we measure
compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated
estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of award, and historical
experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements and prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 becomes effective on January 1, 2007. We are currently evaluating the impact of adopting this Interpretation.



42



---

##### Table of Contents

Inflation

Leases at
the office properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. Substantially all of the leases at the industrial properties provide for pass-through to tenants of certain
operating costs, including real estate taxes, common area maintenance expenses, and insurance. We anticipate that these provisions may permit us to increase rental rates or other charges to tenants in response to rising prices and therefore, serve
to reduce our exposure to the adverse effects of inflation.

Funds from Operations

Funds from operations is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to funds from operations is net income (loss). Although the National Association
of Real Estate Investment Trusts (NAREIT) has published a definition of funds from operations, modifications to the NAREIT calculation of funds from operations are common among REITs, as companies seek to provide financial measures that
meaningfully reflect their business. Funds from operations, as defined by NAREIT, is presented by us as a supplemental financial measure. Funds from operations is not used by us as, nor should it be considered to be, an alternative to net income
(loss) computed under GAAP, as an indicator of our operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of our ability to fund our cash needs.

Funds from operations is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of
our financial condition and operating performance. We believe that net income (loss) computed under GAAP remains the primary measure of operating performance and that funds from operations is only meaningful when it is used in conjunction with net
income (loss) computed under GAAP. Further, we believe that our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance.

NAREITs funds from operations measure adjusts net income (loss) computed under GAAP to exclude historical cost depreciation and gains and losses from the sales of
previously depreciated properties. We agree that these two NAREIT adjustments are useful to investors for the following reasons:

(a) historical cost
accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations since real estate
asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.
Consequently, NAREITs definition of funds from operations reflects the fact that real estate values, as an asset class, generally fluctuate over time to reflect market conditions.

(b) REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and
management of real estate. The exclusion, in NAREITs definition of funds from operations, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating
results of the long-term assets that form the core of a REITs activities and assists in comparing those operating results between periods.

At the
same time that NAREIT created and defined its funds from operations concept for the REIT industry, it also recognized that management of each of its member companies has the responsibility and authority to publish financial information that it
regards as useful to the financial community. We believe that financial analysts, potential investors and shareholders who review our operating results are best served by the NAREIT defined funds from operations measure used together with, but
not as a substitute for, net income (loss) computed under GAAP and cash from operating activities computed under GAAP.

Investors analyses of the
performance of real estate companies tend to be centered on understanding the asset value created by real estate investment decisions and understanding current operating returns that are being generated by those same investment decisions. The
adjustments to net income (loss) computed under GAAP that are included in arriving at the NAREIT defined funds from operations measure are helpful to management in making real estate investment decisions and evaluating our current operating
performance. We believe that these adjustments are also helpful to industry analysts, potential investors and shareholders in their understanding and evaluation of our performance on the key measures of valuation and current operating returns
generated on real estate investments.



43



---

##### Table of Contents

While we believe that the NAREIT defined funds from operations measure is an important supplemental measure, it should
not be used alone because it excludes significant economic components of net income (loss) computed under GAAP and is, therefore, limited as an analytical tool. Some of these limitations are:



| |  |  | Depreciation and amortization of real estate assets are economic costs that are excluded from funds from operations. Funds from operations is limited as it does not reflect the cash
requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of real estate properties are not reflected in
funds from operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gains or losses from property dispositions, if any, represent changes in the value of the disposed properties. Funds from operations, by excluding these gains and losses, does not
capture realized changes in the value of disposed properties arising from changes in market conditions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We compensate for these limitations
by using our funds from operations measure only in conjunction with net income (loss) computed under GAAP. To further compensate, we reconcile the funds from operations measure to net income (loss) computed under GAAP in our financial reports.
Additionally, we provide investors with our complete financial statements prepared under GAAP, our definition of funds from operations which includes a discussion of the limitations of using the non-GAAP measure and a reconciliation of our GAAP
measure (net income (loss)) to our non-GAAP measure so that investors can appropriately incorporate the measure and its limitations into their analyses.



44



---

##### Table of Contents

The following table sets forth our reconciliation of net income (loss) to funds from operations (FFO) for the three and
six months ended June 30, 2006 and 2005 (in thousands):



|                                                                                  |              |                    |         |              |                  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------------------------- | ------------ | ------------------ | ------- | ------------ | ---------------- | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                  |              | Three Months Ended |         |              | Six Months Ended |  
|                                                                                  | June 30,2006 |                    |         | June 30,2005 |                  |   | June 30,2006 |   |  | June 30,2005 |        
|Net income (loss)                                                                 |              | $                  | 30,439  |              |                  | $ | 13,791       |   |  | $            | 38,356  |   |  | $ | (23,032 | )
|Cumulative effect of change in accounting principle                               |              |                    |        |              |                  |   |             |   |  |              | (277    | ) |  |   |        |  
|Real estate depreciation and amortization, net of minority interest(1)            |              |                    | 12,845  |              |                  |   | 12,724       |   |  |              | 25,376  |   |  |   | 27,047  |  
|Preferred dividends                                                               |              |                    | (1,811  | )            |                  |   | (1,812       | ) |  |              | (3,623  | ) |  |   | (3,624  | )
|Dividends declared on redeemed preferred stock                                    |              |                    |        |              |                  |   |             |   |  |              |        |   |  |   | (596    | )
|Premium and write-off of original issuance costs on preferred stock redemption    |              |                    |        |              |                  |   |             |   |  |              |        |   |  |   | (5,309  | )
|Gain on sale of unconsolidated joint venture properties, net of minority interest |              |                    | (18,052 | )            |                  |   |             |   |  |              | (18,052 | ) |  |   |        |  
|Gain on sale of real estate assets, net of minority interest                      |              |                    | (9,619  | )            |                  |   |             |   |  |              | (9,619  | ) |  |   |        |  
|Loss (gain) on sale from discontinued operations, net of minority interest        |              |                    | 69      |              |                  |   | (8,598       | ) |  |              | (6,369  | ) |  |   | (24,587 | )
|Adjustment to reflect FFO of unconsolidated joint ventures(2)                     |              |                    | 251     |              |                  |   | 178          |   |  |              | 408     |   |  |   | 357     |  
|Adjustment to reflect FFO of minority interest(3)                                 |              |                    | 1,288   |              |                  |   | 1,348        |   |  |              | 2,402   |   |  |   | (2,501  | )
|                                                                                  |              |                    |         |              |                  |   |              |   |  |              |         |   |  |   |         |  
|FFO available to Common Stockholders                                              |              | $                  | 15,410  |              |                  | $ | 17,631       |   |  | $            | 28,602  |   |  | $ | (32,245 | )
|                                                                                  |              |                    |         |              |                  |   |              |   |  |              |         |   |  |   |         |  

---

|(1) | Excludes non-real estate depreciation and amortization.
|--- | -------------------------------------------------------

|(2) | Represents the adjustments to FFO required to reflect the FFO of the unconsolidated joint
ventures allocable to us. Our investments in the joint ventures are accounted for using the equity method of accounting.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents the minority interest holders share of real estate depreciation and
amortization, gain on sale of unconsolidated joint venture properties, gain on sale of real estate assets and loss (gain) on sale from discontinued operations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Forward-Looking Statements; Factors That May Affect Operating Results

This Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, beliefs and
strategies regarding the future. These forward-looking statements include statements relating to:



| |  | Our expectation to meet our short-term liquidity requirements generally through our working capital, our unsecured bank line of credit and cash generated by operations;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that cash generated by our operations will be adequate to meet our operating requirements and to make distributions in accordance with REIT requirements in both the
short and the long-term;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our intention to make future stock repurchases from time to time in the open market or otherwise depending on market conditions and other factors;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that we have complied with all requirements to qualify as a REIT and, as a result, our exclusion of income taxes from our consolidated financial statements;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that certain provisions of our lease documents may permit us to increase rental rates or other charges to tenants in response to rising prices and therefore, serve
to reduce our exposure to the adverse effects of inflation;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that lease rollover will affect our rental revenues with changes in portfolio occupancy and changes in rental rates upon lease renewal;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



45



---

##### Table of Contents

| |  | Our expectation that changes in market interest rates will not have a material impact on the performance or fair value of our mortgage loans receivable;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that claims and lawsuits which have arisen against us in our normal course of business will not have a material adverse effect on our financial position, cash flow or
results of operations;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that we will likely be funding a portion of the working capital needs of certain properties held for development;
|- |  | ----------------------------------------------------------------------------------------------------------------------------



| |  | Statements regarding our required principal payments on debt for the next five years and thereafter;
|- |  | ----------------------------------------------------------------------------------------------------



| |  | Our belief that the sales of properties during the current year will not violate any REIT rules or result in the characterization of us as a dealer; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Statements regarding the effect of changes in interest rates on our financial instruments.
|- |  | ------------------------------------------------------------------------------------------

All forward-looking statements included in this document are based on information available to us on the date hereof. Because these forward-looking statements involve risk and uncertainty, there are important factors
that could cause our actual results to differ materially from those stated or implied in the forward-looking statements. Those important factors include:



| |  | increased costs of financing cause a reduction in demand for commercial properties and, therefore, a reduction in the market value of the listed assets;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the unanticipated effect of any future impairment charges associated with asset dispositions or market conditions;
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | an unexpected inability to access capital;
|- |  | ------------------------------------------



| |  | the availability and creditworthiness of prospective tenants and our ability to execute lease deals with them;
|- |  | --------------------------------------------------------------------------------------------------------------



| |  | market fluctuations in rental rates, concessions and occupancy;
|- |  | ---------------------------------------------------------------



| |  | reduced demand for office space;
|- |  | --------------------------------



| |  | failure of market conditions and occupancy levels to improve in certain geographic areas;
|- |  | -----------------------------------------------------------------------------------------



| |  | defaults or non-renewal of leases by customers;
|- |  | -----------------------------------------------



| |  | increased interest rates and operating costs;
|- |  | ---------------------------------------------



| |  | our failure to obtain necessary outside financing;
|- |  | --------------------------------------------------



| |  | changes in market conditions render the repurchase of our stock imprudent;
|- |  | --------------------------------------------------------------------------



| |  | our inadvertent or technical failure to have met all requirements to qualify as a REIT;
|- |  | ---------------------------------------------------------------------------------------



| |  | the unpredictability of changes in accounting rules;
|- |  | ----------------------------------------------------



| |  | an interpretation of lease provisions differing from ours prevails in a dispute regarding recovery of expenses; and
|- |  | -------------------------------------------------------------------------------------------------------------------



| |  | the unpredictability of both the frequency and final outcome of litigation.
|- |  | ---------------------------------------------------------------------------

The forward-looking statements in this quarterly report on Form 10-Q are subject to additional risks and uncertainties further discussed under Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended
December 31, 2005. We assume no obligation to update or supplement any forward-looking-statement.



46



---

##### Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rates

We are exposed to changes in interest rates obtainable on our secured and unsecured borrowings. Our expectation is that changes in market interest rates will not have a
material impact on the performance or fair value of our mortgage loans receivable.

It is our policy to manage our exposure to fluctuations in market
interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In order to maximize financial flexibility when selling properties and minimize
potential prepayment penalties on fixed rate loans, we have also entered into several variable rate debt arrangements. Approximately 12% at June 30, 2006 and 13% at December 31, 2005 of our outstanding debt, including amounts borrowed
under our unsecured bank line of credit, were subject to variable rates. The average interest rate on our debt increased from 5.70% at December 31, 2005 to 5.79% at June 30, 2006. We review interest rate exposure in the portfolio
continually in an effort to minimize the risk of interest rate fluctuations. We do not have any other material market-sensitive financial instruments. It is not our policy to engage in hedging activities for speculative or trading purposes.

We may enter into forward interest rate or similar, agreements to hedge specific anticipated debt issuances where we believe the risk of adverse changes
in market rates are significant. Under a forward interest rate agreement, if the referenced interest rate increases, we are entitled to a receipt in settlement of the agreement that economically would offset the higher financing cost of the debt
issued. If the referenced interest rate decreases, we make payment in settlement of the agreement, creating an expense that economically would offset the reduced financing cost of the debt issued. At June 30, 2006, we were not a party to any
forward interest rate or similar agreements.

The table below provides information about our financial instruments that are sensitive to changes in
interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on rates in effect at the reporting date.



|                      |                |                        |        |      |  |   |        |   |  |      |         |   |      |   |         |            |  |   |        |   |  |            |         |   |  |   |         |   |  |   |        
|--------------------- | -------------- | ---------------------- | ------ | ---- |  | - | ------ | - |  | ---- | ------- | - | ---- | - | ------- | ---------- |  | - | ------ | - |  | ---------- | ------- | - |  | - | ------- | - |  | - | -------
|                      |                | Expected Maturity Date |        |      | 
|                      | 2006           |                        |        | 2007 |  |   | 2008   |   |  | 2009 |         |   | 2010 |   |         | Thereafter |  |   | Total  |   |  | Fair Value
|                      | (in thousands) |                        |        |      |  |   |       
|Secured Fixed         |                | $                      | 65,224 |      |  | $ | 23,705 |   |  | $    | 107,165 |   |      | $ | 193,960 |            |  | $ | 33,115 |   |  | $          | 244,758 |   |  | $ | 667,927 |   |  | $ | 648,967
|Average interest rate |                |                        | 6.76   | %    |  |   | 6.27   | % |  |      | 5.03    | % |      |   | 5.75    | %          |  |   | 4.84   | % |  |            | 5.55    | % |  |   | 5.63    | % |  |   |        
|                      |                |                        |        |      |  |   |        |  
|Unsecured Variable    |                | $                      |       |      |  | $ | 88,734 |   |  | $    |        |   |      | $ |        |            |  | $ |       |   |  | $          |        |   |  | $ | 88,734  |   |  | $ | 88,734 
|Average interest rate |                |                        |       |      |  |   | 7.00   | % |  |      |        |   |      |   |        |            |  |   |       |   |  |            |        |   |  |   | 7.00    | % |  |   |        

A change of 1/8% in the index rate to which our variable rate debt is tied would change the annual interest we
incurred by approximately $111,000, based upon the balances outstanding on variable rate instruments at June 30, 2006.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2006. Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of June 30, 2006, to ensure that information required to be disclosed in reports that we file or submit under the
Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and are also effective to ensure that information required to be disclosed in the reports
that we file under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers to allow timely decisions regarding required disclosure.



47



---

##### Table of Contents

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during our quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Certain claims and lawsuits have arisen against us in our normal course of business. We believe
that such claims and lawsuits will not have a material adverse effect on our financial position, cash flow or results of operations.

Item 1A. Risk Factors

Stockholders or potential stockholders should read the Risk Factors section of our
latest annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) in conjunction with this quarterly report on Form 10-Q to better understand the factors affecting our results of operations and our Common Stock
share price. The fact that some of the risk factors may be the same or similar to our past filings means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are part of
doing business in the real estate industry and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen the significance of the risk.

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

(c) None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

At our annual meeting, held on May 4, 2006, in Redwood
City, California, the following persons were duly elected by majority vote of the holders of our common stock to serve as Class II directors:



|                  |  |            |  |               
|----------------- |  | ---------- |  | --------------
|                  |  | Votes For  |  | Votes Withheld
|Keith Locker      |  | 28,727,666 |  | 98,896        
|Robert Batinovich |  | 28,614,724 |  | 211,838       
|Patrick Foley     |  | 26,126,811 |  | 2,699,751     

The terms of office for Andrew Batinovich, Laura Wallace, Richard A. Blum and Richard A. Magnuson continued after
the annual meeting.

In addition to the election of Class II directors, the Companys shareholders also ratified the selection of
PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm as follows:



|           |  |               |  |            
|---------- |  | ------------- |  | -----------
|Votes For  |  | Votes Against |  | Abstentions
|28,788,590 |  | 24,530        |  | 13,440     



48



---

##### Table of Contents

Item 5. Other Information

None.

Item 6. Exhibits



| | (a) | Exhibits:
| | --- | ---------



|      |  |                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01  |  | Articles of Amendment and Restatement of Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.                   
|      | 
|3.02  |  | Amended Bylaws of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                                                                        
|      | 
|3.03  |  | The Companys Form of Articles Supplementary relating to the 73/4% Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.03 to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.
|      | 
|3.04  |  | Articles Supplementary of the Series B Preferred Stock (relating to the Rights Plan) are incorporated herein by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.                 
|      | 
|4.01  |  | Form of Common Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.02 to the Companys Registration Statement on Form S-4 (Registration No. 33-83506), which
became effective October 26, 1995.                
|      | 
|4.02  |  | Form of 73/4% Series A Convertible Preferred Stock
Certificate of the Company is incorporated herein by reference to Exhibit D to the Companys Registration Statement on Form 8-A which was filed on January 22, 1998.                      
|      | 
|10.01 |  | Amended and Restated 1996 Stock Incentive Plan, which is incorporated by reference to Exhibit 10.1 of a Form 8-K filed by the Company with the SEC on May 5, 2006.                                                                           
|      | 
|11.01 |  | Statement re: Computation of Earnings Per Share is shown in Note 15 of the Consolidated Financial Statements of the Company in Item 1.                                                                                                       



49



---

##### Table of Contents

|      |  |                                                                         
|----- |  | ------------------------------------------------------------------------
|      | 
|31.01 |  | Section 302 Certification of Andrew Batinovich, Chief Executive Officer.
|      | 
|31.02 |  | Section 302 Certification of Brian Peay, Chief Financial Officer.       
|      | 
|32.01 |  | Section 906 Certification of Andrew Batinovich, Chief Executive Officer.
|      | 
|32.02 |  | Section 906 Certification of Brian Peay, Chief Financial Officer.       



50



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |                                                     
|-------------------- |  | ----------------------------------------------------
|                     |  | GLENBOROUGH REALTY TRUST INCORPORATED               
|                     | 
|                     |  | By: Glenborough Realty Trust Incorporated,          
|                     | 
|Date: August 9, 2006 |  | /s/ Andrew Batinovich                               
|                     |  | Andrew Batinovich                                   
|                     |  | Director, President and Chief Executive
Officer     
|                     | 
|Date August 9, 2006  |  | /s/ Brian Peay                                      
|                     |  | Brian Peay                                          
|                     |  | Executive Vice President and Chief Financial
Officer
|                     | 
|Date: August 9, 2006 |  | /s/ Alvin Fong                                      
|                     |  | Alvin Fong                                          
|                     |  | Chief Accounting Officer                            



51



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                
|3.01        |  | Articles of Amendment and Restatement of Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.                   
|            | 
|3.02        |  | Amended Bylaws of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                                                                        
|            | 
|3.03        |  | The Companys Form of Articles Supplementary relating to the 73/4% Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.03 to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.
|            | 
|3.04        |  | Articles Supplementary of the Series B Preferred Stock (relating to the Rights Plan) are incorporated herein by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.                 
|            | 
|4.01        |  | Form of Common Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.02 to the Companys Registration Statement on Form S-4 (Registration No. 33-83506), which
became effective October 26, 1995.                
|            | 
|4.02        |  | Form of 73/4% Series A Convertible Preferred Stock
Certificate of the Company is incorporated herein by reference to Exhibit D to the Companys Registration Statement on Form 8-A which was filed on January 22, 1998.                      
|            | 
|10.01       |  | Amended and Restated 1996 Stock Incentive Plan, which is incorporated by reference to Exhibit 10.1 of a Form 8-K filed by the Company with the SEC on May 5, 2006.                                                                           
|            | 
|11.01       |  | Statement re: Computation of Earnings Per Share is shown in Note 15 of the Consolidated Financial Statements of the Company in Item 1.                                                                                                       



52



---

##### Table of Contents

|      |  |                                                                         
|----- |  | ------------------------------------------------------------------------
|      | 
|31.01 |  | Section 302 Certification of Andrew Batinovich, Chief Executive Officer.
|      | 
|31.02 |  | Section 302 Certification of Brian Peay, Chief Financial Officer.       
|      | 
|32.01 |  | Section 906 Certification of Andrew Batinovich, Chief Executive Officer.
|      | 
|32.02 |  | Section 906 Certification of Brian Peay, Chief Financial Officer.       



53